-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K28GoF6eSy17xTfXL7v3ivlkf0hNVY8Hafpd3j6KHw8dt9tEcTQceNy2pg33gX0v Kyq+Tv7dxRtNnLCluBDE3Q== 0000892569-96-000297.txt : 19960329 0000892569-96-000297.hdr.sgml : 19960329 ACCESSION NUMBER: 0000892569-96-000297 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVCO FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000008795 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 132530491 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06119 FILM NUMBER: 96539851 BUSINESS ADDRESS: STREET 1: 600 ANTON BLVD CITY: COSTA MESA STATE: CA ZIP: 92628 BUSINESS PHONE: 7144457860 MAIL ADDRESS: STREET 1: 3349 MICHELSON DR CITY: IRVINE STATE: CA ZIP: 92715 FORMER COMPANY: FORMER CONFORMED NAME: AVCO DELTA CORP DATE OF NAME CHANGE: 19720526 FORMER COMPANY: FORMER CONFORMED NAME: SEABOARD FINANCE CO DATE OF NAME CHANGE: 19700722 10-K 1 FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1995 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.) COMMISSION FILE NO. 0-6119 AVCO FINANCIAL SERVICES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 714-435-1200 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Not applicable. Aggregate market value of common stock: Not applicable. At December 31, 1995, the Registrant had 500,000 shares of common stock ($1 par value per share) outstanding, all of which are owned by Textron Inc. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL Avco Financial Services, Inc., which was organized under the laws of Delaware on July 17, 1964, is the successor to the finance businesses of Seaboard Finance Company, originally established in 1927, and Delta Acceptance Corporation Limited, originally established in 1954. Unless the context otherwise requires, the term "Registrant" or "AFS" herein refers to Avco Financial Services, Inc. and its consolidated subsidiaries. All of the Registrant's outstanding common stock is owned by Textron Inc. The Registrant is principally engaged in consumer finance and insurance activities. The Registrant's finance operations mainly involve loans made by the Avco Financial Services Group. Such loans consist primarily of consumer loans which are unsecured or secured by personal property and are in relatively small amounts and for relatively short periods; real estate loans which are secured by real property in larger amounts and for considerably longer periods; and retail installment contracts, principally covering personal property. As of December 31, 1995, the Registrant operated 1,230 finance offices located in all states of the United States (except Arkansas, Kansas, Maine, Mississippi, Oklahoma, Texas and Vermont), the Commonwealth of Puerto Rico, the Virgin Islands, all Canadian provinces and the Yukon Territory, six Australian states and the Australian Capital Territory, Hong Kong, New Zealand, Spain and the United Kingdom. The Registrant's insurance business consists primarily of the sale of credit life, credit disability and casualty insurance offered by various subsidiaries (Avco Insurance Services Group), a significant part of which is directly related to the Registrant's finance activities. To complement its existing operations in Australia, in January 1995, the Registrant purchased the stock of HFC of Australia Ltd. and its Australian subsidiaries (HFCA), subsidiaries of Household International, Inc. This acquisition added approximately $436 million to the Registrant's finance receivable portfolio. For a summary of revenues, income before income taxes, and identifiable assets by industry segment, see Note 7 to the Consolidated Financial Statements of the Registrant. At December 31, 1995, the Registrant employed approximately 7,500 persons. AVCO FINANCIAL SERVICES GROUP Finance Receivables The Registrant's finance receivable portfolio consisted of the following:
December 31, --------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- (Thousands of dollars) Consumer loans....................... $3,021,227 $2,721,905 $2,389,994 $2,275,016 $2,076,251 Real estate loans.................... 2,512,619 2,415,621 2,260,815 2,141,900 1,995,075 Retail installment contracts......... 1,135,830 1,107,282 741,998 656,668 544,477 Other loans.......................... 263,850 91,560 76,756 84,721 132,625 ---------- ---------- ---------- ---------- ---------- Total........................... $6,933,526 $6,336,368 $5,469,563 $5,158,305 $4,748,428 ========== ========== ========== ========== ==========
The following table presents the Registrant's outstanding finance receivables by country:
December 31, --------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- (Thousands of dollars) Australia............................ $1,009,345 $ 611,087 $ 489,034 $ 455,771 $ 448,583 Canada............................... 967,809 908,339 874,277 835,942 966,898 United Kingdom....................... 607,986 587,972 467,363 434,498 423,354 United States........................ 4,115,141 4,140,094 3,638,889 3,432,094 2,909,593 Other Countries*..................... 233,245 88,876 ---------- ---------- ---------- ---------- ---------- Total........................... $6,933,526 $6,336,368 $5,469,563 $5,158,305 $4,748,428 ========== ========== ========== ========== ==========
- --------------- * Includes the operations of Hong Kong and Spain which commenced operations in 1994 and New Zealand. 1 3 At December 31, 1995, finance receivables in the United States represented 59% of the Registrant's total finance receivables outstanding. At such date, receivables outstanding in no state exceeded 7% of the United States' portfolio, except California in which outstanding receivables represented 16% of the United States' portfolio and 9% of the consolidated portfolio. Receivable growth in international operations is affected by fluctuations in foreign currency exchange rates. Increases (decreases) in receivable growth due to foreign currency translation for the five years ended December 31, 1995 were (in millions): $(1.1) in 1995, $47.5 in 1994, $(48.2) in 1993, $(211.2) in 1992, and $(16.2) in 1991. Consumer Loans and Real Estate Loans The Registrant's consumer lending activities involve secured and unsecured installment loans to individuals. After repaying portions of their consumer loans, many customers take out new loans in amounts sufficient to pay off the balance of the existing loans and to supply additional needed money. Of the aggregate of 879,439 consumer and real estate loans written during the year ended December 31, 1995, approximately 49% included advances to refinance outstanding balances. The Registrant's real estate loans consist primarily of loans made to individuals which are secured by first or second mortgages on single family homes. A summary of the Registrant's consumer and real estate loan accounts written (excluding both refinanced balances and receivables acquired from other finance companies) and outstanding is as follows:
Year ended December 31, --------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- (Thousands of dollars*) New funds advanced Consumer loans Funds advanced.................. $1,929,581 $1,736,634 $1,474,139 $1,241,420 $1,115,497 Average amount.................. $ 2,272 $ 2,014 $ 1,836 $ 1,705 $ 1,563 Real estate loans Funds advanced.................. $ 709,624 $ 727,139 $ 642,082 $ 630,594 $ 625,745 Average amount.................. $ 23,608 $ 23,714 $ 21,022 $ 20,357 $ 20,391 Receivables outstanding at end of period Consumer loans Net balance..................... $3,021,227 $2,721,905 $2,389,994 $2,275,016 $2,076,251 Average amount.................. $ 2,888 $ 2,725 $ 2,407 $ 2,214 $ 2,139 Real estate loans Net balance..................... $2,512,619 $2,415,621 $2,260,815 $2,141,900 $1,995,075 Average amount.................. $ 27,311 $ 27,450 $ 25,120 $ 23,318 $ 24,083
- ------------ * Except average amount. Retail Installment Contracts The Registrant's sales finance operations consist principally of the purchase, generally without recourse, of retail installment contracts from dealers in automobiles, furniture, television sets, household appliances and floor coverings. Retail installment operations provide a source of new customers for consumer loan business. In general, retail installment contracts carry a lower profit margin than consumer loans, and the volume of such business tends to be more volatile. 2 4 The following table summarizes retail installment contracts purchased (excluding contracts acquired from other finance companies) and outstanding:
Year ended December 31, ------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- -------- -------- (Thousands of dollars*) Retail installment contracts purchased $1,310,373 $1,319,291 $1,041,981 $945,380 $784,957 Retail installment contracts outstanding at end of period Net balance $1,135,830 $1,107,282 $ 741,998 $656,668 $544,477 Average amount $ 1,067 $ 1,042 $ 859 $ 808 $ 821
