<PAGE> 1
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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, 1994
OR
[ ] 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, 1994, 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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<PAGE> 2
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, 1994, the Registrant operated 1,198 finance offices located in all states of
the United States (except 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, Hong Kong, New Zealand, Spain and the
United Kingdom. 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.
Effective the beginning of 1994, the Registrant acquired the interest of
its joint venture partner in Spain. In September 1994, the Registrant commenced
its finance operation in Hong Kong. To complement its existing operations in
Australia, in January 1995, the Registrant purchased the stock of HFC of
Australia Ltd. and its Australian subsidiaries (HFCA), subsidiaries of Household
International, Inc. This acquisition will add approximately $436 million to the
Registrant's finance receivable portfolio.
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, 1994, the Registrant employed approximately 7,100 persons.
AVCO FINANCIAL SERVICES GROUP
Finance Receivables
The Registrant's finance receivable portfolio consisted of the
following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Consumer loans $2,721,905 $2,389,994 $2,275,016 $2,076,251 $2,135,214
Real estate loans 2,415,621 2,260,815 2,141,900 1,995,075 1,783,254
Retail installment contracts 1,107,282 741,998 656,668 544,477 512,999
Other loans 91,560 76,756 84,721 132,625 111,458
---------- ---------- ---------- ---------- ----------
Total $6,336,368 $5,469,563 $5,158,305 $4,748,428 $4,542,925
========== ========== ========== ========== ==========
</TABLE>
The following table presents the Registrant's outstanding finance
receivables by country:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Australia $ 611,087 $ 489,034 $ 455,771 $ 448,583 $ 439,905
Canada 908,339 874,277 835,942 966,898 970,117
United Kingdom 587,972 467,363 434,498 423,354 406,985
United States 4,140,094 3,638,889 3,432,094 2,909,593 2,725,918
Other Countries* 88,876
---------- ---------- ---------- ---------- ----------
Total $6,336,368 $5,469,563 $5,158,305 $4,748,428 $4,542,925
========== ========== ========== ========== ==========
</TABLE>
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* Includes the operations of Hong Kong, New Zealand and Spain.
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At December 31, 1994, finance receivables in the United States represented
65% of the Registrant's total finance receivables outstanding. At such date,
receivables outstanding in no state exceeded 6% of the United States' portfolio,
except California in which outstanding receivables represented 15% of the United
States' portfolio and 10% 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, 1994
were $47.5 million in 1994, $(48.2) million in 1993, $(211.2) million in 1992,
$(16.2) million in 1991, and $42.8 million in 1990.
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 893,089 consumer and real estate loans written during the year
ended December 31, 1994, 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,
---------------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars*)
New funds advanced
Consumer loans
Funds advanced $1,736,634 $1,474,139 $1,241,420 $1,115,497 $1,250,111
Average amount $ 2,014 $ 1,836 $ 1,705 $ 1,563 $ 1,563
Real estate loans
Funds advanced $ 727,139 $ 642,082 $ 630,594 $ 625,745 $ 641,850
Average amount $ 23,714 $ 21,022 $ 20,357 $ 20,391 $ 19,907
Receivables outstanding at end of
period
Consumer loans
Net balance $2,721,905 $2,389,994 $2,275,016 $2,076,251 $2,135,214
Average amount $ 2,725 $ 2,407 $ 2,214 $ 2,139 $ 2,085
Real estate loans
Net balance $2,415,621 $2,260,815 $2,141,900 $1,995,075 $1,783,254
Average amount $ 27,450 $ 25,120 $ 23,318 $ 24,083 $ 22,438
</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,
--------------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars*)
Retail installment contracts purchased $1,319,291 $1,041,981 $945,380 $784,957 $743,247
Retail installment contracts outstanding
at end of period
Net balance $1,107,282 $ 741,998 $656,668 $544,477 $512,999
Average amount $ 1,042 $ 859 $ 808 $ 821 $ 804
</TABLE>
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* Except average amount.
Other Receivables
At December 31, 1994, other receivables outstanding of $91.6 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 1994, 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 $81.3 million at December 31, 1994 and $75.1 million at
December 31, 1993.
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.
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. Subsequent gains and losses on the
disposition of
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<PAGE> 5
real estate owned are reflected in other operating expenses. At December 31,
1994 and 1993, real estate owned was $35.5 million and $43.3 million,
respectively.
The allowance for losses at December 31, 1994 was $180.6 million or 2.85%
of finance receivables then outstanding; such allowance at December 31, 1993 was
$155.0 million or 2.83% 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, 1994. 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, 1994 $141,886 2.5% $ 28,452 $113,434 2.0% $ 136,101
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
</TABLE>
- ------------
* 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%.
Effective in 1994, the Registrant changed its reporting of deliquency for
real estate and consumer loans from a recency of payment basis to a contractual
basis. The following table presents for the five years ended December 31, 1994
loans on which one or more installments were more than 60 days past due
(expressed as a percentage of the related gross receivables outstanding):
<TABLE>
<CAPTION>
Real Estate Other Total
Year ended Loans Loans* Loans
---------------------- ----------- ------ -----
<S> <C> <C> <C>
December 31, 1994 1.29% 2.84% 2.28%
December 31, 1993 1.45% 3.12% 2.46%
December 31, 1992 1.37% 3.77% 2.80%
December 31, 1991 1.51% 4.17% 3.08%
December 31, 1990 1.33% 4.16% 3.09%
</TABLE>
- ---------------
* Includes consumer loans and retail installment contracts.
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
1994 through 1990 was as follows: 1994 -- 6.63%; 1993 -- 6.97%; 1992 -- 8.11%;
1991 -- 9.73%; and 1990 -- 10.69%.
