<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 June 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 June 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>
Six Months Ended Three Months Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Finance charges $2,974.0 $3,048.0 $1,456.5 $1,375.8
Insurance premiums 189.2 186.7 94.0 88.5
Investment and other
income 438.0 360.9 238.5 243.7
-------- -------- -------- --------
3,601.2 3,595.6 1,789.0 1,708.0
EXPENSES
Interest expense 1,408.5 1,402.9 705.2 710.7
Operating expenses 893.2 847.1 433.0 386.5
Provision for losses on
finance receivables 448.0 532.4 211.4 206.3
Insurance benefits paid
or provided 74.6 72.0 38.0 30.2
-------- -------- -------- --------
2,824.3 2,854.4 1,387.6 1,333.7
-------- -------- -------- --------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 776.9 741.2 401.4 374.3
PROVISION FOR INCOME TAXES 287.0 269.2 148.2 137.8
-------- -------- -------- -------
NET EARNINGS $ 489.9 $ 472.0 $ 253.2 $ 236.5
======== ======== ========= ========
</TABLE>
See notes to consolidated financial statements.
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED BALANCE SHEET
(Dollars In Millions)
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
---------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 2,827.0 $ 2,619.7
INVESTMENTS IN DEBT AND EQUITY SECURITIES 1,964.1 1,865.9
FINANCE RECEIVABLES, net of unearned finance
income, allowance for credit losses and
insurance policy and claims reserves 47,103.1 43,895.8
NOTES RECEIVABLE FROM RELATED PARTIES 2,819.9 6,563.9
OTHER ASSETS 4,154.4 1,632.0
--------- ----------
Total assets $58,868.5 $56,577.3
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, unsecured short-term
Commercial Paper $12,874.0 $15,357.2
Bank Loans - 1,070.7
ACCOUNTS PAYABLE AND ACCRUALS 1,582.7 1,187.7
LONG-TERM DEBT
Senior Notes 34,878.8 31,780.2
Subordinated and Capital Notes 425.3 425.3
--------- ---------
35,304.1 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 3,553.3 1,667.8
Retained Earnings 5,433.0 4,951.5
Accumulated Other Comprehensive Income (25.6) (10.1)
--------- ---------
Total stockholders' equity 9,107.7 6,756.2
--------- ---------
Total liabilities and stockholders' equity $58,868.5 $56,577.3
========= =========
See notes to consolidated financial statements.
ASSOCIATES CORPORATION OF NORTH AMERICA
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
(Unaudited)
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 489.9 $ 472.0
Adjustments to reconcile net earnings to
net cash provided from operating activities:
Provision for losses on finance receivables 448.0 532.4
Depreciation and amortization 135.8 133.5
Other operating activities 217.4 (530.2)
--------- ---------
Net cash provided from operating
activities 1,291.1 607.7
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased (21,671.6) (20,254.1)
Finance receivables liquidated and sold 20,619.1 23,409.1
Sale of branches 643.9 -
Other investing activities (211.4) (5,726.5)
--------- ----------
Net cash used for investing
activities (620.0) (2,571.5)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 7,053.0 3,903.7
Retirement of long-term debt (3,954.4) (2,231.6)
(Decrease) increase in notes payable (3,553.9) 196.6
Other financing activities (8.5) -
--------- ---------
Net cash (used for) provided from
financing activities (463.8) 1,868.7
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 207.3 (95.1)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 2,619.7 294.8
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,827.0 $ 199.7
========= =========
</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 - AVCO FINANCIAL SERVICES
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.
NOTE 4 - COMPREHENSIVE INCOME
Accumulated other comprehensive income consisted of net unrealized
losses on available-for-sale securities of $25.6 million and $10.1
million, net of tax, at June 30, 1999 and December 31, 1998,
respectively.
Comprehensive income for the six and three-month periods ended
June 30, 1999 and 1998 consisted of the following components (in
millions):
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $489.9 $472.0 $253.2 $236.5
Net unrealized (loss) gain
on available-for-sale
securities, net of tax (15.5) 1.1 (13.3) 4.0
------ ------ ------ ------
Comprehensive income $474.4 $473.1 $239.9 $240.5
====== ====== ======= ======
</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 June 30, 1999
and December 31, 1998 was $1.9 billion and $1.8 billion, respectively.
The amortized cost at June 30, 1999 and December 31, 1998 was $2.0
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 June 30, 1999 and December 31, 1998 was $24.0 million and $20.8
million, respectively. Historical cost at June 30, 1999 and December
31, 1998 was $16.6 million and $15.5 million, respectively.