- ------------ * Except average amount. Other Receivables At December 31, 1995, other receivables outstanding of $263.9 million consisted primarily of equipment leasing receivables generated by the Registrant's Australian, Hong Kong and United States operations. Such leases are generally written for periods not exceeding 4 years. Lending Policies In conducting lending activities, it is the policy of the Registrant to require a satisfactory credit history. Loans are made to individuals primarily on the basis of the borrower's income and are limited to amounts which the customer appears able to repay without hardship. Investigation of the creditworthiness of obligors is made either through credit agencies or by the Registrant's own agents. When security is taken in connection with a loan, the realizable value of the property on which liens are taken as security (except for real estate in which case the loan amount is limited to a maximum of 85% of the unencumbered appraised market value) is in many cases less than the amount of the related receivable. Subject to governmental restrictions, the Registrant makes loans secured by consumer goods for varying periods, with original contractual terms generally not exceeding 4 years. Loans secured by real estate generally do not exceed 15 years. During 1995, the weighted average maturity of real estate loans written was approximately 8 years. The Registrant purchases retail installment contracts with original contractual terms generally not exceeding 3 years. Nonearning Assets Accrual of interest income is suspended for accounts which are contractually delinquent by more than three payments. Once an account is suspended, subsequent interest income is recognized when collected. Nonearning assets represent those finance receivables on which both the accrual of interest income has been suspended and for which no payment of principal or interest has been received for more than 30 days. Nonearning assets totaled approximately $115.0 million at December 31, 1995 and $81.3 million at December 31, 1994. Loss Experience Provisions for losses on receivables are charged to income in amounts sufficient to maintain the allowance at a level adequate to cover the losses of principal and interest in the existing receivable portfolio. The determination of an appropriate allowance for losses is based upon loss experience and payment history. It is the Registrant's policy to write off accounts when they are deemed uncollectible, but in any event, all accounts for which an amount aggregating a full contractual payment has not been received for six consecutive months are written off. Foreclosed real estate loans are transferred out of finance receivables into other assets at the lower of fair value (less estimated costs to sell) or the outstanding loan balance. The difference between the amount transferred and the outstanding loan balance is written off. Subsequent gains and losses on the disposition of 3 5 real estate owned are reflected in other operating expenses. At December 31, 1995 and 1994, real estate owned was $43.9 million and $35.5 million, respectively. The allowance for losses at December 31, 1995 was $195.4 million or 2.82% of finance receivables then outstanding; such allowance at December 31, 1994 was $180.6 million or 2.85% of finance receivables outstanding. See Note 2 to the Consolidated Financial Statements of the Registrant for an analysis of the allowance for losses for the five years ended December 31, 1995. The following table shows gross and net write-offs, the percentages which these items bear to average finance receivables and the amount of the provision for losses charged to income (less recoveries):
Gross write-offs Recoveries Net write-offs ---------------------- from ---------------------- Percentage receivables Percentage Provision of average previously of average for losses finance written finance less Year ended December 31, Amount receivables off Amount receivables recoveries - ------------------------ -------- ----------- ---------- -------- ----------- ---------- (Thousands of dollars) 1995 $176,804 2.6% $ 32,914 $143,890 2.1% $ 149,143 1994 141,886 2.5 28,452 113,434 2.0 136,101 1993 138,104 2.7 26,611 111,493 2.1 120,694 1992 136,795 2.7 26,797 109,998 2.2 118,251 1991 132,816 2.9 23,798 109,018 2.4 114,222
The following table presents for the five years ended December 31, 1995 loans on which one or more installments were more than 60 days delinquent on a contractual basis (expressed as a percentage of the related gross receivables outstanding):
Real Estate Other Total Year ended December 31, Loans Loans* Loans - ------------------------ ----------- ------ ----- 1995 1.76% 3.50% 2.89% 1994 1.29% 2.84% 2.28% 1993 1.45% 3.12% 2.46% 1992 1.37% 3.77% 2.80% 1991 1.51% 4.17% 3.08%
- --------------- * Includes consumer loans and retail installment contracts. Sources of Funds The Registrant's finance operations are financed from its common stock, additional paid-in capital, retained earnings, unsecured borrowings against bank lines of credit, unsecured commercial paper borrowings and unsecured medium- and long-term borrowings. The cost of borrowing, which is generally affected by changes in interest rates, represents a material expense of the Registrant. Since the maximum rates which the Registrant may charge on certain consumer loans are limited by law in many jurisdictions in the United States (see "Regulation"), any rise in prevailing interest rates adversely affects the profitability of the Registrant's finance operations. The Registrant's average annual cost of borrowed funds for each fiscal year 1995 through 1991 was as follows: 1995 -- 7.32%; 1994 -- 6.63%; 1993 -- 6.97%; 1992 -- 8.11%; and 1991 -- 9.73%. AVCO INSURANCE SERVICES GROUP The Registrant, through the Avco Insurance Services Group, is engaged in the credit life, credit disability and casualty insurance business in most states of the United States, all Canadian provinces, seven Australian jurisdictions and New Zealand. Where applicable laws permit, the Registrant makes available to customers credit life, credit disability and casualty insurance through the Avco Financial Services Group or independent companies. During 1995, approximately 77% of the Group's credit life and credit disability insurance business and approximately 20% of its casualty insurance business was derived from the Registrant's finance customers. The Group's remaining credit life, credit disability and casualty insurance business is written with customers on a direct basis or through independent agents. The Group's casualty business consists primarily of insurance covering collateral protection, involuntary unemployment, personal property and automobile physical damage. 4 6 The following table summarizes the results of operations of the Avco Insurance Services Group by major line of business included in the consolidated financial statements of the Registrant:
Year ended December 31, ---------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (Thousands of dollars) Credit Life, Credit Disability and Other Premiums written $145,243 $151,370 $135,218 $123,863 $105,987 ======== ======== ======== ======== ======== Premiums earned $139,105 $131,840 $127,458 $123,122 $124,468 Investment income 35,594 20,239 19,793 19,366 22,157 Losses and adjustment expenses, less recoveries (61,782) (58,268) (59,306) (56,181) (54,240) Expenses (58,535) (55,019) (54,826) (51,923) (48,495) Income taxes (18,043) (11,567) (10,514) (10,840) (13,719) -------- -------- -------- -------- -------- Income before cumulative effect of changes in accounting principles 36,339 27,225 22,605 23,544 30,171 Cumulative effect of changes in accounting principles (1,788) -------- -------- -------- -------- -------- Net income $ 36,339 $ 27,225 $ 22,605 $ 21,756 $ 30,171 ======== ======== ======== ======== ======== Casualty Premiums written $240,723 $173,380 $158,645 $151,146 $167,498 ======== ======== ======== ======== ======== Premiums earned $210,654 $155,538 $150,954 $151,886 $159,477 Investment income 19,447 24,085 23,532 23,168 26,287 Losses and adjustment expenses, less recoveries (93,695) (69,417) (72,764) (80,957) (75,871) Expenses (107,870) (82,848) (82,894) (75,369) (81,642) Income taxes (9,275) (8,966) (5,004) (4,762) (8,371) -------- -------- -------- -------- -------- Income before cumulative effect of changes in accounting principles 19,261 18,392 13,824 13,966 19,880 Cumulative effect of changes in accounting principles (1,788) -------- -------- -------- -------- -------- Net income $ 19,261 $ 18,392 $ 13,824 $ 12,178 $ 19,880 ======== ======== ======== ======== ======== Total Operations Premiums written $385,966 $324,750 $293,863 $275,009 $273,485 ======== ======== ======== ======== ======== Premiums earned $349,759 $287,378 $278,412 $275,008 $283,945 Investment income(1) 55,041 44,324 43,325 42,534 48,444 Losses and adjustment expenses, less recoveries (155,477) (127,685) (132,070) (137,138) (130,111) Expenses (166,405) (137,867) (137,720) (127,292) (130,137) Income taxes (27,318) (20,533) (15,518) (15,602) (22,090) -------- -------- -------- -------- -------- Income before cumulative effect of changes in accounting principles 55,600 45,617 36,429 37,510 50,051 Cumulative effect of changes in accounting principles (3,576) -------- -------- -------- -------- -------- Net income $ 55,600 $ 45,617 $ 36,429 $ 33,934 $ 50,051 ======== ======== ======== ======== ========
- ------------ (1) Investment income includes capital gains of $3.2 million, $2.8 million, $4.3 million, $3.1 million, and $4.7 million for the years 1995 through 1991, respectively. The 1995 allocation of investment income reflects the growing impact of statutory requirements on capital surplus by product line. Included in the assets of the Avco Insurance Services Group at December 31, 1995 were investments in securities carried at $759.8 million for which the aggregate cost was $728.8 million. At December 31, 1995, the Avco Insurance Services Group carried a valuation adjustment for its investments totaling $20.2 million. This valuation adjustment represents the excess of aggregate estimated fair value over aggregate cost of its securities (net of applicable taxes). 5 7 The composition of invested assets of the Avco Insurance Services Group at December 31, 1995 and 1994 and the returns on such investments for the years then ended were as follows:
1995 1994 -------------------- -------------------- Amount Percent Amount Percent -------- ------- -------- ------- (Thousands of dollars) Composition of Invested Assets Equities, at market Preferred $ 6,831 .9% $ 4,727 .7% Common 16,772 2.2 14,342 2.2 Bonds available for sale, at estimated fair value(1) 654,961 84.2 554,146 84.4 Commercial paper, at estimated fair value (approximates cost) 79,233 10.2 54,242 8.3 Real estate, net 3,417 .4 3,633 .6 Other invested assets 4,341 .6 4,661 .7 Cash 11,912 1.5 20,445 3.1 -------- ------- -------- ------- Total $777,467 100.0% $656,196 100.0% ======== ====== ======== ====== Return on Invested Assets Investment income (before taxes)(2) $ 55,041 $ 44,324 Mean invested assets $707,226 $627,397 Return on mean invested assets, before taxes 7.8% 7.1% Return on mean invested assets, after taxes 5.1% 4.9%
