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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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)
<TABLE>
<S> <C>
DELAWARE 74-1494554
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
250 EAST CARPENTER FREEWAY 75062-2729
IRVING, TEXAS (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code
972-652-4000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ---------------------------------------------- ----------------------------------------------
6.00% Senior Debentures due June 15, 2001 New York Stock Exchange
8.15% Subordinated Debentures due August 1, New York Stock Exchange
2009
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant - None.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. - Not Applicable.
As of December 31, 1997, 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 J.(1)(a) and
(b) to Form 10-K and is therefore filing this Form 10-K with the reduced
disclosure format.
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PART I
ITEM 1. BUSINESS.
Associates Corporation of North America ("Associates" or the "Company"), a
Delaware corporation, is a wholly-owned subsidiary and the domestic operating
unit of Associates First Capital Corporation ("First Capital"), which in turn is
a majority indirect-owned subsidiary of Ford Motor Company ("Ford"). All the
outstanding stock of Associates is owned directly or indirectly by First
Capital. Unless the context otherwise requires, reference to Associates or to
the Company includes Associates and all its subsidiaries.
INITIAL PUBLIC OFFERING AND PROPOSED SPIN-OFF
On May 8, 1996, First Capital made an initial public offering (the
"Offering") of 67 million shares of its Class A Common Stock representing a
19.3% interest in First Capital. Since the Offering, Ford has continued to own a
controlling interest in First Capital's common stock. On October 8, 1997, Ford
announced plans to spin off its interest in First Capital in the form of a
distribution to its stockholders (the "Spin-Off"), subject to a ruling from the
United States Internal Revenue Service that the transaction will be tax-free to
Ford and its stockholders. The ruling process is expected to be completed in the
first half of 1998. Subsequent to the Spin-Off, First Capital will no longer be
a majority indirect-owned subsidiary of Ford Motor Company.
Management believes that the Spin-Off will allow First Capital to pursue
its growth strategy more effectively as a stand-alone entity, providing greater
funding flexibility and improving its ability to compete effectively for
acquisition candidates.
COMPANY OVERVIEW
The Company is a leading diversified consumer and commercial finance
organization which provides finance, leasing and related services to individual
consumers and businesses in the United States. In addition, on January 1, 1998,
the Company's operations will include those of Associates Financial Services
Company of Puerto Rico, Inc. ("AFS-PR"), a Puerto Rican based consumer and
commercial finance operation with net finance receivables at December 31, 1997,
of $246 million. First Capital contributed AFS-PR to the Company on December 31,
1997 as described in NOTE 14 to the consolidated financial statements. At or for
the year ended December 31, 1997, the Company had aggregate net finance
receivables of $47.9 billion, total assets of $50.5 billion, net earnings of
$902.5 million and stockholders' equity of $6.0 billion. The Company believes
that it is the second largest independent finance company in the United States
based on aggregate net finance receivables outstanding. The Company's finance
receivables are geographically dispersed across the United States and Puerto
Rico. At December 31, 1997, 12% of such receivables were in California, 7% in
Florida, 7% in Texas, and no other individual state had more than 5%.
The Company divides its diverse activities into consumer finance and
commercial finance. The Company's consumer finance operations provide a variety
of consumer financing products and services, including home equity lending,
personal lending, retail sales finance and purchasing participations in credit
card receivables originated by an affiliate, Associates National Bank (Delaware)
("ANB"). The Company's commercial finance operations provide retail financing,
leasing and wholesale financing for heavy-duty and medium-duty trucks and truck
trailers, construction, material handling and other industrial and
communications equipment, auto fleet leasing and other commercial products and
services. In addition, prior to December 31, 1997 the Company participated in
First Capital's manufactured housing finance activities. On December 31, 1997
this participation was terminated and substantially all manufactured housing
related assets and liabilities were transferred, at book value, to First
Capital. Although financial and statistical information relating to manufactured
housing financing presented herein is included with the consumer finance
information, the Company managed its manufactured housing financing activities
as part of its commercial finance operations. Accordingly, the manufactured
housing financing operations are described under the "-- Commercial Finance"
section.
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As part of its consumer finance and commercial finance activities, the
Company makes available to its customers credit-related and other insurance
products. See NOTE 16 to the consolidated financial statements for financial
information by business segment.
Although the Company's finance operations are confined to the United States
and Puerto Rico, certain subsidiaries of First Capital which are also affiliates
of the Company operate outside the United States, including in Japan, Canada,
the United Kingdom, Mexico, Costa Rica and Taiwan. The Company provides certain
management and other services relating to these foreign operations. See NOTE 14
to the consolidated financial statements. The results of such foreign operations
are not included in the financial or statistical information of the Company
presented herein.
At December 31, 1997, Associates had 1,580 branch offices geographically
dispersed throughout the United States and Puerto Rico and employed
approximately 18,800 persons. Corporate headquarters are located in Irving,
Texas.
Certain prior year amounts presented herein have been restated to conform
to current year methodology.
CONSUMER FINANCE
GENERAL
The Company's consumer finance business consists of a variety of consumer
financing products and services, and purchasing participations in credit card
receivables originated by an affiliate, ANB. The Company distributes its
consumer finance products through multiple delivery systems, which include (i)
1,504 consumer branch offices; (ii) centralized consumer lending operations; and
(iii) centralized credit card operations managed by ANB. Home equity loans
account for the largest portion of the Company's consumer finance portfolio, and
are distributed through the branch delivery system and centralized lending
operations. The Company also offers personal installment and revolving loans and
purchases consumer retail sales finance contracts through its branch delivery
and centralized lending systems. In addition, the Company purchases
participations in ANB's credit card receivables which are principally generated
from the issuance of VISA(R) and MasterCard(R) bankcards and private label
credit cards. The Company, through certain subsidiaries and others, also makes
available various credit-related and non-credit-related insurance products to
its consumer finance customers, including credit life, credit accident and
health, accidental death and dismemberment, involuntary unemployment and
personal property insurance. See the "-- Related Insurance" section. The Company
also provides emergency roadside assistance and auto club services.
The Company's consumer finance customers span a wide range of income
levels, age groups and credit histories. These customers generally have a
history of using credit from a variety of sources and include homeowners,
purchasers of consumer durables (such as furniture, electronics and appliances)
and college students. In extending credit, the Company considers, among other
things, the customer's capacity to repay (e.g., income, debt ratio, and
employment stability), credit history and available collateral for secured loans
(including home ownership). In addition, the Company makes extensive use of
credit scoring models to evaluate risk.
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The following table shows net finance receivables outstanding attributable
to the various types of consumer financing products (in millions):
CONSUMER NET FINANCE RECEIVABLES OUTSTANDING
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Home Equity Lending................... $17,437.3 $15,435.9 $13,190.4 $11,455.2 $10,053.9
Personal Lending/Sales Finance........ 6,920.6 5,786.5 4,752.7 4,188.9 3,512.6
Credit Card........................... 7,333.6 5,517.1 4,616.8 3,834.6 3,112.8
Manufactured Housing(1)............... 24.1 1,257.6 2,049.3 1,681.1 1,300.5
--------- --------- --------- --------- ---------
Total Consumer........................ $31,715.6 $27,997.1 $24,609.2 $21,159.8 $17,979.8
========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) Information concerning manufactured housing is set forth in the
"-- Commercial Finance" section. The Company considers its manufactured
housing activities to be a commercial business principally because the
predominant portion of its financing receivables is obtained through its
relationships with manufacturers and dealers, notwithstanding the fact that
the credit and related risks typically are those of the consumer purchaser
of the housing. During 1997 and 1996, First Capital or the Company
securitized and sold approximately $800 million and $1.3 billion,
respectively, of manufactured housing retail finance receivables which
reduced the dollar amount of participation owned by the Company in such
receivables. In 1996, the servicing rights to such securitizations were
transferred to Associates Housing Finance Services, Inc. ("AHFS"), an
affiliate and subsidiary of First Capital. During 1997, the Company sold, at
net book value, substantially all of its outstanding manufactured housing
finance receivables to AHFS. Immediately subsequent to the sale, the Company
repurchased a participation interest, at net book value, in substantially
all of such receivables. Such participation was included in the net finance
receivables of Associates until December 31, 1997 when the participation
agreement was terminated. As of December 31, 1997, the receivables of the
manufactured housing business were included in the consolidated accounts of
First Capital and $24.1 million of manufactured housing receivables (which
were not included in the First Capital participation agreement) were
included in the accounts of the Company.
During 1997, the finance charge yield (finance charge revenue divided by
average net receivables) on all types of consumer net finance receivables
averaged approximately 16% per annum. Variable rates were charged on 29% of the
consumer net finance receivables outstanding at December 31, 1997. State laws
often establish maximum allowable finance charges for certain consumer loans;
approximately 92% of the outstanding consumer net finance receivables were
either not subject to such state maximums, or if subject, were not materially
restricted by such as to the interest rates charged. See the "-- Additional
Information Regarding the Company -- Regulation" section.
HOME EQUITY LENDING, PERSONAL LENDING AND RETAIL SALES FINANCE
Home Equity Lending. At December 31, 1997, home equity loans accounted for
the largest share of the Company's consumer finance portfolio. The Company's
home equity lending activities consist of originating and servicing fixed and
variable rate mortgage loans that are primarily secured by single-family
residential properties. Typically, such loans are not used for the acquisition
of homes, but are made to borrowers primarily for the purpose of debt
consolidation, including the refinancing of existing mortgage loans, home
improvements and a variety of other purposes.
The following table shows certain information with respect to the Company's
home equity lending receivables:
HOME EQUITY LENDING
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Receivables (in millions).... $17,437.3 $15,435.9 $13,190.4 $11,455.2 $10,053.9
Average Account Balance.......... $ 44,731 $ 42,513 $ 40,527 $ 39,866 $ 36,743
Number of Accounts............... 389,827 363,089 325,470 287,343 273,630
</TABLE>
The Company's home equity loans typically have initial maturities of 180
months. Approximately 16% of the Company's home equity loans are variable rate
loans. Home equity loans may be secured by either first or second mortgages. At
December 31, 1997, approximately 80% of the aggregate net outstanding balance of
home equity lending receivables was secured by first mortgages.
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Personal Lending. The Company's personal lending business consists of
direct origination and servicing of secured and unsecured personal loans to
individuals. Personal loans are direct consumer loans that are generally not
secured by real estate. Such loans may be secured by existing personal property
(the realizable value of which may be less than the amount of the loan secured),
including automobiles, and consumer durables. Personal loan contract terms range
up to 60 months and generally require payments on an installment basis. In
general, personal loans are made for debt consolidations, home improvements,
education, vacations, taxes and major purchases of automobiles, appliances and
other durable goods. The Company sources personal loan customers through
solicitation of existing retail sales finance customers, direct mail,
advertising and referrals.
Retail Sales Finance. Retail sales finance contracts are generally for the
purchase of items such as household electronics and appliances, furniture and
home improvements. The Company generally purchases retail sales finance
contracts from retailers of such items. Such purchases provide an important
source of new loan customers. The newly-established relationship often leads to
other types of financing for the customer based on the individual's credit
needs. The terms of retail sales finance contracts differ based on the amount
financed and the credit quality of the customer. Generally, retail sales finance
contracts have terms ranging from 24 to 36 months.
Statistical information for average personal loan and average retail sales
finance contract receivables is generally similar. For example, at December 31,
1997, the average balance of the Company's outstanding personal loans was
$2,404, and the average balance of the Company's outstanding retail sales
finance contracts was $2,191.
The following table shows certain information with respect to the Company's
aggregate personal lending and retail sales finance contract receivables:
PERSONAL LENDING/RETAIL SALES FINANCE
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Receivables (in
millions)................. $ 6,920.6 $ 5,786.5 $ 4,752.7 $ 4,188.9 $ 3,512.6
Average Account Balance..... $ 2,312 $ 2,161 $ 2,085 $ 2,095 $ 2,099
Number of Accounts.......... 2,993,929 2,677,735 2,279,006 1,999,316 1,673,150
</TABLE>
Delivery of Home Equity Loans, Personal Loans and Retail Sales
Financing. The Company provides its home equity and personal loans and retail
sales financing through its branch delivery and centralized lending operations,
which are further described as follows:
Branch System. At December 31, 1997, the Company's consumer finance branch
system consisted of 1,504 geographically dispersed office locations in the
United States and Puerto Rico. These locations operate under four different
nameplates -- Associates Financial Services, TranSouth Financial, First Family
Financial Services and Kentucky Finance. The Company retained the latter three
nameplates following their acquisitions by the Company in order to retain name
recognition and awareness, customer relationships and market niches.
Centralized Lending. The Company's centralized home equity lending
operation is conducted through Associates Home Equity Services, Inc. ("AHES"), a
subsidiary of Associates. AHES extends both fixed and variable rate closed-end
loans and lines of credit, secured by residential property, to customers. Prior
to January 1, 1998, AHES was know as Ford Consumer Finance Company, Inc. A
majority of the home equity loans at December 31, 1997 in the Company's
centralized home equity lending operation were originated through mortgage
brokers and financial institutions. Mortgage brokers are independent agents who
match their customers with a lender based on the customer's needs and the credit
profile requirements of the lender. The remainder of the home equity loans in
the centralized lending operation at December 31, 1997 were originated as a
result of existing customer relationships, direct mail and telemarketing
efforts. The Company's centralized home equity lending operation covers most of
the United States through three regional service centers and 47 district sales
offices located in 26 states.
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The Company also conducts a centralized lending operation through
Associates Capital Bank, Inc. ("ACB"), a Federal Deposit Insurance Corporation
("FDIC") insured Utah chartered industrial loan company. ACB offers loans by
mail on a nationwide basis and operates a number of private label retail credit
card programs throughout the United States.
CREDIT CARDS
The Company purchases participations in credit card receivables originated
by ANB. ANB's credit card receivables consist primarily of VISA(R) and
MasterCard(R) bankcards and private label credit cards which are marketed
directly to the public and through co-operative marketing programs. The private
label credit card business has principally consisted of customized revolving
charge programs for customers of Amoco and Texaco. Customers use the cards to
make purchases at Amoco and Texaco gasoline stations or to receive cash
advances.
The following table shows certain information regarding the Company's
participations in credit card receivables:
CREDIT CARD
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Receivables (in millions)....... $ 7,333.6 $ 5,517.1 $ 4,616.8 $ 3,834.6 $ 3,112.8
Average Account Balance(1).......... $ 695 $ 913 $ 788 $ 723 $ 1,462
Number of Accounts.................. 10,550,328 6,039,921 5,860,315 5,302,709 2,129,227
</TABLE>
- ---------------
(1) In 1994, ANB acquired Amoco's private label gasoline credit card program,
which added 3.2 million active accounts. These accounts generally carried
smaller balances than ANB's bankcard accounts, as did the 3.9 million active
accounts of the Texaco private label credit card program acquired in 1997.
These private label acquisitions have had the effect of decreasing the
average balance for the Company's credit card receivables on an ongoing
basis.
The Company's revenues from its participations are derived from finance
charges on revolving accounts, the interchange fees resulting from merchant
discounts, annual membership and other account fees, as well as fees earned from
the sale of insurance and other fee-based products. ANB's credit card
receivables typically bear variable interest rates.
OTHER CONSUMER SERVICES
Emergency Roadside Assistance and Auto Club Services. The Company offers
various emergency roadside assistance and related auto club services to
consumers through major corporations, primarily automobile manufacturers,
including Ford (the largest client of the Company's auto club). The agreement
between the Company and Ford which covers the roadside assistance services
provided to Ford contains a change in control provision which would be engaged
at the proposed Spin-Off date. At such time the agreement would be cancelable on
30 days notice. Should the contract be terminated, such termination would be on
a prospective basis and would not have a material affect on the Company's
results of operations.
COMMERCIAL FINANCE
GENERAL
The Company's commercial finance business provides a variety of retail and
wholesale financing and leasing products and services for heavy-duty (Class 8)
and medium-duty (Classes 3 through 7) trucks and truck trailers and
construction, material handling and other industrial and communications
equipment. Prior to December 31, 1997, the Company also provided a wide range of
retail and wholesale financing products and services to the manufactured housing
sector through its participation in First Capital's manufactured housing
activities. On December 31, 1997 this participation was terminated and
substantially all manufactured housing related assets and liabilities were
transferred, at book value, to First Capital. In addition, the Company engages
in a number of other commercial activities, including auto fleet leasing and
fleet management
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services, Small Business Administration lending, employee relocation services
and municipal finance. The Company, through certain subsidiaries and other third
parties, also makes available various credit-related and non-credit-related
insurance products to its commercial finance customers, including commercial
auto and dealers' open lot physical damage, credit life and motor truck cargo
insurance; the Company also offers commercial auto liability insurance in
certain states. See the "-- Related Insurance" section.
The Company provides truck and truck trailer financing and leasing services
from branch offices in the United States and Puerto Rico. The Company provides
equipment financing and leasing services from branch offices in the United
States and Puerto Rico, and utilizes two centralized lending and service
operations for distributing products and services for material handling and
other industrial and communications equipment. Fee-based services are also
provided from centralized locations. The Company markets its insurance products
to its commercial finance customers through the same delivery systems used to
market its commercial finance products.