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 1994, approximately 72% 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:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Credit Life, Credit Disability and Other
Premiums written $151,370 $135,218 $123,863 $105,987 $133,368
======== ======== ======== ======== ========
Premiums earned $131,840 $127,458 $123,122 $124,468 $123,190
Investment income 20,239 19,793 19,366 22,157 23,694
Losses and adjustment expenses, less
recoveries (58,268) (59,306) (56,181) (54,240) (53,837)
Expenses (55,019) (54,826) (51,923) (48,495) (47,280)
Income taxes (11,567) (10,514) (10,840) (13,719) (13,500)
-------- -------- -------- -------- --------
Income before cumulative effect of changes
in accounting principles 27,225 22,605 23,544 30,171 32,267
Cumulative effect of changes in accounting
principles (1,788)
-------- -------- -------- -------- --------
Net income $ 27,225 $ 22,605 $ 21,756 $ 30,171 $ 32,267
======== ======== ======== ======== ========
Casualty
Premiums written $173,380 $158,645 $151,146 $167,498 $153,368
======== ======== ======== ======== ========
Premiums earned $155,538 $150,954 $151,886 $159,477 $138,601
Investment income 24,085 23,532 23,168 26,287 28,833
Losses and adjustment expenses, less
recoveries (69,417) (72,764) (80,957) (75,871) (61,928)
Expenses (82,848) (82,894) (75,369) (81,642) (76,248)
Income taxes (8,966) (5,004) (4,762) (8,371) (9,782)
-------- -------- -------- -------- --------
Income before cumulative effect of changes
in accounting principles 18,392 13,824 13,966 19,880 19,476
Cumulative effect of changes in accounting
principles (1,788)
-------- -------- -------- -------- --------
Net income $ 18,392 $ 13,824 $ 12,178 $ 19,880 $ 19,476
======== ======== ======== ======== ========
Total Operations
Premiums written $324,750 $293,863 $275,009 $273,485 $286,736
======== ======== ======== ======== ========
Premiums earned $287,378 $278,412 $275,008 $283,945 $261,791
Investment income(1) 44,324 43,325 42,534 48,444 52,527
Losses and adjustment expenses, less
recoveries (127,685) (132,070) (137,138) (130,111) (115,765)
Expenses (137,867) (137,720) (127,292) (130,137) (123,528)
Income taxes (20,533) (15,518) (15,602) (22,090) (23,282)
-------- -------- -------- -------- --------
Income before cumulative effect of changes
in accounting principles 45,617 36,429 37,510 50,051 51,743
Cumulative effect of changes in accounting
principles (3,576)
-------- -------- -------- -------- --------
Net income $ 45,617 $ 36,429 $ 33,934 $ 50,051 $ 51,743
======== ======== ======== ======== ========
</TABLE>
- ------------
(1) Investment income includes capital gains (losses) of $2.8 million, $4.3
million, $3.1 million, $4.7 million, and $(.2) million for the years 1994
through 1990, respectively.
Included in the assets of the Avco Insurance Services Group at December 31,
1994 were investments in securities carried at $629.7 million for which the
aggregate cost was $653.0 million. At December 31, 1994, the Avco Insurance
Services Group carried a valuation adjustment for its investments totaling $15.1
million. This valuation adjustment represents the excess of aggregate cost over
aggregate estimated fair value of its securities (net of applicable taxes).
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The composition of invested assets of the Avco Insurance Services Group at
December 31, 1994 and 1993 and the returns on such investments for the years
then ended were as follows:
<TABLE>
<CAPTION>
1994 1993
-------------------- --------------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
(Thousands of dollars)
Composition of Invested Assets
Equities, at market
Preferred $ 4,727 .7% $ 8,032 1.3%
Common 14,342 2.2 42,615 6.9
Bonds, available for sale(1)(2) 554,146 84.4 59,812 9.7
Bonds held for investment, at cost(1) 451,356 73.5
Commercial paper, at estimated fair value
(approximates cost) 54,242 8.3 41,082 6.7
Real estate, net of debt 3,633 .6 3,359 .5
Other invested assets 4,661 .7 5,457 .9
Cash 20,445 3.1 3,001 .5
-------- ----- -------- -----
Total $656,196 100.0% $614,714 100.0%
======== ===== ======== =====
Return on Invested Assets
Investment income (before taxes)(3) $ 44,324 $ 43,325
Mean invested assets $627,397 $609,752
Return on mean invested assets, before
taxes 7.1% 7.1%
Return on mean invested assets, after
taxes 4.9% 5.1%
</TABLE>
- ------------
(1) Substantially all of the Registrant's bond portfolio is in investment grade
securities.
(2) Bonds available for sale were carried at estimated fair value in 1994 and at
lower of aggregate amortized cost or market in 1993. See Note 1 to the
Consolidated Financial Statements of the Registrant.
(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, 1994, the Registrant operated 122
finance offices in Australia, 215 in Canada and 92 in the United Kingdom. In
these countries, the Registrant engages primarily in consumer finance and
related insurance activities similar to those conducted in the United States. At
December 31, 1994, the percentage of finance receivables of the Australian,
Canadian and United Kingdom finance operations in relation to the Registrant's
total finance receivables was 10%, 14% and 9%, respectively. Operations in these
countries are subject to regulation and competition comparable to that existing
in the United States. See "Regulation" and "Competition". The Registrant
commenced operations in Hong Kong, New Zealand and Spain in 1994, 1990 and 1992,
respectively. Such operations are not individually material to the Registrant's
consolidated financial position or results of operations. 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
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other basic terms of most credit transactions and give customers a limited right
to cancel certain loans and retail installment contracts without penalty.
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. In recent years, 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 1,198 loan offices which the Registrant operated at December
31, 1994, 754 were located in the United States, the Virgin Islands and the
Commonwealth of Puerto Rico, 215 in Canada, 122 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 $81.0 million and $71.0 million were declared and paid in 1994
and 1993, 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, 1994 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,
----------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
REVENUES AND INCOME
Revenues $1,388,234 $1,324,064 $1,340,834 $1,321,823 $1,251,600
========== ========== ========== ========== ==========
Income Before Income Taxes $ 259,110 $ 225,784 $ 203,913 $ 196,886 $ 189,052
Income taxes 96,781 83,755 75,887 72,286 71,177
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
changes in accounting principles 162,329 142,029 128,026 124,600 117,875
Cumulative effect of changes in
accounting principles(1) (24,328)
---------- ---------- ---------- ---------- ----------
Net Income $ 162,329 $ 142,029 $ 103,698 $ 124,600 $ 117,875
========== ========== ========== ========== ==========
Ratio of Income to Fixed Charges(2) 1.7 1.7 1.5 1.5 1.5
========== ========== ========== ========== ==========
FINANCIAL CONDITION
Receivables Outstanding $6,336,368 $5,469,563 $5,158,305 $4,748,428 $4,542,925
Investments 704,244 655,690 586,339 575,468 558,043
Consolidated Assets 7,038,291 6,122,960 5,785,967 5,334,177 5,084,640
Debt (excludes savings deposits)
Commercial paper and banks 2,430,291 1,959,063 1,580,021 1,206,954 1,210,267
Notes 3,168,178 2,851,399 2,987,467 2,973,056 2,785,587
Stockholder's Equity 893,744 827,511 753,071 744,560 673,718
</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", and 109, "Accounting for
Income Taxes".
