UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|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 ______
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Commission file number 1-6594
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COMMERCIAL CREDIT COMPANY
(Exact name of registrant as specified in its charter)
Delaware 52-0883351
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
300 St. Paul Place, Baltimore, Maryland 21202
(Address of principal executive offices) (Zip Code)
(410) 332-3000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
5 1/2% Notes due May 15, 1998 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction I (1)(a)
and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced
disclosure format.
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 |_|
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. |X|
Because the registrant is an indirect wholly owned subsidiary of Travelers Group
Inc., none of the registrant's outstanding voting stock is held by nonaffiliates
of the registrant. As of the date hereof, one share of the registrant's Common
Stock, $.01 par value, was issued and outstanding.
Documents Incorporated by Reference: None
<PAGE>
COMMERCIAL CREDIT COMPANY
Annual Report on Form 10-K
For Fiscal Year Ended December 31, 1997
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TABLE OF CONTENTS
Form 10-K
Item Number Page
- ----------- ----
Part I
1. Business.............................................................. 1
2 Properties............................................................ 9
3. Legal Proceedings..................................................... 10
4. Omitted Pursuant to General Instruction I
Part II
5. Market for Registrant's Common Equity and
Related Stockholder Matters.......................................... 11
6. Selected Financial Data............................................... 12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 13
7A. Qualitative and Quantitative Market Risk Disclosures.................. 19
8. Financial Statements and Supplementary Data........................... 19
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................ 19
Part III
10-13. Omitted Pursuant to General Instruction I
Part IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................................ 19
Exhibit Index......................................................... 2
Signatures............................................................ 2
Index to Consolidated Financial Statements and Schedules..............F-1
<PAGE>
PART I
Item 1. BUSINESS.
THE COMPANY
Commercial Credit Company (the "Company") is a financial services
holding company engaged, through its subsidiaries, principally in consumer
finance services. (1) The Company's predecessor was founded in 1912. The Company
is a wholly owned subsidiary of Travelers Group Inc. ("Travelers Group"), a
diversified financial services holding company engaged, through its
subsidiaries, principally in four business segments: (i) Investment Services;
(ii) Consumer Finance Services (through the Company and its subsidiaries); (iii)
Property & Casualty Insurance Services; and (iv) Life Insurance Services. The
periodic reports of Travelers Group provide additional business and financial
information concerning that company and its consolidated subsidiaries.
On July 31, 1997, the Company acquired Security Pacific Financial
Services ("Security Pacific") from BankAmerica Corporation for a purchase price
of approximately $1.6 billion. The purchase included approximately $1.2 billion
of net consumer finance receivables. The excess of the purchase price over the
estimated fair value of net assets was $380 million and is being amortized over
25 years. The purchase price for the transaction was financed entirely by the
Company, except for an equity contribution by Travelers Group of $520 million to
the Company.
The principal executive offices of the Company are located at 300
St. Paul Place, Baltimore, Maryland 21202; telephone number 410-332-3000.
CONSUMER FINANCE SERVICES
The Company's Consumer Finance Services segment includes consumer
lending services conducted primarily under the name "Commercial Credit," as well
as credit-related insurance and credit card services.
- ----------
(1) Certain items in this Form 10-K, including certain matters discussed under
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" (the "MD&A"), are forward-looking statements. The matters
referred to in such statements could be affected by the risks and uncertainties
involved in the Company's business, including the effect of economic and market
conditions, the level and volatility of interest rates, the impact of current or
pending legislation and regulation and the other risks and uncertainties
detailed herein, including in the paragraph appearing under the table entitled
"Ratio of Allowances for Losses to Consumer Finance Receivables" on page 4, in
the Results of Operations section under the heading "Outlook" and in the
Forward-Looking Statements section of the MD&A.
<PAGE>
Consumer Finance
As of December 31, 1997, the Company maintained 1,026 loan offices
in 45 states, including 24 servicing centers for loans sold through the sales
force of Primerica Financial Services ("PFS"), an affiliate of the Company. This
includes a net increase of approximately 175 loan offices from the July 1997
acquisition of Security Pacific. The Company owns one state-chartered bank and
one federally chartered savings bank, each headquartered in Newark, Delaware.
Total consumer finance receivables of this segment at December 31, 1997, 1996
and 1995 were approximately $11.1 billion, $8.1 billion and $7.2 billion,
respectively. For an analysis of consumer finance receivables, net of unearned
finance charges ("Consumer Finance Receivables"), see Note 5 of Notes to
Consolidated Financial Statements.
Loans to consumers include both fixed and variable rate real
estate-secured loans, both fixed and variable rate unsecured and partially
secured personal loans and fixed rate loans to finance consumer goods purchases.
Travelers Bank & Trust, fsb (formerly The Travelers Bank), a federal savings
bank and a subsidiary of the Company, and The Travelers Bank USA, also a
subsidiary of the Company (together, the "Banks"), provide credit card loans as
discussed below. The Company's loan offices are generally located in small to
medium-sized communities in suburban or rural areas, and are managed by
individuals whogenerally have considerable consumer lending experience. The
primary market for consumer loan customers consists of households with an annual
income of $20,000 to $50,000. The number of active loan customers (excluding
credit card customers) was approximately 1,924,000 at December 31, 1997, as
compared to approximately 1,333,000 at December 31, 1996 and approximately
1,275,000 at December 31, 1995. The Company also operates an agency that
performs appraisals, sells title insurance and provides other closing-related
services for the Company's real estate loans.
The $.M.A.R.T. loan(R) and $.A.F.E.(R) loan programs involve the
solicitation of applications for mortgage and personal loans exclusively through
the PFS sales force. At December 31, 1997, the total loans outstanding generated
from this program were $2.264 billion, or approximately 21% of total loans
outstanding, as compared to $1.524 billion, or approximately 19%, at December
31, 1996 and $1.258 billion, or approximately 17%, at December 31, 1995. Since
early 1998, all new $.M.A.R.T. loan(R) business is being written through
Travelers Bank & Trust, fsb.
The average amount of cash advanced per real estate-secured loan
made was approximately $44,700 in 1997, $35,800 in 1996 and $26,300 in 1995. The
average amount of cash advanced per personal loan made was approximately $4,400
in 1997, $4,250 in 1996 and $4,200 in 1995. The average real estate-secured loan
size increased in 1997 and 1996 due to marketing initiatives that attracted
customers for higher balance loans, particularly in first mortgage programs. The
average annual yield for loans in 1997 was 14.58%, as compared to 15.24% in 1996
and 15.64% in 1995. The average annual yield for real estate-secured loans in
1997 was 11.73%, as compared to 12.13% in 1996 and 12.33% in 1995, and for
personal loans it was 19.66% in 1997, as compared to 19.95% in 1996 and 20.23%
in 1995. The
2
<PAGE>
average yield for real estate-secured loans has been affected by
the normal run-off of older, higher yielding loans and growth in lower yielding,
higher quality loans, while the average yield for personal loans has been
affected by a shift in the portfolio to loans partially secured by real estate
(classified as personal loans) as well as the industry trends associated with
a high level of personal bankruptcies. Consumer Finance Services' average net
interest margin for loans was 8.14% in 1997, 8.64% in 1996 and 8.79% in 1995.
Delinquent Receivables and Loss Experience
Due to the nature of the finance business, some customer delinquency
and loss is unavoidable. The management of the consumer finance business
attempts to control customer delinquencies through careful evaluation of each
borrower's application and credit history at the time the loan is made or
acquired, and appropriate collection activity. An account is considered
delinquent for financial reporting purposes when a payment is more than 60 days
past due, based on the original or extended terms of the contract. The
delinquency and loss experience on real estate-secured loans is generally more
favorable than on personal loans.
The following table sets forth the ratio of receivables delinquent
for 60 days or more on a contractual basis (i.e., more than 60 days past due) to
gross receivables outstanding:
Ratio of Receivables Delinquent 60 Days or More to Gross Receivables
Outstanding(1)
Real
Estate-
Personal Secured Credit Sales Total
As of December 31, Loans Loans Cards Finance Consumer
- ------------------ ----- ----- ----- ------- --------
1997 3.41% 1.61% 1.41% 2.49% 2.35%
1996 3.42% 1.50% 1.44% 2.27% 2.38%
1995 2.89% 1.42% 1.40% 2.17% 2.14%
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(1) The receivable balance used for these ratios is before the deduction of
unearned finance charges and excludes accrued interest receivable.
Receivables delinquent 60 days or more include, for all periods presented,
accounts in the process of foreclosure.
3
<PAGE>
The following table sets forth the ratio of net charge-offs to
average Consumer Finance Receivables. For all periods presented, the ratios
shown give effect to all deferred origination costs.
Ratio of Net Charge-Offs to Average Consumer Finance Receivables
Real
Estate-
Year Ended Personal Secured Credit Sales Total
December 31, Loans Loans Cards Finance Consumer
- ------------ ----- ----- ----- ------- --------
1997 5.39% 0.41% 2.66% 2.86% 2.65%
1996 5.46% 0.50% 2.75% 3.34% 2.91%
1995 4.01% 0.64% 2.04% 2.46% 2.28%
The following table sets forth information regarding the ratio of
allowance for losses to Consumer Finance Receivables:
Ratio of Allowance For Losses to Consumer Finance Receivables
As of December 31,
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1997 2.91%
1996 2.97%
1995 2.66%
As a result of the Security Pacific acquisition, charge-offs in the
second half of 1997 reflect a short-term benefit largely from the transition of
that portfolio to the Company's charge-off policies. As a result, the Company
expects the charge-off rate to increase somewhat in the first half of 1998.
Credit-Related Insurance
American Health and Life Insurance Company ("AHL"), a subsidiary of
the Company, underwrites or arranges for credit-related insurance, which is
offered to customers of the consumer finance business. AHL has an A+ (superior)
rating from A.M. Best Company ("A.M. Best"), whose ratings may be revised or
withdrawn at any time. At a minimum, credit life insurance covers the declining
balance of unpaid indebtedness. Credit disability insurance provides monthly
benefits during periods of covered disability. Credit property insurance covers
the loss of property given as security for loans. Other insurance products
offered or arranged for by AHL primarily include auto single interest and
involuntary unemployment insurance. Most of AHL's products are single premium,
which premiums are earned over the related contract period.
4
<PAGE>
The following table sets forth gross written insurance premiums, net
of refunds, for consumer finance customers:
Consumer Finance Insurance Premiums Written
(In millions)
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Premiums written by AHL and its affiliates (1)
Writings for consumer finance:
Credit life $65.4 $42.7 $41.8
Credit disability and other 91.0 63.1 63.6
Credit property and other 51.5 18.0 4.1
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Total $207.9 $123.8 $109.5
====== ====== ======
Premiums written by other insurance companies (2)
Credit property and other $26.9 $42.9 $51.6
====== ====== ======
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(1) Premiums are written by AHL and other subsidiaries of Travelers Group.
(2) Premiums are written by nonaffiliated insurers for consumer finance
customers.
The increase in premiums year-over-year is the result of growth in
receivables and expanded availability of certain products in additional states.
See Note 7 of Notes to Consolidated Financial Statements for
information regarding reinsurance activities.
Credit Card and Other Services
Travelers Bank & Trust, fsb ("Travelers Bank & Trust") is a
federally chartered savings bank located in Newark, Delaware, which provides
credit card services, including upper market gold credit card services, to
individuals and to affinity groups (such as nationwide professional associations
and fraternal organizations). Travelers Bank & Trust was granted a federal
savings bank charter on November 25, 1997, upon conversion of The Travelers
Bank, a Delaware state-chartered bank. The Travelers Bank USA is a state-
chartered bank located in Newark, Delaware, which also provides credit card
services and loans to finance consumer goods purchases. Although the Banks have
historically limited their activities to credit card operations, since early
1998, all new $.M.A.R.T. loan(R) business is being written through Travelers
Bank & Trust.
