<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, 1995
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.)
600 ANTON BLVD., P.O. BOX 5011, COSTA MESA,
CALIFORNIA 92628-5011
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 714-435-1200
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, 1995, 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 primarily 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, 1995, the Registrant operated 1,230 finance offices located in all states of
the United States (except Arkansas, Kansas, Maine, 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.
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 added 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, 1995, the Registrant employed approximately 7,500 persons.
AVCO FINANCIAL SERVICES GROUP
Finance Receivables
The Registrant's finance receivable portfolio consisted of the
following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Consumer loans....................... $3,021,227 $2,721,905 $2,389,994 $2,275,016 $2,076,251
Real estate loans.................... 2,512,619 2,415,621 2,260,815 2,141,900 1,995,075
Retail installment contracts......... 1,135,830 1,107,282 741,998 656,668 544,477
Other loans.......................... 263,850 91,560 76,756 84,721 132,625
---------- ---------- ---------- ---------- ----------
Total........................... $6,933,526 $6,336,368 $5,469,563 $5,158,305 $4,748,428
========== ========== ========== ========== ==========
</TABLE>
The following table presents the Registrant's outstanding finance
receivables by country:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Australia............................ $1,009,345 $ 611,087 $ 489,034 $ 455,771 $ 448,583
Canada............................... 967,809 908,339 874,277 835,942 966,898
United Kingdom....................... 607,986 587,972 467,363 434,498 423,354
United States........................ 4,115,141 4,140,094 3,638,889 3,432,094 2,909,593
Other Countries*..................... 233,245 88,876
---------- ---------- ---------- ---------- ----------
Total........................... $6,933,526 $6,336,368 $5,469,563 $5,158,305 $4,748,428
========== ========== ========== ========== ==========
</TABLE>
- ---------------
* Includes the operations of Hong Kong and Spain which commenced operations in
1994 and New Zealand.
1
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At December 31, 1995, finance receivables in the United States represented
59% of the Registrant's total finance receivables outstanding. At such date,
receivables outstanding in no state exceeded 7% of the United States' portfolio,
except California in which outstanding receivables represented 16% of the United
States' portfolio and 9% 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, 1995
were (in millions): $(1.1) in 1995, $47.5 in 1994, $(48.2) in 1993, $(211.2) in
1992, and $(16.2) in 1991.
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 879,439 consumer and real estate loans written during the year
ended December 31, 1995, approximately 49% 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,
---------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars*)
New funds advanced
Consumer loans
Funds advanced.................. $1,929,581 $1,736,634 $1,474,139 $1,241,420 $1,115,497
Average amount.................. $ 2,272 $ 2,014 $ 1,836 $ 1,705 $ 1,563
Real estate loans
Funds advanced.................. $ 709,624 $ 727,139 $ 642,082 $ 630,594 $ 625,745
Average amount.................. $ 23,608 $ 23,714 $ 21,022 $ 20,357 $ 20,391
Receivables outstanding at end of
period
Consumer loans
Net balance..................... $3,021,227 $2,721,905 $2,389,994 $2,275,016 $2,076,251
Average amount.................. $ 2,888 $ 2,725 $ 2,407 $ 2,214 $ 2,139
Real estate loans
Net balance..................... $2,512,619 $2,415,621 $2,260,815 $2,141,900 $1,995,075
Average amount.................. $ 27,311 $ 27,450 $ 25,120 $ 23,318 $ 24,083
</TABLE>
- ------------
* 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 automobiles, furniture, television sets, household appliances and
floor coverings. Retail installment operations provide a source of new customers
for consumer loan business. In general, retail installment contracts carry a
lower profit margin than consumer loans, and the volume of such business tends
to be more volatile.
2
<PAGE> 4
The following table summarizes retail installment contracts purchased
(excluding contracts acquired from other finance companies) and outstanding:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars*)
Retail installment contracts purchased $1,310,373 $1,319,291 $1,041,981 $945,380 $784,957
Retail installment contracts outstanding
at end of period
Net balance $1,135,830 $1,107,282 $ 741,998 $656,668 $544,477
Average amount $ 1,067 $ 1,042 $ 859 $ 808 $ 821
</TABLE>
- ------------
* Except average amount.
Other Receivables
At December 31, 1995, other receivables outstanding of $263.9 million
consisted primarily of equipment leasing receivables generated by the
Registrant's Australian, Hong Kong and United States operations. Such leases are
generally written for periods 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 1995, the weighted average maturity of real estate loans written
was approximately 8 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 $115.0 million at December 31, 1995 and $81.3 million at
December 31, 1994.
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
3
<PAGE> 5
real estate owned are reflected in other operating expenses. At December 31,
1995 and 1994, real estate owned was $43.9 million and $35.5 million,
respectively.
The allowance for losses at December 31, 1995 was $195.4 million or 2.82%
of finance receivables then outstanding; such allowance at December 31, 1994 was
$180.6 million or 2.85% of finance receivables outstanding. See Note 2 to the
Consolidated Financial Statements of the Registrant for an analysis of the
allowance for losses for the five years ended December 31, 1995. 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 December 31, Amount receivables off Amount receivables recoveries
- ------------------------ -------- ----------- ---------- -------- ----------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
1995 $176,804 2.6% $ 32,914 $143,890 2.1% $ 149,143
1994 141,886 2.5 28,452 113,434 2.0 136,101
1993 138,104 2.7 26,611 111,493 2.1 120,694
1992 136,795 2.7 26,797 109,998 2.2 118,251
1991 132,816 2.9 23,798 109,018 2.4 114,222
</TABLE>
The following table presents for the five years ended December 31, 1995
loans on which one or more installments were more than 60 days delinquent on a
contractual basis (expressed as a percentage of the related gross receivables
outstanding):
<TABLE>
<CAPTION>
Real Estate Other Total
Year ended December 31, Loans Loans* Loans
- ------------------------ ----------- ------ -----
<S> <C> <C> <C>
1995 1.76% 3.50% 2.89%
1994 1.29% 2.84% 2.28%
1993 1.45% 3.12% 2.46%
1992 1.37% 3.77% 2.80%
1991 1.51% 4.17% 3.08%
</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
1995 through 1991 was as follows: 1995 -- 7.32%; 1994 -- 6.63%; 1993 -- 6.97%;
1992 -- 8.11%; and 1991 -- 9.73%.
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 1995, approximately 77% of the Group's credit life and credit disability
insurance business and approximately 20% of its casualty insurance business was
derived from the Registrant's finance customers. The Group's remaining credit
life, credit disability and casualty insurance business is written with
customers on a direct basis or through independent agents.
The Group's casualty business consists primarily of insurance covering
collateral protection, involuntary unemployment, personal property and
automobile physical damage.