(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
1994 vs. 1993 -- Income before income taxes for the year ended December 31,
1994 was $259.1 million compared to $225.8 million for the year ended December
31, 1993, an increase of $33.3 million (14.8%). This increase resulted primarily
from: (i) an increase in the level of receivables outstanding as average finance
receivables were $5.696 billion for 1994 compared to $5.208 billion for 1993;
(ii) a decrease in the cost of borrowed funds to 6.63% for 1994 from 6.97% for
1993; (iii) a decrease in insurance losses in both the finance related and
independent insurance operations; (iv) a decrease in policy acquisition costs
due to a reduction in non-finance related insurance operation premiums earned;
and (v) an increase in investment income due primarily to an increase in
invested assets. This increase in income was partially offset by: (i) an
increase in the provision for losses associated with the increase in receivables
outstanding and (ii) a decline in yields on finance receivables. Interest income
as a percent of average finance receivables was 18.39% for 1994 compared to
19.10% for 1993. Although 1994 yields were below 1993 levels, in response to
increasing cost of funds, the Registrant began increasing the interest rates it
charges its finance customers in the second half of 1994.
Revenues for 1994 were $1.388 billion compared to $1.324 billion for 1993,
an increase of $64 million (4.8%). This increase resulted primarily from the
aforementioned increase in the level of receivables outstanding and was
partially offset by a decrease of approximately $38.8 million from the decline
in yields on finance receivables.
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%). This 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
in 1993 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 $1.324 billion compared to $1.341 billion for 1992,
a decrease of $17 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.
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.
At December 31, 1994, the Registrant had interest rate exchange agreements
which had the effect of fixing the rate of interest at approximately 8.2% on
$748.5 million of variable rate borrowing (primarily commercial paper which had
a weighted average interest rate of 4.8% for the year ended December 31, 1994).
The agreements, which expire through 2000, had a weighted average original term
of 3.4 years. By utilizing medium- and long-term fixed rate financing, as well
as interest rate exchange agreements, the Registrant had a
9
<PAGE> 11
ratio of fixed rate debt to total debt of 57% at December 31, 1994. See Note 5
to the Consolidated Financial Statements of the Registrant for additional
information regarding interest rate exchange agreements.
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, 1994, adjusted for
the inclusion of certain qualifying investments of the Registrant's insurance
group, was 100%. For further information regarding commercial paper and bank
lines of credit, see Note 5 to the Consolidated Financial Statements of the
Registrant.
At December 31, 1994, $2.42 billion (38%) 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 $27 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, 1994, real estate classified in other assets aggregated $35.5 million.
At December 31, 1994, the Registrant had an investment portfolio of $704.2
million, primarily represented by high quality, investment grade debt
securities. Such portfolio included $36.9 million ($35.0 million market value)
of mortgage-backed securities, including $27.4 million guaranteed by the U.S.
Government or agencies thereof.
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 $81.0 million, $71.0 million and $64.4 million to Textron Inc. in
1994, 1993 and 1992, respectively. See Note 8 to the Consolidated Financial
Statements of the Registrant for restrictions.
Effective at the beginning of 1994, the Registrant adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (FAS 115). 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. The Registrant determined that all of
its investment portfolio should be considered availiable for sale and carried at
estimated fair value. 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 (January 1, 1994), were
recorded as an increase to a separate component of stockholder's equity. In
accordance with FAS 115, prior year's financial statements have not been
restated to reflect the change in accounting principles. The adoption of FAS 115
had no effect on the Registrant's net income.
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, 1994 and 1993 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, 1994. 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, 1994 and 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1994, 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, AFS changed its
method of accounting for investments in 1994 and changed its methods of
accounting for postretirement benefits other than pensions and for income taxes
in 1992.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet at December 31, 1992, 1991 and 1990,
and the related consolidated statements of income, cash flows, and changes in
stockholder's equity for the years ended December 31, 1991 and 1990 (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, 1994, 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 LLP
Orange County, California
February 2, 1995
11
<PAGE> 13
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
(Thousands of dollars)
ASSETS
Finance receivables -- net $5,904,841 $5,083,016
Investments 704,244 655,690
Property and equipment 65,188 59,636
Insurance policy acquisition costs 42,932 34,265
Goodwill 21,770 23,130
Cash 21,817 7,858
Other 277,499 259,365
---------- ----------
TOTAL ASSETS $7,038,291 $6,122,960
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt $5,603,273 $4,815,494
Accounts payable and accrued liabilities 271,480 235,029
Insurance reserves and claims
Unearned insurance premiums 146,163 121,694
Losses and adjustment expenses 55,297 59,171
Income taxes 68,334 64,061
---------- ----------
Total liabilities 6,144,547 5,295,449
---------- ----------
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 860,133 778,804
Securities valuation adjustment 8,278 31,980
Currency translation adjustment (112,755) (121,361)
---------- ----------
Total stockholder's equity 893,744 827,511
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $7,038,291 $6,122,960
========== ==========
</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,
--------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
(Thousands of dollars)
REVENUES
Interest, discount and service charges $1,047,783 $ 994,731 $1,014,505
Credit life, credit disability and casualty insurance
premiums 287,378 278,412 275,008
Investment and other income (including net realized
investment gains) 53,073 50,921 51,321
---------- ---------- ----------
Total revenues 1,388,234 1,324,064 1,340,834
EXPENSES
Interest and debt expense
Interest on notes 212,422 212,495 264,065
Amortization of debt expense 3,555 3,715 3,363
Interest on commercial paper, bank loans and other
indebtedness 119,717 108,483 103,501
---------- ---------- ----------
Total 335,694 324,693 370,929
Salaries, wages, and other employee benefits 263,670 252,066 252,832
Provision for losses on collection of finance
receivables, less recoveries 136,101 120,694 118,251
Credit life, credit disability and casualty insurance
