<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6154
ASSOCIATES CORPORATION OF NORTH AMERICA
(Exact name of registrant as specified in its charter)
Delaware 74-1494554
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 East Carpenter Freeway, Irving, Texas 75062-2729
(Address of principal executive offices)
(Zip Code)
972-652-4000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes..X.. No.....
As of September 30, 1999, the registrant had 260 shares of Common Stock and
1,000,000 shares of Class B Common Stock issued and outstanding, all of which
were owned directly or indirectly by Associates First Capital Corporation.
The registrant meets the conditions set forth in General Instruction H.(1)(a)
and (b) to Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF EARNINGS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Finance charges $4,430.5 $4,436.6 $1,456.5 $1,388.6
Insurance premiums 281.5 279.6 92.3 92.9
Investment and other
income 684.6 611.5 246.6 250.6
-------- -------- -------- --------
5,396.6 5,327.7 1,795.4 1,732.1
EXPENSES
Interest expense 2,126.7 2,117.2 718.2 714.3
Operating expenses 1,325.8 1,253.1 432.6 406.0
Provision for losses on
finance receivables 678.9 729.7 230.9 197.3
Insurance benefits paid
or provided 110.6 105.2 36.0 33.2
-------- -------- -------- --------
4,242.0 4,205.2 1,417.7 1,350.8
-------- -------- -------- --------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 1,154.6 1,122.5 377.7 381.3
PROVISION FOR INCOME TAXES 417.1 410.6 130.1 141.4
-------- -------- ------- --------
NET EARNINGS $ 737.5 $ 711.9 $ 247.6 $ 239.9
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED BALANCE SHEET
(Dollars In Millions)
September 30 December 31
1999 1998
------------ -----------
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 851.0 $ 2,619.7
INVESTMENTS IN DEBT AND EQUITY SECURITIES 2,047.3 1,865.9
FINANCE RECEIVABLES, net of unearned finance
income, allowance for credit losses and
insurance policy and claims reserves 48,476.6 43,895.8
NOTES RECEIVABLE FROM RELATED PARTIES 2,455.5 6,563.9
OTHER ASSETS 4,457.0 1,632.0
--------- ---------
Total assets $58,287.4 $56,577.3
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term
Commercial Paper $12,741.9 $15,357.2
Bank Loans 76.5 1,070.7
ACCOUNTS PAYABLE AND ACCRUALS 1,771.9 1,187.7
LONG-TERM DEBT
Senior Notes 33,932.8 31,780.2
Subordinated and Capital Notes 425.3 425.3
--------- ---------
34,358.1 32,205.5
STOCKHOLDERS' EQUITY
Class B Common Stock, $100 par value,
2,000,000 shares authorized, 1,000,000
shares issued and outstanding 100.0 100.0
Common Stock, no par value, 5,000 shares
authorized, 260 shares issued and
outstanding, at stated value 47.0 47.0
Paid-in Capital 3,553.6 1,667.8
Retained Earnings 5,680.6 4,951.5
Accumulated Other Comprehensive Income (42.2) (10.1)
--------- ---------
Total stockholders' equity 9,339.0 6,756.2
--------- ---------
Total liabilities and stockholders' equity $58,287.4 $56,577.3
========= =========
See notes to consolidated financial statements.
</TABLE>
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 737.5 $ 711.9
Adjustments to reconcile net earnings to
net cash provided from operating activities:
Provision for losses on finance receivables 678.9 729.7
Depreciation and amortization 199.6 185.8
Other operating activities 424.5 (353.7)
--------- ---------
Net cash provided from operating
activities 2,040.5 1,273.7
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased (33,410.3) (29,926.6)
Finance receivables liquidated and sold 30,577.4 31,816.4
Sale of branches 643.9 -
Other investing activities (155.1) (6,310.0)
--------- --------
Net cash used for investing
activities (2,344.1) (4,420.2)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 7,568.5 6,408.5
Retirement of long-term debt (5,415.9) (3,715.5)
(Decrease) Increase in notes payable (3,609.5) 719.8
Other financing activities (8.2) -
--------- --------
Net cash (used for) provided from
financing activities (1,465.1) 3,412.8
--------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,768.7) 266.3
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 2,619.7 294.8
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 851.0 $ 561.1
========= =========
</TABLE>
See notes to consolidated financial statements.