5
<PAGE>
The following table sets forth aggregate information regarding
credit cards issued by the Banks.
Credit Cardholders and Total Outstandings
(Dollars in millions)
As of, or for the year ended, December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
Approximate total credit cardholders 984,000 791,000 753,000
Approximate gold credit cardholders 792,000 642,000 615,000
Total outstandings $1,164.6 $907.1 $761.8
Average annual yield 10.81% 11.82% 12.51%
The decrease in the average annual yield in 1997 and 1996 primarily
resulted from the offering of promotional rates in both years to encourage the
transfer of credit card balances to the Banks. The primary market for the Banks'
credit cards consists of households with annual incomes of $40,000 and above.
The Banks offer deposit-taking services (which as to The Travelers
Bank USA are limited to deposits of at least $100,000 per account). At December
31, 1997, deposits of unaffiliated entities were $45.0 million, as compared to
$81.9 million at December 31, 1996 and $97.9 million at December 31, 1995.
In March 1998, the Banks entered into a securitized transaction
pursuant to which they transferred approximately $356.5 million of their credit
card receivables to an affiliated special purpose corporation, which transferred
such receivables to a trust. The trust sold to the public $227.5 million of
securities securitized by such receivables.
Competition
The consumer finance business competes with banks, savings and loan
associations, credit unions, credit card issuers and other consumer finance
companies. Additionally, substantial national financial services networks have
been formed by major brokerage firms, insurance companies, retailers and bank
holding companies. Some competitors have substantial local market positions;
others are part of large, diversified organizations. Deregulation of banking
institutions has greatly expanded the consumer lending products permitted to be
offered by these institutions, and because of their long-standing insured
deposit base, many of them are able to offer financial services on very
competitive terms. The Company believes that it is able to compete effectively
with such institutions. In particular, the Company believes that the diversity
and features of the products it offers, personal service, and cultivation of
repeat and referral business support and strengthen its competitive position in
its consumer finance businesses.
6
<PAGE>
Regulation
Most consumer finance activities are subject to extensive federal
and state regulation, including examination and review by state authorities of
consumer finance offices. Personal loan, real estate-secured loan and sales
finance laws 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 certain collection
practices and creditor remedies. Federal consumer credit statutes primarily
require disclosure of credit terms in consumer finance transactions. The
Travelers Bank USA, a credit card bank, must undergo periodic examination by the
Delaware State Bank Commissioner and the Federal Deposit Insurance Corporation.
Travelers Bank & Trust is subject to regulation and examination by the Office of
Thrift Supervision. The Banks are subject to additional regulations relating to
capitalization, leverage, reporting, dividends and permitted asset and liability
products. The Banks are also subject to the Community Reinvestment Act, which
assesses the records of the Banks in helping to meet the credit needs in the
delineated community of the Banks, including low and moderate income
neighborhoods, consistent with a safe and sound banking operation. In addition,
a number of federal and state consumer protection laws and regulations are
applicable to the Banks including the Truth in Lending Act, which requires
disclosure to the consumer of the cost of credit and governs billing dispute
resolution, the Equal Credit Opportunity Act, which prohibits discrimination in
any aspect of a credit transaction based on race, color, national origin,
gender, marital status, age, income from public assistance programs or exercise
of rights under the Consumer Protection Act, and the Fair Credit Reporting Act,
which is aimed at ensuring the accuracy and fairness of the mechanism by which
consumer credit and other information about consumers is assembled and
evaluated. Travelers Bank & Trust is also covered by the Home Mortgage
Disclosure Act, which requires disclosure of customer demographics, including
race, gender and age. The Banks are also subject to certain regulatory
restrictions relating to transactions with affiliates.
The Company's insurance subsidiaries are subject to considerable
regulation and supervision by insurance departments or other authorities in each
state or other jurisdiction in which they transact business. The extent of
regulation varies but generally has its source in statutes that delegate
regulatory, supervisory and administrative authority to a department of
insurance. The purpose of such regulation and supervision is primarily to
provide safeguards for policyholders, rather than to protect the interests of
the insurers' stockholders. State laws also regulate transactions and dividends
between an insurance company and its parent or affiliates, and require prior
approval or notification of any change in control of an insurance subsidiary. In
addition, under insurance holding company legislation, most states regulate
affiliated groups with respect to intercompany transfers of assets, service
arrangements and dividend payments from insurance subsidiaries. State insurance
departments also conduct periodic examinations of the affairs of insurance
companies and require the filing of annual and other reports relating to the
financial condition of companies and other matters.
Proposed legislation has been introduced in Congress that would
modify certain laws and regulations affecting the financial services industry,
including the provisions regarding
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<PAGE>
affiliations among insurance companies, investment banks and commercial banks.
The potential impact of such legislation on the Company's consumer finance
businesses cannot be predicted at this time.
In addition to state insurance laws, the Company's insurance
subsidiaries are also subject to general business and corporation laws, state
securities laws, consumer protection laws, fair credit reporting acts and other
laws. The insurance industry generally is exempt from federal antitrust laws
because of the application of the McCarran-Ferguson Act.
CORPORATE AND OTHER OPERATIONS
The Corporate and Other segment consists of corporate staff and
treasury operations, corporate investments and certain corporate income and
expenses that have not been allocated to the operating subsidiaries.
Investment in Travelers Group
The Company holds 2,105 shares of Cumulative Adjustable Rate
Preferred Stock, Series Y, of Travelers Group, with a liquidation value of
$100,000 per share, which is redeemable at the option of the holder at certain
times and callable by Travelers Group at certain times. In 1994, the Company
exchanged the shares of Travelers Group common stock that it had acquired in
1993 in the merger of The Travelers Corporation into Travelers Group for shares
of the preferred stock, which had a value equal to the market value of the
common shares at the time the exchange was agreed upon.
GENERAL BUSINESS FACTORS
In the judgment of the Company, no material part of the business of
the Company and its subsidiaries is dependent upon a single customer or group of
customers, the loss of any one of which would have a materially adverse effect
on the Company, and no one customer or group of affiliated customers accounts
for as much as 10% of the Company's consolidated revenues.
At December 31, 1997, the Company had approximately 6,400 full-time
employees. The Company also employs part-time employees.
OTHER INFORMATION
Source of Funds
For a discussion of the Company's sources of funds and maturities of
the long-term debt of the Company, see Item 7, "Management's Discussion and
Analysis of Financial
8
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Condition and Results of Operations - Liquidity and Capital Resources," and Note
6 of Notes to Consolidated Financial Statements.
The following table sets forth information concerning annual
weighted average interest rates on the Company's borrowed funds:
Annual Weighted Average Interest Rates
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Savings accounts, certificates and
deposits 5.1% 5.9% 6.4%
Short-term borrowings(1) 5.6% 5.4% 6.0%
Long-term borrowings(2) 7.1% 7.3% 7.7%
Total borrowings 6.6% 6.9% 7.2%
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(1) Includes all commercial paper and short-term bank loans; does not include
cost of maintaining bank credit lines.
(2) Includes current maturities of long-term debt and amortization of
long-term debt expenses.
Taxation
For a discussion of tax matters affecting the Company and its
operations, see Notes 1 and 8 of Notes to Consolidated Financial Statements.
Financial Information about Industry Segments
For financial information regarding industry segments of the
Company, see Note 3 of Notes to Consolidated Financial Statements.
Item 2. PROPERTIES.
The Company is engaged in the business of providing services that
are generally not dependent upon their physical plant. Offices and other
properties used by the Company and its subsidiaries are located throughout the
United States. Most office locations and other properties are leased on terms
and for durations that are reflective of commercial standards in the communities
where such offices and other properties are located. A few offices are owned,
none of which is material to the Company's financial condition or operations.
The Company believes its properties are adequate and suitable for
its business as presently conducted and are adequately maintained. For further
information concerning leases, see Note 12 of Notes to Consolidated Financial
Statements.
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Item 3. LEGAL PROCEEDINGS.
This section describes the major pending legal proceedings, other
than ordinary routine litigation incidental to the business, to which the
Company or its subsidiaries is a party or to which any of their property is
subject. Certain other pending matters previously reported by the Company are no
longer required to be disclosed herein.
A number of cases have been filed against several consumer finance
companies relating to charges for various forms of insurance and for refinancing
of loans. The Company and some of its subsidiaries have been named as defendants
in these cases and intend to vigorously defend against the claims asserted by
plaintiffs.
In June 1994, a putative class action lawsuit, entitled Princess
Nobels, et al., v. Associates Corporation of North America, was filed against
the Alabama subsidiary of the Company in the U.S. District Court for the Middle
District of Alabama involving the claim that charges for non-filing insurance
are violative of the Truth in Lending Act and constitute a violation of the
Racketeer Influenced and Corrupt Organization Act. A class was certified only
for the State of Alabama in April 1996, but has subsequently been de-certified,
with the class certification issue to be revisited at a hearing presently set
for April 1998. In May 1996, an additional class action entitled Keckler v.
Commercial Credit Corporation was filed in the U.S. District Court for the
Northern District of Florida with similar allegations to the Nobels case. In
February 1997, Keckler was transferred to the Middle District of Alabama
pursuant to a multi-district litigation plan and was consolidated for pre-trial
purposes with Nobels. Keckler sought a nationwide class action with regard to
the charges for non-filing insurance by all of the Company's subsidiaries other
than those in Alabama. In November 1997, the plaintiffs in Nobels moved to amend
the complaint to embrace a nationwide class, which is essentially duplicative of
the class described in Keckler.
Beginning in June 1994, a number of putative class actions have been
filed against the Alabama subsidiary of the Company alleging the charging of
excessive premiums on credit life insurance. These cases, which are essentially
duplicative of each other, are: Lawrence v. Commercial Credit Corporation, et
al., filed in the Circuit Court of Jefferson County, Alabama in June 1994;
Royster v. Commercial Credit Corporation, et al., filed in the Circuit Court of
Walker County, Alabama in September 1995; Hughes v. Commercial Credit
Corporation, filed in the Circuit Court of Calhoun County, Alabama in July 1996;
and Smith v. Commercial Credit Corporation, filed in the Circuit Court of Walker
County, Alabama in December 1996. In December 1996, a settlement class was
conditionally certified in the Hughes case. However, several recent decisions of
the Alabama Supreme Court cast questions on whether that Court had jurisdiction
to entertain the settlement in Hughes. In the event that it is determined that
the Court in Hughes did not have jurisdiction, the Lawrence class action will
proceed.
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In October 1995, a class action entitled McCurdy v. American General
Finance was filed in the US. District Court for the Middle District of Alabama
on behalf of borrowers who purchased credit property insurance from the Alabama
subsidiary of the Company with allegations similar to those in the
above-referenced credit life cases. In May 1997, a class of Alabama purchasers
of such insurance between 1993 and 1996 was certified.
Since January 1997, the Alabama subsidiary of the Company has been
the subject of two separate purported class actions alleging fraud and
suppression of facts which defendant had a duty to disclose in connection with
the refinancing of loans or the supposed practice of "flipping" loans. Those
cases are: Bridges v. Commercial Credit Corporation, filed in the Circuit Court
of Marengo County, Alabama in January 1997; and Daniel, et al. v. Commercial
Credit Corporation, filed in the Circuit Court of Marengo County, Alabama in
September 1997. The Bridges case has been stayed by an Order compelling
arbitration in January 1998, and only the Daniel case remains. In January 1998,
the Alabama Court of Civil Appeals issued a decision which casts doubt on the
viability of the plaintiff's theory of liability in these cases.
