<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, 1997
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, 1997, the Registrant had 500,000 shares of common stock ($1
par value per share) outstanding, all of which are owned by Textron Inc.
================================================================================
<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 provides financial services to consumers and businesses
worldwide. Consumer lending has been the focus of the Registrant's finance
business; however, in 1996, the Registrant embarked on a strategy to expand its
commercial financing in the international sector. Accordingly, the Registrant's
finance receivables presented below have been segregated into two categories,
consumer and commercial. For years prior to 1997, certain reclassifications have
been made to be consistent with the 1997 presentation.
The Registrant's consumer lending activities consist primarily of the
following: (i) consumer loans which are unsecured or secured by personal
property for relatively small amounts and short periods; (ii) real estate loans
which are secured by real property for larger amounts and for considerably
longer periods; and (iii) retail installment contracts, principally covering
personal property. Its consumer loan business is conducted through a network of
branch offices. At December 31, 1997, the Registrant operated 1,199 consumer
finance offices located throughout the United States, the Commonwealth of Puerto
Rico, the Virgin Islands, Australia, Canada, Hong Kong, India, Ireland, New
Zealand, Spain, Sweden and the United Kingdom.
The Registrant's commercial business focuses primarily on equipment leasing
and inventory financing. During 1996 and 1997, the Registrant acquired or opened
commercial financing operations in Australia, Canada, France, India, and the
United Kingdom. Such operations added to its commercial lending business already
being conducted in Australia and Hong Kong. The Registrant's commercial business
portfolio grew to approximately $900 million at December 31, 1997, from
approximately $300 million at December 31, 1996.
Through various insurance subsidiaries, the Registrant also offers a
variety of insurance products to its consumer loan customers and customers of
independent financial institutions. Such products include credit life, credit
disability and casualty insurance.
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, 1997, the Registrant employed approximately 7,900 persons.
1
<PAGE> 3
FINANCE OPERATIONS
Finance Receivables Outstanding
The Registrant's finance receivable portfolio consists of the
following:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
DOMESTIC:
Consumer loans....................... $1,582,119 $1,794,932 $1,731,912 $1,669,686 $1,508,343
Real estate loans.................... 1,603,904 1,721,008 1,696,090 1,737,606 1,660,793
Retail installment contracts......... 736,808 630,117 605,623 650,882 394,239
---------- ---------- ---------- ---------- ----------
Total consumer finance.......... 3,922,831 4,146,057 4,033,625 4,058,174 3,563,375
Commercial finance.............. -- -- 81,516 81,920 75,514
---------- ---------- ---------- ---------- ----------
Total domestic............. 3,922,831 4,146,057 4,115,141 4,140,094 3,638,889
INTERNATIONAL:
Consumer loans....................... 1,440,503 1,411,130 1,289,315 1,052,219 881,651
Real estate loans.................... 790,985 825,842 816,529 678,015 601,264
Retail installment contracts......... 684,870 579,213 530,207 456,400 347,759
---------- ---------- ---------- ---------- ----------
Total consumer finance.......... 2,916,358 2,816,185 2,636,051 2,186,634 1,830,674
Commercial finance.............. 903,452 291,496 182,334 9,640 --
---------- ---------- ---------- ---------- ----------
Total international........ 3,819,810 3,107,681 2,818,385 2,196,274 1,830,674
---------- ---------- ---------- ---------- ----------
Total...................... $7,742,641 $7,253,738 $6,933,526 $6,336,368 $5,469,563
========== ========== ========== ========== ==========
</TABLE>
The following table presents the Registrant's outstanding finance
receivables by country:
<TABLE>
<CAPTION>
Total
Consumer Commercial ------------------------
Finance Finance Dollars % of Total
---------- ---------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Australia........................... $ 737,018 $424,892 $1,161,910 15.0%
Canada.............................. 1,104,929 88,215 1,193,144 15.4
France.............................. -- 105,398 105,398 1.4
Hong Kong........................... 230,679 143,893 374,572 4.9
India............................... 1,529 2,019 3,548 0.0
New Zealand......................... 55,167 -- 55,167 0.7
Spain............................... 40,870 -- 40,870 0.5
Sweden.............................. 33,767 -- 33,767 0.4
United Kingdom...................... 712,399 139,035 851,434 11.0
United States....................... 3,922,831 -- 3,922,831 50.7
---------- -------- ---------- -----
Total.......................... $6,839,189 $903,452 $7,742,641 100.0%
========== ======== ========== =====
</TABLE>
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.
At December 31, 1997, finance receivables in the United States represented
51% of the Registrant's total finance receivables outstanding. At such date,
receivables outstanding in no state exceeded 9% of the United States' portfolio,
except California in which outstanding receivables represented 16% of the United
States' portfolio and 8% of the consolidated portfolio.
2
<PAGE> 4
Consumer Loans and Real Estate Loans
The Registrant makes consumer loans to individuals primarily on the basis
of the borrower's income while real estate loans consider both the borrower's
income and the value of the real estate. 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. Both consumer and real estate loans are
limited to amounts which the borrower appears able to repay without hardship. In
1997, the Registrant received collateral on 53% of the dollar amount of consumer
loans (including refinancings) made during the year. The realizable value of the
household goods or other property on which liens are taken as security is in
many cases less than the amount of the contract. For real estate loans, the
amount of the loan is limited to a maximum of 85% of the unencumbered appraised
market value. Of the aggregate of 873,151 consumer and real estate loans written
during the year ended December 31, 1997, approximately 47% included advances to
refinance outstanding balances. 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 1997, the weighted average
maturity of real estate loans written was approximately 11 years.
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 was as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Thousands of dollars*)
<S> <C> <C> <C> <C> <C>
New funds advanced
Consumer loans
Funds advanced.................. $1,805,032 $1,868,293 $1,929,581 $1,736,634 $1,474,139
Average amount.................. $ 2,132 $ 2,304 $ 2,272 $ 2,014 $ 1,836
Real estate loans
Funds advanced.................. $ 678,841 $ 635,323 $ 709,624 $ 727,139 $ 642,733
Average amount.................. $ 25,706 $ 21,982 $ 23,608 $ 23,714 $ 21,022
Receivables outstanding at end of
period
Consumer loans
Net balance..................... $3,022,622 $3,206,062 $3,021,227 $2,721,905 $2,389,994
Average amount.................. $ 2,857 $ 2,909 $ 2,888 $ 2,725 $ 2,407
Real estate loans
Net balance..................... $2,394,889 $2,546,850 $2,512,619 $2,415,621 $2,262,057
Average amount.................. $ 29,936 $ 29,615 $ 27,311 $ 27,450 $ 25,120
</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. The Registrant purchases retail installment contracts with
original terms generally not exceeding three years.
3
<PAGE> 5
The following table summarizes retail installment contracts purchased
(excluding any contracts acquired from other finance companies) and outstanding:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
(Thousands of dollars*)
<S> <C> <C> <C>
Retail installment contracts
purchased.......................... $ 1,643,996 $ 1,298,976 $ 1,310,373
Retail installment contracts
outstanding at end of period:
Net balance..................... $ 1,421,678 $ 1,209,330 $ 1,135,830
Average amount.................. $ 1,021 $ 1,017 $ 1,067
<CAPTION>
Year ended December 31,
---------------------------------------
1994 1993
------------------ ------------------
<S> <C> <C>
Retail installment contracts
purchased.......................... $ 1,319,291 $ 1,041,981
Retail installment contracts
outstanding at end of period:
Net balance..................... $ 1,107,282 $ 741,998
Average amount.................. $ 1,042 $ 859
</TABLE>
- ------------
* Except average amount.
Commercial Receivables
At December 31, 1997, commercial receivables outstanding of $903.5 million
consisted primarily of equipment finance lease receivables and inventory
financing generated by the Registrant's international operations. The finance
leases are generally written for periods not exceeding 7 years. Inventory
financing receivables generally mature within one year.
Finance leases are secured by the financed equipment and, in some
instances, are personally guaranteed by the principals or include recourse
arrangements with the originating vendor. Inventory financing receivables are
secured by the inventory of the borrowing distributor or dealer and, in some
programs, by recourse arrangements with the original manufacturer.
Finance Yields
The annual finance charge as a percent of average receivables outstanding
(yield) was as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Consumer finance
Domestic.......................................... 17.29% 17.76% 17.33%
International..................................... 19.90% 20.41% 20.12%
Total consumer finance......................... 18.36% 18.82% 18.40%
Commercial finance
Domestic.......................................... -- 16.27% 17.16%
International..................................... 11.73% 11.40% 11.65%
Total commercial finance....................... 11.73% 12.38% 13.31%
Total.......................................... 17.77% 18.52% 18.20%
</TABLE>
4
<PAGE> 6
Finance Revenues
Revenues from finance receivables are affected by the level of receivables
outstanding, the interest rate environment, competitive pressures, and the
product mix. The following table summarizes the changes in revenues due to both
the level of receivables outstanding and finance receivable yields:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1997 1996
---------- ----------
(Thousands of dollars)
<S> <C> <C>
Change due to:
Growth in receivables
Consumer finance
Domestic........................................ $ 22,744 $(23,566)
International................................... 29,918 22,028
-------- --------
Total consumer finance....................... 52,662 (1,538)
Commercial finance
Domestic........................................ -- (3,028)
International................................... 48,338 5,856
-------- --------
Total commercial finance..................... 48,338 2,828
-------- --------
Total impact of growth....................... 101,000 1,290
Finance charge yield
Consumer finance
Domestic........................................ (18,355) 17,297
International................................... (8,587) 8,619
-------- --------
Total consumer finance....................... (26,942) 25,916
Commercial finance
Domestic........................................ (10,365) (732)
International................................... 797 775
-------- --------
Total commercial finance..................... (9,568) 43
-------- --------
Total impact of yield changes................ (36,510) 25,959
-------- --------
Total.................................................. $ 64,490 $ 27,249
======== ========
</TABLE>
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 years ended December 31, 1997 and
1996 were $(279.0) million and $130.1 million, respectively.
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. Domestic and
international nonearning assets totaled approximately $89.3 million and $47.5
million, respectively, at December 31, 1997 and $90.2 million and $50.5 million,
respectively, at December 31, 1996. For 1997, the impact of nonearning assets on
revenues was not material.
