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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
TEXTRON FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 05-6008768
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
40 WESTMINSTER STREET
P.O. BOX 6687
PROVIDENCE, RHODE ISLAND 02940-6687
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (401) 621-4200
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT:
COMMON STOCK, $100.00 PAR VALUE
(TITLE OF CLASS)
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I 1(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
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TABLE OF CONTENTS
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Item 1. Business.................................................... 1
Item 2. Financial Information....................................... 11
Item 3. Properties.................................................. 13
Item 4. Security Ownership of Certain Beneficial Owners and
Management.................................................. 13
Item 5. Directors and Executive Officers............................ 13
Item 6. Executive Compensation...................................... 15
Item 7. Certain Relationships and Related Transactions.............. 15
Item 8. Legal Proceedings........................................... 15
Item 9. Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters...................... 15
Item 10. Recent Sales of Unregistered Securities..................... 15
Item 11. Description of Registrant's Securities to be Registered..... 15
Item 12. Indemnification of Officers and Directors................... 16
Item 13. Financial Statements and Supplementary Data................. 16
Item 14. Changes in and Disagreements with Accountants and Financial
Disclosure.................................................. 52
Item 15. Financial Statements and Exhibits........................... 52
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ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
General
Textron Financial Corporation (together with its consolidated subsidiaries
called the "Corporation," the "Company" or "TFC," unless the context otherwise
requires) was incorporated on February 5, 1962, in the State of Delaware. TFC is
a diversified commercial finance company with operations in three active
segments: (1) term loans and leases, (2) revolving credit, and (3) specialty
finance. Term lending and leasing activity is focused in aircraft, equipment and
golf finance. Revolving credit products consist primarily of dealer inventory
finance, factoring, and working capital loans. Specialty finance operations
include broadcast media finance, franchise finance, resort receivables finance
and structured investment grade transactions. TFC's other financial services and
products include transaction syndication, equipment appraisal and management,
portfolio servicing and insurance brokerage.
Since TFC's inception, all of its stock has been owned by Textron Inc.
("Textron"), an $11.5 billion global, multi-industry company with market-leading
operations in Aircraft, Automotive, Industrial and Finance. TFC was organized to
finance the distribution of Textron products. However, the scope of the
financial services offered by the Company has become progressively more
diversified. As of September 30, 1999, 24% of TFC's managed finance receivables
were related to Textron products ("Textron-related receivables"). TFC has full
recourse to Textron on approximately three-quarters of managed Textron-related
receivables. For further information on TFC's relationship with Textron, see
"Relationship with Textron" below.
TFC's financing activities are confined almost exclusively to commercial
markets and to lease and secured lending products. The Company's services are
offered primarily in North America and, to a minor extent, in South America,
Europe, and Australia. However, the Company does finance Textron products,
principally Bell helicopters and Cessna aircraft, worldwide.
TFC has approximately 29 offices nationwide, with division offices and
operation centers in Tempe, AZ; East Hartford, CT; Atlanta, GA; Portland, OR;
Columbus, OH; King of Prussia, PA; Wichita, KS; Williamstown, MA; Minneapolis,
MN; Providence, RI; and Ft. Worth, TX. The Corporation's principal executive
offices are located at 40 Westminster Street, Providence, RI 02903.
Recent Acquisitions
TFC has grown through a combination of internal expansion and selective
acquisitions. These acquisitions have been, and future acquisitions will be,
complementary to TFC's principal business segments. Acquired businesses must
have meaningful transaction origination capabilities and credit standards
compatible with TFC's, and, when integrated with TFC, must meet certain return
on investment standards established by Textron. There have been six significant
acquisitions by TFC within the last five years:
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DATE NAME TYPE ASSETS BUSINESS
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February 1998 Systran Financial Services Stock $68 million Factoring
December 1998 Business Leasing Group Assets $186 million Small ticket equipment leasing
March 1999 Southern Capital Corporation Assets $53 million Specialized equipment financing
July 1999 RFC Capital Stock $65 million Factoring
October 1999 Green Tree Financial Assets $432 million Aircraft and franchise finance
November 1999 Litchfield Financial Stock $610 million Resort receivables and other
receivables oriented
transactions
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Description of Business Segments and Operating Units
TFC provides a wide range of leasing, financing and related services
through the following four business segments:
- Term Loans and Leases
- Revolving Credit
- Specialty Finance
- Commercial Real Estate (inactive)
In addition, TFC's Capital Markets Group and TBS Insurance Agency, Inc.
provide support and ancillary products for most of TFC's operating units. The
Capital Markets Group provides loan syndication, warehouse facilities and
advisory services for TFC's operating units and their customers. TBS Insurance
Agency, Inc. structures insurance programs and products for TFC's customers.
For additional information regarding TFC's business segments, see below and
Note 14 to TFC's audited Consolidated Financial Statements and Note 9 to TFC's
unaudited Condensed Consolidated Financial Statements included in Item 13 of
this Form 10.
Term Loans and Leases
Aircraft Finance -- TFC provides financing to commercial users and, to a
minor extent, consumer users of general aviation equipment. The Company finances
new and used Bell helicopters and believes it is one of the largest helicopter
financiers in the world. TFC's Cessna Finance Corporation subsidiary specializes
in the financing of new and used Cessna business jets and single-engine piston
aircraft. The Company also has expertise in financing a variety of other general
aviation aircraft and equipment.
Equipment Finance -- TFC finances an assortment of capital equipment
through vendor-sponsored financing programs, and through direct solicitation of
middle-market companies. Existing vendor programs promote the lease or purchase
of automotive service and repair equipment, machine tools and other industrial
equipment, and office automation equipment. Direct solicitation activity is
concentrated in transportation, construction, printing, and manufacturing
equipment. TFC is skilled in performing equipment appraisals, asset inspections
and repossession and re-marketing of equipment. Through its Asset Control
Services, Inc. operation, TFC offers these services to third parties.
Golf Finance -- TFC provides term financing and leasing to golf course
operators. The Company makes first mortgage loans for the construction,
acquisition or refinancing of golf course facilities, and provides financing
programs for the lease or purchase of E-Z-GO golf cars and Textron Turf Care
equipment (including the Jacobsen, Ransomes, and Cushman product lines).
The following table sets forth certain financial information regarding the
various businesses included in the Term Loans and Leases segment for the periods
indicated.
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NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, 1999 1998 1997 1996
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(IN THOUSANDS)
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AIRCRAFT FINANCE
New business volume....................... $ 550,101 $787,863 $686,791 $547,472
Total finance assets...................... 1,003,266 882,609 818,838 866,163
Revenues.................................. 72,026 94,021 95,832 93,021
Nonperforming assets...................... 13,665 4,806 6,501 8,626
Revenues as a percentage of total
revenues................................ 22.37% 25.61% 27.36% 28.43%
Ratio of net charge-offs (recoveries) to
average finance assets (1).............. 0.30% (0.14)% (0.19)% 0.16%
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NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, 1999 1998 1997 1996
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(IN THOUSANDS)
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EQUIPMENT FINANCE
New business volume....................... $ 341,190 $423,751 $378,371 $422,974
Total finance assets...................... 898,047 843,639 663,118 734,899
Revenues.................................. 75,444 74,228 83,142 79,349
Nonperforming assets...................... 25,346 29,151 25,357 27,577
Revenues as a percentage of total
revenues................................ 23.44% 20.22% 23.74% 24.25%
Ratio of net charge-offs (recoveries) to
average finance assets (1).............. 1.23% 1.66% 1.86% 2.08%
GOLF FINANCE
New business volume....................... $ 364,589 $360,718 $255,034 $282,633
Total finance assets...................... 702,897 418,181 457,666 643,243
Revenues.................................. 37,545 48,394 61,445 55,718
Nonperforming assets...................... 11,354 -- 2,204 830
Revenues as a percentage of total
revenues................................ 11.66% 13.18% 17.54% 17.03%
Ratio of net charge-offs (recoveries) to
average finance assets (1).............. 0.01% 0.02% 0.05% 0.07%
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(1) Annualized
Revolving Credit
Asset-Based Lending and Factoring -- TFC provides working capital loans to
middle-market companies secured by accounts receivable, inventory and equipment.
The Company also provides specialized financing and factoring products to the
trucking and telephone service industries.
Floorplan Finance -- TFC structures inventory finance programs for dealers
and distributors of music, marine, portable spa, wood stove, lawn and garden,
specialty trailer, and manufactured housing products. The Company also provides
programs for E-Z-GO golf cars and Textron Turf Care equipment.
The following table sets forth certain financial information regarding the
various businesses included in the Revolving Credit segment for the periods
indicated.
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NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, 1999 1998 1997 1996
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(IN THOUSANDS)
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ASSET BASED LENDING AND FACTORING
New business volume..................... $770,461 $ 926,476 $200,399 $200,667
Total finance assets.................... 422,874 312,202 184,039 146,082
Revenues................................ 33,700 35,648 18,903 17,982
Nonperforming assets.................... 6,396 -- -- --
Revenues as a percentage of total
revenues.............................. 10.47% 9.71% 5.40% 5.49%
Ratio of net charge-offs (recoveries) to
average finance assets (1)............ 1.27% 0.05% 0.00% 0.55%
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NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, 1999 1998 1997 1996
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(IN THOUSANDS)
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FLOORPLAN FINANCE
New business volume..................... $848,243 $1,048,713 $814,652 $668,879
Total finance assets.................... 572,186 518,963 364,176 334,065
Revenues................................ 45,308 52,187 43,881 36,511
Nonperforming assets.................... 3,340 4,518 5,848 3,507
Revenues as a percentage of total
revenues.............................. 14.07% 14.21% 12.53% 11.16%
Ratio of net charge-offs (recoveries) to
average finance assets (1)............ 0.22% 0.32% 0.60% 0.32%
</TABLE>
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(1) Annualized
Specialty Finance
Structured Finance -- TFC manages an existing portfolio of leveraged
leases, and selectively invests in new leveraged lease transactions. These
transactions involve the long-term lease of real estate and equipment to
investment grade lessees. TFC also participates in investment grade or near
investment grade secured term and revolving structured credit facilities and
equity investments.
Resort Receivables -- TFC offers inventory and notes receivable financing
to developers of vacation interval resorts. Acquisition and construction loans
are also provided to resort developers. TBS Business Services, Inc., a
subsidiary of TFC, provides portfolio servicing of vacation interval loan
portfolios for resort developers.
Franchise Finance -- The Company offers finance programs to franchisees of
well-established franchise concepts for business acquisitions, new store
packages, image enhancements, equipment upgrades, and debt refinancings. Loans
are structured using both conventional and Small Business Administration ("SBA")
products (i.e., government guaranteed loans), through Westminster Development
Bank, a TFC subsidiary.
Broadcast Media Finance -- TFC provides finance programs to broadcast media
operators for station and equipment acquisitions. Loans are structured using
both conventional and SBA products.
The following table sets forth certain financial information regarding the
various businesses included in the Specialty Finance segment for the periods
indicated.
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NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, 1999 1998 1997 1996
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(IN THOUSANDS)
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STRUCTURED FINANCE
New business volume........................ $ 68,192 $ 24,274 -- --
Total finance assets....................... 390,110 341,481 $322,786 $317,770
Revenues................................... 22,129 19,867 15,143 16,115
Nonperforming assets....................... 806 -- -- --
Revenues as a percentage of total
revenues................................. 6.87% 5.41% 4.32% 4.92%
Ratio of net charge-offs (recoveries) to
average finance assets(1)................ 0.00% 0.00% 0.00% 0.00%
RESORT RECEIVABLES
New business volume........................ $452,007 $392,832 $350,144 $155,607
Total finance assets....................... 437,979 336,995 306,145 160,452
Revenues................................... 30,054 39,121 28,298 19,616
Nonperforming assets....................... 4,005 9,883 924 973
Revenues as a percentage of total
revenues................................. 9.34% 10.65% 8.08% 5.99%
Ratio of net charge-offs (recoveries) to
average finance assets(1)................ 0.14% 0.02% (0.01%) 0.00%
</TABLE>
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NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, 1999 1998 1997 1996
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(IN THOUSANDS)
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FRANCHISE FINANCE
New business volume........................ $ 12,643 $ 22,320 $ 2,341 --
Total finance assets....................... 29,789 22,889 2,425 --
Revenues................................... 2,206 987 178 --
Nonperforming assets....................... 76 120 -- --
Revenues as a percentage of total
revenues................................. 0.69% 0.27% 0.05% --
Ratio of net charge-offs (recoveries) to
average finance assets(1)................ 0.24% (.06%) 0.45% --
BROADCAST MEDIA FINANCE
New business volume........................ $ 47,354 $ 21,905 $ 23,948 $ 7,020
Total finance assets....................... 59,176 21,288 11,787 3,575
Revenues................................... 3,433 2,710 1,745 469
Nonperforming assets....................... 896 -- -- --
Revenues as a percentage of total
revenues................................. 1.07% 0.74% 0.50% 0.14%
Ratio of net charge-offs (recoveries) to
average finance assets(1)................ 0.00% 0.00% 0.10% 0.19%
</TABLE>
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(1) Annualized
Commercial Real Estate
In 1993, the Company ceased commercial real estate lending activities and
began to orderly liquidate that portfolio. Commercial real estate mortgages were
primarily secured by first priority liens, and were generally limited to 80% of
the property's appraised market value. Properties financed were located in the
U.S. and included the following types: hotel/motel, retail, recreational,
office, warehouse, industrial, and residential apartments.
The following table sets forth certain financial information regarding the
Commercial Real Estate segment for the periods indicated.
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NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, 1999 1998 1997 1996
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(IN THOUSANDS)
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COMMERCIAL REAL ESTATE
New business volume(2)...................... -- -- -- $2,044
Total finance assets........................ $13,494 $31,740 $49,661 94,266
Revenues.................................... 60 (1) 1,653 8,466
Nonperforming assets........................ 17,943 38,189 58,559 75,752
Revenues as a percentage of total
revenues.................................. 0.02% 0.00% 0.47% 2.59%
Ratio of net charge-offs (recoveries) to
average finance assets(1)................. 11.15% 12.92% 7.25% 6.11%
</TABLE>
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(1) Annualized
(2) Represented funding commitments that existed prior to cessation of business
activities or supplements to pre-existing loans.
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COMPETITION
The markets in which TFC operates are highly fragmented and extremely
competitive. They are characterized by competitive factors that vary, to some
extent, by product and geographic region. TFC's competitors include:
- Commercial finance companies;
- National and regional banks and thrift institutions;
- Insurance companies;
- Leasing companies; and
- Finance operations of equipment vendors.
Competition has intensified in recent years as the result of an improving
economy, easier access to capital and a heightened awareness of the
attractiveness of the commercial finance markets. The rapid expansion of
securitization products has dramatically eased access to capital, breaking down
a significant barrier to entry for new competitors.
TFC competes primarily on the basis of pricing, terms, structure, and
service. Competitors often seek to compete aggressively on the basis of these
factors. The Company may lose market share to the extent that it is unwilling to
match competitors' practices. To the extent that TFC matches these practices,
the Company may experience decreased margins and/or increased risk of credit
losses. Many of TFC's competitors are large companies that have substantial
capital, technological and marketing resources. This has become increasingly the
case given the recent surge in consolidation activity in the commercial finance
industry. In some instances, TFC's competitors have access to capital at a lower
cost than TFC.
RELATIONSHIP WITH TEXTRON
General
TFC derives a significant portion of its business from financing the sale
and leasing of products sold by Textron. In 1998, 1997, and 1996, TFC paid
Textron $980.4 million, $736.3 million and $662.9 million, respectively, for the
purchase of finance assets. TFC recognized finance charge revenues directly from
Textron and its affiliates (net of payments or reimbursements for interest
charged at more or less than market rates) of $3.7 million in 1998, $0.1 million
in 1997 and none in 1996.
Textron and TFC utilize an inter-company account for the allocation of
Textron overhead charges, and for the settlement of receivables purchased by TFC
from Textron and its affiliates. See Note 2 to TFC's audited Consolidated
Financial Statements appearing in Item 13 of this Form 10.
Agreements with Textron
TFC and Textron are parties to several agreements which govern different
aspects of the TFC-Textron relationship. They are described below.
Receivables Purchase Agreement -- Under a Receivables Purchase Agreement
with Textron, TFC has recourse to Textron with respect to most finance
receivables and leases relating to products manufactured and sold by Textron.
Under the Receivables Purchase Agreement, Textron also makes available to TFC a
line of credit of up to $100 million for junior subordinated borrowings at the
prime interest rate.