4
<PAGE> 6
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,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Credit Life, Credit Disability and Other
Premiums written $145,243 $151,370 $135,218 $123,863 $105,987
======== ======== ======== ======== ========
Premiums earned $139,105 $131,840 $127,458 $123,122 $124,468
Investment income 35,594 20,239 19,793 19,366 22,157
Losses and adjustment expenses, less
recoveries (61,782) (58,268) (59,306) (56,181) (54,240)
Expenses (58,535) (55,019) (54,826) (51,923) (48,495)
Income taxes (18,043) (11,567) (10,514) (10,840) (13,719)
-------- -------- -------- -------- --------
Income before cumulative effect of changes
in accounting principles 36,339 27,225 22,605 23,544 30,171
Cumulative effect of changes in accounting
principles (1,788)
-------- -------- -------- -------- --------
Net income $ 36,339 $ 27,225 $ 22,605 $ 21,756 $ 30,171
======== ======== ======== ======== ========
Casualty
Premiums written $240,723 $173,380 $158,645 $151,146 $167,498
======== ======== ======== ======== ========
Premiums earned $210,654 $155,538 $150,954 $151,886 $159,477
Investment income 19,447 24,085 23,532 23,168 26,287
Losses and adjustment expenses, less
recoveries (93,695) (69,417) (72,764) (80,957) (75,871)
Expenses (107,870) (82,848) (82,894) (75,369) (81,642)
Income taxes (9,275) (8,966) (5,004) (4,762) (8,371)
-------- -------- -------- -------- --------
Income before cumulative effect of changes
in accounting principles 19,261 18,392 13,824 13,966 19,880
Cumulative effect of changes in accounting
principles (1,788)
-------- -------- -------- -------- --------
Net income $ 19,261 $ 18,392 $ 13,824 $ 12,178 $ 19,880
======== ======== ======== ======== ========
Total Operations
Premiums written $385,966 $324,750 $293,863 $275,009 $273,485
======== ======== ======== ======== ========
Premiums earned $349,759 $287,378 $278,412 $275,008 $283,945
Investment income(1) 55,041 44,324 43,325 42,534 48,444
Losses and adjustment expenses, less
recoveries (155,477) (127,685) (132,070) (137,138) (130,111)
Expenses (166,405) (137,867) (137,720) (127,292) (130,137)
Income taxes (27,318) (20,533) (15,518) (15,602) (22,090)
-------- -------- -------- -------- --------
Income before cumulative effect of changes
in accounting principles 55,600 45,617 36,429 37,510 50,051
Cumulative effect of changes in accounting
principles (3,576)
-------- -------- -------- -------- --------
Net income $ 55,600 $ 45,617 $ 36,429 $ 33,934 $ 50,051
======== ======== ======== ======== ========
</TABLE>
- ------------
(1) Investment income includes capital gains of $3.2 million, $2.8 million, $4.3
million, $3.1 million, and $4.7 million for the years 1995 through 1991,
respectively. The 1995 allocation of investment income reflects the growing
impact of statutory requirements on capital surplus by product line.
Included in the assets of the Avco Insurance Services Group at December 31,
1995 were investments in securities carried at $759.8 million for which the
aggregate cost was $728.8 million. At December 31, 1995, the Avco Insurance
Services Group carried a valuation adjustment for its investments totaling $20.2
million. This valuation adjustment represents the excess of aggregate estimated
fair value over aggregate cost of its securities (net of applicable taxes).
5
<PAGE> 7
The composition of invested assets of the Avco Insurance Services Group at
December 31, 1995 and 1994 and the returns on such investments for the years
then ended were as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------- --------------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
(Thousands of dollars)
Composition of Invested Assets
Equities, at market
Preferred $ 6,831 .9% $ 4,727 .7%
Common 16,772 2.2 14,342 2.2
Bonds available for sale, at estimated
fair value(1) 654,961 84.2 554,146 84.4
Commercial paper, at estimated fair value
(approximates cost) 79,233 10.2 54,242 8.3
Real estate, net 3,417 .4 3,633 .6
Other invested assets 4,341 .6 4,661 .7
Cash 11,912 1.5 20,445 3.1
-------- ------- -------- -------
Total $777,467 100.0% $656,196 100.0%
======== ====== ======== ======
Return on Invested Assets
Investment income (before taxes)(2) $ 55,041 $ 44,324
Mean invested assets $707,226 $627,397
Return on mean invested assets, before
taxes 7.8% 7.1%
Return on mean invested assets, after
taxes 5.1% 4.9%
</TABLE>
- ------------
(1) Substantially all of the Registrant's bond portfolio is in investment grade
securities.
(2) 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, 1995, the Registrant operated 143
finance offices in Australia, 214 in Canada and 96 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, 1995, the percentage of finance receivables of the Australian,
Canadian and United Kingdom finance operations in relation to the Registrant's
total finance receivables was 15%, 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 other basic terms
of most credit transactions and give customers a limited right to cancel certain
loans and retail installment contracts without penalty.
6
<PAGE> 8
In addition, in certain jurisdictions in which the Registrant operates, the
retail installment business conducted by it is subject to regulatory legislation
which, among other things, limits the rates which may be charged and requires
disclosure to customers as to the terms of the financing transactions.
The insurance businesses have been subject for many years to licensing and
detailed regulation by state authorities, and the rates charged on certain lines
of insurance are subject to governmental limitation and change. In recent years,
the rates which may be charged on credit life insurance generally have been
reduced by the regulatory authorities. 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
benefits payable under policies issued by other insurance companies admitted in
the particular state up to statutory levels. 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 1,230 loan offices which the Registrant operated at December
31, 1995, 756 were located in the United States, the Virgin Islands and the
Commonwealth of Puerto Rico, 214 in Canada, 143 in Australia and 96 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 $90.1 million and $81.0 million were declared and paid in 1995
and 1994, 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, 1995 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,
---------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
REVENUES AND INCOME
Revenues $1,663,987 $1,388,234 $1,324,064 $1,340,834 $1,321,823
========== ========== ========== ========== ==========
Income Before Income Taxes $ 287,459 $ 259,110 $ 225,784 $ 203,913 $ 196,886
Income taxes 108,056 96,781 83,755 75,887 72,286
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
changes in accounting principles 179,403 162,329 142,029 128,026 124,600
Cumulative effect of changes in
accounting principles(1) (24,328)
---------- ---------- ---------- ---------- ----------
Net Income $ 179,403 $ 162,329 $ 142,029 $ 103,698 $ 124,600
========== ========== ========== ========== ==========
Ratio of Income to Fixed Charges(2) 1.6 1.7 1.7 1.5 1.5
========== ========== ========== ========== ==========
FINANCIAL CONDITION
Receivables Outstanding $6,933,526 $6,336,368 $5,469,563 $5,158,305 $4,748,428
Investments 852,450 704,244 655,690 586,339 575,468
Consolidated Assets 7,790,948 7,038,291 6,122,960 5,785,967 5,334,177
Debt (excludes savings deposits)
Commercial paper and banks 2,413,601 2,430,291 1,959,063 1,580,021 1,206,954
Notes 3,746,652 3,168,178 2,851,399 2,987,467 2,973,056
Stockholder's Equity 1,028,230 893,744 827,511 753,071 744,560
</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
1995 vs. 1994 -- Income before income taxes for the year ended December 31,
1995 was $287.5 million compared to $259.1 million for the year ended December
31, 1994, an increase of $28.4 million (11.0%). This increase resulted primarily
from: (i) an increase in the level of receivables outstanding as average finance
receivables were $6.867 billion for 1995 compared to $5.696 billion for 1994;
(ii) a 21.7% increase in earned premiums; (iii) a decrease in the ratio of
operating expenses to revenues in both the finance and insurance operations
(32.3% in 1995 as compared to 33.7% in 1994); and (iv) a 25.0% increase in
investment income due primarily to higher yields and a higher level of invested
assets. This increase in income was partially offset by: (i) an increase in the
cost of borrowed funds to 7.32% for 1995 from 6.63% for 1994; (ii) an increase
in the ratio of net credit losses to average finance receivables to 2.10% in
1995 from 1.99% in 1994; and (iii) lower receivable yields due primarily to an
increase in the level of retail installment contracts outstanding. Interest
income as a percent of average finance receivables was 18.20% for 1995 compared
to 18.39% for 1994.