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 U.S.-based
operating unit of Associates First Capital Corporation ("First Capital").
The Company is a leading diversified finance organization providing finance,
leasing and related services to individual consumers and businesses in the
United States and Puerto Rico.
NOTE 2 - BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant
intercompany balances. Certain prior period financial statement amounts
have been reclassified to conform to the current period presentation.
In the opinion of the management, all adjustments necessary to present
fairly the results of operations and financial position have been made. The
financial position and results of operations as of and for any interim period
are unaudited and not necessarily indicative of the results of operations for
a full year.
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires the use of management
estimates. These estimates are subjective in nature and involve matters of
judgment. Actual results could differ from these estimates.
NOTE 3 - SIGNIFICANT TRANSACTIONS
On January 6, 1999, First Capital purchased the assets and assumed the
liabilities of Avco Financial Services, Inc. ("Avco"). During the first
quarter of 1999, First Capital transferred the domestic and Puerto Rico
consumer finance operations of Avco to the Company. This transfer was in the
form of a $1.9 billion capital contribution of certain Avco domestic assets,
and the $3.4 billion sale, at book value, of substantially all of Avco's
remaining domestic and Puerto Rico net assets to the Company. The sale was
financed through a reduction on the Company's outstanding notes receivable
from First Capital. Included in these transactions was approximately $4
billion of consumer net finance receivables.
In March 1999, the Company sold 128 consumer finance branches, acquired
from Avco, for approximately $640 million to Commercial Credit Corporation,
a subsidiary of Citigroup, Inc. The operating results of these branches from
the date they were transferred to the Company from First Capital (January 31,
1999) through the date of sale were included in investment and other income.
In September 1999, the Company wrote a put option in conjunction with
a First Capital manufactured housing finance receivable securitization
transaction which allows the $2 billion related trust securities to be put
back to the Company at par annually beginning in October 2000. The Company
received approximately $10 million from First Capital for the fair value of
the put option.
NOTE 4 - COMPREHENSIVE INCOME
Accumulated other comprehensive income consisted of net unrealized
losses on available-for-sale securities of $42.2 million and $10.1 million,
net of tax, at September 30, 1999 and December 31, 1998, respectively.
Comprehensive income for the nine and three-month periods ended
September 30, 1999 and 1998 consisted of the following components (in
millions):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $737.5 $711.9 $247.6 $239.9
Net unrealized loss on
available-for-sale
securities, net of tax (32.1) (1.1) (16.6) (2.2)
------ ------ ------ ------
Comprehensive income $705.4 $710.8 $231.0 $237.7
====== ====== ====== ======
</TABLE>
NOTE 5 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities consist of bonds, notes and preferred
stock and other equity securities. The Company generally invests in debt
securities with the intention of holding them to maturity. However, if
market conditions change, the Company may sell them prior to maturity.
Accordingly, the Company classifies these debt and equity securities as
available-for-sale securities and adjusts their recorded value to market.
The estimated market value at September 30, 1999 and December 31, 1998 was
$2.0 billion and $1.8 billion, respectively. The amortized cost at
September 30, 1999 and December 31, 1998 was $2.1 billion and $1.9 billion,
respectively. Realized gains or losses on sales are included in investment
and other income. Unrealized gains or losses are included, net of tax, in
other comprehensive income, a component of stockholders' equity.
TRADING SECURITIES
Trading securities consist of investments in equity securities which are
recorded at market value. Unrealized gains or losses on trading securities
are included in earnings. The estimated market value at September 30, 1999
and December 31, 1998 was $24.8 million and $20.8 million, respectively.