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.
5
<PAGE> 7
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 real estate owned are reflected in other operating expenses. At
December 31, 1997 and 1996, real estate owned was $56.6 million and $48.0
million, respectively.
The following table summarizes the amount of net credit losses, the
percentage which these items bear to average finance receivables, and the
allowance for losses as a percentage of finance receivables. 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, 1997.
<TABLE>
<CAPTION>
Year ended at December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Net Credit Losses
Consumer finance
Real estate loans.............. $ 16,773 $ 20,577 $ 20,153 $ 19,303 $ 23,537
Other loans*................... 202,327 171,018 120,796 91,213 85,645
-------- -------- -------- -------- --------
Total consumer finance.... 219,100 191,595 140,949 110,516 109,182
Commercial finance................ 1,993 3,080 2,941 2,918 2,311
-------- -------- -------- -------- --------
Total..................... $221,093 $194,675 $143,890 $113,434 $111,493
======== ======== ======== ======== ========
Net Credit Losses as a Percentage of
Average Finance Receivables
Consumer finance
Real estate loans.............. 0.67% 0.82% 0.80% 0.84% 1.07%
Other loans*................... 4.63% 4.21% 2.96% 2.75% 2.91%
Total consumer finance.... 3.18% 2.91% 2.14% 1.97% 2.13%
Commercial finance................ 0.30% 0.97% 1.08% 3.62% 3.29%
Total..................... 2.93% 2.82% 2.10% 1.99% 2.14%
Allowance for Losses to Finance
Receivables
Consumer finance.................. 3.25% 3.06% 2.84% 2.84% 2.83%
Commercial finance................ 1.76% 1.79% 2.26% 3.42% 3.30%
</TABLE>
- ---------------
* Includes consumer loans and retail installment contracts.
The following table presents for the five years ended December 31, 1997
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>
Year ended at December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consumer finance
Real estate loans................. 1.70% 1.89% 1.76% 1.29% 1.45%
Other loans*...................... 4.28% 3.96% 3.50% 2.84% 3.12%
Total consumer finance.... 3.42% 3.25% 2.89% 2.28% 2.46%
Commercial finance.................. 1.02% 0.79% 0.89% 1.97% 1.85%
Total..................... 3.16% 3.20% 2.81% 2.27% 2.45%
</TABLE>
- ---------------
* Includes consumer loans and retail installment contracts.
6
<PAGE> 8
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. The Registrant's average
annual cost of borrowed funds, for each fiscal year 1997 through 1995, grouped
by major categories of borrowing, was as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Domestic debt
Commercial paper and bank borrowings............. 5.65% 5.54% 6.08%
Senior and senior subordinated notes*............ 6.51% 6.74% 6.89%
Total domestic........................... 6.15% 6.28% 6.59%
International debt
Commercial paper and bank borrowings............. 6.14% 7.15% 8.26%
Senior and senior subordinated notes*............ 7.41% 8.48% 8.81%
Total international...................... 6.71% 7.80% 8.53%
Total......................................... 6.39% 6.88% 7.32%
</TABLE>
- ---------------
* Includes savings deposits
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 net interest margins were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
Amount Percent(1) Amount Percent(1) Amount Percent(1)
---------- ---------- ---------- ---------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Interest, discount and service
charges............................. $1,341,177 17.77% $1,276,687 18.52% $1,249,438 18.20%
Interest and debt expense............. 434,055 5.75 426,260 6.18 455,379 6.64
---------- ------ ---------- ------ ---------- ------
Net interest margin............... $ 907,122 12.02% $ 850,427 12.34% $ 794,059 11.56%
========== ====== ========== ====== ========== ======
</TABLE>
- ---------------
(1) Rates are expressed as a percent of average finance receivables outstanding
for the indicated period.
The interest expense on borrowings is affected by the level of debt
outstanding, the interest rate environment, and the mix of types of borrowings.
The changes in interest expense due to changes in the level of debt outstanding
and the average cost of borrowing were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1996
---------- ----------
(Thousands of dollars)
<S> <C> <C>
Change due to:
Growth in debt
Domestic.......................................... $ 6,215 $ (8,900)
International..................................... 27,800 6,515
-------- --------
Total impact of growth....................... 34,015 (2,385)
Borrowing rate
Domestic.......................................... (5,521) (11,682)
International..................................... (20,699) (15,052)
-------- --------
Total impact of rate changes................. (26,220) (26,734)
-------- --------
Total............................................. $ 7,795 $(29,119)
======== ========
</TABLE>
7
<PAGE> 9
INSURANCE OPERATIONS
The Registrant is engaged in the credit life, credit disability and
casualty insurance business in most states of the United States, Australia,
Canada, and New Zealand. Where applicable laws permit, the Registrant makes
available to customers credit life, credit disability and casualty insurance
through the Registrant's consumer finance operations or independent companies.
During 1997, approximately 70% of the credit life and credit disability
insurance business and approximately 18% of the casualty insurance business was
derived from the Registrant's finance customers. The remaining credit life,
credit disability and casualty insurance business is written with customers on a
direct basis or through independent agents.
The casualty business consists primarily of insurance covering collateral
protection, involuntary unemployment, personal property and automobile physical
damage.
The following table summarizes the results of the Registrant's insurance
operations by major line of business:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Credit Life, Credit Disability and Other
Premiums written.......................... $ 170,860 $ 151,048 $ 145,243 $ 151,370 $ 135,218
========= ========= ========= ========= =========
Premiums earned........................... $ 151,255 $ 145,026 $ 139,105 $ 131,840 $ 127,458
Investment income......................... 33,488 38,258 35,594 20,239 19,793
Losses and adjustment expenses, less
recoveries.............................. (63,723) (64,211) (61,782) (58,268) (59,306)
Expenses.................................. (62,838) (61,218) (58,535) (55,019) (54,826)
Income taxes.............................. (18,830) (19,007) (18,043) (11,567) (10,514)
--------- --------- --------- --------- ---------
Net income................................ $ 39,352 $ 38,848 $ 36,339 $ 27,225 $ 22,605
========= ========= ========= ========= =========
Casualty
Premiums written.......................... $ 264,136 $ 254,931 $ 240,723 $ 173,380 $ 158,645
========= ========= ========= ========= =========
Premiums earned........................... $ 262,748 $ 253,615 $ 210,654 $ 155,538 $ 150,954
Investment income......................... 24,040 25,942 19,447 24,085 23,532
Losses and adjustment expenses, less
recoveries.............................. (120,435) (119,846) (93,695) (69,417) (72,764)
Expenses.................................. (121,100) (120,633) (107,870) (82,848) (82,894)
Income taxes.............................. (15,307) (13,041) (9,275) (8,966) (5,004)
--------- --------- --------- --------- ---------
Net income................................ $ 29,946 $ 26,037 $ 19,261 $ 18,392 $ 13,824
========= ========= ========= ========= =========
Total Operations
Premiums written.......................... $ 434,996 $ 405,979 $ 385,966 $ 324,750 $ 293,863
========= ========= ========= ========= =========
Premiums earned........................... $ 414,003 $ 398,641 $ 349,759 $ 287,378 $ 278,412
Investment income(1)...................... 57,528 64,200 55,041 44,324 43,325
Losses and adjustment expenses, less
recoveries.............................. (184,158) (184,057) (155,477) (127,685) (132,070)
Expenses.................................. (183,938) (181,851) (166,405) (137,867) (137,720)
Income taxes.............................. (34,137) (32,048) (27,318) (20,533) (15,518)
--------- --------- --------- --------- ---------
Net income................................ $ 69,298 $ 64,885 $ 55,600 $ 45,617 $ 36,429
========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) Investment income includes capital gains of $5.2 million, $11.2 million,
$3.2 million, $2.8 million and $4.3 million for the years 1997 through 1993,
respectively.
Included in the assets of the Registrant's insurance operations at December
31, 1997 were investments in securities carried at $825.5 million for which the
aggregate cost was $805.4 million. At December 31, 1997, the Registrant carried
a valuation adjustment for these investments totaling $13.1 million. This
valuation adjustment represents the excess of aggregate estimated fair value
over aggregate cost of its securities (net of applicable taxes).
8
<PAGE> 10
The composition of invested assets of the Registrant's insurance operations
at December 31, 1997 and 1996 and the returns on such investments for the years
then ended were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Composition of Invested Assets
Equities, at market
Preferred.............................. $ 5,716 .7% $ 7,102 .9%
Common................................. 13,371 1.6 17,842 2.1
Bonds available for sale, at estimated
fair value(1).......................... 748,694 88.3 682,116 84.0
Commercial paper, at estimated fair value
(approximates cost).................... 56,299 6.6 89,180 11.0
First mortgages on real estate, at cost... 1,423 .2 1,975 .2
-------- --------
Investments............................ 825,503 798,215
Other invested assets..................... 3,839 .5 3,507 .5
Cash...................................... 18,078 2.1 10,761 1.3
-------- ----- -------- -----
Total............................. $847,420 100% $812,483 100.0%
======== ===== ======== =====
Return on Invested Assets
Investment income (before taxes)(2)....... $ 57,528 $ 64,200
Mean invested assets...................... $821,126 $765,653
Return on mean invested assets, before
taxes.................................. 7.0% 8.4%
Return on mean invested assets, after
taxes.................................. 4.7% 5.7%
</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.
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, limit maximum charges for loans, the maximum amount and terms thereof.
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. The
Registrant is also subject to legislation addressing, among other things, issues
of credit discrimination.
In addition, in certain jurisdictions in which the Registrant operates, the
retail installment business conducted by it is subject to regulations and
legislation which, among other things, limit the rates which may be charged and
require disclosure to customers of specific terms of the financing transactions.
The insurance businesses are subject to licensing and detailed regulation
by governmental authorities, and the rates charged on certain lines of insurance
are subject to governmental limitation and change. Insurance regulations also
include limitations on the amounts of dividends that can be paid by insurance
companies.
