AVCO FINANCIAL SERVICES INC, 10-K/A, 1994-03-29

AVCO FINANCIAL SERVICES INC
10-K/A, 1994-03-29
PERSONAL CREDIT INSTITUTIONS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934

FOR THE YEAR ENDED DECEMBER 31, 1993

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

(THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
J(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.)

COMMISSION FILE NO. 0-6119

AVCO FINANCIAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 13-2530491
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

3349 MICHELSON DRIVE, IRVINE, CALIFORNIA 92715
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 714-553-1200

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / / Not applicable.

Aggregate market value of common stock: Not applicable.

At December 31, 1993, the Registrant had 500,000 shares of common stock ($1
par value per share) outstanding, all of which are owned by Textron Inc.

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PART I
ITEM 1. BUSINESS

GENERAL

Avco Financial Services, Inc., which was organized under the laws of
Delaware on July 17, 1964, is the successor to the finance businesses of
Seaboard Finance Company, originally established in 1927, and Delta Acceptance
Corporation Limited, originally established in 1954. Unless the context
otherwise requires, the term "Registrant" or "AFS" herein refers to Avco
Financial Services, Inc. and its consolidated subsidiaries.

All of the Registrant's outstanding common stock is owned by Textron Inc.

The Registrant is principally engaged in consumer finance and insurance
activities. The Registrant's finance operations mainly involve loans made by the
Avco Financial Services Group. Such loans consist of consumer loans which are
unsecured or secured by personal property and are in relatively small amounts
and for relatively short periods; real estate loans which are secured by real
property in larger amounts and for considerably longer periods; and retail
installment contracts, principally covering personal property. As of December
31, 1993, the Registrant operated 1,186 finance offices located in all states of
the United States (except Alaska, Arkansas, Kansas, Maine, Michigan,
Mississippi, Oklahoma, Texas and Vermont), the Commonwealth of Puerto Rico, the
Virgin Islands, all Canadian provinces and the Yukon Territory, six Australian
states and the Australian Capital Territory, New Zealand and the United Kingdom.
In 1992, the Registrant commenced a consumer finance operation in Spain as a
joint venture with Bankinter, SA, which is headquartered in Madrid. The
Registrant's insurance business consists primarily of the sale of credit life,
credit disability and casualty insurance offered by various subsidiaries (Avco
Insurance Services Group), a significant part of which is directly related to
the Registrant's finance activities.

For a summary of revenues, income before income taxes, and identifiable
assets by industry segment, see Note 7 to the Consolidated Financial Statements
of the Registrant.

At December 31, 1993, the Registrant employed approximately 6,900 persons.

AVCO FINANCIAL SERVICES GROUP

Finance Receivables

The Registrant's finance receivable portfolio consisted of the
following:

<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------

1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Consumer loans....................... $2,389,994 $2,275,016 $2,076,251 $2,135,214 $2,017,354
Real estate loans.................... 2,260,815 2,141,900 1,995,075 1,783,254 1,399,638
Retail installment contracts......... 741,998 656,668 544,477 512,999 491,816
Other loans.......................... 76,756 84,721 132,625 111,458 98,658
---------- ---------- ---------- ---------- ----------
Total........................... $5,469,563 $5,158,305 $4,748,428 $4,542,925 $4,007,466
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The following table presents the Registrant's outstanding finance
receivables by country:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Australia............................ $ 489,034 $ 455,771 $ 448,583 $ 439,905 $ 405,841
Canada............................... 874,277 835,942 966,898 970,117 829,924
United Kingdom....................... 467,363 434,498 423,354 406,985 270,992
United States........................ 3,638,889 3,432,094 2,909,593 2,725,918 2,500,709
---------- ---------- ---------- ---------- ----------
Total........................... $5,469,563 $5,158,305 $4,748,428 $4,542,925 $4,007,466
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
At December 31, 1993, finance receivables in the United States represented
67% of the Registrant's total finance receivables outstanding. At such date,
receivables outstanding in no state exceeded 7% of the United

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States' portfolio, except California in which outstanding receivables
represented 16% of the United States' portfolio and 11% of the consolidated
portfolio.

Receivable growth in international operations is affected by fluctuations
in foreign currency exchange rates. Increases (decreases) in receivable growth
due to foreign currency translation for the five years ended December 31, 1993
were $(48.2) million in 1993, $(211.2) million in 1992, $(16.2) million in 1991,
$42.8 million in 1990, and $(36.7) million in 1989.

On February 4, 1992, the Registrant purchased substantially all of the
assets of USA Financial Services, Inc. This transaction involved the acquisition
of approximately $340 million of consumer finance receivables generated through
142 branches located in 9 midwestern and southern states.

Consumer Loans and Real Estate Loans

The Registrant's consumer lending activities involve secured and unsecured
installment loans to individuals. After repaying portions of their consumer
loans, many customers take out new loans in amounts sufficient to pay off the
balance of the existing loans and to supply additional needed money. Of the
aggregate of 833,569 consumer and real estate loans written during the year
ended December 31, 1993, approximately 52% included advances to refinance
outstanding balances.

The Registrant's real estate loans consist primarily of loans made to
individuals which are secured by first or second mortgages on single family
homes.

A summary of the Registrant's consumer and real estate loan accounts
written (excluding both refinanced balances and receivables acquired from other
finance companies) and outstanding is as follows:

<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars*)
New funds advanced
Consumer loans
Funds advanced.................. $1,474,139 $1,241,420 $1,115,497 $1,250,111 $1,217,775
Average amount.................. $ 1,836 $ 1,705 $ 1,563 $ 1,563 $ 1,463
Real estate loans
Funds advanced.................. $ 642,082 $ 630,594 $ 625,745 $ 641,850 $ 500,745
Average amount.................. $ 21,022 $ 20,357 $ 20,391 $ 19,907 $ 17,424
Receivables outstanding at end of
period
Consumer loans
Net balance..................... $2,389,994 $2,275,016 $2,076,251 $2,135,214 $2,017,354
Average amount.................. $ 2,407 $ 2,214 $ 2,139 $ 2,085 $ 1,902
Real estate loans
Net balance..................... $2,260,815 $2,141,900 $1,995,075 $1,783,254 $1,399,638
Average amount.................. $ 25,120 $ 23,318 $ 24,083 $ 22,438 $ 19,999
</TABLE>

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* Except average amount.

Retail Installment Contracts

The Registrant's sales finance operations consist principally of the
purchase, generally without recourse, of retail installment contracts from
dealers in furniture, television sets, household appliances and floor coverings.
Retail installment operations provide a source of new customers for consumer
loan business. Retail installment contracts carry a lower profit margin than
consumer loans, and the volume of such business tends to be more volatile.

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The following table summarizes retail installment contracts purchased
(excluding contracts acquired from other finance companies) and outstanding:

<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
1993 1992 1991 1990 1989
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars*)
Retail installment contracts purchased..... $1,041,981 $945,380 $784,957 $743,247 $750,532
Retail installment contracts outstanding at
end of period
Net balance........................... $ 741,998 $656,668 $544,477 $512,999 $491,816
Average amount........................ $ 859 $ 808 $ 821 $ 804 $ 727
</TABLE>

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* Except average amount.

Other Receivables

At December 31, 1993, other receivables outstanding of $76.8 million
consisted primarily of leasing receivables generated by the Registrant's United
States leasing operation. Such leases are generally written for office equipment
in amounts less than $9,000 and for periods generally not exceeding 4 years.

Lending Policies

In conducting lending activities, it is the policy of the Registrant to
require a satisfactory credit history. Loans are made to individuals primarily
on the basis of the borrower's income and are limited to amounts which the
customer appears able to repay without hardship. Investigation of the
creditworthiness of obligors is made either through credit agencies or by the
Registrant's own agents. When security is taken in connection with a loan, the
realizable value of the property on which liens are taken as security (except
for real estate in which case the loan amount is limited to a maximum of 85% of
the unencumbered appraised market value) is in many cases less than the amount
of the related receivable.

Subject to governmental restrictions, the Registrant makes loans secured by
consumer goods for varying periods, with original contractual terms generally
not exceeding 4 years. Loans secured by real estate generally do not exceed 15
years. During 1993, the weighted average maturity of real estate loans written
was approximately 10 years. The Registrant purchases retail installment
contracts with original contractual terms generally not exceeding 3 years.

Nonearning Assets

Accrual of interest income is suspended for accounts which are
contractually delinquent by more than three payments. Once an account is
suspended, subsequent interest income is recognized when collected.

Nonearning assets represent those finance receivables on which both the
accrual of interest income has been suspended and for which no payment of
principal or interest has been received for more than 30 days. Nonearning assets
totaled approximately $75.1 million at December 31, 1993 and $82.9 million at
December 31, 1992.

Loss Experience

Provisions for losses on receivables are charged to income in amounts
sufficient to maintain the allowance at a level adequate to cover the losses of
principal and interest in the existing receivable portfolio. The determination
of an appropriate allowance for losses is based upon loss experience and payment
history.

It is the Registrant's policy to write off accounts when they are deemed
uncollectible, but in any event, all accounts for which an amount aggregating a
full contractual payment has not been received for six consecutive months are
written off.

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real estate owned are reflected in other operating expenses. At December 31,
1993 and 1992, real estate owned was $43.3 million and $63.0 million,
respectively.

The allowance for losses at December 31, 1993 was $155.0 million or 2.83%
of finance receivables then outstanding; such allowance at December 31, 1992 was
$147.1 million or 2.85% of finance receivables outstanding. See Note 2 to the
Consolidated Financial Statements of the Registrant for an analysis of the
allowance for losses for the five years ended December 31, 1993. The following
table shows gross and net write-offs, the percentages which these items bear to
average finance receivables and the amount of the provision for losses charged
to income (less recoveries):

<TABLE>
<CAPTION>
Gross write-offs Recoveries Net write-offs
---------------------- from ----------------------
Percentage receivables Percentage Provision
of average previously of average for losses
finance written finance less
Year ended Amount receivables off Amount receivables recoveries
- - ---------------------------------- -------- ----------- ---------- -------- ----------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993................. $138,104 2.7% $ 26,611 $111,493 2.1% $ 120,694
December 31, 1992................. 136,795 2.7 26,797 109,998 2.2 118,251
December 31, 1991................. 132,816 2.9 23,798 109,018 2.4 114,222
December 31, 1990*................ 95,501 2.3 18,383 77,118 1.8 94,291
December 31, 1989................. 85,066 2.3 18,593 66,473 1.8 76,943
</TABLE>

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* Excludes $33.9 million of gross write-offs resulting from a change in the
Registrant's write-off policy. Including such write-offs, gross write-offs as
a percentage of average finance receivables was 3.1% and net write-offs as a
percentage of average finance receivables was 2.7%.

At December 31, 1993, 1992 and 1991, the Registrant had (expressed in
dollars and as a percentage of related gross receivables outstanding): (1)
consumer and real estate loans on which no payment of principal or interest had
been made within 60 days amounting to $67.0 million (1.3%), $72.3 million (1.5%)
and $79.7 million (1.8%), respectively; (2) consumer and real estate loans on
which partial payments amounting to less than 50% of the original contractual
monthly payment had been received within 60 days amounting to $6.7 million
(.13%), $6.2 million (.13%) and $5.5 million (.12%), respectively; and (3)
retail installment contracts on which one or more installments was more than 60
days past due amounting to $9.9 million (1.3%), $11.8 million (1.8%) and $12.7
million (2.1%), respectively.

Sources of Funds

The Registrant's finance operations are financed from its common stock,
additional paid-in capital, retained earnings, unsecured borrowings against bank
lines of credit, unsecured commercial paper borrowings and unsecured medium-and
long-term borrowings.