Because the nature of the businesses of the Company and its
subsidiaries involves the collection of numerous accounts, the validity of
liens, accident and other damage or loss claims under many types of insurance,
and the construction and interpretation of contracts, the Company and its
subsidiaries are plaintiffs and defendants in numerous legal proceedings. In the
opinion of the Company's management, none of these actions is expected to have a
material adverse effect on the consolidated financial condition of the Company
and its subsidiaries.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to General Instruction I of Form 10-K, the information
required by Item 4 is omitted.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the outstanding common stock of the Company is owned by CCC
Holdings, Inc., which is a wholly owned subsidiary of Travelers Group.
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ITEM 6. SELECTED FINANCIAL DATA
COMMERCIAL CREDIT COMPANY and SUBSIDIARIES
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In millions of dollars)
<TABLE>
<CAPTION>
Year Ended December 31, (1) 1997 1996 1995 1994 1993
- --------------------------- ----------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total revenues (2) $1,741.1 $1,441.1 $1,392.4 $1,598.0 $1,580.3
Income before cumulative
effect of accounting
changes (3) $240.1 $195.8 $219.9 $221.9 $291.8
Net income (3),(4) $240.1 $195.8 $219.9 $221.9 $286.0
December 31,
- ------------
Total assets $13,058.7 $9,359.6 $8,634.5 $8,226.8 $8,893.7
Total debt $10,228.9 $7,333.9 $6,692.5 $6,388.1 $6,232.6
</TABLE>
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(1) The results of Security Pacific Financial Services are included only from
July 31, 1997, the date of acquisition (see Note 2 of Notes to
Consolidated Financial Statements).
(2) On December 30, 1994 the Company sold its remaining 50% interest in
Commercial Insurance Resources, Inc., the parent of Gulf Insurance Company
(Gulf), and accordingly results of operations subsequent to 1994 do not
include Gulf's results.
(3) Included in 1993 results are $34.9 million of equity in the income of The
Travelers Corporation (old Travelers) and after-tax investment portfolio
gains of $30.3 million.
(4) Cumulative effect of accounting changes in 1993 represent a change in
accounting for postretirement benefits other than pensions and a change in
accounting for postemployment benefits.
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ITEM 7. MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION
and RESULTS of OPERATIONS
Consolidated Results of Operations
Year Ended December 31,
-------------------------------------
($ in millions) 1997 1996 1995
- -------------------------------------------------------------------------------
Total revenues $1,741.1 $1,441.1 $1,392.4
=========== =========== ===========
Net income $240.1 $195.8 $219.9
=========== =========== ===========
Results of Operations
The net income of Commercial Credit Company (the Company) for the year ended
December 31, 1997 was $240.1 million compared to $195.8 million in 1996 and
$219.9 million in 1995. Total revenues for the year ended December 31, 1997 were
$1,741.1 million compared to $1,441.1 in 1996 and $1,392.4 million in 1995.
On July 31, 1997, the Company acquired Security Pacific Financial Services
(Security Pacific) from BankAmerica Corporation for a purchase price of
approximately $1.6 billion. The purchase included approximately $1.2 billion of
net consumer finance receivables and approximately $70 million of other net
assets. The excess of the purchase price over the estimated fair value of net
assets was $380.2 million and is being amortized over 25 years. The purchase
price for the transaction was financed primarily by the Company and by an equity
contribution by Travelers Group of $520 million to the Company. This acquisition
has been accounted for as a purchase and accordingly the results of operations
for Security Pacific are included with those of the Company since its date of
acquisition.
The following discussion presents in more detail each segment's performance.
Consumer Finance Services
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------
Net Net Net
($ in millions) Revenues Income Revenues Income Revenues Income
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consumer Finance Services (1) $1,684.7 $235.7 $1,408.9 $221.8 $1,351.3 $245.2
========================================================================================
</TABLE>
(1) Revenues and net income in 1996 include a portion of the gain ($1.2
million and $.7 million, respectively) from the disposition of RCM Capital
Management, a California Limited Partnership (RCM).
13
<PAGE>
Consumer finance earnings were $235.7 million in 1997 compared to $221.8 million
in 1996 and $245.2 million in 1995. The 6% increase in 1997 reflects strong
receivables growth in all major products, largely as a result of investments
made over the last year in marketing, training and systems enhancements. Net
receivables at December 31, 1997 reached a record $11.05 billion (which excludes
$186.0 million in credit card receivables held for securitization) compared to
$8.07 billion at year-end 1996 and $7.24 billion at year end 1995. The
receivables increase in 1997 reflects strong internal growth as well as the July
31, 1997 acquisition of Security Pacific. Security Pacific contributed
approximately $1.2 billion in receivables growth while internal sources
generated the remainder, which grew 22% over year-end 1996 levels. The internal
growth during 1997 was led by the Primerica Financial Services (PFS) generated
portfolio, which grew 49% to $2.3 billion for the year, as well as credit card
outstandings, which grew 28% or $257.5 million to $1.16 billion. (Including the
receivables held for securitization, credit card growth was $443.5 million, or
49%.) Receivables originated in the branch system during 1997 grew 14%,
excluding the impact of Security Pacific.
Despite strong growth in receivables during the second half of 1996, net income
in 1996 was lower than 1995, as expected, driven by a higher provision for loan
losses reflecting industry trends associated with personal bankruptcies. The
growth in Consumer finance receivables in 1996 occurred primarily in real estate
loan and personal loan products generated by the Company's branch office network
and through PFS.
While total interest margin has increased in 1997 from the 1996 and 1995 periods
due to the increase in the portfolio, average net interest margin declined 50
basis points in 1997 to 8.14% and declined 15 basis points in 1996 to 8.64% from
8.79% in 1995, reflecting a decline in the average yield to 14.58% in 1997 and
15.24% in 1996. These declines were partially offset by a decrease in cost of
funds over the period. The decline in average yield has resulted from a shift in
the portfolio mix towards lower yielding higher quality real estate loans,
particularly first mortgage loans, as well as credit cards.
Consumer Finance borrows from the corporate treasury operations of the Company,
which raises funds externally. For fixed rate loan products, Consumer Finance is
charged agreed-upon rates that generally have been set within a narrow range and
approximated 6.55% in 1997 and 6.75% in 1996 and 6.95% in 1995. For variable
rate loan products, Consumer Finance is charged rates based on prevailing
short-term rates. The Company's actual cost of funds may be higher or lower than
rates charged to Consumer Finance, with the difference reflected in the
Corporate and Other segment.
Delinquencies in excess of 60 days were 2.35% as of December 31, 1997 compared
to 2.38% at year end 1996 and 2.14% at year end 1995. The charge off-rate of
2.65% in 1997 was down from the 2.91% rate in 1996 and higher than the 2.28%
rate in 1995. As a result of the Security Pacific acquisition, charge-offs in
the second half of 1997 reflect a short-term benefit largely from the transition
of that portfolio to the Company's charge-off policies. As a result, the Company
expects the charge-off rate to increase somewhat in the first half of 1998.
The allowance for credit losses as a percentage of net outstandings was 2.91% at
year-end 1997 compared to 2.97% at year-end 1996 and 2.66% at year-end 1995.
14
<PAGE>
Integration of Security Pacific has proceeded rapidly, with the conversion to
the Company's proprietary systems and the addition of approximately 175 Security
Pacific branch offices. As of December 31, 1997, the Company had 1,026 branches,
making it the third largest domestic branch network in the consumer finance
industry.
As of, or for the
Year Ended, December 31,
--------------------------
1997 1996 1995
--------------------------
Allowance for credit losses as a % of net
outstandings 2.91% 2.97% 2.66%
Charge-off rate for the year 2.65% 2.91% 2.28%
60 + days past due on a contractual basis
as a % of gross consumer finance
receivables at year end 2.35% 2.38% 2.14%
Insurance subsidiaries of the Company provide credit life, health and property
insurance to Consumer Finance customers. Premiums earned were $173.6 million in
1997, $152.4 million in 1996 and $135.8 million in 1995. The increase in
premiums year-over-year is the result of growth in underlying receivables and
expanded availability of certain products in additional states.
Asset Quality -- Consumer Finance assets totaled approximately $12.7 billion at
December 31, 1997, of which $10.8 billion, or 85%, represented the net consumer
finance receivables (after accrued interest and the allowance for credit
losses). These receivables were predominantly residential real estate secured
loans and personal loans. Receivable quality depends on the likelihood of
repayment. The Company seeks to reduce its risks by focusing on individual
lending, making a greater number of smaller loans than would be practical in
commercial markets, and maintaining disciplined control over the underwriting
process. In response to the high level of personal bankruptcies in the unsecured
market, the Company has shifted its portfolio mix toward higher quality real
estate loans, particularly first mortgage loans. The Company has a
geographically diverse portfolio as described in Note 5 of Notes to Consolidated
Financial Statements. The Company believes that its loss reserves on the
consumer finance receivables are appropriate given current circumstances.
Of the remaining Consumer Finance assets, approximately $915 million were
investments of insurance subsidiaries, including $748 million of fixed income
securities and $93 million of short-term investments with a weighted average
quality rating of A1.
Outlook -- The Consumer Finance results over the last several years have been
influenced by a higher level of loan losses, as a result of a higher level of
personal bankruptcies. Consumer Finance is also affected by the interest rate
environment and general economic conditions. The lower interest rate environment
has resulted in modest downward pressure on interest rates charged on new
receivables secured by real estate and credit cards. For the Company overall,
however, these trends would be offset by the lower costs of funds. From time to
time low interest rates combined with aggressive competitor pricing may increase
the likelihood of prepayments of mortgage loans. This impact has been mitigated
by a number of programs instituted by the Company including those designed to
attract first mortgage business.
15
<PAGE>
Corporate and Other
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------
Net Net Net
Income Income Income
($ in millions) Revenues (Expense) Revenues (Expense) Revenues (Expense)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Corporate and Other (1) $56.4 $4.4 $32.2 $(26.0) $41.1 $(25.3)
=========================================================================================
</TABLE>
(1) Revenues and net income in 1997 include reported portfolio gains of $27.0
million and $16.5 million, respectively. Revenues and net income in 1996
include a portion of the gain ($1.6 million and $1.2 million,
respectively) from the disposition of RCM.
The favorable variance in Corporate and Other net expense (excluding reported
portfolio gains in 1997 and the RCM gain in 1996) in 1997 compared to 1996 is
primarily attributable to increased earnings on a corporate investment and lower
interest cost borne at the corporate level.
The increase in Corporate and Other net expense (before the gain on disposition
of RCM) in 1996 compared to 1995 is primarily attributable to increases in
interest costs borne at the corporate level.
Liquidity and Capital Resources
The Company issues commercial paper directly to investors and maintains unused
credit availability under committed revolving credit agreements at least equal
to the amount of commercial paper outstanding. The Company may borrow under its
revolving credit facilities at various interest rate options (LIBOR, CD, base
rate or money market) and compensates the banks for the facilities through
commitment fees.
Travelers Group, the Company and The Travelers Insurance Company (TIC) have an
agreement with a syndicate of banks to provide $1.0 billion of revolving credit,
to be allocated to any of Travelers Group, the Company or TIC. The revolving
credit facility consists of a five-year facility which expires in June 2001.
Currently, $450 million is allocated to the Company. In addition, the Company
has committed and available revolving credit facilities on a stand-alone basis
of $4.4 billion of which $3.4 billion expires in 2002 and $1.0 billion expires
in July 1998.
The Company has unused credit availablity of $4.850 billion under the revolving
credit facilities referred to above.