The laws of many jurisdictions 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 jurisdictions 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
9
<PAGE> 11
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 1,199 loan offices which the Registrant operated at December
31, 1997, 715 were located in the United States, the Virgin Islands and the
Commonwealth of Puerto Rico, 215 in Canada, 141 in Australia and 98 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. The outcome of
specific legal proceedings could be unfavorable to the Registrant or any
subsidiary. 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).
10
<PAGE> 12
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 $147.8 million and $94.9 million were declared and paid in
1997 and 1996, 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, 1997 and
is reported upon in the "Report of Independent Auditors" included on page 16.
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,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
REVENUES AND INCOME
Revenues
Financial Services and Related
Insurance....................... $1,574,412 $1,499,488 $1,444,893 $1,214,918 $1,145,756
Nonrelated Insurance............... 278,853 260,582 219,094 173,316 178,308
---------- ---------- ---------- ---------- ----------
Total Revenues............. $1,853,265 $1,760,070 $1,663,987 $1,388,234 $1,324,064
========== ========== ========== ========== ==========
Income Before Income Taxes
Financial Services and Related
Insurance....................... $ 281,821 $ 278,825 $ 271,299 $ 242,314 $ 217,789
Nonrelated Insurance............... 29,516 19,734 16,160 16,796 7,995
---------- ---------- ---------- ---------- ----------
Total income before income
taxes.................... 311,337 298,559 287,459 259,110 225,784
Income taxes......................... 115,221 111,552 108,056 96,781 83,755
---------- ---------- ---------- ---------- ----------
Net Income........................... $ 196,116 $ 187,007 $ 179,403 $ 162,329 $ 142,029
========== ========== ========== ========== ==========
Ratio of Income to Fixed
Charges(1)......................... 1.7 1.7 1.6 1.7 1.7
========== ========== ========== ========== ==========
FINANCIAL CONDITION
Receivables Outstanding.............. $7,742,641 $7,253,738 $6,933,526 $6,336,368 $5,469,563
Investments.......................... 996,407 927,571 852,450 704,244 655,690
Consolidated Assets.................. 8,809,898 8,195,059 7,790,948 7,038,291 6,122,960
Debt (excludes savings deposits)
Commercial paper and banks......... 3,174,190 2,766,994 2,413,601 2,430,291 1,959,063
Notes.............................. 3,735,522 3,630,889 3,746,652 3,168,178 2,851,399
Stockholder's Equity................. 1,210,515 1,152,686 1,028,230 893,744 827,511
</TABLE>
- ------------
(1) See Note 1 to the Consolidated Financial Statements of the Registrant for
computation of "Ratio of Income to Fixed Charges".
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1997 VS. 1996 -- Revenues for 1997 were $1.853 billion compared to $1.760
billion for 1996, an increase of $93 million (5%). Income before income taxes
for 1997 was $311 million compared to $299 million for 1996, an increase of $13
million (4%). These results reflect increases in both the Financial Services and
Related Insurance segment and the Nonrelated Insurance segment of the
Registrant's operations.
Financial Services and Related Insurance
REVENUES of this segment increased $75 million (5%) to $1.574 billion, due
primarily to: (i) an increase in average finance receivables ($7.546 billion in
1997 vs. $6.892 billion in 1996) due primarily to acquisitions in 1997 of
approximately $720 million of finance receivables, which consist of consumer
receivables ($186 million) and commercial receivables ($534 million), partially
offset by a decrease in receivable yields (17.77% in 1997 vs. 18.52% in 1996),
reflecting both decreases in consumer finance yields and the impact of the
increase in commercial receivables, which have lower yields; (ii) an increase in
investment and other income due primarily to gains of $22 million on the sale of
certain underperforming branches in 1997, compared to a $7 million gain on the
sale of the U.S. small-ticket leasing operation in 1996, partially offset by a
decrease of $3 million in capital gains.
INCOME BEFORE INCOME TAXES of this segment increased $3 million (1%) to
$282 million, due primarily to: (i) an increase in average finance receivables;
(ii) an increase in investment and other income of $15 million due primarily to
a $22 million gain on the sale of certain underperforming branches in 1997,
compared to a $7 million gain on the sale of the U.S. small-ticket leasing
operation in 1996, partially offset by a decrease of $3 million in capital
gains; and (iii) a reduction in the cost of borrowed funds (6.39% in 1997 vs.
6.88% in 1996). Partially offsetting these increases were: (i) a decrease in
receivable yields; (ii) an increase in the provision for credit losses due
primarily to an increase in the ratio of net credit losses to average finance
receivables (2.93% in 1997 vs. 2.82% in 1996); and (iii) higher operating
expenses due primarily to international expansion and the start-up of
centralized sales processing centers in the U.S. and Canada.
The proliferation of credit cards continues to provide the consumer with an
alternative source of funds, and as a result, the increase in consumer debt has
continued to burden the consumer finance customer, resulting in higher
delinquencies and charge-offs. This has been particularly true in the U.S. where
charge-offs have increased and receivables outstanding have decreased. In order
to make better use of its capital resources, the Registrant has undertaken a
strategic review of its U.S. operations. This review, which will encompass
underperforming branches, started in June 1997 and should be completed by
year-end 1998. Each underperforming branch is being reviewed and when it is
determined that a branch will not meet certain profitability standards, it will
be sold. The Registrant does not anticipate these actions to result in any
losses. Although the strategic review resulted in 47 branches being sold in
1997, the Registrant also opened 47 new branches in the U.S. while closing 38
branches as part of its normal operations. At December 31, 1997, the Registrant
had 1,199 branches, of which 715 were in the U.S.
Nonrelated Insurance
REVENUES of this segment increased $18 million (7%) to $279 million, due
primarily to an increase in premiums earned and a higher level of investment
income, partially offset by lower capital gains.
INCOME BEFORE INCOME TAXES of this segment increased $10 million (50%) to
$29 million, due primarily to a decrease in insurance losses, commissions and
other operating expenses in relation to premiums earned and a higher level of
investment income, partially offset by lower capital gains.
12
<PAGE> 14
1996 VS. 1995 -- Revenues for 1996 were $1.760 billion compared to $1.664
for 1995, an increase of $96 million (6%). Income before taxes for 1996 was $299
million compared to $287 million for 1995, an increase of $11 million (4%).
These results reflect increases in both the Financial Services and Related
Insurance segment as the Nonrelated Insurance segment of the Registrant's
operations.
Financial Services and Related Insurance
REVENUES of this segment increased $55 million (4%) to $1.499 billion, due
primarily to: (i) an increase in finance receivable yields (18.52% in 1996 vs.
18.20% in 1995), which had the effect of increasing revenues by approximately
$25 million; (ii) an increase in premiums earned associated with an increase in
premiums written; and (iii) an increase in investment and other income,
attributable to an increase in capital gains resulting from a higher volume of
sales in the bond investment portfolio and a gain on the sale of certain finance
receivables.
INCOME BEFORE INCOME TAXES of this segment increased $7 million (3%) to
$279 million, due primarily to: (i) the increase in revenues and (ii) a decrease
in the cost of borrowed funds (6.88% in 1996 vs. 7.32% in 1995). These factors
were partially offset by an increase in the provision for credit losses
attributable to an increase in the ratio of net credit losses to average finance
receivables (2.82% in 1996 vs. 2.10% in 1995) and the strengthening of the
allowance for credit losses (3.01% of finance receivables outstanding at
December 31, 1996 vs. 2.82% at December 31, 1995).
Nonrelated Insurance
REVENUES of this segment increased $41 million (19%) to $261 million, due
primarily to an increase in premiums earned associated with an increase in
premiums written (resulting from growth in existing accounts as well as the
addition of new accounts in the second half of 1995).
INCOME BEFORE INCOME TAXES of this segment increased $4 million (22%) to
$20 million, due primarily to: (i) an increase in investment income attributable
to a higher level of investments outstanding and higher capital gains and (ii) a
decrease in underwriting expenses in relation to earned premiums. These
favorable factors were partially offset by higher losses in all lines of
business.
LIQUIDITY/CAPITAL RESOURCES
The Registrant's business consists of its finance operations and insurance
operations. 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.
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, 1997, was 107.4%. 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, 1997, $2.39 billion (31%) of the Registrant's finance
receivables were represented by residential real estate loans, secured primarily
by first and second mortgages on single family homes, which averaged $30
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
13
<PAGE> 15
periodically reevaluated and, where appropriate, adjustments are made to reflect
subsequent decreases in fair value. At December 31, 1997, real estate classified
in other assets aggregated $56.6 million.
At December 31, 1997, the Registrant had an investment portfolio of $996.4
million, primarily represented by high quality, investment grade debt
securities. Such portfolio included $194.6 million ($196.9 million market value)
of mortgage-backed securities, including $54.8 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 $147.8 million, $94.9 million and $90.1 million to Textron Inc. in
1997, 1996 and 1995, respectively. See Note 8 to the Consolidated Financial
Statements of the Registrant for restrictions on the declaration or payment of
cash dividends.
In late 1997, the Registrant changed its dividend policy so that its
dividends will be paid based upon maintaining the Registrant's tangible leverage
ratio at approximately 6.5:1. Under the previous policy, dividends could not
exceed an amount equal to 50% of net earnings during each fiscal year.
FINANCIAL RISK MANAGEMENT
Interest Rate Risk:
The Registrant is exposed to interest rate risk from its various interest
sensitive assets and liabilities. As a result, the Registrant's financial
results could be affected by changes in U.S. and foreign interest rates. As part
of managing this risk, the Registrant enters into interest rate exchange
agreements to convert certain variable-rate debt to long-term fixed-rate debt
and vice versa. The overall objective of the Registrant's interest rate risk
management is to reduce the risk that near-term earnings could be adversely
affected by changes in interest rates while also reducing the overall cost of
debt.
By adjusting the underlying effective interest rate of certain debt
instruments with these agreements, the Registrant is better able to match the
effective maturity and interest rates of the debt to certain finance receivables
to reduce the risk of the interest rate margins declining from increases in
interest rates. The Registrant has interest sensitive assets and liabilities
that are not perfectly matched. Management continuously monitors this situation
to ensure that the net unmatched position is within acceptable limits. If the
unmatched positions were to exceed the acceptable limits, then corrective action
would be implemented. The difference between the variable-rate the Registrant
received and the fixed-rate it paid on interest rate exchange agreements
increased its reported interest expense by $18.2 million in 1997, $16.8 million
in 1996 and $10.9 million in 1995.