Support Agreement with Textron -- Under the Support Agreement with Textron
dated as of May 25, 1994, Textron is required to pay to TFC, quarterly, an
amount sufficient to provide that TFC's pre-tax earnings, before extraordinary
items and fixed charges (including interest on indebtedness and amortization of
debt discount, "fixed charges"), will not be less than 125% of the Company's
fixed charges. No such payments under the Support Agreement were required for
the nine months ended September 30, 1999, or for the years ended 1998, 1997,
1996, 1995, or 1994, when TFC's fixed-charge coverage ratios (as defined) were
170%, 173%, 171%, 165%, 160%, and 172%, respectively. Textron has also agreed to
maintain TFC's consolidated
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shareholder's equity at an amount not less than $200 million. Pursuant to the
terms of the Support Agreement, Textron is required to directly or indirectly
own 100% of TFC's common stock. The Support Agreement also contains a third
party beneficiary provision entitling TFC's creditors to enforce its provisions
against Textron.
Tax Sharing Agreement with Textron -- Under a Tax Sharing Agreement with
Textron, Textron has agreed to loan to TFC, on a junior subordinated
interest-free basis, an amount equal to the deferred income tax liability of
Textron attributable to the manufacturing profit not yet recognized for tax
purposes on products manufactured by Textron and financed by TFC. Borrowings
under this arrangement are reflected in amounts due to Textron in TFC's
Consolidated Balance Sheet.
TFC's revenues and expenses are included in the consolidated Federal tax
return of Textron. TFC files most of its State income tax returns on a separate
basis. TFC is allocated Federal tax benefits and charges on the basis of
statutory U.S. tax rates applied to the Company's taxable income or loss
included in the consolidated returns. The benefits of general business credits,
foreign tax credits and any other tax credits are utilized in computing current
tax liability. TFC is paid for tax benefits generated and utilized in Textron's
consolidated federal and state income tax returns, whether or not TFC would have
been able to utilize these benefits on a separate tax return. Income tax assets
or liabilities are settled on a quarterly basis.
REGULATIONS
Small Business Act
SBA loans made by TFC are governed by the Small Business Act and the Small
Business Investment Act of 1958, as amended, and may also be subject to State
regulations respecting commercial transactions generally. These Federal and
State statutes and regulations specify the types of loans and loan amounts which
are eligible for the SBA's guarantee, as well as the servicing requirements
imposed on the lender to maintain the effectiveness of the SBA guarantees.
Other
TFC's activities are subject, in certain instances, to supervision and
regulation by State and Federal governmental authorities. These activities may
also be subject to various laws, including consumer finance laws in some
instances, and judicial and administrative decisions imposing various
requirements and restrictions, which, among other things:
- Regulate credit granting activities;
- Establish maximum interest rates, finance charges and other charges;
- Require disclosures to customers;
- Govern secured transactions;
- Affect insurance brokerage activities; and
- Set collection, foreclosure, repossession and claims handling procedures
and other trade practices.
Although most states do not intensely regulate commercial finance activity,
many states impose limitations on interest rates and other charges, and prohibit
certain collection and recovery practices. They may also require licensing of
lenders or lessors, and specific disclosure of certain contract terms. TFC is
also required to comply with certain provisions of the Equal Credit Opportunity
Act. The Company is also subject to regulation in those foreign countries in
which it has operations.
Existing statutes and regulations have not had a material adverse effect on
the Company's business. However, it is not possible to forecast the nature of
future legislation, regulations, judicial decisions, orders or interpretations,
or their impact upon TFC's future business, financial condition, results of
operations or prospects.
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EMPLOYEES
As of September 30, 1999, TFC had 871 employees. The Company is not subject
to any collective bargaining agreements.
RISK MANAGEMENT
TFC's business activities contain various elements of risk. The Company
considers the principal types of risk to be:
- Credit risk;
- Asset/liability risk (including interest rate and foreign exchange risk);
and
- Liquidity risk.
Proper management of these risks is essential to maintaining profitability.
Accordingly, the Company has designed its risk management systems and procedures
to identify and quantify these risks. TFC has established appropriate policies
and sets prudent limits in these areas. The Company's management of these risks,
and its compliance with policies and limits, is continuously monitored by means
of administrative and information systems.
Credit Risk Management
TFC manages credit risk through:
- Underwriting procedures;
- Centralized approval of individual transactions exceeding certain dollar
limits; and
- Active portfolio and account management.
The Company has developed underwriting procedures for each operating unit
that assess a prospective borrower's ability to perform in accordance with
proposed loan terms. These procedures include:
- Analyzing business or property cash flows and collateral values;
- Performing financing sensitivity analyses; and
- Assessing potential exit strategies.
Certain receivables transactions are originated with the intent of fully or
partially selling them. This strategy provides an additional tool to manage
credit risk.
TFC has developed a tiered credit approval system which allows certain
transaction types and dollar amounts to be approved at the operating unit level.
The delegation of credit authority is done under strict policy guidelines. TFC
business units are also subject to semi-annual audits by TFC's Corporate
Investment Control Department.
Depending on transaction size and complexity, transactions outside of
operating unit authority require the approval of a Group Investment Control
officer, the Executive Vice President and Chief Operating Officer, the Executive
Vice President and Chief Credit Officer, the Chairman, President and Chief
Executive Officer and/or TFC's Credit Committee, which is comprised of its
Chairman, President and Chief Executive Officer, Executive Vice President and
Chief Operating Officer, Executive Vice President and Chief Credit Officer,
Executive Vice President and Chief Financial Officer, and Executive Vice
President, General Counsel and Secretary.
The Company controls the credit risk associated with its portfolio by
limiting transaction sizes, as well as diversifying transactions by: (1)
industry, (2) geographic area, (3) property type and (4) borrower. Through these
practices, TFC identifies and limits exposure to unfavorable risks and seeks
favorable financing opportunities. Management reviews receivable aging trends
and watch list reports, and conducts regular business reviews, in order to
monitor portfolio performance.
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Geographic Concentration -- TFC continuously monitors its portfolio to
avoid any undue geographic concentration in any region of the U.S. or in any
foreign country. The largest concentration of domestic receivables was in the
Southeastern U.S., representing 25% of TFC's total owned and securitized
portfolio at September 30, 1999. International receivables are mostly generated
in support of Textron product sales. At September 30, 1999, international
receivables represented 11% of TFC's total owned and securitized portfolio, with
no single country representing more than 6%.
Asset/Liability Risk Management
The Company continuously measures and quantifies: (1) interest rate risk,
(2) foreign exchange risk, and (3) liquidity risk, in each case taking into
account the effect of derivatives hedging activity. TFC uses derivatives as an
integral part of its asset/liability management program, in order to reduce:
- Interest rate exposure arising from mismatches between assets and
liabilities; and
- Foreign currency exposure arising from changes in exchange rates.
The Company does not use derivative products for the purpose of generating
earnings from changes in market conditions. Before entering into a derivative
transaction, the Company determines that a high correlation exists between the
change in value of the hedged transaction and the value of the derivative. When
TFC executes a transaction, it designates the derivative to specific debt. The
risk that a derivative will become an ineffective hedge is generally limited to
the possibility that an asset being hedged will prepay before the related
derivative matures. Accordingly, after the inception of a hedge transaction, TFC
monitors the effectiveness of derivatives through an ongoing review of the
amounts and maturities of assets, liabilities and swap positions. This
information is reviewed by TFC's Treasurer and its Chief Financial Officer so
that appropriate remedial action can be taken, as necessary.
TFC carefully manages exposure to counterparty risk in connection with its
derivatives transactions. In general, the Company limits its transactions to
counterparties having ratings of at least "A" by Standard & Poors Rating
Service, or "A2" by Moody's Investor Service. Total notional counterparty
exposure is limited to $500 million. This maximum notional exposure equates to
approximately $15 million of potential credit exposure (within two standard
deviations of probability) for the types of derivative transactions typically
entered into by TFC (e.g., interest rate swaps, basis swaps, and short-term
currency swaps and forward contracts).
Interest Rate Risk Management -- TFC manages interest rate risk by
monitoring the duration and interest rate sensitivity of its assets, and by
incurring liabilities (either directly or synthetically with derivatives) having
a similar duration and interest sensitivity profile. TFC's internal policies
limit the aggregate mismatch of interest sensitive assets and liabilities to 10%
of total assets.
From a quantitative perspective, TFC assesses its exposure to interest rate
changes using an analysis that measures the potential loss in net income, over a
12 month period, resulting from a hypothetical increase in interest rates of 100
basis points across all maturities occurring at the outset of the measurement
period (sometimes referred to as a "shock test"). The Company also assumes in
its analysis that: prospective receivables additions will be perfectly match
funded, existing portfolio will not prepay, and all other relevant factors will
remain constant. Applying this "shock test" model to TFC's asset and liability
position as of September 30, 1999, the Company's net income for the following
twelve-month period would not be significantly effected.
Foreign Exchange Risk Management -- A small portion of the finance assets
owned by TFC are located outside of the United States. These receivables are
generally in support of Textron's overseas product sales and are predominantly
denominated in U.S. dollars. TFC presently has foreign currency receivables
denominated in Canadian and Australian dollars. In order to minimize the effect
of fluctuations in foreign currency exchange rates in TFC's financial results,
the Company enters into forward exchange contracts, on a monthly basis, in
amounts sufficient to hedge TFC's total asset exposure. As a result, TFC has no
material exposure to changes in foreign currency exchange rates.
9
<PAGE> 12
Liquidity Risk Management
The Company uses cash to fund asset growth and to meet debt obligations and
other commitments. TFC's primary sources of funds are:
- commercial paper borrowings;
- issuances of medium-term notes and other term debt securities; and
- syndication, securitization or sale of receivables.
All commercial paper borrowings are fully backed by committed bank lines,
providing liquidity in the event of capital market dislocation. The Company
generally maintains less than 50% of debt obligations in commercial paper and
short-term debt. If the Company is unable to access these markets on acceptable
terms, it can draw on its bank credit facilities and use cash flow from
operations and portfolio liquidations to satisfy its liquidity needs. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," included in Item 13, for further
information concerning TFC's liquidity risk management.
PORTFOLIO QUALITY
The performance of TFC's portfolio reflects the Company's rigorous credit
approval process and disciplined portfolio management. As of September 30, 1999,
nonperforming assets were $83.8 million, or 1.8% of finance assets, improved
from $86.7 million, or 2.3% of finance assets at the end of 1998. Much of the
improvement in portfolio performance is a consequence of the liquidation of
TFC's commercial real estate portfolio. TFC's performance is comfortably within
its target range for nonperforming assets of 2% to 4% of finance assets.
The following table presents information about the credit quality of the
Company's portfolio:
<TABLE>
<CAPTION>
NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, 1999 1998 1997 1996 1995 1994
------------------ ----- ----- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NONPERFORMING ASSETS
Non-accrual loans................... $68.8 $69.9 $85.6 $ 91.2 $ 98.7 $100.3
Real estate owned................... 6.7 11.6 10.6 17.9 27.1 29.4
Repossessed assets.................. 8.3 5.2 3.2 8.2 1.6 6.6
----- ----- ----- ------ ------ ------
Total nonperforming assets..... $83.8 $86.7 $99.4 $117.3 $127.4 $136.3
===== ===== ===== ====== ====== ======
Ratio of nonperforming assets to total
receivables............................ 1.9% 2.4% 3.2% 3.7% 4.3% 4.9%
Ratio of nonperforming assets to total
finance assets......................... 1.8% 2.3% 3.1% 3.6% 4.1% 4.7%
ALLOWANCE FOR LOSSES
Allowance for losses of receivables...... $89.2 $83.9 $77.4 $ 74.8 $ 74.8 $ 70.0
Ratio of allowance for losses on
receivables to receivables............. 2.0% 2.3% 2.5% 2.4% 2.5% 2.5%
Ratio of allowance for losses on
receivables to net charge-offs......... 3.9x(1) 5.1x 4.0x 2.8x 3.3x 2.5x
Ratio of allowance for losses on
receivables to nonperforming assets.... 106.4% 96.8% 77.9% 63.8% 58.7% 51.4%
</TABLE>
- ---------------
(1) Annualized
10
<PAGE> 13
Nonperforming Assets
Nonperforming assets include nonaccrual finance receivables and repossessed
assets. TFC classifies receivables as nonaccrual, and suspends the recognition
of earnings, when accounts are contractually delinquent by more than three
months, unless collection of principal and interest is not doubtful. In
addition, earlier suspension may occur if TFC has significant doubt about the
ability of the obligor to meet current contractual terms. Doubt may be created
by: (1) payment delinquency, (2) reduction in the obligor's cash flows, (3)
deterioration in the loan to collateral value relationship, or (4) other
relevant considerations. The table below shows nonperforming assets by business
segment:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30, ------------------------
1999 1998 1997 1996
------------- ----- ----- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
NONPERFORMING ASSETS BY SEGMENT
Term loans and leases........................... $50.4 $34.0 $34.1 $ 37.0
Revolving credit................................ 9.7 4.5 5.8 3.5
Specialty finance............................... 5.8 10.0 .9 1.0
Commercial real estate.......................... 17.9 38.2 58.6 75.8
----- ----- ----- ------
Total nonperforming assets................. $83.8 $86.7 $99.4 $117.3
===== ===== ===== ======
</TABLE>
The above table does not include captive receivables with recourse to
Textron. Captive receivables with recourse that were 90 days or more delinquent
amounted to 10.8%, 10.9%, 9.7%, and 10.1% of recourse captive finance
receivables at September 30, 1999 and years ended 1998, 1997, and 1996,
respectively. TFC recognizes revenues on such delinquent accounts. Such revenues
were approximately $5.1 million, $5.8 million, $7.9 million, and $6.9 million
for the nine months ended September 30, 1999, and years ended 1998, 1997, and
1996, respectively.
Delinquent Earning Accounts and Loan Modifications
TFC does not have any earning accounts that are 90 days or more delinquent,
with the exception of captive receivables described above. Loans that are
modified are not returned to accruing status until six months of timely payments
have been received, or TFC otherwise deems that full collection of principal and
interest is not doubtful.
Allowance for Losses
The allowance for losses on receivables is available to absorb losses in
the entire portfolio. TFC establishes this allowance through direct charges to
income. Losses are charged to the allowance when all or a portion of a
receivable is considered to be uncollectible. The Company reviews the allowance
periodically, and adjusts it in response to: (1) the size and loss experience of
the overall portfolio, (2) current economic conditions, and (3) the
collectibility and workout potential of identified nonperforming accounts.
Finance receivables are written down to the fair value of the related collateral
(less estimated cost to sell) when the collateral is repossessed or when no
payment has been received for six months. If the fair market value of
repossessed assets declines after the time of repossession, TFC records a
writedown to reflect this reduction in value.
ITEM 2. FINANCIAL INFORMATION
The results of TFC's operations and balance sheet data for each of the
years in the three-year period ended January 2, 1999, and as of January 2, 1999,
January 3, 1998, and December 28, 1996, respectively, were derived from TFC's
audited Consolidated Financial Statements, and the notes thereto, which appear
elsewhere in this Form 10. The results of operations and balance sheet data for
each of the years in the two-year period ended December 30, 1995, and as of
December 30, 1995, and December 31, 1994, respectively, were derived from TFC's
audited Consolidated Financial Statements, and the notes thereto, which are not
presented herein. The results of operations and balance sheet data for the nine
months ended
11
<PAGE> 14
September 30, 1999 and 1998 were derived from TFC's unaudited Condensed
Consolidated Financial Statements, and Notes thereto, appearing in Item 13 of
this Form 10. The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and TFC's audited Consolidated Financial Statements and unaudited
Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, AT OR FOR THE YEARS ENDED(1)
($ IN THOUSANDS) 1999 1998 1998 1997 1996 1995 1994
---------------- -------------- -------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Finance charges and
discounts.................... $ 270,036 $ 223,053 $ 297,091 $ 290,943 $ 281,830 $ 271,580 $ 237,634
Rental revenues on operating
leases....................... 11,926 13,011 17,181 18,664 19,071 20,859 20,841
Other income................... 39,943 38,705 52,890 40,613 26,346 18,777 18,692
Net income..................... 58,110 51,939 69,576 67,741 58,339 54,447 51,141
BALANCE SHEET DATA
Total finance receivables...... $4,424,033 $3,098,812 $3,611,397 $3,069,123 $3,172,824 $2,967,569 $2,786,891
Reserve for losses............. 89,208 79,148 83,887 77,394 74,824 74,769 69,981
Operating lease equipment,
net.......................... 105,785 121,747 118,590 111,518 127,691 124,728 136,135
Total assets................... 4,683,849 3,234,972 3,784,538 3,177,965 3,269,141 3,060,521 2,910,841
Commercial paper & short-term
debt......................... 1,177,331 961,629 1,424,872 1,073,665 1,014,613 1,009,761 940,371
Long-term notes................ 2,425,500 1,338,945 1,403,958 1,290,903 1,426,783 1,266,911 1,220,778
Deferred income taxes.......... 336,986 313,028 321,521 319,293 315,366 302,741 293,532
Shareholders equity............ 528,667 428,715 472,452 405,876 411,715 382,476 354,629
External debt to shareholder's
equity....................... 6.81x 5.37x 5.99x 5.83x 5.93x 5.95x 6.09x
SELECTED DATA AND RATIOS
PROFITABILITY
Net interest margin as a
percentage of average net
investment(2)................ 6.66% 6.93% 6.88% 6.51% 6.15% 5.98% 6.32%
Return on equity............... 15.69% 16.29% 16.2% 16.8% 14.8% 14.8% 15.0%
Return on average assets(3).... 1.87% 2.08% 2.06% 2.07% 1.84% 1.82% 1.85%
Ratio of earnings to fixed
charges...................... 1.69x 1.72x 1.72x 1.70x 1.65x 1.60x 1.72x
Salaries and administrative
expenses as a percentage of
average managed
receivables(4)............... 1.78% 1.72% 1.73% 1.54% 1.65% 1.59% 1.66%
CREDIT QUALITY
60+ days contractual
delinquency as a percentage
of finance receivables(5).... 1.12% 0.91% 0.87% 0.86% 0.75% 2.52% 0.93%
Nonperforming assets as a
percentage of finance
assets....................... 1.85% 2.50% 2.3% 3.1% 3.6% 4.1% 4.7%
Reserves for losses as a
percentage of finance
receivables.................. 2.0% 2.6% 2.3% 2.5% 2.4% 2.5% 2.5%
</TABLE>
- ---------------
(1) TFC's year-end dates conform with Textron's year-end which falls on the
nearest Saturday to December 31st. All interim periods are calendar month
end.