The cost of borrowing, which is generally affected by changes in interest
rates, represents a material expense of the Registrant. Since the maximum rates
which the Registrant may charge on certain consumer loans are limited by law in
many jurisdictions in the United States (see "Regulation"), any rise in
prevailing interest rates adversely affects the profitability of the
Registrant's finance operations.

The Registrant's average annual cost of borrowed funds for each fiscal year
1993 through 1989 was as follows: 1993 -- 6.97%; 1992 -- 8.11%; 1991 -- 9.73%;
1990 -- 10.69%; and 1989 -- 10.96%.

AVCO INSURANCE SERVICES GROUP

The Registrant, through the Avco Insurance Services Group, is engaged in
the credit life, credit disability and casualty insurance business in most
states of the United States, all Canadian provinces, seven Australian
jurisdictions and New Zealand. Where applicable laws permit, the Registrant
makes available to customers credit life, credit disability and casualty
insurance through the Avco Financial Services Group or independent companies.
During 1993, approximately 71% of the Group's credit life and credit disability
insurance business and approximately 26% of its casualty insurance business was
derived from the Registrant's finance customers.

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<PAGE> 6

The Group's remaining credit life, credit disability and casualty insurance
business is written with customers directly by the Group or through independent
agents.

The Group's casualty business consists primarily of insurance covering
collateral protection, involuntary unemployment, personal property and
automobile physical damage.

The following table summarizes the results of operations of the Avco
Insurance Services Group by major line of business included in the consolidated
financial statements of the Registrant (before elimination of intercompany
amounts):

<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Credit Life, Credit Disability and Other
Premiums written.......................... $135,218 $123,863 $105,987 $133,368 $125,720
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Premiums earned........................... $127,458 $123,122 $124,468 $123,190 $115,815
Investment income......................... 19,793 19,366 22,157 23,694 24,492
Losses and adjustment expenses, less
recoveries............................. (59,306) (56,181) (54,240) (53,837) (49,601)
Expenses.................................. (54,826) (51,923) (48,495) (47,280) (42,546)
Income taxes.............................. (10,514) (10,840) (13,719) (13,500) (13,914)
-------- -------- -------- -------- --------
Income before cumulative effect of changes
in accounting principles............... 22,605 23,544 30,171 32,267 34,246
Cumulative effect of changes in accounting
principles............................. (1,788)
-------- -------- -------- -------- --------
Net income................................ $ 22,605 $ 21,756 $ 30,171 $ 32,267 $ 34,246
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Casualty
Premiums written.......................... $158,645 $151,146 $167,498 $153,368 $126,660
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Premiums earned........................... $150,954 $151,886 $159,477 $138,601 $108,376
Investment income......................... 23,532 23,168 26,287 28,833 29,886
Losses and adjustment expenses, less
recoveries............................. (72,764) (80,957) (75,871) (61,928) (50,497)
Expenses.................................. (82,894) (75,369) (81,642) (76,248) (63,244)
Income taxes.............................. (5,004) (4,762) (8,371) (9,782) (7,692)
-------- -------- -------- -------- --------
Income before cumulative effect of changes
in accounting principles............... 13,824 13,966 19,880 19,476 16,829
Cumulative effect of changes in accounting
principles............................. (1,788)
-------- -------- -------- -------- --------
Net income................................ $ 13,824 $ 12,178 $ 19,880 $ 19,476 $ 16,829
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Operations
Premiums written.......................... $293,863 $275,009 $273,485 $286,736 $252,380
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Premiums earned........................... $278,412 $275,008 $283,945 $261,791 $224,191
Investment income(1)...................... 43,325 42,534 48,444 52,527 54,378
Losses and adjustment expenses, less
recoveries............................. (132,070) (137,138) (130,111) (115,765) (100,098)
Expenses.................................. (137,720) (127,292) (130,137) (123,528) (105,790)
Income taxes.............................. (15,518) (15,602) (22,090) (23,282) (21,606)
-------- -------- -------- -------- --------
Income before cumulative effect of changes
in accounting principles............... 36,429 37,510 50,051 51,743 51,075
Cumulative effect of changes in accounting
principles............................. (3,576)
-------- -------- -------- -------- --------
Net income................................ $ 36,429 $ 33,934 $ 50,051 $ 51,743 $ 51,075
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>

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(1) Investment income includes capital gains (losses) of $4.3 million, $3.1
million, $4.7 million, $(.2) million and $.8 million for the years 1993
through 1989, respectively.

Included in the assets of the Avco Insurance Services Group at December 31,
1993 were investments in securities (excluding investments in debt of
affiliates) carried at $605.4 million for which the market value was $630.7
million. At December 31, 1993, the Avco Insurance Services Group carried a
valuation adjustment for the marketable equity securities' portion of its
investments totaling $13.8 million. This valuation adjustment represents the
excess of aggregate quoted market value over aggregate cost of marketable equity
securities (net of applicable taxes).

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The composition of invested assets of the Avco Insurance Services Group
(before intercompany eliminations) at December 31, 1993 and 1992 and the returns
on such investments for the years then ended were as follows:

<TABLE>
<CAPTION>
1993 1992
-------------------- --------------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
(Thousands of dollars)
Composition of Invested Assets
Equities, at market
Preferred............................. $ 8,032 1.3% $ 7,668 1.3%
Common................................ 42,615 6.9 61,861 10.4
Bonds(1)(2).............................. 511,168 83.2 455,956 76.4
Commercial paper, at cost................ 41,082 6.7 60,713 10.2
Real estate, net of debt................. 3,359 .5 3,833 .6
Other invested assets.................... 5,457 .9 5,889 1.0
Cash..................................... 3,001 .5 294 .1
-------- ------- -------- -------
Total............................ $614,714 100.0% $596,214 100.0%
-------- ------- -------- -------
-------- ------- -------- -------
Return on Invested Assets
Investment income (before taxes)(3)...... $ 43,325 $ 42,534
Mean invested assets..................... $609,752 $591,583
Return on mean invested assets, before
taxes................................. 7.1% 7.2%
Return on mean invested assets, after
taxes................................. 5.1% 5.1%
</TABLE>

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(1) Bonds are carried at amortized cost except for those classified as available
for sale, which are carried at lower of aggregate amortized cost or market.
See Note 1 to the Consolidated Financial Statements of the Registrant.

(2) Substantially all of the Registrant's bond portfolio is in investment grade
securities.

(3) Includes capital gains and losses set forth in note (1) to the immediately
preceding table.

OPERATIONS BY GEOGRAPHIC AREA

The Registrant's foreign operations are conducted primarily in Australia,
Canada and the United Kingdom. At December 31, 1993, the Registrant operated 128
finance offices in Australia, 217 in Canada and 92 in the United Kingdom. In
these countries, the Registrant engages in consumer finance and related
insurance activities similar to those conducted in the United States. At
December 31, 1993, the percentage of finance receivables of the Australian,
Canadian and United Kingdom finance operations in relation to the Registrant's
total finance receivables was 9%, 16% and 8%, respectively. Operations in these
countries are subject to regulation and competition comparable to that existing
in the United States. See "Regulation" and "Competition". For a summary of
revenues, income before income taxes and identifiable assets by geographic area,
see Note 7 to the Consolidated Financial Statements of the Registrant.

REGULATION

The Registrant's loan business is regulated by laws which are in force in
certain jurisdictions in which the Registrant operates and which, among other
things, generally limit maximum charges for loans, the maximum amount and terms
thereof. In recent years, the trend of state legislation has been to deregulate
interest rates or to increase the maximum rates permitted to be charged. In
jurisdictions within Australia, the United Kingdom and the United States, laws
also require that each office conducting a consumer loan business be separately
licensed. Such licenses have limited terms, but are renewable, and are subject
to revocation for cause. Laws under which the Registrant operates also require
disclosure to customers of the annual simple interest rate and other basic terms
of most credit transactions and give customers a limited right to cancel certain
loans and retail installment contracts without penalty.

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<PAGE> 8

In addition, in certain jurisdictions in which the Registrant operates, the
retail installment business conducted by it is subject to regulatory legislation
which, among other things, limits the rates which may be charged and requires
disclosure to customers as to the terms of the financing transactions.

The insurance businesses have been subject for many years to licensing and
detailed regulation by state authorities and the rates charged on certain lines
of insurance are subject to governmental limitation and change. In recent years,
the rates which may be charged on credit life insurance generally have been
reduced by the regulatory authorities. Certain states have recently enacted
legislation providing for the reduction of premiums on certain lines of property
and casualty insurance. The state insurance regulations also include limitations
on the amounts of dividends that can be paid by insurance companies.

The laws of many states in which the Registrant's insurance subsidiaries
are admitted to do business require as a condition of admission that all
insurance companies so admitted collectively guarantee to policyholders the
solvency of other insurance companies admitted in the particular state. The
Registrant's insurance subsidiaries have not been required to date to make any
significant payments pursuant to such guarantees. While the amount of any
assessments which may be made in the future cannot be predicted, the Registrant
does not believe the total assessments, if any, will be material to its net
income or financial condition.

COMPETITION

The consumer finance business is highly competitive. The Registrant's
competitors include not only other companies operating under consumer loan laws,
but also other types of lending institutions not so regulated and usually not
limited in the size of their loans, such as companies which finance the sale of
their own merchandise or the merchandise of others, industrial banks, the
personal loan departments of commercial banks and credit unions. The most
serious competition is offered by commercial banks and credit unions. The
effective interest rates charged by these lenders are usually lower than the
rates charged by the Registrant. The Registrant's insurance businesses, to the
extent that they are not related to the Registrant's finance activities, compete
with many other insurance companies offering similar products.

ITEM 2. PROPERTIES

Almost all of the offices of the Registrant are occupied under leases.
Reference is made to Note 9 to the Consolidated Financial Statements of the
Registrant for information concerning the Registrant's lease obligations. The
Registrant does not own any substantial amount of physical property other than
properties acquired by enforcing security interests and office furniture and
fixtures. Of the 1,186 loan offices which the Registrant operated at December
31, 1993, 749 were located in the United States, the Virgin Islands and the
Commonwealth of Puerto Rico, 217 in Canada, 128 in Australia and 92 in the
United Kingdom.

ITEM 3. LEGAL PROCEEDINGS

Because the business of the Registrant involves the collection of numerous
accounts, the validity of liens, accident and other damage or loss claims under
many types of insurance, and compliance with state and federal consumer laws,
the Registrant and its subsidiaries are plaintiffs and defendants in numerous
legal proceedings, including individual and class action proceedings which seek
compensatory, treble or punitive damages in substantial amounts. It is the
opinion of the Registrant's management, based upon the advice of its counsel,
that the aggregate liability from pending or threatened litigation will not have
a material effect on the Registrant's net income or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Omitted in accordance with General Instruction J(2)(c).

7
<PAGE> 9

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

Textron Inc. owns all of the outstanding common stock of the Registrant.

Dividends of $71.0 million and $64.4 million were declared and paid in 1993
and 1992, respectively. See Note 8 to the Consolidated Financial Statements of
the Registrant regarding restrictions as to dividend availability.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial information has been derived from the
Consolidated Financial Statements for the five years ended December 31, 1993 and
is reported upon in the "Report of Independent Auditors" included on page 11.
The information should be read in conjunction with the "Management's Discussion
and Analysis of Financial Condition and Results of Operations", and the
Consolidated Financial Statements and accompanying notes, included elsewhere in
this report.