Historical cost at September 30, 1999 and December 31, 1998 was $16.7 million
and $15.5 million, respectively.
NOTE 6 - FINANCE RECEIVABLES
At September 30, 1999 and December 31, 1998, finance receivables
consisted of the following (in millions):
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
------------ -----------
<S> <C> <C>
Home equity lending $23,248.9 $20,435.8
Truck and truck trailer 11,660.0 10,038.0
Personal lending and retail sales finance 7,713.6 6,566.2
Equipment 5,319.4 4,882.1
Auto fleet leasing 1,509.1 1,471.4
Credit card (a) 111.7 1,398.0
Warehouse lending and other 1,111.5 1,247.0
--------- ---------
Finance receivables net of unearned
finance income ("net finance
receivables")(b) 50,674.2 46,038.5
Allowance for losses on finance receivables (1,445.1) (1,378.9)
Insurance policy and claims reserves (752.5) (763.8)
--------- --------
Finance receivables, net of unearned
finance income, allowance for credit
losses and insurance policy and claims
reserves $48,476.6 $43,895.8
========= =========
(a) In June 1999, the Company sold to First Capital, at book value,
approximately $900 million of the Company's participation interest in First
Capital's private label receivables. These receivables were subsequently
securitized and sold by First Capital. In addition, approximately $714
million of the Company's participation interest in First Capital's private
label receivables were transferred to other assets as receivables held for
sale, reflecting management's intent to sell these receivables to First
Capital during the 4th quarter of 1999 in a similar transaction.
(b) Unearned finance income was approximately $4.0 billion and $3.5 billion
at September 30, 1999 and December 31, 1998, respectively.
</TABLE>
<PAGE>
NOTE 7 - ALLOWANCE FOR LOSSES ON FINANCE RECEIVABLES
Changes in the allowance for losses on finance receivables during the
periods indicated were as follows (in millions):
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30 December 31
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $1,378.9 $1,661.9 $ 1,661.9
Provision for losses 678.9 729.7 949.4
Recoveries on receivables
charged off 118.4 122.5 150.5
Losses sustained (773.7) (794.1) (1,032.5)
Reserves of receivables sold
or held for sale (117.4) (334.7) (359.4)
Reserves of acquired
businesses 174.8 - -
Other (14.8) (15.0) 9.0
-------- -------- ---------
Balance at end of period $1,445.1 $1,370.3 $ 1,378.9
======== ======== =========
</TABLE>
The Company maintains an allowance for losses on finance receivables at
an amount that it believes is sufficient to provide for losses in its
existing receivables portfolios. The allowance is determined principally on
the basis of historical loss experience, and reflects management's judgment
of current loss exposure at the end of the period considering economic
conditions and the nature and characteristics of the underlying finance
receivables. The Company records an allowance for losses when it believes
the event causing the loss has occurred. The allowance is evaluated 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.
NOTE 8 - NOTES RECEIVABLE FROM RELATED PARTIES
Notes receivable from related parties include amounts due from the
Company's affiliates and First Capital. These notes are unsecured demand
notes and generally bear interest at a floating rate. The weighted average
interest rate at September 30, 1999 was 8.34%. During the nine month period
ended September 30, 1999, interest income on notes receivable from related
parties was approximately $330.9 million.
<PAGE>
NOTE 9 - OTHER ASSETS
The components of other assets at September 30, 1999 and December 31,
1998 were as follows (in millions):
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
------------ -----------
<S> <C> <C>
Goodwill $1,699.8 $ 331.5
Notes and other receivables 770.7 382.3
Finance receivables held for sale, net 714.0 -
Collateral held for resale 317.1 229.9
Property and equipment 281.1 238.7
Customer lists and operating agreements 274.4 -
Relocation client advances 158.5 171.8
Other 241.4 277.8
-------- --------
Total other assets $4,457.0 $1,632.0
======== ========
</TABLE>
NOTE 10 - DEBT RESTRICTIONS
A restriction contained in certain revolving credit agreements requires
Associates to maintain a minimum tangible net worth, as defined, of $2.5
billion. At September 30, 1999, Associates tangible net worth was
approximately $7.6 billion.