The following table shows net finance receivables outstanding attributable
to the various types of commercial financing products (in millions):
COMMERCIAL NET FINANCE RECEIVABLES OUTSTANDING
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Truck and Truck Trailer..................... $ 9,011.1 $ 8,077.6 $ 7,415.7 $6,553.0 $5,476.3
Equipment................................... 4,899.8 4,261.4 3,729.1 2,909.3 2,443.9
Auto Fleet Leasing.......................... 1,418.9 1,087.4 327.1 299.4 278.6
Warehouse Lending and Other(1).............. 809.1 355.4 287.2 54.2 20.5
--------- --------- --------- -------- --------
Total Commercial............................ $16,138.9 $13,781.8 $11,759.1 $9,815.9 $8,219.3
========= ========= ========= ======== ========
Manufactured Housing(2)..................... $ 24.1 $ 1,257.6 $ 2,049.3 $1,681.1 $1,300.5
========= ========= ========= ======== ========
</TABLE>
- ---------------
(1) Includes warehouse lending, Small Business Administration lending and
municipal finance (prior to 1997, municipal finance was included in truck
and truck trailer and equipment net finance receivables).
(2) Except as otherwise indicated, the dollar amount of manufactured housing
receivables is included in the dollar amount of total consumer net finance
receivables throughout this document, because the credit and related risks
of the manufactured housing business are similar to those of the Company's
consumer finance business. However, manufactured housing operations are
described below under "-- Commercial Finance -- Manufactured Housing" as
part of the Company's commercial activities because the marketing and
management of manufactured housing finance products are more closely related
to commercial finance products. During 1997 and 1996, First Capital or the
Company securitized and sold approximately $800 million and $1.3 billion,
respectively, of manufactured housing retail finance receivables, which
reduced the dollar amount of participation owned by the Company in such
receivables. In 1996, the servicing rights to such securitizations were
transferred to AHFS, an affiliate and subsidiary of First Capital. During
1997, the Company sold, at net book value, substantially all of its
outstanding manufactured housing finance receivables to AHFS. Immediately
subsequent to the sale, the Company repurchased a participation interest, at
net book value, in substantially all of such receivables. Such participation
was included in the net finance receivables of Associates until December 31,
1997 when the participation agreement was terminated. As of December 31,
1997, the receivables of the manufactured housing business were included in
the consolidated accounts of First Capital and $24.1 million of manufactured
housing receivables (which were not included in the First Capital
participation agreement) were included in the accounts of the Company.
At December 31, 1997, the interest rates charged on approximately 20% of
the commercial net finance receivables were variable rates. Commercial finance
receivables are generally not subject to maximum finance charges established by
state law, and where such restrictions apply, at the present time, they do not
materially restrict the interest rates charged. See the "-- Regulation" section.
At December 31, 1997, the finance charge yield on all types of commercial
finance receivables averaged approximately 10% per annum, and original
maturities of such receivables averaged 58 months.
Except for lease or rental transactions in which the Company owns the
equipment, liens on the equipment financed secure the receivables. In certain
instances, the dealer and/or manufacturer provides some form of loss protection
to the Company.
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TRUCK AND TRUCK TRAILER FINANCING AND LEASING
The Company believes that it is a leading independent source of financing
and leasing for heavy-duty trucks and truck trailers in the United States. The
Company provides retail financing and leasing for purchasers and users of
medium-duty trucks, heavy-duty trucks and truck trailers, as well as wholesale
financing, accounts receivable financing and working capital loans to dealers
and trucking companies. The Company also provides financing and leasing for
truck and truck trailer purchases by truck leasing and rental companies.
The following table shows certain information regarding the Company's truck
and truck trailer financing and leasing receivables:
TRUCK AND TRUCK TRAILER
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net Receivables (in millions)...... $ 9,011.1 $ 8,077.6 $ 7,415.7 $ 6,553.0 $5,476.3
Retail and Leasing Receivables
Average account balance.......... $ 38,616 $ 38,638 $ 37,067 $ 36,253 $ 32,829
Number of accounts............... 211,000 188,815 172,826 161,029 150,091
Wholesale Receivables
Average balance per dealer....... $1,214,065 $1,117,283 $1,442,143 $1,021,429 $819,403
</TABLE>
The Company provides retail financing of new and used medium-duty trucks,
heavy-duty trucks and truck trailers primarily on an indirect basis through
truck and truck trailer dealers. Under an installment sales contract, the dealer
and purchaser enter into a financing arrangement for the installment purchase of
a truck or truck trailer. Subject to credit approval by the Company, the dealer
assigns the installment contract to the Company. The Company funds the
transaction by a payment to the dealer for the net amount financed in the
contract. The Company also sources retail truck and truck trailer financing
directly with the truck or truck trailer purchaser.
Generally, retail financing transactions provide for terms up to 60 months
for trucks and up to 84 months for truck trailers at fixed rates of interest.
The interest rate varies depending on, among other things, the credit quality of
the purchaser, the transaction size, the term and down payment, and whether the
collateral is new or used.
The Company provides fleet leasing for users of medium-duty trucks,
heavy-duty trucks and truck trailers. Most of the Company's truck and truck
trailer leases are non-maintenance, open-end leases. Under such leases, the
customer is responsible for the maintenance and residual value of the vehicle
and the Company generally retains the tax depreciation benefit.
The Company also provides truck trailer rental services. These are
represented by short-term operating leases. Under these leases, the Company is
the owner of the equipment and the lessee enjoys the use of the equipment for
periods of a few days or up to several months.
In addition, the Company provides new and used vehicle wholesale financing
to truck and truck trailer dealers. Generally, wholesale loans are short-term
loans with variable rates (prime rate based) and are secured by inventory.
EQUIPMENT FINANCING AND LEASING
The Company believes that it is a leading independent source of financing
and leasing of new and used construction, mining, forestry, industrial, machine
tool, material handling, communications and turf maintenance equipment and golf
cars in the United States. The Company offers wholesale and rental fleet
financing to dealers (who may either sell or rent the equipment to end-users)
and retail financing and leasing to end-users of equipment.
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The following table shows certain information regarding the Company's
equipment financing and leasing receivables:
EQUIPMENT
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Receivables (in millions)........... $4,899.8 $4,261.4 $3,729.1 $2,909.3 $2,443.9
Retail and Leasing Receivables
Average account balance............... $ 28,228 $ 26,897 $ 24,795 $ 21,425 $ 19,373
Number of accounts.................... 147,468 134,207 124,121 110,691 105,076
Wholesale Receivables
Average balance per dealer............ $653,457 $611,284 $723,889 $597,444 $458,764
</TABLE>
The Company provides retail financing for the purchase of new and used
equipment through installment sales contracts purchased from dealers and
distributors, and through direct loans to purchasers. Generally, retail
financing transactions for equipment provide for maturities of up to 60 months
at fixed rates of interest. The interest rate varies depending on, among other
things, the credit quality of the purchaser, transaction size, term, down
payment and whether the collateral is new or used.
The Company also provides leasing for end-users of equipment, either
directly to the customer or through dealers. Finance leases typically include an
option for the lessee to acquire the equipment at a set time before the
termination of the lease for a specified price (designed to offer the lessee an
incentive to purchase as part of residual risk management) and typically include
an option for the lessee to acquire the equipment at the end of the lease term
for the fair market value.
In addition, the Company provides wholesale and rental fleet financing for
selected dealers. Generally, wholesale loans are short-term loans with variable
rates (prime rate based) and are secured by inventory.
MANUFACTURED HOUSING
Prior to December 31, 1997, the Company participated in First Capital's
manufactured housing activities. On December 31, 1997, this participation was
terminated and substantially all manufactured housing assets were transferred at
book value to First Capital. Accordingly, the manufactured housing receivable
balance decreased from $1.3 billion on December 31, 1996 to $24.1 million on
December 31, 1997. First Capital's manufactured housing activities consist of
purchasing manufactured housing retail installment contracts originated by
retail dealers, originating and servicing direct loans to purchasers, and
providing wholesale financing to approved manufactured housing dealers. First
Capital also offers commercial business loans to certain manufactured housing
dealers to provide capital to build new retail sales centers, update existing
facilities or expand into community park sales.
AUTO FLEET LEASING
The Company believes it is a leading provider of auto fleet leasing and
management services for corporations and municipalities in the United States
with auto and light truck fleets of 100 or more vehicles. At December 31, 1997
and 1996, the Company had $1.4 billion and $1.1 billion, respectively, in auto
fleet leasing receivables outstanding. This has substantially increased from
prior periods principally due to the July 1996 acquisition of certain auto
leasing assets of USL Capital, an affiliate and Ford subsidiary and the
acquisition of the commercial auto fleet leasing operation of AT&T Capital
Corporation in December 1997. These acquisitions are further described in NOTE 3
to the consolidated financial statements.
WAREHOUSE LENDING AND OTHER COMMERCIAL ACTIVITIES
The Company's other commercial activities principally include the following
products and services:
Warehouse Lending. The Company provides short-term financing, secured by
real estate mortgages, to mortgage companies and other mortgage lenders.
8
<PAGE> 10
Small Business Administration Lending. The Company extends credit to
individuals and businesses that is partially guaranteed by the federal
government under the Small Business Administration loan program.
Employee Relocation Services. The Company provides corporations and certain
agencies of the federal government with assistance in employee relocation,
origination of mortgages and management and disposition of residential real
estate.
Municipal Finance. The Company provides financing for the acquisition of
real and personal property by state and local government entities, non-profit
(sec.501(c)(3)) corporations and qualified industrial companies.
RELATED INSURANCE
The Company, through certain of its subsidiaries and other third party
insurance providers, makes available various credit and non-credit insurance
products to its finance customers. Insurance products offered to the Company's
consumer finance customers include credit life, credit accident and health,
accidental death and dismemberment, involuntary unemployment and personal
property insurance. Insurance products offered to the Company's commercial
finance customers include commercial auto and dealers' open lot physical damage,
credit life and motor truck cargo insurance. In addition to insurance
underwriting, the Company also receives compensation for certain insurance
programs underwritten by other companies. The Company underwrites liability
insurance in certain states for its commercial auto physical damage customers.
The purchase of insurance by a finance customer is optional with the
exception of physical damage insurance on loan collateral, which is required in
most instances. The customer can purchase such insurance either from the Company
or an alternative carrier chosen by the customer. Premiums for insurance
coverage are generally financed as part of the insured's finance obligation.
The following table sets forth certain information relating to the
Company's insurance operations (in millions):
INSURANCE STATISTICAL DATA(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Written Premium
Credit life, accident and other related.......... $252.3 $232.2 $187.9 $201.7 $158.9
Physical damage.................................. 210.3 186.2 180.3 168.7 138.9
Other casualty and liability..................... 64.2 51.4 46.4 35.5 20.1
------ ------ ------ ------ ------
Total.................................... $526.8 $469.8 $414.6 $405.9 $317.9
====== ====== ====== ====== ======
Premium Revenue(2)
Credit life, accident and other related.......... $186.6 $170.5 $164.8 $136.1 $111.4
Physical damage.................................. 140.6 143.8 115.7 130.0 114.3
Other casualty and liability..................... 42.9 40.5 44.6 27.4 16.5
------ ------ ------ ------ ------
Total.................................... $370.1 $354.8 $325.1 $293.5 $242.2
====== ====== ====== ====== ======
Investment Income.................................. $ 78.9 $ 68.4 $ 65.3 $ 44.9 $ 38.4
====== ====== ====== ====== ======
Benefits Paid or Provided.......................... $142.1 $142.9 $135.7 $144.1 $114.9
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) This table does not reflect any direct or indirect expenses that may be
associated with the Company's insurance operations. The Company markets its
insurance products through its consumer and commercial distribution systems
and, accordingly, does not allocate overhead and related expenses to its
insurance operations.
(2) Includes compensation for insurance policies underwritten by other
companies.
9
<PAGE> 11
ADDITIONAL INFORMATION REGARDING THE COMPANY
ALLOWANCE FOR LOSSES, CREDIT LOSSES AND CONTRACTUAL DELINQUENCY
The Company maintains an allowance for losses on finance receivables at an
amount which it believes is sufficient to provide adequate protection against
anticipated 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 receivables. Additions to the
allowance are generally charged to the provision for losses on finance
receivables. An analysis of changes in the allowance for losses is contained in
NOTE 4 to the consolidated financial statements.
Finance receivables are charged to the allowance for losses when they are
deemed to be uncollectible. Additionally, Company policy generally provides for
charge-off of various types of accounts on a contractual basis. Consumer direct
and other installment and credit card receivables are charged to the allowance
for losses when they become 180 days contractually 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 contractually delinquent for one year. A contractually delinquent
account is one on which the customer has not made payments as contractually
agreed. Recoveries on losses previously charged to the allowance are credited to
the allowance at the time recovery is collected.
The following table sets forth information as of the dates shown regarding
net credit losses, allowance for losses and contractual delinquency. This
information should be read in conjunction with the discussion of the Company's
financial condition under the caption "-- Management's Discussion and Analysis
of Financial Condition and Results of Operations".
NET CREDIT LOSSES, ALLOWANCE FOR LOSSES TO NET FINANCE
RECEIVABLES AND 60+DAYS CONTRACTUAL DELINQUENCY
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31
----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Credit Losses
Amount (in millions).......................... $1,107.8 $ 798.0 $557.7 $456.7 $387.5
As a Percentage of Average Net Receivables
Consumer................................... 3.45% 2.82% 2.35% 2.29% 2.16%
Commercial................................. 0.27 0.33 0.19 0.09 0.30
Total................................. 2.43% 2.02% 1.66% 1.60% 1.59%
Allowance for Losses to Net Finance
Receivables................................... 3.47% 3.28% 3.05% 3.01% 3.05%
Allowance for Losses to Net Credit Losses....... 1.50x 1.72x 1.99x 2.04x 2.06x
60+Days Contractual Delinquency
Amount (in millions).......................... $1,211.0 $1,038.9 $698.6 $463.8 $406.8
As a Percentage of Finance Receivables
Consumer................................... 3.06% 2.90% 2.24% 1.81% 1.77%
Commercial................................. 1.04 1.12 0.64 0.28 0.53
Total................................. 2.35% 2.29% 1.72% 1.33% 1.38%
</TABLE>
The Company's ten largest accounts at December 31, 1997 (all of which were
current at December 31, 1997) represented less than 1% of the Company's total
gross finance receivables outstanding. All ten of such accounts are commercial
finance accounts and are secured.
10
<PAGE> 12
COMPETITION
The markets in which the Company operates are highly competitive. Many of
the competitors of the Company in different segments and regions are large
companies that have substantial capital, technological and marketing resources.
Some of these competitors are larger than the Company and may have access to
capital at a lower cost than the Company. The Company believes that the finance
charge rate is one of the primary competitive factors in many of its markets.
From time to time, competitors of the Company may seek to compete aggressively
on the basis of pricing, and the Company may lose market share to the extent it
is not willing to match competitor pricing, in order to maintain interest
margins.
Consumer Finance. Traditional competitors in the consumer finance business
include captive and independent finance companies, commercial banks and thrift
institutions, credit unions, industrial banks, credit card issuers, leasing
companies, manufacturers and vendors. On a local level, community banks and
smaller independent finance and/or mortgage companies are a competitive force.
Some competitors have substantial local market positions; others are part of
large, diversified organizations. Because of their longstanding insured deposit
base, many banks that compete with the Company are able to offer financial
services on very competitive terms.
Competition varies across products offered. While there is considerable
competition in the home equity loan market, the market is fragmented with no
single competitor claiming more than a 10% market share. The Company, as a
portfolio lender, maintains considerable product and delivery flexibility, which
the Company believes is a competitive advantage.
Competition also varies, depending on the operating divisions of the
Company. For example, competitors of the Company's branch system are distinct
from the competitors of the Company's centralized lending operation. In
addition, competition varies a great deal across geographic regions.
Commercial Finance. In its commercial finance business, the Company
competes with captive and independent finance companies, commercial banks,
thrifts and other financial institutions, leasing companies, lease brokers,
manufacturers, vendors and others.
The Company believes, based on its experience in the industry, that the
primary competitive factors in the commercial finance and leasing business are
price, product quality, risk management, new account marketing and retention of
customers through emphasis on superior customer service. In addition, the
Company believes that innovation is necessary to compete in the industry,
including enhanced customer service, specialization in certain types of
equipment, exploitation of alternative channels of distribution and, in certain
lines of business, optimization of tax treatment between owner and user.
Purchasers of equipment financed by the Company generally seek transactions that
are simple, flexible and customer responsive.
Insurance. Competitors in the insurance business include national, regional
and local insurance companies, as well as self-insurance programs and captive
insurers. Competition in the insurance business is based upon price, product
design and service levels rendered to producers and policyholders. The insurance
business is extremely competitive, in both price and services, and no single
insurer is dominant. The Company believes that its ability to market its
insurance products through its consumer and commercial distribution systems
gives it a distinct competitive advantage over its competitors who do not have
such ability.
REGULATION
The Company's operations are subject to extensive state and federal
regulation including, but not limited to, the following federal statutes and
regulations: The Consumer Credit Protection Act of 1968, as amended (including
certain provisions thereof, commonly known as the "Truth-in-Lending Act" or
"TILA"), the Equal Credit Opportunity Act of 1974, as amended (the "ECOA"), the
Fair Credit Reporting Act of 1970, as amended (the "FCRA") and the Real Estate
Settlement Procedures Act, as amended (the "RESPA"). In addition, the Company is
subject to state laws and regulations with respect to the amount of interest and
other charges which lenders can collect on loans.