<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
REVENUES AND INCOME
Revenues
Avco Financial Services Group... $1,024,724 $1,046,848 $1,014,151 $ 962,868 $ 873,840
Avco Insurance Services Group... 321,737 317,542 332,389 314,318 278,569
---------- ---------- ---------- ---------- ----------
Total.................... $1,346,461 $1,364,390 $1,346,540 $1,277,186 $1,152,409
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Income Before Income Taxes
Avco Financial Services Group... $ 173,837 $ 150,801 $ 124,745 $ 114,027 $ 98,815
Avco Insurance Services Group... 51,947 53,112 72,141 75,025 72,681
---------- ---------- ---------- ---------- ----------
Total...................... 225,784 203,913 196,886 189,052 171,496
Income taxes....................... 83,755 75,887 72,286 71,177 63,072
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
changes in accounting
principles...................... 142,029 128,026 124,600 117,875 108,424
Cumulative effect of changes in
accounting principles(1)........ (24,328)
---------- ---------- ---------- ---------- ----------
Net Income......................... $ 142,029 $ 103,698 $ 124,600 $ 117,875 $ 108,424
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of Income to Fixed
Charges(2)...................... 1.7 1.5 1.5 1.5 1.5
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
FINANCIAL CONDITION
Receivables Outstanding............ $5,469,563 $5,158,305 $4,748,428 $4,542,925 $4,007,466
Investments........................ 655,690 586,339 575,468 558,043 524,983
Consolidated Assets................ 6,122,960 5,785,967 5,334,177 5,084,640 4,483,632
Debt (excludes savings deposits)
Commercial paper and banks...... 1,959,063 1,580,021 1,206,954 1,210,267 941,196
Notes........................... 2,851,399 2,987,467 2,973,056 2,785,587 2,496,043
Stockholder's Equity............... 827,511 753,071 744,560 673,718 656,840
</TABLE>

- - ------------

(1) Effective at the beginning of 1992, the Registrant adopted Statements of
Financial Accounting Standards Nos. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (FAS 106), and 109, "Accounting
for Income Taxes" (FAS 109).

(2) See Note 1 to the Consolidated Financial Statements of the Registrant for
computation of "Ratio of Income to Fixed Charges".

8
<PAGE> 10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

1993 vs. 1992 -- Income before income taxes for the year ended December 31,
1993 was $225.8 million compared to $203.9 million for the year ended December
31, 1992, an increase of $21.9 million (10.7%). The increase resulted primarily
from: (i) a decrease in the cost of borrowed funds to 6.97% for 1993 from 8.11%
for 1992; (ii) an increase in the level of receivables outstanding as average
finance receivables were $5.208 billion for 1993 compared to $4.999 billion for
1992; and (iii) a decrease in insurance losses as 1992 included losses related
to Hurricanes Andrew and Iniki. This increase in income was partially offset by:
(i) higher insurance commissions on non-related insurance business and (ii) a
decrease in yields on finance receivables. Due to the declining cost of borrowed
funds in all of the countries in which the Registrant operates, the Registrant
has lowered the rate of interest it charges customers on finance receivables. As
a result, interest income as a percent of average finance receivables was 19.10%
for 1993 compared to 20.30% for 1992.

Revenues for 1993 were $1.346 billion compared to $1.364 billion for 1992,
a decrease of $18 million (1%). This decrease in revenues was due to: (i) a
decrease of approximately $56.6 million due to the decline in yields on finance
receivables described above and (ii) a decrease of approximately $46.0 million
due to a decline in the foreign exchange translation rates at December 31, 1993
as compared to December 31, 1992. These factors were largely offset by the
aforementioned increase in the level of receivables outstanding.

1992 vs. 1991 -- Income before income taxes for the year ended December 31,
1992 was $203.9 million compared to $196.9 million for the year ended December
31, 1991, an increase of $7.0 million (3.6%). The increase resulted from: (i) an
increase in average finance receivables outstanding to $4.999 billion during
1992 from $4.571 billion during 1991; (ii) a decrease in the cost of borrowed
funds to 8.11% for 1992 from 9.73% for 1991; and (iii) reduced credit losses, as
net credit losses as a percent of average finance receivables declined to 2.20%
in 1992 from 2.39% in 1991. The increases in income before income taxes were
partially offset by: (i) a decrease in yields on finance receivables due both to
a shift in the receivable portfolio toward lower yielding real estate loans and
a lowering of yields to meet market conditions as interest income as a percent
of average finance receivables was 20.30% for 1992 compared to 21.47% for 1991;
(ii) an increase in the insurance loss ratio due primarily to catastrophe losses
related to Hurricanes Andrew and Iniki; and (iii) a decrease in investment
income due primarily to lower yields.

LIQUIDITY/CAPITAL RESOURCES

The Registrant consists of the Avco Financial Services Group and Avco
Insurance Services Group. The insurance operations have historically generated
positive cash flows sufficient to preclude the need for borrowings.

The Registrant utilizes a broad base of financial sources for its liquidity
and capital requirements. Cash is provided from both operations and several
different sources of borrowings, including unsecured borrowings under bank lines
of credit, the issuance of commercial paper and sales of medium-and long-term
debt in the U.S. and foreign financial markets.

The Registrant has interest rate exchange agreements which had the effect
of fixing the rate of interest at approximately 10% on $342 million of variable
rate borrowings at December 31, 1993. The agreements, which expire through 2000,
had a weighted average original term of 4.4 years. By utilizing medium-and
long-term fixed rate financing, as well as interest rate exchange agreements,
the Registrant had a ratio of variable rate debt to total debt of 47% at
December 31, 1993.

For liquidity purposes, the Registrant has a policy of maintaining
sufficient unused bank lines of credit to support its outstanding commercial
paper. The commercial paper coverage ratio at December 31, 1993, adjusted for
the inclusion of certain qualifying investments of the Registrant's insurance
group, was 102%. For further information regarding commercial paper and bank
lines of credit, see Note 5 to the Consolidated Financial Statements of the
Registrant.

9
<PAGE> 11

At December 31, 1993, $2.261 billion (41%) of the Registrant's finance
receivables were represented by residential real estate loans, secured primarily
by first and second mortgages on single family homes and averaged $25 thousand
in outstanding principal balance per loan. Such loans are geographically
dispersed among many customers and the loan amounts are limited to a maximum of
85% of the unencumbered appraised market value at the date of the loans,
although most loans are made at significantly lower loan to value ratios. The
Registrant believes that substantially all such loans remain fully secured.

Foreclosed real estate loans 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 carrying value of real estate owned is
periodically reevaluated and, where appropriate, adjustments are made through a
valuation allowance to reflect subsequent decreases in fair value. At December
31, 1993, real estate classified in other assets aggregated $43 million.

At December 31, 1993, the Registrant had an investment portfolio of $655.7
million primarily represented by high quality, investment grade debt securities.
Such portfolio included $45.5 million ($47.0 million market value) of
mortgage-backed securities, including $24.2 million guaranteed by the U.S.
Government or agencies thereof.

The Registrant will adopt Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS
115) as of the beginning of 1994. FAS 115 establishes new, more restrictive
criteria to be used in determining which debt securities can be carried in the
financial statements at amortized cost. Securities which will be carried at
amortized cost and classified in the Registrant's held for investment category
will be those which the Registrant has both the ability and positive intent to
hold to maturity. Securities classified in the available for sale category will
be carried at fair value and will consist of those securities which the
Registrant intends to hold for an indefinite period of time but not necessarily
to maturity. Unrealized gains and losses related to securities available for
sale will be reported as a separate component of stockholder's equity. Upon
adopting FAS 115, the Registrant will transfer certain debt securities, with an
amortized cost of approximately $499.3 million, from the held for investment
category to the available for sale category of its investment portfolio. The net
unrealized gains of approximately $16.5 million, net of applicable income taxes,
relating to the debt securities classified in the available for sale portfolio
at the date of adoption, will be recorded as an increase to stockholder's
equity.

The amount of net assets of the Registrant available for cash dividends and
other payments to its parent, Textron Inc., is restricted by the terms of
lending agreements and insurance statutory requirements. The Registrant paid
dividends of $71.0 million, $64.4 million and $62.2 million to Textron Inc. in
1993, 1992 and 1991, respectively. See Note 8 to the Consolidated Financial
Statements of the Registrant for restrictions.

10
<PAGE> 12

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Avco Financial Services, Inc.

We have audited the accompanying consolidated balance sheet of Avco Financial
Services, Inc. as of December 31, 1993 and 1992 and the related consolidated
statements of income, cash flows and changes in stockholder's equity for each of
the three years in the period ended December 31, 1993. Our audits also included
the financial statement schedules listed in the accompanying index to financial
statements at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules 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 Avco Financial
Services, Inc. at December 31, 1993 and 1992, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1993, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

As discussed in notes to the consolidated financial statements, in 1992 AFS
changed its methods of accounting for postretirement benefits other than
pensions and for income taxes.

We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet at December 31, 1991, 1990 and 1989,
and the related consolidated statements of income, cash flows, and changes in
stockholder's equity for the years ended December 31, 1990 and 1989 (none of
which are presented separately herein); and we expressed unqualified opinions on
those consolidated financial statements. In our opinion, the information set
forth in the selected financial data for each of the five years in the period
ended December 31, 1993, appearing on page 8, is fairly stated in all material
respects in relation to the consolidated financial statements from which it has
been derived.

ERNST & YOUNG

Orange County, California
February 3, 1994

11
<PAGE> 13

AVCO FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
December 31,
-------------------------
1993 1992
---------- ----------
<S> <C> <C>
(Thousands of dollars)
ASSETS
Finance receivables -- net.......................................... $5,083,016 $4,796,166
Investments......................................................... 655,690 586,339
Property and equipment.............................................. 59,636 60,066
Unamortized insurance policy acquisition costs...................... 34,265 34,837
Goodwill............................................................ 23,130 24,487
Cash................................................................ 7,858 318
Other............................................................... 259,365 283,754
---------- ----------
TOTAL ASSETS.............................................. $6,122,960 $5,785,967
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt................................................................ $4,815,494 $4,573,091
Accounts payable and accrued liabilities............................ 235,029 234,256
Insurance reserves and claims
Unearned insurance premiums....................................... 121,694 118,413
Losses and adjustment expenses.................................... 59,171 49,728
Income taxes........................................................ 64,061 57,408
---------- ----------
Total liabilities......................................... 5,295,449 5,032,896
---------- ----------
Stockholder's equity
Common stock ($1 par value, 1,000,000 shares authorized;
500,000 shares outstanding).................................... 500 500
Additional paid-in capital........................................ 137,588 137,588
Retained earnings................................................. 778,804 707,775
Marketable equity securities valuation adjustment................. 31,980 19,793
Currency translation adjustment................................... (121,361) (112,585)
---------- ----------
Total stockholder's equity................................ 827,511 753,071
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................ $6,122,960 $5,785,967
---------- ----------
---------- ----------
</TABLE>

See accompanying notes to consolidated financial statements.