(2) Represents revenues earned less interest expense on borrowings as a
percentage of average net investment. Average net investment includes
finance receivables plus operating leases less deferred taxes on leveraged
leases.
(3) Average assets include finance receivables less allowance for loan loss,
operating leases and other assets. Investments in leveraged leases are not
net of deferred taxes.
(4) Average managed receivables include owned receivables plus receivables
serviced under securitizations, participations and third party portfolio
servicing agreements.
(5) Delinquency excludes captive receivables with recourse to Textron. Captive
receivables represent third party finance receivables originated in
connection with the sale or lease of Textron manufactured products.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is located in Item 13.
12
<PAGE> 15
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about the potential effect of changes in interest rates and
currency exchange rates on TFC's financial results is discussed in Item 1, and
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations," found in Item 13.
ITEM 3. PROPERTIES
TFC leases office space from a Textron affiliate for its corporate
headquarters at 40 Westminster Street, Providence, Rhode Island 02903. The
Company leases other offices throughout the United States. For information
concerning TFC's lease obligations, see Note 12 to TFC's audited Consolidated
Financial Statements appearing elsewhere in this Form 10.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding shares of common stock ($100.00 par value per share)
of TFC are owned by Textron, whose principal executive offices are located at 40
Westminster Street, Providence, RI 02903. Textron possesses sole voting and
investment power with respect to such shares of common stock. The directors and
officers of TFC do not own any of TFC's common shares.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of TFC are as follows:
DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Edward C. Arditte............ 44 TFC Director since May of 1997. Vice President and Treasurer of
Textron Inc. since 1997. Vice President Finance and Business
Development, Textron Fastening Systems, from 1995 to 1997, and Vice
President -- Communications and Risk Management of Textron Inc.
from 1994 to 1995.
Lewis B. Campbell............ 53 TFC Director since January of 1993. Chairman and Chief Executive
Officer of Textron since 1999. President and Chief Executive
Officer from 1998 to 1999. President and Chief Operating Officer of
Textron Inc. from 1994 to 1998.
Stephen A. Giliotti.......... 51 TFC Director since December of 1994. Chairman, President and Chief
Executive Officer of TFC since 1999. President from 1995 to 1999.
Executive Vice President and Chief Operating Officer from 1994 to
1995.
John A. Janitz............... 57 TFC Director since May 1999. President and Chief Operating Officer
of Textron Inc. since 1999. Chairman, President and Chief Executive
Officer of Textron Automotive Company From 1996 to 1999. Executive
Vice President, General Manager, Occupant Restraint, Seat Belt and
Fasteners of TRW, Inc. from 1990 to 1996.
Wayne W. Juchatz............. 53 TFC Director since May of 1995. Executive Vice President and
General Counsel of Textron Inc. since 1995. Executive Vice
President, General Counsel and Secretary of RJ Reynolds Co. from
1994 to 1995.
</TABLE>
13
<PAGE> 16
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Stephen A. Giliotti.......... 51 Chairman, President and Chief Executive Officer since 1999.
President from 1995 to 1999. Executive Vice President and Chief
Operating Officer from 1994 to 1995.
Buell J. Carter.............. 53 Executive Vice President and Chief Operating Officer since 1999.
Senior Vice President, Operations from 1997 to 1999. Vice
President, Division Manager, Asset Based Finance from 1991 to 1997.
Andrew M. Chester............ 45 Executive Vice President -- Human Resources since 1999. Senior Vice
President, Human Resources from 1998 to 1999. Vice President, Human
Resources from 1989 to 1998.
Thomas J. Cullen............. 43 Executive Vice President and Chief Financial Officer since 1999.
Senior Vice President and Chief Financial Officer from 1997 to
1999. Senior Vice President, Finance from 1995 to 1997. Vice
President, and Controller from 1992 to 1995.
O. Lewis Humphrey............ 52 Executive Vice President and Chief Credit Officer since 1999.
Senior Vice President and Chief Credit Officer from 1995 to 1999.
Vice President, Corporate Investment Control from 1991 to 1995.
John W. Mayers, Jr........... 45 Executive Vice President -- Corporate Development since 1999. Vice
President, Risk Management and Insurance for Textron Inc. from 1997
to 1999. Director, Risk Management and Insurance for Textron Inc.
from 1993 to 1997.
Elizabeth C. Perkins......... 45 Executive Vice President, General Counsel and Secretary since 1999.
Senior Vice President, General Counsel and Secretary from 1994 to
1999.
David A. Raspallo............ 40 Executive Vice President and Chief Information Officer since 1999.
Senior Vice President and Chief Information Officer from 1998 to
1999. Vice President, Financial Segments TFC/AFS 1998. Vice
President, Information Systems from 1993 to 1998.
Dan R. McCullough............ 55 Senior Vice President, Operations since 1995. Vice President Vendor
Finance and Floorplan Finance from 1991 to 1995.
Richard H. Mitterling........ 52 Senior Vice President, Operations since 1998. Vice President,
Division Manager, Resort Receivable Division from 1994 to 1998.
Ronald W. Oake............... 55 Senior Vice President, Operations since 1999. Vice President,
Division Manager, Floorplan Finance Division from 1998 to 1999.
General Manager of Avco Financial Services from 1995 to 1998. Vice
President, Operations, Floorplan Finance Division from 1992 to
1995.
Richard A. Stratton.......... 49 Senior Vice President, Operations since 1999. Chief Executive
Officer of Litchfield Financial Corporation from 1996 to 1999.
President of Litchfield Financial Corporation from 1988 to 1996.
Barry L. Elfstrom............ 47 Vice President, Controller Financial Reporting since 1999. Vice
President and Controller or Assistant Controller 1986 to 1999.
Brian F. Lynn................ 39 Vice President and Treasurer since 1999. Vice President, Division
Manager, Vendor Finance Division from 1996 to 1999. Vice President
and Treasurer from 1994 to 1996.
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Eric Salander................ 40 Vice President, Finance since 1999. Vice President, Strategic
Planning from 1996 to 1999. Vice President Administration for AAA
Southern New England from 1995 to 1996. Manager Ernst & Young from
1989 to 1995.
Kathleen A. Smith............ 50 Vice President, Tax since 1998. Assistant Vice President, Tax from
1996 to 1998. Senior Manager of Tax for Lefkowitz, Garfunkel,
Champi & DiRenzo from 1992 to 1996.
</TABLE>
ITEM 6. EXECUTIVE COMPENSATION
Omitted.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted.
ITEM 8. LEGAL PROCEEDINGS
See Note 13 to TFC's audited Consolidated Financial Statements regarding
legal proceedings.
ITEM 9. MARKET PRICE OF AND DIVIDENDS OF THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The common stock of TFC is owned entirely by Textron and, therefore, there
is no trading of TFC's stock. Dividends of $35.7 million were declared and paid
in the nine months ended September 30, 1999, and $62.3 million and $73.6 million
were declared and paid in the years ended 1998 and 1997, respectively. See Note
8 to TFC's audited Consolidated Financial Statements regarding restrictions as
to dividend availability.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, TFC has sold medium-term notes from time to
time. These debt securities were sold to qualified institutional buyers and
accredited institutional investors, and were exempt from the Securities Act of
1933 under Section 4(2).
The following table lists sales of TFC's Series C and Series D medium-term
notes having maturities in excess of one year for the periods shown:
<TABLE>
<CAPTION>
YEAR SERIES AMOUNT MATURITY
---- ------ -------------- ---------
<S> <C> <C> <C>
1996................................... C $ 75,000,000 3 years
1997................................... C $ 200,000,000 2 years
1998................................... D $ 370,000,000 2-3 years
1999 (through September 30)............ D $1,163,000,000 3-4 years
</TABLE>
The Company's medium-term notes have been publicly offered by the following
underwriters: Banc of America Securities LLC, Chase Securities, Inc., J.P.
Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Salomon Smith Barney, and Warburg Dillion Read LLC. Commissions paid by TFC to
these underwriters ranged from 0.25% to 0.45% of the amount of the medium-term
notes sold. These medium-term notes were sold for cash and generally at par.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The following description of the capital stock of the Company and certain
provisions of the Company's Restated Certificate of Incorporation and By-Laws is
a summary and is qualified in its entirety by the provisions of the Restated
Certificate of Incorporation and By-Laws, which have been filed as exhibits to
this Form 10.
15
<PAGE> 18
The Company has authorized Four Thousand (4,000) shares of Common Stock
with a par value of $100.00 per share. No preferred stock has been issued or
authorized. All outstanding shares of stock are held by Textron.
Each stockholder of record is entitled to one vote, by person or by proxy,
for each share of Common Stock held on every matter properly submitted to the
stockholders for a vote. Except as otherwise provided by law, or in the Restated
Certificate of Incorporation or By-Laws, stockholder votes shall be decided by
the vote of a majority in interest of the stockholders entitled to vote thereon.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes and empowers
each Delaware corporation to indemnify its directors, officers, employees and
agents against liabilities incurred in connection with, and related expenses
resulting from, any claim, action or suit brought against any such person as a
result of his or her relationship with the corporation, provided that such
persons acted in good faith and in a manner such person reasonably believed to
be in, and not opposed to, the best interests of the corporation in connection
with the acts or events on which such claim, action or suit is based. The
finding of either civil or criminal liability on the part of such person in
connection with such acts or events is not necessarily determinative of the
question of whether such person has met the required standard of conduct and is,
accordingly, entitled to be indemnified. The foregoing statements are subject to
the detailed provisions of Section 145 of the General Corporation Law of the
State of Delaware.
The By-Laws of Textron Financial Corporation provide that each person who
at any time is or shall have been a director or elected or appointed officer of
Textron Financial Corporation, or is or shall have been serving another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise in any capacity at the request of Textron Financial Corporation, and
his or her heirs, executors and administrators, shall be indemnified by Textron
Financial Corporation in accordance with and to the full extent permitted by the
General Corporation Law of the State of Delaware. Paragraph (f) of Article XII
of the By-Laws of Textron Financial Corporation facilitates enforcement of the
right of directors and owners to be indemnified by establishing such right as a
contract right pursuant to which the person entitled thereto may bring suit as
if the indemnification provisions of the By-Laws were set forth in a separate
written contract between Textron Financial Corporation and the director or
officer.
The By-Laws of Textron Financial Corporation provide that Textron Financial
Corporation shall indemnify, in all respects and to the full extent authorized
or permitted by law, any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of his or
her being or having been a director, elected or appointed officer, employee or
agent, of any other corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding. Such
indemnification of any person shall inure to the benefit of his or her heirs,
executors and administrators.
The By-Laws of Textron also provide similar indemnification for officers of
Textron who serve as directors of the Company.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
TFC utilizes a broad base of financial resources for its liquidity and
capital requirements. Cash is provided from operations and several different
sources of borrowings, including the issuance of commercial
16
<PAGE> 19
paper and short-term bank debt, sales of medium- and long-term debt in the U.S.
and foreign financial markets and junior subordinated borrowings under a $100
million line of credit with Textron. For liquidity purposes, TFC has a policy of
maintaining sufficient unused lines of credit to support its outstanding
commercial paper and short-term bank debt. TFC has line of credit agreements of
$1.2 billion, of which $400 million will expire in 2000 and $800 million will
expire in 2003. TFC's lines of credit not used or reserved as support for
commercial paper and bank borrowings were $454 million at September 30, 1999, as
compared to $114 million at January 2, 1999.
In the first half of 1999, TFC entered into a short-term promissory note
program with Textron at market rates of interest. As of June 30, 1999, TFC had
no borrowings under this program and the program was cancelled.
TFC has two medium-term note facilities, totaling $2.25 billion, under Rule
144A of the Securities Act of 1933, as amended. Proceeds from issuances under
these facilities have been used to refinance maturing commercial paper and
long-term debt and to fund receivable growth. During the first nine months of
1999, TFC issued $683 million of fixed rate notes and $697 million of variable
rate notes through these facilities. At September 30, 1999, TFC had $92 million
available through its medium-term note facilities.
Cash flows from operations during the first nine months of 1999 were $114
million, as compared to $132 million in the corresponding period last year. The
decrease in operating cash flows is due mostly to timing of payments of accrued
interest and other liabilities and the increase in other assets, reflecting an
increase in goodwill and a deposit on a then pending acquisition. The decrease
was partially offset by higher net income and the timing of income tax payments.
Cash flows used in investing activities were funded from the collection of
receivables and through the issuance of long-and short-term bank debt.
Short-term borrowings decreased by $248 million and long-term borrowings
increased by $1,022 million. Borrowings under a junior subordinated facility
increased by $12 million, reflecting the funding of finance receivables related
to Textron's manufacturing divisions. During the first nine months of 1999,
Textron contributed capital of $33.8 million to TFC to finance acquisitions and
growth.
Because the finance business involves the purchase and carrying of
receivables, a relatively high ratio of borrowings to net worth is customary.
Debt as a percentage of total capitalization was 87% at September 30, 1999
compared to 86% at January 2, 1999. Commercial paper and short-term debt as a
percentage of total debt was 33% at September 30, 1999, down from 50% at January
2, 1999.
TFC's ratio of earnings to fixed charges decreased to 1.69x during the
first nine months of 1999, as compared to a ratio of 1.72x for the same period
last year. The decrease is attributable to higher leverage which resulted in a
16% increase in interest expense, versus a 14% increase in income before
interest expense and income taxes.
FINANCE RECEIVABLES
Total finance receivables increased to $4.424 billion at September 30,
1999, up from $3.611 billion at January 2, 1999. Equipment on operating leases
at September 30, 1999 decreased to $106 million, as compared to $119 million at
January 2, 1999. The increase in receivables is related to growth in all three
of TFC's active segments. Growth in the term loans and leases segment was $473
million or 23% reflecting strong growth in golf course financing and captive
aircraft in addition to the March 1999 acquisition of an equipment financing
portfolio totaling $53 million in assets. The specialty finance segment
increased by $194 million or 27% primarily due to growth in resort receivables
and revolving structured credit facility loans. Additionally, the revolving
credit segment increased by $164 million or 20% largely due to growth in
floorplan receivables and the July 1999 acquisition of a factoring company
totaling $65 million in assets.
Finance receivable additions for the first nine months of 1999 were $3.455
billion, as compared to $2.838 billion for the corresponding period in 1998. The
increase in additions was due to growth in all three active segments. Term loans
and leases new business volume increased $226 million or 22% primarily due to
increases in the golf finance and equipment portfolios. New business volume for
specialty finance increased $255 million or 79% mostly due to increases in the
resort receivable portfolio. The structured finance segment
17
<PAGE> 20
and broadcast media finance portfolio also showed moderate increases. Revolving
credit new business volume increased $136 million or 9%. The increase was
attributable to growth in TFC's asset-based lending, factoring, and floorplan
financing portfolios.