- ------------ (1) Substantially all of the Registrant's bond portfolio is in investment grade securities. (2) Includes capital gains and losses set forth in note (1) to the immediately preceding table. OPERATIONS BY GEOGRAPHIC AREA The Registrant's foreign operations are conducted primarily in Australia, Canada and the United Kingdom. At December 31, 1995, the Registrant operated 143 finance offices in Australia, 214 in Canada and 96 in the United Kingdom. In these countries, the Registrant engages primarily in consumer finance and related insurance activities similar to those conducted in the United States. At December 31, 1995, the percentage of finance receivables of the Australian, Canadian and United Kingdom finance operations in relation to the Registrant's total finance receivables was 15%, 14% and 9%, respectively. Operations in these countries are subject to regulation and competition comparable to that existing in the United States. See "Regulation" and "Competition". The Registrant commenced operations in Hong Kong, New Zealand and Spain in 1994, 1990 and 1992, respectively. Such operations are not individually material to the Registrant's consolidated financial position or results of operations. For a summary of revenues, income before income taxes and identifiable assets by geographic area, see Note 7 to the Consolidated Financial Statements of the Registrant. REGULATION The Registrant's loan business is regulated by laws which are in force in certain jurisdictions in which the Registrant operates and which, among other things, generally limit maximum charges for loans, the maximum amount and terms thereof. In recent years, the trend of state legislation has been to deregulate interest rates or to increase the maximum rates permitted to be charged. In jurisdictions within Australia, the United Kingdom and the United States, laws also require that each office conducting a consumer loan business be separately licensed. Such licenses have limited terms, but are renewable, and are subject to revocation for cause. Laws under which the Registrant operates also require disclosure to customers of the annual simple interest rate and other basic terms of most credit transactions and give customers a limited right to cancel certain loans and retail installment contracts without penalty. 6 8 In addition, in certain jurisdictions in which the Registrant operates, the retail installment business conducted by it is subject to regulatory legislation which, among other things, limits the rates which may be charged and requires disclosure to customers as to the terms of the financing transactions. The insurance businesses have been subject for many years to licensing and detailed regulation by state authorities, and the rates charged on certain lines of insurance are subject to governmental limitation and change. In recent years, the rates which may be charged on credit life insurance generally have been reduced by the regulatory authorities. In recent years, certain states have recently enacted legislation providing for the reduction of premiums on certain lines of property and casualty insurance. The state insurance regulations also include limitations on the amounts of dividends that can be paid by insurance companies. The laws of many states in which the Registrant's insurance subsidiaries are admitted to do business require as a condition of admission that all insurance companies so admitted collectively guarantee to policyholders the benefits payable under policies issued by other insurance companies admitted in the particular state up to statutory levels. The Registrant's insurance subsidiaries have not been required to date to make any significant payments pursuant to such guarantees. While the amount of any assessments which may be made in the future cannot be predicted, the Registrant does not believe the total assessments, if any, will be material to its net income or financial condition. COMPETITION The consumer finance business is highly competitive. The Registrant's competitors include not only other companies operating under consumer loan laws, but also other types of lending institutions not so regulated and usually not limited in the size of their loans, such as companies which finance the sale of their own merchandise or the merchandise of others, industrial banks, the personal loan departments of commercial banks and credit unions. The most serious competition is offered by commercial banks and credit unions. The effective interest rates charged by these lenders are usually lower than the rates charged by the Registrant. The Registrant's insurance businesses, to the extent that they are not related to the Registrant's finance activities, compete with many other insurance companies offering similar products. ITEM 2. PROPERTIES Almost all of the offices of the Registrant are occupied under leases. Reference is made to Note 9 to the Consolidated Financial Statements of the Registrant for information concerning the Registrant's lease obligations. The Registrant does not own any substantial amount of physical property other than properties acquired by enforcing security interests and office furniture and fixtures. Of the 1,230 loan offices which the Registrant operated at December 31, 1995, 756 were located in the United States, the Virgin Islands and the Commonwealth of Puerto Rico, 214 in Canada, 143 in Australia and 96 in the United Kingdom. ITEM 3. LEGAL PROCEEDINGS Because the business of the Registrant involves the collection of numerous accounts, the validity of liens, accident and other damage or loss claims under many types of insurance, and compliance with state and federal consumer laws, the Registrant and its subsidiaries are plaintiffs and defendants in numerous legal proceedings, including individual and class action proceedings which seek compensatory, treble or punitive damages in substantial amounts. It is the opinion of the Registrant's management, based upon the advice of its counsel, that the aggregate liability from pending or threatened litigation will not have a material effect on the Registrant's net income or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted in accordance with General Instruction J(2)(c). 7 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Textron Inc. owns all of the outstanding common stock of the Registrant. Dividends of $90.1 million and $81.0 million were declared and paid in 1995 and 1994, respectively. See Note 8 to the Consolidated Financial Statements of the Registrant regarding restrictions as to dividend availability. ITEM 6. SELECTED FINANCIAL DATA The following selected financial information has been derived from the Consolidated Financial Statements for the five years ended December 31, 1995 and is reported upon in the "Report of Independent Auditors" included on page 11. The information should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations", and the Consolidated Financial Statements and accompanying notes, included elsewhere in this report.
Year ended December 31, --------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- (Thousands of dollars) REVENUES AND INCOME Revenues $1,663,987 $1,388,234 $1,324,064 $1,340,834 $1,321,823 ========== ========== ========== ========== ========== Income Before Income Taxes $ 287,459 $ 259,110 $ 225,784 $ 203,913 $ 196,886 Income taxes 108,056 96,781 83,755 75,887 72,286 ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of changes in accounting principles 179,403 162,329 142,029 128,026 124,600 Cumulative effect of changes in accounting principles(1) (24,328) ---------- ---------- ---------- ---------- ---------- Net Income $ 179,403 $ 162,329 $ 142,029 $ 103,698 $ 124,600 ========== ========== ========== ========== ========== Ratio of Income to Fixed Charges(2) 1.6 1.7 1.7 1.5 1.5 ========== ========== ========== ========== ========== FINANCIAL CONDITION Receivables Outstanding $6,933,526 $6,336,368 $5,469,563 $5,158,305 $4,748,428 Investments 852,450 704,244 655,690 586,339 575,468 Consolidated Assets 7,790,948 7,038,291 6,122,960 5,785,967 5,334,177 Debt (excludes savings deposits) Commercial paper and banks 2,413,601 2,430,291 1,959,063 1,580,021 1,206,954 Notes 3,746,652 3,168,178 2,851,399 2,987,467 2,973,056 Stockholder's Equity 1,028,230 893,744 827,511 753,071 744,560
- ------------ (1) Effective at the beginning of 1992, the Registrant adopted Statements of Financial Accounting Standards Nos. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", and 109, "Accounting for Income Taxes". (2) See Note 1 to the Consolidated Financial Statements of the Registrant for computation of "Ratio of Income to Fixed Charges". 8 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 1995 vs. 1994 -- Income before income taxes for the year ended December 31, 1995 was $287.5 million compared to $259.1 million for the year ended December 31, 1994, an increase of $28.4 million (11.0%). This increase resulted primarily from: (i) an increase in the level of receivables outstanding as average finance receivables were $6.867 billion for 1995 compared to $5.696 billion for 1994; (ii) a 21.7% increase in earned premiums; (iii) a decrease in the ratio of operating expenses to revenues in both the finance and insurance operations (32.3% in 1995 as compared to 33.7% in 1994); and (iv) a 25.0% increase in investment income due primarily to higher yields and a higher level of invested assets. This increase in income was partially offset by: (i) an increase in the cost of borrowed funds to 7.32% for 1995 from 6.63% for 1994; (ii) an increase in the ratio of net credit losses to average finance receivables to 2.10% in 1995 from 1.99% in 1994; and (iii) lower receivable yields due primarily to an increase in the level of retail installment contracts outstanding. Interest income as a percent of average finance receivables was 18.20% for 1995 compared to 18.39% for 1994. Revenues for the year ended December 31, 1995 were $1.664 billion compared to $1.388 billion for the year ended December 31, 1994, an increase of $276 million (19.9%). The increase resulted primarily from the increase in the level of receivables outstanding, earned premium, and investment income, partially offset by a slight decrease in yields on finance receivables. An increase in delinquencies and net credit losses experienced during the latter part of 1995 was due to economic slowdowns in the countries in which the Registrant operates. The consumer debt load has continued to increase faster than the consumers' ability to pay. The Registrant has tightened its underwriting standards and, unless the economies in which it operates declines further, the Registrant believes these trends will turn around by mid-1996. 