11
<PAGE> 13
In the judgment of the Company, existing statutes and regulations have not
had a materially adverse effect on the operations of the Company. However, it is
not possible to forecast the nature of future legislation, regulations, judicial
decisions, orders or regulatory interpretations or their impact on the future
business, financial condition or prospects of the Company.
Consumer Finance. The Company's consumer finance business, including its
credit card business, is generally subject to detailed supervision by
governmental authorities under legislation and regulations which generally
require licensing of the lender, limitations on the amount, duration and charges
for various categories of loans, adequate disclosure of certain contract terms
and limitations on collection practices and creditor remedies. Licenses are
renewable, and may be subject to revocation for violations of such laws and
regulations. In addition, most states have usury laws which limit interest
rates. Federal legislation preempts state interest rate ceilings on first
mortgage loans and state laws which restrict various types of alternative home
equity receivables, except in those states which have specifically opted out of
such preemption.
The Company is subject to the TILA and Regulation Z promulgated thereunder.
The TILA requires, among other things, disclosure of pertinent elements of
consumer credit transactions, including the finance charges and the comparative
costs of credit expressed in terms of an annual percentage rate. The TILA
disclosure requirements are designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans and
credit transactions in order to enable them to compare credit terms. The TILA
also guarantees consumers a three-day right to cancel certain credit
transactions, including refinanced mortgages and junior mortgage loans on a
consumer's primary residence. Section 32 of Regulation Z mandates that
applicants for real estate loans which contain certain rate and fee amounts be
provided an additional three days waiting period prior to signing loan
documents.
In addition, the Company is subject to the ECOA which, in part, prohibits
credit discrimination on the basis of race, color, religion, sex, marital
status, national origin and age. Regulation B promulgated under ECOA restricts
the type of information that may be obtained by creditors in connection with a
credit application. It also requires certain disclosures by the lender regarding
consumer rights and requires lenders to advise applicants who are denied credit
of the reasons therefor. In instances where a loan application is denied or the
rate or charge on a loan is increased as a result of information obtained from a
consumer credit agency, the FCRA requires the lender to supply the applicant
with the name and address of the reporting agency.
RESPA has been extended to cover real estate secured loans that are
subordinated to other mortgage loans. RESPA and Regulation X thereunder require
disclosure of certain information to customers within prescribed time frames and
regulate the receipt or payment of fees or charges for services performed.
Associates Capital Bank ("ACB") (formally named Associates Investment
Corporation), a Utah industrial loan company, is regulated by the Federal
Deposit Insurance Corporation and the Utah Department of Financial Institutions
in regard to capital adequacy, leverage, loans, deposits, consumer protection,
community reinvestment, the payment of dividends, transactions with affiliates
and other aspects of operations.
Federal and state legislation seeking to regulate the maximum interest rate
and/or other charges on consumer finance receivables has been introduced in the
past, and may from time to time be introduced in the future. However, it is not
possible to predict the nature of future legislation with respect to the
foregoing or its impact on the future business, financial condition or prospects
of the Company.
Commercial Finance. Although most jurisdictions do not regulate commercial
finance, certain jurisdictions do require licensing of lenders and financers,
limitations on interest rates and other charges, adequate disclosure of certain
contract terms and limitations on certain collection practices and creditor
remedies. The Company is also required to comply with certain provisions of the
ECOA which are applicable to commercial loans.
Small Business Administration loans made by the Company are governed by the
Small Business Act and the Small Business Investment Act of 1958, as amended,
and may be subject to the same regulations by certain jurisdictions as are other
commercial finance operations. The federal statutes and regulations specify the
types of loans and loan amounts which are eligible for the Small Business
Administration's guaranty as well as the servicing requirements imposed on the
lender to maintain Small Business Administration guarantees.
12
<PAGE> 14
Insurance. The insurance operations of the Company are subject to detailed
regulation and supervision in each state or other jurisdiction in which they
conduct business. The laws of the various jurisdictions establish supervisory
and regulatory agencies with broad administrative powers. Generally, such laws
cover, among other things, types of insurance that may be sold, policy forms,
reserve requirements, permissible investments, premiums charged, trade
practices, limitations on the amount of dividends payable by any insurance
company and guidelines and standards with respect to dealings between insurance
companies and affiliates.
ITEM 2. PROPERTIES.
The furniture, equipment and other physical property owned by Associates
and its subsidiaries represent less than 1% of total assets at December 31, 1997
and are therefore not significant in relation to total assets. The branch
finance operations are generally conducted on leased premises under short-term
operating leases normally not exceeding five years. At December 31, 1997, the
Company had 1,580 offices in the United States and Puerto Rico.
ITEM 3. LEGAL PROCEEDINGS.
Various legal actions, governmental investigations and proceedings and
claims are pending or may be instituted or asserted in the future against the
Company and its subsidiaries. Certain of the pending legal actions are, or
purport to be, class actions. Some of the foregoing matters involve or may
involve compensatory, punitive, or other treble damage claims which, if
adversely held against the Company, would require large expenditures or could
affect the manner in which the Company conducts its business.
Litigation is subject to many uncertainties, and the outcome of individual
litigated matters is not predictable with assurance. Some of the matters
discussed in the foregoing paragraph could be decided unfavorably to the Company
or the subsidiary involved and could require the Company or such subsidiary to
pay damages or make other expenditures in amounts or a range of amounts that
cannot be estimated at December 31, 1997. The Company does not reasonably
expect, based on its analysis, that any adverse outcome from such matters would
have a material effect on future consolidated financial statements for a
particular year, although such an outcome is possible.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted in accordance with General Instruction J.(2)(c) to Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the outstanding Common Stock of Associates is owned by First Capital
and all of the Class B Common Stock is owned by Associates World Capital
Corporation, a wholly-owned subsidiary of First Capital. There is no market for
Associates stock.
Dividends on the Common Stock and Class B Common Stock are paid when
declared by the Board of Directors. Dividends of $14.20 per share per annum on
the Class B Common Stock outstanding must be paid each year before any dividends
may be paid on the Common Stock. A dividend of $14.2 million was paid on Class B
Common Stock during the year ended December 31, 1996. A Common Stock dividend of
$204.7 million was paid during 1996. No dividends were paid in 1997.
Associates is subject to various limitations under the provisions of its
outstanding debt and revolving credit agreements, including limitations on the
payment of dividends. A restriction contained in one series of public debt
securities, maturing March 15, 1999, generally limits payments of cash dividends
on the Company's Common Stock during any fiscal 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 any fiscal year and not so paid, may
be paid in any one or
13
<PAGE> 15
more of the five subsequent fiscal years. A restriction contained in certain
revolving credit agreements requires Associates to maintain a minimum tangible
net worth, as defined, of $2.0 billion. At December 31, 1997, Associates
tangible net worth was $5.7 billion. In addition, ACB and the Company's
insurance subsidiaries may pay dividends and make certain other transfers of
funds to the Company only up to amounts permitted by applicable banking and
insurance regulations, respectively.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial information
regarding the Company's financial position and operating results which has been
extracted from the Company's consolidated financial statements for the five
years ended December 31, 1997. This information is being provided in lieu of the
information called for by item 6 of Form 10-K, in accordance with General
Instruction J.(2)(a) to Form 10-K. The information should be read in conjunction
with Item 7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and
accompanying notes included elsewhere in this report (dollar amounts in
millions):
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Results of Operations
Total revenue........................... $ 7,151.1 $ 6,221.4 $ 5,384.4 $ 4,387.9 $ 3,689.6
Finance charge revenue.................. 6,428.5 5,580.3 4,805.3 3,866.7 3,250.7
Interest expense........................ 2,543.9 2,206.7 1,979.8 1,509.7 1,291.8
Net interest margin..................... 3,884.6 3,373.6 2,825.5 2,357.0 1,958.9
Operating expenses...................... 1,842.5 1,603.3 1,417.8 1,191.6 979.6
Provision for losses.................... 1,195.6 963.4 729.7 569.9 468.9
Insurance benefits paid................. 142.1 142.9 135.7 144.1 114.9
Earnings before provision for income
taxes................................ 1,427.0 1,305.1 1,121.4 972.6 834.4
Provision for income taxes.............. 524.5 482.0 413.3 369.1 310.7
Net earnings............................ 902.5 823.1 708.1 603.5 523.7
Balance Sheet Data
Finance receivables, net of unearned
finance income:
Consumer............................. $31,715.6 $27,997.1 $24,609.2 $21,159.8 $17,979.8
Commercial........................... 16,138.9 13,781.8 11,759.1 9,815.9 8,219.3
--------- --------- --------- --------- ---------
Total........................... 47,854.5 41,778.9 36,368.3 30,975.7 26,199.1
========= ========= ========= ========= =========
Allowance for losses.................... 1,661.9 1,371.4 1,109.2 932.4 798.0
Total assets............................ 50,531.1 42,598.1 37,023.7 31,687.2 27,365.1
Short-term debt (notes payable)......... 18,386.6 15,714.4 13,434.7 12,211.9 10,208.2
Long-term debt.......................... 25,135.4 20,816.9 18,311.5 14,963.2 13,042.5
Stockholders' equity.................... 6,048.7 5,086.2 4,444.0 3,786.1 3,274.2
Selected Data and Ratios
Net interest margin as a percentage of
average net finance receivables...... 8.53% 8.53% 8.39% 8.24% 8.01%
Earnings to fixed charges............... 1.56x 1.59x 1.56x 1.64x 1.64x
Total debt to equity.................... 7.1:1 7.1:1 7.1:1 7.1:1 7.0:1
60+days contractual delinquency......... 2.35% 2.29% 1.72% 1.33% 1.38%
Net credit losses to average net finance
receivables.......................... 2.43 2.02 1.66 1.60 1.59
Allowance for losses to net finance
receivables.......................... 3.47 3.28 3.05 3.01 3.05
Allowance for losses to net credit
losses............................... 1.50x 1.72x 1.99x 2.04x 2.06x
</TABLE>
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company is in the consumer and commercial finance business, providing
finance, leasing and related insurance products as well as other services. The
Company's revenues principally consist of finance charge income and, to a lesser
extent, insurance premiums and investment and other fee income. The Company's
primary expenses are interest expense from the funding of its finance business,
provision for loan losses and operating expenses. A principal factor determining
the profitability of the Company is the Company's finance charge revenue less
interest expense ("net interest margin").
The following discussion and analysis provides information that management
believes to be relevant to understanding the Company's consolidated financial
condition and results of operations. It has been prepared in accordance with
General Instruction J.(2)(a) to Form 10-K. This discussion should be read in
conjunction with the consolidated financial statements of the Company and the
related notes thereto.
RESULTS OF OPERATIONS
SUMMARY OF RESULTS OF OPERATIONS
The following table summarizes the Company's net earnings and related data
(dollars in millions):
NET EARNINGS AND RELATED DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net Earnings............................................ $902.5 $823.1 $708.1
Change in Net Earnings
Amount................................................ $ 79.4 $115.0 $104.6
Percent............................................... 9.6% 16.2% 17.3%
</TABLE>
The principal factors which influenced the changes in the Company's net
earnings in each period are finance charge revenue and interest expense,
operating expenses and provision for loan losses, all of which are described
below:
FINANCE CHARGE REVENUE AND INTEREST EXPENSE
The Company's net interest margin was as follows (dollars in millions):
NET INTEREST MARGIN
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
PERCENT PERCENT PERCENT
AMOUNT (1) AMOUNT (1) AMOUNT (1)
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Finance Charge
Revenue............... $6,428.5 14.11% $5,580.3 14.12% $4,805.3 14.27%
Interest Expense........ 2,543.9 6.34 2,206.7 6.34 1,979.8 6.72
-------- -------- --------
Net Interest Margin..... $3,884.6 8.53% $3,373.6 8.53% $2,825.5 8.39%
======== ======== ========
</TABLE>
- ---------------
(1) Finance charge revenue and net interest margin are expressed as a percent of
average net finance receivables outstanding for the indicated period;
interest expense is expressed as a percent of average debt outstanding for
the indicated period.
15
<PAGE> 17
Finance charge revenue increased in each of the years presented,
principally from growth in average net finance receivables outstanding ("ANR").
The 1997 and 1996 decreases in the finance charge yield (finance charge revenue
divided by ANR) partially offset increases in finance charge revenue caused by
growth. The components of the change in finance charge revenue are set forth in
the following table (in millions):
COMPONENTS OF CHANGES IN FINANCE CHARGE REVENUE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Change Due to:
Growth in receivables................................. $851.9 $826.6 $725.6
Finance charge yield.................................. (3.7) (51.6) 213.0
------ ------ ------
Total......................................... $848.2 $775.0 $938.6
====== ====== ======
</TABLE>
The finance charge yields to ANR for the Company's business segments were
as follows:
FINANCE CHARGE YIELDS TO ANR
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Consumer Segment........................................... 16.28% 16.16% 16.41%
Commercial Segment......................................... 10.01 10.14 10.08
Total Company.................................... 14.11% 14.12% 14.27%
</TABLE>
The principal factors which influence the trend of finance charge yields
are (i) the interest rate environment; (ii) the level of business competition;
and (iii) the composition of the finance receivable portfolios (i.e., "product
mix"). A generally declining rate environment, changes in product mix and
increased competition were the primary causes of the movements in finance charge
yield from 1995 to 1997.
Total dollars of interest expense increased in each of the three years
ended 1997. In each year the increase was principally due to higher average
outstanding debt as a result of the Company's growth in net finance receivables.
The increase in interest expense as a result of growth in 1997 and 1996 was
partially offset by a decline, compared to 1995 levels, in the Company's average
borrowing rate (interest expense divided by average outstanding debt).
Fluctuations in the Company's average borrowing rate were primarily caused by
changes in market interest rates, which varied over the corresponding periods,
and by a modest shift toward a higher percentage of floating rate debt as a
percentage of total debt. Floating rate debt rates were lower than long-term
debt rates in each period. Average short- and long-term borrowing rates were as
follows:
AVERAGE BORROWING RATES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Short-term Debt............................................. 5.70% 5.49% 5.93%
Long-term Debt(1)........................................... 6.82 7.02 7.33
Total Debt........................................ 6.34% 6.34% 6.72%
</TABLE>
- ---------------
(1) Includes the current portion of long-term debt and certain long-term debt
issues which bear interest on a floating rate basis.
The short-term interest expense and average borrowing rate for short-term
debt relates principally to commercial paper issued by the Company, and to a
lesser extent, bank loans. Such borrowings typically are for a duration of 270
days or less. In contrast, the long-term interest expense and average borrowing
rate for long-term debt relate principally to debt issued by the Company with a
typical maturity in the range of 3-7 years. The changes in short- and long-term
average borrowing rates from 1995 to 1997 are principally due to changes in
market interest rates for debt of a comparable term and credit quality.
Additionally, the Company's average
16
<PAGE> 18
long-term borrowing rate was reduced in all years, in part, by refinancing
maturing debt at lower prevailing market rates, as well as by issuing larger
amounts of long-term debt which bear interest on a floating rate basis.
For purposes of measuring business segment profitability, the Company
generally allocates the interest expense incurred to the business segments based
on ANR. Management believes that analysis of the principal components of change
in interest expense is only meaningful on a total Company basis. The change in
interest expense attributable to growth in average outstanding debt and changes
in average borrowing rates are set forth in the following table (in millions):
COMPONENTS OF CHANGES IN INTEREST EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest Expense........................................ $2,543.9 $2,206.7 $1,979.8
Change Due to:
Growth in debt........................................ $ 337.3 $ 339.4 $ 285.5
Borrowing rate........................................ (0.1) (112.5) 184.6
-------- -------- --------
Total......................................... $ 337.2 $ 226.9 $ 470.1
======== ======== ========
</TABLE>
As a result of the forgoing changes in finance charge revenue and interest
expense, the Company's net interest margin measured in dollars increased in each
of the three years ended December 31, 1997. The increase as measured in dollars
was principally due to growth in net finance receivables.
INSURANCE PREMIUM REVENUE
Insurance premium revenue was $370.1 million, $354.8 million and $325.1
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Insurance premium revenue, which is earned over the coverage term, increased
$15.3 million (4.3%) in 1997, $29.7 million (9.1%) in 1996, and $31.6 million
(10.8%) in 1995. The insurance operation is engaged in underwriting
credit-related and other specialized insurance products for customers of the
consumer and commercial finance businesses. Therefore, insurance sales, and
resulting revenue, are largely dependent on the business activities and volumes
of the consumer and commercial finance businesses. The increase in insurance
revenue in each of the years was principally caused by increased sales of
insurance products associated with the increase in net finance receivables
outstanding.
INVESTMENT AND OTHER INCOME
Investment and other income for the years ended December 31, 1997, 1996 and
1995 was $352.5 million, $286.3 million and $254.0 million, respectively.
Investment income is derived from realized or unrealized returns on the
Company's investments in equity securities and realized returns on investments
in debt securities, both of which are principally owned by the Company's
insurance operation. Other income is primarily derived from fee-based services,
such as employee relocation services and emergency roadside assistance and auto
club services and from royalty, guarantee and service fees the Company receives
from its foreign affiliates. The increase in other income from 1995 through 1997
was principally due to increases in other revenue related to growth in fee-based
businesses.