The Company is limited by covenants in its revolving credit agreements as to the
amount of dividends and advances that may be made to its parent or its
affiliated companies. At December 31, 1997, the Company would have been able to
remit $567.3 million to its parent under its most restrictive covenants.
During 1997 and through March 6, 1998 the Company completed the following
long-term debt offerings, leaving $2.350 billion available for debt offerings
and $400 million available for trust preferred security offerings under its
shelf registration statements.
16
<PAGE>
o 6.45% Notes due July 1, 2002......................$300 million
o 6.75% Notes due July 1, 2007......................$300 million
o 6.50% Notes due August 1, 2004....................$250 million
o 6.25% Notes due January 1, 2008...................$300 million
In March 1998, Travelers Bank & Trust, fsb (formerly The Travelers Bank), a
subsidiary of the Company, and The Travelers Bank USA, also a subsidiary of the
Company, entered into a securitized transaction pursuant to which they
transferred approximately $356.5 million of their credit card receivables to an
affiliated special purpose corporation which transferred such receivables to a
trust. The trust sold to the public $227.5 million of securities securitized by
such receivables.
Future Application of Accounting Standards
See Note 1 of Notes to Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
Year 2000 Date Conversion
In 1996, the Company began the process of identifying, evaluating and
implementing changes to computer programs and equipment necessary to address the
year 2000 issue. This issue involves the ability of computer systems and
equipment that have time-sensitive programs to properly recognize the year 2000.
The inability to do so could result in major failures or miscalculations. The
Company is currently addressing its internal year 2000 issue with modifications
to existing programs and conversions to new programs and expects to bring all of
its business systems into year 2000 compliance by early 1999. The total pre-tax
cost associated with the required modifications and conversions is expected to
be $5 million to $7 million and is being expensed as incurred in the period 1996
through 1999. The Company is also
17
<PAGE>
communicating with customers, financial institutions, vendors and others with
which it conducts business to identify and resolve year 2000 issues. While it is
likely that these efforts will be successful, if necessary modifications and
conversions are not completed in a timely manner, the year 2000 issue could have
a material adverse effect on certain operations of the Company.
Forward-Looking Statements
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. In particular, the information
appearing in the Results of Operations section under the heading "Outlook" for
the Company's consumer finance business segment is forward-looking. These
forward-looking statements involve risks and uncertainties including, but not
limited to, the following: changes in general economic conditions, interest
rates, and the level of personal bankruptcies; customer responsiveness to both
new products and distribution channels; competitive, regulatory, or tax changes
that affect the cost of or demand for the Company's products; and adverse
litigation results. Readers also are directed to other risks and uncertainties
discussed in documents filed by the Company with the Securities and Exchange
Commission.
18
<PAGE>
Item 7a. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES
Not applicable
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and Schedules on page
F-1 hereof. There is also incorporated by reference herein in response to this
Item the Company's Consolidated Financial Statements and the notes thereto and
the material under the caption "Quarterly Financial Data (Unaudited)" set forth
in the Consolidated Financial Statements.
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.
Pursuant to General Instruction I of Form 10-K, the information
required by Item 10 is omitted.
Item 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction I of Form 10-K, the information
required by Item 11 is omitted.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction I of Form 10-K, the information
required by Item 12 is omitted.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction I of Form 10-K, the information
required by Item 13 is omitted.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
19
<PAGE>
(1) Financial Statements. See Index to Consolidated Financial
Statements and Schedules on page F-1 hereof.
(2) Financial Statement Schedules. See Index to Consolidated
Financial Statements and Schedules on page F-1 hereof.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On October 14, 1997, the Company filed a Current Report on Form 8-K dated
October 13, 1997, reporting under Item 5 thereof the results of its
operations for the three months and nine months ended September 30, 1997.
No other reports on Form 8-K have been filed by the Company during the
last quarter of the period covered by this report; however, on January 7,
1998, the Company filed a Current Report on Form 8-K dated January 5,
1998, filing certain exhibits under Item 7 thereof relating to the offer
and sale of the Company's 6 1/4% Notes due January 1, 2008, and on January
27, 1998, the Company filed a Current Report on Form 8-K dated January 26,
1998, reporting under Item 5 thereof the results of its operations for the
three months and year ended December 31, 1997.
20
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.01 Restated Certificate of Incorporation of Commercial Credit Company
(the "Company"), included in Certificate of Merger of CCC Merger
Company into the Company; Certificate of Ownership and Merger
merging CCCH Acquisition Corporation into the Company; and
Certificate of Ownership and Merger merging RDI Service Corporation
into the Company, incorporated by reference to Exhibit 3.01 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 (File No. 1-6594).
3.02 By-laws of the Company, as amended May 14, 1990, incorporated by
reference to Exhibit 3.02.2 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1990 (File No. 1-6594).
4.01.1 Indenture, dated as of December 1, 1986 (the "Indenture"), between
the Company and Citibank, N.A., relating to the Company's debt
securities, incorporated by reference to Exhibit 4.01 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988 (File No. 1-6594).
4.01.2 First Supplemental Indenture, dated as of June 13, 1990, to the
Indenture, incorporated by reference to Exhibit 1 to the Company's
Current Report on Form 8-K dated June 13, 1990 (File No. 1-6594).
10.01.1 Amended and Restated Credit Agreement dated as of June 28, 1996
among the Company, the Banks party thereto and Morgan Guaranty Trust
Company of New York, as Agent, incorporated by reference to Exhibit
10.02 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1996 (File No. 1-6594).
10.01.2 Amended and Restated Credit Agreement dated as of May 6, 1997 among
the Company, the Banks party thereto and Morgan Guaranty Trust
Company of New York, as Agent, incorporated by reference to Exhibit
10.01.3 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1997 (File No. 1-6594).
10.01.3 Amendment dated as of September 19, 1997 to the Amended and Restated
Credit Agreement dated as of May 6, 1997 among the Company, the
Banks party thereto and Morgan Guaranty Trust Company of New York,
as Agent, incorporated by reference to Exhibit 10.01.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997 (File No. 1-6594).
21
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.02 Five-Year Credit Agreement dated as of July 18, 1997 among the
Company, the Banks party thereto and Morgan Guaranty Trust Company
of New York, as Agent, incorporated by reference to Exhibit 10.01.3
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997 (File No. 1-6594).
12.01+ Computation of Ratio of Earnings to Fixed Charges.
21.01 Pursuant to General Instruction I of Form 10-K, the list of
subsidiaries of the Company is omitted.
23.01+ Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
27.01+ Financial Data Schedule.
- ----------
+ Filed herewith.
The total amount of securities authorized pursuant to any other
instrument defining rights of holders of long-term debt of the Company does not
exceed 10% of the total assets of the Company and its consolidated subsidiaries.
The Company will furnish copies of any such instrument to the Securities and
Exchange Commission upon request.
Copies of any of the exhibits referred to above will be furnished at
a cost of $.25 per page to security holders who make written request therefor to
Patricia A. Rouzer, Corporate Communications and Investor Relations, Commercial
Credit Company, 300 St. Paul Place, Baltimore, Maryland 21202.
22
<PAGE>
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, on the
24th day of March, 1998.
COMMERCIAL CREDIT COMPANY
(Registrant)
By: /s/ Robert B. Willumstad
---------------------------------
Robert B. Willumstad, Chairman of
the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on the 24th day of March, 1998.
SIGNATURE TITLE
--------- -----
/s/ Robert B. Willumstad
- ----------------------------------- Chairman of the Board, Chief Executive
Robert B. Willumstad Officer (Principal Executive Officer)
and Director
/s/ Barbara A. Yastine
- ----------------------------------- Executive Vice President--Finance and
Barbara A. Yastine Insurance and Chief Financial Officer
(Principal Financial Officer)
/s/ Irwin Ettinger
- ----------------------------------- Executive Vice President, Chief
Irwin Ettinger Accounting Officer (Principal
Accounting Officer) and Director
/s/ James Dimon
- ----------------------------------- Director
James Dimon
/s/ Robert I. Lipp
- ----------------------------------- Director
Robert I. Lipp
<PAGE>
COMMERCIAL CREDIT COMPANY and SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES*
- --------------------------------------------------------------------------------
Page
Herein
------
Independent Auditors' Report F-2
Consolidated Statement of Income for the years ended
December 31, 1997, 1996 and 1995 F-3
Consolidated Statement of Financial Position at
December 31, 1997 and 1996 F-4
Consolidated Statement of Changes in Stockholder's
Equity for the years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7 - F-25
Schedules:
Schedule I - Condensed Financial Information of
Registrant (Parent Company only) F-26 - F-28
* Schedules not listed are omitted as not applicable or not required by
Regulation S-X.