1994 vs. 1993 -- Income before income taxes for the year ended December 31, 1994 was $259.1 million compared to $225.8 million for the year ended December 31, 1993, an increase of $33.3 million (14.8%). This increase resulted primarily from: (i) an increase in the level of receivables outstanding as average finance receivables were $5.696 billion for 1994 compared to $5.208 billion for 1993; (ii) a decrease in the cost of borrowed funds to 6.63% for 1994 from 6.97% for 1993; (iii) a decrease in insurance losses in both the finance related and independent insurance operations; (iv) a decrease in policy acquisition costs due to a reduction in non-finance related insurance operation premiums earned; and (v) an increase in investment income due primarily to an increase in invested assets. This increase in income was partially offset by: (i) an increase in the provision for losses associated with the increase in receivables outstanding and (ii) a decline in yields on finance receivables. Interest income as a percent of average finance receivables was 18.39% for 1994 compared to 19.10% for 1993. Although 1994 yields were below 1993 levels, in response to increasing cost of funds, the Registrant began increasing the interest rates it charges its finance customers in the second half of 1994. Revenues for 1994 were $1.388 billion compared to $1.324 billion for 1993, an increase of $64 million (4.8%). This increase resulted primarily from the aforementioned increase in the level of receivables outstanding and was partially offset by a decrease of approximately $38.8 million from the decline in yields on finance receivables. LIQUIDITY/CAPITAL RESOURCES The Registrant consists of the Avco Financial Services Group and Avco Insurance Services Group. The insurance operations have historically generated positive cash flows sufficient to preclude the need for borrowings. The Registrant utilizes a broad base of financial sources for its liquidity and capital requirements. Cash is provided from both operations and several different sources of borrowings, including unsecured borrowings under bank lines of credit, the issuance of commercial paper and sales of medium- and long-term debt in the U.S. and foreign financial markets. Under interest rate exchange agreements, the Registrant makes periodic fixed payments in exchange for periodic variable payments. The Registrant has entered into such agreements to mitigate its exposure to increases in interest rates on a portion of its variable rate debt. The effect of the swaps is to fix the rate of interest on a portion of the Registrant's variable rate debt, thereby giving it the characteristics of long-term 9 11 fixed rate debt. The agreements are designated against (i) specific long-term variable rate borrowings and (ii) existing short-term borrowings. The Registrant continuously monitors the level of short-term borrowings to ensure that there is a high degree of probability that its short-term borrowings will remain at a level in excess of the notional amount of the designated agreements. At December 31, 1995, the Registrant had interest rate exchange agreements which had the effect of fixing the rate of interest at approximately 8.2% on $1.063 billion of variable rate borrowing. The agreements, which expire through 2000, had a weighted average original term of 3.2 years. By utilizing medium- and long-term fixed rate financing, as well as interest rate exchange agreements, the Registrant had a ratio of fixed rate debt to total debt of 64% at December 31, 1995. During the three years ended December 31, 1995, short-term rates were lower than long-term rates. As a result, the amount the Registrant paid on swaps exceeded the amount it received. The spread between the variable rate the Registrant received and the fixed rate the Registrant paid increased the reported interest expense by $10.9 million in 1995, $17.2 million in 1994, and $38.7 million in 1993. Such spread had the effect of increasing the Registrant's cost of borrowing by .18% in 1995, .34% in 1994, and .84% in 1993. See Note 5 to the Consolidated Financial Statements of the Registrant for additional information regarding interest rate exchange agreements. In 1995, the Registrant entered into additional fixed-pay interest rate exchange agreements which become effective in 1996. These agreements expire through 1999 and will fix the rate of interest at 8.1% on $204 million of variable rate borrowing. The agreements will mitigate the Registrant's exposure to increases in interest rates primarily by replacing maturing fixed-pay swap agreements and fixed-rate notes. For liquidity purposes, the Registrant has a policy of maintaining sufficient unused bank lines of credit to support its outstanding commercial paper. The commercial paper coverage ratio at December 31, 1995, was 128%. For further information regarding commercial paper and bank lines of credit, see Note 5 to the Consolidated Financial Statements of the Registrant. At December 31, 1995, $2.51 billion (36%) of the Registrant's finance receivables were represented by residential real estate loans, secured primarily by first and second mortgages on single family homes, and averaged $27 thousand in outstanding principal balance per loan. Such loans are geographically dispersed among many customers and the loan amounts are limited to a maximum of 85% of the unencumbered appraised market value at the date of the loans, although most loans are made at significantly lower loan to value ratios. The Registrant believes that substantially all such loans remain fully secured. Foreclosed real estate loans are transferred out of finance receivables into other assets at the lower of fair value (less estimated costs to sell) or the outstanding loan balance. The carrying value of real estate owned is periodically reevaluated and, where appropriate, adjustments are made to reflect subsequent decreases in fair value. At December 31, 1995, real estate classified in other assets aggregated $43.9 million. At December 31, 1995, the Registrant had an investment portfolio of $852.5 million, primarily represented by high quality, investment grade debt securities. Such portfolio included $39.6 million ($40.2 million market value) of mortgage-backed securities, including $36.6 million guaranteed by the U.S. Government or agencies thereof. The amount of net assets of the Registrant available for cash dividends and other payments to its parent, Textron Inc., is restricted by the terms of lending agreements and insurance statutory requirements. The Registrant paid dividends of $90.1 million, $81.0 million and $71.0 million to Textron Inc. in 1995, 1994 and 1993, respectively. See Note 8 to the Consolidated Financial Statements of the Registrant for restrictions. 10 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS The Board of Directors Avco Financial Services, Inc. We have audited the accompanying consolidated balance sheet of Avco Financial Services, Inc. as of December 31, 1995 and 1994 and the related consolidated statements of income, cash flows and changes in stockholder's equity for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedules listed in the accompanying index to financial statements at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avco Financial Services, Inc. at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet at December 31, 1993, 1992 and 1991, and the related consolidated statements of income, cash flows, and changes in stockholder's equity for the years ended December 31, 1992 and 1991 (none of which are presented separately herein), and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the selected financial data for each of the five years in the period ended December 31, 1995, appearing on page 8, is fairly stated in all material respects in relation to the consolidated financial statements from which it has been derived. ERNST & YOUNG LLP Orange County, California January 25, 1996 11 13 AVCO FINANCIAL SERVICES, INC. CONSOLIDATED BALANCE SHEET
December 31, ------------------------- 1995 1994 ---------- ---------- (Thousands of dollars) ASSETS Finance receivables -- net $6,476,614 $5,904,841 Investments 852,450 704,244 Property and equipment 72,159 65,188 Insurance policy acquisition costs 54,716 42,932 Goodwill 21,388 21,770 Cash 25,454 21,817 Other 288,167 277,499 ---------- ---------- TOTAL ASSETS $7,790,948 $7,038,291 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Debt $6,165,437 $5,603,273 Accounts payable and accrued liabilities 285,909 271,480 Insurance reserves and claims Unearned insurance premiums 196,591 146,163 Losses and adjustment expenses 61,557 55,297 Income taxes 53,224 68,334 ---------- ---------- Total liabilities 6,762,718 6,144,547 ---------- ---------- Stockholder's equity Common stock ($1 par value, 1,000,000 shares authorized; 500,000 shares outstanding) 500 500 Additional paid-in capital 137,588 137,588 Retained earnings 949,436 860,133 Securities valuation adjustment 56,309 8,278 Currency translation adjustment (115,603) (112,755) ---------- ---------- Total stockholder's equity 1,028,230 893,744 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $7,790,948 $7,038,291 ========= =========
See accompanying notes to consolidated financial statements. 12 14 AVCO FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, -------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (Thousands of dollars) REVENUES Interest, discount and service charges $1,249,438 $1,047,783 $ 994,731 Credit life, credit disability and casualty insurance premiums 349,759 287,378 278,412 Investment and other income (including net realized investment gains) 64,790 53,073 50,921 ---------- ---------- ---------- Total revenues 1,663,987 1,388,234 1,324,064 EXPENSES Interest and debt expense Interest on notes 261,223 212,422 212,495 Amortization of debt expense 4,740 3,555 3,715 Interest on commercial paper, bank loans and other indebtedness 189,416 119,717 108,483 ---------- ---------- ---------- Total 455,379 335,694 324,693 Salaries, wages, and other employee benefits 293,273 263,670 252,066 Provision for losses on collection of finance receivables, less recoveries 149,143 136,101 120,694 Credit life, credit disability and casualty insurance losses and adjustment expenses, less recoveries 155,477 127,685 132,070 Amortization of insurance policy acquisition costs 79,168 61,531 67,039 Other operating expenses 244,088 204,443 201,718 ---------- ---------- ---------- Total expenses 1,376,528 1,129,124 1,098,280 ---------- ---------- ---------- Income before income taxes 287,459 259,110 225,784 Income taxes 108,056 96,781 83,755 ---------- ---------- ---------- NET INCOME $ 179,403 $ 162,329 $ 142,029 ========= ========= ========= Ratio of income to fixed charges 1.6 1.7 1.7 --- --- --- --- --- ---