17
<PAGE> 19
OPERATING EXPENSES
Operating expenses, which do not include interest expense, were as follows
(dollars in millions):
OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
AMOUNT % ANR AMOUNT % ANR AMOUNT % ANR
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Salaries and Benefits.......... $ 961.5 2.11% $ 828.8 2.10% $ 711.9 2.11%
Occupancy, Data Processing and
Other........................ 881.0 1.93 774.5 1.96 705.9 2.10
-------- ---- -------- ---- -------- ----
Total................ $1,842.5 4.04% $1,603.3 4.06% $1,417.8 4.21%
======== ==== ======== ==== ======== ====
Efficiency Ratio............... 41.3% 41.4% 43.4%
==== ==== ====
</TABLE>
Total operating expenses on a dollar basis increased from 1995 to 1997,
principally due to increased levels of business volume and outstanding
receivables in each year. As a percentage of ANR, total operating expenses
decreased from 1995 to 1997. In addition, the Company's total operating
efficiency, as measured by the ratio of total operating expenses to revenues net
of interest expense and insurance benefits paid or provided (the "Efficiency
Ratio") improved in each year.
ALLOWANCE FOR LOSSES, LOSSES AND ASSET QUALITY
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 its 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 receivables. For purposes of measuring
business unit profitability, each business unit establishes an allowance for
loan loss when a loan is made through a charge to the provision for losses. The
Company manages its allowance for losses on finance receivables on a
Company-wide basis taking into account actual and expected losses in each
business unit, the relationship of the allowance for losses to net finance
receivables outstanding and the relationship of the allowance for losses to
total net credit losses. The resulting charge is included in the provision for
losses.
The balance of the allowance for losses was principally influenced by the
provision for losses and by net credit loss experience. Additions to the
allowance, due to growth in finance receivables, were generally charged to the
provision for losses at the time the growth occurred. Losses were charged to the
allowance as incurred and recoveries on losses previously charged to the
allowance were credited to the allowance at the time the recovery was collected.
The components of the changes in the allowance for losses were as follows
(dollars in millions):
COMPONENTS OF CHANGES IN THE ALLOWANCE FOR LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at Beginning of Period........................ $1,371.4 $1,109.2 $ 932.4
Provision for losses................................ 1,195.6 963.4 729.7
Recoveries on receivables charged off............... 190.5 127.7 112.3
Losses sustained.................................... (1,298.3) (925.7) (670.0)
-------- -------- --------
Net credit loss experience.................. (1,107.8) (798.0) (557.7)
-------- -------- --------
Reserves of acquired businesses and other........... 202.7 96.8 4.8
-------- -------- --------
Balance at End of Period.............................. $1,661.9 $1,371.4 $1,109.2
======== ======== ========
Allowance for Losses to Net Finance Receivables....... 3.47% 3.28% 3.05%
Allowance for Losses to Net Credit Losses............. 1.50x 1.72x 1.99x
</TABLE>
18
<PAGE> 20
The allowance for losses as a percent of net finance receivables (the
"allowance ratio") increased in each year, reflecting management's opinion that
delinquencies and net credit losses may increase primarily due to higher
consumer debt levels and increased bankruptcies. However, in spite of the
increase in the allowance ratio, the loss coverage ratio (allowance for losses
as a percent of net credit losses) decreased in each year. Notwithstanding the
decrease in the loss coverage ratio, management believes the allowance for
losses at December 31, 1997 is sufficient to provide adequate protection against
losses in its portfolios. Although the allowance for losses on finance
receivables reflected in the Company's consolidated balance sheet at December
31, 1997 is considered adequate by the Company's management, there can be no
assurance that this allowance will prove to be adequate over time to cover
ultimate losses in connection with the Company's finance receivables. This
allowance may prove to be inadequate due to unanticipated adverse changes in the
economy or discrete events adversely affecting specific customers or industries.
The Company's results of operations and financial condition could be materially
adversely affected to the extent that the Company's allowance is insufficient to
cover such changes or events.
A principal component of the change in the balance of allowance for losses
in each year was the provision for losses. The following table summarizes the
components of the changes in the provision for losses (in millions):
COMPONENTS OF CHANGES IN PROVISION FOR LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Change Due to:
Change in net loss experience............................. $187.8 $143.2 $ 19.6
Growth in receivables, change in reserves and other....... 44.4 90.5 140.2
------ ------ ------
Total............................................. $232.2 $233.7 $159.8
====== ====== ======
</TABLE>
The increase in the year-over-year growth in net finance receivables was a
principal cause of the increase in the provision for losses in each of the
years. Additionally, in 1997, 1996 and 1995 the increase in the allowance ratio
also contributed to the change in the provision for losses in those years.
The Company's 60+days contractual delinquency and net credit losses for
each of these years are set forth in the following table (dollars in millions):
CONTRACTUAL DELINQUENCY AND NET CREDIT LOSSES
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31
------------------------------
1997 1996 1995
-------- -------- ------
<S> <C> <C> <C>
60+Days Contractual Delinquency
Consumer............................................ 3.06% 2.90% 2.24%
Commercial.......................................... 1.04 1.12 0.64
Total....................................... 2.35% 2.29% 1.72%
Total dollars delinquent.................... $1,211.0 $1,038.9 $698.6
Net Credit Losses to ANR
Consumer............................................ 3.45% 2.82% 2.35%
Commercial.......................................... 0.27 0.33 0.19
Total....................................... 2.43% 2.02% 1.66%
Total dollars............................... $1,107.8 $ 798.0 $557.7
</TABLE>
Consumer contractual delinquency levels and net credit losses increased
from 1995 through 1997, reflecting higher consumer debt levels and increased
bankruptcies. In addition, commercial delinquency levels and net credit losses
increased in 1996 compared to 1995, reflecting generally unfavorable trends in
economic conditions. Commercial delinquency levels and net credit losses
declined slightly in 1997.
19
<PAGE> 21
INSURANCE BENEFITS PAID OR PROVIDED
Insurance benefits paid or provided were $142.1 million in 1997, $142.9
million in 1996 and $135.7 million in 1995. Benefits paid or provided are
influenced by the amount of insurance in force, underwriting standards, loss
experience, term of coverage and product mix. Benefits paid or provided
increased in 1997 and 1996 as compared to 1995, primarily as a result of more
insurance in force.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes and effective tax rates were as
follows (dollars in millions):
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
EFFECTIVE EFFECTIVE EFFECTIVE
AMOUNT TAX RATE AMOUNT TAX RATE AMOUNT TAX RATE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Statutory Rate.................. $499.4 35.0% $456.8 35.0% $392.5 35.0%
State income taxes................. 22.3 1.6 20.3 1.6 13.6 1.2
Non-deductible goodwill and
other........................... 2.8 0.2 4.9 0.3 7.2 0.7
------ ----- ------ ----- ------ -----
Provision for Income Taxes........... $524.5 36.8% $482.0 36.9% $413.3 36.9%
====== ===== ====== ===== ====== =====
</TABLE>
The provision for income taxes maintained consistent levels in each of the
comparable periods.
FINANCIAL CONDITION
GROWTH IN NET FINANCE RECEIVABLES
The Company experienced growth in its consumer and commercial finance
receivable portfolios in 1997 and 1996 as follows (dollars in millions):
GROWTH IN NET FINANCE RECEIVABLES
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31
---------------------------------------------------------
1997 1996
--------------------------- ---------------------------
INCREASE FROM INCREASE FROM
PRIOR YEAR PRIOR YEAR
--------------- ---------------
BALANCE AMOUNT % BALANCE AMOUNT %
--------- -------- ---- --------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Consumer Finance.............. $31,715.6 $3,718.5 13.3% $27,997.1 $3,387.9 13.8%
Commercial Finance............ 16,138.9 2,357.1 17.1 13,781.8 2,022.7 17.2
--------- -------- --------- --------
Total(1)............ $47,854.5 $6,075.6 14.5% $41,778.9 $5,410.6 14.9%
========= ======== ========= ========
</TABLE>
- ---------------
(1) AFS-PR was contributed from First Capital to the Company on December 31,
1997. AFS-PR net finance receivables at December 31, 1997 were $246 million
and the operations of AFS-PR will be recorded by the Company on a
prospective basis.
Approximately 46% and 41% of the growth in net finance receivables during
1997 and 1996, respectively, resulted from internal sources, principally through
additional expansion of the Company's branch network system, increased
penetration in its existing markets, entry into new markets and offering of new
products. The remaining growth portion, in both years, was from the acquisition
of finance receivables and companies.
DEBT
Total outstanding debt was $43.5 billion and $36.5 billion at December 31,
1997 and 1996, respectively. Such amounts of debt reflect net increases of $7.0
billion (19.1%) in 1997 and $4.8 billion (15.1%) in 1996. In both years, the
increase was primarily a result of the growth in net finance receivables. At
December 31, 1997
20
<PAGE> 22
and 1996, short-term debt, including the current portion of long-term debt, as a
percent of total debt was 52% and 51%, respectively. The current portion of
long-term debt at December 31, 1997 and 1996 was $4.2 billion and $3.1 billion,
respectively.
STOCKHOLDERS' EQUITY
Stockholders' equity increased to $6.0 billion in 1997 from $5.1 billion in
1996. In each year, the increase was principally as a result of the
aforementioned increase in net earnings. Stockholders' equity was also adjusted
in 1997 and 1996 by unrealized gains/(losses) of $4.9 million and $(12.7)
million, respectively, related to its insurance subsidiary's investments in
marketable debt securities. During 1996, the Company paid cash dividends to
First Capital on its common stock in the amount of $218.9 million. No common
stock dividends were paid in 1997. During 1997 the Company received a
contribution of $55.1 million from its parent in the form of shares of an
affiliate, Associates Financial Services Company of Puerto Rico, Inc., which
approximates its fair value. During 1996 the Company received a contribution of
$82.1 million from its parent in the form of shares of an affiliate, Financial
Reassurance Company, Ltd., which approximated its fair value. Also, as
referenced in NOTE 3 to the consolidated financial statements, in 1996 the
Company paid a cash dividend to First Capital in the amount of $31.4 million
related to its acquisition of certain assets from a Ford affiliate. The dividend
represents the difference between the purchase price and historical value of the
net assets acquired.
LIQUIDITY/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 Company's principal sources of cash 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, the Company believes that it 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 manage 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 December 31, 1997, the Company had short-term debt outstanding of $18.4
billion. Short-term debt principally consists of commercial paper issued by the
Company and represents the Company's primary source of short-term liquidity.
Commercial paper is issued with maturities ranging from 1 to 270 days. The
average interest rate on short-term debt in 1997 and 1996 was 5.70% and 5.49%,
respectively.
At December 31, 1997, the Company had long-term debt outstanding of $25.1
billion. 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 years ended 1997 and 1996, the Company raised debt aggregating $7.4
billion and $5.1 billion, respectively, through public and private offerings at
weighted average effective interest rates and weighted average terms of 6.26%
and 6.7 years and 6.57% and 4.8 years, respectively. The change in effective
average interest rates was primarily caused by overall changes in market rates
during such years and a slight shift in debt mix to include more floating rate
debt instruments. A portion of the long-term debt raised was used to retire
outstanding indebtedness. For the years ended 1997 and 1996, the Company
replaced maturing long-term debt in the amount of $3.1 billion and $2.6 billion,
respectively.
21
<PAGE> 23
Substantial additional liquidity is available to the Company's operations
through established credit facilities in support of its net short-term
borrowings. Such credit facilities provide a means of refinancing its maturing
short-term obligations as needed. At December 31, 1997, these short-term bank
lines, revolving credit facilities and receivable purchase facilities totaled
$14.9 billion, of which $1.2 billion was allocated for use by First Capital. The
remaining $13.7 billion represents 75% of domestic net short-term indebtedness
outstanding at December 31, 1997.
Additionally, the Company believes it has access to other sources of
liquidity, which to date it has either accessed only on a limited basis, such as
securitization of assets, or has not accessed, such as the issuance of capital,
including preferred stock.
MARKET RISK
The risk management discussion and the estimated amounts generated from the
analysis that follows are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially from these projected results due to changes in the Company's product
and debt mix and developments in the global financial markets. The analytical
methods used by the Company to assess and mitigate these risks should not be
considered projections of future events or operating performance.
The Company is exposed to a variety of market risks, primarily the effects
of movements in interest rates. These exposures are monitored and managed by the
Company as an integral part of its overall management program, the principal
goal of which is to reduce the potential impact of such exposures on the
Company's financial position and operating performance. In addition to the
techniques described below, the Company uses derivative financial instruments
for the purpose of hedging exposures as part of its risk management program. See
NOTES 2 and 15 of the consolidated financial statements for a further discussion
of the Company's use of derivative financial instruments. The Company also
believes that its overall balance sheet structure has repricing and cash flow
characteristics that mitigate the impact of interest rate movements.
INTEREST RATE RISK
Interest rate risk is measured and controlled through the use of static gap
analysis and financial forecasting, both of which incorporate assumptions as to
future events. The Company's gap position is defined as the sum of floating rate
asset balances and principal payments on fixed rate assets, less the sum of
floating rate liability balances and principal payments on fixed rate
liabilities. The Company measures its gap position at various time horizons,
ranging from three months to five years. The Company seeks to maintain a
negative three- and six-month gap, and a positive one-year gap. The Company
targets a one-year gap in a range of 5% to 15% of total earning assets. At
December 31, 1997, the one-year gap was a positive 8%. The Company's positive
one year gap target range indicates that a greater percentage of assets than
liabilities reprice within a one-year time frame.
In addition to the gap analysis, the Company uses a simulation model to
evaluate the impact on earnings under a variety of scenarios. These scenarios
may include changes in the absolute level of interest rates, the shape of the
yield curve, prepayments, interest rate spread relationships and changes in the
volumes and rates of various asset and liability categories. For an immediate 1%
increase in rates, projected annual after-tax earnings would increase by less
than $1 million. An immediate 1% rise in interest rates is a hypothetical rate
scenario, used to calibrate risk, and does not currently represent management's
view of future market developments.
For purposes of the new United States Securities and Exchange Commission
disclosure requirements, the Company has also performed an enterprise-wide value
at risk ("VAR") analysis of the Company's financial assets and liabilities and
their exposure to changes in interest rates. The VAR was calculated using an
historical simulation risk model to calculate changes in earnings due to changes
in interest rates on all significant on- and off-balance sheet exposures. The
simulation generates monthly interest rate scenarios over a forecast horizon of
12 months. The VAR analysis calculates the potential after-tax earnings at risk
associated from changes in interest rates, within a 95% confidence level (as
required under applicable United States Securities and Exchange Commission
rules). The model assumes interest rates are normally distributed
22
<PAGE> 24
and draws volatilities from various market sources including JP Morgan Risk
Metrics(TM). At December 31 1997, interest rate movements would affect annual
after-tax earnings by less than $10 million, as calculated under the VAR
methodology.
The Company utilizes a wide variety of risk management methods, including
those discussed above, and believes that no risk model alone provides a reliable
method of monitoring and controlling risk. While these models are relatively
sophisticated, the quantitative risk information generated is limited by the
model parameters. Therefore, such models do not substitute for the experience or
judgment of Company management to adjust positions and revise strategies as
deemed necessary.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company has identified all significant applications that will require
modification to ensure Year 2000 Compliance. Internal and external resources are
being used to make the required modifications and test Year 2000 Compliance. The
modification process of all significant applications is substantially complete.
The Company plans on completing the testing process of all significant
applications by December 31, 1998.
In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, 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.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income", was issued by the Financial Accounting
Standards Board in June 1997. This Statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company will adopt SFAS
130 beginning January 1, 1998.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information", was
issued by the Financial Accounting Standards Board in June 1997. This Statement
establishes standards for reporting information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company is in the process of
finalizing its determination of its reportable segments under SFAS 131 and plans
to adopt SFAS 131 in the year ending December 31, 1998.
FORWARD-LOOKING STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
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
23
<PAGE> 25
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 following is a summary of the factors the Company believes important
and that could cause actual results to differ from the Company's expectations.
The Company is publishing these factors pursuant to the 1995 Act. Such factors
should not be construed as exhaustive or as an admission regarding the adequacy
of disclosure made by the Company prior to the effective date of the 1995 Act.
Readers should understand that many factors govern whether any forward-looking
statement will be or can be achieved. Any one of those factors could cause
actual results to differ materially from those projected. No assurance is or can
be given that any important factor set forth below will be realized in a manner
so as to allow the Company to achieve the desired or projected results. The
words "believe," "expect," "anticipate," "intend," "aim," "will" and similar
words identify forward-looking statements. The Company cautions readers that the
following important factors, among others, could affect the Company's actual
results and could cause the Company's actual consolidated results to differ
materially from those expressed in any forward-looking statements made by or on
behalf of the Company.
- Rapid changes in interest rates, limiting the Company's ability to
generate new finance receivables and decreasing the Company's net
interest margins.
- Increase in non-performing loans and credit losses.
- Rapid changes in receivable prepayment rates.
- The inability of the Company to access capital and financing on terms
acceptable to the Company.
- Changes in governmental regulation affecting the Company's ability to
conduct business, the manner in which it conducts business or the level
of the interest rates charged by the Company.
- Heightened competition, including the intensification of price
competition, the entry of new competitors and the introduction of new
products by new and existing competitors.
- Adverse publicity and news coverage about the Company or about any of its
proposed products or services.
- Adverse results in litigation matters involving the Company.
- General economic and inflationary conditions affecting consumer debt
levels and credit losses and overall increases in the cost of doing
business.
- Changes in social and economic conditions such as increasing consumer
bankruptcies, inflation and monetary fluctuations, and changes in tax
rates or tax laws.