F-1
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholder
Commercial Credit Company:
We have audited the consolidated financial statements of Commercial Credit
Company and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Commercial Credit
Company and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
January 26, 1998
F-2
<PAGE>
COMMERCIAL CREDIT COMPANY and SUBSIDIARIES
Consolidated Statement of Income
(In millions of dollars)
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
REVENUES
Finance related interest and other charges $1,404.1 $1,163.2 $1,119.2
Insurance premiums 173.6 152.4 135.8
Interest and dividends 71.7 54.7 49.9
Other income 91.7 70.8 87.5
- --------------------------------------------------------------------------------
Total revenues 1,741.1 1,441.1 1,392.4
- --------------------------------------------------------------------------------
EXPENSES
Interest 574.1 475.5 463.5
Policyholder benefits and claims 61.2 49.5 50.0
Insurance underwriting, acquisition and
operating 26.6 27.9 26.7
Non-insurance compensation and benefits 164.7 133.5 148.0
Provision for consumer finance credit losses 277.1 260.0 171.0
Other operating 267.6 197.7 199.2
- --------------------------------------------------------------------------------
Total expenses 1,371.3 1,144.1 1,058.4
- --------------------------------------------------------------------------------
Income before income taxes 369.8 297.0 334.0
Provision for income taxes 129.7 101.2 114.1
- --------------------------------------------------------------------------------
Net income $ 240.1 $ 195.8 $ 219.9
================================================================================
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
COMMERCIAL CREDIT COMPANY and SUBSIDIARIES
Consolidated Statement of Financial Position
(In millions of dollars)
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 18.4 $ 11.4
Investments:
Fixed maturities:
Available for sale, at market value 926.8 809.1
Equity securities at market value (cost $71.8 and $45.6) 74.4 46.4
Short-term and other 92.7 76.9
- --------------------------------------------------------------------------------------
Total investments 1,093.9 932.4
- --------------------------------------------------------------------------------------
Consumer finance receivables 11,137.0 8,123.8
Allowance for losses (321.4) (239.3)
- --------------------------------------------------------------------------------------
Net consumer finance receivables 10,815.6 7,884.5
Other receivables 384.5 123.0
Deferred policy acquisition costs 4.2 9.3
Cost of acquired businesses in excess of net assets 476.8 106.6
Other assets 265.3 292.4
- --------------------------------------------------------------------------------------
Total assets $13,058.7 $9,359.6
- --------------------------------------------------------------------------------------
LIABILITIES
Certificates of deposit $ 57.3 $ 102.3
Short-term borrowings 3,871.6 1,481.6
Long-term debt 6,300.0 5,750.0
- --------------------------------------------------------------------------------------
Total debt 10,228.9 7,333.9
Insurance policy and claims reserves 452.3 402.9
Accounts payable and other liabilities 523.1 348.3
- --------------------------------------------------------------------------------------
Total liabilities 11,204.3 8,085.1
- --------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY
Common stock ($.01 par value; authorized shares: 1,000; share
issued: 1) -- --
Additional paid-in capital 685.1 164.1
Retained earnings 1,157.5 1,115.2
Unrealized gain (loss) on investment securities and other, net 11.8 (4.8)
- --------------------------------------------------------------------------------------
Total stockholder's equity 1,854.4 1,274.5
- --------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $13,058.7 $9,359.6
======================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
COMMERCIAL CREDIT COMPANY and SUBSIDIARIES
Consolidated Statement of Changes in Stockholder's Equity
(In millions of dollars)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
- -------------------------------------------------------------------------------------
Balance, beginning and end of year $ -- $ -- $ --
- -------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 164.1 163.5 163.5
Capital contribution 521.0 .6 --
- -------------------------------------------------------------------------------------
Balance, end of year 685.1 164.1 163.5
- -------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year 1,115.2 984.4 974.5
Net income 240.1 195.8 219.9
Cash dividends (197.8) (65.0) (210.0)
- -------------------------------------------------------------------------------------
Balance, end of year 1,157.5 1,115.2 984.4
- -------------------------------------------------------------------------------------
UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES AND
OTHER, NET
Balance, beginning of year (4.8) 15.0 (25.6)
Net change in unrealized gains and (losses)
on investment securities 16.6 (19.8) 40.6
- -------------------------------------------------------------------------------------
Balance, end of year 11.8 (4.8) 15.0
- -------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $1,854.4 $1,274.5 $1,162.9
=====================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
COMMERCIAL CREDIT COMPANY and SUBSIDIARIES
Consolidated Statement of Cash Flows
(In millions of dollars)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 240.l $ 195.8 $ 219.9
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of deferred policy acquisition
costs and value of insurance in force 5.1 6.9 7.9
Additions to deferred policy acquisition
costs -- (0.1) (5.7)
Deferred tax provision (10.5) (10.1) (14.6)
Provision for consumer finance credit
losses 277.1 260.0 171.0
Undistributed equity earnings (0.8) (0.8) (1.3)
Changes in insurance policy and claims
reserves 49.4 10.1 6.3
Changes in other assets and liabilities,
net 44.6 105.0 123.8
Other, net (46.9) (6.3) 5.1
- ------------------------------------------------------------------------------------
Net cash provided by operating activities 558.1 560.5 512.4
- ------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in credit card receivables (484.8) (172.1) (66.0)
Loans originated or purchased (4,981.4) (3,410.0) (2,748.0)
Loans repaid or sold 3,208.0 2,534.4 2,245.2
Purchases of investments (298.4) (533.1) (434.2)
Proceeds from sales of investments 167.0 441.7 359.2
Proceeds from maturities of investments 1.3 8.7 7.0
Business acquisitions (1,617.6) (11.7) --
Business divestments -- 23.0 --
Other, net 237.6 36.1 36.5
- -------------------------------------------------------------------------------------
Net cash (used in) investing activities (3,768.3) (1,083.0) (600.3)
- -------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (197.8) (65.0) (210.0)
Capital contribution 520.0 -- --
Issuance of long-term debt 900.0 1,000.0 2,000.0
Payments and redemptions of long-term debt (350.0) (450.0) (810.0)
Net change in short-term borrowings 2,390.0 87.4 (910.4)
Net change in certificates of deposit (45.0) (68.6) 24.8
- -------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 3,217.2 503.8 94.4
- -------------------------------------------------------------------------------------
Change in cash and cash equivalents 7.0 (18.7) 6.5
Cash and cash equivalents at beginning of
period 11.4 30.1 23.6
- -------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 18.4 $ 11.4 $ 30.1
=====================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 556.1 $ 467.7 $ 441.2
Cash paid during the period for income taxes $ 153.3 $ 121.3 $ 125.6
=====================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
COMMERCIAL CREDIT COMPANY and SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
Principles of Consolidation - Commercial Credit Company (the Company) is a
wholly owned subsidiary of CCC Holdings, Inc., which is a wholly owned
subsidiary of Travelers Group Inc. (hereinafter referred to as TRV). The
consolidated financial statements include the accounts of the Company and
its subsidiaries.
Unconsolidated entities in which the Company has at least a 20% interest
are accounted for on the equity method. Significant intercompany
transactions and balances have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
Changes in Accounting Principles
FAS 121. Effective January 1, 1996 the Company adopted Statement of
Financial Accounting Standards (FAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This statement establishes accounting standards for the impairment of
long-lived assets and certain identifiable intangibles to be disposed of.
This statement requires a write down to fair value when long-lived assets
to be held and used are impaired. This statement also requires that
long-lived assets to be disposed of (e.g. real estate held for sale) are
carried at the lower of cost or fair value less cost to sell, and does not
allow such assets to be depreciated. The adoption of this standard did not
have a material impact on the Company's financial condition, results of
operations or liquidity.
FAS 125. In June 1996, the Financial Accounting Standards Board (FASB)
issued FAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." FAS No. 125 provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards are
based on consistent application of a financial components approach that
focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial assets when
F-7
<PAGE>
Notes to Consolidated Financial Statements (continued)
control has been surrended, and derecognizes liabilities when
extinguished. FAS No. 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are
secured borrowings. In December 1996, the FASB issued FAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125" which delays until January 1, 1998 the effective date for certain
provisions. Earlier or retroactive application is not permitted. The
adoption of the provisions of this statement effective January 1, 1997 did
not have a material impact on results of operations, financial condition
or liquidity. The adoption of the provisions of FAS No. 127 effective
January 1, 1998 will not have a material impact on results of operations,
financial condition or liquidity.
Accounting Policies
CASH AND CASH EQUIVALENTS include cash on hand and short-term highly
liquid investments with original maturities of three months or less, other
than those held for sale in the ordinary course of business. These
short-term investments are carried at cost plus accrued interest, which
approximates market value.
INVESTMENTS are owned principally by the insurance subsidiaries. Fixed
maturities include bonds, notes and redeemable preferred stocks. Equity
securities include common and non-redeemable preferred stocks. Fixed
maturity securities classified as "available for sale" and equity
securities are carried at market values that are based primarily on quoted
market prices or if quoted market prices are not available, discounted
expected cash flows using market rates commensurate with the credit
quality and maturity of the investment. The difference between amortized
cost and market values of such securities net of applicable income taxes
is reflected as a component of stockholder's equity. Provisions are made
to write down the value of fixed maturity securities for declines in value
that are other than temporary. Short-term investments are carried at cost,
which approximates fair value. Realized gains and losses on sales of
investments and unrealized losses considered to be other than temporary,
determined on a specific identification basis, are included in other
income.
THE COST OF ACQUIRED BUSINESSES IN EXCESS OF NET ASSETS (goodwill) is
being amortized on a straight-line basis principally over a 25-year
period. The carrying amount is regularly reviewed for indicators of
impairment in value that in the view of management are other than
temporary. Impairments would be recognized in operating results if a
permanent diminution in value is deemed to have occurred.
INCOME TAXES. The Company and its wholly owned domestic non-life insurance
subsidiaries file a consolidated federal income tax return with TRV. A
life insurance subsidiary files a separate federal income tax return.
Deferred income taxes result from temporary differences between the tax
basis of assets and liabilities and their recorded amounts for financial
reporting purposes.
F-8
<PAGE>
Notes to Consolidated Financial Statements (continued)
Income taxes are not provided for on the Company's life insurance
subsidiary's retained earnings designated as "policyholders' surplus,"
because such taxes will become payable only to the extent such retained
earnings are distributed as a dividend or exceed limits prescribed by
federal law. Distributions are not contemplated from this portion of the
life insurance company's retained earnings, which aggregated $39.5
million (subject to a tax effect of $13.8 million) at December 31, 1997.
STOCK-BASED COMPENSATION. The Company along with affiliated companies
participates in stock option and other stock-based incentive plans
sponsored by TRV. The Company has elected to continue to account for its
stock-based compensation plans using the accounting method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (Opinion 25) and has included in the Notes to Consolidated
Financial Statements the pro forma disclosures required by FAS No. 123,
"Accounting for Stock-Based Compensation." (See Note 10).
FINANCE RELATED INTEREST AND OTHER CHARGES are recognized as income using
the constant yield method. Allowances for losses are established by direct
charges to income in amounts sufficient to maintain the allowance at a
level management determines to be adequate to cover losses in the
portfolio. The allowance fluctuates based upon continual review of the
loan portfolio and current economic conditions. For financial reporting
purposes, finance receivables are considered delinquent when they are 60
days or more contractually past due. Income stops accruing on finance
receivables when they are 90 days contractually past due. If payments are
made on a finance receivable that is not accruing income, and the
receivable is no longer 90 days contractually past due, the accrual of
income resumes. Finance receivables are charged against the allowance for
losses when considered uncollectible. Personal loans are considered
uncollectible when payments are six months contractually past due and six
months past due on a recency of payment basis. Loans that are twelve
months contractually past due regardless of recency of payment are charged
off. Recoveries on losses previously charged to the allowance are credited
to the allowance at the time of recovery. Consideration of whether to
proceed with foreclosure on loans secured by real estate begins when a
loan is 60 days past due on a contractual basis. Real estate credit losses
are recognized when the title to the property is obtained.
Fees received and direct costs incurred for the origination of loans are
deferred and amortized over the contractual lives of the loans as part of
interest income. The remaining unamortized balances are reflected in
interest income at the time that the loans are paid in full, renewed or
charged off.
PREMIUMS from short-duration insurance contracts are earned over the
related contract period. Short-duration contracts include primarily
property and casualty, credit life and accident and health credit
policies. Benefits and expenses are associated with premiums by means of
the provision for future policy benefits, unearned premiums and the
deferral and amortization of policy acquisition costs.
F-9
<PAGE>
Notes to Consolidated Financial Statements (continued)
DEFERRED POLICY ACQUISITION COSTS represent the costs of acquiring new
business, principally commissions, certain underwriting and agency
expenses and the cost of issuing policies. Acquisition costs of the life
insurance subsidiary are amortized over the premium-paying periods of the
related policies, in proportion to the ratio of the annual premium revenue
to the total anticipated premium revenue. For certain property and
casualty lines, acquisition costs (commissions and premium taxes) have
been deferred to the extent recoverable from future earned premiums and
anticipated investment income and are amortized ratably over the terms of
the related policies. Deferred policy acquisition costs are reviewed to
determine if they are recoverable from future income, including investment
income, and if not recoverable are charged to expense. All other
acquisition expenses are charged to operations as incurred.
INSURANCE POLICY AND CLAIMS RESERVES represent liabilities for future
insurance policy benefits. Reserves for losses of the life insurance
company are based on claims experience, actual claims reported and
estimates of claims incurred but not reported. Assumptions are based on
historical company experience, adjusted to provide for possible adverse
deviation. These estimates are periodically reviewed and compared with
actual experience and industry standards, and may be revised if it is
determined that future experience will differ substantially from that
previously assumed. Policy and contract claims include provisions for
reported and unreported losses. Reserves for property and casualty
insurance losses represent the estimated ultimate unpaid cost of all
incurred property and casualty claims. Since the reserves are based on
estimates, the ultimate liability may be more or less than such reserves.
The effects of changes in such estimated reserves are included in the
results of operations in the period in which the estimates are changed.
FINANCIAL INSTRUMENTS - DISCLOSURES ABOUT FAIR VALUE - Included in the
Notes to Consolidated Financial Statements are various disclosures
relating to the methods and assumptions used to estimate fair value of
each material type of financial instrument. The carrying value of
short-term financial instruments approximates fair value because of the
relatively short period of time between the origination of the instruments
and their expected realization. The carrying value of receivables and
payables arising in the ordinary course of business approximates fair
market value. The fair value assumptions were based upon subjective
estimates of market conditions and perceived risks of the financial
instruments at a certain point in time. Disclosed fair values for
financial instruments do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of
a particular financial instrument. Potential taxes and other expenses that
would be incurred in an actual sale or settlement are not reflected in
amounts disclosed.