12
<PAGE> 14

AVCO FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
(Thousands of dollars)
REVENUES
Interest, discount and service charges...................... $ 994,731 $1,014,505 $ 981,585
Insurance premiums and other insurance income............... 300,809 298,564 308,662
Investment and other income (including net capital gains and
losses).................................................. 50,921 51,321 56,293
---------- ---------- ----------
Total revenues...................................... 1,346,461 1,364,390 1,346,540
EXPENSES
Interest and debt expense
Interest on notes........................................ 212,495 264,065 288,312
Amortization of debt expense............................. 3,715 3,363 4,391
Interest on commercial paper, bank loans and other
indebtedness........................................... 108,483 103,501 104,984
---------- ---------- ----------
Total............................................... 324,693 370,929 397,687
Salaries, wages, and other employee benefits................ 252,066 252,832 239,863
Provision for losses on collection of finance receivables,
less recoveries.......................................... 120,694 118,251 114,222
Credit life, credit disability and casualty insurance losses
and adjustment expenses, less recoveries................. 132,070 137,138 130,111
Amortization of insurance policy acquisition costs.......... 89,436 83,435 84,303
Other operating expenses.................................... 201,718 197,892 183,468
---------- ---------- ----------
Total expenses...................................... 1,120,677 1,160,477 1,149,654
---------- ---------- ----------
Income before income taxes.................................... 225,784 203,913 196,886
Income taxes.................................................. 83,755 75,887 72,286
---------- ---------- ----------
Income before cumulative effect of changes in accounting
principles.................................................. 142,029 128,026 124,600
Cumulative effect of changes in accounting principles:
Postretirement benefits other than pensions, net of
income taxes........................................... (18,890)
Income taxes............................................. (5,438)
---------- ---------- ----------
NET INCOME.................................................... $ 142,029 $ 103,698 $ 124,600
---------- ---------- ----------
---------- ---------- ----------
Ratio of income to fixed charges.............................. 1.7 1.5 1.5
--- --- ---
--- --- ---
</TABLE>

See accompanying notes to consolidated financial statements.

13
<PAGE> 15

AVCO FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1993 1992 1991
----------- ---------- ----------
<S> <C> <C> <C>
(Thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $ 142,029 $ 103,698 $ 124,600
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of changes in accounting
principles....................................... 24,328
Provision for losses on receivables................ 147,305 145,048 138,020
Depreciation....................................... 16,168 16,092 14,330
Gain on sales of investments....................... (4,335) (3,084) (4,685)
Decrease (increase) in unamortized insurance policy
acquisition costs................................ 443 4,992 (514)
Increase (decrease) in unearned insurance premiums
and reserves for insurance losses and adjustment
expenses......................................... 16,109 (4,386) (12,889)
Increase (decrease) in accounts payable and accrued
liabilities...................................... 2,778 12,254 (1,725)
Increase in income taxes........................... 7,070 1,247 8,757
Other - net........................................ 28,276 (15,784) (24,335)
----------- ---------- ----------
Net cash provided by operating activities..... 355,843 284,405 241,559
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated or purchased......................... (3,392,345) (3,097,325) (2,709,977)
Loans repaid or sold.................................. 2,896,021 2,688,113 2,355,822
Purchases of investments.............................. (286,824) (198,807) (261,770)
Proceeds from investments............................. 241,682 209,967 261,111
Capital expenditures.................................. (18,486) (16,148) (17,344)
Cash used in acquisition of assets of USA Financial
Services, Inc., net of cash acquired............... (285,334)
----------- ---------- ----------
Net cash used by investing activities......... (559,952) (699,534) (372,158)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term debt........................... 392,095 340,046 637
Proceeds from issuance of notes....................... 1,016,140 857,289 992,108
Principal payments on notes........................... (1,125,045) (731,991) (794,514)
Decrease in savings deposits.......................... (541) (169) (1,095)
Dividends paid........................................ (71,000) (64,400) (62,200)
----------- ---------- ----------
Net cash provided by financing activities..... 211,649 400,775 134,936
----------- ---------- ----------
Net increase (decrease) in cash......................... 7,540 (14,354) 4,337
Cash at beginning of year............................... 318 14,672 10,335
----------- ---------- ----------
Cash at end of year..................................... $ 7,858 $ 318 $ 14,672
----------- ---------- ----------
----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.............................................. $ 336,716 $ 368,931 $ 394,189
Income taxes.......................................... $ 83,553 $ 70,320 $ 49,854
</TABLE>

See accompanying notes to consolidated financial statements.

14
<PAGE> 16

AVCO FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
Marketable
equity
Additional securities Currency
Common paid-in Retained valuation translation
stock capital earnings adjustment adjustment Total
------ ---------- --------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Thousands of dollars)
Balance at December 31, 1990......... $500 $ 137,588 $ 606,077 $ 4,779 $ (75,226) $ 673,718
Net income......................... 124,600 124,600
Cash dividends declared
($124.40 per common share)...... (62,200) (62,200)
Change in valuation adjustment..... 10,486 10,486
Change in translation adjustment... (2,044) (2,044)
------ ---------- --------- -------------- ---------- ---------
Balance at December 31, 1991......... 500 137,588 668,477 15,265 (77,270) 744,560
Net income......................... 103,698 103,698
Cash dividends declared
($128.80 per common share)...... (64,400) (64,400)
Change in valuation adjustment..... 4,528 4,528
Change in translation adjustment... (35,315) (35,315)
------ ---------- --------- -------------- ---------- ---------
Balance at December 31, 1992......... 500 137,588 707,775 19,793 (112,585) 753,071
Net income......................... 142,029 142,029
Cash dividends declared
($142.00 per common share)...... (71,000) (71,000)
Change in valuation adjustment..... 12,187 12,187
Change in translation adjustment... (8,776) (8,776)
------ ---------- --------- -------------- ---------- ---------
Balance at December 31, 1993......... $500 $ 137,588 $ 778,804 $ 31,980 $ (121,361) $ 827,511
------ ---------- --------- -------------- ---------- ---------
------ ---------- --------- -------------- ---------- ---------
</TABLE>

See accompanying notes to consolidated financial statements.

15
<PAGE> 17

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

Avco Financial Services, Inc. is a wholly-owned subsidiary of Textron Inc.
The consolidated financial statements include the accounts of Avco Financial
Services, Inc. and its subsidiaries (AFS). All significant intercompany
transactions are eliminated. Certain reclassifications have been made to prior
year amounts to conform with current year presentation.

FINANCE RECEIVABLES

Revenue and Acquisition Cost Recognition

For finance receivables, interest income is recognized in revenues using
the interest method so as 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 payments. Once an account is
suspended, subsequent interest income is recognized when collected. Fees
received and direct loan origination costs are deferred and recognized in income
over the contractual lives of the respective loans. Unamortized amounts are
recognized in income when loans are sold or paid in full.

Credit Losses

Provisions for losses on receivables are charged to income in amounts
sufficient to maintain the allowance at a level considered adequate to cover the
losses of principal and interest in the existing receivable portfolio. The
determination of an appropriate allowance for losses is based upon loss
experience and payment history.

Finance receivables are written off when they are deemed uncollectible, but
in any event, all accounts for which an amount aggregating a full contractual
payment has not been received for six consecutive months are written off.

Foreclosed real estate loans 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 decreases in fair value.
Subsequent gains and losses on the disposition of real estate owned are
reflected in other operating expenses.

INSURANCE OPERATIONS

Recognition of Revenues and Expenses

Unearned insurance premiums are deferred and subsequently recognized in
revenues over the lives of the policies (a) on the interest method for
decreasing term credit life insurance coverage and on the pro rata method for
level term credit life coverage, (b) in relation to anticipated claims for
credit disability insurance and (c) on the pro rata method for casualty
insurance.

Deferred Policy Acquisition Costs

Costs, which vary with, and are primarily related to, the production of new
business, have been deferred to the extent such costs are deemed recoverable
from future profits. Such costs primarily include commissions and premium taxes.
These costs are amortized in proportion to premiums over the estimated lives of
the policies. Anticipated investment income is considered in determining if a
premium deficiency relating to short-term contracts exists.

16
<PAGE> 18

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Insurance Reserves and Claims

Insurance reserves and claims represent the estimated ultimate cost of
settling claims incurred as of the balance sheet date. The reserves for casualty
losses are based upon estimates for losses and loss adjustment expenses reported
prior to the close of the accounting period and estimates of incurred but not
reported losses and adjustment expenses based upon past experience and adjusted
for current conditions, net of reinsurance recoverable and salvage and
subrogation. The reserves for credit life and credit disability losses represent
estimates of those claims due and unpaid, in the course of settlement, and
incurred but not reported, computed using historical liquidation patterns
adjusted for changes in portfolio composition, net of reinsurance recoverable.

Reinsurance

Effective at the beginning of 1993, AFS adopted Statement of Financial
Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts" (FAS 113). FAS 113 specifies the
accounting for the reinsuring (ceding) of insurance contracts.

Amounts recoverable from reinsurers are estimated and recognized in a
manner consistent with the claim liability associated with the reinsured policy.

See Note 6 for further information about reinsurance.

INVESTMENTS

Investments in marketable equity securities are carried at market value.
Unrealized gains and losses, net of applicable income taxes, resulting from
fluctuations in the aggregate market value of marketable equity securities are
reflected as an adjustment to stockholder's equity.

Investments in most debt securities are carried at amortized cost (less
adjustments for other than temporary declines in value). In 1992, AFS determined
that a portion of its debt security portfolio should be considered available for
sale and carried at the lower of aggregate amortized cost or market. At December
31, 1993 and 1992, the aggregate market value of the securities available for
sale exceeded their amortized cost.

AFS will adopt Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (FAS 115) as
of the beginning of 1994. FAS 115 establishes new, more restrictive criteria to
be used in determining which debt securities can be carried in the financial
statements at amortized cost. Securities which will be carried at amortized cost
and classified in AFS' held for investment category will be those which AFS has
both the ability and positive intent to hold to maturity. Securities classified
in the available for sale category will be carried at fair value and will
consist of those securities which AFS intends to hold for an indefinite period
of time but not necessarily to maturity. Unrealized gains and losses related to
securities available for sale will be reported as a separate component of
stockholder's equity. Upon adopting FAS 115, AFS will transfer certain debt
securities, with an amortized cost of approximately $499.3 million, from the
held for investment category to the available for sale category of its
investment portfolio. The net unrealized gains of approximately $16.5 million,
net of applicable income taxes, relating to the debt securities classified in
the available for sale portfolio at the date of adoption, will be recorded as an
increase to stockholder's equity.

Net realized gains or losses resulting from sales or calls of investments
and losses resulting from declines in fair values of investments that are other
than temporary declines are included in revenues. The cost of securities sold
was based primarily upon the specific identification method.

17
<PAGE> 19

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INTEREST RATE AGREEMENTS

As part of managing its interest rate exposure on its variable interest
rate borrowings, AFS is a party to various interest rate exchange agreements.
While AFS is exposed to credit loss for the periodic settlement of amounts due
under such agreements in the event of nonperformance by the counterparties, AFS
does not anticipate nonperformance by any of those parties. The risk of loss in
the event of nonperformance by the counterparties was insignificant at December
31, 1993.

Interest differentials to be paid or received are accrued and recognized in
interest expense over the lives of the agreements.

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

See Note 11 for information about AFS' accounting policies for
postretirement benefits other than pensions.

INCOME TAXES

Deferred income taxes for years prior to 1992 were recognized for income
and expense items that were reported in different periods for financial
reporting and income tax purposes based on the tax rates applicable in the years
such timing differences arose. Deferred income taxes for 1993 and 1992 have been
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. See
Note 4 for further information about income taxes.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values presented in Note 14 are estimates of the fair values of
the financial instruments 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 AFS could realize or settle currently. AFS
does not necessarily intend to dispose of or liquidate such instruments prior to
maturity.

FOREIGN OPERATIONS

AFS' foreign entities' financial statements are measured in their
functional currency. Balance sheet accounts at December 31, 1993 and 1992 have
been translated at the closing rates on those dates. Income and expense accounts
have been translated at the average rates prevailing during the respective
periods. Adjustments resulting from the translation of the financial statements
of AFS' foreign operations are excluded from the determination of its
consolidated income and are accumulated as a separate component of consolidated
stockholder's equity until the entity is sold or substantially liquidated.
Foreign exchange gains and losses included in consolidated income (which relate
principally to transactions denominated in foreign currencies) in 1993, 1992 and
1991 were not material.