NONPERFORMING ASSETS
Nonperforming assets were $84 million at September 30, 1999, down from $87
million at January 2, 1999. This decrease was primarily due to a decrease in the
real estate portfolio, partially offset by an increase in nonperforming assets
in the term loans and leases portfolio. Nonperforming commercial real estate
assets comprised 21% of total nonperforming assets at September 30, 1999, down
from 44% at January 2, 1999.
The allowance for losses on receivables as percentage of nonperforming
assets increased to 106% at September 30, 1999, from 97% at January 2, 1999. The
increase from January 2, 1999 primarily reflects a decrease of nonperforming
assets, principally in the commercial real estate portfolio, and an increase in
the allowance for losses for receivable growth.
INTEREST RATE SENSITIVITY
Management's strategy of matching interest-sensitive assets with
interest-sensitive liabilities limits the Company's risk to changes in interest
rates and includes entering into interest rate exchange agreements as part of
this matching strategy. At September 30, 1999, TFC's interest-sensitive assets
in excess of interest-sensitive liabilities were $47 million, net of $350
million of fixed-rate interest rate exchange agreements. Interest sensitive
liabilities in excess of interest-sensitive assets were $463 million at January
2, 1999, net of $300 million of interest rate exchange agreements ($250 million
fixed rate and $50 million variable rate). The change in the Company's net
position does not reflect a change in management's match funding strategy.
FINANCIAL RISK MANAGEMENT
As part of managing its interest rate risk, TFC utilizes interest rate
exchange agreements. The objective of TFC's use of such agreements is not to
speculate for profit, but generally to convert variable rate debt into fixed
rate debt (or vice versa) with respect to specific liabilities, depending on
prevailing market conditions. These agreements do not involve a high degree of
complexity or risk. TFC does not trade interest rate exchange agreements or
enter into leveraged interest rate exchange agreements. The difference between
the variable rate TFC received and the fixed rate TFC paid on the interest rate
exchange agreements increased interest expense by $1.8 million for the first
nine months in 1999 and $1.4 million for the corresponding period in 1998.
TFC has also entered into a $125 million interest rate exchange agreement
involving a basis swap requiring prime based payments for LIBOR based receipts.
The objective of this interest rate exchange agreement is to limit the Company's
exposure to interest rate volatility on LIBOR based debt in late 1999.
TFC manages its foreign currency exposure by funding certain foreign
currency denominated assets with liabilities in the same currency and, as such,
certain exposures are naturally offset. In addition, as part of managing its
foreign currency exposure, TFC enters into foreign currency forward exchange
contracts. The objective of such agreements is to manage the exposure to changes
in currency rates.
RESULTS OF OPERATIONS
REVENUES
For nine months ended September 30, 1999 vs. September 30, 1998
Revenues for the first nine months of 1999 increased by $47.1 million or
17%, as compared to the corresponding nine-month period last year. Higher
revenues reflect a 21% increase in finance charges and discounts on a 24% higher
level of average finance receivables partially offset by lower finance
receivable yields. Finance receivable yields decreased to 9.90% for the nine
months ended September 30, 1999, as
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<PAGE> 21
compared to 10.10% in the corresponding period in 1998. The change reflects
lower floating rate yields due to a lower interest rate environment and lower
prime rate as compared to the corresponding period in 1998. The lower yields
were partially offset by higher leveraged lease income. Other income increased
reflecting higher servicing fees. Included in 1999 results is a gain on the sale
of an investment of $4.7 million; 1998 included a gain on portfolio
securitization of $3.4 million. Operating lease rental revenue of $11.9 million
decreased from $13.0 million for the corresponding period in 1998, on 9% lower
average operating lease assets.
Years ended 1998 vs. 1997 and 1996
Total revenues in 1998 increased $17 million from 1997, to $367 million,
reflecting a higher level of average finance receivables and higher other
income. Total revenues in 1997 were $350 million, as compared to $327 million in
1996.
Finance charge revenues increased 2% in 1998, as compared to a 3% increase
in 1997. The 1998 results reflect a 2% higher level of average owned finance
receivables while yields on owned finance receivables remained constant at 10.0%
for both 1998 and 1997. Finance charge revenues of $291 million increased 3% in
1997, as compared to a 4% increase in 1996. The 1997 results reflect a 3% higher
level of average owned finance receivables and constant finance receivables
yields at 10.0% in both 1997 and 1996.
Rental revenue from operating leases in 1998 was $17 million, down from $19
million in both 1997 and 1996, on lower average operating lease assets of 3% in
1998 and 2% in 1997. Other income of $53 million in 1998 increased by $12
million from 1997, reflecting higher syndications fees, residual income,
servicing fees and prepayment income. Other income of $41 million in 1997
increased by $14 million from 1996, reflecting higher syndications fees, a $3.5
million gain on a securitization of Textron-related receivables and higher
prepayment income.
INTEREST EXPENSE
For nine months ended September 30, 1999 vs. September 30, 1998
Interest expense for the nine months ended September 30, 1999 increased
$18.8 million or 16% as compared to the first nine months of 1998. A 26%
increase in average debt outstanding, partially offset by a decrease in the
average borrowing rate to 5.74% from 6.22% for the first nine months of 1998.
The decrease in the average borrowing rate for the nine months ended September
30, 1999, as compared to the same period last year, is primarily attributable to
lower short-term interest rates reflecting a lower prevailing interest rate
environment.
Years ended 1998 vs. 1997 and 1996
Interest expense of $155 million in 1998 increased 1%, or $2 million, from
1997, reflecting a 2% increase in average debt outstanding, partially offset by
a decrease in the cost of borrowed funds. TFC's average borrowing rate primarily
reflects a reduction in long-term variable rate debt costs. Interest expense of
$153 million in 1997 increased 4%, or $6 million, from 1996, reflecting a 4%
increase in average debt outstanding and an increase in the cost of borrowed
funds. TFC's average borrowing rate was 6.2% in 1998, 6.3% in 1997 and 6.2% in
1996.
INTEREST MARGIN
TFC's earnings are influenced by the interest margin earned on finance
receivables (i.e., the excess of revenues over interest expense on borrowings).
For nine months ended September 30, 1999 vs. September 30, 1998
Interest margin was 6.85% for the nine months ended September 30, 1999
compared to 6.91% for the corresponding period last year, reflecting a decrease
in interest earned on variable rate receivables due to prevailing interest
rates, and lower growth in fee income.
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<PAGE> 22
Years ended 1998 vs. 1997 and 1996
Interest margin increased to 6.88% in 1998 from 6.51% in 1997, primarily
reflecting higher other income and a lower average borrowing rate. The increase
was partially offset by a decrease in variable rate receivables which are
generally tied to changes in the prime rate offered by major U.S. banks and the
London Interbank Offered Rate (LIBOR). These decreases preceded a decrease in
short-term borrowing costs in the fourth quarter of 1998.
Interest margin increased to 6.51% in 1997 from 6.15% in 1996, primarily
reflecting higher other income which included a gain on a receivable
securitization. The increase was partially offset by an increase in short-term
interest rates on borrowings that preceded the repricing of TFC's variable rate
receivables, which are generally tied to changes in the prime rate offered by
major U.S. banks and LIBOR, and competitive pressures.
OPERATING EXPENSES
For nine months ended September 30, 1999 vs. September 30, 1998
Selling and administrative expenses increased by $13.1 million for the
first nine months of 1999, as compared to the first nine months of 1998,
reflecting higher expenses related to acquisitions, growth in managed
receivables and higher information systems expense.
Years ended 1998 vs. 1997 and 1996
Selling and administrative expenses of $72 million in 1998 increased by $14
million from 1997, as compared to an increase of $8 million in 1997 from 1996.
The increase in 1998 principally reflects higher expenses related to an
acquisition of a receivable factoring company, growth in managed receivables and
growth in businesses with higher operating expenses. The 1997 increase
principally reflects higher expenses related to the growth of managed finance
receivables, an increase in collection expenses related to the equipment
portfolio and a change in business mix.
PROVISION FOR LOSSES
For nine months ended September 30, 1999 vs. September 30, 1998
The provision for losses of $22.0 million increased by $6.0 million for the
first nine months of 1999, as compared to the corresponding period in 1998. The
increase in the provision is primarily related to a higher provision for losses
in the term loans and leases and revolving credit segments, partially offset by
a lower provision in the commercial real estate segment in 1999 as compared to
1998.
Years ended 1998 vs. 1997 and 1996
The provision for losses of $20 million in 1998 decreased from $23 million
in 1997. The decrease in the 1998 provision for losses reflects lower real
estate charge-offs and lower nonperforming assets. The provision for losses in
1997 decreased by $3 million from $26 million in 1996, reflecting lower real
estate charge-offs, higher recoveries of previously charged off aircraft and
equipment loans and lower nonperforming assets.
The allowance for losses on receivables was $84 million at January 2, 1999
and $77 million at January 3, 1998. The increase is primarily related to
portfolio growth. Net charge-offs were $16 million in 1998, as compared to $20
million in 1997 and $27 million in 1996 (including $1 million and $2 million
charged to the real estate owned valuation allowance in 1997 and 1996,
respectively). Net charge-offs related to commercial real estate assets were $5
million in 1998, down from $6 million in 1997. Equipment related net charge-offs
decreased to $11 million in 1998, as compared to $14 million in 1997. The
allowance for losses as a percent of receivables was 2.3% at January 2, 1999,
and 2.5% at January 3, 1998 (2.7% and 3.0% excluding receivables with recourse
to Textron in 1998 and 1997, respectively).
Although management believes it has made adequate provision for anticipated
losses, realization of these assets remains subject to uncertainties. Subsequent
evaluations of nonperforming assets, in light of factors
20
<PAGE> 23
then prevailing, including economic conditions, may require additional increases
in the allowance for losses for such assets.
NET INCOME
Nine months ended September 30, 1999 vs. September 30, 1998
Net income for the first nine months of 1999 was $58.1 million, $6.2
million or 12% higher than the corresponding period in 1998. Earnings were
favorably impacted by higher average receivables and fee income. The favorable
results were partially offset by lower finance yields, an increase in selling
and administrative expenses and a higher provision for losses.
Years ended 1998 vs. 1997 and 1996
Net income increased by 3% to $70 million in 1998. Net income was favorably
affected by an increase in other income, higher average managed finance
receivables, a lower provision for losses and lower borrowing costs, partially
offset by a higher tax provision rate and higher selling and administrative
expenses. Net income increased by 16% in 1997, to $68 million, favorably
affected by an increase in other income, higher average managed finance
receivables, a lower provision for losses and a lower tax provision rate,
partially offset by higher borrowing costs and higher selling and administrative
expenses.
YEAR 2000 READINESS DISCLOSURE
Introduction
Much of the world's computer hardware and software is not designed to
process date information after 1999. This is largely because computer programs
have historically used only two digits to identify the year in a date, but
problems related to processing of date information also may arise because some
software assigns special meaning to certain dates. This Year 2000 problem could,
if uncorrected, cause a failure of computer and other equipment used by TFC and
its suppliers and customers.
Year 2000 Program
In early 1997, TFC began a company-wide program (the "Program") to assess
the possible vulnerability of TFC to the Year 2000 problem and to minimize the
effect of the problem on TFC's operations. The Program is centrally directed
from the year 2000 Program Office at Textron's corporate headquarters and is
executed at TFC. With respect to TFC, the Program addresses four "Major
Elements":
- Business Systems: management information systems and personal computer
applications, including the computing environments that support them.
- Facilities Equipment: equipment that uses a computer to control its
operation for providing services.
- Suppliers: assurance that those who sell goods and services to TFC will
not interrupt TFC operations due to the Year 2000 problem.
- Customers: assurance that those who enter into financing transactions
with TFC will not interrupt TFC's operations due to the Year 2000
problem.
For each of the Major Elements, the Program measures five "Readiness
Levels":
Level I Management has become aware of the issue. An inventory is being
taken of the items that the Year 2000 problem may affect.
Level II The inventory of Year 2000 items has been completed. The
priority of each item is being assessed. Actions are being
planned to assure that each item is ready for the Year 2000.
Resources are being committed to do the work.
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<PAGE> 24
Level III Planning has been completed. The prescribed actions are being
performed, including testing to verify that the actions are
effective. Suppliers and customers are being surveyed and their
progress is being tracked.
Level IV Items critical to operations have been tested. Audits and
associated corrective actions have been completed. Contingency
plans are being prepared. Audits to verify readiness are being
performed. Remediation of items that are important to operations,
but not critical, is being performed.
Level V Systems critical to operations have been tested. Audits and
associated corrective actions have been completed. Contingency
plans have been completed. Follow-up checking of suppliers and
customers is continuing. In all material respects, TFC is ready
for Year 2000.
TFC reached Readiness Level V by September 30, 1999. TFC has had a combination
of independent parties and Textron personnel complete an assessment of the
implementation of the Program. As of September 30, 1999, all planned assessments
were complete.
Risks and Contingency Plans
Year 2000 issues have the potential, if not remedied, to severely disrupt
TFC's business operations and to adversely affect TFC's financial condition. The
Year 2000 Program is expected to significantly reduce TFC's exposure to these
issues, particularly with respect to TFC's Business Systems and Facilities
Equipment. However, it is possible that unanticipated problems may arise in the
course of TFC's implementation of the Year 2000 Program. In addition, while
monitoring of Year 2000 readiness by TFC's suppliers and customers is a major
part of the Year 2000 Program, TFC has very limited ability to ensure Year 2000
readiness by such parties. TFC could also be affected by failure of government
agencies, in the U.S. and elsewhere, to maintain governmental services that are
essential to TFC's operations. TFC cannot identify all possible scenarios.
However, the most reasonably likely worst case scenario would be the inability
of third parties, including utilities, to deliver supplies and services that are
critical to TFC's operations and that could not quickly be replaced by other
suppliers or internally. In that situation, operations at the affected TFC
facilities could be interrupted, with adverse effects on TFC's financial
results.
Contingency plans to cover situations in which Year 2000 problems arise
despite TFC's efforts are substantially ready. TFC is monitoring the Year 2000
readiness of critical suppliers and has identified qualified alternate suppliers
that can be substituted if necessary. TFC has established procedures and backup
capabilities to process loan and lease functions and applications that could be
affected at various facilities by a disruption in services provided by
utilities. TFC is preparing facilities, procedures and alternate utility sources
to support critical communications if there are disruptions in normal
communications services.
Forward-looking statements contained in this report relating to Year 2000
issues, including expectations of readiness, possible effects on TFC and similar
matters, are subject to the risks described in this section.
Year 2000 Costs
The total cost of the Year 2000 Program for continuing operations is
estimated to be approximately $7.7 million. Approximately $1.2 million was
incurred for modifications to existing systems and other program expenses while
$6.5 million is for replacement systems which have been capitalized in
accordance with Company policy. Through September 30, 1999, total expenditures
were $7.7 million. The estimated future cost to complete the Program is expected
to be immaterial. Funds for the Program were provided from normal operating and
capital budgets. The Year 2000 Program has delayed certain other TFC information
management projects. Delay of these projects is not expected to have an adverse
impact on TFC.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued FAS 133,
"Accounting for Derivative Instruments and Hedging Activities." FAS 133 requires
entities to recognize all derivatives as either assets or
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<PAGE> 25
liabilities and measure those instruments at fair value. This statement is
effective for fiscal years beginning after June 15, 2000.
TFC is evaluating the potential impact of this pronouncement on future
reporting.
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10 are forward-looking statements,
including those that discuss strategies, goals, outlook or other non-historical
matters; or project revenues, income, returns or other financial measures. These
forward-looking statements are subject to risks and uncertainties that may cause
actual results to differ materially from those contained in the statements,
including the following: (a) the extent to which TFC is able to successfully
integrate acquisitions, (b) changes in worldwide economic and political
conditions and associated impact on interest and foreign exchange rates, (c) the
level of sales of Textron products for which TFC offers financing, (d) the
ability to maintain credit quality and control costs when entering new markets,
(e) the actions of our competitors and our ability to respond, and (f) our
ability to attract and retain qualified and experienced personnel.
Looking forward, TFC will be affected by a number of factors that are
difficult to predict, including, among other things, the Company's access to
debt financing at competitive rates and equity in the form of retained earnings
and capital contributions from Textron. These factors may influence TFC's future
growth and earnings.