losses and adjustment expenses, less recoveries 127,685 132,070 137,138
Amortization of insurance policy acquisition costs 61,531 67,039 59,879
Other operating expenses 204,443 201,718 197,892
---------- ---------- ----------
Total expenses 1,129,124 1,098,280 1,136,921
---------- ---------- ----------
Income before income taxes 259,110 225,784 203,913
Income taxes 96,781 83,755 75,887
---------- ---------- ----------
Income before cumulative effect of changes in accounting
principles 162,329 142,029 128,026
Cumulative effect of changes in accounting principles:
Postretirement benefits other than pensions, net of
income taxes (18,890)
Income taxes (5,438)
---------- ---------- ----------
NET INCOME $ 162,329 $ 142,029 $ 103,698
========== ========== ==========
Ratio of income to fixed charges 1.7 1.7 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,
----------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
(Thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 162,329 $ 142,029 $ 103,698
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 164,553 147,305 145,048
Depreciation 16,329 16,168 16,092
Gain on sales of investments (2,845) (4,335) (3,084)
Decrease (increase) in insurance policy acquisition
costs (8,844) 443 4,992
Increase (decrease) in unearned insurance premiums
and reserves for insurance losses and adjustment
expenses 34,702 16,109 (4,386)
Increase in accounts payable and accrued
liabilities 34,984 2,778 12,254
Increase in income taxes 2,624 7,070 1,247
Other - net (654) 28,276 (15,784)
----------- ----------- -----------
Net cash provided by operating activities 403,178 355,843 284,405
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased (4,143,681) (3,392,345) (3,097,325)
Finance receivables repaid or sold 3,181,633 2,896,021 2,688,113
Purchases of investments available for sale (187,444) (37,877)
Purchases of investments held for investment (248,947) (198,807)
Proceeds from sales of investments available for sale 55,384 5,368
Proceeds from sales of investments held for investment 109,269 64,261
Proceeds from maturities and calls of investments
available for sale 56,306 5,674
Proceeds from maturities and calls of investments held
for investment 121,371 145,706
Capital expenditures (19,897) (18,486) (16,148)
Cash used in acquisition of assets of USA Financial
Services, Inc., net of cash acquired (285,334)
----------- ----------- -----------
Net cash used by investing activities (1,057,699) (559,952) (699,534)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term debt 446,121 392,095 340,046
Proceeds from issuance of notes 1,029,764 1,016,140 857,289
Principal payments on notes (726,158) (1,125,045) (731,991)
Decrease in savings deposits (247) (541) (169)
Dividends paid (81,000) (71,000) (64,400)
----------- ----------- -----------
Net cash provided by financing activities 668,480 211,649 400,775
----------- ----------- -----------
Net increase (decrease) in cash 13,959 7,540 (14,354)
Cash at beginning of year 7,858 318 14,672
----------- ----------- -----------
Cash at end of year $ 21,817 $ 7,858 $ 318
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 329,753 $ 336,716 $ 368,931
Income taxes $ 100,711 $ 83,553 $ 70,320
</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>
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, 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
Net income 162,329 162,329
Cash dividends declared
($162.00 per common share) (81,000) (81,000)
Change in valuation adjustment (23,702) (23,702)
Change in translation adjustment 8,606 8,606
---- -------- -------- -------- --------- --------
Balance at December 31, 1994 $500 $137,588 $860,133 $ 8,278 $(112,755) $893,744
==== ======== ======== ======== ========= ========
</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.
Due to the short-term nature of AFS' loss development and the effect of
reinsurance agreements, casualty insurance losses and adjustment expenses in
1994, 1993 and 1992 relating to insured events occurring prior to each of those
years, is immaterial.
Reinsurance
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.
Prior to 1994, AFS carried most of its debt securities at amortized cost (less
adjustments for other than temporary declines in value). A portion of AFS' debt
security portfolio was considered available for sale and carried at the lower of
aggregate amortized cost or market.
Effective at the beginning of 1994, AFS adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (FAS 115). 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. AFS determined that all of its investment
portfolio should be considered available for sale and carried at estimated fair
value. Unrealized gains and losses, net of applicable income taxes, are reported
as a separate component of stockholder's equity. In accordance with FAS 115,
prior year's financial statements have not been restated to reflect the change
in accounting principles. The adoption of FAS 115 had no effect on AFS' net
income.
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. See Note 3 for
further information about investments.
INTEREST RATE EXCHANGE AGREEMENTS
As part of its interest rate management strategies, 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 immaterial at December 31, 1994.
Interest differentials to be paid or received are accrued and recognized in
interest expense over the lives of the agreements.
17
<PAGE> 19
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 are recognized for temporary differences between the
financial reporting basis and income tax basis of assets and liabilities based
on enacted tax rates expected to be in effect when such amounts are expected to
be realized or settled. 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, 1994 and 1993 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 1994, 1993 and
1992 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 income) are covered by income before income taxes, cumulative effect
of changes in accounting principles and fixed charges.
18
<PAGE> 20
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
Contractual maturities of finance receivables outstanding at December 31,
1994 and total finance receivables outstanding at that date and at December 31,
1993 were as follows:
<TABLE>
<CAPTION>
Contractual maturities Less Receivables outstanding
------------------------------------ finance -----------------------
1995 1996 1997-2009 charges 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Thousands of dollars)
Consumer loans $1,576,984 $1,142,555 $1,153,613 $1,151,247 $2,721,905 $2,389,994
Real estate loans 592,228 526,353 3,814,934 2,517,894 2,415,621 2,260,815
Retail installment contracts 783,879 458,528 412,039 547,164 1,107,282 741,998
Other loans 45,566 35,437 32,788 22,231 91,560 76,756
---------- ---------- ---------- ---------- ---------- ----------
$2,998,657 $2,162,873 $5,413,374 $4,238,536 6,336,368 5,469,563
========== ========== ========== ==========
Less allowance for credit losses (180,573) (155,015)
Less finance-related insurance reserves and claims (250,954) (231,532)
---------- ----------
Finance receivables -- net $5,904,841 $5,083,016
========== ==========
</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 1994 and 1993, cash collections of receivables
(excluding finance charges) were $3.2 billion and $2.9 billion, respectively.
The ratio of cash collections to average finance receivables was approximately
56% and 55%, respectively.
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 $81.3 million at December 31, 1994.