For a further discussion of interest rate exchange agreements, see Note 1
to the Consolidated Financial Statements of the Registrant.
Foreign Exchange Risks:
A portion of the Registrant's cash flows are denominated in foreign
currencies. As a result, the Registrant is exposed to exchange rate market
risks. The Registrant's financial results could be affected by changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which the Registrant operates. The Registrant's primary exposures are
the Canadian dollar, Australian dollar, French franc, British pound and Hong
Kong dollar.
The Registrant funds non-U.S. dollar receivables with debt denominated in
the same currency. However, the amount of the Registrant's non-U.S. dollar
receivables generally exceeds the amount of debt denominated in that same
currency. As such, the effect of changing exchange rates on foreign denominated
assets and liabilities is reflected within the translation adjustment in
stockholder's equity and is not part of income.
Quantitative Risk Measures:
The Registrant has used a value-at-risk model to quantify the market risk
inherent in its financial instruments at year end. The value-at-risk model is
intended to measure the maximum amount of fair value the Registrant's financial
instruments could hypothetically lose over a given time period from adverse
14
<PAGE> 16
movements in interest rates and foreign exchange rates at a 95% confidence
level. The model uses the variance-covariance statistical modeling technique and
only considers financial instruments (finance receivables, investments, debt,
and interest rate swaps) but not all underlying exposures. The model only
assumes adverse market conditions and most likely is not indicative of actual
results. The estimated value-at-risk amounts representing the potential loss in
value the Registrant's financial instruments could realize from adverse changes
in interest rates and foreign exchange rates for a one day period are not
material.
YEAR 2000 ISSUE
In early 1997, the Registrant performed a companywide assessment of its
computer programs to identify the impact of the Year 2000 Issue on its
operations. Some of these programs are critical to operations and could fail to
properly process data unless they are modified. The Year 2000 Issue results from
many computer programs using only two digits to identify the year in the date
field. As a result of this assessment, the Registrant instituted a plan of
corrective action. This project, which began in mid-1997, will be carried out
both by existing personnel and outside contractors. The Registrant anticipates
that all of the necessary internal program modifications will be completed by
the end of 1998. During the latter part of 1998 and the first half of 1999, the
Registrant will test its ability to communicate electronically with other
entities, such as suppliers, independent data processing agencies, and
customers. The costs of these efforts are recognized in income as incurred. The
costs related to this project did not have a material impact on the Registrant's
results of operations in 1997, and they are not anticipated to have a material
impact in 1998 or 1999. The Registrant does not expect the Year 2000 Issue to
materially affect its financial results, products, services, or competitive
conditions in the year 2000 or thereafter.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" was
issued. This Statement establishes new standards for reporting information about
operating segments. This Statement is effective for periods beginning after
December 15, 1997. The Registrant is evaluating the impact of this Statement on
future segment reporting.
* * * * *
Forward-looking Information: Certain statements in this Form 10-K, and other
oral and written statements made by the Registrant from time to time, are
forward-looking statements, including those that discuss strategies, goals,
outlook, projected revenues, income, returns and other financial measures, and
other non-historical statements. These forward-looking statements are subject to
risks and uncertainties that may cause actual results to differ materially from
those contained in the statements, including the following: (i) continued market
demand for the types of financial services offered by the Registrant; (ii)
increased contractual delinquencies or credit losses; (iii) ability of the
Registrant to utilize a broad base of financial sources for liquidity and
capital requirements; (iv) changes in laws or regulations governing the
Registrant's finance operations or insurance operations; (v) increased
competition; and (vi) changes in worldwide economic and political conditions and
the associated impact on interest and foreign exchange rates and consumer
bankruptcies and delinquencies. The statement on Year 2000 Issue that appears
above is subject to the Registrant's ability to complete the corrective action
without unexpected complications and the ability of its suppliers, and customers
to successfully modify their own programs. The quantification of the
interest-rate and foreign exchange-rate value-at-risk amounts above are also
forward-looking statements, but should not be considered projections of future
events or losses, since the analysis model only assumes adverse conditions. In
addition, the words "believe," "expect," "anticipate," "intend," "aim," "will"
and similar words identify forward-looking statements in this Form 10-K.
15
<PAGE> 17
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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, 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, 1995, 1994 and 1993,
and the related consolidated statements of income, cash flows, and changes in
stockholder's equity for the years ended December 31, 1994 and 1993 (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, 1997, appearing on page 11, 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 27, 1998
16
<PAGE> 18
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---------- ----------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Finance receivables -- net.................................. $7,233,561 $6,762,507
Investments................................................. 996,407 927,571
Property and equipment...................................... 89,982 80,646
Insurance policy acquisition costs.......................... 60,863 60,480
Goodwill.................................................... 78,406 27,086
Cash........................................................ 44,958 15,562
Other....................................................... 305,721 321,207
---------- ----------
TOTAL ASSETS...................................... $8,809,898 $8,195,059
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt........................................................ $6,915,782 $6,403,348
Accounts payable and accrued liabilities.................... 347,796 303,713
Insurance reserves and claims
Unearned insurance premiums............................... 215,968 215,768
Losses and adjustment expenses............................ 64,879 66,758
Income taxes................................................ 54,958 52,786
---------- ----------
Total liabilities................................. 7,599,383 7,042,373
---------- ----------
Stockholder's equity
Common stock ($1 par value, 500,000 shares authorized;
500,000 shares outstanding)............................ 500 500
Additional paid-in capital................................ 257,453 137,588
Retained earnings......................................... 1,089,859 1,041,543
Securities valuation adjustment........................... 13,056 65,061
Currency translation adjustment........................... (150,353) (92,006)
---------- ----------
Total stockholder's equity........................ 1,210,515 1,152,686
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........ $8,809,898 $8,195,059
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 19
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C>
REVENUES
Interest, discount and service charges.................. $1,341,177 $1,276,687 $1,249,438
Credit life, credit disability and casualty insurance
premiums............................................. 414,003 398,641 349,759
Investment and other income (including net realized
investment gains).................................... 98,085 84,742 64,790
---------- ---------- ----------
Total revenues.................................. 1,853,265 1,760,070 1,663,987
EXPENSES
Interest and debt expense
Interest on notes.................................... 226,117 240,687 261,223
Amortization of debt expense......................... 6,782 4,731 4,740
Interest on commercial paper, bank loans and other
indebtedness....................................... 201,156 180,842 189,416
---------- ---------- ----------
Total........................................... 434,055 426,260 455,379
Salaries, wages, and other employee benefits............ 323,888 307,224 293,273
Provision for losses on collection of finance
receivables.......................................... 233,182 203,410 149,143
Credit life, credit disability and casualty insurance
losses and adjustment expenses, less recoveries...... 184,158 184,057 155,477
Amortization of insurance policy acquisition costs...... 95,129 90,808 79,168
Other operating expenses................................ 271,516 249,752 244,088
---------- ---------- ----------
Total expenses.................................. 1,541,928 1,461,511 1,376,528
---------- ---------- ----------
Income before income taxes................................ 311,337 298,559 287,459
Income taxes.............................................. 115,221 111,552 108,056
---------- ---------- ----------
NET INCOME................................................ $ 196,116 $ 187,007 $ 179,403
========== ========== ==========
Ratio of income to fixed charges.......................... 1.7 1.7 1.6
=== === ===
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 20
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
(Thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $ 196,116 $ 187,007 $ 179,403
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on collection of finance
receivables...................................... 233,182 203,410 149,143
Depreciation....................................... 20,464 19,301 19,249
Gain on sales of investments....................... (5,217) (11,218) (3,167)
Increase in insurance policy acquisition costs..... (559) (5,872) (11,720)
Increase in unearned insurance premiums and
reserves for insurance losses and adjustment
expenses......................................... 13,389 27,125 68,365
Increase (decrease) in accounts payable and accrued
liabilities...................................... (20,850) 13,822 4,881
Increase (decrease) in income taxes................ 15,594 (2,012) (14,540)
Other - net........................................ (1,926) (17,173) (20,370)
----------- ----------- -----------
Net cash provided by operating activities..... 450,193 414,390 371,244
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased........... (5,682,214) (4,610,664) (4,272,148)
Finance receivables repaid or sold.................... 5,244,630 4,222,535 3,957,343
Purchases of investments available for sale........... (288,434) (288,544) (179,210)
Proceeds from sales of investments available for
sale............................................... 151,183 198,562 65,513
Proceeds from maturities and calls of investments
available for sale................................. 90,210 49,669 54,935
Capital expenditures.................................. (38,109) (31,249) (22,108)
Cash used in acquisitions............................. (85,160) -- (39,808)
----------- ----------- -----------
Net cash used by investing activities......... (607,894) (459,691) (435,483)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt................ 66,581 282,940 (307,542)
Proceeds from issuance of notes....................... 917,736 839,294 1,376,393
Principal payments on notes........................... (690,243) (992,045) (911,255)
Increase in savings deposits.......................... 823 120 380
Dividends paid........................................ (147,800) (94,900) (90,100)
Capital Contribution.................................. 40,000 -- --
----------- ----------- -----------
Net cash provided by financing activities..... 187,097 35,409 67,876
----------- ----------- -----------
Net increase (decrease) in cash......................... 29,396 (9,892) 3,637
Cash at beginning of year............................... 15,562 25,454 21,817
----------- ----------- -----------
Cash at end of year..................................... $ 44,958 $ 15,562 $ 25,454
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.............................................. $ 442,087 $ 433,607 $ 461,587
Income taxes.......................................... $ 109,967 $ 111,193 $ 122,310
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 21
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
------ ---------- ---------- -------------- ----------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
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
Net income...................... 187,007 187,007
Cash dividends declared ($189.80
per common share)............ (94,900) (94,900)
Change in valuation
adjustment................... 8,752 8,752
Change in translation
adjustment................... 23,597 23,597
---- -------- ---------- -------- --------- ----------
Balance at December 31, 1996...... 500 137,588 1,041,543 65,061 (92,006) 1,152,686
Net income...................... 196,116 196,116
Cash dividends declared ($295.60
per common share)............ (147,800) (147,800)
Capital contribution............ 40,000 40,000
Exchange of Textron, Inc.
shares....................... 79,865 (79,865)
Change in valuation
adjustment................... 27,860 27,860
Change in translation
adjustment................... (58,347) (58,347)
---- -------- ---------- -------- --------- ----------
Balance at December 31, 1997...... $500 $257,453 $1,089,859 $ 13,056 $(150,353) $1,210,515
==== ======== ========== ======== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 22
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Avco Financial Services, Inc. is a wholly-owned subsidiary of Textron Inc.