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<PAGE> 26
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Textron Financial Corporation
We have audited the accompanying consolidated balance sheet of Textron
Financial Corporation as of January 2, 1999 and January 3, 1998, and the related
consolidated statements of income, cash flows, and changes in shareholder's
equity for each of the three years in the period ended January 2, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Textron
Financial Corporation at January 2, 1999 and January 3, 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended January 2, 1999, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
January 26, 1999
24
<PAGE> 27
TEXTRON FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
For each of the three years in the period ended January 2, 1999
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Finance charges and discounts............................... $297,091 $290,943 $281,830
Rental revenues on operating leases......................... 17,181 18,664 19,071
Other income................................................ 52,890 40,613 26,346
-------- -------- --------
367,162 350,220 327,247
Expenses
Interest.................................................... 155,126 153,127 146,615
Selling and administrative.................................. 71,587 57,757 50,121
Provision for losses........................................ 20,483 22,824 26,350
Depreciation of equipment on operating leases............... 7,340 8,433 8,437
-------- -------- --------
254,536 242,141 231,523
-------- -------- --------
Income before income taxes.................................. 112,626 108,079 95,724
Income taxes................................................ 43,050 40,338 37,385
-------- -------- --------
Net income.................................................. $ 69,576 $ 67,741 $ 58,339
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 28
TEXTRON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and equivalents........................................ $ 22,396 $ 13,597
Finance receivables, net of unearned income:
Installment contracts.................................. 1,338,644 1,140,460
Floorplan receivables.................................. 572,289 408,721
Revolving loans........................................ 555,571 392,787
Finance leases......................................... 424,436 392,326
Leveraged leases....................................... 345,873 329,811
Golf course and resort mortgages....................... 342,844 355,357
Commercial real estate mortgages....................... 31,740 49,661
---------- ----------
Total finance receivables......................... 3,611,397 3,069,123
Allowance for losses on receivables.................... (83,887) (77,394)
---------- ----------
Finance receivables -- net.................................. 3,527,510 2,991,729
Equipment on operating leases -- net........................ 118,590 111,518
Other assets................................................ 116,042 61,121
---------- ----------
Total assets...................................... $3,784,538 $3,177,965
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Accrued interest and other liabilities...................... $ 143,316 $ 81,812
Amounts due to Textron Inc.................................. 18,419 6,416
Deferred income taxes....................................... 321,521 319,293
Debt........................................................ 2,828,830 2,364,568
---------- ----------
Total liabilities................................. 3,312,086 2,772,089
---------- ----------
Shareholder's equity
Common stock, $100 par value (4,000 shares authorized; 2,500
shares issued and outstanding)............................ 250 250
Capital surplus............................................. 155,171 95,871
Retained earnings........................................... 317,031 309,755
---------- ----------
Total shareholder's equity........................ 472,452 405,876
---------- ----------
Total liabilities and shareholder's equity........ $3,784,538 $3,177,965
========== ==========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 29
TEXTRON FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For each of the three years in the period ended January 2, 1999
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 69,576 $ 67,741 $ 58,339
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase (decrease) in accrued interest and other
liabilities....................................... 42,209 (4,901) (4,532)
Provision for losses................................ 20,483 22,824 26,350
Depreciation and amortization....................... 13,716 11,221 10,936
Deferred income taxes............................... 2,228 3,927 12,625
Leveraged lease earnings in excess of cash
received.......................................... (7,646) (5,162) (7,707)
Gain on receivables securitization.................. (3,400) (3,500) --
Other............................................... 7,141 462 2,860
---------- ---------- ----------
Net cash provided by operating activities...... 144,307 92,612 98,871
CASH FLOWS FROM INVESTING ACTIVITIES:
Finance receivables originated or purchased.............. (4,069,256) (2,711,680) (2,287,293)
Finance receivables repaid or sold....................... 3,458,873 2,444,301 2,090,923
Proceeds from receivables securitization................. 259,577 373,046 --
Acquisitions, net of cash acquired....................... (203,203) -- --
Purchase of assets for operating leases.................. (36,840) (38,073) (52,572)
Proceeds from disposition of operating lease and other
assets................................................. 25,892 45,409 43,061
Other capital expenditures............................... (12,948) (7,443) (2,559)
Proceeds from real estate owned.......................... 2,028 5,460 6,134
Other investments........................................ (5,997) -- --
---------- ---------- ----------
Net cash provided by (used in) investing
activities................................... (581,874) 111,020 (202,306)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt................. 370,000 200,000 345,000
Principal payments on long-term debt..................... (304,311) (335,880) (185,128)
Net increase in commercial paper......................... 188,176 23,313 10,034
Net increase (decrease) in short-term bank debt.......... 163,031 35,739 (5,182)
Proceeds from issuance of non-recourse debt.............. 60,404 -- --
Principal payments on non-recourse debt.................. (39,937) (38,938) (34,882)
Net increase (decrease) in amounts due to Textron Inc.... 12,003 (7,744) 6,576
Capital contribution from Textron Inc.................... 59,300 -- --
Dividends paid to Textron Inc............................ (62,300) (73,580) (29,100)
---------- ---------- ----------
Net cash provided by (used in) financing
activities................................... 446,366 (197,090) 107,318
---------- ---------- ----------
Net increase in cash..................................... 8,799 6,542 3,883
Cash and equivalents at beginning of year................ 13,597 7,055 3,172
---------- ---------- ----------
Cash and equivalents at end of year...................... $ 22,396 $ 13,597 $ 7,055
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 30
TEXTRON FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For each of the three years in the period ended January 2, 1999
<TABLE>
<CAPTION>
COMMON CAPITAL RETAINED
STOCK SURPLUS EARNINGS TOTAL
------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance December 30, 1995........................... $250 $ 95,871 $286,355 $382,476
Net income.......................................... -- -- 58,339 58,339
Dividends to Textron Inc............................ -- -- (29,100) (29,100)
---- -------- -------- --------
Balance December 28, 1996........................... 250 95,871 315,594 411,715
Net income.......................................... -- -- 67,741 67,741
Dividends to Textron Inc............................ -- -- (73,580) (73,580)
---- -------- -------- --------
Balance January 3, 1998............................. 250 95,871 309,755 405,876
NET INCOME.......................................... -- -- 69,576 69,576
CAPITAL CONTRIBUTIONS FROM TEXTRON.................. -- 59,300 -- 59,300
DIVIDENDS TO TEXTRON INC............................ -- -- (62,300) (62,300)
---- -------- -------- --------
BALANCE JANUARY 2, 1999............................. $250 $155,171 $317,031 $472,452
==== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 31
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Textron Financial Corporation (TFC or the Company) is a diversified
commercial finance company offering specialized lending for equipment finance,
revolving credit arrangements and leveraged leasing. TFC originates loan and
lease transactions for numerous industries including aircraft, golf, timeshare
resorts, transportation and machine tool. TFC's other financial services and
products include syndications, asset management, portfolio servicing and
insurance brokerage. TFC is a subsidiary of Textron Inc. (Textron), a $10
billion global, multi-industry company with market-leading businesses in
Aircraft, Automotive, Industrial and Finance. At January 2, 1999, TFC's finance
receivables which were related to Textron or Textron's products comprised 27% of
TFC's total managed finance receivables. TFC's principal markets are located in
North America.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
TFC and its subsidiaries, all of which are wholly-owned. All significant
inter-company transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in those statements and
accompanying notes. Actual results may differ from such estimates.
Finance Charges, Discounts and Investment Tax Credits
Finance charges and discounts include interest on loans, capital lease
earnings and discounts on certain revolving credit arrangements. Finance charges
and investment tax credits are recognized in finance charge revenues using the
interest method to produce a constant rate of return over the terms of the
receivables. Accrual of interest income is suspended for accounts which are
contractually delinquent by more than three months, unless collection is not
doubtful. In addition, detailed reviews of loans may result in earlier
suspension if collection is doubtful. Accrual of interest is resumed when the
loan becomes contractually current, and suspended interest income is recognized
at that time.
Other Income
Other income includes late charges, prepayment penalties, residual gains
and other miscellaneous fees which are primarily recognized as income when
received.
Other income also includes gains on the sale of loans and leases. When the
Company sells loans and leases in securitizations, it retains interest-only
strips, subordinated tranches, servicing rights, and cash reserve accounts. Gain
or loss on sale depends in part on the previous carrying amount of retained
interest, allocated in proportion to their fair value. Subsequent to the sales,
certain retained interests are carried at fair value and accounting for other
retained interests is based in part on fair values. The Company generally
estimates fair value based on the present value of future cash flows expected
under management's best estimates of the key assumptions-credit losses,
prepayment speeds, forward yield curves, and discount rates commensurate with
the risks involved.
Finance Receivable Origination Fees and Costs
Fees received and direct loan origination costs are deferred and amortized
to finance charge revenues over the contractual lives of the respective
receivables using the interest method. Unamortized amounts are recognized in
revenues when receivables are sold or paid in full.
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<PAGE> 32
Allowance for Losses on Receivables
Provisions for losses on finance receivables are charged to income in
amounts sufficient to maintain the allowance at a level considered adequate to
cover losses in the existing receivable portfolio. Management evaluates the
allowance by examining current delinquencies, the characteristics of the
existing accounts, historical loss experience, the value of the underlying
collateral and general economic conditions and trends.
Finance receivables are written off when they are deemed uncollectible.
Finance receivables are written down to the fair value (less estimated costs to
sell) of the related collateral when the collateral is repossessed or when no
payment has been received for six months, unless management deems the receivable
collectible. Foreclosed real estate loans and repossessed assets are transferred
out of finance receivables into other assets at the lower of fair value (less
estimated costs to sell) or the outstanding loan balance. The difference between
the amount transferred and the outstanding loan balance is written off. The
carrying value of real estate owned is periodically reevaluated, and where
appropriate, adjustments are made through a valuation allowance to reflect
subsequent changes in fair value, but the carrying amount is never increased
above the amount originally transferred.
Equipment on Operating Leases
Income from operating leases is recognized in equal amounts over the lease
term. The cost of such assets is capitalized and depreciated to estimated
residual values using the straight-line method over the estimated useful lives
of the assets or the lease term.
Employee Benefits
The Company participates in a Textron pension plan which provides pension
benefits to substantially all of the Company's employees. The benefits are based
on the employees' compensation and years of service. Textron's funding policy is
consistent with the funding requirements of federal law and regulation. Plan
assets consist principally of corporate and government bonds and common stocks.
Pension cost in 1998, 1997 and 1996 was $1.2 million, $0.9 million and $0.7
million, respectively.
Foreign Currency Exchange Contracts
TFC has entered into foreign currency exchange contracts to minimize its
currency exchange risk on its foreign currency receivables and debt. Gains and
losses on foreign currency exchange contracts that hedge foreign currency
receivables and debt are recognized in income as the exchange rates change and
offset foreign currency gains and losses on the foreign currency receivables and
debt. While TFC is exposed to credit loss in the event of nonperformance by the
other parties to the contracts, TFC does not anticipate nonperformance by any of
those parties. Foreign currency exchange gains and losses in 1998, 1997 and 1996
were not material.
Interest Rate Exchange Agreements
As part of managing interest rate exposure on its variable interest rate
borrowings, TFC is a party to various interest rate exchange agreements. While
TFC is exposed to credit loss for the periodic settlement of amounts due under
such agreements in the event of nonperformance by the counterparties, TFC does
not anticipate nonperformance by any of those parties. TFC currently minimizes
this potential for risk by entering into contracts exclusively with major,
financially sound counterparties having no less than a long-term bond rating of
"A" by continuously monitoring the counterparties' credit rating and by limiting
exposure with any one financial institution. The risk of loss in the event of
nonperformance by the counterparties was insignificant at January 2, 1999.
Interest differentials to be paid or received are accrued and recognized in
interest expense over the lives of the agreements.
Fees and expenses incurred to enter into interest rate exchange agreements
are deferred and subsequently amortized to expense over the terms of the
agreements.
30
<PAGE> 33
Income Taxes
TFC's revenues and expenses are included in Textron's consolidated tax
return. Current tax expense is based on allocated federal tax charges and
benefits on the basis of statutory U.S. tax rates applied to the Company's
taxable income or loss included in Textron's consolidated returns.
Deferred income taxes are recognized for temporary differences between the
financial reporting basis and income tax basis of assets and liabilities, based
on enacted tax rates expected to be in effect when such amounts are expected to
be realized or settled.
Intangible Assets
Goodwill is amortized over its estimated period of benefit on a
straight-line basis; other intangible assets, including internal-use software,
are amortized on a straight-line basis over their estimated lives. No
amortization period exceeds 25 years.
Fair Value of Financial Instruments
Fair values of financial instruments are based upon estimates at a specific
point in time using available market information and appropriate valuation
methodologies. These estimates are subjective in nature and involve
uncertainties and significant judgment in the interpretation of current market
data. Therefore, the fair values presented are not necessarily indicative of
amounts TFC could realize or settle currently. TFC does not necessarily intend
to dispose of or liquidate such instruments prior to maturity.
Cash and Equivalents
Cash and equivalents consist of cash in banks and overnight interest
bearing deposits in banks.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 2
RELATIONSHIP WITH TEXTRON INC.
TFC is a wholly-owned subsidiary of Textron and derives a portion of its
business from financing the sale and lease of products manufactured and sold by
Textron. TFC recognized finance charge revenues from Textron and affiliates (net
of payments or reimbursements for interest charged at more or less than market
rates on Textron manufactured products) of $3.7 million in 1998, $0.1 million in
1997, with no net revenue in 1996 and operating lease revenues of $10.8 million
in 1998, $13.3 million in 1997 and $13.7 million in 1996. In 1998, 1997 and
1996, TFC paid Textron $980.4 million, $736.3 million and $662.9 million,
respectively, for the purchase of receivables and operating lease assets.
TFC and Textron are parties to several agreements, collectively referred to
as operating agreements, which govern many areas of the TFC-Textron
relationship.
Under operating agreements with Textron, TFC has recourse to Textron with
respect to certain finance receivables and operating leases. Finance receivables
of $540.2 million at January 2, 1999 and $518.9 million at January 3, 1998 and
operating leases of $76.6 million at both January 2, 1999 and January 3, 1998
were subject to recourse to Textron or due from Textron. In addition, TFC had
recourse to Textron on subordinated certificates of $27 million and $16 million
at year-end 1998 and 1997, respectively, and on cash reserves of $10 million and
$6 million at year-end 1998 and 1997 respectively. Both the subordinated
certificates and the cash reserves were related to receivable securitizations.
Under the operating agreements between Textron and TFC, Textron has made
available to TFC a $100 million line of credit for junior subordinated
borrowings at the prime interest rate (7.75% at January 2, 1999). TFC had no
borrowings under this line at January 2, 1999 or January 3, 1998. In addition,
Textron has
31
<PAGE> 34
agreed to lend TFC, interest-free, an amount not to exceed the deferred income
tax liability of Textron attributable to the manufacturing profit deferred for
tax purposes on products manufactured by Textron and financed by TFC. The
Company had borrowings from Textron of $18.8 million at January 2, 1999 ($20.2
million at January 3, 1998) under this arrangement, which are reflected in
Amounts due to Textron Inc. and in Accrued Interest and Other Liabilities on
TFC's consolidated balance sheet.
Textron has also agreed with TFC to cause TFC's pretax income available for
fixed charges to be not less than 125% of its fixed charges and its consolidated
shareholder's equity to be not less than $200 million. No related payments were
required for 1998, 1997 or 1996.
The Company has an income tax liability of $4.6 million at January 2, 1999,
as compared to an income tax receivable of $5.8 million at January 3, 1998.
These amounts are included in Accrued Interest and Other Liabilities on TFC's
consolidated balance sheet, and will be settled with Textron as Textron manages
its consolidated federal tax position.
NOTE 3
ACQUISITIONS
During 1998, TFC acquired two businesses -- Systran Financial Services
Corporation and Business Leasing Group. These transactions were accounted for
using the purchase method. Each company's results of operations are included in
TFC's consolidated financial statements from the date of each acquisition.
Systran Financial Services Corporation, a receivables factoring company,
was acquired in the first quarter of 1998. The total purchase price was $22.8
million. The fair value of the assets acquired was $67.5 million and liabilities
assumed were $59.2 million. The goodwill associated with this transaction is
being amortized over 25 years.
Business Leasing Group, an equipment leasing division of a commercial bank,
was acquired on December 31, 1998. The total purchase price was $186.4 million.
TFC is in the process of finalizing the purchase price allocation for this
acquisition.
Had the acquisitions occurred on January 4, 1998, the effect on the
Company's 1998 results would not have been material. Consequently, pro forma
information has not been presented.
NOTE 4
RECEIVABLE SECURITIZATIONS
The Company securitized $273 million and $401 million of loan and lease
receivables in the third quarters of 1998 and 1997, respectively. These
transactions resulted in gains of $3.4 million and $3.5 million in 1998 and
1997, respectively. Retained interests in transferred assets consist primarily
of subordinated certificates totaling $27 million at year-end 1998 and $16
million at year-end 1997, as well as interest-only securities. Additionally, $4
million of proceeds were used to fund a restricted cash reserve to support the
1998 transaction, as compared to $6 million in 1997. Both the subordinated
certificates and the cash reserve are included in Other Assets on TFC's
consolidated balance sheet. TFC did not recognize a servicing asset or
liability.