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, 1994, committed lines totaled approximately $738 million of which
approximately $97 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,
---------------------------------------------------------
1994 1993 1992 1991(b) 1990(b)
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Balance of the allowance for credit
losses at beginning of year $ 155,015 $147,088 $135,330 $131,779 $153,364
Add -- charged to income:
Real estate 21,106 25,487 17,616 12,879 9,629
Other 114,995 95,207 100,635 101,343 84,662
--------- -------- -------- -------- --------
Total 136,101 120,694 118,251 114,222 94,291
Deduct -- balances charged off(a):
Gross charge offs:
Real estate (20,845) (25,125) (15,394) (10,388) (5,615)
Other (121,041) (112,979) (121,401) (122,428) (123,816)
--------- -------- -------- -------- --------
Total (141,886) (138,104) (136,795) (132,816) (129,431)
Recoveries:
Real estate 1,591 1,588 1,117 729 592
Other 26,861 25,023 25,680 23,069 17,791
--------- -------- -------- -------- --------
Total 28,452 26,611 26,797 23,798 18,383
--------- -------- -------- -------- --------
Net charge offs (113,434) (111,493) (109,998) (109,018) (111,048)
Other 2,891 (1,274) 3,505 (1,653) (4,828)
--------- -------- -------- -------- --------
Balance of the allowance for credit
losses at end of year $ 180,573 $155,015 $147,088 $135,330 $131,779
========= ======== ======== ======== ========
Balance of the allowance for credit
losses at the end of each year
applicable to:
Real estate $ 34,017 $ 32,048 $ 30,316 $ 27,784 $ 24,606
Other 146,556 122,967 116,772 107,546 107,173
--------- -------- -------- -------- --------
Total $ 180,573 $155,015 $147,088 $135,330 $131,779
========= ======== ======== ======== ========
</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 1991 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>
1994 1993
-------- --------
(Thousands of dollars)
<S> <C> <C>
Debt securities:
Commercial paper, at estimated fair value (approximates
cost) $ 54,242 $ 41,082
Bonds held for investment, at amortized cost (estimated
fair value: $481,246,000) 458,186
Bonds available for sale at estimated fair value in 1994
(cost: $591,497,000) and at lower of amortized cost or
market in 1993 (estimated fair value: $62,060,000) 567,940 59,812
-------- --------
Total 622,182 559,080
-------- --------
Marketable equity securities, at market:
Preferred stocks (cost: $4,811,000 in 1994 and $7,834,000
in 1993) 4,727 8,032
Common stocks, industrial, miscellaneous and all other
(cost: $38,978,000 in 1994 and $37,274,000 in 1993) 75,074 86,093
-------- --------
Total 79,801 94,125
-------- --------
First mortgages on real estate, at cost 2,261 2,485
-------- --------
Total $704,244 $655,690
======== ========
</TABLE>
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1994 and of debt securities at December 31, 1993 were
as follows:
<TABLE>
<CAPTION>
December 31, 1994
-----------------------------------------------
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 $ 40,218 $ 646 $ 379 $ 40,485
Obligations of states, municipalities and political
subdivisions 114,309 1,697 2,659 113,347
Obligations of foreign governments and agencies 83,863 619 2,074 82,408
Public utility securities 69,272 265 5,898 63,639
Mortgage-backed securities 36,873 1,837 3,694 35,016
Corporate securities 301,204 2,264 16,181 287,287
Marketable equity securities 43,789 36,494 482 79,801
-------- ------- ------- --------
Total $689,528 $43,822 $31,367 $701,983
======== ======= ======= ========
</TABLE>
21
<PAGE> 23
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: INVESTMENTS (CONTINUED)
<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>
The amortized cost and estimated fair value of debt securities at December
31, 1994, 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 1995 $ 75,642 $ 75,935
Due 1996 to 1999 199,631 193,917
Due 2000 to 2004 234,591 220,206
Due after 2004 99,002 97,108
-------- --------
608,866 587,166
Mortgage-backed securities 36,873 35,016
--------- --------
$645,739 $622,182
======== ========
</TABLE>
During 1994, gross realized gains and losses from sales of securities were
$4.5 million and $1.7 million, respectively. Gross gains and losses realized on
sales of debt securities (excluding commercial paper) were $3.9 million and $1.2
million, respectively, in 1993 and $2.4 million and $.3 million, respectively,
in 1992.
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. 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.
22
<PAGE> 24
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INCOME TAXES (CONTINUED)
Deferred income taxes have not been provided for the undistributed earnings
of foreign subsidiaries which aggregated approximately $279 million at December
31, 1994. 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 $24 million, principally due
to foreign withholding taxes.
At December 31, 1994, 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 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>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
(Thousands of dollars)
Current
Federal............................. $53,299 $50,575 $45,428
State............................... 8,005 7,778 6,440
Foreign............................. 41,732 34,809 30,425
------- ------- -------
103,036 93,162 82,293
Deferred
Federal............................. (3,650) (7,254) (2,596)
State............................... (503) (144) (143)
Foreign............................. (2,102) (2,009) (3,667)
------- ------- -------
(6,255) (9,407) (6,406)
------- ------- -------
Total income tax
provision................. $96,781 $83,755 $75,887
======= ======= =======
</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.
23
<PAGE> 25
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INCOME TAXES (CONTINUED)
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>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory tax rate................................ 35.0% 35.0% 34.0%
Increases (decreases) in taxes resulting from:
Residual tax on foreign dividends............................ .6 .2 .5
Higher tax on foreign income................................. .7 .4 1.4
State income taxes........................................... 1.9 2.2 2.0
Nontaxable investment income................................. (.8) (1.1) (1.3)
Other, net................................................... .4 .6
---- ---- ----
Effective income tax rate...................................... 37.4% 37.1% 37.2%
==== ==== ====
</TABLE>
AFS' net deferred tax asset consisted of gross deferred tax assets and
gross deferred tax liabilities of $92.4 million and $20.2 million, respectively,
at December 31, 1994 and $82.3 and $29.4 million, respectively, at December 31,
1993.