Revenues for the year ended December 31, 1995 were $1.664 billion compared
to $1.388 billion for the year ended December 31, 1994, an increase of $276
million (19.9%). The increase resulted primarily from the increase in the level
of receivables outstanding, earned premium, and investment income, partially
offset by a slight decrease in yields on finance receivables.
An increase in delinquencies and net credit losses experienced during the
latter part of 1995 was due to economic slowdowns in the countries in which the
Registrant operates. The consumer debt load has continued to increase faster
than the consumers' ability to pay. The Registrant has tightened its
underwriting standards and, unless the economies in which it operates declines
further, the Registrant believes these trends will turn around by mid-1996.
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.
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.
Under interest rate exchange agreements, the Registrant makes periodic
fixed payments in exchange for periodic variable payments. The Registrant has
entered into such agreements to mitigate its exposure to increases in interest
rates on a portion of its variable rate debt. The effect of the swaps is to fix
the rate of interest on a portion of the Registrant's variable rate debt,
thereby giving it the characteristics of long-term
9
<PAGE> 11
fixed rate debt. The agreements are designated against (i) specific long-term
variable rate borrowings and (ii) existing short-term borrowings. The Registrant
continuously monitors the level of short-term borrowings to ensure that there is
a high degree of probability that its short-term borrowings will remain at a
level in excess of the notional amount of the designated agreements.
At December 31, 1995, the Registrant had interest rate exchange agreements
which had the effect of fixing the rate of interest at approximately 8.2% on
$1.063 billion of variable rate borrowing. The agreements, which expire through
2000, had a weighted average original term of 3.2 years. By utilizing medium-
and long-term fixed rate financing, as well as interest rate exchange
agreements, the Registrant had a ratio of fixed rate debt to total debt of 64%
at December 31, 1995.
During the three years ended December 31, 1995, short-term rates were lower
than long-term rates. As a result, the amount the Registrant paid on swaps
exceeded the amount it received. The spread between the variable rate the
Registrant received and the fixed rate the Registrant paid increased the
reported interest expense by $10.9 million in 1995, $17.2 million in 1994, and
$38.7 million in 1993. Such spread had the effect of increasing the Registrant's
cost of borrowing by .18% in 1995, .34% in 1994, and .84% in 1993. See Note 5 to
the Consolidated Financial Statements of the Registrant for additional
information regarding interest rate exchange agreements.
In 1995, the Registrant entered into additional fixed-pay interest rate
exchange agreements which become effective in 1996. These agreements expire
through 1999 and will fix the rate of interest at 8.1% on $204 million of
variable rate borrowing. The agreements will mitigate the Registrant's exposure
to increases in interest rates primarily by replacing maturing fixed-pay swap
agreements and fixed-rate notes.
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, 1995, was 128%. 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, 1995, $2.51 billion (36%) 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 to reflect
subsequent decreases in fair value. At December 31, 1995, real estate classified
in other assets aggregated $43.9 million.
At December 31, 1995, the Registrant had an investment portfolio of $852.5
million, primarily represented by high quality, investment grade debt
securities. Such portfolio included $39.6 million ($40.2 million market value)
of mortgage-backed securities, including $36.6 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 $90.1 million, $81.0 million and $71.0 million to Textron Inc. in
1995, 1994 and 1993, respectively. See Note 8 to the Consolidated Financial
Statements of the Registrant for restrictions.
10
<PAGE> 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Avco Financial Services, Inc.
We have audited the accompanying consolidated balance sheet of Avco Financial
Services, Inc. as of December 31, 1995 and 1994 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, 1995. 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, 1995 and 1994, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, 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.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet at December 31, 1993, 1992 and 1991,
and the related consolidated statements of income, cash flows, and changes in
stockholder's equity for the years ended December 31, 1992 and 1991 (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, 1995, 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
January 25, 1996
11
<PAGE> 13
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
(Thousands of dollars)
ASSETS
Finance receivables -- net $6,476,614 $5,904,841
Investments 852,450 704,244
Property and equipment 72,159 65,188
Insurance policy acquisition costs 54,716 42,932
Goodwill 21,388 21,770
Cash 25,454 21,817
Other 288,167 277,499
---------- ----------
TOTAL ASSETS $7,790,948 $7,038,291
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt $6,165,437 $5,603,273
Accounts payable and accrued liabilities 285,909 271,480
Insurance reserves and claims
Unearned insurance premiums 196,591 146,163
Losses and adjustment expenses 61,557 55,297
Income taxes 53,224 68,334
---------- ----------
Total liabilities 6,762,718 6,144,547
---------- ----------
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 949,436 860,133
Securities valuation adjustment 56,309 8,278
Currency translation adjustment (115,603) (112,755)
---------- ----------
Total stockholder's equity 1,028,230 893,744
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $7,790,948 $7,038,291
========= =========
</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,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
(Thousands of dollars)
REVENUES
Interest, discount and service charges $1,249,438 $1,047,783 $ 994,731
Credit life, credit disability and casualty insurance
premiums 349,759 287,378 278,412
Investment and other income (including net realized
investment gains) 64,790 53,073 50,921
---------- ---------- ----------
Total revenues 1,663,987 1,388,234 1,324,064
EXPENSES
Interest and debt expense
Interest on notes 261,223 212,422 212,495
Amortization of debt expense 4,740 3,555 3,715
Interest on commercial paper, bank loans and other
indebtedness 189,416 119,717 108,483
---------- ---------- ----------
Total 455,379 335,694 324,693
Salaries, wages, and other employee benefits 293,273 263,670 252,066
Provision for losses on collection of finance
receivables, less recoveries 149,143 136,101 120,694
Credit life, credit disability and casualty insurance