See accompanying notes to consolidated financial statements. 13 15 AVCO FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, ------------------------------------- 1995 1994 1993 ----------- ---------- ---------- (Thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 179,403 $ 162,329 $ 142,029 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on receivables 182,057 164,553 147,305 Depreciation 19,249 16,329 16,168 Gain on sales of investments (3,167) (2,845) (4,335) Decrease (increase) in insurance policy acquisition costs (11,720) (8,844) 443 Increase in unearned insurance premiums and reserves for insurance losses and adjustment expenses 68,365 34,702 16,109 Increase in accounts payable and accrued liabilities 4,881 34,984 2,778 Increase (decrease) in income taxes (14,540) 2,624 7,070 Other - net (20,370) (654) 28,276 ----------- ---------- ---------- Net cash provided by operating activities 404,158 403,178 355,843 ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Finance receivables originated or purchased (4,272,148) (4,143,681) (3,392,345) Finance receivables repaid or sold 3,924,429 3,181,633 2,896,021 Purchases of investments available for sale (179,210) (187,444) (37,877) Purchases of investments held for investment (248,947) Proceeds from sales of investments available for sale 65,513 55,384 5,368 Proceeds from sales of investments held for investment 109,269 Proceeds from maturities and calls of investments available for sale 54,935 56,306 5,674 Proceeds from maturities and calls of investments held for investment 121,371 Capital expenditures (22,108) (19,897) (18,486) Cash used in acquisition of assets of HFC of Australia, Ltd., net of cash acquired (39,808) ----------- ---------- ---------- Net cash used by investing activities (468,397) (1,057,699) (559,952) ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in short-term debt (307,542) 446,121 392,095 Proceeds from issuance of notes 1,376,393 1,029,764 1,016,140 Principal payments on notes (911,255) (726,158) (1,125,045) Increase (decrease) in savings deposits 380 (247) (541) Dividends paid (90,100) (81,000) (71,000) ----------- ---------- ---------- Net cash provided by financing activities 67,876 668,480 211,649 ----------- ---------- ---------- Net increase in cash 3,637 13,959 7,540 Cash at beginning of year 21,817 7,858 318 ----------- ---------- ---------- Cash at end of year $ 25,454 $ 21,817 $ 7,858 ========== ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 461,587 $ 329,753 $ 336,716 Income taxes $ 122,310 $ 100,711 $ 83,553
See accompanying notes to consolidated financial statements. 14 16 AVCO FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
Additional Securities Currency Common paid-in Retained valuation translation stock capital earnings adjustment adjustment Total ------ ---------- -------- -------------- ---------- ---------- (Thousands of dollars) Balance at December 31, 1992 $500 $ 137,588 $707,775 $ 19,793 $ (112,585) $ 753,071 Net income 142,029 142,029 Cash dividends declared ($142.00 per common share) (71,000) (71,000) Change in valuation adjustment 12,187 12,187 Change in translation adjustment (8,776) (8,776) ------ ---------- -------- -------------- ---------- ---------- Balance at December 31, 1993 500 137,588 778,804 31,980 (121,361) 827,511 Net income 162,329 162,329 Cash dividends declared ($162.00 per common share) (81,000) (81,000) Change in valuation adjustment (23,702) (23,702) Change in translation adjustment 8,606 8,606 ------ ---------- -------- -------------- ---------- ---------- Balance at December 31, 1994 500 137,588 860,133 8,278 (112,755) 893,744 Net income 179,403 179,403 Cash dividends declared ($180.20 per common share) (90,100) (90,100) Change in valuation adjustment 48,031 48,031 Change in translation adjustment (2,848) (2,848) ------ ---------- -------- -------------- ---------- ---------- Balance at December 31, 1995 $500 $ 137,588 $949,436 $ 56,309 $ (115,603) $1,028,230 ====== ======== ======== ========== ========= =========
See accompanying notes to consolidated financial statements. 15 17 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION Avco Financial Services, Inc. is a wholly-owned subsidiary of Textron Inc. The consolidated financial statements include the accounts of Avco Financial Services, Inc. and its subsidiaries (AFS). All significant intercompany transactions are eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in those statements and accompanying notes. Actual results may differ from such estimates. FINANCE RECEIVABLES Revenue and Acquisition Cost Recognition For finance receivables, interest income is recognized in revenues using the interest method so as to produce a constant rate of return over the terms of the receivables. Accrual of interest income is suspended for accounts which are contractually delinquent by more than three payments. Once an account is suspended, subsequent interest income is recognized when collected. Fees received and direct loan origination costs are deferred and recognized in income over the contractual lives of the respective loans. Unamortized amounts are recognized in income when loans are sold or paid in full. Credit Losses Provisions for losses on receivables are charged to income in amounts sufficient to maintain the allowance at a level considered adequate to cover the losses of principal and interest in the existing receivable portfolio. The determination of an appropriate allowance for losses is based upon loss experience and payment history. Finance receivables are written off when they are deemed uncollectible, but in any event, all accounts for which an amount aggregating a full contractual payment has not been received for six consecutive months are written off. Foreclosed real estate loans are transferred out of finance receivables into other assets at the lower of fair value (less estimated costs to sell) or the outstanding loan balance. The difference between the amount transferred and the outstanding loan balance is written off. The carrying value of real estate owned is periodically reevaluated and, where appropriate, adjustments are made to reflect subsequent decreases in fair value. Subsequent gains and losses on the disposition of real estate owned are reflected in other operating expenses. INSURANCE OPERATIONS Recognition of Revenues and Expenses Unearned insurance premiums are deferred and subsequently recognized in revenues over the lives of the policies (a) on the interest method for decreasing term credit life insurance coverage and on the pro rata method for level term credit life coverage, (b) in relation to anticipated claims for credit disability insurance and (c) on the pro rata method for casualty insurance. Deferred Policy Acquisition Costs Costs, which vary with, and are primarily related to, the production of new business, have been deferred to the extent such costs are deemed recoverable from future profits. Such costs primarily include commissions 16 18 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) and premium taxes. These costs are amortized in proportion to premiums over the estimated lives of the policies. Anticipated investment income is considered in determining if a premium deficiency relating to short-term contracts exists. Insurance Reserves and Claims Insurance reserves and claims represent the estimated ultimate cost of settling claims incurred as of the balance sheet date. The reserves for casualty losses are based upon estimates for losses and loss adjustment expenses reported prior to the close of the accounting period and estimates of incurred but not reported losses and adjustment expenses based upon past experience and adjusted for current conditions, net of reinsurance recoverable and salvage and subrogation. The reserves for credit life and credit disability losses represent estimates of those claims due and unpaid, in the course of settlement, and incurred but not reported, computed using historical liquidation patterns adjusted for changes in portfolio composition, net of reinsurance recoverable. Due to the short-term nature of AFS' loss development and the effect of reinsurance agreements, casualty insurance losses and adjustment expenses in 1995, 1994 and 1993 relating to insured events occurring prior to each of those years, is immaterial. Reinsurance Prepaid reinsurance premiums and amounts recoverable from reinsurers are estimated and recognized in a manner consistent with the reinsured policy. See Note 6 for further information about reinsurance. INVESTMENTS AFS' securities portfolio is classified as available for sale and reported at estimated fair value. Unrealized gains and losses, net of applicable income taxes, are reported as a separate component of stockholder's equity. Net realized gains or losses resulting from sales or calls of investments and losses resulting from declines in fair values of investments that are other than temporary declines are included in revenues. The cost of securities sold was based primarily upon the specific identification method. See Note 3 for further information about investments. INTEREST RATE EXCHANGE AGREEMENTS As part of its interest rate management strategies, AFS is a party to various interest rate exchange agreements. While AFS is exposed to credit loss for the periodic settlement of amounts due under such agreements in the event of nonperformance by the counterparties, AFS does not anticipate nonperformance by any of those parties. The risk of loss in the event of nonperformance by the counterparties was not material at December 31, 1995. AFS' interest rate exchange agreements are accounted for on the accrual basis. The agreements are designated against (i) specific long-term variable rate borrowings and (ii) existing short-term borrowings. AFS continuously monitors the level of short-term borrowings to ensure that there is a high degree of probability that its short-term borrowings will remain at a level in excess of the notional amount of the designated agreements. If AFS were to determine it probable that the level of anticipated short-term borrowings will at any time be less than the notional amount of designated agreements, any excess would be marked to market and the associated gain or loss recorded in income. 