The assets and (liabilities) comprising AFS' net deferred tax assets as of
December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
------- --------
(Thousands of Dollars)
<S> <C> <C>
Allowance for credit losses.......................................... $45,496 $ 38,451
Liabilities for future policy benefits............................... 21,338 20,010
Unrealized gain on marketable equity securities...................... (3,868) (16,874)
Obligation for postretirement benefits other than pensions........... 13,611 12,797
Depreciation......................................................... (4,991) (5,652)
Insurance policy acquisition costs................................... (9,376) (4,026)
Lease financing transactions......................................... (1,994) (2,917)
Other -- principally timing of expense deductions.................... 11,936 11,075
------- --------
Total net deferred tax assets.............................. $72,152 $ 52,864
======= ========
</TABLE>
24
<PAGE> 26
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: DEBT AND CREDIT FACILITIES
At December 31, 1994 and 1993, consolidated debt consisted of the
following:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
(Thousands of dollars)
Senior
Commercial paper $2,380,039 $1,933,570
Banks 50,252 25,493
Savings deposits 4,804 5,032
3.20% to 4.93% due 1994 to 1995(a) 150,000 607,842
5.09% to 6.95% due 1994 to 2000(a) 1,328,445 911,738
7.00% to 8.99% due 1994 to 2001(a) 1,378,949 761,369
9.00% to 10.95% due 1994 to 1998(a) 161,854 302,441
11.00% to 12.85% due 1994 to 1996 141,130 212,038
14.50% due 1994 35,991
---------- ----------
Total senior debt 5,595,473 4,795,514
---------- ----------
Senior subordinated
9.55% to 13.75% due 1994 to 1998 7,800 19,980
---------- ----------
Total debt $5,603,273 $4,815,494
========== ==========
</TABLE>
- ------------
(a) Interest rates on certain notes are adjusted periodically.
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, 1994, 1993 and 1992,
without giving effect to the costs of maintaining the lines of credit, were
6.3%, 6.4% and 9.0%, respectively, for bank borrowings (primarily consisting of
borrowings in foreign operations) and 6.1%, 3.8% and 4.6%, respectively, for
commercial paper. The weighted average interest rate on bank borrowings and
commercial paper outstanding during the three years ended December 31, 1994 was
4.8%, 3.9%, and 4.5%, 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, 1994 and 1993, AFS had lines of credit with various banks
amounting to $2.59 billion and $2.16 billion, respectively, of which the unused
portion of these lines amounted to $2.33 billion and $1.93 billion,
respectively. AFS generally pays fees in support of these lines.
During the years ended December 31, 1994 and 1993, AFS issued the following
notes:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
(Thousands of dollars)
Senior notes due 1994 to 1997 (Australia) $ 79,047 $ 29,895
Senior notes due 1994 to 1998 (Canada) 99,972 246,664
Senior notes due 1994 to 1998 (United Kingdom) 745 34,581
Senior notes due 1994 to 2001 (United States) 850,000 705,000
---------- ----------
Total $1,029,764 $1,016,140
========== ==========
</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 (principally commercial paper). At December 31, 1994 and
1993, these
25
<PAGE> 27
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: DEBT AND CREDIT FACILITIES (CONTINUED)
agreements had weighted average original terms of 3.4 years and 4.4 years and
had the effect of fixing the rate of interest at 8.2% and 10.0% on $748.5
million and $341.6 million of variable rate borrowing, respectively.
The following details AFS' "fixed-pay" interest rate exchange agreement
activity for the years 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(Thousands of dollars)
<S> <C> <C>
Beginning notional amount $ 341,585 $ 599,317
Notional amount of new contracts 513,979 102,027
Notional amount of terminated and expired contracts (107,047) (359,759)
--------- ---------
Ending notional amount $ 748,517 $ 341,585
========= =========
</TABLE>
The notional amount of fixed-pay interest rate swap agreements at December
31, 1994 categorized by annual maturity, along with the related weighted average
interest rates paid are as follows: $187.5 million (8.9%) in 1995; $151.7
million (8.9%) in 1996; $146.5 million (8.3%) in 1997; $120.8 million (8.5%) in
1998; $126.5 million (6.0%) in 1999; and $15.5 million (6.7%) for years
thereafter.
In addition, AFS entered into basis swap agreements that had the effect of
exchanging the indices used to determine interest expense under certain variable
rate borrowing. These agreements serve to better match the rate of interest AFS
incurred on its financing with the rate of interest earned on certain of its
variable rate finance receivables. The effect of these agreements on AFS'
average annual cost of funds is immaterial. At December 31, 1994, $205.0 million
of such agreements were in effect and expire through 1998.
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, 1994, 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, 1994, for the
five years ending December 31, 1999, were (in millions): $883.1 for 1995; $501.8
for 1996; $487.1 for 1997; $430.8 for 1998; and $440.4 for 1999.
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 and trust accounts. Reinsurance receivables and prepaid reinsurance
premiums were not material as of December 31, 1994 and 1993.