The consolidated financial statements include the accounts of Avco Financial
Services, Inc. and its subsidiaries (AFS). All significant intercompany
transactions are eliminated. Certain reclassifications have been made to prior
year amounts to conform with current year presentation.
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 and premium taxes.
These costs are amortized in proportion to premiums over the estimated lives of
the
21
<PAGE> 23
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
1997, 1996 and 1995 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, with the exception of the investment in Textron Inc.
Series D Cumulative Preferred Stock. Unrealized gains and losses, net of
applicable income taxes, are reported as a separate component of stockholder's
equity.
In 1990, AFS purchased $25.0 million of Textron Inc. common stock on the
open market. In December 1997, Textron Inc. and AFS, pursuant to an exchange
agreement, exchanged the shares of common stock held by AFS for 1,522 shares of
Textron Inc. Series D Cumulative Preferred Stock bearing an annual dividend
yield of 5.92%.
Prior to the exchange, the common shares were carried as an investment at
fair market value. As of the date of the exchange agreement, the market value of
the common stock was $152,207,000. The preferred shares are not registered with
the Securities and Exchange Commission. The preferred shares may be redeemed at
the option of the issuer or the holder subsequent to December 31, 2017, in an
amount equal to the per share price as of the date of the exchange ($100,000 per
share), plus accrued but unpaid dividends. Accordingly, AFS carries, at cost,
the preferred shares at the value established on the date of the exchange
agreement. AFS reclassified the unrealized gain, net of taxes, recorded on the
common shares at the date of the agreement (approximately $79,865,000) to
additional paid-in capital.
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.
22
<PAGE> 24
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST RATE EXCHANGE AGREEMENTS
Interest rate exchange agreements are used to help manage interest rate
risk by converting certain variable-rate debt to fixed-rate debt and vice versa.
Those agreements involve the exchange of fixed-rate interest for variable-rate
amounts over the life of the agreement without the exchange of the notional
amount. Interest rate exchange agreements are accounted for on the accrual basis
with the differential to be paid or received recorded currently as an adjustment
to interest expense.
Some agreements that require the payment of fixed rate interest are
designated against specific long-term variable-rate borrowings, while the
balance is designated against existing short-term borrowings through maturity
and their anticipated replacements. AFS continuously monitors variable-rate
borrowings to maintain the level of borrowings above the notional amount of the
designated agreements. If it is not probable variable-rate borrowings will
continuously exceed the notional amount of the designated agreements, the excess
is marked to market and the associated gain or loss recorded in income.
Premiums paid to terminate these agreements are deferred and amortized to
expense over the remaining term of the original life of the contract. If the
underlying debt is then paid early, unamortized premiums are recognized as an
adjustment to the gain or loss associated with the debt's extinguishment.
GOODWILL
AFS amortizes goodwill on the straight-line method, over periods not
exceeding 25 years. AFS periodically reviews goodwill for impairment by
comparing the carrying amount to the estimated future undiscounted cash flows of
the businesses acquired. If this review indicates that goodwill is not
recoverable, the carrying amount would be reduced to fair value. The increase in
goodwill during 1997 was due to international acquisitions of commercial finance
businesses.
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 13 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, 1997 and 1996 have
been translated at the closing rates on those dates. Income and
23
<PAGE> 25
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 1997, 1996 and
1995 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 and fixed charges.
NOTE 2: FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
Contractual maturities of finance receivables outstanding at December 31,
1997 and total finance receivables outstanding at that date and at December 31,
1996 were as follows:
<TABLE>
<CAPTION>
Contractual maturities Less Receivables outstanding
------------------------------------ finance -----------------------
1998 1999 2000-2012 charges 1997(a) 1996
---------- ---------- ---------- ---------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC:
Consumer loans............ $ 979,194 $ 667,668 $ 663,442 $ 728,185 $1,582,119 $1,794,932
Real estate loans......... 313,251 311,701 2,845,707 1,866,755 1,603,904 1,721,008
Retail installment
contracts................. 506,096 300,289 340,307 409,884 736,808 630,117
---------- ---------- ---------- ---------- ---------- ----------
Total consumer
finance.............. 1,798,541 1,279,658 3,849,456 3,004,824 3,922,831 4,146,057
INTERNATIONAL:
Consumer loans............ 749,115 524,976 640,169 473,757 1,440,503 1,411,130
Real estate loans......... 285,526 176,023 664,058 334,622 790,985 825,842
Retail installment
contracts............... 567,400 134,123 84,324 100,977 684,870 579,213
---------- ---------- ---------- ---------- ---------- ----------
Total consumer
finance.............. 1,602,041 835,122 1,388,551 909,356 2,916,358 2,816,185
Commercial finance...... 472,545 173,775 364,873 107,741 903,452 291,496
---------- ---------- ---------- ---------- ---------- ----------
Total
international.. 2,074,586 1,008,897 1,753,424 1,017,097 3,819,810 3,107,681
---------- ---------- ---------- ---------- ---------- ----------
Total..................... $3,873,127 $2,288,555 $5,602,880 $4,021,921 7,742,641 7,253,738
========== ========== ========== ==========
Less allowance for credit losses............................................. (237,809) (218,416)
Less finance-related insurance reserves and claims........................... (271,271) (272,815)
---------- ----------
Finance receivables -- net................................................... $7,233,561 $6,762,507
========== ==========
</TABLE>
- ---------------
(a) As of December 31, 1997, total consumer and commercial finance receivables
outstanding include loans bearing a variable rate of interest of
approximately $736 million and $325 million, respectively.
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.
24
<PAGE> 26
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
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 1997 and 1996, cash collections of receivables
(excluding finance charges) were $4.9 billion and $4.2 billion, respectively.
The ratio of cash collections to average finance receivables was approximately
65% and 61%, 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 $136.8 million at December 31, 1997 and $140.7 million at
December 31, 1996.
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, 1997, committed lines totaled approximately $846 million of which
approximately $418 million remained unused.
25
<PAGE> 27
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: FINANCE RECEIVABLES AND ALLOWANCE FOR LOSSES (CONTINUED)
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1997 1996 1995 1994(a) 1993(a)
--------- --------- --------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Balance of the allowance for credit losses at
beginning of year............................... $ 218,416 $ 195,413 $ 180,573 $ 155,015 $ 147,088
Deduct -- balances charged off:
Gross charge offs:
Domestic
Real estate.................................. (15,135) (15,021) (14,773) (15,851) (17,647)
Other loans.................................. (163,676) (136,490) (100,017) (79,087) (73,181)
Commercial................................... -- (2,686) (3,354) (3,414) (2,849)
--------- --------- --------- --------- ---------
Total domestic............................. (178,811) (154,197) (118,144) (98,352) (93,677)
International
Real estate.................................. (6,509) (7,462) (7,166) (5,046) (7,478)
Other loans.................................. (81,976) (66,771) (50,929) (38,488) (36,949)
Commercial................................... (5,998) (1,725) (565) -- --
--------- --------- --------- --------- ---------
Total international........................ (94,483) (75,958) (58,660) (43,534) (44,427)
--------- --------- --------- --------- ---------
Total................................... (273,294) (230,155) (176,804) (141,886) (138,104)
Recoveries:
Domestic
Real estate.................................. 2,301 623 847 830 800
Other loans.................................. 28,520 18,720 17,782 16,489 14,870
Commercial................................... -- 759 744 496 538
--------- --------- --------- --------- ---------
Total domestic............................. 30,821 20,102 19,373 17,815 16,208
International
Real estate.................................. 2,570 1,283 939 764 788
Other loans.................................. 14,805 13,523 12,368 9,873 9,615
Commercial................................... 4,005 572 234 -- --
--------- --------- --------- --------- ---------
Total international........................ 21,380 15,378 13,541 10,637 10,403
--------- --------- --------- --------- ---------
Total................................... 52,201 35,480 32,914 28,452 26,611
Add -- charged to income.......................... 233,182 203,410 149,143 136,101 120,694
Other............................................. 7,304 14,268 9,587 2,891 (1,274)
--------- --------- --------- --------- ---------
Balance of the allowance for credit losses at end
of year......................................... $ 237,809 $ 218,416 $ 195,413 $ 180,573 $ 155,015
========= ========= ========= ========= =========
Balance of the allowance for credit losses at the
end of each year applicable to:
Domestic
Real estate.................................. $ 16,039 $ 25,815 $ 25,441 $ 26,064 $ 24,912
Other loans.................................. 129,003 117,009 98,346 99,234 83,481
Commercial................................... -- -- 2,649 3,031 2,492
--------- --------- --------- --------- ---------
Total domestic............................. 145,042 142,824 126,436 128,329 110,885
International
Real estate.................................. 5,694 9,213 8,850 7,953 7,136
Other loans.................................. 71,200 61,161 56,810 44,195 36,994
Commercial................................... 15,873 5,218 3,317 96 --
--------- --------- --------- --------- ---------
Total international........................ 92,767 75,592 68,977 52,244 44,130
--------- --------- --------- --------- ---------
Total................................... $ 237,809 $ 218,416 $ 195,413 $ 180,573 $ 155,015
========= ========= ========= ========= =========
</TABLE>
- ------------
(a) The above data for the two years ended 1994 is not reported upon herein by
independent auditors.