losses and adjustment expenses, less recoveries 155,477 127,685 132,070
Amortization of insurance policy acquisition costs 79,168 61,531 67,039
Other operating expenses 244,088 204,443 201,718
---------- ---------- ----------
Total expenses 1,376,528 1,129,124 1,098,280
---------- ---------- ----------
Income before income taxes 287,459 259,110 225,784
Income taxes 108,056 96,781 83,755
---------- ---------- ----------
NET INCOME $ 179,403 $ 162,329 $ 142,029
========= ========= =========
Ratio of income to fixed charges 1.6 1.7 1.7
--- --- ---
--- --- ---
</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,
-------------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
(Thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 179,403 $ 162,329 $ 142,029
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 182,057 164,553 147,305
Depreciation 19,249 16,329 16,168
Gain on sales of investments (3,167) (2,845) (4,335)
Decrease (increase) in insurance policy acquisition
costs (11,720) (8,844) 443
Increase in unearned insurance premiums and
reserves for insurance losses and adjustment
expenses 68,365 34,702 16,109
Increase in accounts payable and accrued
liabilities 4,881 34,984 2,778
Increase (decrease) in income taxes (14,540) 2,624 7,070
Other - net (20,370) (654) 28,276
----------- ---------- ----------
Net cash provided by operating activities 404,158 403,178 355,843
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased (4,272,148) (4,143,681) (3,392,345)
Finance receivables repaid or sold 3,924,429 3,181,633 2,896,021
Purchases of investments available for sale (179,210) (187,444) (37,877)
Purchases of investments held for investment (248,947)
Proceeds from sales of investments available for sale 65,513 55,384 5,368
Proceeds from sales of investments held for investment 109,269
Proceeds from maturities and calls of investments
available for sale 54,935 56,306 5,674
Proceeds from maturities and calls of investments held
for investment 121,371
Capital expenditures (22,108) (19,897) (18,486)
Cash used in acquisition of assets of HFC of
Australia, Ltd., net of cash acquired (39,808)
----------- ---------- ----------
Net cash used by investing activities (468,397) (1,057,699) (559,952)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt (307,542) 446,121 392,095
Proceeds from issuance of notes 1,376,393 1,029,764 1,016,140
Principal payments on notes (911,255) (726,158) (1,125,045)
Increase (decrease) in savings deposits 380 (247) (541)
Dividends paid (90,100) (81,000) (71,000)
----------- ---------- ----------
Net cash provided by financing activities 67,876 668,480 211,649
----------- ---------- ----------
Net increase in cash 3,637 13,959 7,540
Cash at beginning of year 21,817 7,858 318
----------- ---------- ----------
Cash at end of year $ 25,454 $ 21,817 $ 7,858
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 461,587 $ 329,753 $ 336,716
Income taxes $ 122,310 $ 100,711 $ 83,553
</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, 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
Net income 179,403 179,403
Cash dividends declared
($180.20 per common share) (90,100) (90,100)
Change in valuation adjustment 48,031 48,031
Change in translation adjustment (2,848) (2,848)
------ ---------- -------- -------------- ---------- ----------
Balance at December 31, 1995 $500 $ 137,588 $949,436 $ 56,309 $ (115,603) $1,028,230
====== ======== ======== ========== ========= =========
</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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in those statements and
accompanying notes. Actual results may differ from such estimates.
FINANCE 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
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
16
<PAGE> 18
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
1995, 1994 and 1993 relating to insured events occurring prior to each of those
years, is immaterial.
Reinsurance
Prepaid reinsurance premiums and amounts recoverable from reinsurers are
estimated and recognized in a manner consistent with the reinsured policy.
See Note 6 for further information about reinsurance.
INVESTMENTS
AFS' securities portfolio is classified as available for sale and reported
at estimated fair value. Unrealized gains and losses, net of applicable income
taxes, are reported as a separate component of stockholder's equity.
Net realized gains or losses resulting from sales or calls of investments
and losses resulting from declines in fair values of investments that are other
than temporary declines are included in revenues. The cost of securities sold
was based primarily upon the specific identification method. 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 not material at December 31, 1995.
AFS' interest rate exchange agreements are accounted for on the accrual
basis. The agreements are designated against (i) specific long-term variable
rate borrowings and (ii) existing short-term borrowings. AFS continuously
monitors the level of short-term borrowings to ensure that there is a high
degree of probability that its short-term borrowings will remain at a level in
excess of the notional amount of the designated agreements. If AFS were to
determine it probable that the level of anticipated short-term borrowings will
at any time be less than the notional amount of designated agreements, any
excess would be marked to market and the associated gain or loss recorded in
income.
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, 1995 and 1994 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 1995, 1994 and
1993 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,
1995 and total finance receivables outstanding at that date and at December 31,
1994 were as follows:
<TABLE>
<CAPTION>
Contractual maturities Less Receivables outstanding
------------------------------------ finance -----------------------
1996 1997 1998-2010 charges 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Thousands of dollars)
Consumer loans $1,774,624 $1,227,356 $1,240,024 $1,220,777 $3,021,227 $2,721,905
Real estate loans 721,490 510,765 3,804,070 2,523,706 2,512,619 2,415,621
Retail installment contracts 904,116 522,813 364,719 655,818 1,135,830 1,107,282
Other loans 125,059 86,758 76,686 24,653 263,850 91,560
---------- ---------- ---------- ---------- ---------- ----------
$3,525,289 $2,347,692 $5,485,499 $4,424,954 6,933,526 6,336,368
========= ========= ========= =========
Less allowance for credit losses (195,413) (180,573)
Less finance-related insurance reserves and claims (261,499) (250,954)
---------- ----------
Finance receivables -- net $6,476,614 $5,904,841
========= =========
</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 1995 and 1994, cash collections of receivables
(excluding finance charges) were $3.9 billion and $3.2 billion, respectively.
The ratio of cash collections to average finance receivables was approximately
57% and 56%, 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 $115.0 million at December 31, 1995.