RATIO OF INCOME TO FIXED CHARGES

The ratio of income to fixed charges represents the number of times fixed
charges (interest and debt expense [without adjustments for discounts or
premiums resulting from the repurchase of debt securities] and one-third of all
rent and related costs, considered to represent an appropriate interest factor,
charged to

18
<PAGE> 20

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

income) are covered by income before income taxes, cumulative effect of changes
in accounting principles and fixed charges.

NOTE 2: FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

Contractual maturities of finance receivables outstanding at December 31,
1993 and total finance receivables outstanding at that date and at December 31,
1992 were as follows:

<TABLE>
<CAPTION>
Contractual maturities Less Receivables outstanding
------------------------------------ finance -----------------------
1994 1995 1996-2008 charges 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Thousands of dollars)
Consumer loans............ $1,485,006 $1,014,026 $ 919,161 $1,028,199 $2,389,994 $2,275,016
Real estate loans......... 567,195 489,497 3,328,809 2,124,686 2,260,815 2,141,900
Retail installment
contracts................ 558,258 304,337 193,099 313,696 741,998 656,668
Other loans............... 39,922 28,964 25,801 17,931 76,756 84,721
---------- ---------- ---------- ---------- ---------- ----------
$2,650,381 $1,836,824 $4,466,870 $3,484,512 5,469,563 5,158,305
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------

Less allowance for credit losses............................................. (155,015) (147,088)
Less finance-related insurance reserves and claims........................... (231,532) (215,051)
---------- ----------
Finance receivables -- net................................................... $5,083,016 $4,796,166
---------- ----------
---------- ----------
</TABLE>

The maximum term over which consumer loans and retail installment contracts
are written is 10 years, but approximately 90% of these loans are written with
terms of 4 years or less. Real estate loans are written with a maximum term of
15 years. Consumer loans are unsecured or secured by personal property and are
in relatively small amounts. Retail installment contracts are secured by
personal property. Real estate loans are secured by real property and are
limited to a maximum of 85% of the property's unencumbered appraised market
value at the date of the loans.

Accounts are often repaid or refinanced prior to contractual maturity.
Accordingly, the foregoing tabulation should not be regarded as a forecast of
future cash collections. During 1993 and 1992, cash collections of receivables
(excluding finance charges) were $2.9 billion and $2.7 billion, respectively.
The ratio of cash collections to average finance receivables was approximately
55% and 54%, respectively.

AFS has commitments to extend additional credit to customers under
revolving secured and unsecured loan agreements. Interest rates charged are
variable. The agreements provide for suspension or termination of the credit
line for default and other factors adverse to the interests of AFS. At December
31, 1993, committed lines totaled approximately $634 million of which
approximately $69 million remained unused.

19
<PAGE> 21

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2: FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)

Changes in the allowance for credit losses were as follows:

<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1993 1992 1991 1990(b) 1989(b)
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Balance of the allowance for credit
losses at beginning of year.......... $ 147,088 $135,330 $131,779 $153,364 $143,935
Add -- charged to income:
Real estate....................... 25,487 17,616 12,879 9,629 5,445
Other............................. 95,207 100,635 101,343 84,662 71,498
--------- -------- -------- -------- --------
Total............................. 120,694 118,251 114,222 94,291 76,943
Deduct -- balances charged off(a):
Gross charge offs:
Real estate....................... (25,125) (15,394) (10,388) (5,615) (3,690)
Other............................. (112,979) (121,401) (122,428) (123,816) (81,376)
--------- -------- -------- -------- --------
Total............................. (138,104) (136,795) (132,816) (129,431) (85,066)
Recoveries:
Real estate....................... 1,588 1,117 729 592 660
Other............................. 25,023 25,680 23,069 17,791 17,933
--------- -------- -------- -------- --------
Total............................. 26,611 26,797 23,798 18,383 18,593
--------- -------- -------- -------- --------
Net charge offs...................... (111,493) (109,998) (109,018) (111,048) (66,473)
Other.................................. (1,274) 3,505 (1,653) (4,828) (1,041)
--------- -------- -------- -------- --------
Balance of the allowance for credit
losses at end of year................ $ 155,015 $147,088 $135,330 $131,779 $153,364
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Balance of the allowance for credit
losses at the end of each year
applicable to:
Real estate............................ $ 32,048 $ 30,316 $ 27,784 $ 24,606 $ 20,240
Other.................................. 122,967 116,772 107,546 107,173 133,124
--------- -------- -------- -------- --------
Total.................................. $ 155,015 $147,088 $135,330 $131,779 $153,364
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
</TABLE>

- - ------------

(a) Amounts in 1990 include $33.9 million resulting from a change in AFS'
write-off policy.

(b) The above data for the two years ended 1990 is not reported upon herein by
independent auditors.

20
<PAGE> 22

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3: INVESTMENTS

<TABLE>
<CAPTION>
1993 1992
-------- --------
(Thousands of dollars)
<S> <C> <C>
Debt securities:
Commercial paper, at cost (approximates fair value)........ $ 41,082 $ 56,586
Bonds held for investment, at amortized cost (estimated
fair value: $481,246,000 in 1993 and $433,870,000 in
1992)................................................... 458,186 430,311
Bonds available for sale (estimated fair value: $62,060,000
in 1993 and $31,679,000 in 1992)........................ 59,812 29,290
-------- --------
Total................................................... 559,080 516,187
-------- --------
Marketable equity securities:
Preferred stocks, at market (cost: $7,834,000 in 1993 and
$7,695,000 in 1992)..................................... 8,032 7,668
Common stocks, at market; industrial, miscellaneous and all
other (cost: $37,274,000 in 1993 and $31,943,000 in
1992)................................................... 86,093 61,861
-------- --------
Total................................................... 94,125 69,529
-------- --------
First mortgages on real estate, at cost...................... 2,485 623
-------- --------
Total.............................................. $655,690 $586,339
-------- --------
-------- --------
</TABLE>

At December 31, 1993, a valuation allowance has been credited directly to
stockholder's equity. This valuation adjustment represents the excess of
aggregate quoted market value over aggregate cost of marketable equity
securities in AFS' investment portfolios aggregating $32.0 million. The
valuation adjustment is comprised of unrealized gains of $32.1 million and
unrealized losses of $143,000, net of applicable income taxes.

Net realized gains (losses), after income taxes, resulting from sales of
marketable equity securities included in net income for the years ended December
31, 1993, 1992 and 1991 were $440,000, $116,000 and $(137,000), respectively.

21
<PAGE> 23

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3: INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of debt securities at December
31, 1993 and 1992 were as follows:

<TABLE>
<CAPTION>
December 31, 1993
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(Thousands of dollars)
U.S. Treasury securities and obligations of other U.S.
Government agencies and authorities.................. $ 15,500 $ 2,246 $ 18 $ 17,728
Obligations of states, municipalities and political
subdivisions......................................... 130,053 8,998 195 138,856
Obligations of foreign governments and agencies........ 45,459 3,031 38 48,452
Public utility securities.............................. 56,945 2,006 356 58,595
Mortgage-backed securities............................. 43,654 1,569 353 44,870
Corporate securities................................... 207,657 7,784 1,614 213,827
--------- ---------- ---------- ---------
Debt securities held for investment.................. 499,268 25,634 2,574 522,328
Debt securities available for sale (principally U.S.
Government securities)............................ 59,812 2,393 145 62,060
--------- ---------- ---------- ---------
Total............................................. $ 559,080 $ 28,027 $2,719 $ 584,388
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</TABLE>

<TABLE>
<CAPTION>
December 31, 1992
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(Thousands of dollars)
U.S. Treasury securities and obligations of other U.S.
Government agencies and authorities.................. $ 15,352 $ 1,647 $ $ 16,999
Obligations of states, municipalities and political
subdivisions......................................... 182,222 6,270 9,636 178,856
Obligations of foreign governments and agencies........ 27,430 1,079 71 28,438
Public utility securities.............................. 37,340 788 107 38,021
Mortgage-backed securities............................. 66,140 2,982 2,231 66,891
Corporate securities................................... 158,413 4,659 1,821 161,251
--------- ---------- ---------- ---------
Debt securities held for investment.................. 486,897 17,425 13,866 490,456
Debt securities available for sale (principally
corporate securities)............................. 29,290 2,389 31,679
--------- ---------- ---------- ---------
Total............................................. $ 516,187 $ 19,814 $ 13,866 $ 522,135
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</TABLE>

22
<PAGE> 24

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3: INVESTMENTS (CONTINUED)

The amortized cost and estimated fair value of debt securities at December
31, 1993, by contractual maturity, are presented below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
--------- ---------
(Thousands of dollars)
<S> <C> <C>
Due in 1994............................................ $ 44,203 $ 44,542
Due 1995 to 1998....................................... 190,306 199,472
Due 1999 to 2003....................................... 180,615 187,785
Due after 2003......................................... 98,452 105,625
--------- ---------
513,576 537,424
Mortgage-backed securities............................. 45,504 46,964
--------- ---------
$ 559,080 $ 584,388
--------- ---------
--------- ---------
</TABLE>

Proceeds from sales of debt securities (excluding commercial paper) during
1993, 1992 and 1991 were $114.1 million, $66.5 million and $95.5 million,
respectively. Gross gains and (losses) realized on those sales, after income
taxes, were $2,566,000 and $(754,000), respectively, in 1993, $1,542,000 and
$(185,000), respectively, in 1992, and $3,286,000 and $(170,000), respectively,
in 1991.

NOTE 4: INCOME TAXES

AFS' provisions for income taxes are based upon including all eligible U.S.
subsidiaries in the consolidated U.S. federal income tax return filed by its
parent, Textron Inc. Such provisions do not differ materially from the amounts
which AFS would have provided if it and its eligible subsidiaries were filing
their own consolidated federal income tax return. The provisions for income
taxes also include amounts for AFS' foreign subsidiaries which file their own
separate income tax returns.

In 1992, AFS adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (FAS 109). FAS 109 requires AFS to modify its
income tax accounting so that deferred taxes are stated at prevailing income tax
rates. AFS' adoption of FAS 109 was made by a cumulative effect charge to income
of $5.4 million. Prior year financial statements have not been restated. There
was no effect of FAS 109 on AFS' net income in 1992, other than the cumulative
effect of the accounting change. The adoption of FAS 109 had no cash flow impact
on AFS.

For years beginning after December 31, 1992, the U.S. Revenue
Reconciliation Act of 1993 increased the maximum corporate tax rate from 34% to
35% and the Australian government reduced its corporate tax rate from 39% to
33%. In accordance with FAS 109, the changes in the tax rates resulted in a
revaluation of AFS' net deferred tax assets which were in existence at the
beginning of 1993. The effect of this revaluation was immaterial.

Deferred income taxes have not been provided for the undistributed earnings
of foreign subsidiaries which aggregated approximately $250 million at December
31, 1993. Management's intention is to reinvest such undistributed earnings for
an indefinite period, except for distributions upon which incremental taxes
would not be material. If such earnings were distributed, taxes (net of foreign
tax credits) would have increased by approximately $21 million, principally due
to foreign withholding taxes.

At December 31, 1993, consolidated stockholder's equity included $17
million of U.S. life insurance subsidiary policyholders' surplus on which no
income taxes have been provided. The amount of taxes which

23
<PAGE> 25

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4: INCOME TAXES (CONTINUED)

would become due if the surplus were distributed is approximately $6 million.
Under present circumstances, it is not anticipated that any of these earnings
will become taxable.