NOTE 11 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments for the purpose of
hedging specific exposures as part of its risk management program. Such
instruments to date have been limited to currency swap, interest rate swap,
treasury lock agreements and treasury futures and option contracts.
Foreign currency swap agreements are held for purposes other than
trading and have been designated for accounting purposes as hedges of
specific foreign currency exposures under certain debt obligations. Under
these agreements, the Company and the agreement counterparties are obligated
to exchange specific foreign currencies at varying times over the next 4
years. The aggregate notional amount of these agreements at both September
30, 1999 and December 31, 1998 was $1.1 billion. The fair value of such
agreements at September 30, 1999 and December 31, 1998 would have been a
liability of $35.9 million and an asset of $65.0 million, respectively.
Interest rate swap agreements are held for purposes other than trading
and are used by the Company to hedge the effect of interest rate movements on
existing debt transactions. The aggregate notional amount of interest rate
swap agreements at September 30, 1999 was $3.3 billion. The fair value of
such agreements would have been an asset of $1.5 million. These agreements
mature on varying dates over the next 4 years. The aggregate notional amount
of interest rate swap agreements at December 31, 1998 was $3.3 billion. The
fair value of such agreements at December 31, 1998 would have been a
liability of $59.2 million.
Treasury futures and option contracts are used to minimize fluctuations
in the value of preferred stock investments and are held for purposes other
than trading. The aggregate notional amount of futures and options contracts
at September 30, 1999 and December 31, 1998 was $647.9 million and $711.4
million, respectively. The fair value of these contracts would have been a
liability of $3.0 million and $5.0 million at September 30, 1999 and December
31, 1998, respectively. Such contracts mature on varying dates through 2000.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis has been prepared in accordance
with General Instruction H.(2)(a) to Form 10-Q, and should be read in
conjunction with the consolidated financial statements of the Company and the
related notes thereto.
Results of Operations
Net Earnings
Net earnings for the nine-month period ended September 30, 1999 were
$737.5 million, a 4% increase over the same period in 1998. Net earnings for
the three-month period ended September 30, 1999 were $247.6 million, an
increase of 3% compared to the same period in 1998. The primary factors
affecting earnings and the Company's operating results are discussed below.
Finance Charges
Finance charge revenue on a dollar basis decreased slightly for the
nine-month period ended September 30, 1999 to $4,430.5 million from $4,436.6
million for the same period in 1998. Finance charge revenue as a percentage
of average net finance receivables (the "Finance Charge Ratio") was 11.96%
for the nine-month period ended September 30, 1999 a decrease from 13.06% the
comparable period in 1998. A shift in product mix towards more secured
portfolios was the primary cause for the decrease as secured portfolios
generally have lower finance charge rates than unsecured receivables. The
shift in product mix was principally caused by the second quarter 1998 sale
of approximately $5.2 billion of the Company's participation interest in
First Capital's U.S. bankcard receivables. Also contributing to the shift in
product mix was the second quarter 1999 reduction of the Company's credit
card receivables, as described in NOTE 6 to the consolidated financial
statements.
Finance charge revenue in the third quarter of 1999 increased to
$1,456.5 million from $1,388.6 million in the third quarter of 1998,
primarily due to higher levels of average finance receivables outstanding. A
lower Finance Charge Ratio in the current quarter, resulting from the shift
in product mix described above, somewhat offset this increase. The Finance
Charge Ratio was 11.67% and 12.53% in the third quarters of 1999 and 1998,
respectively.
Interest Expense
Interest expense was $2,126.7 million and $718.2 million for the nine
and three-month periods ended September 30, 1999, respectively, compared to
$2,117.2 million and $714.3 million for the same periods in 1998. Interest
expense was comparable to the prior year periods because the effects of lower
average borrowing rates were offset by a slight increase in average debt
outstanding.