- Changes in accounting policies and practices, and the application of such
policies and practices to the Company.
- Loss or retirement of key executives, employees or technical personnel.
- The effect of changes within the Company's organization or in
compensation and benefit plans and the ability of the Company to attract
and retain experienced and qualified management personnel.
- Natural events and acts of God such as earthquakes, fires or floods.
- Adverse changes, or any announcement relating to a possible or
contemplated adverse change, in the ratings obtained from any of the
independent rating agencies relating to the Company's debt securities or
other financial instruments.
24
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996 and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
January 20, 1998
25
<PAGE> 27
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF EARNINGS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Finance charges........................................... $6,428.5 $5,580.3 $4,805.3
Insurance premiums........................................ 370.1 354.8 325.1
Investment and other income............................... 352.5 286.3 254.0
-------- -------- --------
7,151.1 6,221.4 5,384.4
EXPENSES
Interest expense.......................................... 2,543.9 2,206.7 1,979.8
Operating expenses........................................ 1,842.5 1,603.3 1,417.8
Provision for losses on finance receivables -- NOTE 4..... 1,195.6 963.4 729.7
Insurance benefits paid or provided....................... 142.1 142.9 135.7
-------- -------- --------
5,724.1 4,916.3 4,263.0
-------- -------- --------
EARNINGS BEFORE PROVISION FOR INCOME TAXES.................. 1,427.0 1,305.1 1,121.4
PROVISION FOR INCOME TAXES -- NOTE 10....................... 524.5 482.0 413.3
-------- -------- --------
NET EARNINGS................................................ $ 902.5 $ 823.1 $ 708.1
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 28
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH AND CASH EQUIVALENTS................................... $ 294.8 $ 278.4
INVESTMENTS IN DEBT AND EQUITY SECURITIES -- NOTE 5......... 1,153.5 1,044.4
FINANCE RECEIVABLES, net of unearned finance income,
allowance for credit losses and insurance policy and
claims reserves -- NOTE 3................................. 45,430.2 39,714.5
OTHER ASSETS -- NOTE 6...................................... 3,652.6 1,560.8
--------- ---------
Total assets...................................... $50,531.1 $42,598.1
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE -- NOTE 8
Commercial Paper.......................................... $17,184.5 $14,712.6
Bank Loans................................................ 1,202.1 1,001.8
ACCOUNTS PAYABLE AND ACCRUALS............................... 960.4 980.6
LONG-TERM DEBT -- NOTE 9.................................... 25,135.4 20,816.9
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 1,612.7
Retained Earnings......................................... 4,229.5 3,327.0
Unrealized (Loss) Gain on Available-for-Sale
Securities -- NOTES 2 and 5............................ 4.4 (0.5)
--------- ---------
Total stockholders' equity........................ 6,048.7 5,086.2
--------- ---------
Total liabilities and stockholders' equity........ $50,531.1 $42,598.1
========= =========
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 29
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, 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
Net Earnings........................... 823.1 823.1
Contributions from Parent.............. 82.1 82.1
Cash Dividends.........................
Class B Common Shares............... (14.2) (14.2)
Common Shares....................... (204.7) (204.7)
Other............................... (31.4) (31.4)
Current Period Adjustment.............. (12.7) (12.7)
------ -------- -------- ------ --------
DECEMBER 31, 1996........................ 147.0 1,612.7 3,327.0 (0.5) 5,086.2
Net Earnings........................... 902.5 902.5
Contributions from Parent.............. 55.1 55.1
Current Period Adjustment.............. 4.9 4.9
------ -------- -------- ------ --------
DECEMBER 31, 1997........................ $147.0 $1,667.8 $4,229.5 $ 4.4 $6,048.7
====== ======== ======== ====== ========
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 30
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net earnings......................................... $ 902.5 $ 823.1 $ 708.1
Adjustments to reconcile net earnings to net cash
provided from operating activities:
Provision for losses on finance receivables..... 1,195.6 963.4 729.7
Depreciation and amortization................... 268.2 204.5 149.4
Increase in insurance policy and claims
reserves..................................... 69.4 90.3 57.2
Deferred income taxes........................... 17.5 42.8 18.5
Unrealized (gain) loss on trading securities.... (3.1) 1.7 (3.6)
Purchases of trading securities................. (174.0) (5.8)
Sales and maturities of trading securities...... 56.3 0.6 38.7
(Decrease) increase in accounts payable
and accruals................................. (102.9) 111.2 61.3
---------- ---------- ----------
Net cash provided from operating
activities................................. 2,229.5 2,237.6 1,753.5
---------- ---------- ----------
Cash Flows from Investing Activities
Finance receivables originated or purchased.......... (42,796.6) (38,876.6) (33,433.9)
Finance receivables liquidated....................... 35,890.9 32,648.0 27,772.2
Acquisitions of other finance businesses, net........ (143.9)
(Increase) decrease in real estate loans held for
sale.............................................. (21.8) 13.5 (3.7)
Purchases of available-for-sale securities........... (253.3) (542.5) (893.9)
Sales and maturities of available-for-sale
securities........................................ 271.9 359.4 636.8
Increase in other assets............................. (2,073.8) (487.2) (20.6)
---------- ---------- ----------
Net cash used for investing activities....... (8,982.7) (6,885.4) (6,087.0)
---------- ---------- ----------
Cash Flows from Financing Activities
Issuance of long-term debt........................... 7,366.7 5,133.1 5,154.5
Retirement of long-term debt......................... (3,085.5) (2,627.6) (2,015.7)
Increase in notes payable............................ 2,485.0 2,279.7 1,222.8
Cash contributions from parent....................... 3.4 82.1 200.0
Cash dividends to parent............................. (250.3) (280.0)
---------- ---------- ----------
Net cash provided from financing
activities................................. 6,769.6 4,617.0 4,281.6
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents....... 16.4 (30.8) (51.9)
Cash and cash equivalents at beginning of period....... 278.4 309.2 361.1
---------- ---------- ----------
Cash and cash equivalents at end of period............. $ 294.8 $ 278.4 $ 309.2
========== ========== ==========
Cash paid for:
Interest............................................. $ 2,505.3 $ 2,190.8 $ 1,950.6
========== ========== ==========
Income taxes......................................... $ 558.2 $ 407.2 $ 431.8
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 31
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 a
majority indirect-owned subsidiary of Ford Motor Company ("Ford"). All the
outstanding Common Stock of Associates is owned by First Capital. All shares of
Class B Common Stock are owned by Associates World Capital Corporation, a
wholly-owned subsidiary of First Capital. Class B Common Stock is redeemable
only at the option of the issuer. The Company is a leading, diversified consumer
and commercial finance organization which provides finance, leasing and related
services to individual consumers and businesses in the United States and Puerto
Rico. As described in NOTE 17, on October 8, 1997, Ford announced plans to spin
off its 80.7% interest in First Capital in the form of a distribution of its
First Capital shares to Ford common and class B stockholders.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
Basis of Presentation and Consolidation
The accompanying consolidated financial statements consolidate Associates
and its subsidiaries. The 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
estimates. These estimates are subjective in nature and involve 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, 1997 and 1996, net finance receivables on
which revenue was not accrued approximated $1.1 billion and $1.0 billion,
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 investment and
other income 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, principally preferred stock,
are included in investment and other income as incurred. The cost basis of debt
and equity securities sold is determined by the specific identification method.
30
<PAGE> 32
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Receivables Sold with Servicing Retained
As required, the Company adopted Statement of Financial Accounting
Standards No. 125 ("SFAS 125"), -- Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities on January 1, 1997. In 1996,
the Company securitized certain manufactured housing receivables. During 1997,
the assets and related servicing of the manufactured housing business were sold,
at net book value, to Associates Housing Finance Services ("AHFS"), a subsidiary
of First Capital. Immediately after the sale the Company purchased a
participation in substantially all of AHFS's assets. Securitized transactions
have been conducted by First Capital in 1997. The Company's participation in the
assets of AHFS required that these transactions be recorded in accordance with
SFAS 125. Under SFAS 125, a sale is recognized when control over the securitized
receivable is relinquished. The difference between the net proceeds received and
the carrying amount of the receivable sold is recognized as a gain or loss on
sale. To date, no significant securitization related gains or losses have been
recorded by the Company. On December 31, 1997, the participation agreement was
terminated and substantially all receivables of the manufactured housing
business were included in the consolidated amounts of First Capital.
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 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
generally 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 contractually 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 contractually delinquent. A contractually
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.
Although the allowance for losses on finance receivables reflected in the
Company's consolidated balance sheet at December 31, 1997 is considered adequate
by the Company's management, there can be no assurance that this allowance will
prove to be adequate over time to cover ultimate losses in connection with the
Company's finance receivables. This allowance may prove to be inadequate due to
unanticipated adverse changes in the economy or discrete events adversely
affecting specific customers or industries. The Company's results of operations
and financial condition could be materially adversely affected to the extent
that the Company's allowance is insufficient to cover such changes or events.
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
31
<PAGE> 33
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
First Capital 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.
On May 6, 1996, First Capital entered into a modified tax sharing agreement
with Ford which addressed the United States federal and state taxes. This
agreement is discussed further in NOTE 10.
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.
Disclosure about Fair Value of Financial Instruments
The consolidated financial statements present the information required by
Statement of Financial Accounting Standards No. 107 ("SFAS 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.
Derivative Financial Instruments
The Company uses derivative financial instruments for the purpose of
hedging specific exposures as part of its risk management program and holds all
derivatives for purposes other than trading. Deferral (hedge) accounting is
applied only if the derivative reduces the risk of the underlying hedged item
and is designated at inception as a hedge with respect to the underlying hedged
item. Additionally, the derivative must result in cash flows that are expected
to be inversely correlated to those of the underlying hedged item. Such
instruments to date have been limited to interest rate swap, currency swap and
treasury lock agreements.
Interest rate and currency swap agreements are used to hedge specific debt
obligations and financing transactions. Accordingly, the differential paid or
received by the Company on these agreements is recognized as an adjustment to
interest expense over the term of the underlying transaction.
Treasury lock agreements are used to hedge specific anticipated debt
issuances of the Company. Accordingly, the differential paid or received by the
Company on maturity of a treasury lock agreement is recognized as an adjustment
to interest expense over the term of the underlying financing transaction.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income", was issued by the Financial Accounting
Standards Board in June 1997. This Statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive
32
<PAGE> 34
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company will adopt SFAS 130
beginning January 1, 1998.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information", was
issued by the Financial Accounting Standards Board in June 1997. This Statement
establishes standards for reporting information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company is in the process of
finalizing its determination of its reportable segments under SFAS 131 and plans
to adopt SFAS 131 in the year ending December 31, 1998.
NOTE 3 -- FINANCE RECEIVABLES
Composition of Finance Receivables
At December 31, 1997 and 1996, net finance receivables consisted of the
following (in millions):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Consumer Finance
Home equity lending....................................... $17,437.3 $15,435.9
Personal lending and retail sales finance................. 6,920.6 5,786.5
Credit card............................................... 7,333.6 5,517.1
Manufactured housing(1)................................... 24.1 1,257.6
--------- ---------
31,715.6 27,997.1
--------- ---------
Commercial Finance
Truck and truck trailer................................... 9,011.1 8,077.6
Equipment................................................. 4,899.8 4,261.4
Auto fleet leasing........................................ 1,418.9 1,087.4
Warehouse lending and other(2)............................ 809.1 355.4
--------- ---------
16,138.9 13,781.8
--------- ---------
Finance receivables, net of unearned finance
income ("net finance receivables").............. 47,854.5 41,778.9
Allowance for losses on finance receivables................. (1,661.9) (1,371.4)
Insurance policy and claims reserves........................ (762.4) (693.0)
--------- ---------
Finance receivables, net of unearned finance
income, allowance for losses and insurance
policy and claims reserves...................... $45,430.2 $39,714.5
========= =========
</TABLE>
- ---------------
(1) During 1996, the Company securitized and sold approximately $1.3 billion of
manufactured housing retail finance receivables. In 1996, the servicing
rights to such securitizations were transferred to AHFS, an affiliate and
subsidiary of First Capital. During 1997, the Company sold, at net book
value, substantially all of its outstanding manufactured housing retail
finance receivables to AHFS. Immediately subsequent to the sale, the Company
purchased a participation interest, at net book value, in substantially all
of such receivables. During 1997, First Capital securitized and sold
approximately $800 million of manufactured housing finance receivables which
reduced the dollar amount of participation owned by the Company in such
receivables. Through its participation in AHFS manufactured housing
receivables, the Company recognized no significant gains on the sale of such
receivables. At December 31, 1997, the Company terminated its participation
in the manufactured housing receivables of AHFS and substantially all
manufactured housing receivables were transferred, at book value, to First
Capital.
(2) Includes warehouse lending, Small Business Administration lending and
municipal finance (in 1996, municipal finance receivables were included in
truck and truck trailer and equipment net finance receivables).
33
<PAGE> 35
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, contractual maturities of net finance receivables
were as follows (in millions):
<TABLE>
<CAPTION>
CONSUMER COMMERCIAL
YEAR DUE FINANCE FINANCE TOTAL
-------- ---------- ---------- ----------
<S> <C> <C> <C>
1998.......................................... $ 4,339.4 $ 6,165.6 $ 10,505.0
1999.......................................... 3,829.8 4,165.2 7,995.0
2000.......................................... 3,359.5 2,648.6 6,008.1
2001.......................................... 2,711.9 1,573.2 4,285.1
2002 and thereafter........................... 17,475.0 1,586.3 19,061.3
---------- ---------- ----------
$ 31,715.6 $ 16,138.9 $ 47,854.5
========== ========== ==========
</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.
Included in commercial finance receivables are direct financing leases as
follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
-------- --------
<S> <C> <C>
Minimum lease rentals....................................... $5,448.9 $4,199.5
Unearned finance income..................................... (759.4) (596.7)
-------- --------
Net investment in direct financing leases................. $4,689.5 $3,602.8
======== ========
</TABLE>
Future net minimum lease rentals on direct financing leases for each of the
years succeeding December 31, 1997 are as follows (in millions):
1998 -- $1,462.3; 1999 -- $1,230.4; 2000 -- $982.0; 2001 -- $609.5;
2002 -- $279.9 and 2003 and thereafter -- $125.4.
Estimated Fair Value of Net Finance Receivables
The estimated fair value of net finance receivables at December 31, 1997
and 1996 was $50.6 billion and $44.7 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 at December 31, 1997 as follows: 12% were in
California, 7% in Florida, 7% in Texas, and no other individual state had more
than 5%.
Acquisitions of Finance Businesses
During the years ended December 31, 1997, 1996 and 1995, the Company made
acquisitions of finance receivables and finance businesses, the most significant
of which were as follows:
In December 1997, Associates acquired the United States based
commercial auto fleet leasing operation of AT&T Capital Corporation. The
fair market value of the assets acquired was approximately $233 million.
The transaction was accounted for as a purchase.
34
<PAGE> 36
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 1997, Associates National Bank (Delaware), a subsidiary of
First Capital, acquired a portfolio of proprietary credit card receivables
and stock from Texaco Refining and Marketing, Inc. and its affiliate, Star
Enterprise. The fair market value of the assets acquired was approximately
$704 million. The transaction was accounted for as a purchase by First
Capital. Substantially all of the acquired receivables were sold to
Associates in the form of a participation and are included in the net
finance receivables of Associates.
In April 1997, Associates National Bank (Delaware), a subsidiary of
First Capital, acquired a portfolio of bankcard credit card receivables
from J.C. Penney, Inc. The fair market value of the assets acquired was
approximately $700 million. The transaction was accounted for as a purchase
by First Capital. Substantially all of the acquired receivables were sold
to Associates in the form of a participation and are included in the net
finance receivables of Associates.
In March 1997, Associates National Bank (Delaware), a subsidiary of
First Capital, acquired a portfolio of bankcard credit card receivables
from The Bank of New York. The fair market value of such assets acquired
totaled approximately $800 million. The transaction was accounted for as a
purchase by First Capital. Substantially all of the acquired receivables
were sold to Associates in the form of a participation and are included in
the net finance receivables of Associates.
In August 1996, Associates acquired $1.2 billion of net finance
receivables, principally home equity and personal lending receivables and
other assets and liabilities, from Fleet Financial Group. The fair market
value of total assets acquired and liabilities assumed was $1.3 billion and
$1.0 million, respectively.
In July 1996, Associates acquired $837.6 million of certain assets of
USL Capital, an affiliate and Ford subsidiary. Such assets acquired
consisted principally of vehicle fleet leasing receivables. The transaction
was accounted for at historical cost. The excess of purchase price over the
historical value of assets acquired was $31.4 million which was recorded as
an adjustment to stockholders' equity.
In October 1995, Associates acquired the assets of LCA Corporation,
principally consisting of leasing receivables. The fair market value of
total assets acquired and liabilities assumed was $253 million and $225
million, respectively.
In January 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.
The pro forma effect of the above acquisitions, when taken in aggregate for
each reporting period, was not significant.