The effect of reinsurance on premiums written, premiums earned and losses
incurred for the years ended December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
-------------------------------- --------------------------------
Premiums Premiums Losses Premiums Premiums Losses
Written Earned Incurred Written Earned Incurred
--------- --------- -------- --------- --------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Direct $290,961 $254,741 $115,218 $259,453 $256,990 $124,127
Assumed 47,133 47,114 15,176 50,974 38,801 18,904
Ceded (13,344) (14,477) (2,709) (16,564) (17,379) (10,961)
-------- -------- -------- -------- -------- --------
Total $324,750 $287,378 $127,685 $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,
-------------------------------------------------------------
1994 1993 1992 1991* 1990*
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Revenues
Financial Services and Related
Insurance $1,214,918 $1,145,756 $1,160,637 $1,127,771 $1,072,963
Nonrelated Insurance 173,316 178,308 180,197 194,052 178,637
---------- ---------- ---------- ---------- ----------
Total revenues $1,388,234 $1,324,064 $1,340,834 $1,321,823 $1,251,600
========== ========== ========== ========== ==========
Income Before Income Taxes
Financial Services and Related
Insurance $ 242,314 $ 217,789 $ 193,782 $ 179,601 $ 171,505
Nonrelated Insurance 16,796 7,995 10,131 17,285 17,547
---------- ---------- ---------- ---------- ----------
Total income before income taxes $ 259,110 $ 225,784 $ 203,913 $ 196,886 $ 189,052
========== ========== ========== ========== ==========
Identifiable Assets
Financial Services and Related
Insurance $6,582,978 $5,681,416 $5,360,280 $4,927,784 $4,648,346
Nonrelated Insurance 455,313 441,544 425,687 406,393 436,294
---------- ---------- ---------- ---------- ----------
Total identifiable assets $7,038,291 $6,122,960 $5,785,967 $5,334,177 $5,084,640
========== ========== ========== ========== ==========
</TABLE>
- ---------------
* The above data for the two years ended 1991 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,
--------------------------------------------------------------
1994 1993 1992 1991* 1990*
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Revenues
Australia $ 148,264 $ 133,080 $ 137,054 $ 143,422 $ 135,869
Canada 204,068 210,423 234,964 263,954 241,998
United Kingdom 127,813 112,607 119,351 111,556 99,574
United States 900,023 867,954 849,465 802,891 774,159
Other Countries** 8,066
---------- ---------- ---------- ---------- ----------
Total revenues $1,388,234 $1,324,064 $1,340,834 $1,321,823 $1,251,600
========== ========== ========== ========== ==========
Income (Loss) Before Income Taxes
Australia $ 43,796 $ 34,542 $ 30,125 $ 27,593 $ 25,935
Canada 47,029 42,503 37,776 51,070 51,551
United Kingdom 21,572 14,819 14,364 12,788 12,168
United States 147,274 133,920 121,648 105,435 99,398
Other Countries** (561)
---------- ---------- ---------- ---------- ----------
Total income before income taxes $ 259,110 $ 225,784 $ 203,913 $ 196,886 $ 189,052
========== ========== ========== ========== ==========
Identifiable Assets
Australia $ 646,958 $ 526,410 $ 473,424 $ 501,093 $ 485,834
Canada 963,689 937,339 895,050 1,017,341 1,007,795
United Kingdom 585,736 465,820 435,661 427,126 409,563
United States 4,735,989 4,193,391 3,981,832 3,388,617 3,181,448
Other Countries** 105,919
---------- ---------- ---------- ---------- ----------
Total identifiable assets $7,038,291 $6,122,960 $5,785,967 $5,334,177 $5,084,640
========== ========== ========== ========== ==========
</TABLE>
- ------------
* The above data for the two years ended 1991 is not reported upon herein
by independent auditors.
** Includes the operations of Hong Kong, New Zealand and Spain.
At December 31, 1994, finance receivables in the United States represented
65% of AFS' total finance receivables outstanding. At such date, receivables
outstanding in no state exceeded 6% of the United States' portfolio, except
California in which outstanding receivables represented 15% of the United
States' portfolio and 10% of the consolidated portfolio.
Capital expenditures and depreciation expense for each of the five years
ended 1994 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, 1994, approximately $165 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. and foreign insurance
regulatory agencies and minimum capital requirements of various U.S. and foreign
regulatory agencies imposed on certain of AFS' finance operations restrict the
amount of certain subsidiaries' net assets which can be transferred to AFS. Such
restricted net assets totaled approximately $179 million at December 31, 1994.
28
<PAGE> 30
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $47 million, $48 million and
$46 million in 1994, 1993 and 1992, respectively. Future minimum rental
commitments for all noncancelable operating leases in effect at December 31,
1994 approximated $33 million for 1995, $28 million for 1996, $21 million for
1997, $16 million for 1998, $13 million for 1999 and $77 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 $15
million, $13 million and $12 million for 1994, 1993 and 1992, respectively.
AFS provides certain health care and life insurance benefits for its
employees and for certain retired 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. 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 1994, 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, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
------- -------
(Thousands of
dollars)
<S> <C> <C>
Actuarial present value of benefits attributed to:
Retirees $22,015 $27,363
Fully eligible active plan participants 5,738 9,364
Other active plan participants 355 455
------- -------
Accumulated postretirement benefit obligation 28,108 37,182
Unrecognized net actuarial gains (losses) 7,445 (3,549)
------- -------
Postretirement benefit liability recognized on the
consolidated balance sheet $35,553 $33,633
======= =======
</TABLE>
An assumed discount rate of 7.25% for 1994 and 8% for 1993 and 1992 was
used to determine postretirement benefit costs other than pensions. An assumed
discount rate of 8.25% and 7.25% was used to determine the status of AFS' plans
at December 31, 1994 and December 31, 1993, 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 10% for retirees age 65 and over and 14% for
retirees under age 65 in 1995, 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, 1994 by
$2.0 million and increased the aggregate of the service and interest cost
components of postretirement benefit costs for 1994 by $100,000.
NOTE 12: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations for the years ended December 31, 1994 and
1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
----------------------------------------- -----------------------------------------
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 $327,566 $336,835 $353,206 $370,627 $327,124 $329,296 $333,264 $334,380
======== ======== ======== ======== ======== ======== ======== ========
Income before income taxes $ 61,886 $ 63,970 $ 68,149 $ 65,105 $ 54,875 $ 56,225 $ 58,552 $ 56,132
Income taxes 23,061 24,235 25,520 23,965 20,385 20,852 21,728 20,790
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 38,825 $ 39,735 $ 42,629 $ 41,140 $ 34,490 $ 35,373 $ 36,824 $ 35,342
======== ======== ======== ======== ======== ======== ======== ========
</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.
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.
30
<PAGE> 32
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used in estimating the fair
value of AFS' financial instruments.
Investments
The estimated fair values of investment 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 ($81.9 million and $251.0 million, net carrying value,
respectively, at December 31, 1994 and $75.5 million and $231.5 million,
respectively, at December 31, 1993) 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, 1994 December 31, 1993
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(Thousands of dollars)
ASSETS:
Investments $ 704,244 $ 704,244 $ 655,690 $ 680,998
========== ========== ========== ==========
Finance receivables $6,073,875 $6,061,875 $5,239,034 $5,266,034
========== ========== ========== ==========
LIABILITIES:
Debt:
Variable rate debt $3,164,929 $3,164,929 $2,586,081 $2,586,081
Interest rate exchange agreements (25,585) 28,421
Fixed rate debt 2,438,344 2,350,844 2,229,413 2,326,593
---------- ---------- ---------- ----------
Total debt $5,603,273 $5,490,188 $4,815,494 $4,941,095
========== ========== ========== ==========
</TABLE>
NOTE 15: SUBSEQUENT EVENT
In January 1995, AFS purchased the stock of HFC of Australia Ltd. and its
Australian subsidiaries (HFCA), subsidiaries of Household International, Inc.
This acquisition will add approximately $436 million to AFS' finance receivable
portfolio.