Interest-only securities represent the right to receive certain cash flows
which exceed the amount of cash flows sold in the Company's securitized contract
sale. Interest-only securities generally represent the value of interest to be
collected on the underlying financial contracts of the securitization over the
sum of the interest to be paid to security classes sold, contractual servicing
fees and credit losses. These cash flows are projected and discounted over the
expected life of the financial contracts using prepayment, default, loss and
interest rate assumptions that the Company believes market participants would
use for similar financial instruments.
TFC has entered into certain interest rate exchange agreements to mitigate
its exposure to decreases in interest rates on its interest-only securities.
Under the interest rate exchange agreements, TFC makes periodic variable rate
payments based upon the prime rate and the one and six month London Interbank
Offered Rate (LIBOR) and receives fixed rate payments. These interest rate
exchange agreements are adjusted periodically
32
<PAGE> 35
to match the amortization of the variable rate contracts in the securitized
portfolio and are summarized in the following table:
<TABLE>
<CAPTION>
JAN. 2, JAN. 3,
1999 1998
------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Prime rate.................................................. 7.75% 8.50%
One-Month LIBOR............................................. 4.94% --
1998 Securitization
Notional principal -- variable............................
payments tied to the prime rate........................... $55.3 --
Fixed Rate................................................ 7.94% --
Notional principal -- variable............................
Payments tied to LIBOR................................. $34.3 --
Fixed rate............................................. 5.13% --
Six-month LIBOR............................................. 4.94% 5.72%
1997 Securitization
Notional principal variable
payments tied to the prime rate........................ $46.6 $69.5
Fixed rate........................................... 8.77% 8.77%
Notional principal -- variable
Payments tied to LIBOR................................. $21.2 $44.4
Fixed rate........................................... 5.97% 5.97%
</TABLE>
Interest rate floor agreements, entered into through AAA-rated
counterparties to the Textron Financial Corporation Receivables Trust 1998-A and
1997-A (the Trusts), provide a minimum interest rate on variable rate
receivables held by the Trusts and are tied to both the prime rate and the one-
and six-month LIBOR. These interest rate floor agreements are adjusted
periodically to match the amortization of the variable rate contracts in the
securitized portfolio and are summarized as follows:
<TABLE>
<CAPTION>
JAN. 2, JAN. 3,
1999 1998
------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Prime rate.................................................. 7.75% 8.50%
One-month LIBOR............................................. 4.94% --
1998 Securitization
Notional principal tied to the prime rate.............. $57.6 --
Floor rate............................................. 8.50% --
Notional principal tied to LIBOR....................... $36.5 --
Floor rate.................................................. 5.34% --
Six-month LIBOR............................................. 4.94% 5.72%
1997 Securitization
Notional principal tied to the prime rate.............. $70.5 $72.5
Floor rate............................................. 8.50% 8.50%
Notional principal tied to LIBOR....................... $37.1 $45.7
Floor rate............................................. $5.65% $5.65%
</TABLE>
TFC also has a securitization program consisting of a $160 million interest
in a designated pool of installment contracts. Subsequent collections of
installment contracts sold typically are reinvested in the pool of eligible
assets to maintain an aggregate outstanding balance of sold installment
contracts at a constant amount. Receivables sold which remained uncollected at
January 2, 1999 were $160 million. The ongoing purchase arrangement is
discretionary on the part of both parties and has been extended through 2000.
33
<PAGE> 36
NOTE 5
FINANCE RECEIVABLES
Contractual Maturities
The contractual maturities of finance receivables outstanding at January 2,
1999 were as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL
---------- -------- -------- -------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Installment contracts....................... $ 306,325 $224,078 $185,854 $134,902 $113,532 $373,953 $1,338,644
Floorplan receivables....................... 435,811 102,048 34,004 426 -- -- 572,289
Revolving loans............................. 376,286 19,882 57,400 91,259 8,726 2,018 555,571
Finance leases.............................. 101,276 93,066 90,320 53,279 35,384 51,111 424,436
Leveraged leases............................ 3,553 8,458 (4,411) (6,240) (5,286) 349,799 345,873
Golf course and resort mortgages............ 18,291 56,782 73,830 21,290 56,368 116,283 342,844
Commercial real estate mortgages............ 22,080 9,660 -- -- -- -- 31,740
---------- -------- -------- -------- -------- -------- ----------
Total finance receivables........... $1,263,622 $513,974 $436,997 $294,916 $208,724 $893,164 $3,611,397
========== ======== ======== ======== ======== ======== ==========
</TABLE>
Finance receivables often are repaid or refinanced prior to contractual
maturity. Accordingly, the foregoing tabulation should not be regarded as a
forecast of future cash collections. During 1998 and 1997, cash collections of
finance receivables (excluding proceeds from sales of receivable portfolios)
were $3.41 billion and $2.29 billion, respectively. Revolving loans generally
have terms of one to three years, and at times convert to term loans that
contractually amortize over an average term of seven years. Floorplan and
revolving loans are cyclical and result in cash turnover that is several times
larger than contractual maturities. In 1998, such cash turnover was 4.0 times
contractual maturities. Finance leases include residual values expected to be
realized at contractual maturity. The ratio of cash collections (net of finance
charges) to average net receivables, excluding floorplan and revolving
receivables, was approximately 56% in 1998 and 48% in 1997. Leveraged leases
reflect contractual maturities net of contractual non-recourse debt payments and
include residual values expected to be realized at contractual maturity.
Installment contracts have initial terms generally ranging from one to 12
years. Commercial real estate and golf course mortgages have initial terms
generally ranging from three to seven years with amortization periods from 15 to
20 years. Finance leases have initial terms generally up to 12 years. Leveraged
leases have initial terms up to approximately 30 years. Floorplan and revolving
receivables generally mature within one year.
Finance leases and installment contracts are secured by the financed
equipment and, in some instances, by the personal guarantee of the principals or
recourse arrangements with the originating vendor. Golf course and resort
mortgages are generally secured by real property and are limited to 70% or less
of the property's appraised market value at loan origination. Commercial real
estate loans are secured by real property and are generally limited to 80% or
less of the property's appraised market value at loan origination. Leveraged
leases are secured by the ownership of the leased asset. Floorplan receivables
are secured by the inventory of the financed distributor or dealer and, in some
programs, by recourse arrangements with the originating manufacturer. Revolving
loans consist of loans secured by pools of vacation interval notes receivable,
and, in most instances, the underlying real property, or trade receivables,
inventory, and/or plant and equipment.
TFC's finance receivables are diversified across geographic region,
borrower industry and type of collateral. TFC's owned and securitized receivable
geographic concentrations at January 2, 1999 were as follows: Southeast 25%; Far
West 16%; Southwest 10%; Great Lakes 10%; Mideast 10%; Plains 9%; New England
5%; other domestic 4%; and international 11%. TFC's most significant collateral
concentration was aircraft, which accounted for 26% of owned and securitized
receivables at January 2, 1999. There were no significant industry
concentrations at January 2, 1999.
34
<PAGE> 37
Loan Impairment
At January 2, 1999 and January 3, 1998, the Company had nonaccrual loans
and leases totaling $69.9 million and $85.6 million, respectively. Approximately
$46.5 million and $63.5 million of these respective amounts were considered
impaired, which excludes finance leases and homogeneous loan portfolios. TFC's
nonaccrual loans consist primarily of delinquent and/or restructured commercial
real estate loans. Cash payments, including finance charges on nonaccrual
accounts, generally are applied to reduce loan principal. The allowance for
losses on receivables related to impaired loans was $14.9 million at January 2,
1999 and $13.5 million at January 3, 1998. The average recorded investment in
impaired loans during 1998 and 1997 was $50.7 million and $67.5 million,
respectively. Nonaccrual accounts resulted in TFC's revenues being reduced by
$5.1 million in 1998, $5.6 million in 1997 and $6.1 million in 1996. No interest
income was recognized using the cash basis method.
Finance Leases
<TABLE>
<CAPTION>
JAN. 2, JAN. 3,
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Total minimum lease payments receivable.................. $390,232 $348,886
Estimated residual values of leased equipment............ 130,403 130,732
-------- --------
520,635 479,618
Unearned income.......................................... (96,199) (87,292)
-------- --------
Net investment in finance leases......................... $424,436 $392,326
======== ========
</TABLE>
Minimum lease payments due under finance leases for each of the next five
years and the aggregate amounts due thereafter are as follows: $117.3 million in
1999; $101.6 million in 2000; $81.5 million in 2001; $38.5 million in 2002;
$23.7 million in 2003; and $27.6 million thereafter.
Leveraged Leases
<TABLE>
<CAPTION>
JAN. 2, JAN. 3,
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Rental receivable (net of principal and interest on
non-recourse debt)....................................... $200,134 $188,151
Estimated residual values of leased assets............... 428,809 425,222
Less unearned income..................................... (283,070) (283,562)
-------- --------
Investment in leveraged leases........................... 345,873 329,811
Deferred income taxes arising from leveraged leases...... (255,034) (253,123)
Fees payable............................................. (1,607) (2,854)
-------- --------
Net investment in leveraged leases....................... $ 89,232 $ 73,834
======== ========
</TABLE>
Approximately 63% of TFC's investment in leveraged leases is collateralized
by real estate. TFC has a forward interest rate exchange arrangement which will
have the effect of fixing interest rates at 7.5% on $60 million of non-recourse
debt beginning in 1999.
35
<PAGE> 38
The components of income from leveraged leases were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income recognized including investment tax
credits........................................... $16,426 $14,717 $15,446
Income tax expense................................ (6,237) (5,089) (5,324)
------- ------- -------
Income from Leveraged leases...................... $10,189 $ 9,628 $10,122
======= ======= =======
</TABLE>
Allowance for Losses on Receivables
<TABLE>
<CAPTION>
JAN. 2, JAN. 3,
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year............................ $ 77,394 $ 74,824
Provision for losses on receivables..................... 18,033 21,124
Receivable charge-offs.................................. (21,181) (24,848)
Recoveries of prior charge-offs......................... 4,860 6,294
Acquisitions............................................ 4,781 --
-------- --------
Balance at end of year.................................. $ 83,887 $ 77,394
======== ========
</TABLE>
Managed Finance Receivables
TFC manages finance receivables for a variety of investors, participants
and third party portfolio owners.
<TABLE>
<CAPTION>
JAN. 2, JAN. 3,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Owned receivables.................................... $3,611,397 $3,069,123
Securitized receivables.............................. 616,220 520,676
---------- ----------
4,227,617 3,589,799
Non-recourse participations.......................... 228,357 174,377
Third party portfolio servicing...................... 30,908 51,437
SBA sales agreements................................. 21,958 13,732
---------- ----------
Total managed finance receivables.................... $4,508,840 $3,829,345
========== ==========
</TABLE>
NOTE 6
EQUIPMENT ON OPERATING LEASES
<TABLE>
<CAPTION>
JAN. 2, JAN. 3,
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Equipment on Operating leases, at cost.................. $147,261 $137,249
Accumulated depreciation................................ (28,671) (25,731)
-------- --------
Net investment in operating leases...................... $118,590 $111,518
======== ========
</TABLE>
Initial lease terms of rental equipment generally range from one year to
ten years. Future minimum rental payments on operating leases at January 2, 1999
were $14.3 million in 1999; $11.7 million in 2000; $10.3 million in 2001; $11.5
million in 2002; $4.7 million in 2003; and $3.9 million thereafter.
36
<PAGE> 39
NOTE 7
OTHER ASSETS
<TABLE>
<CAPTION>
JAN. 2, JAN. 3,
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Real estate owned....................................... $ 17,412 $13,960
Real estate valuation allowance......................... (5,783) (3,333)
-------- -------
Net real estate owned................................... 11,629 10,627
Subordinated certificates............................... 27,214 16,181
Goodwill -- net......................................... 27,093 --
Fixed assets and software -- net........................ 19,853 9,660
Trustee cash reserve.................................... 10,210 6,009
Interest-only securities................................ 8,668 8,941
Repossessed equipment................................... 5,149 3,182
Other................................................... 6,226 6,521
-------- -------
Total other assets............................ $116,042 $61,121
======== =======
</TABLE>
Sales of real estate owned totaled $2.0 million in 1998 and $5.4 million in
1997, of which TFC received $2.0 million and $5.4 million in cash in 1998 and
1997, respectively.
The cost of fixed assets is being depreciated based on estimated useful
lives of the assets using the straight-line method. Depreciation expense was
$3.5 million in 1998, $2.1 million in 1997 and $1.6 million in 1996.
REAL ESTATE VALUATION ALLOWANCE
<TABLE>
<CAPTION>
JAN. 2, JAN. 3,
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year.............................. $3,333 $ 2,633
Provision for losses on real estate owned................. 2,450 1,700
Charge-offs............................................... -- (1,000)
------ -------
Balance at end of year.................................... $5,783 $ 3,333
====== =======
</TABLE>
NOTE 8
DEBT AND CREDIT FACILITIES
<TABLE>
<CAPTION>
JAN. 2, 1999 JAN. 3, 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Commercial paper............................... $1,185,591 $ 997,415
Short-term bank debt........................... 239,281 76,250
---------- ----------
Total short-term debt..................... 1,424,872 1,073,665
Long-term debt:
5.72% -- 5.86% notes; due 2000 to 2001......... 33,000 21,000
6.13% -- 6.51% notes; due 1999 to 2001......... 204,000 112,000
7.14% -- 7.67% notes; due 1999 to 2000......... 234,958 258,903
Variable rate notes due 1999 to 2001........... 932,000 899,000
---------- ----------
Total long-term debt...................... 1,403,958 1,290,903
---------- ----------
Total debt................................ $2,828,830 $2,364,568
========== ==========
</TABLE>
TFC has lines of credit with a bank group aggregating $1.2 billion at
January 2, 1999, of which $400 million will expire in 1999 and $800 million will
expire in 2003. TFC's lines of credit, including the line of credit with
Textron, not used or reserved as support for commercial paper or short-term bank
borrowings at January 2, 1999 were $114.4 million. TFC generally pays fees in
support of these lines.
37
<PAGE> 40
The weighted average interest rates on short-term borrowings, before
consideration of the effect of interest rate exchange agreements, were as
follows:
<TABLE>
<CAPTION>
JAN. 2, JAN. 3, DEC. 28,
1999 1998 1996
------- ------- --------
<S> <C> <C> <C>
Commercial paper................................... 6.12% 6.14% 5.64%
Short-term bank debt............................... 6.91% 5.54% 5.56%
</TABLE>
The corresponding weighted average interest rates on these borrowings
during the last three years were 5.83% in 1998, 5.77% in 1997 and 5.65% in 1996.
Weighted average interest rates have been determined by relating interest costs
for each year to the daily average dollar amounts outstanding.
Interest on TFC's variable rate notes is tied predominantly to the
three-month LIBOR for U.S. dollar deposits. The weighted average interest rate
on these notes was 5.79% at January 2, 1999 and 6.11% at January 3, 1998.
The amount of net assets available for dividends and other payments to
Textron is restricted by the terms of the Company's lending agreements. As of
January 2, 1999, approximately $168.9 million of net assets was unrestricted and
available to be transferred to Textron. The lending agreements also contain
various restrictive provisions regarding additional debt (not in excess of 800%
of consolidated net worth and qualifying subordinated obligations), the creation
of liens and the maintenance of a fixed charges coverage ratio of no less than
125%.
Required principal payments during the next five years on debt outstanding
at January 2, 1999 (excluding short-term debt) are as follows: $558.5 million in
1999; $507.5 million in 2000; and $338.0 million in 2001.
Cash payments made by TFC for interest were $152.9 million in 1998, $153.0
million in 1997 and $149.8 million in 1996.
NOTE 9
INTEREST RATE EXCHANGE AGREEMENTS
Under interest rate exchange agreements, TFC makes periodic fixed payments
in exchange for periodic variable payments and vice versa. TFC has entered into
such agreements to mitigate its exposure to increases in interest rates on a
portion of its fixed and variable debt.
Interest rate exchange agreements, excluding those related to
securitizations, were designated against long-term notes and had the effect of
adjusting the average rate of interest during the year to 6.03% from 5.96% on a
variable rate notes and to 6.79% from 6.89% on the long-term fixed rate notes.
Interest rate exchange agreements in effect on January 2, 1999 will expire in
1999.