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, 1995, committed lines totaled approximately $1.143 billion of which
approximately $437 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,
---------------------------------------------------------
1995 1994 1993 1992(a) 1991(a)
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Balance of the allowance for credit
losses at beginning of year $ 180,573 $155,015 $147,088 $135,330 $131,779
Add -- charged to income:
Real estate 19,457 21,106 25,487 17,616 12,879
Other 129,686 114,995 95,207 100,635 101,343
--------- -------- -------- -------- --------
Total 149,143 136,101 120,694 118,251 114,222
Deduct -- balances charged off:
Gross charge offs:
Real estate (21,939) (20,845) (25,125) (15,394) (10,388)
Other (154,865) (121,041) (112,979) (121,401) (122,428)
--------- -------- -------- -------- --------
Total (176,804) (141,886) (138,104) (136,795) (132,816)
Recoveries:
Real estate 1,786 1,591 1,588 1,117 729
Other 31,128 26,861 25,023 25,680 23,069
--------- -------- -------- -------- --------
Total 32,914 28,452 26,611 26,797 23,798
--------- -------- -------- -------- --------
Net charge offs (143,890) (113,434) (111,493) (109,998) (109,018)
Other 9,587 2,891 (1,274) 3,505 (1,653)
--------- -------- -------- -------- --------
Balance of the allowance for credit
losses at end of year $ 195,413 $180,573 $155,015 $147,088 $135,330
========= ======== ======== ======== ========
Balance of the allowance for credit
losses at the end of each year
applicable to:
Real estate $ 34,291 $ 34,017 $ 32,048 $ 30,316 $ 27,784
Other 161,122 146,556 122,967 116,772 107,546
--------- -------- -------- -------- --------
Total $ 195,413 $180,573 $155,015 $147,088 $135,330
========= ======== ======== ======== ========
</TABLE>
- ------------
(a) The above data for the two years ended 1992 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>
1995 1994
-------- --------
<S> <C> <C>
(Thousands of
dollars)
Debt securities:
Commercial paper, at estimated fair value (approximates cost) $ 79,233 $ 54,242
Bonds available for sale at estimated fair value (cost: $637,497,000
in 1995 and $591,497,000 in 1994) 666,184 567,940
-------- --------
Total 745,417 622,182
-------- --------
Marketable equity securities, at market:
Preferred stocks (cost: $6,513,000 in 1995 and $4,811,000 in 1994) 6,831 4,727
Common stocks, industrial, miscellaneous and all other
(cost: $39,771,000 in 1995 and $38,978,000 in 1994) 98,150 75,074
-------- --------
Total 104,981 79,801
-------- --------
First mortgages on real estate, at cost 2,052 2,261
-------- --------
Total $852,450 $704,244
======== ========
</TABLE>
The amortized cost and estimated fair value of debt securities and
marketable equity securities at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------
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 $ 64,460 $ 3,878 $ 38 $ 68,300
Obligations of states, municipalities and political
subdivisions 93,223 4,833 726 97,330
Obligations of foreign governments and agencies 78,866 4,502 58 83,310
Public utility securities 61,230 1,961 105 63,086
Mortgage-backed securities 39,554 784 176 40,162
Corporate securities 379,397 15,468 1,636 393,229
Marketable equity securities 46,284 58,788 91 104,981
-------- ------- ------ --------
Debt and marketable equity securities available
for sale $763,014 $90,214 $2,830 $850,398
======== ======= ====== ========
</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, 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
-------- ------- ------- --------
Debt and marketable equity securities available
for sale $689,528 $43,822 $31,367 $701,983
======== ======= ======= ========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1995, 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 1996 $ 106,929 $ 107,290
Due 1997 to 2000 299,114 308,061
Due 2001 to 2005 196,452 207,160
Due after 2005 74,681 82,744
Mortgage-backed securities 39,554 40,162
--------- ---------
$ 716,730 $ 745,417
======== ========
</TABLE>
Gross realized gains and losses on sales of securities were $6.7 million
and $3.5 million, respectively, in 1995 and $4.5 million and $1.7 million,
respectively, in 1994. Gross gains and losses realized on sales of debt
securities (excluding commercial paper) were $3.9 million and $1.2 million,
respectively, in 1993.
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.
For years beginning after December 31, 1994, the Australian government
increased its corporate tax rate from 33% to 36%. In accordance with FAS 109,
the change in the tax rate resulted in a revaluation of AFS' net deferred tax
assets that were in existence at the beginning of 1995. The effect of this
revaluation was not material.
Deferred income taxes have not been provided for the undistributed earnings
of foreign subsidiaries which aggregated approximately $341 million at the end
of 1995. Management's intention is to reinvest such
22
<PAGE> 24
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INCOME TAXES (CONTINUED)
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 $25 million, principally due to foreign withholding taxes.
At December 31, 1995, 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) are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
(Thousands of dollars)
Current
Federal........................................... $ 56,628 $ 53,299 $50,575
State............................................. 8,227 8,005 7,778
Foreign........................................... 42,073 41,732 34,809
-------- -------- -------
106,928 103,036 93,162
Deferred
Federal........................................... (2,826) (3,650) (7,254)
State............................................. (938) (503) (144)
Foreign........................................... 4,892 (2,102) (2,009)
-------- -------- -------
1,128 (6,255) (9,407)
-------- -------- -------
Total income tax provision................ $108,056 $ 96,781 $83,755
======== ======== =======
</TABLE>
Following is a reconciliation of the federal statutory income tax rate to
the effective income tax rate applicable to pretax income, as reflected in the
consolidated statement of income:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory tax rate................................ 35.0% 35.0% 35.0%
Increases (decreases) in taxes resulting from:
Residual tax on foreign dividends............................ .1 .6 .2
Higher tax on foreign income................................. 1.2 .7 .4
State income taxes........................................... 1.6 1.9 2.2
Nontaxable investment income................................. (1.0) (.8) (1.1)
Other, net................................................... .7 .4
---- ---- ----
Effective income tax rate...................................... 37.6% 37.4% 37.1%
==== ==== ====
</TABLE>
AFS' net deferred tax asset consisted of gross deferred tax assets and
gross deferred tax liabilities of $106.8 million and $46.4 million,
respectively, at December 31, 1995 and $92.4 million and $20.2 million,
respectively, at December 31, 1994.
23
<PAGE> 25
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INCOME TAXES (CONTINUED)
The components of AFS' net deferred tax asset as of December 31, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(Thousands of Dollars)
<S> <C> <C>
Allowance for credit losses.......................................... $ 51,005 $ 45,496
Liabilities for future policy benefits............................... 20,160 21,338
Unrealized gain on marketable equity securities...................... (30,430) (3,868)
Obligation for postretirement benefits other than pensions........... 13,664 13,611
Depreciation......................................................... (6,703) (4,991)
Insurance policy acquisition costs................................... (6,613) (9,376)
Lease financing transactions......................................... (2,616) (1,994)
Other -- principally timing of expense deductions.................... 21,967 11,936
-------- --------
Total net deferred tax asset............................... $ 60,434 $ 72,152
======== ========
</TABLE>
NOTE 5: DEBT AND CREDIT FACILITIES
At December 31, 1995 and 1994, consolidated debt consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
(Thousands of dollars)
Senior
Commercial paper $2,067,722 $2,380,039
Banks 345,879 50,252
Savings deposits 5,184 4,804
4.33% to 5.99% due 1995 to 2000(a) 730,777 1,086,811
6.00% to 7.99% due 1995 to 2002(a) 2,076,114 1,121,569
8.00% to 9.70% due 1995 to 2000(a) 834,218 685,320
10.00% to 12.85% due 1995 to 1998 101,643 266,678
---------- ----------
Total senior debt 6,161,537 5,595,473
---------- ----------
Senior subordinated
10.28% to 11.4% due 1995 to 1998 3,900 7,800
---------- ----------
Total debt $6,165,437 $5,603,273
========= =========
</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, 1995, 1994 and 1993,
without giving effect to the costs of maintaining the lines of credit, were
7.5%, 6.3% and 6.4%, respectively, for bank borrowings (primarily consisting of
borrowings in foreign operations) and 6.2%, 6.1% and 3.8%, respectively, for
commercial paper. The weighted average interest rate on bank borrowings and
commercial paper outstanding during the three years ended December 31, 1995 was
6.6%, 4.8% and 3.9%, 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.
24
<PAGE> 26
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: DEBT AND CREDIT FACILITIES (CONTINUED)
At December 31, 1995 and 1994, AFS had lines of credit with various banks
amounting to $3.28 billion and $2.59 billion, respectively, of which the unused
portion of these lines amounted to $2.64 billion and $2.33 billion,
respectively. AFS generally pays fees in support of these lines.