Net Interest Margin
As a result of the factors discussed in the finance charges and interest
expense sections above, net interest margin was $2,303.8 million and $738.3
million for the nine and three-month periods ended September 30, 1999,
respectively, compared to $2,319.4 million and $674.3 million for the
comparable periods in the prior year. The Company's net interest margin
expressed as a ratio to average finance receivables was 6.22% and 5.91% for
the nine and three-month periods ended September 30, 1999, respectively,
compared to 6.83% and 6.09% for the comparable periods in the prior year.
Operating Expenses
Nine and three-month operating expenses for the periods ended September
30, 1999 were higher on a dollar basis than in the corresponding periods in
1998, reflecting the growth in the size of the Company.
Provision for Losses
The Company's provision for losses declined to $678.9 million for the
nine-month period ended September 30, 1999 from $729.7 million for the
comparable prior year period. This decline was primarily due to a decrease
in the Company's total net credit losses as a percentage of average net
finance receivables ("Loss Ratio") to 1.77% for the nine-month period ended
September 30, 1999 from 1.98% for the comparable period in 1998. A shift in
product mix towards more secured portfolios, as described in the finance
charges section above, was the primary cause of the lower Loss Ratio as
secured portfolios generally have lower loss rates than unsecured portfolios.
The Company's provision for losses increased slightly to $230.9 million
in the third quarter of 1999 from $197.3 million in the third quarter of
1998. The Loss Ratio increased to 1.76% for the three-month period ended
September 30, 1999 from 1.71% for the comparable period in 1998. Lower
loss levels resulting from a slight shift in product mix towards more
secured portfolios during the quarter were offset by slightly higher loss
levels in the Company's secured portfolios.
Financial Condition
Receivable Growth
During the first nine months of 1999, net finance receivables increased
by $4.6 billion. The transactions described in NOTES 3 and 6 to the
consolidated financial statements and internal growth were the primary
factors affecting receivable growth during the period.
Allowance for Losses on Finance Receivables
The Company maintains an allowance for losses on finance receivables at
an amount that it believes is sufficient to provide for losses in its
existing receivables portfolios. The allowance is determined principally on
the basis of historical loss experience, and reflects management's judgment
of current loss exposure at the end of the period considering economic
conditions and the nature and characteristics of the underlying finance
receivables. The Company records an allowance for losses when it believes
the event causing the loss has occurred. The allowance is evaluated 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. The Company's
allowance for loss methodology has been consistently applied for all periods
presented, although this paragraph contains clarification from the related
disclosure in the Company's 1998 Form 10-K.
Composite 60+days contractual delinquency was 2.70% of gross finance
receivables at September 30, 1999, compared to 2.41% at December 31, 1998.
However, the allowance for losses to net finance receivables declined
slightly to 2.85% at September 30, 1999 from 3.00% at December 31, 1998.
This decline is primarily a result of lower loss levels resulting from a
shift in product mix towards more secured portfolios. Secured portfolios
generally have lower loss levels than unsecured portfolios. The shift in
product mix was primarily due to the sale of the Company's credit card
receivable participation, as described in NOTE 6 to the consolidated
financial statements.
Company management believes the allowance for losses at September 30,
1999 is sufficient to provide adequate coverage against existing losses in
its portfolios.
Liquidity and Capital Resources
Through its asset and liability management function, the Company
maintains a disciplined approach to the management of liquidity, capital and
interest rate risk. The Company has a formal process for managing its
liquidity to ensure that funds are available at all times to meet the
Company's commitments.
The principal sources of cash for the Company are proceeds from the
issuance of short and long-term debt and cash provided from the Company's
operations. While First Capital has made periodic capital contributions to
the Company in the past, no assurance can be made with respect to future
capital contributions by First Capital to the Company. Nevertheless,
management believes that the Company has available sufficient liquidity, from
a combination of cash provided from operations, external borrowings and
asset securitizations 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 domestic and international
borrowings.