17 19 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS See Note 11 for information about AFS' accounting policies for postretirement benefits other than pensions. INCOME TAXES Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are expected to be realized or settled. See Note 4 for further information about income taxes. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values presented in Note 14 are estimates of the fair values of the financial instruments at a specific point in time using available market information and appropriate valuation methodologies. These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the fair values presented are not necessarily indicative of amounts AFS could realize or settle currently. AFS does not necessarily intend to dispose of or liquidate such instruments prior to maturity. FOREIGN OPERATIONS AFS' foreign entities' financial statements are measured in their functional currency. Balance sheet accounts at December 31, 1995 and 1994 have been translated at the closing rates on those dates. Income and expense accounts have been translated at the average rates prevailing during the respective periods. Adjustments resulting from the translation of the financial statements of AFS' foreign operations are excluded from the determination of its consolidated income and are accumulated as a separate component of consolidated stockholder's equity until the entity is sold or substantially liquidated. Foreign exchange gains and losses included in consolidated income (which relate principally to transactions denominated in foreign currencies) in 1995, 1994 and 1993 were not material. RATIO OF INCOME TO FIXED CHARGES The ratio of income to fixed charges represents the number of times fixed charges (interest and debt expense [without adjustments for discounts or premiums resulting from the repurchase of debt securities] and one-third of all rent and related costs, considered to represent an appropriate interest factor, charged to income) are covered by income before income taxes, cumulative effect of changes in accounting principles and fixed charges. 18 20 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2: FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES Contractual maturities of finance receivables outstanding at December 31, 1995 and total finance receivables outstanding at that date and at December 31, 1994 were as follows:
Contractual maturities Less Receivables outstanding ------------------------------------ finance ----------------------- 1996 1997 1998-2010 charges 1995 1994 ---------- ---------- ---------- ---------- ---------- ---------- (Thousands of dollars) Consumer loans $1,774,624 $1,227,356 $1,240,024 $1,220,777 $3,021,227 $2,721,905 Real estate loans 721,490 510,765 3,804,070 2,523,706 2,512,619 2,415,621 Retail installment contracts 904,116 522,813 364,719 655,818 1,135,830 1,107,282 Other loans 125,059 86,758 76,686 24,653 263,850 91,560 ---------- ---------- ---------- ---------- ---------- ---------- $3,525,289 $2,347,692 $5,485,499 $4,424,954 6,933,526 6,336,368 ========= ========= ========= ========= Less allowance for credit losses (195,413) (180,573) Less finance-related insurance reserves and claims (261,499) (250,954) ---------- ---------- Finance receivables -- net $6,476,614 $5,904,841 ========= =========
The maximum term over which consumer loans and retail installment contracts are written is 10 years, but approximately 90% of these loans are written with terms of 4 years or less. Real estate loans are written with a maximum term of 15 years. Consumer loans are unsecured or secured by personal property and are in relatively small amounts. Retail installment contracts are secured by personal property. Real estate loans are secured by real property and are limited to a maximum of 85% of the property's unencumbered appraised market value at the date of the loans. Accounts are often repaid or refinanced prior to contractual maturity. Accordingly, the foregoing tabulation should not be regarded as a forecast of future cash collections. During 1995 and 1994, cash collections of receivables (excluding finance charges) were $3.9 billion and $3.2 billion, respectively. The ratio of cash collections to average finance receivables was approximately 57% and 56%, respectively. Nonearning assets represent those finance receivables on which both the accrual of interest income has been suspended and for which no payment of principal or interest has been received for more than 30 days. Nonearning assets totaled approximately $115.0 million at December 31, 1995. AFS has commitments to extend additional credit to customers under revolving secured and unsecured loan agreements. Interest rates charged are variable. The agreements provide for suspension or termination of the credit line for default and other factors adverse to the interests of AFS. At December 31, 1995, committed lines totaled approximately $1.143 billion of which approximately $437 million remained unused. 19 21 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2: FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED) Changes in the allowance for credit losses were as follows:
Year ended December 31, --------------------------------------------------------- 1995 1994 1993 1992(a) 1991(a) --------- -------- -------- -------- -------- (Thousands of dollars) Balance of the allowance for credit losses at beginning of year $ 180,573 $155,015 $147,088 $135,330 $131,779 Add -- charged to income: Real estate 19,457 21,106 25,487 17,616 12,879 Other 129,686 114,995 95,207 100,635 101,343 --------- -------- -------- -------- -------- Total 149,143 136,101 120,694 118,251 114,222 Deduct -- balances charged off: Gross charge offs: Real estate (21,939) (20,845) (25,125) (15,394) (10,388) Other (154,865) (121,041) (112,979) (121,401) (122,428) --------- -------- -------- -------- -------- Total (176,804) (141,886) (138,104) (136,795) (132,816) Recoveries: Real estate 1,786 1,591 1,588 1,117 729 Other 31,128 26,861 25,023 25,680 23,069 --------- -------- -------- -------- -------- Total 32,914 28,452 26,611 26,797 23,798 --------- -------- -------- -------- -------- Net charge offs (143,890) (113,434) (111,493) (109,998) (109,018) Other 9,587 2,891 (1,274) 3,505 (1,653) --------- -------- -------- -------- -------- Balance of the allowance for credit losses at end of year $ 195,413 $180,573 $155,015 $147,088 $135,330 ========= ======== ======== ======== ======== Balance of the allowance for credit losses at the end of each year applicable to: Real estate $ 34,291 $ 34,017 $ 32,048 $ 30,316 $ 27,784 Other 161,122 146,556 122,967 116,772 107,546 --------- -------- -------- -------- -------- Total $ 195,413 $180,573 $155,015 $147,088 $135,330 ========= ======== ======== ======== ========
- ------------ (a) The above data for the two years ended 1992 is not reported upon herein by independent auditors. 20 22 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3: INVESTMENTS
1995 1994 -------- -------- (Thousands of dollars) Debt securities: Commercial paper, at estimated fair value (approximates cost) $ 79,233 $ 54,242 Bonds available for sale at estimated fair value (cost: $637,497,000 in 1995 and $591,497,000 in 1994) 666,184 567,940 -------- -------- Total 745,417 622,182 -------- -------- Marketable equity securities, at market: Preferred stocks (cost: $6,513,000 in 1995 and $4,811,000 in 1994) 6,831 4,727 Common stocks, industrial, miscellaneous and all other (cost: $39,771,000 in 1995 and $38,978,000 in 1994) 98,150 75,074 -------- -------- Total 104,981 79,801 -------- -------- First mortgages on real estate, at cost 2,052 2,261 -------- -------- Total $852,450 $704,244 ======== ========
The amortized cost and estimated fair value of debt securities and marketable equity securities at December 31, 1995 and 1994 were as follows:
December 31, 1995 ----------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value --------- ---------- ---------- --------- (Thousands of dollars) U.S. Treasury securities and obligations of other U.S. Government agencies and authorities $ 64,460 $ 3,878 $ 38 $ 68,300 Obligations of states, municipalities and political subdivisions 93,223 4,833 726 97,330 Obligations of foreign governments and agencies 78,866 4,502 58 83,310 Public utility securities 61,230 1,961 105 63,086 Mortgage-backed securities 39,554 784 176 40,162 Corporate securities 379,397 15,468 1,636 393,229 Marketable equity securities 46,284 58,788 91 104,981 -------- ------- ------ -------- Debt and marketable equity securities available for sale $763,014 $90,214 $2,830 $850,398 ======== ======= ====== ========
21 23 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3: INVESTMENTS (CONTINUED)
December 31, 1994 ----------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value --------- ---------- ---------- --------- (Thousands of dollars) U.S. Treasury securities and obligations of other U.S. Government agencies and authorities $ 40,218 $ 646 $ 379 $ 40,485 Obligations of states, municipalities and political subdivisions 114,309 1,697 2,659 113,347 Obligations of foreign governments and agencies 83,863 619 2,074 82,408 Public utility securities 69,272 265 5,898 63,639 Mortgage-backed securities 36,873 1,837 3,694 35,016 Corporate securities 301,204 2,264 16,181 287,287 Marketable equity securities 43,789 36,494 482 79,801 -------- ------- ------- -------- Debt and marketable equity securities available for sale $689,528 $43,822 $31,367 $701,983 ======== ======= ======= ========