Income taxes (benefit) before the cumulative effect of changes in
accounting principles is summarized as follows:

<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
(Thousands of dollars)
Current
Federal............................. $50,575 $45,428 $34,626
State............................... 7,778 6,440 4,157
Foreign............................. 34,809 30,425 31,035
------- ------- -------
93,162 82,293 69,818
Deferred
Federal............................. (7,254) (2,596) 1,390
State............................... (144) (143) 448
Foreign............................. (2,009) (3,667) 630
------- ------- -------
(9,407) (6,406) 2,468
------- ------- -------
Total income tax
provision................. $83,755 $75,887 $72,286
------- ------- -------
------- ------- -------
</TABLE>

Income taxes related to the cumulative effect of changes in accounting
principles in 1992 consist of a $11.7 million deferred tax benefit related to
the adoption of FAS 106 (see Note 11) and a $5.4 million deferred tax provision
related to the adoption of FAS 109.

Following is a reconciliation of the federal statutory income tax rate to
the effective income tax rate applicable to pretax income before the cumulative
effect of changes in accounting principles, as reflected in the consolidated
statement of income:

<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory tax rate................................ 35.0% 34.0% 34.0%
Increases (decreases) in taxes resulting from:
Residual tax on foreign dividends............................ .2 .5 (.7)
Higher tax on foreign income................................. .4 1.4 2.0
State income taxes........................................... 2.2 2.0 1.5
Nontaxable investment income................................. (1.1) (1.3) (1.2)
Other, net................................................... .4 .6 1.1
---- ---- ----
Effective income tax rate...................................... 37.1% 37.2% 36.7%
---- ---- ----
---- ---- ----
</TABLE>

AFS' net deferred tax asset consisted of gross deferred tax assets and
gross deferred tax liabilities of $82.3 million and $29.4 million, respectively,
at December 31, 1993 and $77.9 and $27.8 million, respectively, at December 31,
1992.

24
<PAGE> 26

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4: INCOME TAXES (CONTINUED)

The assets and (liabilities) comprising AFS' net deferred tax assets as of
December 31, 1993 and 1992 were as follows:

<TABLE>
<CAPTION>
1993 1992
-------- --------
(Thousands of Dollars)
<S> <C> <C>
Allowance for credit losses.......................................... $ 38,451 $ 35,554
Liabilities for future policy benefits............................... 20,010 16,833
Unrealized gain on marketable equity securities...................... (16,874) (9,945)
Obligation for postretirement benefits other than pensions........... 12,797 11,481
Depreciation......................................................... (5,652) (6,987)
Insurance policy acquisition costs................................... (4,026) (7,873)
Lease financing transactions......................................... (2,917) (2,986)
Other -- principally timing of expense deductions.................... 11,075 13,994
-------- --------
Total net deferred tax assets.............................. $ 52,864 $ 50,071
-------- --------
-------- --------
</TABLE>

AFS' 1991 deferred income tax provision of $2.5 million consisted
principally of timing differences relating to interest income and provision for
credit losses on finance receivables.

NOTE 5: DEBT AND CREDIT FACILITIES

At December 31, 1993 and 1992, consolidated debt consisted of the
following:

<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
(Thousands of dollars)
Senior
Commercial paper.................................................. $1,933,570 $1,559,680
Banks............................................................. 25,493 20,341
Savings deposits.................................................. 5,032 5,603
3.20% to 4.93% due 1994 to 1996(a)................................ 607,842 657,000
5.21% to 6.95% due 1994 to 2000(a)................................ 911,738 348,536
7.00% to 8.99% due 1994 to 2000(a)................................ 761,369 912,366
9.00% to 10.96% due 1994 to 1998(a)............................... 302,441 481,127
11.00% to 12.92% due 1994 to 1996................................. 212,038 392,727
13.20% to 14.50% due 1994......................................... 35,991 65,139
---------- ----------
Total senior debt......................................... 4,795,514 4,442,519
---------- ----------
Senior subordinated
8.88% to 9.65% due 1994 to 1996................................... 1,000 103,650
10.05% to 11.75% due 1994 to 1998................................. 10,700 16,292
12.75% to 15.00% due 1994......................................... 8,280 10,630
---------- ----------
Total senior subordinated debt............................ 19,980 130,572
---------- ----------
Total debt................................................ $4,815,494 $4,573,091
---------- ----------
---------- ----------
</TABLE>

- - ------------

(a) Interest rates on certain notes are adjusted periodically.

25
<PAGE> 27

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5: DEBT AND CREDIT FACILITIES (CONTINUED)
Bank borrowings are arranged under revolving lines of credit. These
borrowings are either on a demand basis or provide for maturities ranging up to
one year. Commercial paper is issued with maturities up to one year with
interest at prevailing market rates. The weighted average interest rates on bank
borrowings and commercial paper outstanding at December 31, 1993, 1992 and 1991,
without giving effect to the costs of maintaining the lines of credit, were
6.4%, 9.0% and 11.5%, respectively, for bank borrowings (primarily consisting of
borrowings in foreign operations) and 3.8%, 4.6% and 5.7%, respectively, for
commercial paper.

The maximum aggregate commercial paper and bank borrowings outstanding at
any month-end during the three years ended December 31, 1993 was $1.96 billion
in 1993, $1.67 billion in 1992 and $1.24 billion in 1991. The average aggregate
amount of such commercial paper and bank borrowings outstanding during the three
years ended December 31, 1993 was $1.81 billion in 1993, $1.46 billion in 1992
and $1.11 billion in 1991, and the related weighted average interest rate was
3.9%, 4.5% and 7.3%, respectively. The weighted average interest rate is
determined primarily by reference to daily outstanding principal amounts and
excludes the cost of maintaining the lines of credit.

At December 31, 1993 and 1992, AFS had lines of credit with various banks
amounting to $2.16 billion and $1.93 billion, respectively, of which the unused
portion of these lines amounted to $1.93 billion and $1.58 billion,
respectively. AFS generally pays fees in support of these lines.

During the years ended December 31, 1993 and 1992, AFS issued the following
notes:

<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
(Thousands of dollars)
Senior notes due 1993 to 1996 (Australia)........................... $ 29,895 $ 108,560
Senior notes due 1993 to 1998 (Canada).............................. 246,664
Senior notes due 1993 to 1998 (United Kingdom)...................... 34,581 168,729
Senior notes due 1993 to 2000 (United States)....................... 705,000 580,000
---------- ----------
Total..................................................... $1,016,140 $ 857,289
---------- ----------
---------- ----------
</TABLE>

Under interest rate exchange agreements, AFS makes periodic fixed payments
in exchange for periodic variable payments. AFS has entered into such agreements
to mitigate its exposure to increases in interest rates on a portion of its
variable rate debt. At December 31, 1993 and 1992, these agreements had weighted
average original terms of 4.4 years and 3.6 years and had the effect of fixing
the rate of interest at 10.0% and 10.6% on $341.6 million and $599.3 million of
variable rate borrowings, respectively. AFS' exposure to credit risk associated
with counterparty nonperformance on interest rate exchange agreements is limited
to the amounts reflected in AFS' consolidated balance sheet. At December 31,
1993, such amounts were not material.

The aggregate maturities, required prepayments, redemptions and sinking
fund requirements with respect to the consolidated debt outstanding (excluding
commercial paper, bank notes and savings deposits) at December 31, 1993, for the
five years ending December 31, 1998, were (in millions): $597.2 for 1994; $661.6
for 1995; $597.7 for 1996; $227.7 for 1997; and $442.2 for 1998.

The senior subordinated notes are subordinate and junior in right of
payment, in all respects, to all indebtedness of AFS for money borrowed.

26
<PAGE> 28

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6: REINSURANCE

In the normal course of business, AFS seeks to reduce the loss that may
arise through AFS' insurance subsidiaries from catastrophes or other events that
may cause unfavorable underwriting results by reinsuring certain levels of risk
in various areas of exposure with other insurance enterprises, or reinsurers.

While reinsurance contracts do not relieve AFS from its obligations to
policyholders, AFS evaluates the financial condition of its reinsurers and
monitors concentration of credit risk arising from similar geographic regions,
activities or economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. Additionally, AFS
holds collateral under certain reinsurance agreements in the form of letters of
credit. Reinsurance receivables and prepaid reinsurance premiums were not
material as of December 31, 1993.

The effect of reinsurance on premiums written, premiums earned and losses
incurred for the year ended December 31, 1993 were as follows:

<TABLE>
<CAPTION>
Premiums Premiums Losses
Written Earned Incurred
--------- --------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Direct......................................... $ 259,453 $ 256,990 $124,127
Assumed........................................ 50,974 38,801 18,904
Ceded.......................................... (16,564) (17,379) (10,961)
--------- --------- --------
Total................................ $ 293,863 $ 278,412 $132,070
--------- --------- --------
--------- --------- --------
</TABLE>

NOTE 7: OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA

Industry Segment

The following is a summary of revenues, income before income taxes and
identifiable assets by industry segment:

<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------
1993 1992 1991 1990* 1989*
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Revenues
Financial Services and Related
Insurance................................ $1,168,153 $1,184,193 $1,152,488 $1,098,549 $1,007,929
Nonrelated Insurance....................... 178,308 180,197 194,052 178,637 144,480
---------- ---------- ---------- ---------- ----------
Total revenues...................... $1,346,461 $1,364,390 $1,346,540 $1,277,186 $1,152,409
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Income Before Income Taxes
Financial Services and Related
Insurance................................ $ 217,789 $ 193,782 $ 179,601 $ 171,505 $ 157,491
Nonrelated Insurance....................... 7,995 10,131 17,285 17,547 14,005
---------- ---------- ---------- ---------- ----------
Total income before income taxes.... $ 225,784 $ 203,913 $ 196,886 $ 189,052 $ 171,496
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Identifiable Assets
Financial Services and Related
Insurance................................ $5,681,416 $5,360,280 $4,927,784 $4,648,346 $4,050,353
Nonrelated Insurance....................... 441,544 425,687 406,393 436,294 433,279
---------- ---------- ---------- ---------- ----------
Total identifiable assets........... $6,122,960 $5,785,967 $5,334,177 $5,084,640 $4,483,632
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>

- - ---------------

* The above data for the two years ended 1990 is not reported upon herein by
independent auditors.

27
<PAGE> 29

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7: OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA (CONTINUED)

Geographic Area

The following is a summary of revenues, income before income taxes and
identifiable assets by geographic area:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------
1993 1992 1991 1990* 1989*
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Revenues
Australia.................................. $ 136,210 $ 140,064 $ 145,934 $ 138,192 $ 127,208
Canada..................................... 211,362 235,881 264,980 242,921 208,585
United Kingdom............................. 118,900 125,453 117,594 107,014 84,959
United States.............................. 879,989 862,992 818,032 789,059 731,657
--------- --------- --------- --------- ---------
Total revenues...................... $1,346,461 $1,364,390 $1,346,540 $1,277,186 $1,152,409
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income Before Income Taxes
Australia.................................. $ 34,542 $ 30,125 $ 27,593 $ 25,935 $ 26,478
Canada..................................... 42,503 37,776 51,070 51,551 48,615
United Kingdom............................. 14,819 14,364 12,788 12,168 11,411
United States.............................. 133,920 121,648 105,435 99,398 84,992
--------- --------- --------- --------- ---------
Total income before income taxes.... $ 225,784 $ 203,913 $ 196,886 $ 189,052 $ 171,496
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Identifiable Assets
Australia.................................. $ 526,410 $ 473,424 $ 501,093 $ 485,834 $ 439,266
Canada..................................... 937,339 895,050 1,017,341 1,007,795 867,642
United Kingdom............................. 465,820 435,661 427,126 409,563 270,763
United States.............................. 4,193,391 3,981,832 3,388,617 3,181,448 2,905,961
--------- --------- --------- --------- ---------
Total identifiable assets........... $6,122,960 $5,785,967 $5,334,177 $5,084,640 $4,483,632
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- - ------------
* The above data for the two years ended 1990 is not reported upon herein by
independent auditors.