35
<PAGE> 37
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
-------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period.......................... $ 1,371.4 $1,109.2 $ 932.4
Provision for losses.................................. 1,195.6 963.4 729.7
Recoveries on receivables charged off................. 190.5 127.7 112.3
Losses sustained...................................... (1,298.3) (925.7) (670.0)
Reserves of acquired businesses and other............. 202.7 96.8 4.8
--------- -------- --------
Balance at end of period................................ $ 1,661.9 $1,371.4 $1,109.2
========= ======== ========
</TABLE>
NOTE 5 -- INVESTMENTS IN DEBT AND EQUITY SECURITIES
Debt Securities
The Company invests in debt securities, principally bonds and notes held by
the Company's insurance subsidiaries, with the intention of holding them to
maturity. However, if market conditions change, the Company may sell these
securities prior to maturity. Accordingly, the Company classifies its
investments in debt securities as available-for-sale and adjusts its recorded
value to market. During 1997 and 1996, gross realized gains and losses on sales
amounted to $2.4 million and $0.2 million, and $3.5 million and $0.1 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, 1997 and
1996 (in millions):
<TABLE>
<CAPTION>
1997
------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government obligations................ $ 182.6 $ 2.4 $ (0.8) $ 184.2
Corporate obligations...................... 219.5 1.1 (1.1) 219.5
Mortgage-backed............................ 598.4 5.4 (0.3) 603.5
Other...................................... 15.3 15.3
-------- ------ ------ --------
Total debt securities............ $1,015.8 $ 8.9 $ (2.2) $1,022.5
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government obligations................ $ 267.1 $ 4.8 $ (1.2) $ 270.7
Corporate obligations...................... 282.6 1.2 (4.3) 279.5
Mortgage-backed............................ 475.2 1.3 (2.7) 473.8
Other...................................... 10.0 0.1 10.1
-------- ------ ------ --------
Total debt securities............ $1,034.9 $ 7.4 $ (8.2) $1,034.1
======== ====== ====== ========
</TABLE>
36
<PAGE> 38
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market value of debt securities at
December 31, 1997 and 1996, by contractual maturity, are shown below (in
millions):
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less.............................. $ 81.8 $ 82.2 $ 67.0 $ 67.5
Due after one year through five years................ 383.1 385.9 410.3 412.0
Due after five years through ten years............... 195.2 195.5 269.5 267.9
Due after ten years.................................. 355.7 358.9 288.1 286.7
-------- -------- -------- --------
$1,015.8 $1,022.5 $1,034.9 $1,034.1
======== ======== ======== ========
</TABLE>
Equity Securities
Equity security investments, principally preferred stock, are recorded at
market value. The Company classifies its investments in equity securities as
trading securities and includes in earnings unrealized gains or losses on such
securities. The estimated market value at December 31, 1997 and 1996 was $131.0
million and $10.3 million, respectively. Historical cost at December 31, 1997
and 1996 was $126.7 million and $7.8 million, respectively.
Estimated market values of debt and equity securities are based on quoted
market prices.
NOTE 6 -- OTHER ASSETS
The components of other assets at December 31, 1997 and 1996 were as
follows (in millions):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Balances with related parties -- NOTE 14 ................. $2,331.0 $ 341.0
Goodwill.................................................... 343.1 353.1
Property and equipment...................................... 164.2 127.9
Collateral held for resale.................................. 205.6 161.5
Other....................................................... 608.7 577.3
-------- --------
Total other assets................................ $3,652.6 $1,560.8
======== ========
</TABLE>
NOTE 7 -- CREDIT FACILITIES
At December 31, 1997, Associates had the following credit facilities (in
millions):
<TABLE>
<CAPTION>
FACILITY
CREDIT FACILITY DESCRIPTION AMOUNT
--------------------------- ---------
<S> <C>
Lines of Credit $ 5,635.9*
Revolving Lines 7,505.0*
Receivables Purchase Facilities 1,775.0
---------
$14,915.9
=========
</TABLE>
- ---------------
* Included in Associates lines of credit and revolving lines are $210 million
and $2.6 billion 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, including failure to pay
principal or interest when due, breach of representations, warranties or
covenants, default on other debt, or bankruptcy or other insolvency-type
proceedings. Associates
37
<PAGE> 39
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pays fees for the availability of its credit facilities ranging from .06 to .17
of 1% per annum of the facility amount.
NOTE 8 -- 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 range from 3 to 8 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, 1997......................... $17,184.5 $1,202.1
Weighted average interest rate at December 31, 1997......... 5.91% 7.51%
Ending balance at December 31, 1996......................... $14,712.6 $1,001.8
Weighted average interest rate at December 31, 1996......... 5.82% 7.94%
</TABLE>
The amounts reported in the consolidated balance sheet approximate fair
value.
NOTE 9 -- LONG-TERM DEBT
Outstanding balances of long-term debt at December 31 were as follows (in
millions):
<TABLE>
<CAPTION>
INTEREST RATE MATURITIES
RANGE THROUGH 1997 1996
------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Senior Notes.................... 5.96%-8.55% 2037 $24,710.0 $20,391.4
Subordinated and Capital:
Subordinated.................. 6.88%-8.15% 2009 425.0 425.0
Capital....................... 6.73%-6.73% 2002 0.4 0.5
--------- ---------
425.4 425.5
--------- ---------
Total long-term
debt................ $25,135.4 $20,816.9
========= =========
</TABLE>
The weighted average interest rate for total long-term debt was 6.77% at
December 31, 1997 and 7.02% at December 31, 1996.
The estimated fair value of long-term debt at December 31, 1997 and 1996
was $21.5 billion and $21.2 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: 1998, $4,190.5 million;
1999, $5,198.0 million; 2000, $3,479.2 million; 2001, $3,304.0 million; 2002,
$3,926.5 million and 2003 and thereafter, $5,037.2 million. Certain debt issues
are subject to put or call redemption provision whereby repayment may be prior
to the maturity date. As applicable, the amount of the option premium received
by the Company is deferred and amortized over the expected life of the debt
obligation.
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
38
<PAGE> 40
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, $781.1 million was available for dividends at December 31,
1997.
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 $2.0
billion. At December 31, 1997, Associates tangible net worth was approximately
$5.7 billion.
NOTE 10 -- 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, 1997
Current................................................. $472.7 $34.3 $507.0
------ ----- ------
Deferred:
Leasing transactions................................. 52.0 52.0
Finance revenue...................................... (37.0) (37.0)
Provision for losses on finance receivables and
other.............................................. 2.5 2.5
------ ----- ------
Total deferred.................................. 17.5 17.5
------ ----- ------
$490.2 $34.3 $524.5
====== ===== ======
Year Ended December 31, 1996
Current................................................. $407.9 $31.3 $439.2
------ ----- ------
Deferred:
Leasing transactions................................. 102.5 102.5
Finance revenue...................................... (6.9) (6.9)
Provision for losses on finance receivables and
other.............................................. (52.8) (52.8)
------ ----- ------
Total deferred.................................. 42.8 42.8
------ ----- ------
$450.7 $31.3 $482.0
====== ===== ======
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
====== ===== ======
</TABLE>
39
<PAGE> 41
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997 and 1996, the components of the Company's net deferred
tax asset were as follows (in millions):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Provision for losses on finance receivables and other..... $ 642.7 $ 614.4
Postretirement and other employee benefits................ 57.1 69.3
------- -------
699.8 683.7
Deferred tax liabilities:
Leasing transactions...................................... (396.3) (344.3)
Finance revenue and other................................. (163.2) (179.4)
------- -------
(559.5) (523.7)
------- -------
Net deferred tax asset............................ $ 140.3 $ 160.0
======= =======
</TABLE>
First Capital is included in Ford's federal consolidated income tax group,
and First Capital's federal income tax liability will be included in the
consolidated federal income tax liability of Ford and its subsidiaries. In
certain circumstances, First Capital's and the Company's subsidiaries will also
be included with certain Ford subsidiaries in combined, consolidated or unitary
income tax groups for state and local tax purposes. On May 6, 1996, First
Capital entered into a modified tax sharing agreement with Ford. Pursuant to
this agreement, the amount of taxes to be paid by the Company will be determined
as though the Company were to file separate federal, state and local income tax
returns as the common parent of an affiliated group of corporations filing
combined, consolidated or unitary (as applicable) federal, state and local
income tax returns.
The effective tax rate differed from the statutory United States Federal
income tax rate as follows:
<TABLE>
<CAPTION>
% OF PRETAX INCOME
YEAR ENDED DECEMBER 31
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate.......................................... 35.0% 35.0% 35.0%
State tax rate.............................................. 1.6 1.6 1.2
Other non-deductible items.................................. 0.2 0.3 0.7
---- ---- ----
Effective tax rate................................ 36.8% 36.9% 36.9%
==== ==== ====
</TABLE>
On October 8, 1997, Ford announced its intention to distribute shares of
First Capital pursuant to the tax-free spin-off provisions of the Internal
Revenue Code, subject to receiving a favorable ruling from the Internal Revenue
Service. Ford and First Capital plan to enter into a separation agreement which,
among other matters, will determine how Ford and First Capital will settle
certain tax matters related to open year tax returns subject to the existing tax
sharing agreement between Ford and First Capital.
NOTE 11 -- LEASE COMMITMENTS
Leases on the Company's branch and operating center facilities are
primarily short-term and generally provide for renewal options not exceeding the
initial term. Total rent expense for the years ended December 31, 1997, 1996 and
1995 was $91.9 million, $77.7 million, and $67.0 million, respectively. Minimum
rental commitments as of December 31, 1997 for all noncancelable leases
(primarily office leases) for the years ending December 31, 1998, 1999, 2000,
2001 and 2002 are $69.9 million, $56.0 million, $39.1 million, $24.5 million and
$5.1 million, respectively, and $3.1 million thereafter.
40
<PAGE> 42
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- 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 United States based employees who meet certain eligibility
requirements.
Net periodic pension cost for the years indicated includes the following
components (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost............................................ $ 20.1 $ 18.8 $ 13.1
Interest cost........................................... 29.4 26.4 23.1
Actual return on Plan assets............................ (76.7) (49.3) (51.1)
Net amortization........................................ 50.0 28.7 33.9
------ ------ ------
Net periodic pension cost............................. $ 22.8 $ 24.6 $ 19.0
====== ====== ======
Assumed discount rate, beginning of year................ 7.25% 7.00% 8.25%
====== ====== ======
</TABLE>
The funded status of the Plan is as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1997 1996
------------------------ ------------------------
QUALIFIED NONQUALIFIED QUALIFIED NONQUALIFIED
PLAN PLAN PLAN PLAN
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligation:
Vested................................. $ 344.4 $ 34.0 $275.0 $25.3
Nonvested.............................. 15.9 2.7 12.1 0.3
------- ------- ------ -----
Accumulated benefit obligation........... 360.3 36.7 287.1 25.6
Effect of projected future salary
increases.............................. 84.6 11.1 77.5 10.6
------- ------- ------ -----
Projected benefit obligation............. 444.9 47.8 364.6 36.2
Plan assets at fair market value......... 473.5 376.1
------- ------- ------ -----
(Excess)/shortage of plan assets over
plan obligation........................ (28.6) 47.8 (11.5) 36.2
Unamortized transition obligation and
amendments............................. (2.2) (2.9) (3.6) (3.4)
Unamortized net loss..................... (12.8) (17.1) (15.0) (8.6)
Adjustment required to recognize minimum
liability.............................. 8.9 1.4
------- ------- ------ -----
(Prepaid)/accrued pension liability.... $ (43.6) $ 36.7 $(30.1) $25.6
======= ======= ====== =====
Assumed discount rate.................... 6.75% 6.75% 7.25% 7.25%
======= ======= ====== =====
Projected compensation increases......... 5.00% 5.00% 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.
Associates Savings and Profit-Sharing Plan
The Company participates in a defined contribution plan sponsored by First
Capital that covers substantially all United States based employees who meet
certain eligibility requirements, is intended to
41
<PAGE> 43
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provide assistance in accumulating personal savings for retirement and is
designed to qualify for favorable tax treatment under Sections 401(a) and 401(k)
of the United States Internal Revenue Code of 1986, as amended. For the years
ended December 31, 1997, 1996 and 1995, the Company's pretax contributions to
the plan were $21.9 million, $19.1 million and $16.6 million, respectively.
Employers' Accounting for Postretirement Benefits Other Than Pensions
The Company provides for certain postretirement benefits through unfunded
plans sponsored by First Capital. These benefits are currently provided to
substantially all United States based employees who meet certain eligibility
requirements. The benefits of such plans can be modified or terminated at the
discretion of First Capital. The amount paid for postretirement nonpension
benefits for the years ended December 31, 1997, 1996 and 1995 was approximately
$2.8 million, $2.7 million and $2.0 million, respectively.
Net periodic postretirement benefit cost for 1997, 1996 and 1995 includes
the following components (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Service cost................................................ $ 7.1 $ 7.5 $ 5.5
Interest cost............................................... 8.2 8.2 7.7
Net amortization............................................ (1.4) (0.7) (1.3)
----- ----- -----
Net periodic postretirement benefit cost.................. $13.9 $15.0 $11.9
===== ===== =====
Assumed discount rate, beginning of year.................... 7.50% 7.25% 8.75%
===== ===== =====
</TABLE>
Accrued postretirement benefit cost at December 31, 1997 and 1996 is
composed of the following (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1997 1996
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation ("APBO"):
Retired participants...................................... $ 48.3 $ 45.2
Fully eligible participants............................... 30.0 24.9
Other active participants................................. 51.5 45.1
------ ------
Total APBO........................................ 129.8 115.2
Unamortized amendments...................................... 2.5 3.9
Unrecognized actuarial loss................................. (9.8) (7.9)
------ ------
Accrued postretirement benefit cost....................... $122.5 $111.2
====== ======
Assumed discount rate....................................... 7.00% 7.50%
====== ======
</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, an 11.27% and 11.67% weighted average annual rate
of increase in per capita cost of covered health care benefits was assumed for
1997 and 1996, 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, 1997 and 1996 by $9.5 million
and $8.4 million, respectively, and the aggregate of the service and interest
cost components of the net periodic postretirement benefit cost by $1.1 million
and $1.2 million, respectively.
42
<PAGE> 44
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCENTIVE COMPENSATION PROGRAMS
First Capital sponsors various compensation plans covering certain officers
and employees.
Incentive Compensation Plan and Long-Term Performance Plan
The Company participates in the Incentive Compensation Plan (the "ICP"),
sponsored by First Capital, which beginning in 1997 provided, among other types
of compensation, for corporate annual performance pay bonuses. The size of the
ICP bonus pools is determined based, in part, on the performance of First
Capital. Prior to 1997, corporate annual performance bonuses were provided for
by the Corporate Annual Performance Plan (the "CAPP"). The Long-Term Performance
Plan ("LTPP") is a long-term cash incentive plan. The size of the LTPP incentive
pool is determined for a performance period based, in part, on the success of
First Capital 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. Bonuses reflect individual participants' performances during
the applicable performance period. Amounts charged to expense for these bonus
plans amounted to $25.1 million, $23.3 million and $16.1 million during the
years ended December 31, 1997, 1996 and 1995, respectively.
Phantom Stock Appreciation Right Plan
The Company participated 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 extinguished, principally by cash payment, all
outstanding phantom stock appreciation rights ("PSARs") prior to completion of
First Capital's initial public offering in 1996. 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 during the
year ended December 31, 1995. No amounts were charged to expense in 1997 and
1996. Upon termination of the PSAR Plan, certain officers of the Company were
required to defer one-half of the amount payable in satisfaction of their
respective PSARs granted in 1995. The amounts so deferred are administered by
the Company in accordance with the terms of the Associates First Capital
Corporation Equity Deferral Plan (the "EDP").
Stock-Based Compensation Plans
Incentive Compensation Plan -- The Company participates in the ICP,
formerly known as the Long-Term Equity Compensation Plan (the "ECP") sponsored
by First Capital. The ECP was established in 1996, amended and renamed effective
January 1, 1997. First Capital had no outstanding grants under any other
stock-based compensation plan prior to 1996. The ICP allows First Capital to
issue to employees awards of up to 20,799,268 shares of its Class A Common Stock
("Common Stock"). Awards may be made as nonqualified or incentive stock options,
stock appreciation rights, restricted stock, performance units or performance
shares.
43
<PAGE> 45
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the activity of option grants by First Capital under the ICP
for the years ended December 31, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year........................... 2,374,440 $29.07 $
Granted.......................... 2,386,025 43.59 2,436,290 29.07
Exercised........................ (216,604) 30.10
Forfeited........................ (349,010) 36.96 (61,850) 29.00
--------- ---------
Outstanding at end of year....... 4,194,851 $36.62 2,374,440 $29.07
========= ====== ========= ======
Options exercisable at year
end............................ 520,419 $29.09
========= ======
Weighted-average fair value of
options granted during the
year........................... $ 11.24 $ 9.32
========= =========
</TABLE>
The fair value was determined at the date of grant using the Black-Scholes
option-pricing model which assumed a 1997 and 1996 dividend yield range of
0.65%-0.92% and 0.97%-1.38%, expected volatility of 22.00% and 30.44%, risk free
interest rate range of 5.90%-6.81% and 6.30%-6.66%, respectively, and an
expected option life range of 4-6 years.
The weighted average remaining life and weighted average exercise price for
total options outstanding and exercisable options outstanding at December 31,
1997 is summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------
RANGE OF EXERCISE WEIGHTED-AVG. WEIGHTED-AVG. WEIGHTED-AVG.