During the years ended December 31, 1995 and 1994, AFS issued the following
notes:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
(Thousands of dollars)
Senior notes due 1995 to 1998 (Australia) $ 55,775 $ 79,047
Senior notes due 1996 to 2000 (Canada) 139,702 99,972
Senior notes due 2000 (Hong Kong) 77,544
Senior notes due 1996 to 1999 (United Kingdom) 153,372 745
Senior notes due 1995 to 2002 (United States) 950,000 850,000
---------- ----------
Total $1,376,393 $1,029,764
========= =========
</TABLE>
Under interest rate exchange agreements, AFS makes periodic fixed payments
in exchange for periodic variable payments. AFS has entered into such agreements
to mitigate its exposure to increases in interest rates on a portion of its
variable rate debt. At December 31, 1995 and 1994, these agreements had weighted
average original terms of 3.2 years and 3.4 years and had the effect of fixing
the rate of interest at 8.2% at each date on $1.063 billion and $748.5 million
of variable rate borrowing, respectively. The spread between the variable rate
AFS received and the fixed rate AFS paid increased the reported interest expense
by $10.9 million in 1995, $17.2 million in 1994, and $38.7 million in 1993. Such
spread had the effect of increasing AFS' cost of borrowing by .18% in 1995, .34%
in 1994, and .84% in 1993.
The following details AFS' "fixed-pay" interest rate exchange agreement
activity for the years 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
(Thousands of dollars)
Beginning notional amount $ 748,517 $ 341,585
Notional amount of new contracts 509,035 513,979
Notional amount of terminated and expired contracts (194,434) (107,047)
---------- ---------
Ending notional amount $1,063,118 $ 748,517
========= =========
</TABLE>
The notional amount of fixed-pay interest rate swap agreements at December
31, 1995 categorized by annual maturity, along with the related weighted average
interest rates paid are as follows: $315.9 million (8.8%) in 1996; $260.3
million (8.6%) in 1997; $259.9 million (8.5%) in 1998; $212.1 million (6.6%) in
1999; and $14.9 million (6.7%) in 2000.
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 was not material. At December 31, 1995, $250.0
million of such agreements were in effect and expire in 1996.
In 1995, AFS entered into additional fixed-pay interest rate exchange
agreements which become effective in 1996. These agreements expire through 1999
and will fix the rate of interest at 8.1% on $204 million of variable rate
borrowing. The agreements will mitigate AFS' exposure to increases in interest
rates primarily by replacing maturing fixed-pay swap agreements and fixed-rate
notes.
25
<PAGE> 27
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: DEBT AND CREDIT FACILITIES (CONTINUED)
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, 1995, 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, 1995, for the
five years ending December 31, 2000, were (in millions): $816.4 for 1996; $531.5
for 1997; $869.7 for 1998; $434.9 for 1999; and $694.2 for 2000.
The senior subordinated notes are subordinate and junior in right of
payment, in all respects, to all indebtedness of AFS for money borrowed.
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. At December 31, 1995, reinsurance receivables with a
carrying value of $1.1 million and prepaid reinsurance premiums of $22.2 million
relating to a quota share agreement were associated with a single reinsurer. AFS
holds collateral under this reinsurance agreement in the form of a trust account
totalling $29.5 million. Additionally, AFS holds collateral under certain other
reinsurance agreements in the forms of letters of credit and trust accounts.
Reinsurance receivables and prepaid reinsurance premiums were $6.8 million and
$24.2 million respectively at December 31, 1995. Reinsurance receivables and
prepaid reinsurance premiums were not material as of December 31, 1994.
The effect of reinsurance on premiums written, premiums earned and losses
incurred for the three years ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
(Thousands of Dollars)
Premiums Written
Direct $382,592 $290,961 $259,453
Assumed 50,784 47,133 50,974
Ceded (47,410) (13,344) (16,564)
-------- -------- --------
Total premiums written $385,966 $324,750 $293,863
======== ======== ========
Premiums Earned
Direct $330,902 $254,741 $256,990
Assumed 44,195 47,114 38,801
Ceded (25,338) (14,477) (17,379)
-------- -------- --------
Total premiums earned $349,759 $287,378 $278,412
======== ======== ========
Losses Incurred
Direct $143,248 $115,218 $124,127
Assumed 16,626 15,176 18,904
Ceded (4,397) (2,709) (10,961)
-------- -------- --------
Total losses incurred $155,477 $127,685 $132,070
======== ======== ========
</TABLE>
26
<PAGE> 28
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
AFS is principally engaged in consumer finance and insurance activities.
AFS' 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, 1995, AFS operated
1,230 finance offices located in all states of the United States (except
Arkansas, Kansas, Maine, 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. AFS' 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 AFS' finance activities.
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,
-------------------------------------------------------------
1995 1994 1993 1992* 1991*
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Revenues
Financial Services and Related
Insurance $1,444,893 $1,214,918 $1,145,756 $1,160,637 $1,127,771
Nonrelated Insurance 219,094 173,316 178,308 180,197 194,052
---------- ---------- ---------- ---------- ----------
Total revenues $1,663,987 $1,388,234 $1,324,064 $1,340,834 $1,321,823
========== ========== ========== ========== ==========
Income Before Income Taxes
Financial Services and Related
Insurance $ 271,299 $ 242,314 $ 217,789 $ 193,782 $ 179,601
Nonrelated Insurance 16,160 16,796 7,995 10,131 17,285
---------- ---------- ---------- ---------- ----------
Total income before income taxes $ 287,459 $ 259,110 $ 225,784 $ 203,913 $ 196,886
========== ========== ========== ========== ==========
Identifiable Assets
Financial Services and Related
Insurance $7,437,119 $6,582,978 $5,681,416 $5,360,280 $4,927,784
Nonrelated Insurance 353,829 455,313 441,544 425,687 406,393
---------- ---------- ---------- ---------- ----------
Total identifiable assets $7,790,948 $7,038,291 $6,122,960 $5,785,967 $5,334,177
========== ========== ========== ========== ==========
</TABLE>
- ---------------
* The above data for the two years ended 1992 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,
--------------------------------------------------------------
1995 1994 1993 1992* 1991*
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Revenues
Australia $ 240,683 $ 148,264 $ 133,080 $ 137,054 $ 143,422
Canada 221,175 204,068 210,423 234,964 263,954
United Kingdom 144,675 127,813 112,607 119,351 111,556
United States 1,028,907 900,023 867,954 849,465 802,891
Other Countries** 28,547 8,066
---------- ---------- ---------- ---------- ----------
Total revenues $1,663,987 $1,388,234 $1,324,064 $1,340,834 $1,321,823
========== ========== ========== ========== ==========
Income (Loss) Before Income Taxes
Australia $ 53,801 $ 43,796 $ 34,542 $ 30,125 $ 27,593
Canada 48,236 47,029 42,503 37,776 51,070
United Kingdom 22,737 21,572 14,819 14,364 12,788
United States 158,592 147,274 133,920 121,648 105,435
Other Countries** 4,093 (561)
---------- ---------- ---------- ---------- ----------
Total income before income taxes $ 287,459 $ 259,110 $ 225,784 $ 203,913 $ 196,886
========== ========== ========== ========== ==========
Identifiable Assets
Australia $1,081,286 $ 646,958 $ 526,410 $ 473,424 $ 501,093
Canada 1,031,678 963,689 937,339 895,050 1,017,341
United Kingdom 606,857 585,736 465,820 435,661 427,126
United States 4,823,918 4,735,989 4,193,391 3,981,832 3,388,617
Other Countries** 247,209 105,919
---------- ---------- ---------- ---------- ----------
Total identifiable assets $7,790,948 $7,038,291 $6,122,960 $5,785,967 $5,334,177
========== ========== ========== ========== ==========
</TABLE>
- ------------
* The above data for the two years ended 1992 is not reported upon herein by
independent auditors.