At September 30, 1999, the Company had short and long-term debt
outstanding of $12.8 billion and $34.4 billion, respectively. Short-term
debt principally consists of commercial paper issued by the Company and
represents the Company's primary source of short-term liquidity. Long-term
debt principally consists of senior unsecured long-term debt issued publicly
and privately by the Company in the United States and abroad. During the nine
months ended September 30, 1999 and 1998, the Company raised debt aggregating
$7.6 billion and $6.4 billion, respectively, through public and private
offerings.
Substantial additional liquidity is available to the Company's
operations through established credit facilities in support of its net
commercial paper program. Such credit facilities provide a means of
refinancing its maturing short-term obligations as needed. At September 30,
1999, these credit facilities were allocated to provide 75% coverage of the
Company's recurring commercial paper borrowing. In addition, the Company has
access to other sources of liquidity such as the issuance of capital
securities and asset securitization. Up to this point the Company's
securitization transactions have been limited to the home equity asset class.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process date fields containing a 2-
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, if such systems are not repaired they may be unable to
accurately process certain date-based information.
The Company has a company-wide initiative to address the Year 2000
Compliance issue. A team of technology professionals began addressing the
Year 2000 Compliance issue in 1995. Since then, the Company has identified
and addressed all significant third party and internal applications that
require modification to ensure Year 2000 Compliance.
The Company divides its Year 2000 Compliance initiative into two
components, information technology ("IT") and non-information technology
("Non-IT"). The IT initiative includes third party and Company mainframe and
desktop systems and applications. The Non-IT initiative includes third party
suppliers, embedded systems and the Company's larger commercial borrowers.
The project organization, awareness, inventory and analysis, renovation,
testing, implementation and contingency planning phases of the Year 2000
effort have been successfully completed. Results from the testing phase were
reviewed to confirm Year 2000 Compliance. In cases where testing identifies
potential non-compliance, modifications are made to the system as necessary
and retested until successful. To provide added assurance that no new Year
2000 problems have been introduced into previously repaired systems, the
Company will continue to perform additional testing and facilitate
independent verification and validation testing through the remainder of
1999. The Company is also developing a plan to monitor systems and critical
providers, suppliers and others with which the Company has significant
relationships to ensure that any unforeseen problems are quickly identified
and resolved.
The Company's Non-IT efforts include evaluating Year 2000 Compliance of
third party suppliers, embedded systems and the Company's larger commercial
borrowers. The Company has communicated with third party suppliers that
provide critical products or services, providers of significant embedded
systems and large commercial borrowers to determine their Year 2000
Compliance readiness and has tested where feasible the extent to which the
Company may be vulnerable to any significant Year 2000 issues. In addition,
the Company required these suppliers and borrowers to certify that they will
be Year 2000 compliant. Contingency plans are in place and in some cases
have been activated to mitigate risk of suppliers' inability to provide
adequate certification.
Contingency planning is an integral part of the Company's Year 2000
readiness project. The Company has developed and is continuing to refine and
test contingency plans which document the processes necessary to maintain
critical business functions should a significant third party system or
critical internal system fail. These contingency plans generally include the
repair of existing systems and the use of alternative systems or procedures.
There can be no guarantee that the systems of other companies on which
the Company's systems rely will be converted in a timely manner, or that a
failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company. In addition, there are many risks associated with the Year 2000
Compliance issue, including but not limited to the possible failure of the
Company's computer and information technology systems. Any such failure
could have a material adverse effect on the Company including the inability
to properly bill and collect payments from customers and errors or omissions
in accounting and financial data. In addition, the Company is exposed to the
inability of third parties to perform as a result of Year 2000 Compliance.
Any such failure by a third party bank, regulatory agency, group of
investors, securities exchange or clearing agency, software product or
service provider, utility or other entity may have a material adverse
financial or operational effect on the Company.