Future Application of Accounting Standards
In June 1997, the FASB issued No. 130, "Reporting Comprehensive Income"
(FAS No. 130). FAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. All items that are required to be
F-10
<PAGE>
Notes to Consolidated Financial Statements (continued)
recognized under accounting standards as components of comprehensive
income are to be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement
stipulates that comprehensive income reflect the change in equity of an
enterprise during a period from transactions and other events and
circumstances from nonowner sources. Comprehensive income will thus
represent the sum of net income and other comprehensive income, although
FAS No. 130 does not require the use of the terms comprehensive income or
other comprehensive income. The accumulated balance of other comprehensive
income is required to be displayed separately from retained earnings and
additional paid-in capital in the statement of financial position. This
statement is effective for fiscal years beginning after December 15, 1997.
The Company anticipates that the adoption of FAS No. 130 will result
primarily in reporting unrealized gains and losses on investments held by
the insurance subsidiaries in debt and equity securities in comprehensive
income.
In June 1997, the FASB also issued FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (FAS No. 131). FAS No.
131 establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and
requires that selected information about those operating segments be
reported in interim financial statements. This statement supersedes FAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." FAS
No. 131 requires that all public enterprises report financial and
descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources
and in assessing performance. This statement is effective for fiscal years
beginning after December 15, 1997. The Company's reportable operating
segments are not expected to change as a result of the adoption of FAS No.
131.
2. Business Acquisition
On July 31, 1997, the Company acquired Security Pacific Financial Services
(Security Pacific) from BankAmerica Corporation for a purchase price of
approximately $1.6 billion. The purchase included approximately $1.2
billion of net consumer finance receivables and approximately $70 million
of other net assets. The excess of the purchase price over the estimated
fair value of net assets was $380.2 million and is being amortized over 25
years. The purchase price for the transaction was financed entirely by the
Company, except for an equity contribution by TRV of $520 million to the
Company. This acquisition has been accounted for as a purchase and
accordingly the results of operations for Security Pacific are included
with those of the Company since its date of acquisition.
F-11
<PAGE>
Notes to Consolidated Financial Statements (continued)
3. Business Segment Information
The Company, through its subsidiaries, is primarily engaged in the
following businesses: Consumer Finance Services and Corporate and Other:
(millions)
1997 1996 1995
--------- --------- ---------
REVENUES
Consumer Finance Services $ 1,684.7 $ 1,408.9 $ 1,351.3
Corporate and Other 56.4 32.2 41.1
--------- --------- ---------
$ 1,741.1 $ 1,441.1 $ 1,392.4
========= ========= =========
INCOME BEFORE INCOME TAXES
Consumer Finance Services $ 364.9 $ 340.5 $ 376.2
Corporate and Other 4.9 (43.5) (42.2)
--------- --------- ---------
$ 369.8 $ 297.0 $ 334.0
========= ========= =========
NET INCOME
Consumer Finance Services $ 235.7 $ 221.8 $ 245.2
Corporate and Other 4.4 (26.0) (25.3)
--------- --------- ---------
$ 240.1 $ 195.8 $ 219.9
========= ========= =========
IDENTIFIABLE ASSETS
Consumer Finance Services $12,671.3 $ 8,951.8 $ 8,110.4
Corporate and Other 387.4 407.8 524.1
--------- --------- ---------
$13,058.7 $ 9,359.6 $ 8,634.5
========= ========= =========
The Consumer Finance Services segment includes consumer lending (including
secured and unsecured personal loans, real estate-secured loans and
consumer goods financing) and credit cards. Also included in this segment
are credit-related insurance services provided through American Health and
Life Insurance Company (AHL) and its affiliates.
Corporate and Other consists of corporate staff and treasury operations, a
hotel investment through its date of sale, the Company's investment in
TRV's securities and certain corporate income and expenses that have not
been allocated to the operating subsidiaries. Also included in the segment
is the non-affiliated insurance business of AHL.
Cumulative effect of accounting changes, and capital expenditures for
property, plant and equipment and related depreciation expense are not
material to any of the business segments. Intersegment sales and
international operations are not significant.
For gains and special charges included in each segment, see "Results of
Operations" discussion in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
F-12
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. Investments
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if quoted market prices are not available,
discounted expected cash flows using market rates commensurate with the
credit quality and maturity of the investment.
The amortized cost and estimated market values of investments in fixed
maturities classified as available for sale were as follows:
-------------------------------------
Gross Unrealized
Amortized ---------------- Market
December 31, 1997 Cost Gains Losses Value
----------------- -------------------------------------
(millions)
Mortgage-backed securities-principally
obligations of U.S. Government
agencies $236.9 $ 3.1 $ (0.7) $239.3
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies 153.1 6.8 (0.2) 159.7
Obligations of states and political
subdivisions 58.5 2.8 -- 61.3
Debt securities issued by foreign
governments 14.8 0.2 -- 15.0
Corporate securities 447.4 4.2 (0.1) 451.5
-------------------------------
Total $910.7 $ 17.1 $ (1.0) $926.8
===============================
-------------------------------------
Gross Unrealized
Amortized ---------------- Market
December 31, 1996 Cost Gains Losses Value
----------------- -------------------------------------
(millions)
Mortgage-backed securities-principally
obligations of U.S. Government
agencies $201.2 $ 0.7 $ (3.7) $198.2
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies 158.2 0.3 (4.5) 154.0
Obligations of states and political
subdivisions 50.4 0.8 (0.3) 50.9
Debt securities issued by foreign
government 14.7 -- (0.3) 14.4
Corporate securities 392.3 1.3 (2.0) 391.6
--------------------------------
Total $816.8 $ 3.1 $(10.8) $809.1
================================
F-13
<PAGE>
Notes to Consolidated Financial Statements (continued)
The amortized cost and estimated market value at December 31, 1997 by
contractual maturity are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
(millions) Estimated
Amortized Market
Cost Value
----------- ----------
Due in one year or less $ 14.4 $ 14.7
Due after one year through five years 104.7 105.7
Due after five years through ten years 181.3 184.1
Due after ten years 162.9 172.5
----------- ----------
463.3 477.0
Mortgage-backed securities 236.9 239.3
Investment in Series Y Preferred Stock of TRV 210.5 210.5
----------- ----------
$910.7 $926.8
=========== ==========
Realized gains and losses on fixed maturities for the year ended December
31, were as follows:
(millions) 1997 1996 1995
------- ------- -------
REALIZED GAINS
Pre-tax $ 0.7 $ 9.0 $ 9.5
------- ------- -------
After-tax $ 0.5 $ 5.8 $ 6.2
------- ------- -------
REALIZED LOSSES
Pre-tax $ (0.6) -- $ (1.4)
------- ------- -------
After-tax $ (0.4) -- $ (0.9)
------- ------- -------
5. Consumer Finance Receivables
Consumer finance receivables, net of unearned finance charges of $728.3
million and $635.3 million at December 31, 1997 and 1996, respectively,
consisted of the following:
(millions) 1997 1996
--------- ---------
Real estate-secured loans $ 5,107.6 $ 3,456.7
Personal loans 3,922.2 3,199.6
Credit cards 1,164.6 907.1
Sales finance and other 857.0 507.7
--------- ---------
Consumer finance receivables 11,051.4 8,071.1
Accrued interest receivable 85.6 52.7
Allowance for credit losses (321.4) (239.3)
--------- ---------
Net consumer finance receivables $10,815.6 $ 7,884.5
========= =========
F-14
<PAGE>
Notes to Consolidated Financial Statements (continued)
An analysis of the allowance for credit losses on consumer finance
receivables at December 31, was as follows:
<TABLE>
<CAPTION>
(millions) 1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance, January 1 $ 239.3 $ 192.5 $ 181.9
Provision for credit losses 277.1 260.0 171.0
Amounts written off (280.9) (245.6) (188.3)
Recovery of amounts previously written off 30.3 26.3 27.1
Allowance on receivables purchased 55.6 6.1 0.8
---------- ---------- ----------
Balance, December 31 $ 321.4 $ 239.3 $ 192.5
---------- ---------- ----------
Net outstandings $ 11,051.4 $ 8,071.1 $ 7,238.1
========== ========== ==========
Ratio of allowance for credit losses to net
outstandings 2.91% 2.97% 2.66%
========== ========== ==========
</TABLE>
Contractual maturities of receivables before deducting unearned finance
charges and excluding accrued interest were as follows:
<TABLE>
<CAPTION>
Receivables
Outstanding Due
December 31, Due Due Due Due Due After
(millions) 1997 1998 1999 2000 2001 2002 2002
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate-secured
loans $ 5,179.1 $ 234.8 $ 244.2 $ 316.8 $ 266.9 $ 272.3 $ 3,844.1
Personal loans 4,500.0 1,345.6 1,163.4 871.8 517.8 251.5 349.9
Credit cards 1,161.5 107.1 97.3 88.3 79.8 72.5 716.5
Sales finance and
other 939.1 617.3 150.3 140.5 21.4 8.8 0.8
--------------------------------------------------------------------------------
Total $11,779.7 $ 2,304.8 $ 1,655.2 $ 1,417.4 $ 885.9 $ 605.1 $ 4,911.3
================================================================================
Percentage 100% 20% 14% 12% 7% 5% 42%
================================================================================
</TABLE>
Contractual terms average 18 years on real estate-secured loans (excluding
call provisions) and 5 years on personal loans. Experience has shown that
a substantial amount of the receivables will be renewed or repaid prior to
contractual maturity dates. Accordingly, the foregoing tabulation should
not be regarded as a forecast of future cash collections.
The Company has a geographically diverse consumer finance loan portfolio.
At December 31, the distribution by state was as follows:
F-15
<PAGE>
Notes to Consolidated Financial Statements (continued)
1997 1996
------ ------
Ohio 10% 11%
North Carolina 8% 9%
Pennsylvania 7% 6%
California 5% 6%
South Carolina 5% 6%
Texas 4% 5%
Tennessee 4% 5%
New York 4% 4%
All other states* 53% 48%
---- ----
Total 100% 100%
==== ====
* None of the remaining states individually accounts for more than 5% of
total consumer finance receivables.
The estimated fair value of the consumer finance receivables portfolio
depends on the methodology selected to value such portfolio (i.e., exit
value versus entry value). Exit value represents a valuation of the
portfolio based upon sales of comparable portfolios and takes into
account the value of customer relationships and the current level of
funding costs. Under the exit value methodology, the estimated fair value
of the receivables portfolio at December 31, 1997 is approximately $612
million above the recorded carrying value. Entry value is determined by
comparing the portfolio yields to the yield at which new loans are being
originated. Under the entry value methodology, the estimated fair value of
the receivables portfolio at December 31, 1997 is approximately equal to
the aggregate carrying value due to the increase in variable rate
receivables whose rates are periodically reset and the fact that the
average yield on fixed rate receivables is approximately equal to that on
new fixed rate loans made at year-end 1997. Fair values included in Note
11 are based on the exit value methodology.
F-16
<PAGE>
Notes to Consolidated Financial Statements (continued)
6. Debt
Short-term borrowings
At December 31, short-term borrowings and weighted average interest rates
consisted of:
1997 1996
-------------------------- --------------------------
(millions) Outstanding Interest Rate Outstanding Interest Rate
----------- ------------- ----------- -------------
Commercial paper $3,871.6 5.83% $1,481.6 5.55%
======== ==== ======== ====
The Company issues commercial paper directly to investors and maintains
unused credit availability under its bank lines of credit at least equal
to the amount of its outstanding commercial paper. The Company may borrow
under its revolving credit facilities at various interest rate options
(LIBOR, CD, base rate or money market) and compensates the banks for the
facilities through commitment fees.