** Includes the operations of Hong Kong, New Zealand and Spain.
At December 31, 1995, finance receivables in the United States represented
59% of AFS' total finance receivables outstanding. At such date, receivables
outstanding in no state exceeded 7% of the United States' portfolio, except
California in which outstanding receivables represented 16% of the United
States' portfolio and 9% of the consolidated portfolio.
Capital expenditures and depreciation expense for each of the five years
ended 1995 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, 1995, approximately $262 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.
28
<PAGE> 30
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: CERTAIN PROVISIONS CONTAINED IN NOTES, LOAN AGREEMENTS AND CERTIFICATE
OF INCORPORATION AND OTHER RESTRICTIONS (CONTINUED)
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 $250 million at December 31, 1995.
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 $51 million, $47 million and
$48 million in 1995, 1994 and 1993, respectively. Future minimum rental
commitments for all noncancelable operating leases in effect at December 31,
1995 approximated $35 million for 1996, $29 million for 1997, $23 million for
1998, $18 million for 1999, $13 million for 2000 and $69 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 benefits payable under
policies issued by other insurance companies admitted in the particular state up
to statutory levels. 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 $16
million, $15 million and $13 million for 1995, 1994 and 1993, 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.
AFS recognizes the cost of postretirement benefits using the accrual method
of accounting over the employees' years of service. Such costs for 1995, 1994
and 1993 were not material.
29
<PAGE> 31
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
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, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------- -------
(Thousands of
dollars)
<S> <C> <C>
Actuarial present value of benefits attributed to:
Retirees $24,676 $22,015
Fully eligible active plan participants 5,414 5,738
Other active plan participants 309 355
------- -------
Accumulated postretirement benefit obligation 30,399 28,108
Unrecognized net actuarial gains 4,539 7,445
------- -------
Postretirement benefit liability recognized on the
consolidated balance sheet $34,938 $35,553
======= =======
</TABLE>
An assumed discount rate of 8.25% for 1995, 7.25% for 1994 and 8% for 1993
was used to determine postretirement benefit costs other than pensions. An
assumed discount rate of 7.25% and 8.25% was used to determine the status of
AFS' plans at December 31, 1995 and December 31, 1994, 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 8% for retirees age
65 and over and 12% for retirees under age 65 in 1996, and both rates are
assumed to decrease gradually to 5.5% until 2001 and 2003, 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, 1995 by $1.9 million and increased the aggregate
of the service and interest cost components of postretirement benefit costs for
1995 by $100,000.
NOTE 12: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations for the years ended December 31, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------- --------------------------------------------
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 $397,595 $406,780 $420,607 $439,005 $327,566 $336,835 $353,206 $370,627
======== ======== ======== ======== ======== ======== ======== ========
Income before income taxes $ 69,678 $ 69,551 $ 75,603 $ 72,627 $ 61,886 $ 63,970 $ 68,149 $ 65,105
Income taxes 26,349 26,027 28,527 27,153 23,061 24,235 25,520 23,965
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 43,329 $ 43,524 $ 47,076 $ 45,474 $ 38,825 $ 39,735 $ 42,629 $ 41,140
======== ======== ======== ======== ======== ======== ======== ========
</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
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,
30
<PAGE> 32
AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 ($263.9 million and $261.5 million, net carrying value,
respectively, at December 31, 1995 and $81.9 million and $251.0 million,
respectively, at December 31, 1994) 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.
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, 1995 December 31, 1994
------------------------ ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(Thousands of dollars)
ASSETS:
Investments $ 852,450 $ 852,450 $ 704,244 $ 704,244
========= ========= ========= =========
Finance receivables $6,474,263 $6,456,263 $6,073,875 $6,061,875
========= ========= ========= =========
LIABILITIES:
Debt:
Variable rate debt $3,310,181 $3,310,181 $3,164,929 $3,164,929
Interest rate exchange agreements 531 (25,585)
Fixed rate debt 2,855,256 2,930,534 2,438,344 2,350,844
---------- ---------- ---------- ----------
Total debt $6,165,437 $6,241,246 $5,603,273 $5,490,188
========= ========= ========= =========
</TABLE>
31
<PAGE> 33
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).
32
<PAGE> 34
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, 1995 and 1994........ 12
Consolidated Statement of Income for the three years ended
December 31, 1995............................................... 13
Consolidated Statement of Cash Flows for the three years
ended
December 31, 1995............................................... 14
Consolidated Statement of Changes in Stockholder's Equity for
the
three years ended December 31, 1995............................. 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, 1995, the Registrant
filed a report on Form 8-K dated December 8, 1995 relating
to the Registrant's Registration Statement Nos. 33-50547 and
33-55953 with respect to which the Registrant commenced an
offering on December 5, 1995 of $200,000,000 of 6% Senior
Notes due August 15, 2002. The report included as an exhibit
a form of 6% senior note.
(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. In addition, instruments with
respect to issues of long-term debt being registered have
been filed as exhibits to the Registrant's Registration
Statement Nos. 33-50547 and 33-55953, with the respective
form of note relating to specific issues filed as an exhibit
to the relevant current report on Form 8-K, which are herein
incorporated by reference.
*(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.
33
<PAGE> 35
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.
AVCO FINANCIAL SERVICES, INC.
Dated March 27, 1996 By WARREN R. LYONS
--------------------------------------
Warren R. Lyons
Chairman (Principal Executive Officer)
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, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------------------- --------------------------------------------
<S> <C>
*WARREN R. LYONS Chairman of the Board of Directors
- ----------------------------------------------- (Principal Executive Officer)
Warren R. Lyons
*RONALD BUKOW Executive Vice President, Treasurer and
- ----------------------------------------------- Director (Principal Financial Officer)
Ronald Bukow
*LEWIS B. CAMPBELL Director
- -----------------------------------------------
Lewis B. Campbell
*STEPHEN J. DAVIS Vice Chairman of the Board of Directors
- -----------------------------------------------
Stephen J. Davis
*GARY L. FITE Executive Vice President, Controller and
- ----------------------------------------------- Director (Principal Accounting Officer)
Gary L. Fite
*GAYLORD E. FRANCIS Executive Vice President and Director
- -----------------------------------------------
Gaylord E. Francis
*STEPHEN A. GILIOTTI Director
- -----------------------------------------------
Stephen A. Giliotti
*JAMES F. HARDYMON Director
- ----------------------------------------------
James F. Hardymon
*DAVID R. HEVIA Senior Vice President and Director
- ----------------------------------------------
David R. Hevia
</TABLE>
34
<PAGE> 36
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------------------- --------------------------------------------
<S> <C>
*WAYNE W. JUCHATZ Director
- -----------------------------------------------
Wayne W. Juchatz
*STEPHEN L. KEY Director
- -----------------------------------------------
Stephen L. Key
*WILLIAM J. PEARSON Executive Vice President and Director
- -----------------------------------------------
William J. Pearson
*MARK A. SCHIMBOR Executive Vice President and Director
- -----------------------------------------------
Mark A. Schimbor
*EUGENE R. SCHUTT, JR. Executive Vice President and Director
- -----------------------------------------------
Eugene R. Schutt, Jr.