PRICES OPTIONS REMAINING LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
----------------- --------- -------------- -------------- ------- --------------
(YEARS)
<S> <C> <C> <C> <C> <C>
$29.00 to $39.99......... 2,010,881 8.35 $29.02 517,755 $29.03
40.00 to 62.19......... 2,183,970 9.02 43.61 2,664 41.38
--------- -------
29.00 to 62.19......... 4,194,851 8.70 36.62 520,419 29.09
========= =======
</TABLE>
Under the ICP, in 1997 and 1996, First Capital issued 42,000 and 169,630
shares of restricted Common Stock to employees, of which 200,500 were
outstanding at December 31, 1997.
Deemed Investment in Stock -- In 1997 and 1996 under the EDP, First Capital
credited PSAR amounts deferred by selected employees to unfunded accounts that
are deemed to be invested in shares of First Capital Common Stock. Accounts are
credited with amounts that reflect dividends paid on Common Stock, which amounts
are then deemed to be reinvested in First Capital Common Stock. Amounts deferred
are fully vested and payable beginning in May 2001, subject to earlier
distribution upon a participant's death, disability, retirement or termination
of employment, in cash and/or shares of First Capital Common Stock.
Approximately 860 and 131,890 deemed shares were issued by First Capital during
1997 and 1996, respectively, including 860 and 608 respective shares related to
the reinvestment of dividends, 104,257 of which were outstanding at December 31,
1997. The value of all such shares at year end based on $71 3/16 per common
share was $7.4 million.
Accounting for Stock-Based Compensation Plans -- First Capital has elected
to apply Accounting Principles Board Opinion 25 ("APB 25") rather than the
optional provisions of Statement of Financial Accounting Standards No. 123
("SFAS 123") in accounting for its stock-based compensation plans. Had the
compensation cost of First Capital's stock-based compensation plans been
determined based on the optional
44
<PAGE> 46
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provisions of SFAS 123, in the years ended December 31, 1997 and 1996 the
Company's net income would have been approximately $894 million and $820
million, respectively.
NOTE 13 -- COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
Various legal actions, governmental investigations and proceedings and
claims are pending or may be instituted or asserted in the future against the
Company and its subsidiaries. Certain of the pending legal actions are, or
purport to be, class actions. Some of the foregoing matters involve or may
involve compensatory, punitive, or other treble damage claims which, if
adversely held against the Company, would require large expenditures or could
affect the manner in which the Company conducts its business.
Litigation is subject to many uncertainties, and the outcome of individual
litigated matters is not predictable with assurance. Some of the matters
discussed in the foregoing paragraph could be decided unfavorably to the Company
or the subsidiary involved and could require the Company or such subsidiary to
pay damages or make other expenditures in amounts or a range of amounts that
cannot be estimated at December 31, 1997. The Company does not reasonably
expect, based on its analysis, that any adverse outcome from such matters would
have a material effect on future consolidated financial statements for a
particular year, although such an outcome is possible.
NOTE 14 -- TRANSACTIONS AND BALANCES WITH RELATED PARTIES
Associates provides debt financing or advances to certain foreign
affiliates. At December 31, 1997 and 1996, amounts due from foreign affiliates
totaled $37.1 million and $35.2 million, respectively, and were included in
other assets. These receivables or advances bear variable interest rates (as
applicable) and are payable on demand. Interest income related to these
transactions was $2.2 million, $6.4 million and $7.9 million for the years ended
December 31, 1997, 1996 and 1995, respectively. The estimated fair value of
these receivables was $37.1 million and $35.2 million at December 31, 1997 and
1996, respectively.
Associates, from time to time, invests a portion of its working capital
funds in variable rate demand notes of First Capital. The balance of its
investment at December 31, 1996 was $(162.6) million and was included in other
assets. There was no balance outstanding at December 31, 1997. Income from such
investments totaled $0.3 million, $15.8 million and $14.3 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
Associates occasionally makes advances to Associates National Bank
(Delaware) ("ANB"), a wholly-owned subsidiary of First Capital. The balances of
such advances at December 31, 1997 and 1996 were $252.6 million and $174.2
million, respectively, and were included in other assets. Income from such
advances totaled $11.6 million, $8.6 million and $6.9 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
In 1997, Associates began making advances to AHFS, a wholly-owned
subsidiary of First Capital in the form of a participation in the finance
receivables of AHFS. At December 31, 1997, the participation agreement was
terminated and replaced with an advance to AHFS. The balance of such advance at
December 31, 1997 was $1.6 billion and is included in other assets. Income from
such participation agreement and advance totaled $9.3 million for the year ended
December 31, 1997.
At December 31, 1997 and 1996, the net consumer finance receivables
included participations in credit card receivables owned or originated by ANB,
an affiliate of Associates. The balances of these receivables were $7.3 billion
and $5.5 billion at December 31, 1997 and 1996, respectively, and were included
in finance receivables.
45
<PAGE> 47
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company provides certain services of an administrative nature, use of
certain tangible and intangible assets, including trademarks, guarantees of debt
support agreements (comfort letters) and related interest, and other management
services to certain of its foreign affiliates in Japan, Canada, the United
Kingdom, Costa Rica and Taiwan. Services and usage are charged to the affiliates
based on the nature of the service. Fees for financial accommodations range from
0.25% to 2.00% 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, 1997, 1996 and 1995 were $84.8 million, $74.7 million and $68.4
million, respectively.
The Company provides certain emergency roadside assistance and auto club
services and employee relocation services to Ford. Revenues related to these
services were $36.0 million, $33.4 million and $29.7 million for the years ended
December 31, 1997, 1996 and 1995, respectively. The agreement between the
Company and Ford which covers the roadside assistance services provided to Ford
contains a change in control provision which would be engaged at the proposed
spin-off date. At such time the agreement would be cancelable on 30 days notice.
Should the contract be terminated, such termination would be on a prospective
basis and would not have a material effect on the Company's results of
operations.
At December 31, 1997, the Company was a guarantor on debt and related
accrued interest of its foreign affiliate in Canada amounting to $1.2 billion.
Associates receives a fee for services it provides to First Capital. During
the years ended December 31, 1997, 1996 and 1995, Associates received $15.0
million, $6.0 million and $6.0 million, respectively in fees for these services.
At December 31, 1997 and 1996, Associates current income taxes
(receivable)/payable to First Capital amounted to $(8.1) million and $25.9
million, respectively.
On December 31, 1997 the Company received a contribution of $55.1 million
from its parent in the form of shares of an affiliate, Associates Financial
Services Company of Puerto Rico, Inc., ("AFS-PR"). The contribution was recorded
at fair value. The effect of AFS-PR's operations on the Company's current and
prior year financial statements was not significant; accordingly, the operations
of AFS-PR have not been retroactively reflected in the Company's financial
statements.
In March 1997, ANB, an affiliate of the Company acquired a portfolio of
approximately $800 million in credit card receivables from The Bank of New York.
Subsequently all of the receivables were sold to Associates in the form of a
participation and are included in the Company's net finance receivables. A
director of First Capital was Chairman and Chief Executive officer of The Bank
of New York during 1997. The Bank of New York and the Company are not otherwise
affiliated.
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.
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 interest rate swap, currency swap and
treasury lock agreements.
The Company manages its exposure to counterparty credit risk by limiting
its total position with any single counterparty and monitoring the financial
condition of each counterparty. In the unlikely event that a counterparty fails
to meet the terms of an agreement, the Company's financial exposure is limited
to the fair value of the agreement. Estimated fair values of such agreements are
determined by the Company using available market information and present
value-based valuation methods.
46
<PAGE> 48
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and anticipated debt issuances of the Company. Such
agreements are executed as an integral element of specific or anticipated
financing transactions. The aggregate notional amount of interest rate swap and
treasury lock agreements at December 31, 1997 was $2.0 billion. The fair value
of such agreements at December 31, 1997 was $(6.8) million. Interest rate swap
and treasury lock agreements mature on varying dates over the next 2 years and 9
months, respectively. The Company had no such agreements at December 31, 1996.
At December 31, 1997, the Company had foreign currency swap agreements
wherein the Company is obligated to receive a specific foreign currency in
exchange for United States Dollars at varying times over the next 4 years. The
aggregate notional amount of these agreements at December 31, 1997 was $272.7
million. The fair value of such agreements at December 31, 1997 was $1.2
million. The Company had no currency swap agreements at December 31, 1996. Such
agreements have been designated by the Company for accounting purposes as hedges
of specific debt obligations and are held for purposes other than trading.
The consumer finance business grants revolving lines of credit to certain
of its revolving customers. At December 31, 1997 the unused portion of these
lines aggregated $4.1 billion. 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, 1997
the unused portion of these lines aggregated $1.3 billion. The potential risk
associated with, and the estimated fair value of, the unused credit lines are
not considered to be significant.
NOTE 16 -- BUSINESS SEGMENT INFORMATION
Associates primary business activities are consumer finance and commercial
finance. The consumer finance operation is engaged in home equity, personal and
sales finance lending, purchasing participations in credit card receivables and
providing emergency roadside assistance and auto club services. The commercial
finance operation is principally engaged in the financing and leasing of
transportation, industrial and communication equipment, auto fleet leasing and
fleet management services, warehouse lending, Small Business Administration
lending and employee relocation 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.
47
<PAGE> 49
ASSOCIATES CORPORATION OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth information by business segment (in
millions):
<TABLE>
<CAPTION>
BUSINESS SEGMENT
----------------------
CONSUMER COMMERCIAL
FINANCE FINANCE(1) CONSOLIDATED
--------- ---------- ------------
<S> <C> <C> <C>
Year Ended or at December 31, 1997
Revenue.......................................... $ 5,343.1 $ 1,808.0 $ 7,151.1
========= ========= =========
Operating income(2).............................. $ 936.9 $ 490.1 $ 1,427.0
========= ========= =========
Total assets..................................... $34,157.0 $16,374.1 $50,531.1
========= ========= =========
Year Ended or at December 31, 1996
Revenue.......................................... $ 4,493.2 $ 1,728.2 $ 6,221.4
========= ========= =========
Operating income(2).............................. $ 914.5 $ 390.6 $ 1,305.1
========= ========= =========
Total assets..................................... $27,665.6 $14,932.5 $42,598.1
========= ========= =========
Year Ended or at December 31, 1995
Revenue.......................................... $ 3,882.4 $ 1,502.0 $ 5,384.4
========= ========= =========
Operating income(2).............................. $ 795.9 $ 325.5 $ 1,121.4
========= ========= =========
Total assets..................................... $23,278.0 $13,745.7 $37,023.7
========= ========= =========
</TABLE>
- ---------------
(1) Includes information pertaining to the financing of manufactured housing
purchases which are managed by the commercial operation.
(2) Includes operating income pertaining to the Company's non-operating
subsidiaries.
Capital expenditures and depreciation and amortization expense are not
significant.
NOTE 17 -- SUBSEQUENT EVENT
On October 8, 1997, Ford announced plans to spin off its 80.7% interest in
First Capital in the form of a distribution of its First Capital shares to Ford
common and class B stockholders. The transaction is subject to a ruling from the
United States Internal Revenue Service that the transaction will be tax-free to
Ford and its stockholders. The ruling process is expected to be completed in the
first half of 1998.
48
<PAGE> 50
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>
1997
-----------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Finance charges.............................. $1,684.3 $1,631.5 $1,595.5 $1,517.2
======== ======== ======== ========
Interest expense............................. $ 681.0 $ 655.2 $ 623.6 $ 584.1
======== ======== ======== ========
Earnings before provision for income taxes... $ 365.9 $ 364.7 $ 358.6 $ 337.8
Provision for income taxes................... 134.5 134.7 132.9 122.4
-------- -------- -------- --------
Net earnings................................. $ 231.4 $ 230.0 $ 225.7 $ 215.4
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Finance charges.............................. $1,478.0 $1,439.8 $1,354.2 $1,308.3
======== ======== ======== ========
Interest expense............................. $ 579.3 $ 581.4 $ 531.3 $ 514.7
======== ======== ======== ========
Earnings before provision for income taxes... $ 345.6 $ 326.4 $ 324.3 $ 308.8
Provision for income taxes................... 128.9 119.3 118.8 115.0
-------- -------- -------- --------
Net earnings................................. $ 216.7 $ 207.1 $ 205.5 $ 193.8
======== ======== ======== ========
</TABLE>
49
<PAGE> 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Items 10-13 has been omitted in accordance with
General Instruction J.(2)(c) to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 25
Consolidated Statement of Earnings for the years ended
December 31, 1997, 1996 and 1995.......................... 26
Consolidated Balance Sheet at December 31, 1997 and 1996.... 27
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995...... 28
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... 29
Notes to consolidated financial statements.................. 30
</TABLE>
(b) Reports on Form 8-K
During the quarter ended December 31, 1997, Associates filed Current
Reports on Form 8-K dated October 8, 1997 (related to the announcement
of Ford's planned spin-off of First Capital), October 14, 1997 (related
to the release of third quarter earnings) and October 23, 1997 and
December 4, 1997 (both related to the issuances of debt securities
pursuant to Rule 415).
50
<PAGE> 52
(c) Exhibits
<TABLE>
<C> <S>
(3) (1) Certificate of Incorporation. Incorporated by reference
to Exhibit 3(a) to the Company's Form 10-K for the fiscal
year ended October 31, 1986.
(2) By-laws.
(4) Instruments with respect to issues of long-term debt have
not been filed as exhibits to this annual report on Form
10-K as the authorized principal amount of any one of such
issues does not exceed 10% of the total assets of the
registrant and its consolidated subsidiaries. Registrant
agrees to furnish to the Commission a copy of each such
instrument upon its request.
(12) Computation of Ratio of Earnings to Fixed Charges.
(21) Subsidiaries of the registrant. Omitted in accordance with
General Instruction J.(2)(b) to Form 10-K.
(23) Consent of Independent Accountants.
(24) Powers of Attorney.
(27) Financial Data Schedule.
</TABLE>
51
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ASSOCIATES CORPORATION OF NORTH AMERICA
By /s/ JOHN F. STILLO
-----------------------------------------
Senior Vice President and Comptroller
February 19, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ KEITH W. HUGHES* Chairman of the Board,
- ----------------------------------------------------- Principal Executive Officer
(Keith W. Hughes) and Director
/s/ HAROLD D. MARSHALL* President and Director February 19, 1998
- -----------------------------------------------------
(Harold D. Marshall)
/s/ ROY A. GUTHRIE* Senior Executive Vice
- ----------------------------------------------------- President, Chief Financial
(Roy A. Guthrie) Officer and Director
/s/ JOHN F. STILLO Senior Vice President,
- ----------------------------------------------------- Comptroller and Principal
(John F. Stillo) Accounting Officer
</TABLE>
By signing his name hereto, John F. Stillo signs this document on behalf of
himself and each of the other persons indicated above pursuant to powers of
attorney duly executed by such persons.
*By /s/ JOHN F. STILLO
----------------------------------------
Attorney-in-fact
52
<PAGE> 54
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
(3) (1) Certificate of Incorporation. Incorporated by reference
to Exhibit 3(a) to the Company's Form 10-K for the fiscal
year ended October 31, 1986.
(2) By-laws.
(4) Instruments with respect to issues of long-term debt have
not been filed as exhibits to this annual report on Form
10-K as the authorized principal amount of any one of such
issues does not exceed 10% of the total assets of the
registrant and its consolidated subsidiaries. Registrant
agrees to furnish to the Commission a copy of each such
instrument upon its request.
(12) Computation of Ratio of Earnings to Fixed Charges.
(21) Subsidiaries of the registrant. Omitted in accordance with
General Instruction J.(2)(b) to Form 10-K.
(23) Consent of Independent Accountants.
(24) Powers of Attorney.
(27) Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.2
01/10/90
Rev. 09/25/96
BY-LAWS
OF
ASSOCIATES CORPORATION OF NORTH AMERICA
(DELAWARE)
ARTICLE I
STOCKHOLDERS
Section 1. PLACE OF MEETING: Meetings of the stockholders (whether annual or
special) may be held at such place, within or without the State of Delaware, as
the board of directors shall from time to time designate, provided, however, in
the absence of such designation, meetings shall be held at the principal office
of the company in Irving, Texas.
Section 2. ANNUAL MEETING: The annual meeting of stockholders shall be held at
such time as may from time to time be fixed by resolution of the board of
directors. Should said day be a Saturday, Sunday or legal holiday, such annual
meeting shall be held on the preceding regular business day. If, for any
reason,the annual meeting be not held at the time aforesaid, the directors shall
fix another date for such meeting.
Section 3. NOTICE OF ANNUAL MEETING: The secretary shall mail, in the manner
provided in Section 2 of Article V of these by-laws, or shall deliver, a written
or printed notice of each annual meeting to each stockholder of record entitled
to vote thereat, at least ten (10) days before the date of such meeting.
Section 4. PURPOSE OF ANNUAL MEETING: Annual meetings of stockholders shall be
held for the purpose of receiving the reports of officers, electing directors
and transacting such other business as may be properly presented thereat.
Section 5. SPECIAL MEETINGS: Special Meetings of the stockholders may be held at
any time on call of the chairman of the board of directors, or of a vice
chairman of the board of directors, or of the board of directors, or of the
president, or of the stockholders holding not less than one-fourth (1/4) of the
outstanding shares entitled, by the Certificate of Incorporation and by the
General Corporation Law of the State of Delaware, to vote on the business
proposed to be transacted thereat.