TRV, the Company and The Travelers Insurance Company (TIC) have a
five-year revolving credit facility, which expires in June 2001, with a
syndicate of banks to provide $1.0 billion of revolving credit, to be
allocated to any of TRV, the Company or TIC. The participation of TIC in
this agreement is limited to $250 million. At December 31, 1997, $500
million was allocated to TRV, $450 million was allocated to the Company
and $50 million was allocated to TIC. At December 31, 1997 there were no
borrowings outstanding under this facility.
At December 31, 1997, the Company also had a committed and available
revolving credit facility on a stand-alone basis of $4.4 billion, of which
$3.4 billion expires in 2002 and $1.0 billion expires in July 1998.
The carrying value of short-term borrowings approximates fair value.
Long-term debt
Long-term debt, including its current portion, and final maturity dates
were as follows at December 31:
F-17
<PAGE>
Notes to Consolidated Financial Statements (continued)
(millions) 1997 1996
-------- --------
6 3/4% Notes due 1997 $ -- $ 200.0
8 1/8% Notes due 1997 -- 150.0
5.70% Notes due 1998 100.0 100.0
5 1/2% Notes due 1998 100.0 100.0
8 1/2% Notes due 1998 100.0 100.0
Floating Rate Note due 1998 50.0 --
6.70% Notes due 1999 150.0 150.0
10% Notes due 1999 100.0 100.0
9.6% Notes due 1999 100.0 100.0
6% Notes due 2000 100.0 100.0
5 3/4% Notes due 2000 200.0 200.0
6 1/8% Notes due 2000 100.0 100.0
6% Notes due 2000 150.0 150.0
6 3/4% Notes due 2000 200.0 200.0
5.55% Notes due 2001 200.0 200.0
6.20% Notes due 2001 200.0 200.0
8 1/4% Notes due 2001 300.0 300.0
6 3/8% Notes due 2002 200.0 200.0
6.45% Notes due 2002 300.0 --
6 7/8% Notes due 2002 200.0 200.0
7 3/8% Notes due 2002 200.0 200.0
5 7/8% Notes due 2003 200.0 200.0
5.9% Notes due 2003 200.0 200.0
6.50% Notes due 2004 250.0 --
7 7/8% Notes due 2004 200.0 200.0
6 1/8% Notes due 2005 200.0 200.0
6 1/2% Notes due 2005 200.0 200.0
7 3/8% Notes due 2005 200.0 200.0
7 3/4% Notes due 2005 200.0 200.0
6.45% Notes due 2006 (a) 200.0 200.0
6 5/8% Notes due 2006 200.0 200.0
6.75% Notes due 2007 300.0 --
10% Notes due 2008 150.0 150.0
10% Debentures due 2009 100.0 100.0
8.7% Debentures due 2009 (b) 150.0 150.0
8.7% Debentures due 2010 (c) 100.0 100.0
6 5/8% Notes due 2015 (d) 200.0 200.0
7 7/8% Notes due 2025 (e) 200.0 200.0
-------- --------
$6,300.0 $5,750.0
======== ========
(a) Redeemable at option of holder on October 18, 1999 at face amount.
(b) Redeemable at option of holder on June 15, 1999 at face amount
(c) Redeemable at option of holder on June 15 of each of 1999, 2002 or 2005 at
face amount.
(d) Redeemable at option of holder on June 1, 2002 at face amount.
(e) Redeemable at option of holder on February 1, 2005 at face amount.
F-18
<PAGE>
Notes to Consolidated Financial Statements (continued)
Aggregate annual maturities for the next five years on long-term debt
obligations (based on final maturity dates) are as follows:
(millions)
1998 $350
1999 350
2000 750
2001 700
2002 900
The fair value of the Company's long-term debt is estimated based on the
quoted market price for the same or similar issues or on current rates
offered to the Company for debt of the same remaining maturities. At
December 31, 1997 the aggregate fair value of the Company's long-term debt
was approximately $6,515 million.
7. Reinsurance
The Company's insurance subsidiaries participate in reinsurance in order
to limit losses, to reduce exposure on large risks and to provide
additional capacity for future growth. This is accomplished through
various plans of reinsurance, primarily coinsurance, modified coinsurance
and yearly renewable term. Reinsurance ceded arrangements do not discharge
the insurance subsidiaries or the Company as the primary insurer.
Reinsurance amounts included in the Consolidated Statement of Income were
as follows:
Ceded to
Gross Other
(millions) Amount Companies Net Amount
------ --------- ----------
Year ended December 31, 1997
Premiums
Credit life insurance $ 40.2 $ -- $ 40.2
Credit accident and health
insurance 64.8 -- 64.8
Credit property and other 77.1 (8.5) 68.6
------ ------ ------
$182.1 $ (8.5) $173.6
====== ====== ======
Claims incurred $ 61.9 $ (0.7) $ 61.2
====== ====== ======
F-19
<PAGE>
Notes to Consolidated Financial Statements (continued)
Ceded to
Gross Other
(millions) Amount Companies Net Amount
------ --------- ----------
Year ended December 31, 1996
Premiums
Credit life insurance $ 38.5 $ -- $ 38.5
Credit accident and health
insurance 57.4 -- 57.4
Credit property and other 84.0 (27.5) 56.5
------ ------- ------
$179.9 $ (27.5) $152.4
====== ======= ======
Claims incurred $ 52.3 $ (2.8) $ 49.5
====== ======= ======
Year ended December 31, 1995
Premiums
Credit life insurance $ 45.5 $ (5.8) $ 39.7
Credit accident and health
insurance 62.7 (6.8) 55.9
Property and casualty insurance 135.5 (95.3) 40.2
------ ------- ------
$243.7 $(107.9) $135.8
====== ======= ======
Claims incurred $ 64.3 $ (14.3) $ 50.0
====== ======= ======
8. Income Taxes
The provision for income taxes for the year ended December 31, was as
follows:
(millions) 1997 1996 1995
------- ------- -------
CURRENT:
Federal $ 129.4 $ 103.4 $ 116.6
Foreign -- -- 3.3
State 10.8 7.9 8.8
------- ------- -------
140.2 111.3 128.7
------- ------- -------
DEFERRED:
Federal (9.4) (9.2) (10.9)
Foreign -- -- (3.3)
State (1.1) (0.9) (0.4)
------- ------- -------
(10.5) (10.1) (14.6)
------- ------- -------
Total $ 129.7 $ 101.2 $ 114.1
======= ======= =======
F-20
<PAGE>
Notes to Consolidated Financial Statements (continued)
The reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate for the year ended December 31, was as
follows:
1997 1996 1995
------ ------ ------
Federal statutory rate 35.0% 35.0% 35.0%
Other, net 0.1 (0.9) (0.8)
------ ------ ------
Effective income tax rate 35.1% 34.1% 34.2%
====== ====== ======
Deferred income taxes at December 31, related to the following:
(millions)
1997 1996
------- -------
DEFERRED TAX ASSETS:
Bad debt reserves $ 114.4 $ 84.3
Differences in computing
policy reserves 14.1 13.9
Employee benefits 11.6 7.2
Other reserves 15.5 6.2
Other deferred tax assets 45.4 31.5
------- -------
201.0 143.1
------- -------
DEFERRED TAX LIABILITIES:
Lease obligations and fixed
assets (15.1) (15.1)
Investments (16.5) (7.1)
Other deferred tax liabilities (23.8) (24.3)
------- -------
(55.4) (46.5)
------- -------
Total $ 145.6 $ 96.6
======= =======
The Company and its wholly owned domestic non-life insurance subsidiaries
join with TRV in filing a consolidated federal income tax return. Under a
tax sharing agreement with TRV, the Company is entitled to a current tax
benefit if it incurs losses that are utilized in TRV's consolidated
return. TRV's consolidated tax return group has reported large amounts of
taxable income in recent years and can, more likely than not, expect to
have significant taxable income in the future, thereby enabling
utilization of the Company's deferred tax asset.
9. Stockholder's Equity
Certain long-term credit agreements restrict the payment of dividends
with such restrictions based on cumulative net earnings, as defined.
Additionally, a minimum net worth restriction, as defined, contained in
such agreements imposes an additional constraint on dividends. At
December 31, 1997, the Company would be able to remit $567.3 million in
dividends to its parent under its most restrictive covenants.
F-21
<PAGE>
Notes to Consolidated Financial Statements (continued)
The combined insurance subsidiaries' statutory stockholder's equity at
December 31, 1997 and 1996 was $199.3 million and $180.9 million,
respectively, and is subject to certain restrictions imposed by state
insurance departments as to the transfer of funds and payment of
dividends. The combined insurance subsidiaries' net income determined in
accordance with statutory accounting practices for the years ended
December 31, 1997, 1996 and 1995 was $68.3 million, $66.6 million and
$49.6 million, respectively.
10. Employee Benefit Plans
Pension plans
The Company, along with affiliated companies, participates in a
noncontributory defined benefit pension plan sponsored by TRV (the Plan)
covering the majority of U.S. employees. Benefits are based on an account
balance formula. Under this formula, each employee's accrued benefit can
be expressed as an account that is credited with amounts based upon the
employee's pay, length of service and a specified interest rate, all
subject to a minimum benefit level. The Plan is funded in accordance with
the Employee Retirement Income Security Act of 1974 and the Internal
Revenue Code. Pension costs allocated to the Company from the Plan were
$1.6 million, $1.3 million and $2.6 million in 1997, 1996 and 1995,
respectively.
The Company also has an unfunded noncontributory supplemental retirement
plan that covers certain executives and key employees. Pension costs
related to this plan were $0.8 million, $0.6 million and $1.4 million in
1997, 1996 and 1995, respectively.
Stock option plan
The Company participates in a stock option plan sponsored by TRV that
provides for the granting of stock options in TRV common stock to officers
and key employees. The Company applies Opinion 25 and related
interpretations in accounting for stock options. Since stock options are
issued at fair market value on the date of award, no compensation cost has
been recognized for these awards. In October 1995, the FASB issued FAS No.
123, "Accounting for Stock-Based Compensation." This statement provides an
alternative to Opinion 25 whereby fair values may be ascribed to options
using a valuation model and amortized to compensation cost over the
vesting period of the options. Had the Company applied FAS No. 123 in
accounting for stock options, net income would have been reduced by $4.8
million, $2.1 million and $0.7 million in 1997, 1996 and 1995,
respectively.
11. Fair Value of Financial Instruments
The following table summarizes the fair value and carrying amount of the
Company's financial instruments at December 31, 1997 and 1996. The fair
value assumptions were based upon subjective estimates of market
conditions and perceived risks of the financial instruments at a certain
point in time as disclosed further in various notes to the consolidated
financial statements. Disclosed fair values for financial instruments do
not reflect any premium or discount that could result from offering for
sale at one time the Company's entire holdings of a
F-22
<PAGE>
Notes to Consolidated Financial Statements (continued)
particular financial instrument. Potential taxes and other expenses that
would be incurred in an actual sale or settlement are not reflected in
amounts disclosed.
1997 1996
------------------------ ----------------------
Carrying Carrying
(millions) Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Assets:
Investments $ 1,093.9 $ 1,093.9 $1,072.2 $1,072.2
Net consumer finance
receivables $ 10,815.6 $ 11,427.6 $7,884.5 $8,556.0
Liabilities:
Long-term debt $ 6,300.0 $ 6,515.0 $5,750.0 $5,888.0
12. Lease Commitments and Other Financial Instruments
Rentals
Rental expense (principally for offices and computer equipment) was $31.3
million, $28.1 million and $28.8 million for the years ended December 31,
1997, 1996 and 1995, respectively.