The amortized cost and estimated fair value of debt securities at December 31, 1995, by contractual maturity, are presented below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized fair cost value --------- --------- (Thousands of dollars) Due in 1996 $ 106,929 $ 107,290 Due 1997 to 2000 299,114 308,061 Due 2001 to 2005 196,452 207,160 Due after 2005 74,681 82,744 Mortgage-backed securities 39,554 40,162 --------- --------- $ 716,730 $ 745,417 ======== ========
Gross realized gains and losses on sales of securities were $6.7 million and $3.5 million, respectively, in 1995 and $4.5 million and $1.7 million, respectively, in 1994. Gross gains and losses realized on sales of debt securities (excluding commercial paper) were $3.9 million and $1.2 million, respectively, in 1993. NOTE 4: INCOME TAXES AFS' provisions for income taxes are based upon including all eligible U.S. subsidiaries in the consolidated U.S. federal income tax return filed by its parent, Textron Inc. Such provisions do not differ materially from the amounts which AFS would have provided if it and its eligible subsidiaries were filing their own consolidated federal income tax return. The provisions for income taxes also include amounts for AFS' foreign subsidiaries which file their own separate income tax returns. For years beginning after December 31, 1994, the Australian government increased its corporate tax rate from 33% to 36%. In accordance with FAS 109, the change in the tax rate resulted in a revaluation of AFS' net deferred tax assets that were in existence at the beginning of 1995. The effect of this revaluation was not material. Deferred income taxes have not been provided for the undistributed earnings of foreign subsidiaries which aggregated approximately $341 million at the end of 1995. Management's intention is to reinvest such 22 24 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4: INCOME TAXES (CONTINUED) undistributed earnings for an indefinite period, except for distributions upon which incremental taxes would not be material. If such earnings were distributed, taxes (net of foreign tax credits) would have increased by approximately $25 million, principally due to foreign withholding taxes. At December 31, 1995, consolidated stockholder's equity included $17 million of U.S. life insurance subsidiary policyholders' surplus on which no income taxes have been provided. The amount of taxes which would become due if the surplus were distributed is approximately $6 million. Under present circumstances, it is not anticipated that any of these earnings will become taxable. Income taxes (benefit) are summarized as follows:
1995 1994 1993 -------- -------- ------- (Thousands of dollars) Current Federal........................................... $ 56,628 $ 53,299 $50,575 State............................................. 8,227 8,005 7,778 Foreign........................................... 42,073 41,732 34,809 -------- -------- ------- 106,928 103,036 93,162 Deferred Federal........................................... (2,826) (3,650) (7,254) State............................................. (938) (503) (144) Foreign........................................... 4,892 (2,102) (2,009) -------- -------- ------- 1,128 (6,255) (9,407) -------- -------- ------- Total income tax provision................ $108,056 $ 96,781 $83,755 ======== ======== =======
Following is a reconciliation of the federal statutory income tax rate to the effective income tax rate applicable to pretax income, as reflected in the consolidated statement of income:
1995 1994 1993 ---- ---- ---- U.S. federal statutory tax rate................................ 35.0% 35.0% 35.0% Increases (decreases) in taxes resulting from: Residual tax on foreign dividends............................ .1 .6 .2 Higher tax on foreign income................................. 1.2 .7 .4 State income taxes........................................... 1.6 1.9 2.2 Nontaxable investment income................................. (1.0) (.8) (1.1) Other, net................................................... .7 .4 ---- ---- ---- Effective income tax rate...................................... 37.6% 37.4% 37.1% ==== ==== ====
AFS' net deferred tax asset consisted of gross deferred tax assets and gross deferred tax liabilities of $106.8 million and $46.4 million, respectively, at December 31, 1995 and $92.4 million and $20.2 million, respectively, at December 31, 1994. 23 25 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4: INCOME TAXES (CONTINUED) The components of AFS' net deferred tax asset as of December 31, 1995 and 1994 were as follows:
1995 1994 -------- -------- (Thousands of Dollars) Allowance for credit losses.......................................... $ 51,005 $ 45,496 Liabilities for future policy benefits............................... 20,160 21,338 Unrealized gain on marketable equity securities...................... (30,430) (3,868) Obligation for postretirement benefits other than pensions........... 13,664 13,611 Depreciation......................................................... (6,703) (4,991) Insurance policy acquisition costs................................... (6,613) (9,376) Lease financing transactions......................................... (2,616) (1,994) Other -- principally timing of expense deductions.................... 21,967 11,936 -------- -------- Total net deferred tax asset............................... $ 60,434 $ 72,152 ======== ========
NOTE 5: DEBT AND CREDIT FACILITIES At December 31, 1995 and 1994, consolidated debt consisted of the following:
1995 1994 ---------- ---------- (Thousands of dollars) Senior Commercial paper $2,067,722 $2,380,039 Banks 345,879 50,252 Savings deposits 5,184 4,804 4.33% to 5.99% due 1995 to 2000(a) 730,777 1,086,811 6.00% to 7.99% due 1995 to 2002(a) 2,076,114 1,121,569 8.00% to 9.70% due 1995 to 2000(a) 834,218 685,320 10.00% to 12.85% due 1995 to 1998 101,643 266,678 ---------- ---------- Total senior debt 6,161,537 5,595,473 ---------- ---------- Senior subordinated 10.28% to 11.4% due 1995 to 1998 3,900 7,800 ---------- ---------- Total debt $6,165,437 $5,603,273 ========= =========
- ------------ (a) Interest rates on certain notes are adjusted periodically. Bank borrowings are arranged under revolving lines of credit. These borrowings are either on a demand basis or provide for maturities ranging up to one year. Commercial paper is issued with maturities up to one year with interest at prevailing market rates. The weighted average interest rates on bank borrowings and commercial paper outstanding at December 31, 1995, 1994 and 1993, without giving effect to the costs of maintaining the lines of credit, were 7.5%, 6.3% and 6.4%, respectively, for bank borrowings (primarily consisting of borrowings in foreign operations) and 6.2%, 6.1% and 3.8%, respectively, for commercial paper. The weighted average interest rate on bank borrowings and commercial paper outstanding during the three years ended December 31, 1995 was 6.6%, 4.8% and 3.9%, respectively. The weighted average interest rate is determined primarily by reference to daily outstanding principal amounts and excludes the cost of maintaining the lines of credit. 24 26 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5: DEBT AND CREDIT FACILITIES (CONTINUED) At December 31, 1995 and 1994, AFS had lines of credit with various banks amounting to $3.28 billion and $2.59 billion, respectively, of which the unused portion of these lines amounted to $2.64 billion and $2.33 billion, respectively. AFS generally pays fees in support of these lines. During the years ended December 31, 1995 and 1994, AFS issued the following notes:
1995 1994 ---------- ---------- (Thousands of dollars) Senior notes due 1995 to 1998 (Australia) $ 55,775 $ 79,047 Senior notes due 1996 to 2000 (Canada) 139,702 99,972 Senior notes due 2000 (Hong Kong) 77,544 Senior notes due 1996 to 1999 (United Kingdom) 153,372 745 Senior notes due 1995 to 2002 (United States) 950,000 850,000 ---------- ---------- Total $1,376,393 $1,029,764 ========= =========
Under interest rate exchange agreements, AFS makes periodic fixed payments in exchange for periodic variable payments. AFS has entered into such agreements to mitigate its exposure to increases in interest rates on a portion of its variable rate debt. At December 31, 1995 and 1994, these agreements had weighted average original terms of 3.2 years and 3.4 years and had the effect of fixing the rate of interest at 8.2% at each date on $1.063 billion and $748.5 million of variable rate borrowing, respectively. The spread between the variable rate AFS received and the fixed rate AFS paid increased the reported interest expense by $10.9 million in 1995, $17.2 million in 1994, and $38.7 million in 1993. Such spread had the effect of increasing AFS' cost of borrowing by .18% in 1995, .34% in 1994, and .84% in 1993. The following details AFS' "fixed-pay" interest rate exchange agreement activity for the years 1995 and 1994:
1995 1994 ---------- --------- (Thousands of dollars) Beginning notional amount $ 748,517 $ 341,585 Notional amount of new contracts 509,035 513,979 Notional amount of terminated and expired contracts (194,434) (107,047) ---------- --------- Ending notional amount $1,063,118 $ 748,517 ========= =========