Section 6. NOTICE OF SPECIAL MEETINGS: The person or persons calling a special
meeting, or the secretary at their direction, shall mail, in the manner provided
in Section 2 of Article V of these by-laws, or shall deliver, a written or
printed notice thereof to each holder of outstanding shares entitled, by the
Certificate of Incorporation and by the General Corporation Law of the State of
Delaware, to vote on the business proposed to be transacted at such meeting, at
least ten (10) days before the date of such meeting. Such notice shall specify
by whom such meeting was called and the time and place thereof and the purpose
or purposes for which such meeting was called.
Section 7. WAIVER OF NOTICE: Any stockholder may waive, in writing, notice of
any meeting of stockholders. Presence of a stockholder, in person or by proxy,
at any meeting of stockholders, and participation in such meeting, shall
constitute a waiver of notice thereof on the part of such stockholder.
Section 8. QUORUM: A majority of the shares of issued and outstanding capital
stock entitled, by the Certificate of Incorporation and by the General
Corporation Law of the State of Delaware, to vote on the business proposed to be
transacted at such meeting represented by the holders of record thereof, in
person or by proxy, shall constitute a quorum for the transaction of business.
Section 9. VOTING RIGHTS: Shares which have been transferred on the books of the
company after the record date of such meeting fixed by the board of directors,
or, if no such record date is fixed, within ten (10) days next preceding the
date of the meeting, shall not be entitled to vote at such meeting.
At all meetings of the holders of common stock, each share of stock shall
be entitled to one (1) vote.
Section 10. PROXIES: Any stockholder entitled to vote at any meeting of
stockholders may vote either in person or by proxy executed in writing by the
stockholder or any authorized attorney in fact. All proxies shall be delivered
to the secretary at or before the time of such meeting. No proxy shall be valid
after eleven (11) months from the date of its execution unless a longer time is
<PAGE> 2
expressly provided therein.
Section 11. ORDER OF BUSINESS: The order of business at the annual meeting
and,so far as practical, at all other meetings shall be as follows:
1. Determination of shares present.
2. Reading and disposal of any unapproved minutes.
3. Reports of officers and committees.
4. Election of directors.
5. Unfinished business.
6. New business.
ARTICLE II
DIRECTORS
Section 1. NUMBER AND ELECTION: The number of directors of this company shall be
not less than three (3) nor more than twenty-five (25). Hereafter, the number of
directors shall be such number between three (3) and twenty-five (25),
inclusive, as may be elected from time to time by resolution of the board of
directors adopted by the vote of a majority of the then number of directors, or
by resolution of the stockholders adopted by the vote of a majority of the
shares entitled to vote thereon. Each director shall be elected each year by a
majority vote of the stockholders present in person or by proxy at the annual
meeting of stockholders and shall hold office until his successor is elected and
qualified or until his earlier death, resignation or removal. Any vacancy
occurring in the board of directors caused by death, resignation, increase in
number of directors or otherwise may be filled by a majority vote of the
remaining members of the board, and any director so elected shall hold office
until the next annual meeting of stockholders and until his successor is elected
and qualified.
Section 2. PLACE OF MEETING: Meetings of the board of directors may be held at
such place, either within or without the State of Delaware, as may from time to
time be designated by the chairman of the board of directors, or by a vice
chairman of the board of directors, or by the president, or by resolution of the
board of directors or as may be specified in the call of any meeting. In the
absence of any such designation, the meetings shall be held at the principal
office of the company in Irving, Texas.
Section 3. REGULAR MEETINGS: Regular meetings of the board of directors shall be
held immediately after each annual meeting of stockholders and at such other
times as may from time to time be fixed by resolution of the board of directors.
Notice need not be given of regular meetings of the board of directors.
Section 4. SPECIAL MEETINGS: Special meetings of the board of directors may be
held at any time on the call of the chairman of the board of directors, or of a
vice chairman of the board of directors, or of the president, or of the board of
directors, or of the executive committee. Special meetings may be held at any
time or place without notice if all the directors are present or if those not
present waive notice of the meeting in writing.
Section 5. NOTICE OF SPECIAL MEETINGS: The person or persons calling a special
meeting, or the secretary, at their discretion, shall do so by oral, telegraphic
or written notice duly delivered to each director not less than one day before
such meeting. Notice of any special meeting need not specify the purpose
thereof.
Section 6. WAIVER OF NOTICE: Any director may waive, in writing, notice of any
meeting of directors. The presence of a director at any meeting of the board and
his participation in such meeting shall constitute a waiver of notice thereof on
the part of such director.
Section 7. QUORUM: A majority of the duly elected and qualified directors then
holding such positions shall constitute a quorum for the transaction of
business.
Section 8. COMPENSATION OF DIRECTORS: Each director who is not an officer or
employee of this company or of the parent company of this company or of any
affiliate of either shall (1) be paid a fee of Twelve Thousand Five Hundred
Dollars ($12,500.00) per annum, (2) be paid a fee of One Thousand Two Hundred
Fifty Dollars ($1,250.00) per meeting of the board of directors attended, (3) be
paid a fee of Five Hundred Dollars ($500.00) per meeting of committees of the
board of directors attended, and (4) be reimbursed for travel expenses incurred
in attending any meetings held outside the county of his residence.
<PAGE> 3
Section 9. ORDER OF BUSINESS: The regular order of business of the meetings of
directors, so far as practical, shall be as follows:
1. Reading and disposal of unapproved minutes.
2. Reports of officers and committees.
3. Unfinished business.
4. New business.
Section 10. EXECUTIVE COMMITTEE: The board of directors may, by resolution
adopted by a majority of the whole board, designate three (3) or more of their
number to constitute an executive committee, which committee shall have and
exercise all of the authority of the board of directors in the management of the
company, including but not limited to the power and authority to declare regular
or special dividends and to authorize the issuance of stock. The committee shall
appoint a secretary who need not be a member of the committee. He shall keep
minutes of all meetings which minutes shall be read at the following meeting of
the board of directors. The committee shall from time to time make such rules as
it deems proper for the convening and conducting of its meetings.
Section 11. OTHER COMMITTEES: The board of directors may, by resolution adopted
by a majority of the whole board, designate from time to time such standing and
special committees as may be necessary or desirable to manage the affairs of the
company, fix the number of members thereof, and specify the duties thereof.
Section 12. TEMPORARY COMMITTEE MEMBERS: In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the board of directors to serve on such
committee until the next regular meeting of the board of directors.
ARTICLE III
OFFICERS
Section 1. OFFICERS: The officers of the company shall consist of the chairman
of the board of directors, one or more vice chairmen of the board of directors,
the president, the secretary, the treasurer, the comptroller, the general
counsel and such vice presidents, assistant vice presidents, assistant
secretaries,assistant treasurers and other officers as may from time to time be
elected by the board of directors or appointed by the chairman of the board of
directors or the president as provided in Section 3 hereof. Any two or more
offices may be held by the same person, excepting that the duties of the
president and secretary shall not be performed by one person.
Section 2. ELECTION: At the first meeting after their election the directors
shall elect annually the officers enumerated in Section 1 of this Article to
hold office until the regular meeting of directors following the next annual
meeting of the stockholders and until others are elected and shall have
qualified in their stead, excepting as in this Article otherwise provided.
Section 3. APPOINTMENT: The chairman of the board or the president may, from
time to time, designate and appoint one or more senior executive vice
presidents, one or more executive vice presidents, one or more senior vice
presidents, one or more vice president, a treasurer, a comptroller, a general
counsel, one or more assistant vice presidents, one or more assistant
treasurers, one or more assistant comptrollers, one or more assistant general
counsels, one or more assistant secretaries, and the chairman of the board or
president may elect or appoint such other officers as such officer may deem
necessary, or desirable, each of whom shall have such authority, shall perform
such duties and shall hold office until the regular meeting of the board of
directors following the next annual meeting of the stockholders, excepting as in
this Article otherwise provided.
Section 4. CHAIRMAN OF THE BOARD OF DIRECTORS: The chairman of the board of
directors shall be a director. He shall preside at all meetings of stockholders
and at all meetings of the directors and of the executive committee thereof. As
chief executive officer he shall have general supervision of the affairs of the
company. He is charged with the responsibility for the prudential affairs of the
company and for the maintenance of harmony and accord and may at his discretion
discharge subordinate officers, employees, clerks and agents
<PAGE> 4
under his supervision, excepting officers who are also directors, and appoint
their successors who shall hold office until the next annual meeting of
directors. He shall also perform all such other duties as are incidental to his
office or properly required of him by the board of directors.
Section 5. VICE CHAIRMAN OF THE BOARD OF DIRECTORS: Each vice chairman of the
board of directors shall be a director and shall be assigned specific areas of
responsibility by the chairman of the board of directors. He shall have general
supervision of those affairs of the corporation designated by the chairman for
his attention and may employ and discharge subordinate officers, employees,
clerks and agents under his supervision, excepting officers who are also
directors. He shall perform such duties as are incidental to his office or
properly required of him by the chairman of the board of directors.
Section 6. PRESIDENT: The president shall be a director. In the absence of the
chairman of the board of directors he shall preside at all meetings of
stockholders and at meetings of the board of directors. As chief operating
officer the president shall have general supervision of the affairs of the
corporation designated by the chairman for his attention and may employ and
discharge subordinate officers, employees, clerks and agents under his
supervision, excepting officers who are also directors. He shall perform all
such duties as are incidental to his office or properly required of him by the
chairman of the board of directors.
Section 7. VICE PRESIDENTS: Each vice president shall have general supervision
of those affairs of the company designated for his attention by the chairman of
the board of directors and such other officer to whom he is directly responsible
and may employ and discharge subordinate officers, employees, clerks and agents
under his supervision. Each vice president shall perform all such duties as are
incidental to his office or properly required of him by the chairman of the
board of directors and such other officer or officers to whom he is directly
responsible.
Section 8. SECRETARY: The secretary shall keep full and accurate minutes of the
meetings of stockholders and of directors in the proper record book of the
company provided therefor, give due notice of all annual meetings of
stockholders and of all special meetings of stockholders and directors on proper
call therefor being filed with him. He shall have custody of the seal of the
company and shall perform all such duties as are incidental to his office or
properly required of him by the chairman of the board of directors and such
other officer or officers to whom he is directly responsible.
Section 9. TREASURER: The treasurer shall perform all such duties as are
incidental to his office or properly required of him by the chairman of the
board of directors and such other officer or officers to whom he is directly
responsible.
Section 10. COMPTROLLER: The comptroller shall keep and maintain the books of
account of the company in such manner that they fairly present the financial
condition of the company and its subsidiaries. The comptroller shall perform all
such duties as are incidental to his office or properly required of him by the
chairman of the board of directors and such other officer or officers to whom he
is directly responsible.
Section 11. GENERAL COUNSEL: The general counsel shall have general supervision
of the legal affairs and litigation of the company. He shall perform all such
duties as are incidental to this office or are properly required of him by the
chairman of the board of directors and such other officer or officers to whom he
is directly responsible.
Section 12. ASSISTANT VICE PRESIDENTS; ASSISTANT SECRETARIES; ASSISTANT
TREASURERS AND OTHER SUBORDINATE OFFICERS: Each assistant vice president,
assistant secretary, assistant treasurer and other subordinate officers shall
perform such duties as may be incidental to his office or properly required of
him by the chairman of the board and such other officer or officers to whom he
is directly responsible.
Section 13. VACANCIES: A vacancy in any office filled by election of the board
of directors existing at the time of any meeting of the board of directors or of
the executive committee of the board of directors may be filled by the board of
directors or by the executive committee of the board of directors by the
election of a new officer who shall hold office, subject to the provisions of
this Article, until the regular meeting of directors following the next annual
meeting of stockholders and until his successor is elected.
<PAGE> 5
Section 14. REMOVAL OR DISCHARGE: Any officer may be removed or discharged by
the chairman of the board of directors at any time excepting an officer who is
also a director. Any officer who is a director may be discharged at any time by
the board of directors.
ARTICLE IV
CAPITAL STOCK
Section 1. CERTIFICATE OF STOCK: Each stockholder of the company whose stock has
been paid in full shall be entitled to a certificate or certificates showing the
amount of stock of the company standing on the books in his or her name. Each
certificate of stock shall be numbered and bear the manual or facsimile
signatures of the chairman of the board of directors, a vice chairman of the
board of directors, the president, or vice president and secretary or assistant
secretary.
Section 2. FORM OF CERTIFICATE: The form of stock certificates shall be as
prescribed from time to time by resolution of the board of directors.
Section 3. RECORD HOLDER OF SHARES: The company shall be entitled to treat the
holder of record of any share or shares as the holder in fact thereof, and
accordingly shall not be bound to recognize any equitable or other claims to or
interest in such shares on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by the General
Corporation Law of the State of Delaware. The company shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends and to vote as such owner.
Section 4. LOST STOCK CERTIFICATE: In case of loss or destruction of a
certificate of stock, a new certificate shall be issued upon satisfactory proof
of such loss or destruction and the giving of security by bond, or the giving of
security otherwise satisfactory to the board of directors, the chairman of the
board of directors, a vice chairman of the board of directors, the executive
committee or the president.
ARTICLE V
MISCELLANEOUS
Section 1. FISCAL YEAR: The fiscal year of the company shall be the calendar
year.
Section 2. MAILING OF NOTICES: Mailing of notices to stockholders or directors
shall be by depositing the same in a post office or letter box in a postpaid
sealed wrapper, addressed to such stockholder or director at his, her or its
address, as the same appears on the books of the company. Such notice shall be
deemed to be given at the time when the same shall be thus mailed.
Section 3. CORPORATE SEAL: The corporate seal of the company shall be in such
form as the board of directors shall from time to time prescribe.
ARTICLE VI
AMENDMENTS
These by-laws may be amended or repealed at any meeting of the board of
directors by a vote of a majority of all members of the board of directors then
elected and qualified; provided, however, that such power, having been conferred
upon the board of directors, shall not divest the stockholders of the power to
adopt, amend, or repeal by-laws.
<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
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed Charges(a)
Interest expense............................. $2,543.9 $2,206.7 $1,979.8 $1,509.7 $1,291.8
Implicit interest in rent.................... 13.3 13.0 11.4 9.6 9.7
-------- -------- -------- -------- --------
Total fixed charges.................. $2,557.2 $2,219.7 $1,991.2 $1,519.3 $1,301.5
======== ======== ======== ======== ========
Earnings(b).................................... $1,427.0 $1,305.1 $1,121.4 $ 972.6 $ 834.4
Fixed charges.................................. 2,557.2 2,219.7 1,991.2 1,519.3 1,301.5
-------- -------- -------- -------- --------
Earnings, as defined................. $3,984.2 $3,524.8 $3,112.6 $2,491.9 $2,135.9
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges............. 1.56 1.59 1.56 1.64 1.64
======== ======== ======== ======== ========
</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
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Associates Corporation of North America on Form S-3 (File No. 33-63577) of
our report dated January 20, 1998, on our audits of the consolidated financial
statements of Associates Corporation of North America and Subsidiaries as of
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996, and
1995, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 17, 1998
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, an officer
and/or a director of ASSOCIATES CORPORATION OF NORTH AMERICA (the "Company"),
has made, constituted and appointed and by these presents does hereby make,
constitute and appoint ROY A. GUTHRIE, TIMOTHY M. HAYES, JOHN F. STILLO, KEITH
W. HUGHES and CHESTER D. LONGENECKER, and each of them, his true and lawful
attorneys, for him and in his name, place and stead, and in his office and
capacity as aforesaid, to sign and file the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, and any and all amendments thereto
and any and all other documents to be signed and filed with the Securities and
Exchange Commission in connection therewith, hereby granting to said ROY A.
GUTHRIE, TIMOTHY M. HAYES, JOHN F. STILLO, KEITH W. HUGHES and CHESTER D.
LONGENECKER, and each of them, full power and authority to do and perform each
and every act and thing whatsoever requisite and necessary to be done in the
premises, as fully, to all intents and purposes, as he might or could do if
personally present, hereby ratifying and confirming in all respects that said
ROY A. GUTHRIE, TIMOTHY M. HAYES, JOHN F. STILLO, KEITH W. HUGHES and CHESTER D.
LONGENECKER, or any of them, as said attorneys, may or shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand this 12th day of
February, 1998.
<TABLE>
<S> <C> <C> <C>
Signature: /s/ KEITH W. HUGHES Signature: /s/ HAROLD D. MARSHALL
---------------------------------- ----------------------------------
Name: Keith W. Hughes Name: Harold D. Marshall
Title: Chairman of the Board, Title: President and Director
Principal Executive
Officer and Director
Signature: /s/ ROY A. GUTHRIE Signature: /s/ JOHN F. STILLO
---------------------------------- ----------------------------------
Name: Roy A. Guthrie Name: John F. Stillo
Title: Director, Senior Executive Title: Senior Vice President,
Vice President and Comptroller and
Chief Financial Principal Accounting
Officer Officer
</TABLE>
<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, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 295
<SECURITIES> 1,154
<RECEIVABLES> 47,855
<ALLOWANCES> 1,662
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,531
<CURRENT-LIABILITIES> 0
<BONDS> 43,522
0
0
<COMMON> 147
<OTHER-SE> 5,902
<TOTAL-LIABILITY-AND-EQUITY> 50,531
<SALES> 7,151
<TOTAL-REVENUES> 7,151
<CGS> 0
<TOTAL-COSTS> 5,724
<OTHER-EXPENSES> 1,984
<LOSS-PROVISION> 1,196
<INTEREST-EXPENSE> 2,544
<INCOME-PRETAX> 1,427
<INCOME-TAX> 524
<INCOME-CONTINUING> 903
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 903
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