From the inception of the Company's Year 2000 readiness project through
September 30, 1999, the Company incurred and expensed approximately $25
million for incremental costs primarily related to third party vendors,
outside contractors and additional staff dedicated to the Year 2000 readiness
project. During the nine and three-month periods ended September 30, 1999,
approximately $9 million and $3 million of respective incremental Year 2000
project costs were incurred. The Company expects that it will incur
additional future incremental costs related to the project of approximately
$4 million. These incremental costs do not include existing resources
allocated to the project effort. The Company's Year 2000 project is expected
to continue through March of 2000. The first quarter of the Year 2000 effort
is specifically designed to monitor all Year 2000 transition activities.
These costs and the date on which the Company plans to complete the Year
2000 project 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.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management has no material changes to report from the disclosure set
forth in the Company's Form 10-K for the year ended December 31, 1998.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None to report.
In accordance with General Instruction H.(2)(b), the following items
have been omitted: Item 2, Changes in Securities; Item 3, Defaults Upon
Senior Securities; and Item 4, Submission of Matters to a Vote of Security
Holders.
ITEM 5. OTHER INFORMATION.
Forward-Looking Statements
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). The
1995 Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide information without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected. Although the
Company does not anticipate that it will make forward-looking statements as a
general policy, the Company will make forward-looking statements as required
by law or regulation, and from time to time may make such statements with
respect to management's estimation of the future operating results and
business of the Company.
The Company hereby incorporates into this report by reference to its
Form 10-K for the year ended December 31, 1998 the cautionary statements
found on page 23-24 of such Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(12) Computation of Ratio of Earnings to Fixed Charges.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the third quarter ended September 30, 1999,
Associates filed Current Reports on Form 8-K
as of July 16, 1999 announcing earnings
for the second quarter of 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 12, 1999
ASSOCIATES CORPORATION OF NORTH AMERICA
(registrant)
By/s/ John F. Stillo
Executive Vice President, Comptroller and
Principal Accounting Officer
<PAGE>
EXHIBIT 12
ASSOCIATES CORPORATION OF NORTH AMERICA
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar Amounts in Millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1999 1998
---- ----
<S> <C> <C>
Fixed Charges (a)
Interest expense $2,126.7 $2,117.2
Implicit interest in rent 13.2 13.8
-------- --------
Total fixed charges $2,139.9 $2,131.0
======== ========
Earnings (b)
Earnings before provision for income
taxes $1,154.6 $1,122.5
Fixed charges 2,139.9 2,131.0
-------- --------
Earnings, as defined $3,294.5 $3,253.5
======== ========
Ratio of Earnings to Fixed Charges 1.54 1.53
==== ====
(a) For purposes of such computation, the term "fixed charges" represents
interest expense and a portion of rentals representative of an implicit
interest factor for such rentals.
(b) For purposes of such computation, the term "earnings" represents
earnings before provision for income taxes, plus fixed charges.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<PAGE>
<ARTICLE> 5
<LEGEND>
0 MEANS NOT APPLICABLE OR NOT SEPARATELY DISCLOSED. This schedule contains
summary financial information extracted from the Company's unaudited
consolidated financial statements as of September 30, 1999 and the three
months then ended and is qualified in its entirety by reference to such
consolidated financial statements.
</LEGEND>
<CIK> 0000007973
<NAME> ASSOCIATES CORPORATION OF NORTH AMERICA
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 851
<SECURITIES> 2,047
<RECEIVABLES> 50,674
<ALLOWANCES> 1,445
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 58,287
<CURRENT-LIABILITIES> 0
<BONDS> 47,177
<COMMON> 147
0
0
<OTHER-SE> 9,192
<TOTAL-LIABILITY-AND-EQUITY> 58,287
<SALES> 5,397
<TOTAL-REVENUES> 5,397
<CGS> 0
<TOTAL-COSTS> 4,242
<OTHER-EXPENSES> 1,436
<LOSS-PROVISION> 679
<INTEREST-EXPENSE> 2,127
<INCOME-PRETAX> 1,155
<INCOME-TAX> 417
<INCOME-CONTINUING> 738
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 738
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