26
<PAGE> 28
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: INVESTMENTS
<TABLE>
<CAPTION>
1997 1996
-------- --------
(Thousands of
dollars)
<S> <C> <C>
Debt securities:
Commercial paper, at estimated fair value (approximates
cost).................................................. $ 56,299 $ 89,180
Bonds available for sale at estimated fair value
(cost: $748,612,000 in 1997 and $686,140,000 in
1996).................................................. 767,392 697,844
-------- --------
Total.................................................. 823,691 787,024
Preferred stock, at cost.................................... 152,207 --
Marketable equity securities, at market..................... 19,086 138,572
First mortgages on real estate, at cost..................... 1,423 1,975
-------- --------
Total............................................. $996,407 $927,571
======== ========
</TABLE>
The amortized cost and estimated fair value of debt securities and equity
securities at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of other U.S.
Government agencies and authorities................. $ 77,971 $ 2,189 $ 51 $ 80,109
Obligations of states, municipalities and political
subdivisions........................................ 57,823 4,146 621 61,348
Obligations of foreign governments and agencies....... 103,566 4,339 67 107,838
Public utility securities............................. 40,485 519 129 40,875
Mortgage-backed securities............................ 194,621 2,342 84 196,879
Corporate securities.................................. 330,444 7,026 828 336,642
Equity securities..................................... 169,977 1,363 47 171,293
-------- -------- ------ --------
Debt and equity securities available for sale.... $974,887 $ 21,924 $1,827 $994,984
======== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of other U.S.
Government agencies and authorities................. $ 56,007 $ 1,547 $ 161 $ 57,393
Obligations of states, municipalities and political
subdivisions........................................ 74,849 4,038 697 78,190
Obligations of foreign governments and agencies....... 96,336 4,573 90 100,819
Public utility securities............................. 53,289 730 434 53,585
Mortgage-backed securities............................ 179,484 829 583 179,730
Corporate securities.................................. 315,355 4,106 2,154 317,307
Equity securities..................................... 47,816 90,777 21 138,572
-------- -------- ------ --------
Debt and equity securities available for sale.... $823,136 $106,600 $4,140 $925,596
======== ======== ====== ========
</TABLE>
27
<PAGE> 29
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of debt securities at December
31, 1997, 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 1998............................................ $141,686 $143,700
Due 1999 to 2002....................................... 254,363 258,852
Due 2003 to 2007....................................... 136,957 143,065
Due after 2007......................................... 77,283 81,195
Mortgage-backed securities............................. 194,621 196,879
-------- --------
$804,910 $823,691
======== ========
</TABLE>
Gross realized gains and (losses) on sales of securities were (in
millions), $5.1 and $(.1) in 1997, $9.8 and ($.4) in 1996, and $6.7 and ($3.5)
in 1995.
NOTE 4: INCOME TAXES
AFS' provision for income tax is based upon including all eligible U.S.
subsidiaries in the consolidated U.S. federal income tax return filed by its
parent, Textron Inc. Such provision does not differ materially from the amount
which AFS would have provided if it and its eligible subsidiaries were filing
their own consolidated federal income tax return, except that AFS would not have
been able to utilize approximately $4 million of foreign tax credit benefits in
1997. The provision for income tax also includes amounts for AFS' foreign
subsidiaries which file their own separate income tax returns. AFS recognizes
deferred income taxes 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 amounts are likely to be realized or settled.
For years beginning after March 31, 1997, the United Kingdom government
decreased its corporate tax rate from 33% to 31%. 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 1997. 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 $481 million at the end
of 1997. Management intends to reinvest those 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 $31 million, principally due to foreign withholding
taxes.
At December 31, 1997, 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.
28
<PAGE> 30
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INCOME TAXES (CONTINUED)
Income taxes (benefit) are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
(Thousands of dollars)
<S> <C> <C> <C>
Current
Federal.......................................... $ 32,428 $ 49,950 $ 56,628
State............................................ 5,692 6,038 8,227
Foreign.......................................... 71,221 59,734 42,073
--------------- --------------- ---------------
109,341 115,722 106,928
Deferred
Federal.......................................... 10,191 (4,792) (2,826)
State............................................ 716 (276) (938)
Foreign.......................................... (5,027) 898 4,892
--------------- --------------- ---------------
5,880 (4,170) 1,128
--------------- --------------- ---------------
Total income tax provision............... $ 115,221 $ 111,552 $ 108,056
=============== =============== ===============
</TABLE>
The following reconciles 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>
1997 1996 1995
------- ------- -------
<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........................ (0.7) .8 .1
Higher tax on foreign income............................. 0.9 1.0 1.2
State income taxes....................................... 1.3 1.3 1.6
Nontaxable investment income............................. (0.8) (0.9) (1.0)
Other, net............................................... 1.3 .2 .7
------- ------- -------
Effective income tax rate.................................. 37.0% 37.4% 37.6%
======= ======= =======
</TABLE>
AFS' net deferred tax asset consisted of gross deferred tax assets and
gross deferred tax liabilities of $127.0 million and $98.1 million,
respectively, at December 31, 1997 and $120.9 million and $63.5 million,
respectively, at December 31, 1996.
The components of AFS' net deferred tax asset as of December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(Thousands of Dollars)
<S> <C> <C>
Allowance for credit losses................................. $ 56,676 $ 56,673
Liabilities for future policy benefits...................... 24,299 21,628
Unrealized gain on marketable equity securities............. (52,369) (36,717)
Obligation for postretirement benefits other than
pensions.................................................. 13,642 13,877
Depreciation................................................ (10,643) (8,703)
Insurance policy acquisition costs.......................... (12,943) (484)
Lease financing transactions................................ 3,450 789
Other -- principally timing of expense deductions........... 6,824 10,314
-------- --------
Total net deferred tax asset...................... $ 28,936 $ 57,377
======== ========
</TABLE>
29
<PAGE> 31
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: DEBT AND CREDIT FACILITIES
At December 31, 1997 and 1996, consolidated debt consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(Thousands of dollars)
<S> <C> <C>
Senior
Commercial paper.......................................... $2,956,719 $2,651,627
Banks..................................................... 217,471 115,367
Savings deposits.......................................... 6,070 5,465
3.74% to 5.99% due 1997 to 2002(a)........................ 1,895,949 1,124,414
6.00% to 7.99% due 1997 to 2002(a)........................ 1,316,216 1,819,816
8.00% to 9.99% due 1997 to 2000(a)........................ 504,720 664,676
10.77% due 1998........................................... 18,137 20,983
---------- ----------
Total senior debt................................. 6,915,282 6,402,348
---------- ----------
Senior subordinated
10.28% due 1998........................................... 500 1,000
---------- ----------
Total debt........................................ $6,915,782 $6,403,348
========== ==========
</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, 1997, 1996 and 1995,
without giving effect to the costs of maintaining the lines of credit, were
6.8%, 6.5% and 7.5%, respectively, for bank borrowings (primarily consisting of
borrowings in foreign operations) and 5.5%, 5.4% and 6.2%, respectively, for
commercial paper. The weighted average interest rate on bank borrowings and
commercial paper outstanding during the three years ended December 31, 1997 was
5.5%, 5.9% and 6.6%, respectively. The weighted average interest rate is
determined primarily by reference to daily outstanding principal amounts and
excludes the cost of maintaining the lines of credit.
At December 31, 1997 and 1996, AFS had lines of credit with various banks
amounting to $4.1 billion and $3.5 billion, respectively, of which the unused
portion of these lines amounted to $3.2 billion and $2.9 billion, respectively.
AFS generally pays fees in support of these lines.
During the years ended December 31, 1997 and 1996, AFS issued the following
notes:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
(Thousands of dollars)
<S> <C> <C>
Senior notes due 1997 to 2000 (Australia)................... $ 56,152 $ 422,187
Senior notes due 1997 to 2000 (Canada)...................... 158,192 36,675
Senior notes due 1999 to 2000 (Hong Kong)................... -- 71,111
Senior notes due 1997 to 2002 (United Kingdom).............. 314,916 9,321
Senior notes due 1997 to 1999 (United States)............... 400,000 300,000
-------- ----------
Total............................................. $929,260 $ 839,294
======== ==========
</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. These agreements had weighted average remaining terms of
less than 2 years and had the effect of fixing the rate of interest at 7.3% and
7.9% on $1.125 billion and $1.143 billion of
30
<PAGE> 32
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: DEBT AND CREDIT FACILITIES (CONTINUED)
variable rate borrowing at December 31, 1997 and 1996, respectively. The spread
between the variable rate AFS received and the fixed rate AFS paid increased the
reported interest expense by $18.2 million in 1997, $16.8 million in 1996, and
$10.9 million in 1995. Such spread had the effect of increasing AFS' cost of
borrowing by .27% in 1997, .27% in 1996, and .18% in 1995.
The following details AFS' "fixed-pay" interest rate exchange agreement
activity for the years 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(Thousands of dollars)
<S> <C> <C>
Beginning notional amount................................... $1,143,369 $1,063,118
Notional amount of new contracts............................ 489,511 412,407
Notional amount of terminated and expired contracts......... (507,489) (332,156)
---------- ----------
Ending notional amount...................................... $1,125,391 $1,143,369
========== ==========
</TABLE>
The notional amount of fixed-pay interest rate swap agreements at December
31, 1997 categorized by annual maturity, along with the related weighted average
interest rates paid are as follows: $362.9 million (8.1%) in 1998; $458.3
million (7.0%) in 1999; $267.6 million (6.9%) in 2000; $10.4 million (6.7%) in
2001; and $26.0 million (6.9%) in 2002.
In 1997, AFS entered into additional fixed-pay interest rate exchange
agreements which become effective in 1998 and 1999. These agreements expire
through 2001 and will fix the rate of interest at 6.7% on $74 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.
In addition, AFS entered into variable-pay swap agreements which have the
effect of varying the rate of fixed rate debt. 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, 1997, $100.4 million of such agreements were in effect and expire
through 2000.
AFS had minimal exposure to loss from nonperformance by the counterparties
to its interest rate exchange agreements at the end of 1997, and does not
anticipate nonperformance by counterparties in the periodic settlements of
amounts due. AFS currently minimizes this potential for risk by entering into
contracts exclusively with major, financially sound counterparties having no
less than a long-term bond rating of "A," by continuously monitoring the
counterparties' credit ratings, and by limiting exposure with any one financial
institution. The credit risk generally is limited to the amount by which the
counterparties' contractual obligations exceed AFS' obligations to the
counterparty.