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, 1994 and 1993..... 12
Consolidated Statement of Income for the three years ended
December 31, 1994.......................................... 13
Consolidated Statement of Cash Flows for the three years
ended December 31, 1994.................................... 14
Consolidated Statement of Changes in Stockholder's Equity for
the three years ended December 31, 1994.................... 15
Notes to Consolidated Financial Statements................... 16
2. Index to Financial Statement Schedules
I. 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, 1994, the Registrant filed
the following report on Form 8-K:
Report dated October 14, 1994, relating to the Registrant's
Registration Statement No. 33-50547 with respect to which the
Registrant commenced an offering on or about October 12, 1994 of up
to $600,000,000 of Medium Term Notes, Series F, due from more than
9 months to 10 years from the date of issue. The report included as
exhibits a form of Distribution Agreement and a form of Medium Term
Note, Series F.
(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.
(21) Omitted in accordance with General Instruction J(2)(b).
*(23) Consent of Independent Auditors.
*(24) Powers of Attorney.
*(27) Financial Data Schedule.
</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 27, 1995 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 27, 1995.
<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 Executive Vice President and Director
---------------------------------
William J. Pearson
*MARK SCHIMBOR Executive Vice President and Director
---------------------------------
Mark Schimbor
*EUGENE R. SCHUTT, JR. Executive Vice President and Director
---------------------------------
Eugene R. Schutt, Jr.
*HERBERT F. SMITH Executive 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 I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
(Thousands of dollars)
BALANCE SHEET
ASSETS
Demand notes receivable from Avco Financial Services Group
subsidiaries $3,880,641 $3,429,937
Investments in subsidiaries, at equity 1,400,785 1,315,538
Other 97,894 86,845
---------- ----------
Total assets $5,379,320 $4,832,320
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt $4,397,312 $3,936,827
Other 88,264 67,982
---------- ----------
Total liabilities 4,485,576 4,004,809
Stockholder's equity 893,744 827,511
---------- ----------
Total liabilities and stockholder's equity $5,379,320 $4,832,320
========== ==========
</TABLE>
See accompanying note.
S-1
<PAGE> 39
AVCO FINANCIAL SERVICES, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (CONTINUED)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
(Thousands of dollars)
STATEMENT OF INCOME
Revenues (primarily interest from Avco Financial
Services Group subsidiaries) $ 231,116 $ 218,396 $ 235,667
Expenses (primarily interest expense) (245,092) (229,512) (250,084)
--------- --------- ---------
Loss before items shown below (13,976) (11,116) (14,417)
Income tax benefits 4,868 3,605 4,884
Equity in income of subsidiaries 171,437 149,540 137,559
--------- --------- ---------
Income before cumulative effect of changes in accounting
principles 162,329 142,029 128,026
Cumulative effect of changes in accounting principles,
net of income taxes (24,328)
--------- --------- ---------
Net income $ 162,329 $ 142,029 $ 103,698
========= ========= =========
STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 162,329 $ 142,029 $ 103,698
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of changes in accounting principles 24,328
Other 31,395 (4,771) 11,017
--------- --------- ---------
Net cash provided by operating activities 193,724 137,258 139,043
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in demand notes receivable (450,704) (178,923) (620,238)
Increase in investments in subsidiaries (122,505) (116,490) (94,829)
--------- --------- ---------
Net cash used by investing activities (573,209) (295,413) (715,067)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term debt 151,255 258,412 316,493
Proceeds from issuance of notes 850,000 705,000 680,290
Principal payments on notes (540,770) (734,257) (367,059)
Dividends paid (81,000) (71,000) (64,400)
--------- --------- ---------
Net cash provided by financing activities 379,485 158,155 565,324
--------- --------- ---------
Net decrease in cash (10,700)
Cash at beginning of year 10,700
--------- --------- ---------
Cash at end of year $ -- $ -- $ --
========= ========= =========
</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, 1994 for the
five years ending December 31, 1999 were (in millions): $621.3 in 1995; $356.7
in 1996; $200.0 in 1997; $237.4 in 1998; and $434.9 in 1999.
At December 31, 1994 and 1993, the parent company was guarantor for payment
of all its foreign subsidiaries' commercial paper and bank line borrowings of
$938.3 million and $632.9 million, respectively, and senior notes of $892.9
million and $885.3 million, respectively.
The Registrant received cash dividends from its subsidiaries aggregating
$45.5 million in 1994, $48.0 million in 1993, and $46.7 million in 1992.
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,
-----------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Income
Income before income taxes and cumulative
effect of changes in accounting
principles $259,110 $225,784 $203,913 $196,886 $189,052
-------- -------- -------- -------- --------
Fixed charges to be added back to
income --
Interest and debt expense 334,084 324,211 370,884 395,703 392,040
Rentals (one-third of all rent and
related costs charged to income) 13,942 14,378 15,460 14,915 14,226
-------- -------- -------- -------- --------
Total fixed charges 348,026 338,589 386,344 410,618 406,266
-------- -------- -------- -------- --------
Income before income taxes, cumulative
effect of changes in accounting principles
and fixed charges $607,136 $564,373 $590,257 $607,504 $595,318
======== ======== ======== ======== ========
Ratio
Number of times fixed charges covered by
income before income taxes, cumulative
effect of changes in accounting
principles, and fixed charges 1.7 1.7 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 33-55953) of Avco Financial Services, Inc. and in
the related Prospectuses of our report dated February 2, 1995, 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,
1994.
ERNST & YOUNG LLP
Orange County, California
March 27, 1995
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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AFS'
CONSOLIDATED BALANCE SHEET AT DECMEBER 31, 1994 AND CONSOLIDATED STATEMENT OF
INCOME FOR THE YEAR ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 21,817
<SECURITIES> 0
<RECEIVABLES> 6,336,368
<ALLOWANCES> 180,573
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 65,188
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,038,291
<CURRENT-LIABILITIES> 0
<BONDS> 3,172,982
<COMMON> 500
0
0
<OTHER-SE> 893,244
<TOTAL-LIABILITY-AND-EQUITY> 7,038,291
<SALES> 0
<TOTAL-REVENUES> 1,388,234
<CGS> 0
<TOTAL-COSTS> 189,216
<OTHER-EXPENSES> 468,113
<LOSS-PROVISION> 136,101
<INTEREST-EXPENSE> 335,694
<INCOME-PRETAX> 259,110
<INCOME-TAX> 96,781
<INCOME-CONTINUING> 162,329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 162,329
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