NOTE 6 - FINANCE RECEIVABLES
At June 30, 1999 and December 31, 1998, finance receivables
consisted of the following (in millions):
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
---- ----
<S> <C> <C>
Home equity lending $22,257.8 $20,435.8
Truck and truck trailer 11,060.0 10,038.0
Personal lending and retail sales finance 8,114.3 6,566.2
Equipment 5,170.5 4,882.1
Auto fleet leasing 1,593.0 1,471.4
Credit card (a) 112.5 1,398.0
Warehouse lending and other 977.9 1,247.0
--------- ---------
Finance receivables net of unearned
finance income ("net finance
receivables")(b) 49,286.0 46,038.5
Allowance for losses on finance receivables (1,434.7) (1,378.9)
Insurance policy and claims reserves (748.2) (763.8)
--------- ---------
Finance receivables, net of unearned
finance income, allowance for credit
losses and insurance policy and claims
reserves $47,103.1 $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 3rd or 4th quarter of 1999 in a similar transaction.
(b) Unearned finance income was approximately $4.0 billion and $3.5 billion
at June 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>
Six Months Ended Year Ended
June 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 448.0 532.4 949.4
Recoveries on receivables
charged off 79.6 87.3 150.5
Losses sustained (515.2) (569.3) (1,032.5)
Reserves of receivables sold
and held for sale (117.4) (334.7) (359.4)
Reserves of acquired
businesses 174.8 - -
Other (14.0) 9.7 9.0
-------- -------- ---------
Balance at end of period $1,434.7 $1,387.3 $ 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 receivable portfolio. 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 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.
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 June 30, 1999 was 8.34%. During the
six-month period ended June 30, 1999, interest income on notes
receivable from related parties was approximately $233.2 million.
NOTE 9 - OTHER ASSETS
The components of other assets at June 30, 1999 and December 31,
1998 were as follows (in millions):
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
------- -----------
<S> <C> <C>
Goodwill $1,700.4 $ 331.5
Finance receivables held for sale, net 714.0 -
Notes and other receivables 473.5 382.3
Collateral held for resale 278.7 229.9
Customer lists and operating agreements 275.0 -
Property and equipment 269.0 238.7
Relocation client advances 155.1 171.8
Other 288.7 277.8
-------- --------
Total other assets $4,154.4 $1,632.0
======== ========
</TABLE>
NOTE 10 - DEBT RESTRICTION
A restriction contained in certain revolving credit agreements
requires Associates to maintain a minimum tangible net worth, as
defined, of $2.5 billion. At June 30, 1999, Associates tangible net
worth was approximately $7.4 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 agreements,
interest rate swap 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 June 30, 1999 and December 31, 1998 was $1.1 billion. The fair
value of such agreements at June 30, 1999 and December 31, 1998 would
have been a liability of $68.6 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 June 30, 1999 was $3.3 billion. The
fair value of such agreements would have been an asset of $0.4 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 June 30, 1999 and December 31, 1998 was
$639.8 million and $711.4 million, respectively. The fair value of
these contracts would have been an asset of $7.2 million and a liability
of $5.0 million at June 30, 1999 and December 31, 1998, respectively.
Such contracts mature on varying dates through 1999.
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 six-month period ended June 30, 1999 were
$489.9 million, a 4% increase over the same period in 1998. Net
earnings for the three-month period ended June 30, 1999 were $253.2
million, an increase of 7% 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
six-month period ended June 30, 1999 to $2,974.0 million from $3,048.0
million for the same period in 1998. Finance charge revenue as a
percentage of average net finance receivables (the "Finance Charge
Ratio")was 12.10% for the six-month period ended June 30, 1999 a
decrease from 13.53% for 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 second quarter of 1999 increased to
$1,456.5 million from $1,375.8 million in the second 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 11.95% and 12.81% in the
second quarters of 1999 and 1998, respectively.
Interest Expense
Interest expense was $1,408.5 million and $705.2 million for the
six and three-month periods ended June 30, 1999, respectively, compared
to $1,402.9 million and $710.7 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 $1,565.5
million and $751.3 million for the six and three-month periods ended
June 30, 1999, respectively, compared to $1,645.1 million and $665.1
million for the comparable periods in the prior year. The Company's net
interest margin expressed as a ratio to average managed finance
receivables was 6.37% and 6.16% for the six and three-month periods
ended June 30, 1999, respectively, compared to 7.30% and 6.19% for the
comparable periods in the prior year.