At December 31, 1993, finance receivables in the United States represented
67% of AFS' total finance receivables outstanding. At such date, receivables
outstanding in no state exceeded 7% of the United States' portfolio, except
California in which outstanding receivables represented 16% of the United
States' portfolio and 11% of the consolidated portfolio.

Capital expenditures and depreciation expense for each of the five years
ended 1993 were not material to the operations of the industry segments.

NOTE 8: CERTAIN PROVISIONS CONTAINED IN NOTES, LOAN AGREEMENTS AND CERTIFICATE
OF INCORPORATION AND OTHER RESTRICTIONS

The notes, loan agreements and certificate of incorporation of AFS contain
restrictions on the declaration or payment of cash dividends and on redemptions,
purchases or other acquisitions of stock. Under the most restrictive provision
at December 31, 1993, approximately $190 million of retained earnings was
available for dividends on common stock or for redemptions, purchases or other
acquisitions of stock. The notes and loan agreements also contain various
restrictive provisions regarding debt, the creation of liens or guarantees and
the making of investments.

Maximum dividend limitations imposed by U.S. insurance regulatory agencies
and minimum capital requirements of various local regulatory agencies imposed on
AFS' U.S. industrial loan offices restrict the amount of certain subsidiaries'
net assets which can be transferred to AFS. Such restricted net assets totaled
approximately $94 million at December 31, 1993.

NOTE 9: LEASE COMMITMENTS

AFS' headquarters and regional executive offices are occupied under
noncancelable operating leases expiring on various dates through 2017. The loan
office locations through which operations are conducted are occupied under
noncancelable operating leases having terms generally not exceeding five years
with renewal options for an additional five years. Rental expense for such
leases and for leased equipment was approximately $48 million, $46 million and
$45 million in 1993, 1992 and 1991, respectively. Future minimum rental

28
<PAGE> 30

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9: LEASE COMMITMENTS (CONTINUED)

commitments for all noncancelable operating leases in effect at December 31,
1993 approximated $32 million for 1994, $24 million for 1995, $17 million for
1996, $13 million for 1997, $9 million for 1998 and $65 million thereafter.

NOTE 10: CONTINGENCIES

There is pending or threatened litigation against AFS and its subsidiaries.
Among these lawsuits and proceedings are individual and class action proceedings
which seek compensatory, treble or punitive damages in substantial amounts.
These suits and proceedings are being defended or contested on behalf of AFS. On
the basis of information presently available, AFS believes that any such
liability from pending or threatened litigation will not have a material effect
on AFS' net income or financial condition.

The laws of many states in which AFS' insurance subsidiaries are admitted
to do business require as a condition of admission that all insurance companies
so admitted collectively guarantee to policyholders the solvency of other
insurance companies admitted in the particular state. AFS' insurance
subsidiaries have not been required to date to make any significant payments
pursuant to such guarantees. While the amount of any assessments which may be
made in the future cannot be predicted, AFS does not believe the total
assessments, if any, will be material to its net income or financial condition.

NOTE 11: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

AFS has retirement plans, principally non-contributory (defined
contribution) which cover substantially all employees. Costs relating to these
plans, which are generally funded as accrued, amounted to approximately $13
million, $12 million and $11 million for 1993, 1992 and 1991, respectively.

AFS provides certain health care and life insurance benefits for its
employees. Such benefits are administered by insurance companies or other
carriers who determine premiums for insured plans and expected costs to be paid
during the year under self-insured plans. Prior to 1992, AFS recognized the cost
of providing these benefits by expensing the annual insurance premiums and costs
under self-insured plans on a pay-as-you-go basis. For 1991, the costs of
providing these benefits for the 413 retirees and the 5,916 active employees was
$11.1 million. Such costs were not separately identified for retirees and active
employees. In 1989, AFS began phasing out postretirement benefits for future
retirees.

In 1992, AFS adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS
106), with respect to its retiree health care and life insurance benefits. FAS
106 requires AFS to recognize the cost of such benefits using the accrual method
of accounting over the employees' years of service.

The FAS 106 transition obligation -- representing the accumulated
postretirement benefit obligation for retiree health care and life insurance
benefit plans at December 31, 1991 -- of $18.9 million, net of related income
tax benefit, was recorded as the cumulative effect of a change in accounting
principle. The adoption of FAS 106 had no cash flow impact on AFS.

29
<PAGE> 31

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)

Postretirement benefit costs for 1993 and 1992 were not material.

AFS' postretirement benefit plans other than pensions currently are not
funded. The following table sets forth the status of AFS' retiree health care
and life insurance plans at December 31, 1993 and 1992:

<TABLE>
<CAPTION>
1993 1992
------- -------
(Thousands of
dollars)
<S> <C> <C>
Actuarial present value of benefits attributed to:
Retirees............................................... $27,363 $22,189
Fully eligible active plan participants................ 9,364 9,288
Other active plan participants......................... 455 222
------- -------
Accumulated postretirement benefit obligation............ 37,182 31,699
Unrecognized net actuarial losses........................ (3,549)
------- -------
Postretirement benefit liability recognized on the
consolidated balance sheet........................ $33,633 $31,699
------- -------
------- -------
</TABLE>

An assumed discount rate of 8% was used to determine postretirement benefit
costs other than pensions for 1993 and 1992. An assumed discount rate of 7.25%
and 8% was used to determine the status of AFS' plans at December 31, 1993 and
December 31, 1992, respectively. The weighted average annual assumed rate of
increase in the per capita cost of covered benefits (that is, health care cost
trend rate) is 12% for retirees age 65 and over and 16% for retirees under age
65 in 1994, and both rates are assumed to decrease gradually to 5.5% until 2002
and 2004, respectively, and remain at that rate thereafter. Increasing these
rates by one percentage point in each year would have increased the accumulated
postretirement benefit obligation as of December 31, 1993 by $4.5 million and
increased the aggregate of the service and interest cost components of
postretirement benefit costs for 1993 by $200,000.

NOTE 12: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Quarterly results of operations for the years ended December 31, 1993 and
1992 were as follows:

<TABLE>
<CAPTION>
1993 1992
----------------------------------------- -----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Thousands of dollars)
Revenues.............................. $333,098 $335,169 $338,809 $339,385 $339,550 $341,865 $343,805 $339,170
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes............ $ 54,875 $ 56,225 $ 58,552 $ 56,132 $ 50,765 $ 50,139 $ 52,077 $ 50,932
Income taxes.......................... 20,385 20,852 21,728 20,790 18,664 18,564 19,602 19,057
-------- -------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of
changes in accounting principles.... 34,490 35,373 36,824 35,342 32,101 31,575 32,475 31,875
Cumulative effect of changes in
accounting principles............... (24,328)
-------- -------- -------- -------- -------- -------- -------- --------
Net income............................ $ 34,490 $ 35,373 $ 36,824 $ 35,342 $ 7,773 $ 31,575 $ 32,475 $ 31,875
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>

NOTE 13: RELATED PARTY TRANSACTIONS

During 1990, AFS purchased $25.0 million of Textron Inc. common stock on
the open market. The investment is being carried in marketable equity
securities.

30
<PAGE> 32

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (FAS 107), requires disclosure of fair
value information about all financial instruments held or owed by a company
except for certain excluded instruments and instruments for which it is not
practicable to estimate fair value.

The following methods and assumptions were used in estimating the fair
value of AFS' financial instruments.

Investments

The estimated fair values of debt securities and marketable equity
securities were based on quoted market prices where available. If quoted market
prices were not available, the estimated fair values were based on independent
appraisals, prices from independent brokers or discounted cash flow analyses.
Independent appraisals and discounted cash flow analyses, using interest rates
currently being offered for similar loans to borrowers of similar credit
quality, were generally used to estimate the fair value of certain privately
placed investments.

Finance Receivables

The estimated fair values of fixed rate consumer loans and real estate
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 AFS' estimates of
prepayments, refinances, and loan losses based on internal historical data. The
estimated fair value of all variable rate receivables and fixed rate retail
installment contracts approximated the net carrying value of such receivables.
The fair values of AFS' leasing receivables and finance-related insurance
reserves and claims ($75.5 million and $231.5 million, net carrying value,
respectively, at December 31, 1993 and $67.6 million and $215.1 million,
respectively, at December 31, 1992) are not required to be disclosed under
generally accepted accounting principles.

Debt and Interest Rate Exchange Agreements

The estimated fair value of fixed rate debt was determined by independent
investment bankers. The fair values of variable rate debt and borrowings under
or supported by credit facilities approximated their carrying values. The
estimated fair values of interest rate exchange agreements were determined by
independent investment bankers as the estimated amounts that AFS would be
required to pay to a third party to assume AFS' obligations under the
agreements.

31
<PAGE> 33

AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

The carrying values and estimated fair values of AFS' financial instruments
for which it is practicable to calculate a fair value are as follows:

<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(Thousands of dollars)
Investments................................... $ 655,690 $ 680,998 $ 586,339 $ 592,287
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Finance receivables........................... $5,239,034 $5,266,034 $4,943,593 $4,975,593
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Debt:
Variable rate debt fixed by interest rate
exchange agreements......................... $ 341,585 $ 370,006 $ 599,317 $ 641,109
Other variable rate debt...................... 2,244,496 2,244,496 1,851,512 1,851,512
Fixed rate debt............................... 2,229,413 2,326,593 2,122,262 2,207,067
---------- ---------- ---------- ----------
Total debt.......................... $4,815,494 $4,941,095 $4,573,091 $4,699,688
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

32
<PAGE> 34

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Omitted in accordance with General Instruction J(2)(c).

ITEM 11. EXECUTIVE COMPENSATION

Omitted in accordance with General Instruction J(2)(c).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Omitted in accordance with General Instruction J(2)(c).

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Omitted in accordance with General Instruction J(2)(c).

33
<PAGE> 35

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
(a)1. Index to Financial Statements
Report of Independent Auditors............................... 11
Consolidated Balance Sheet at December 31, 1993 and 1992..... 12
Consolidated Statement of Income for the three years ended
December 31, 1993............................................ 13
Consolidated Statement of Cash Flows for the three years
ended
December 31, 1993............................................ 14
Consolidated Statement of Changes in Stockholder's Equity for
the
three years ended December 31, 1993.......................... 15
Notes to Consolidated Financial Statements................... 16
2. Index to Financial Statement Schedules
III. Condensed Financial Information of the Registrant...... S-1
All other schedules are omitted since the required information is
not present or not present in amounts sufficient to require the
submission of the schedules, or because the information required is
included in the consolidated financial statements or the notes
thereto.
(b) Reports on Form 8-K
During the quarter ended December 31, 1993, the Registrant filed
the following reports on Form 8-K:
Report dated October 21, 1993 providing certain supplemental
information pursuant to item 4 of the Securities Act Industries
Guide 3.
Report dated November 12, 1993 relating to the Registrant's
Registration Statement Nos. 33-50547 and 33-52284 with respect to
which the Registrant commenced an offering on or about November 12,
1993 of up to $500,000,000 of Medium Term Notes, Series E, due from
more than 9 months to 10 years from the date of issue. The report
included as an exhibit a form of Medium Term Note, Series E.
(c) Exhibits
(3) (a) Certificate of incorporation of the Registrant, as
amended, incorporated by reference to Exhibit 3(a) to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988.
(b) Bylaws of the Registrant, as amended, incorporated by reference
to Exhibit 3(b) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1988.
(4) Instruments with respect to issues of long-term debt have
not been filed as exhibits to this Annual Report Form 10-K as the
authorized principal amount of any one of such issues does
not exceed 10% of the total assets of the Registrant and
its consolidated subsidiaries. Registrant agrees to furnish
to the Commission a copy of each such instrument upon
request.
*(12) Statement of Computation of Number of Times Fixed
Charges Earned.
(22) Omitted in accordance with General Instruction
J(2)(b).
*(23) Consent of Independent Auditors.
*(24) Powers of Attorney.
</TABLE>

- - ------------

* Filed herewith.