<TABLE>
<CAPTION>
JAN. 2, 1999 JAN. 3, 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Weighted average original term.................. 2.5 years 2.7 years
Notional principal-fixed rate payments.......... $ 250,000 $ 450,000
Fixed weighted average interest rate............ 6.26% 6.02%
Variable weighted average interest rate......... 5.27% 5.89%
Notional principal -- variable rate payments.... $ 50,000 $ 50,000
Fixed weighted average interest rate............ 6.30% 6.30%
Variable weighted average interest rate......... 5.22% 5.94%
</TABLE>
38
<PAGE> 41
NOTE 10
INCOME TAXES
The components of income taxes were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $35,445 $33,187 $21,301
State.......................................... 5,377 3,224 3,459
------- ------- -------
Total current income taxes..................... 40,822 36,411 24,760
Deferred:
Federal........................................ 544 3,045 9,700
State.......................................... 1,684 882 2,925
------- ------- -------
Total deferred income taxes.................... 2,228 3,927 12,625
Total income taxes............................. $43,050 $40,338 $37,385
======= ======= =======
</TABLE>
Cash paid for income taxes was $26.1 million in 1998, $44.3 million in 1997
and $24.7 million in 1996. The federal statutory income tax rate is reconciled
to the effective income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate................... 35.0% 35.0% 35.0%
State income taxes.................................. 4.1 2.6 4.3
Tax exempt interest................................. (0.3) (0.4) (0.4)
Other, net.......................................... (0.6) 0.1 0.2
---- ---- ----
Effective income tax rate........................... 38.2% 37.3% 39.1%
==== ==== ====
</TABLE>
The components of TFC's deferred tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for losses on receivables................. $ 31,599 $ 29,798
Earnings on nonaccrual loans........................ 2,674 4,682
Other............................................... 12,002 2,508
-------- --------
Total deferred tax assets........................... 46,275 36,988
Deferred tax liabilities:
Leveraged leases.................................... 255,034 253,123
Finance leases...................................... 76,179 70,310
Equipment on operating leases....................... 25,719 20,139
Other............................................... 10,864 12,709
-------- --------
Total deferred tax liabilities...................... 367,796 356,281
-------- --------
Net deferred tax liabilities........................ $321,521 $319,293
======== ========
</TABLE>
NOTE 11
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating the fair
value of TFC's financial instruments:
Finance Receivables
The estimated fair values of fixed rate installment contracts, real estate
loans, floorplan receivables and revolving loans were estimated based on
discounted cash flow analyses using interest rates currently being offered for
similar loans to borrowers of similar credit quality. Estimated future cash
flows were adjusted for
39
<PAGE> 42
TFC's estimates of prepayments, refinances and loan losses based on internal
historical data. The estimated fair values of all variable rate receivables
approximated the net carrying value of such receivables. The estimated fair
values of nonperforming loans were based on independent appraisals, discounted
cash flow analyses using risk adjusted interest rates, or TFC valuations based
on the fair value of the related collateral. The fair values of TFC's finance
leases, leveraged leases and operating leases ($424.4 million, $345.9 million
and $118.6 million, net carrying amount, respectively, at January 2, 1999 and
$392.3 million, $329.8 million and $111.5 million, net carrying amount,
respectively, at January 3, 1998) are not required to be disclosed under
generally accepted accounting principles. As a result, a significant portion of
the assets which are included in the Company's asset and liability management
strategy are excluded from this fair value disclosure.
Debt, Interest Rate Exchange Agreements and Foreign Currency Exchange
Agreements
The estimated fair value of fixed rate debt was determined by either
independent investment bankers or discounted cash flow analyses using interest
rates for similar debt with maturities similar to the remaining terms of the
existing debt. The fair values of variable rate debt and short-term borrowings
supported by credit facilities approximated their carrying values. The estimated
fair values of interest rate exchange agreements and foreign currency exchange
agreements were determined by independent investment bankers and represent the
estimated amounts that TFC would be required to pay to (or collect from) a third
party to assume TFC's obligations under the agreements.
The carrying values and estimated fair values of TFC's financial
instruments for which it is practicable to calculate a fair value are as
follows:
<TABLE>
<CAPTION>
JANUARY 2, 1999 JANUARY 3, 1998
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Installment contracts........................ $1,338,644 $1,343,642 $1,140,460 $1,142,651
Floorplan receivables........................ 572,289 571,810 408,721 408,105
Revolving loans.............................. 555,571 555,577 392,787 392,787
Golf course and resort mortgages............. 342,844 347,988 355,357 355,826
Commercial real estate mortgages............. 31,740 18,015 49,661 34,251
Subordinated certificates.................... 27,214 27,214 16,181 16,181
Trustee cash reserve......................... 10,210 10,210 6,009 6,009
Interest-only securities..................... 8,668 8,668 8,941 8,941
Investments in equity partnerships........... 5,997 5,997 -- --
Allowance for loan losses.................... (67,024) -- (66,806) --
---------- ---------- ---------- ----------
$2,826,153 $2,889,121 $2,311,311 $2,364,751
========== ========== ========== ==========
LIABILITIES
Commercial paper and short-term bank debt.... $1,424,872 $1,424,872 $1,073,665 $1,073,665
Variable rate long-term notes................ 932,000 932,000 899,000 899,000
Fixed rate long-term debt.................... 471,958 479,075 391,903 407,492
Amounts due to Textron Inc................... 18,810 15,662 20,151 16,502
Foreign currency exchange agreements......... -- (55) -- (13)
Interest rate exchange agreements............ -- 1,301 -- 429
---------- ---------- ---------- ----------
$2,847,640 $2,852,855 $2,384,719 $2,397,075
========== ========== ========== ==========
</TABLE>
NOTE 12
COMMITMENTS
TFC makes future loan commitments to accommodate the financial needs of its
customers, for which TFC receives commitment fees. Loan commitments of $432.4
million were outstanding at January 2, 1999. Generally, interest rates on these
commitments are not set until the loans are funded; therefore, TFC is not
40
<PAGE> 43
exposed to interest rate changes. Loan commitments have credit risk essentially
the same as that involved in extending loans to customers and are subject to
TFC's normal credit policies. Creditworthiness and collateral are both
considered before a loan commitment is approved.
TFC's offices are occupied under non-cancelable operating leases expiring
on various dates through 2004. Rental expense was $3.5 million in 1998 ($2.5
million in 1997 and $2.3 million in 1996). Future minimum rental commitments for
all non-cancelable operating leases in effect at January 2, 1999 approximated
$2.9 million for 1999; $2.0 million for 2000; $1.2 million for 2001; $0.9
million for 2002; $0.6 million for 2003; and $0.3 million thereafter. Of these
amounts, $0.9 million per year through the year 2000 and $0.3 million in 2001
are payable to Textron.
NOTE 13
CONTINGENCIES
There are pending or threatened against TFC and its subsidiaries lawsuits
and other proceedings. Among these suits and proceedings are some which seek
compensatory, treble or punitive damages in substantial amounts. These suits and
proceedings are being defended or contested on behalf of TFC and its
subsidiaries. On the basis of information presently available, TFC believes any
such liability would not have a material effect on TFC's net income or financial
condition.
NOTE 14
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
At year-end 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, which requires segment data to be measured and analyzed on a basis
that is consistent with how business activities are reported internally for
management. The Company's business segments are organized based on the nature of
products and services provided. The accounting policies for these segments are
the same as those described for the consolidated entity.
The Company evaluates the performance of its business segments primarily on
the basis of revenues, income before taxes, and finance assets. Details of total
revenues, income before taxes, and finance assets by business segment are
provided below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
1998 % 1997 % 1996 %
---------- --- ---------- --- ---------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Term loans and leases.................. $ 216,643 59 $ 240,419 69 $ 228,088 70
Revolving credit....................... 87,835 24 62,784 18 54,493 17
Specialty finance...................... 62,685 17 45,364 13 36,200 11
Commercial real estate................. (1) -- 1,653 -- 8,466 2
---------- --- ---------- --- ---------- ---
Total revenues.............................. $ 367,162 100 $ 350,220 100 $ 327,247 100
Income before taxes(1)(2)
Term loans and leases.................. $ 70,304 $ 81,809 $ 70,954
Revolving credit....................... 26,398 18,524 17,879
Specialty finance...................... 26,752 19,509 17,105
Commercial real estate................. (10,828) (11,763) (10,214)
---------- ---------- ----------
Total income before taxes................... $ 112,626 $ 108,079 $ 95,724
========== ========== ==========
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Finance assets(3)
Term loans and leases....................... $2,144,429 $1,939,622 $2,244,305
Revolving credit....................... 831,165 548,215 480,147
Specialty finance...................... 722,653 643,143 481,797
Commercial real estate................. 31,740 49,661 94,266
---------- ---------- ----------
Total finance receivables................... $3,729,987 $3,180,641 $3,300,515
========== ========== ==========
</TABLE>
- ---------------
(1) Interest expense is allocated to each segment in proportion to its net
investment in finance assets. Net investment in finance assets includes
deferred income taxes, security deposits and other specifically identified
liabilities. The interest allocated matches variable rate debt with variable
rate finance assets and fixed rate debt with fixed rate finance assets.
(2) Indirect expenses are allocated to each segment based on the utilization of
such resources. Some allocations are based on the segments proportion of net
investment in finance assets, headcount, number of transactions, computer
resources and senior management time.
(3) Finance assets include finance receivables and equipment on operating
leases, net of accumulated depreciation, but exclude repossessed assets and
beneficial interests in securitized assets (classified as other assets in
TFC's Consolidated Balance Sheet).
NOTE 15
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
----------------- ----------------- ----------------- -----------------
1998 1997 1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................................... $85,390 $82,789 $90,870 $89,378 $98,509 $91,509 $92,393 $86,544
Expenses...................................... 60,812 58,901 63,898 62,528 65,365 61,954 64,461 58,758
Net income.................................... 15,074 14,473 16,548 16,331 20,317 19,004 17,637 17,933
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
42
<PAGE> 45
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
REVENUES
Finance charges and discounts............................. $270,036 $223,053
Rental revenues on operating leases....................... 11,926 13,011
Other income.............................................. 39,943 38,705
-------- --------
321,905 274,769
EXPENSES
Interest.................................................. 134,874 116,068
Selling and administrative................................ 65,638 52,550
Provision for losses...................................... 21,967 15,980
Depreciation of equipment on operating leases............. 5,192 5,477
-------- --------
227,671 190,075
-------- --------
Income before income taxes.................................. 94,234 84,694
Income taxes................................................ 36,124 32,755
-------- --------
NET INCOME.................................................. $ 58,110 $ 51,939
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
43
<PAGE> 46
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 JANUARY 2, 1999
------------------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and equivalents........................................ $ 54,254 $ 22,396
Finance receivables, net of unearned income:
Installment contracts.................................. 1,587,729 1,338,644
Revolving loans........................................ 776,238 555,571
Floorplan receivables.................................. 616,808 572,289
Golf course and resort mortgages....................... 545,870 342,844
Finance leases......................................... 540,857 424,436
Leveraged leases....................................... 343,037 345,873
Commercial real estate mortgages....................... 13,494 31,740
---------- ----------
Total finance receivables......................... 4,424,033 3,611,397
Allowance for losses on receivables......................... (89,208) (83,887)
---------- ----------
Finance receivables -- net........................ 4,334,825 3,527,510
Equipment on operating leases -- net........................ 105,785 118,590
Other assets................................................ 188,985 116,042
---------- ----------
Total assets...................................... $4,683,849 $3,784,538
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Accrued interest and other liabilities.................... $ 185,269 $ 143,316
Amounts due to Textron Inc................................ 30,096 18,419
Deferred income taxes..................................... 336,986 321,521
Debt...................................................... 3,602,831 2,828,830
---------- ----------
Total liabilities................................. 4,155,182 3,312,086
SHAREHOLDER'S EQUITY
Common stock, $100 par value (4,000 shares authorized;
2,500 shares issued and outstanding)................... 250 250
Capital surplus........................................... 188,976 155,171
Retained earnings......................................... 339,441 317,031
---------- ----------
Total shareholder's equity........................ 528,667 472,452
---------- ----------
Total liabilities and shareholder's equity........ $4,683,849 $3,784,538
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
44
<PAGE> 47
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 58,110 $ 51,939
Adjustments to reconcile net income to net cash provided by
operating activities:
Net increase in accrued interest and other
liabilities.......................................... 23,033 63,593
Provision for losses................................... 21,967 15,980
Deferred income taxes.................................. 15,465 (6,265)
Depreciation and amortization.......................... 12,359 10,735
Gain on sale of investment............................. (4,710) --
Leveraged lease earnings in excess of cash received.... (1,052) (5,734)
Gain on receivables securitization..................... -- (3,400)
Other.................................................. (11,459) 4,665
----------- -----------
Net cash provided by operating activities 113,713 131,513
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased................. (3,454,780) (2,898,763)
Finance receivables repaid or sold.......................... 2,807,218 2,613,395
Acquisitions, net of cash acquired.......................... (103,811) (16,762)
Proceeds from receivables securitization.................... -- 259,577
Proceeds from disposition of operating lease and other
assets.................................................... 29,458 16,434
Purchase of assets for operating leases..................... (19,128) (28,116)
Net proceeds from sale of investment........................ 4,501 --
Proceeds from sales of real estate owned.................... 3,503 2,028
Other investments........................................... (2,390) --
Other capital expenditures.................................. (7,320) (8,431)
----------- -----------
Net cash used in investing activities............. (742,749) (60,638)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt.................... 1,163,000 300,000
Principal payments on long-term debt........................ (194,940) (299,324)
Net decrease in commercial paper............................ (350,762) (116,250)
Proceeds from non-recourse debt............................. -- 60,404
Principal payments on non-recourse debt..................... (69,407) (29,952)
Net increase in amounts due to Textron Inc.................. 11,677 28,942
Net increase in short-term debt............................. 103,221 4,214
Capital contributions from Textron Inc...................... 33,805 22,800
Dividends paid to Textron Inc............................... (35,700) (51,900)
----------- -----------
Net cash provided by (used in) financing
activities...................................... 660,894 (81,066)
----------- -----------
NET INCREASE (DECREASE) IN CASH............................. 31,858 (10,191)
Cash and equivalents at beginning of year................... 22,396 13,597
----------- -----------
Cash and equivalents at end of period....................... $ 54,254 $ 3,406
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
45
<PAGE> 48
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON CAPITAL RETAINED
STOCK SURPLUS EARNINGS TOTAL
------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance January 3, 1998................................ $250 $ 95,871 $309,755 $405,876
Net income............................................. -- -- 69,576 69,576
Capital contributions from Textron Inc................. -- 59,300 -- 59,300
Dividends to Textron Inc............................... -- -- (62,300) (62,300)
---- -------- -------- --------
Balance January 2, 1999................................ 250 155,171 317,031 472,452
Net income............................................. -- -- 58,110 58,110
Capital contributions from Textron Inc................. -- 33,805 -- 33,805
Dividends to Textron Inc............................... -- -- (35,700) (35,700)
---- -------- -------- --------
Balance September 30, 1999............................. $250 $188,976 $339,441 $528,667
==== ======== ======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
46
<PAGE> 49
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company included in the 1998
Annual Report include additional notes, which should be read in conjunction with
the consolidated financial statements included in this Form 10.
The accompanying consolidated financial statements include the accounts of
Textron Financial Corporation (the Company or TFC) and its subsidiaries, all of
which are wholly owned. All significant intercompany transactions are
eliminated. The consolidated financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of TFC's consolidated
financial position at September 30, 1999, and January 2, 1999, and its
consolidated results of operations for each of the nine month periods ended
September 30, 1999 and 1998 and its consolidated cash flows for each of the nine
month periods ended September 30, 1999 and 1998. The results of operations for
the interim periods are not necessarily indicative of the results to be expected
for the full year.
NOTE 2. ACQUISITIONS
On March 31, 1999, TFC acquired certain assets from Southern Capital
Corporation. The total purchase price was $52.8 million. The fair value of the
assets acquired was $50.3 million. The goodwill associated with this transaction
is being amortized over 10 years.
On July 1, 1999, TFC acquired RFC Capital Corporation. The total purchase
price was $18.0 million. The net book value of the assets acquired was $4.2
million. The goodwill associated with this transaction is being amortized over
10 years.
The acquisitions were accounted for as purchases and accordingly, the
results of operations of each acquired company are included in the statement of
income from the date of acquisition. Had the acquisitions occurred on January 3,
1999, the effect on the Company's 1999 results would not have been material.
Consequently, pro forma information has not been presented.
NOTE 3. MANAGED FINANCE RECEIVABLES
TFC manages finance receivables for a variety of investors, participants
and third party portfolio owners.