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, 1997, for the
five years ending December 31, 2002, were (in millions): $1,198.1 in 1998;
$829.6 in 1999; $1,223.0 in 2000; $200.0 in 2001; and $284.8 in 2002.
The senior subordinated note is subordinate and junior in right of payment,
in all respects, to all indebtedness of AFS for money borrowed.
31
<PAGE> 33
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: REINSURANCE
In the normal course of business, AFS seeks to reduce the loss that may
arise through AFS' insurance subsidiaries from catastrophes or other events that
may cause unfavorable underwriting results by reinsuring certain levels of risk
in various areas of exposure with other insurance enterprises, or reinsurers.
While reinsurance contracts do not relieve AFS from its obligations to
policyholders, AFS evaluates the financial condition of its reinsurers and
monitors concentration of credit risk arising from similar geographic regions,
activities or economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. Additionally, AFS
holds collateral under certain reinsurance agreements in the form of letters of
credit and trust accounts at December 31, 1997. Reinsurance receivables with a
carrying value of $2.8 million and prepaid reinsurance premiums of $26.1 million
relating to a quota share agreement were associated with a single reinsurer.
This reinsurance agreement was cancelled effective May 1, 1997. AFS holds
collateral under this reinsurance agreement in the form of a trust account
totalling $43.3 million at December 31, 1997. 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
$4.7 million and $27.7 million respectively at December 31, 1997 and $7.2
million and $38.1 million respectively at December 31, 1996.
The effect of reinsurance on premiums written, premiums earned and losses
incurred for the three years ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Premiums Written
Direct........................................... $389,597 $387,343 $382,592
Assumed.......................................... 55,931 64,039 50,784
Ceded............................................ (10,532) (45,403) (47,410)
-------- -------- --------
Total premiums written................... $434,996 $405,979 $385,966
======== ======== ========
Premiums Earned
Direct........................................... $386,476 $397,753 $330,902
Assumed.......................................... 48,511 60,693 44,195
Ceded............................................ (20,984) (59,805) (25,338)
-------- -------- --------
Total premiums earned.................... $414,003 $398,641 $349,759
======== ======== ========
Losses Incurred
Direct........................................... $174,507 $170,855 $143,248
Assumed.......................................... 16,659 20,210 16,626
Ceded............................................ (7,008) (7,008) (4,397)
-------- -------- --------
Total losses incurred.................... $184,158 $184,057 $155,477
======== ======== ========
</TABLE>
NOTE 7: OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
AFS is principally engaged in finance and insurance activities. AFS'
finance operations 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, and commercial lending,
focusing primarily on equipment leasing and inventory financing. As of December
31, 1997, AFS operated 1,199 consumer finance offices located throughout the
United States, the Commonwealth of Puerto Rico, the Virgin Islands, Australia,
Canada, Hong Kong, India, Ireland, New Zealand, Spain, Sweden and the United
Kingdom. AFS' insurance business consists primarily of the sale of credit life,
credit
32
<PAGE> 34
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA (CONTINUED)
disability and casualty insurance offered by various subsidiaries, a significant
part of which is directly related to 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,
-----------------------------------------------------------------
1997 1996 1995 1994* 1993*
--------- --------- --------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Revenues.....................................
Financial Services and Related
Insurance................................ $1,574,412 $1,499,488 $1,444,893 $1,214,918 $1,145,756
Nonrelated Insurance....................... 278,853 260,582 219,094 173,316 178,308
---------- ---------- ---------- ---------- ----------
Total revenues...................... $1,853,265 $1,760,070 $1,663,987 $1,388,234 $1,324,064
========== ========== ========== ========== ==========
Income Before Income Taxes
Financial Services and Related
Insurance................................ $ 281,821 $ 278,825 $ 271,299 $ 242,314 $ 217,789
Nonrelated Insurance....................... 29,516 19,734 16,160 16,796 7,995
---------- ---------- ---------- ---------- ----------
Total income before income taxes.... $ 311,337 $ 298,559 $ 287,459 $ 259,110 $ 225,784
========== ========== ========== ========== ==========
Identifiable Assets
Financial Services and Related
Insurance................................ $8,384,440 $7,802,766 $7,437,119 $6,582,978 $5,681,416
Nonrelated Insurance....................... 425,458 392,293 353,829 455,313 441,544
---------- ---------- ---------- ---------- ----------
Total identifiable assets........... $8,809,898 $8,195,059 $7,790,948 $7,038,291 $6,122,960
========== ========== ========== ========== ==========
</TABLE>
- ---------------
* The above data for the two years ended 1994 is not reported upon herein by
independent auditors.
33
<PAGE> 35
AVCO FINANCIAL SERVICES, INC.
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,
--------------------------------------------------------------
1997 1996 1995 1994* 1993*
---------- ---------- ---------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Revenues
Australia.................................... $ 261,589 $ 258,899 $ 240,683 $ 148,264 $ 133,080
Canada....................................... 260,104 235,197 221,175 204,068 210,423
United Kingdom............................... 174,816 147,349 144,675 127,813 112,607
United States................................ 1,083,744 1,071,412 1,028,907 900,023 867,954
Other Countries**............................ 73,012 47,213 28,547 8,066 --
---------- ---------- ---------- ---------- ----------
Total revenues........................ $1,853,265 $1,760,070 $1,663,987 $1,388,234 $1,324,064
========== ========== ========== ========== ==========
Income (Loss) Before Income Taxes
Australia.................................... $ 63,351 $ 58,236 $ 53,801 $ 43,796 $ 34,542
Canada....................................... 57,527 55,853 48,236 47,029 42,503
United Kingdom............................... 39,184 31,044 22,737 21,572 14,819
United States................................ 137,629 144,354 158,592 147,274 133,920
Other Countries**............................ 13,646 9,072 4,093 (561) --
---------- ---------- ---------- ---------- ----------
Total income before income taxes...... $ 311,337 $ 298,559 $ 287,459 $ 259,110 $ 225,784
========== ========== ========== ========== ==========
Identifiable Assets
Australia.................................... $1,244,675 $1,130,930 $1,081,286 $ 646,958 $ 526,410
Canada....................................... 1,270,180 1,105,794 1,031,678 963,689 937,339
United Kingdom............................... 874,201 679,761 606,857 585,736 465,820
United States................................ 4,768,121 4,911,331 4,823,918 4,735,989 4,193,391
Other Countries**............................ 652,721 367,243 247,209 105,919 --
---------- ---------- ---------- ---------- ----------
Total identifiable assets............. $8,809,898 $8,195,059 $7,790,948 $7,038,291 $6,122,960
========== ========== ========== ========== ==========
</TABLE>
- ------------
* The above data for the two years ended 1994 is not reported upon herein by
independent auditors.
** Includes the operations of France, Hong Kong, India, New Zealand, Spain and
Sweden.
At December 31, 1997, finance receivables in the United States represented
51% of AFS' total finance receivables outstanding. At such date, receivables
outstanding in no state exceeded 9% of the United States' portfolio, except
California in which outstanding receivables represented 16% of the United
States' portfolio and 8% of the consolidated portfolio.
Capital expenditures and depreciation expense for each of the five years
ended 1997 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, 1997, approximately $373.3 million of retained earnings was
available for dividends on common stock or for redemptions, purchases or other
acquisitions of stock. The notes and loan
34
<PAGE> 36
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: CERTAIN PROVISIONS CONTAINED IN NOTES, LOAN AGREEMENTS AND CERTIFICATE
OF INCORPORATION AND OTHER RESTRICTIONS (CONTINUED)
agreements also contain various restrictive provisions regarding debt, the
creation of liens or guarantees and the making of investments.
Maximum dividend limitations imposed by U.S. and foreign insurance
regulatory agencies and minimum capital requirements of various U.S. and foreign
regulatory agencies imposed on certain of AFS' finance operations restrict the
amount of certain subsidiaries' net assets which can be transferred to AFS. Such
restricted net assets totaled approximately $486 million at December 31, 1997.
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 for each of the
three years ended December 31, 1997. Future minimum rental commitments for all
noncancelable operating leases in effect at December 31, 1997 approximate $37
million in 1998, $31 million in 1999, $26 million in 2000, $21 million in 2001,
$17 million in 2002 and $68 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 $15
million, $17 million and $16 million for 1997, 1996 and 1995, 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 1997, 1996
and 1995 were not material.
35
<PAGE> 37
AVCO FINANCIAL SERVICES, INC.
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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
(Thousands of
dollars)
<S> <C> <C>
Actuarial present value of benefits attributed to:
Retirees.................................................. $16,778 $23,149
Fully eligible active plan participants................... 5,489 5,056
Other active plan participants............................ 377 777
------- -------
Accumulated postretirement benefit obligation............... 22,644 28,982
Unrecognized net actuarial gains............................ 10,453 6,479
------- -------
Postretirement benefit liability recognized on the
consolidated balance sheet........................... $33,097 $35,461
======= =======
</TABLE>
An assumed discount rate of 7.25% for 1997, 7.5% for 1996 and 8.25% for
1995 was used to determine postretirement benefit costs other than pensions. An
assumed discount rate of 7.25% and 7.5% was used to determine the status of AFS'
plans at December 31, 1997 and December 31, 1996, 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 6.5% for retirees age 65 and
over and 9.0% for retirees under age 65 in 1998, 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, 1997 by $2.1 million and increased the aggregate of the service and
interest cost components of postretirement benefit costs for 1997 by $100,000.
NOTE 12: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations for the years ended December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------- -----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $446,089 $457,637 $464,303 $485,236 $432,249 $433,481 $442,088 $452,252
======== ======== ======== ======== ======== ======== ======== ========
Income before income taxes..... $ 75,545 $ 76,075 $ 77,178 $ 82,539 $ 72,214 $ 75,372 $ 75,711 $ 75,262
Income taxes................... 28,217 28,067 28,101 30,836 27,005 28,486 28,233 27,828
-------- -------- -------- -------- -------- -------- -------- --------
Net income..................... $ 47,328 $ 48,008 $ 49,077 $ 51,703 $ 45,209 $ 46,886 $ 47,478 $ 47,434
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
NOTE 13: 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, 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.