34
<PAGE> 36

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<S> <C>
AVCO FINANCIAL SERVICES, INC.

Dated March 11, 1994 By WARREN R. LYONS
------------------------
Warren R. Lyons
President
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 11, 1994.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*WARREN R. LYONS President and Director
- - ------------------------------------------- (Principal Executive Officer)
Warren R. Lyons

*RONALD BUKOW Executive Vice President, Treasurer and
- - ------------------------------------------- Director
Ronald Bukow (Principal Financial Officer)

*LEWIS B. CAMPBELL Director
- - -------------------------------------------
Lewis B. Campbell

*GARY L. FITE Executive Vice President, Controller and
- - ------------------------------------------- Director
Gary L. Fite (Principal Accounting Officer)

*GAYLORD E. FRANCIS Executive Vice President and Director
- - -------------------------------------------
Gaylord E. Francis

*JAMES F. HARDYMON Director
- - -------------------------------------------
James F. Hardymon

*THOMAS P. HOLLOWELL Director
- - -------------------------------------------
Thomas P. Hollowell

*RICHARD A. McWHIRTER Director
- - -------------------------------------------
Richard A. McWhirter
</TABLE>

35
<PAGE> 37

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*WILLIAM J. PEARSON Senior Vice President and Director
- - ---------------------------------------------
William J. Pearson

*EUGENE R. SCHUTT, JR. Executive Vice President and Director
- - ---------------------------------------------
Eugene R. Schutt, Jr.

*HERBERT F. SMITH Senior Vice President, Secretary and
- - --------------------------------------------- Director
Herbert F. Smith (General Counsel)

*THOMAS D. SOUTTER Director
- - ---------------------------------------------
Thomas D. Soutter

*JOHN C. SPENCE Director
- - ---------------------------------------------
John C. Spence

*RICHARD A. WATSON Director
- - ---------------------------------------------
Richard A. Watson

*By HERBERT F. SMITH
- - ---------------------------------------------
(Herbert F. Smith, on behalf
of himself and as attorney-in-fact for
each of the other persons indicated above)
</TABLE>

36
<PAGE> 38

AVCO FINANCIAL SERVICES, INC.

SCHEDULE III

CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

<TABLE>
<CAPTION>
December 31,
--------------------------
1993 1992
----------- -----------
<S> <C> <C>
(Thousands of dollars)
BALANCE SHEET
ASSETS
Demand notes receivable from Avco Financial Services Group
subsidiaries...................................................... $ 3,429,937 $ 3,251,014
Investments in subsidiaries, at equity.............................. 1,315,538 1,238,934
Other............................................................... 86,845 42,491
----------- -----------
Total assets................................................... $ 4,832,320 $ 4,532,439
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt................................................................ $ 3,936,827 $ 3,707,672
Other............................................................... 67,982 71,696
----------- -----------
Total liabilities.............................................. 4,004,809 3,779,368
Stockholder's equity................................................ 827,511 753,071
----------- -----------
Total liabilities and stockholder's equity..................... $ 4,832,320 $ 4,532,439
----------- -----------
----------- -----------
</TABLE>

See accompanying note.

S-1
<PAGE> 39

AVCO FINANCIAL SERVICES, INC.

SCHEDULE III

CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (CONTINUED)

<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
(Thousands of dollars)
STATEMENT OF INCOME
Revenues (primarily interest from Avco Financial
Services Group subsidiaries).......................... $ 218,396 $ 235,667 $ 248,513
Expenses (primarily interest expense)................... (229,512) (250,084) (268,123)
--------- --------- ---------
Loss before items shown below........................... (11,116) (14,417) (19,610)
Income tax benefits..................................... 3,605 4,884 6,650
Equity in income of subsidiaries........................ 149,540 137,559 137,560
--------- --------- ---------
Income before cumulative effect of changes in accounting
principles............................................ 142,029 128,026 124,600
Cumulative effect of changes in accounting principles,
net of income taxes................................... (24,328)
--------- --------- ---------
Net income.............................................. $ 142,029 $ 103,698 $ 124,600
--------- --------- ---------
--------- --------- ---------
STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 142,029 $ 103,698 $ 124,600
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of changes in accounting
principles......................................... 24,328
Other................................................. (4,771) 11,017 4,154
--------- --------- ---------
Net cash provided by operating activities.......... 137,258 139,043 128,754
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in demand notes receivable..................... (178,923) (620,238) (190,756)
Increase in investments in subsidiaries................. (116,490) (94,829) (120,425)
--------- --------- ---------
Net cash used by investing activities.............. (295,413) (715,067) (311,181)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term debt............................. 258,412 316,493 168,082
Proceeds from issuance of notes......................... 705,000 680,290 772,000
Principal payments on notes............................. (734,257) (367,059) (686,846)
Dividends paid.......................................... (71,000) (64,400) (62,200)
--------- --------- ---------
Net cash provided by financing activities.......... 158,155 565,324 191,036
--------- --------- ---------
Net increase (decrease) in cash......................... (10,700) 8,609
Cash at beginning of year............................... 10,700 2,091
--------- --------- ---------
Cash at end of year..................................... $ -- $ -- $ 10,700
--------- --------- ---------
--------- --------- ---------
</TABLE>

NOTE TO CONDENSED FINANCIAL INFORMATION

The parent company is the primary financing entity for the U.S. Avco
Financial Services Group.

See Note 1 to the Consolidated Financial Statements for significant
accounting policies.

The aggregate maturities, required prepayments, redemptions and sinking
fund requirements with respect to the Registrant's debt outstanding (excluding
commercial paper, bank notes and savings deposits) at December 31, 1993 for the
five years ending December 31, 1998 were (in millions): $460 in 1994; $379 in
1995; $362 in 1996; $200 in 1997; and $239 in 1998.

At December 31, 1993 and 1992, the parent company was guarantor for payment
of all its foreign subsidiaries' commercial paper and bank line borrowings of
$632.9 million and $435.5 million, respectively, and senior notes of $885.3
million and $992.1 million, respectively.

The Registrant received dividends from its subsidiaries aggregating $48.0
million in 1993; $46.7 million in 1992, and $37.9 million in 1991.

S-2

<PAGE> 1

EXHIBIT 12

AVCO FINANCIAL SERVICES, INC.

STATEMENT OF COMPUTATION OF NUMBER OF TIMES
FIXED CHARGES EARNED

<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Income
Income before income taxes, extraordinary
item and cumulative effect of changes
in accounting principles............... $ 225,784 $ 203,913 $ 196,886 $ 189,052 $ 171,496
--------- --------- --------- --------- ---------
Fixed charges to be added back to
income --
Interest and debt expense.............. 324,211 370,884 395,703 392,040 360,433
Rentals (one-third of all rent and
related costs charged to income)..... 14,378 15,460 14,915 14,226 10,779
--------- --------- --------- --------- ---------
Total fixed charges............... 338,589 386,344 410,618 406,266 371,212
--------- --------- --------- --------- ---------
Income before income taxes, extraordinary
item, cumulative effect of changes in
accounting principles and fixed charges... $ 564,373 $ 590,257 $ 607,504 $ 595,318 $ 542,708
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio
Number of times fixed charges covered by
income before income taxes,
extraordinary item, cumulative effect
of changes in accounting principles,
and fixed charges...................... 1.7 1.5 1.5 1.5 1.5
</TABLE>

S-3

<PAGE> 1

EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 33-50547 and 33-52284) of Avco Financial Services, Inc. and in
the related Prospectus of our report dated February 3, 1994, with respect to the
consolidated financial statements and schedules of Avco Financial Services, Inc.
included in this Annual Report (Form 10-K) for the year ended December 31, 1993.

ERNST & YOUNG

Orange County, California
March 11, 1994

S-4

<PAGE> 1
EXHIBIT 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each of the undersigned, an officer or
director, or both, of AVCO FINANCIAL SERVICES, INC., a Delaware corporation,
does hereby constitute and appoint HERBERT F. SMITH or LAILA B. SOARES with full
power of substitution to said attorney, as the true and lawful attorney and
agent of the undersigned, to do any and all acts and things and to execute any
and all instruments which said attorney and agent deems advisable, of AVCO
FINANCIAL SERVICES, INC. to comply with the Securities Act of 1934, as amended,
and any requirements of the Securities and Exchange Commission with respect
thereto in connection with the filing under the Securities Act of 1934 of an
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 on Form 10-K for the 1993 year of AVCO FINANCIAL SERVICES, INC., as well as
any and all amendments to said Report, including specifically, but without
limitation of the authority hereby granted, the power and authority to sign his
or her name as an officer or director, or both, of AVCO FINANCIAL SERVICES,
INC., as indicated opposite his or her signature below, to said Report, and any
such amendments, and each of the undersigned does fully ratify and confirm all
that said attorney, or any of them, or the substitute of any of them, shall do
or cause to be done by virtue hereof.

IN WITNESS WHEREOF, each of the undersigned has subscribed these presents
this 30th day of September, 1993.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- - ----------------------------------------------- ----------
<S> <C>
/s/ L. B. CAMPBELL Director
- - -----------------------------------------------
L. B. Campbell

/s/ J. F. HARDYMON Director
- - -----------------------------------------------
J. F. Hardymon

/s/ T. P. HOLLOWELL Director
- - -----------------------------------------------
T. P. Hollowell

/s/ R. A. McWHIRTER Director
- - -----------------------------------------------
R. A. McWhirter

/s/ T. D. SOUTTER Director
- - -----------------------------------------------
T. D. Soutter

/s/ R. A. WATSON Director
- - -----------------------------------------------
R. A. Watson

/s/ W. R. LYONS President and Director
- - ----------------------------------------------- (Chief Executive Officer)
W. R. Lyons

/s/ E. R. SCHUTT, JR. Executive Vice President,
- - ----------------------------------------------- General Manager,
E. R. Schutt, Jr. International Operations
and Director

/s/ G. E. FRANCIS Executive Vice President,
- - ----------------------------------------------- President U.S. Finance
G. E. Francis Operations and
Director

/s/ R. BUKOW Executive Vice President,
- - ----------------------------------------------- Treasurer, Chief Financial
R. Bukow Officer and Director

/s/ G. L. FITE Executive Vice President,
- - ----------------------------------------------- Controller and Director
G. L. Fite

/s/ W. J. PEARSON Senior Vice President and
- - ----------------------------------------------- Director
W. J. Pearson

/s/ H. F. SMITH Senior Vice President,
- - ----------------------------------------------- Secretary and Director
H. F. Smith

/s/ J. C. SPENCE Director
- - -----------------------------------------------
J. C. Spence
</TABLE>