<TABLE>
<CAPTION>
SEPTEMBER 30, JANUARY 2,
1999 1999
------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Owned receivables........................................... $4,424,033 $3,611,397
Securitized receivables..................................... 450,092 616,220
---------- ----------
4,874,125 4,227,617
Non-recourse participations................................. 391,882 228,357
Third party portfolio servicing............................. 68,096 30,908
SBA sales agreements........................................ 27,546 21,958
---------- ----------
Total managed finance receivables........................... $5,361,649 $4,508,840
========== ==========
</TABLE>
NOTE 4. LOAN IMPAIRMENT
The Company measures reserves for credit losses on non-homogeneous impaired
loans based on the present value of expected future cash flows discounted at the
loans' effective interest rates, or at the observable market price or at the
fair value of collateral if the loan is collateral dependent. This evaluation is
inherently
47
<PAGE> 50
subjective, as it requires estimates, including the amount and timing of future
cash flows expected to be received on impaired loans, which are likely to differ
from actual results.
Accrual of interest income is suspended for accounts that are contractually
delinquent by more than three months, unless collection is not doubtful. Cash
payments on nonaccrual accounts, including finance charges, generally are
applied to reduce loan principal. At September 30, 1999, the Company had
nonaccrual loans and leases totaling $68.8 million and $69.9 million on January
2, 1999, of which approximately $42.8 million and $46.5 million, respectively,
was considered impaired, excluding finance leases and homogeneous loan
portfolios. The allowance for losses on receivables related to impaired loans
was $10.2 million at September 30, 1999 and $14.9 million at January 2, 1999.
The average recorded investment in impaired loans during the first nine months
of 1999 was $42.0 million and $56.0 million in the corresponding period in 1998.
Nonaccrual loans resulted in TFC's revenues being reduced by approximately $3.4
million and $4.4 million for the first nine months of 1999 and 1998,
respectively, and by approximately $0.9 million and $1.5 million for the third
quarters of 1999 and 1998, respectively. No interest income was recognized using
the cash basis method.
NOTE 5. INTEREST RATE EXCHANGE AGREEMENTS FOR RECEIVABLE SECURITIZATIONS
TFC has entered into certain interest rate exchange agreements to mitigate
its exposure to decreases in interest rates on its interest-only securities.
Under the interest rate exchange agreements, TFC makes periodic variable rate
payments based upon the prime rate and the one- and six-month London Interbank
Offered Rate (LIBOR) and receives fixed rate payments. These interest rate
exchange agreements are adjusted periodically to match the amortization of the
variable rate contracts in the securitized portfolio and are summarized in the
following table:
<TABLE>
<CAPTION>
SEPTEMBER 30, JANUARY 2,
1999 1999
------------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Prime rate.................................................. 8.25% 7.75%
One-month LIBOR............................................. 5.40% 4.94%
1998 SECURITIZATION
Notional principal -- variable payments tied to the prime
rate...................................................... $42.6 $55.3
Fixed rate.................................................. 7.94% 7.94%
Notional principal -- variable payments tied to LIBOR....... $20.1 $34.3
Fixed rate.................................................. 5.13% 5.13%
Six-month LIBOR............................................. 5.96% 4.94%
1997 SECURITIZATION
Notional principal -- variable payments tied to the prime
rate...................................................... $14.7 $46.6
Fixed rate.................................................. 8.77% 8.77%
Notional principal -- variable payments tied to LIBOR....... $13.2 $21.2
Fixed rate.................................................. 5.97% 5.97%
</TABLE>
Interest rate floor agreements, entered into through AAA-rated
counterparties to the Textron Financial Corporation Receivables Trusts 1998-A
and 1997-A (the Trusts), provide a minimum interest rate on variable rate
receivables held by the Trusts and are tied to both the prime rate and the one-
and six-month LIBOR.
48
<PAGE> 51
These interest rate floor agreements are adjusted periodically to match the
amortization of the variable rate contracts in the securitized portfolio and are
summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JANUARY 2,
1999 1999
------------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Prime rate.................................................. 8.25% 7.75%
One-month LIBOR............................................. 5.40% 4.94%
1998 SECURITIZATION
Notional principal -- variable payments tied to the prime
rate...................................................... $43.4 $57.6
Fixed rate.................................................. 8.50% 8.50%
Notional principal -- variable payments tied to LIBOR....... $19.8 $36.5
Floor rate.................................................. 5.34% 5.34%
Six-month LIBOR............................................. 5.96% 4.94%
1997 SECURITIZATION
Notional principal -- variable payments tied to the prime
rate...................................................... $17.1 $70.5
Floor rate.................................................. 8.50% 8.50%
Notional principal -- variable payments tied to LIBOR....... $15.2 $37.1
Fixed rate.................................................. 5.65% 5.65%
</TABLE>
TFC also has a securitization program consisting of a $150 million interest
in a designated pool of installment contracts. Effective July 1, 1999, TFC
exercised its right under the agreement and discontinued the sale of eligible
assets into the pool.
NOTE 6. DEBT AND CREDIT FACILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, JANUARY 2,
1999 1999
------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Commercial paper............................................ $ 834,829 $1,185,591
Other short-term debt....................................... 342,502 239,281
---------- ----------
Total short-term debt.................................. 1,177,331 1,424,872
Long-term debt:
5.66% -- 5.86% notes; due 2000 to 2002...................... 233,000 33,000
6.13% -- 6.51% notes; due 2000 to 2001...................... 112,500 204,000
7.14% -- 7.67% notes; due 1999 to 2003...................... 668,000 234,958
Variable rate notes; due 1999 to 2002....................... 1,412,000 932,000
---------- ----------
Total long-term debt................................... 2,425,500 1,403,958
---------- ----------
Total debt............................................. $3,602,831 $2,828,830
========== ==========
</TABLE>
Combined commercial paper and short-term bank debt weighted average
interest rates, before consideration of the effect of interest rate exchange
agreements, have been determined by relating the annualized interest cost to the
daily average dollar amounts outstanding. The combined weighted average interest
rate during the nine months ended September 30, 1999, was 5.27%. The combined
weighted average interest rate, before consideration of the effect of interest
rate exchange agreements, at September 30, 1999, was 5.78%.
Interest on variable rate notes is tied predominantly to the three-month
London Interbank Offered Rate for U.S. dollar deposits. The weighted average
interest rate on variable rate notes at September 30, 1999 was 5.72%.
49
<PAGE> 52
The terms of certain of the Company's loan agreements and credit facilities
limit the payment of dividends to $225 million at September 30, 1999. In the
first nine months of 1999, TFC paid dividends of $35.7 million.
TFC entered into a promissory note agreement with Textron whereby TFC could
borrow up to $1.25 billion from Textron. As of June 30, 1999, nothing was
outstanding under this agreement and the agreement was cancelled. The maximum
amount outstanding under this facility during the first half of 1999 was $1.0
billion. This note was due on demand and the interest rate was at a rate
equivalent to the Federal Reserve Banks' A2/P2 commercial paper rate on the date
the funds were drawn upon. Approximately $14.6 million of interest expense
related to this facility is included in TFC's consolidated statement of income
for the nine months ended September 30, 1999.
NOTE 7. INTEREST RATE EXCHANGE AGREEMENTS
Under interest rate exchange agreements, TFC makes period fixed payments in
exchange for periodic variable payments and makes prime based payments in
exchange for LIBOR based payments. TFC has entered into such agreements to
mitigate its exposure to increases in interest rates on a portion of its fixed
and variable debt.
<TABLE>
<CAPTION>
SEPTEMBER 30, JANUARY 2,
1999 1999
------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Weighted average original term.............................. 1.36 years 2.50 years
Notional principal -- fixed rate payments................... $350,000 $250,000
Fixed weighted average interest rate........................ 5.82% 6.26%
Variable weighted average interest rate..................... 5.51% 5.27%
Notional principal -- variable rate payments................ $-- $50,000
Fixed weighted average interest rate........................ -- 6.30%
Variable weighted average interest rate..................... -- 5.22%
Notional principal -- prime rate payments................... $125,000 $--
Prime rate based (pay)...................................... 5.34% --
LIBOR rate based (receive).................................. 5.44% --
</TABLE>
NOTE 8. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
At year-end 1998, TFC adopted Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information,
which requires segment data to be measured and analyzed on a basis that is
consistent with how business activities are reported internally for management.
TFC's business segments are organized based on the nature of products and
services provided. The accounting policies for these segments are the same as
those described for the consolidated entity.
50
<PAGE> 53
TFC evaluates the performance of its business segments primarily on the
basis of revenues, income before taxes, and finance assets. Details of total
revenues, income before taxes and finance assets by business segment are
provided below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
REVENUES
Term loans and leases.................................. $185,015 $166,347
Revolving credit..................................... 79,008 64,176
Specialty finance.................................... 57,822 44,247
Commercial real estate............................... 60 (1)
-------- --------
Total revenues.................................... $321,905 $274,769
======== ========
INCOME BEFORE INCOME TAXES(1,2)
Term loans and leases................................ $ 51,640 $ 54,423
Revolving credit..................................... 19,310 20,154
Specialty finance.................................... 25,024 18,511
Commercial real estate............................... (1,740) (8,394)
-------- --------
Total income before income taxes.................. $ 94,234 $ 84,694
======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JANUARY 2,
1999 1999
------------- ----------
<S> <C> <C>
FINANCE ASSETS(3)
Term loans and leases....................................... $2,604,210 $2,144,429
Revolving credit.......................................... 995,060 831,165
Specialty finance......................................... 917,054 722,653
Commercial real estate.................................... 13,494 31,740
---------- ----------
Total finance assets.............................. $4,529,818 $3,729,987
========== ==========
</TABLE>
- ---------------
(1) Interest expense is allocated to each segment in proportion to its net
investment in finance assets. Net investment in finance assets includes
deferred income taxes, security deposits and other specifically identified
liabilities. The interest allocated matches variable rate debt with variable
rate finance assets and fixed rate debt with fixed rate finance assets.
(2) Indirect expenses are generally allocated to each segment based on the
utilization of such resources; however, certain allocations are based on the
segment's proportion of net investment in finance assets, headcount,
transaction volume and computer resources deployed.
(3) Finance assets include receivables and equipment on operating leases, net of
accumulated depreciation, but exclude repossessed assets and beneficial
interests in securitized assets (classified as other assets in TFC's
Consolidated Balance Sheet).
NOTE 9. CONTINGENCIES
There are pending or threatened against TFC and its subsidiaries lawsuits
and other proceedings. Among these suits and proceedings are some, which seek
compensatory, treble or punitive damages in substantial amounts. These suits and
proceedings are being defended or contested on behalf of TFC and its
subsidiaries. On the basis of information presently available, TFC believes any
such liability would not have a material effect on TFC's net income or financial
condition.
51
<PAGE> 54
NOTE 10. SUBSEQUENT EVENTS
On October 1, 1999, TFC acquired substantially all of the assets of Green
Tree Financial's aircraft and franchise finance operations. The acquisition has
been accounted for using the purchase method. The total purchase price was $471
million. The fair value of the assets acquired was $432 million. Additionally,
TFC acquired the common stock of Litchfield Financial Corporation (Litchfield)
on November 3, 1999, for approximately $185 million. Litchfield, which
specializes in resort receivables financing and other receivables oriented
transactions, has $610 million of assets. TFC is in the process of finalizing
the purchase price allocation for these acquisitions.
Effective November 9, 1999, TFC entered into an additional line of credit
agreement with a bank group aggregating $400 million. The agreement, which
expires March 31, 2000, increased TFC's total lines of credit to $1.6 billion.
ITEM 14. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS AND FINANCIAL
DISCLOSURES
Not applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
FINANCIAL STATEMENTS
The following documentation is filed with the Securities and Exchange
Commission as part of this report:
1. Management's Discussion and Analysis of Financial Condition and Results
of Operations of Textron Financial Corporation
2. Report of Independent Auditors -- Ernst & Young LLP
3. The Consolidated Financial Statements of Textron Financial Corporation
(audited)
4. The Condensed Consolidated Financial Statements of Textron Financial
Corporation for the nine months ended September 30, 1999 and 1998
(unaudited)
EXHIBITS
The following is an Index of Exhibits required by Item 601 of Regulation
S-K filed with the Securities and Exchange Commission as part of this report.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1* Asset Purchase Agreement dated August 27, 1999, among TFC,
as buyer, and Green Tree Financial Servicing Corporation,
Green Tree Financial Loan Company, and Piper Financial
Services, Inc., as sellers.
2.2 Agreement and Plan of Merger, dated as of September 22,
1999, by and among TFC, Lighthouse Acquisition Corp. and
Litchfield Financial Corporation (incorporated by reference
to Exhibit C to Schedule 14D-1 filed by TFC on September 22,
1999)
3.1* Restated Certificate of Incorporation of TFC, dated July 19,
1993
3.2* By-Laws of TFC as of May 4, 1999
4.1 Long-term debt instruments with principal amounts not
exceeding 10% of TFC's total consolidated assets are not
filed as exhibits to this Report. TFC will furnish a copy of
those agreements to the SEC upon its request
10.1* Support Agreement dated as of May 25, 1994, between TFC and
Textron
10.2* Receivables Purchase Agreement between TFC and Textron dated
as of January 1, 1986
10.3* Tax Sharing Agreement between TFC and Textron dated as of
December 29, 1990
12.1 Computation of Ratios of Earnings to Fixed Charges
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Previously filed with the Commission.
52
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this amended registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized.
TEXTRON FINANCIAL CORPORATION
BY: STEPHEN A. GILIOTTI
----------------------------------
NAME: STEPHEN A. GILIOTTI
TITLE: CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: November 15, 1999
53
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1* Asset Purchase Agreement dated August 27, 1999, among TFC,
as buyer, and Green Tree Financial Servicing Corporation,
Green Tree Financial Loan Company, and Piper Financial
Services, Inc., as sellers.
2.2 Agreement and Plan of Merger, dated as of September 22,
1999, by and among TFC, Lighthouse Acquisition Corp. and
Litchfield Financial Corporation (incorporated by reference
to Exhibit C to Schedule 14D-1 filed by TFC on September 22,
1999)
3.1* Restated Certificate of Incorporation of TFC, dated July 19,
1993
3.2* By-Laws of TFC as of May 4, 1999
4.1 Long-term debt instruments with principal amounts not
exceeding 10% of TFC's total consolidated assets are not
filed as exhibits to this Report. TFC will furnish a copy of
those agreements to the SEC upon its request
10.1* Support Agreement dated as of May 25, 1994, between TFC and
Textron
10.2* Receivables Purchase Agreement between TFC and Textron dated
as of January 1, 1986
10.3* Tax Sharing Agreement between TFC and Textron dated as of
December 29, 1990
12.1 Computation of Ratios of Earnings to Fixed Charges
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Previously filed with the Commission.
<PAGE> 1
EXHIBIT 12.1
TEXTRON FINANCIAL CORPORATION
STATEMENT SETTING FORTH COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
In Thousands
Nine months
ended
September 30,
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------
Income before Income Taxes 94,234 112,626 108,079 95,724 88,600 83,110
-------------------------------------------------------------------------------
FIXED CHARGES:
Interest on debt 134,874 155,126 153,127 146,615 146,649 114,842
Estimated interest portion of rents 1,069 817 680 666
1,198 879
-------------------------------------------------------------------------------
Total fixed charges 135,943 156,324 154,006 147,432 147,329 115,508
-------------------------------------------------------------------------------
Adjusted Income 230,177 268,950 262,085 243,156 235,929 198,618
Ratio of earnings to fixed charges (1) 1.69 1.72 1.70 1.65 1.60 1.72
</TABLE>
(1) The ratio of earnings to fixed charges has been computed by dividing income
before income taxes and fixed charges by fixed charges. Fixed charges
consist of interest on debt and one-third rental expense as representative
of interest portion of rentals
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> JAN-1-2000 JAN-02-1999
<PERIOD-START> JAN-2-1999 JAN-03-1998
<PERIOD-END> SEP-30-1999 JAN-02-1999
<CASH> 54,254 22,396
<SECURITIES> 0 0
<RECEIVABLES> 4,424,033 3,611,397
<ALLOWANCES> 89,208 83,887
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 4,683,849 3,784,538
<CURRENT-LIABILITIES> 0 0
<BONDS> 3,602,831 2,828,830
0 0
0 0
<COMMON> 250 250
<OTHER-SE> 528,417 472,202
<TOTAL-LIABILITY-AND-EQUITY> 4,683,849 3,784,538
<SALES> 0 0
<TOTAL-REVENUES> 321,905 367,162
<CGS> 0 0
<TOTAL-COSTS> 70,830 78,927
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 21,967 20,483
<INTEREST-EXPENSE> 134,874 155,126
<INCOME-PRETAX> 94,234 112,626
<INCOME-TAX> 36,124 43,050
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 58,110 69,576
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