*HERBERT F. SMITH Executive Vice President, Secretary and
- ----------------------------------------------- Director (General Counsel)
Herbert F. Smith
*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>
35
<PAGE> 37
AVCO FINANCIAL SERVICES, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
(Thousands of dollars)
BALANCE SHEET
ASSETS
Demand notes receivable from Avco Financial Services Group
subsidiaries $ 3,807,690 $ 3,880,641
Investments in subsidiaries, at equity 1,443,003 1,400,785
Other 129,293 97,894
----------- -----------
Total assets $ 5,379,986 $ 5,379,320
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt $ 4,293,732 $ 4,397,312
Other 58,024 88,264
----------- -----------
Total liabilities 4,351,756 4,485,576
Stockholder's equity 1,028,230 893,744
----------- -----------
Total liabilities and stockholder's equity $ 5,379,986 $ 5,379,320
========= =========
</TABLE>
See accompanying note.
S-1
<PAGE> 38
AVCO FINANCIAL SERVICES, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (CONTINUED)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
(Thousands of dollars)
STATEMENT OF INCOME
Revenues (primarily interest from Avco Financial
Services Group subsidiaries) $ 295,315 $ 231,116 $ 218,396
Expenses (primarily interest expense) (305,314) (245,092) (229,512)
--------- --------- ---------
Loss before items shown below (9,999) (13,976) (11,116)
Income tax benefits 3,450 4,868 3,605
Equity in income of subsidiaries 185,952 171,437 149,540
--------- --------- ---------
Net income $ 179,403 $ 162,329 $ 142,029
========= ========= =========
STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 179,403 $ 162,329 $ 142,029
Adjustments to reconcile net income to net cash provided
by operating activities 3,854 31,395 (4,771)
--------- --------- ---------
Net cash provided by operating activities 183,257 193,724 137,258
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease/(increase) in demand notes receivable 20,207 (450,704) (178,923)
Increase in investments in subsidiaries (9,784) (122,505) (116,490)
--------- --------- ---------
Net cash provided/(used) by investing activities 10,423 (573,209) (295,413)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease/(increase) in short-term debt (426,815) 151,255 258,412
Proceeds from issuance of notes 950,000 850,000 705,000
Principal payments on notes (626,765) (540,770) (734,257)
Dividends paid (90,100) (81,000) (71,000)
--------- --------- ---------
Net cash provided/(used) by financing activities (193,680) 379,485 158,155
--------- --------- ---------
Net change in cash
Cash at beginning of year
--------- --------- ---------
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, 1995 for the
five years ending December 31, 2000 were (in millions): $603.1 in 1996; $300.0
in 1997; $335.6 in 1998; $434.9 in 1999; and $525.0 in 2000.
At December 31, 1995 and 1994, the parent company was guarantor for payment
of all its foreign subsidiaries' commercial paper and bank line borrowings of
$1.223 billion and $938.3 million, respectively, and senior notes of $1.148
billion and $892.9 million, respectively.
The Registrant received cash dividends from its subsidiaries aggregating
$194.6 million in 1995, $45.5 million in 1994, and $48.0 million in 1993.
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,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Thousands of dollars)
Income
Income before income taxes and cumulative
effect of changes in accounting
principles $ 287,459 $ 259,110 $ 225,784 $ 203,913 $ 196,886
--------- --------- --------- --------- ---------
Fixed charges to be added back to
income --
Interest and debt expense 455,379 334,084 324,211 370,884 395,703
Rentals (one-third of all rent and
related costs charged to income) 14,905 13,942 14,378 15,460 14,915
--------- --------- --------- --------- ---------
Total fixed charges 470,284 348,026 338,589 386,344 410,618
--------- --------- --------- --------- ---------
Income before income taxes, cumulative
effect of changes in accounting principles
and fixed charges $ 757,743 $ 607,136 $ 564,373 $ 590,257 $ 607,504
======== ======== ======== ======== ========
Ratio
Number of times fixed charges covered by
income before income taxes, cumulative
effect of changes in accounting
principles, and fixed charges 1.6 1.7 1.7 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 January 25, 1996, 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,
1995.
ERNST & YOUNG LLP
Orange County, California
March 27, 1996
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 1995 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 27th day of March, 1996.
/s/ W. R. LYONS Chairman and Director
- ---------------------------------
W. R. Lyons
/s/ S. J. DAVIS Vice Chairman and Director
- ---------------------------------
S. J. Davis
/s/ E. R. SCHUTT, JR. Executive Vice President,
- --------------------------------- President International
E. R. Schutt, Jr. Operations and Director
/s/ G. E. FRANCIS Executive Vice President,
- --------------------------------- President Strategic Business
G. E. Francis Operations and Director
/s/ R. BUKOW Executive Vice President,
- --------------------------------- Treasurer, Chief Financial
R. Bukow Officer and Director
S-5
<PAGE> 2
/s/ G. L. FITE Executive Vice President,
- --------------------------------- Controller and Director
G. L. Fite
/s/ W. J. PEARSON Executive Vice President and
- --------------------------------- Director
W. J. Pearson
/s/ M. A. SCHIMBOR Executive Vice President,
- --------------------------------- President U.S. Finance
M. A. Schimbor and Director
/s/ H. F. SMITH Executive Vice President,
- --------------------------------- Secretary and Director
H. F. Smith
/s/ J. C. SPENCE Director
- ---------------------------------
J. C. Spence
/s/ DAVID HEVIA Senior Vice President and
- --------------------------------- Director
David Hevia
/s/ L. B. CAMPBELL Director
- ---------------------------------
L. B. Campbell
/s/ JAMES F. HARDYMON Director
- ---------------------------------
J. F. Hardymon
/s/ S. A. GILIOTTI Director
- ---------------------------------
S. A. Giliotti
/s/ W. W. JUCHATZ Director
- ---------------------------------
W. W. Juchatz
/s/ S. I. KEY Director
- ---------------------------------
S. I. KEY
/s/ R. A. WATSON Director
- ---------------------------------
R. A. Watson
S-6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AFS'
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1995 AND CONSOLIDATED STATEMENT OF
INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 25,454
<SECURITIES> 0
<RECEIVABLES> 6,933,526
<ALLOWANCES> 195,413
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 72,159
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,790,948
<CURRENT-LIABILITIES> 0
<BONDS> 3,751,836
<COMMON> 500
0
0
<OTHER-SE> 1,027,730
<TOTAL-LIABILITY-AND-EQUITY> 7,790,948
<SALES> 0
<TOTAL-REVENUES> 1,663,987
<CGS> 0
<TOTAL-COSTS> 234,645
<OTHER-EXPENSES> 537,361
<LOSS-PROVISION> 149,143
<INTEREST-EXPENSE> 455,379
<INCOME-PRETAX> 287,459
<INCOME-TAX> 108,056
<INCOME-CONTINUING> 179,403
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 179,403
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