At December 31, 1997, future minimum annual rentals under noncancellable
operating leases were as follows:
(millions)
1998 $26.7
1999 20.8
2000 14.9
2001 9.8
2002 2.8
Thereafter 0.3
-------
$75.3
=======
Credit Cards
The Company provides bank and private label credit card services through
its subsidiaries. These services are provided to individuals and to
affinity groups nationwide. At December 31, 1997 and 1996 total credit
lines available to credit cardholders were $8.766 billion and $6.622
billion, respectively.
F-23
<PAGE>
Notes to Consolidated Financial Statements (continued)
13. Related Party Transactions
To facilitate cash management the Company has entered into an agreement
with TRV under which the Company or TRV may borrow from the other party at
any time an amount up to the greater of $50.0 million or 1% of the
Company's consolidated assets up to a maximum of $100.0 million. The
agreement may be terminated by either party at any time. The interest rate
to be charged on borrowings outstanding will be equivalent to an
appropriate market rate.
In July 1997 the Company issued, at a premium, $50 million of 15% coupon
debt securities yielding 5.62% due July 10, 1998. Concurrently, the
Company entered into a $50 million notional amount swap transaction with
Smith Barney Capital Services Inc., an affiliated company, to receive
fixed and to pay variable interest. The swap is accounted for as hedge of
the related liability and the periodic receipts or payments are accrued as
adjustments to interest expense. This swap contract terminates on July 10,
1998.
During 1994, all of the Company's shares of TRV common stock that it owned
were exchanged for 2,655 shares of Cumulative Adjustable Rate Preferred
Stock, Series Y, of TRV, with a liquidation value of $100,000 per share,
which is redeemable at the option of the Company at certain times and
callable by TRV at certain times. The preferred stock had a value equal to
the market value of the common shares at the time the exchange was agreed
upon. The market value exceeded the Company's carrying value by $58.6
million and such excess was treated as an adjustment to additional paid-in
capital. Subsequently 550 shares of preferred stock were distributed to
TRV as a dividend. At December 31, 1997 and 1996, this investment is
included in "fixed maturities--available for sale" and is reflected at a
carrying amount of $210.5 million. During 1997, 1996 and 1995, the Company
recorded $10.3 million, $10.2 million and $10.2 million, respectively, of
dividend income from this investment.
14. Contingencies
In the ordinary course of business the Company and/or its subsidiaries are
defendants or co-defendants in various litigation matters. Although there
can be no assurances, the Company believes, based on information currently
available, that the ultimate resolution of these legal proceedings would
not be likely to have a material adverse effect on its results of
operations, financial condition or liquidity.
F-24
<PAGE>
Notes to Consolidated Financial Statements (continued)
15. Selected Quarterly Financial Data (unaudited)
1997
-------------------------------------------
(millions) First Second Third Fourth Total
-------------------------------------------
Total revenues $373.7 $398.6 $483.9 $484.9 $1,741.1
Total expenses 309.1 320.7 356.8 384.7 1,371.3
-------------------------------------------
Income before income taxes 64.6 77.9 127.1 100.2 369.8
Provision for income taxes 22.2 26.8 45.6 35.1 129.7
-------------------------------------------
Net income $ 42.4 $ 51.1 $ 81.5 $ 65.1 $ 240.1
===========================================
1996
-------------------------------------------
(millions) First Second Third Fourth Total
-------------------------------------------
Total revenues $355.6 $357.9 $357.5 $370.1 $1,441.1
Total expenses 281.4 275.6 286.7 300.4 1,144.1
-------------------------------------------
Income before income taxes 74.2 82.3 70.8 69.7 297.0
Provision for income taxes 25.8 28.0 24.2 23.2 101.2
-------------------------------------------
Net income $ 48.4 $ 54.3 $ 46.6 $ 46.5 $ 195.8
===========================================
F-25
<PAGE>
SCHEDULE I
COMMERCIAL CREDIT COMPANY
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars)
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $533.2 $439.0 $429.7
- ------------------------------------------------------------------------------------
EXPENSES
Interest 570.5 471.5 460.5
Other (7.0) 9.9 16.2
- ------------------------------------------------------------------------------------
Total 563.5 481.4 476.7
- ------------------------------------------------------------------------------------
Pre-tax loss (30.3) (42.4) (47.0)
Income tax benefit 13.3 17.6 18.5
- ------------------------------------------------------------------------------------
Loss before equity in net income of subsidiaries (17.0) (24.8) (28.5)
Equity in net income of subsidiaries 257.1 220.6 248.4
- ------------------------------------------------------------------------------------
NET INCOME $240.1 $195.8 $219.9
====================================================================================
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto.
F-26
<PAGE>
SCHEDULE I
COMMERCIAL CREDIT COMPANY
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars except per share amounts)
Condensed Statement of Financial Position
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investment in securities of TRV $ 179.2 $ 179.2
Mortgage loans and real estate held for sale -- 129.3
Notes and accounts receivable from subsidiaries-eliminated
in consolidation 10,800.7 7,422.6
Investment in subsidiaries at cost plus equity in net
earnings-eliminated in consolidation 1,178.8 853.3
Other 67.7 70.1
- --------------------------------------------------------------------------------------
Total assets $12,226.4 $8,654.5
======================================================================================
LIABILITIES
Short-term borrowings $3,871.6 $1,481.6
Long-term debt 6,300.0 5,750.0
Accrued expenses and other liabilities 200.4 148.4
- --------------------------------------------------------------------------------------
Total liabilities 10,372.0 7,380.0
- --------------------------------------------------------------------------------------
Stockholder's equity
Common stock ($.01 par value; authorized shares: 1,000; share
issued: 1) -- -
Additional paid-in capital 685.1 164.1
Retained earnings 1,157.5 1,115.2
Unrealized gain (loss) on investment securities and other, net 11.8 (4.8)
- --------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 1,854.4 1,274.5
======================================================================================
Total liabilities and stockholder's equity $12,226.4 $8,654.5
======================================================================================
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto.
F-27
<PAGE>
SCHEDULE I
COMMERCIAL CREDIT COMPANY
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from operations before equity in net
income of subsidiaries $ (17.0) $ (24.8) $ (28.5)
Adjustment to reconcile loss from operations
before equity in net income of subsidiaries
to net cash provided by (used in) operating
activities
Undistributed equity earnings (0.1) (0.8) (1.3)
Dividends received from subsidiaries 64.9 72.2 111.8
Net advances to subsidiaries (1,827.4) (576.9) (76.1)
Other, net (91.0) (53.7) (58.2)
- ---------------------------------------------------------------------------------------
Net cash used in operating activities (1,870.6) (584.0) (52.3)
- ---------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Business acquisitions (1,617.6) (18.1) --
Sale of investments 218.5 -- 3.8
Business divestment -- 16.6 --
Other, net 7.9 12.9 (20.3)
- ---------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (1,391.2) 11.4 (16.5)
- ---------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowings 2,390.0 87.3 (910.4)
Issuance of long-term debt 900.0 1,000.0 2,000.0
Payments and redemptions of long-term debt (350.0) (450.0) (810.0)
Capital Contribution 520.0 -- --
Dividends paid (197.8) (65.0) (210.0)
- ---------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,262.2 572.3 69.6
- ---------------------------------------------------------------------------------------
Change in cash and cash equivalents 0.4 (0.3) 0.8
Cash and cash equivalents at beginning of period 3.5 3.8 3.0
- ---------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3.9 $ 3.5 $ 3.8
======================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 544.8 $ 460.9 $ 436.5
Cash paid during the period for income taxes $ 43.6 $ 43.5 $ 28.4
======================================================================================
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto.
F-28
EXHIBIT 12.01
Commercial Credit Company and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
ALL COMPANIES CONSOLIDATED
(In millions of dollars)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes and minority
interests $369.8 $297.0 $334.0 $363.9 $467.9
Elimination of undistributed
equity earnings (0.7) (0.8) (1.3) (1.9) (26.8)
Pre-tax minority interest -- -- -- (20.0) (32.3)
Add:
Interest 574.1 475.5 463.5 402.8 363.7
Interest portion of rentals 10.4 9.4 9.6 10.9 11.2
- -----------------------------------------------------------------------------------
Income available for fixed charges $953.6 $781.1 $805.8 $755.7 $783.7
===================================================================================
Fixed charges:
Interest $574.1 $475.5 $463.5 $402.8 $363.7
Interest portion of rentals 10.4 9.4 9.6 10.9 11.2
- -----------------------------------------------------------------------------------
Fixed charges $584.5 $484.9 $473.1 $413.7 $374.9
===================================================================================
Ratio of earnings to fixed charges 1.63x 1.61x 1.70x 1.83x 2.09x
===================================================================================
</TABLE>
Exhibit 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Commercial Credit Company:
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-18208, 33-27241 (and the related offerings of securities registered
under Registration Statement No. 33-10444), 33-28723, 33-35618, 33-39857,
33-43351, 33-51814, 33-50513, 33-56553, 33-59415, 333-00055, 333-13311,
333-28847 and 333-44181) on Form S-3 of Commercial Credit Company of our report
dated January 26, 1998, with respect to the consolidated statement of financial
position of Commercial Credit Company and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, changes in
stockholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1997 and the related financial statement schedule,
which report appears in the December 31, 1997 annual report on Form 10-K
of Commercial Credit Company.
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 FINANCIAL STATEMENTS OF COMMERCIAL CREDIT COMPANY AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,400
<SECURITIES> 1,093,900 <F1>
<RECEIVABLES> 11,521,500 <F2>
<ALLOWANCES> (321,400)
<INVENTORY> 0 <F3>
<CURRENT-ASSETS> 0 <F3>
<PP&E> 0 <F3>
<DEPRECIATION> 0 <F3>
<TOTAL-ASSETS> 13,058,700
<CURRENT-LIABILITIES> 0 <F3>
<BONDS> 10,228,900 <F4>
0 <F3>
0 <F3>
<COMMON> 0
<OTHER-SE> 1,854,400 <F5>
<TOTAL-LIABILITY-AND-EQUITY> 13,058,700
<SALES> 0 <F3>
<TOTAL-REVENUES> 1,741,100
<CGS> 0 <F3>
<TOTAL-COSTS> 1,371,300
<OTHER-EXPENSES> 0 <F3>
<LOSS-PROVISION> 277,100 <F6>
<INTEREST-EXPENSE> 574,100 <F6>
<INCOME-PRETAX> 369,800
<INCOME-TAX> 129,700
<INCOME-CONTINUING> 240,100
<DISCONTINUED> 0 <F3>
<EXTRAORDINARY> 0 <F3>
<CHANGES> 0 <F3>
<NET-INCOME> 240,100
<EPS-PRIMARY> 0 <F3>
<EPS-DILUTED> 0 <F3>
<FN>
<F1> Includes the following items from the financial statements: total
investments $1,093,900.
<F2> Includes the following items from the financial statements: consumer
finance receivables $11,137,000 and other receivables $384,500.
<F3> Items which are inapplicable relative to the underlying financial
statements are indicated with a zero as required.
<F4> Includes the following items from the financial statements: certificates
of deposit $57,300; short-term borrowings $3,871,600 and long-term debt
$6,300,000.
<F5> Includes the following items from the financial statements: additional
paid-in capital $685,100 retained earnings $1,157,500; unrealized gain on
investments $12,100; and cumulative translation adjustment $(300).
<F6> Included in total costs and expenses applicable to sales and revenues.
</FN>
</TABLE>