Operating Expenses
Six and three-month operating expenses for the periods ended June
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 $448.0 million for
the six-month period ended June 30, 1999 from $532.4 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 six-
month period ended June 30, 1999 from 2.14% 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 $211.4
million in the second quarter of 1999 from $206.3 million in the second
quarter of 1998. The Loss Ratio was 1.73% for both quarters. 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 six months of 1999, net finance receivables
increased by $3.2 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 receivable portfolio. 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 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. 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 2.55% of gross
finance receivables at June 30, 1999, compared to 2.41% at December 31,
1998. However, the allowance for losses to net finance receivables
declined slightly to 2.91% at June 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 second quarter 1999
reduction of the Company's credit card receivables, as described in
NOTE 6 to the consolidated financial statements.
Company management believes the allowance for losses at June 30,
1999 is sufficient to provide adequate coverage against losses in its
portfolios.
Liquidity and Capital Resources
Through its asset and liability management function, the Company
maintains a disciplined approach to the management of liquidity, capital
and interest rate risk. The Company has a formal process for managing
its liquidity to ensure that funds are available at all times to meet
the Company's commitments.
The principal sources of cash for the Company are proceeds from
the issuance of short and long-term debt and cash provided from the
Company's operations. While First Capital has made periodic capital
contributions to the Company in the past, no assurance can be made with
respect to future capital contributions by First Capital to the Company.
Nevertheless, management believes that the Company has available
sufficient liquidity, from a combination of cash provided from
operations and external borrowings, to support its operations.
A principal strength of the Company is its ability to access the
global debt markets in a cost-efficient manner. Continued access to the
public and private debt markets is critical to the Company's ability to
continue to fund its operations. The Company seeks to maintain a
conservative liquidity position and actively 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 June 30, 1999, the Company had short and long-term debt
outstanding of $12.9 billion and $35.3 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 six months ended June 30, 1999 and 1998, the Company
raised debt aggregating $7.1 billion and $3.9 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 June 30,
1999, these credit facilities were allocated to provide 75%
coverage of the Company's recurring commercial paper borrowings.
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 identified potential non-compliance, modifications were
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 further
develop and test Year 2000 contingency plans, perform additional testing
and facilitate independent verification and validation testing through
the rest 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, in some instances,
the use of alternative systems or procedures.
There can be no guarantee that the systems of other companies on
which the Company's systems rely have been converted accurately, or that
a failure to accurately 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 potential 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 June 30, 1999 the Company incurred and expensed approximately
$22 million for incremental costs primarily related to third party
vendors, outside contractors and additional staff dedicated to the Year
2000 readiness project. During the first six months of 1999,
approximately $6 million of incremental Year 2000 project costs were
incurred with approximately $3 million incurred in each quarter. The
Company expects that it will incur additional future incremental costs
related to the project of approximately $7 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 second quarter ended June 30, 1999, Associates filed
Current Reports on Form 8-K dated April 13, 1999 (announcing
earnings for the first quarter of 1999); April 15, 1999, May 13,
1999, June 10, 1999 and June 25, 1999 (each related to an issuance
of debt securities pursuant to Rule 415); and May 28, 1999
(announcing a change in certifying accountants).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 13, 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>
Six Months Ended
June 30
1999 1998
---- ----
<S> <C> <C>
Fixed Charges (a)
Interest expense $1,408.5 $1,402.9
Implicit interest in rent 9.1 9.2
-------- --------
Total fixed charges $1,417.6 $1,412.1
======== ========
Earnings (b)
Earnings before provision for income
taxes $ 776.9 $ 741.2
Fixed charges 1,417.6 1,412.1
-------- --------
Earnings, as defined $2,194.5 $2,153.3
======== ========
Ratio of Earnings to Fixed Charges 1.55 1.52
==== ====
(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 June 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 2,827
<SECURITIES> 1,964
<RECEIVABLES> 49,286
<ALLOWANCES> 1,435
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 58,868
<CURRENT-LIABILITIES> 0
<BONDS> 48,178
<COMMON> 147
0
0
<OTHER-SE> 8,961
<TOTAL-LIABILITY-AND-EQUITY> 58,868
<SALES> 3,601
<TOTAL-REVENUES> 3,601
<CGS> 0
<TOTAL-COSTS> 2,824
<OTHER-EXPENSES> 968
<LOSS-PROVISION> 448
<INTEREST-EXPENSE> 1,408
<INCOME-PRETAX> 777
<INCOME-TAX> 287
<INCOME-CONTINUING> 490
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 490
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