36
<PAGE> 38
AVCO FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 ($496.9 million and $271.2 million, net carrying value,
respectively, at December 31, 1997 and $291.5 million and $272.8 million,
respectively, at December 31, 1996) 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, 1997 December 31, 1996
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C>
ASSETS:
Investments......................... $ 996,407 $ 996,407 $ 927,571 $ 927,571
========== ========== ========== ==========
Finance receivables................. $6,736,705 $6,695,524 $6,471,011 $6,451,011
========== ========== ========== ==========
LIABILITIES:
Debt:
Variable rate debt.................. $4,839,706 $4,839,706 $3,989,901 $3,989,901
Interest rate exchange agreements... -- 11,075 -- 18,811
Fixed rate debt..................... 2,076,076 2,094,906 2,413,447 2,443,804
---------- ---------- ---------- ----------
Total debt................ $6,915,782 $6,945,687 $6,403,348 $6,452,516
========== ========== ========== ==========
</TABLE>
37
<PAGE> 39
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).
38
<PAGE> 40
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.............................. 16
Consolidated Balance Sheet at December 31, 1997 and 1996.... 17
Consolidated Statement of Income for the three years ended
December 31, 1997........................................... 18
Consolidated Statement of Cash Flows for the three years
ended
December 31, 1997........................................... 19
Consolidated Statement of Changes in Stockholder's Equity
for the
three years ended December 31, 1997......................... 20
Notes to Consolidated Financial Statements.................. 21
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) No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
(c) Exhibits
(4) Instruments with respect to issues of long-term debt have not
been filed as exhibits to this Annual Report Form 10-K as the
authorized principal amount of any one of such issues does not
exceed 10% of the total assets of the Registrant and its
consolidated subsidiaries. Registrant agrees to furnish to the
Commission a copy of each such instrument upon request.
*(12) Statement of Computation of Number of Times Fixed
Charges Earned.
(21) Omitted in accordance with General Instruction
J(2)(b).
*(23) Consent of Independent Auditors.
*(24) Powers of Attorney.
*(27) Financial Data Schedule.
</TABLE>
- ------------
* Filed herewith.
39
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
AVCO FINANCIAL SERVICES, INC.
Dated: March 25, 1998 By WARREN R. LYONS
-------------------------------------------
Warren R. Lyons
Chairman (Principal Executive Officer)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 27, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*WARREN R. LYONS Chairman of the Board of Directors
-------------------------------- (Principal Executive Officer)
Warren R. Lyons
*NEIL R. ATON Director
--------------------------------
Neil R. Aton
*RONALD BUKOW Executive Vice President 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
Gary L. Fite (Principal Accounting Officer)
*STEPHEN A. GILIOTTI Director
--------------------------------
Stephen A. Giliotti
*JAMES F. HARDYMON Director
--------------------------------
James F. Hardymon
*WAYNE W. JUCHATZ Director
--------------------------------
Wayne W. Juchatz
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*STEPHEN L. KEY Director
--------------------------------
Stephen L. Key
*EUGENE R. SCHUTT, JR. Executive Vice President and Director
--------------------------------
Eugene R. Schutt, Jr.
*HERBERT F. SMITH Executive Vice President, Secretary and
-------------------------------- Director
Herbert F. Smith
*JOHN C. SPENCE Director
--------------------------------
John C. Spence
*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>
41
<PAGE> 43
AVCO FINANCIAL SERVICES, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---------- ----------
(Thousands of dollars)
<S> <C> <C>
BALANCE SHEET
ASSETS
Demand notes receivable from Avco Financial Services Group
subsidiaries.............................................. $3,717,619 $3,868,329
Investments in subsidiaries, at equity...................... 1,444,526 1,468,045
Other....................................................... 216,502 167,655
---------- ----------
Total assets........................................... $5,378,647 $5,504,029
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt........................................................ $4,108,984 $4,295,970
Other....................................................... 59,148 55,373
---------- ----------
Total liabilities...................................... 4,168,132 4,351,343
Stockholder's equity........................................ 1,210,515 1,152,686
---------- ----------
Total liabilities and stockholder's equity............. $5,378,647 $5,504,029
========== ==========
</TABLE>
See accompanying note.
S-1
<PAGE> 44
AVCO FINANCIAL SERVICES, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (CONTINUED)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C>
STATEMENT OF INCOME
Revenues (primarily interest from Avco Financial
Services Group subsidiaries).......................... $ 268,218 $ 268,171 $ 295,315
Expenses (primarily interest expense)................... (266,062) (275,087) (305,314)
--------- --------- ---------
Earnings (loss) before items shown below................ 2,156 (6,916) (9,999)
Income tax benefits (expense)........................... (813) 2,378 3,450
Equity in income of subsidiaries........................ 194,773 191,545 185,952
--------- --------- ---------
Net income.............................................. $ 196,116 $ 187,007 $ 179,403
========= ========= =========
STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 196,116 $ 187,007 $ 179,403
Adjustments to reconcile net income to net cash provided
by (used in) operating activities..................... (7,738) (34,611) 3,854
--------- --------- ---------
Net cash provided by operating activities.......... 188,378 152,396 183,257
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in demand notes receivable.......... 125,075 (35,004) 20,207
Increase in investments in subsidiaries................. (30,790) (12,607) (9,784)
--------- --------- ---------
Net cash provided by (used in) investing
activities....................................... 94,285 (47,611) 10,423
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt.................. 27,002 295,055 (426,815)
Proceeds from issuance of notes......................... 400,000 300,000 950,000
Principal payments on notes............................. (601,865) (604,940) (626,765)
Capital contribution from parent........................ 40,000 -- --
Dividends paid.......................................... (147,800) (94,900) (90,100)
--------- --------- ---------
Used in financing activities....................... (282,663) (104,785) (193,680)
--------- --------- ---------
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. finance
operations.
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, 1997 for the
five years ending December 31, 2002 were (in millions): $581.9 in 1998; $584.9
in 1999; $525.0 in 2000; $200.0 in 2001; and $200.0 in 2002.
At December 31, 1997 and 1996, the parent company was guarantor for payment
of all its foreign subsidiaries' commercial paper and bank line borrowings of
$1.587 billion and $1.261 billion, respectively, and senior notes of $1.644
billion and $1.337 billion, respectively.
The Registrant received cash dividends from its subsidiaries aggregating
$168.0 million in 1997, $187.6 million in 1996, and $194.6 million in 1995.
S-2
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<C> <S>
(4) Instruments with respect to issues of long-term debt have
not been filed as exhibits to this Annual Report Form 10-K
as the authorized principal amount of any one of such issues
does not exceed 10% of the total assets of the Registrant
and its consolidated subsidiaries. Registrant agrees to
furnish to the Commission a copy of each such instrument
upon request.
*(12) Statement of Computation of Number of Times Fixed Charges
Earned
(21) Omitted in accordance with General Instruction J(2)(b)
*(23) Consent of Independent Auditors
*(24) Powers of Attorney
*(27) Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
S-3
<PAGE> 1
EXHIBIT 12
AVCO FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF NUMBER OF TIMES
FIXED CHARGES EARNED
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Income
Income before income taxes................ $311,337 $298,559 $287,459 $259,110 $225,784
-------- -------- -------- -------- --------
Fixed charges to be added back to income--
Interest and debt expense.............. 434,055 426,260 455,379 334,084 324,211
Rentals (one-third of all rent and
related costs charged to income)..... 14,961 15,015 14,905 13,942 14,378
-------- -------- -------- -------- --------
Total fixed charges............... 449,016 441,275 470,284 348,026 338,589
-------- -------- -------- -------- --------
Income before income taxes and fixed
charges................................... $760,353 $739,834 $757,743 $607,136 $564,373
======== ======== ======== ======== ========
Ratio
Number of times fixed charges covered by
income before income taxes and fixed
charges................................ 1.7 1.7 1.6 1.7 1.7
=== === === === ===
</TABLE>
S-4
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 33-55953) of Avco Financial Services, Inc. and in the related Prospectus
of our report dated January 27, 1998, 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, 1997.
ERNST & YOUNG LLP
Orange County, California
March 25, 1998
S-5
<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 1997 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 25th day of February, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ N. R. ATON Director
- -----------------------------------------------------
N. R. Aton
/s/ R. BUKOW Director
- -----------------------------------------------------
R. Bukow
/s/ L. B. CAMPBELL Director
- -----------------------------------------------------
L. B. Campbell
/s/ S. J. DAVIS Director
- -----------------------------------------------------
S. J. Davis
/s/ G. L. FITE Director
- -----------------------------------------------------
G. L. Fite
/s/ S. A. GILIOTTI Director
- -----------------------------------------------------
S. A. Giliotti
/s/ J. F. HARDYMON Director
- -----------------------------------------------------
J. F. Hardymon
/s/ W. W. JUCHATZ Director
- -----------------------------------------------------
W. W. Juchatz
/s/ S. L. KEY Director
- -----------------------------------------------------
S. L. Key
/s/ W. R. LYONS Director
- -----------------------------------------------------
W. R. Lyons
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ W. J. PEARSON Director
- -----------------------------------------------------
W. J. Pearson
/s/ E. R. SCHUTT, JR. Director
- -----------------------------------------------------
E. R. Schutt, Jr.
/s/ H. F. SMITH Director
- -----------------------------------------------------
H. F. Smith
/s/ J. C. SPENCE Director
- -----------------------------------------------------
J. C. Spence
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AFS'
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND CONSOLIDATED STATEMENT OF
INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 44,958
<SECURITIES> 0
<RECEIVABLES> 7,742,641
<ALLOWANCES> 237,809
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 89,982
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,809,898
<CURRENT-LIABILITIES> 0
<BONDS> 3,741,592
0
0
<COMMON> 500
<OTHER-SE> 1,210,015
<TOTAL-LIABILITY-AND-EQUITY> 8,809,898
<SALES> 0
<TOTAL-REVENUES> 1,853,265
<CGS> 0
<TOTAL-COSTS> 279,287
<OTHER-EXPENSES> 595,404
<LOSS-PROVISION> 233,182
<INTEREST-EXPENSE> 434,055
<INCOME-PRETAX> 311,337
<INCOME-TAX> 115,221
<INCOME-CONTINUING> 196,116
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 196,116
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