The notional amount of fixed-pay interest rate swap agreements at December 31, 1995 categorized by annual maturity, along with the related weighted average interest rates paid are as follows: $315.9 million (8.8%) in 1996; $260.3 million (8.6%) in 1997; $259.9 million (8.5%) in 1998; $212.1 million (6.6%) in 1999; and $14.9 million (6.7%) in 2000. In addition, AFS entered into basis swap agreements that had the effect of exchanging the indices used to determine interest expense under certain variable rate borrowing. These agreements serve to better match the rate of interest AFS incurred on its financing with the rate of interest earned on certain of its variable rate finance receivables. The effect of these agreements on AFS' average annual cost of funds was not material. At December 31, 1995, $250.0 million of such agreements were in effect and expire in 1996. In 1995, AFS entered into additional fixed-pay interest rate exchange agreements which become effective in 1996. These agreements expire through 1999 and will fix the rate of interest at 8.1% on $204 million of variable rate borrowing. The agreements will mitigate AFS' exposure to increases in interest rates primarily by replacing maturing fixed-pay swap agreements and fixed-rate notes. 25 27 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5: DEBT AND CREDIT FACILITIES (CONTINUED) AFS' exposure to credit risk associated with counterparty nonperformance on interest rate exchange agreements is limited to the amounts reflected in AFS' consolidated balance sheet. At December 31, 1995, such amounts were not material. The aggregate maturities, required prepayments, redemptions and sinking fund requirements with respect to the consolidated debt outstanding (excluding commercial paper, bank notes and savings deposits) at December 31, 1995, for the five years ending December 31, 2000, were (in millions): $816.4 for 1996; $531.5 for 1997; $869.7 for 1998; $434.9 for 1999; and $694.2 for 2000. The senior subordinated notes are subordinate and junior in right of payment, in all respects, to all indebtedness of AFS for money borrowed. NOTE 6: REINSURANCE In the normal course of business, AFS seeks to reduce the loss that may arise through AFS' insurance subsidiaries from catastrophes or other events that may cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises, or reinsurers. While reinsurance contracts do not relieve AFS from its obligations to policyholders, AFS evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Additionally, AFS holds collateral under certain reinsurance agreements in the form of letters of credit and trust accounts. At December 31, 1995, reinsurance receivables with a carrying value of $1.1 million and prepaid reinsurance premiums of $22.2 million relating to a quota share agreement were associated with a single reinsurer. AFS holds collateral under this reinsurance agreement in the form of a trust account totalling $29.5 million. Additionally, AFS holds collateral under certain other reinsurance agreements in the forms of letters of credit and trust accounts. Reinsurance receivables and prepaid reinsurance premiums were $6.8 million and $24.2 million respectively at December 31, 1995. Reinsurance receivables and prepaid reinsurance premiums were not material as of December 31, 1994. The effect of reinsurance on premiums written, premiums earned and losses incurred for the three years ended December 31, 1995 were as follows:
1995 1994 1993 -------- -------- -------- (Thousands of Dollars) Premiums Written Direct $382,592 $290,961 $259,453 Assumed 50,784 47,133 50,974 Ceded (47,410) (13,344) (16,564) -------- -------- -------- Total premiums written $385,966 $324,750 $293,863 ======== ======== ======== Premiums Earned Direct $330,902 $254,741 $256,990 Assumed 44,195 47,114 38,801 Ceded (25,338) (14,477) (17,379) -------- -------- -------- Total premiums earned $349,759 $287,378 $278,412 ======== ======== ======== Losses Incurred Direct $143,248 $115,218 $124,127 Assumed 16,626 15,176 18,904 Ceded (4,397) (2,709) (10,961) -------- -------- -------- Total losses incurred $155,477 $127,685 $132,070 ======== ======== ========
26 28 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7: OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA AFS is principally engaged in consumer finance and insurance activities. AFS' finance operations mainly involve loans made by the Avco Financial Services Group. Such loans consist of consumer loans which are unsecured or secured by personal property and are in relatively small amounts and for relatively short periods; real estate loans which are secured by real property in larger amounts and for considerably longer periods; and retail installment contracts, principally covering personal property. As of December 31, 1995, AFS operated 1,230 finance offices located in all states of the United States (except Arkansas, Kansas, Maine, Mississippi, Oklahoma, Texas and Vermont), the Commonwealth of Puerto Rico, the Virgin Islands, all Canadian provinces and the Yukon Territory, six Australian states and the Australian Capital Territory, Hong Kong, New Zealand, Spain and the United Kingdom. AFS' insurance business consists primarily of the sale of credit life, credit disability and casualty insurance offered by various subsidiaries (Avco Insurance Services Group), a significant part of which is directly related to the AFS' finance activities. Industry Segment The following is a summary of revenues, income before income taxes and identifiable assets by industry segment:
Year ended December 31, ------------------------------------------------------------- 1995 1994 1993 1992* 1991* --------- --------- --------- --------- --------- (Thousands of dollars) Revenues Financial Services and Related Insurance $1,444,893 $1,214,918 $1,145,756 $1,160,637 $1,127,771 Nonrelated Insurance 219,094 173,316 178,308 180,197 194,052 ---------- ---------- ---------- ---------- ---------- Total revenues $1,663,987 $1,388,234 $1,324,064 $1,340,834 $1,321,823 ========== ========== ========== ========== ========== Income Before Income Taxes Financial Services and Related Insurance $ 271,299 $ 242,314 $ 217,789 $ 193,782 $ 179,601 Nonrelated Insurance 16,160 16,796 7,995 10,131 17,285 ---------- ---------- ---------- ---------- ---------- Total income before income taxes $ 287,459 $ 259,110 $ 225,784 $ 203,913 $ 196,886 ========== ========== ========== ========== ========== Identifiable Assets Financial Services and Related Insurance $7,437,119 $6,582,978 $5,681,416 $5,360,280 $4,927,784 Nonrelated Insurance 353,829 455,313 441,544 425,687 406,393 ---------- ---------- ---------- ---------- ---------- Total identifiable assets $7,790,948 $7,038,291 $6,122,960 $5,785,967 $5,334,177 ========== ========== ========== ========== ==========
- --------------- * The above data for the two years ended 1992 is not reported upon herein by independent auditors. 27 29 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7: OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA (CONTINUED) Geographic Area The following is a summary of revenues, income before income taxes and identifiable assets by geographic area:
Year ended December 31, -------------------------------------------------------------- 1995 1994 1993 1992* 1991* ---------- ---------- ---------- ---------- ---------- (Thousands of dollars) Revenues Australia $ 240,683 $ 148,264 $ 133,080 $ 137,054 $ 143,422 Canada 221,175 204,068 210,423 234,964 263,954 United Kingdom 144,675 127,813 112,607 119,351 111,556 United States 1,028,907 900,023 867,954 849,465 802,891 Other Countries** 28,547 8,066 ---------- ---------- ---------- ---------- ---------- Total revenues $1,663,987 $1,388,234 $1,324,064 $1,340,834 $1,321,823 ========== ========== ========== ========== ========== Income (Loss) Before Income Taxes Australia $ 53,801 $ 43,796 $ 34,542 $ 30,125 $ 27,593 Canada 48,236 47,029 42,503 37,776 51,070 United Kingdom 22,737 21,572 14,819 14,364 12,788 United States 158,592 147,274 133,920 121,648 105,435 Other Countries** 4,093 (561) ---------- ---------- ---------- ---------- ---------- Total income before income taxes $ 287,459 $ 259,110 $ 225,784 $ 203,913 $ 196,886 ========== ========== ========== ========== ========== Identifiable Assets Australia $1,081,286 $ 646,958 $ 526,410 $ 473,424 $ 501,093 Canada 1,031,678 963,689 937,339 895,050 1,017,341 United Kingdom 606,857 585,736 465,820 435,661 427,126 United States 4,823,918 4,735,989 4,193,391 3,981,832 3,388,617 Other Countries** 247,209 105,919 ---------- ---------- ---------- ---------- ---------- Total identifiable assets $7,790,948 $7,038,291 $6,122,960 $5,785,967 $5,334,177 ========== ========== ========== ========== ==========
- ------------ * The above data for the two years ended 1992 is not reported upon herein by independent auditors. ** Includes the operations of Hong Kong, New Zealand and Spain. At December 31, 1995, finance receivables in the United States represented 59% of AFS' total finance receivables outstanding. At such date, receivables outstanding in no state exceeded 7% of the United States' portfolio, except California in which outstanding receivables represented 16% of the United States' portfolio and 9% of the consolidated portfolio. Capital expenditures and depreciation expense for each of the five years ended 1995 were not material to the operations of the industry segments. NOTE 8: CERTAIN PROVISIONS CONTAINED IN NOTES, LOAN AGREEMENTS AND CERTIFICATE OF INCORPORATION AND OTHER RESTRICTIONS The notes, loan agreements and certificate of incorporation of AFS contain restrictions on the declaration or payment of cash dividends and on redemptions, purchases or other acquisitions of stock. Under the most restrictive provision at December 31, 1995, approximately $262 million of retained earnings was available for dividends on common stock or for redemptions, purchases or other acquisitions of stock. The notes and loan agreements also contain various restrictive provisions regarding debt, the creation of liens or guarantees and the making of investments. 28 30 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8: CERTAIN PROVISIONS CONTAINED IN NOTES, LOAN AGREEMENTS AND CERTIFICATE OF INCORPORATION AND OTHER RESTRICTIONS (CONTINUED) Maximum dividend limitations imposed by U.S. and foreign insurance regulatory agencies and minimum capital requirements of various U.S. and foreign regulatory agencies imposed on certain of AFS' finance operations restrict the amount of certain subsidiaries' net assets which can be transferred to AFS. Such restricted net assets totaled approximately $250 million at December 31, 1995. NOTE 9: LEASE COMMITMENTS AFS' headquarters and regional executive offices are occupied under noncancelable operating leases expiring on various dates through 2017. The loan office locations through which operations are conducted are occupied under noncancelable operating leases having terms generally not exceeding five years with renewal options for an additional five years. Rental expense for such leases and for leased equipment was approximately $51 million, $47 million and $48 million in 1995, 1994 and 1993, respectively. Future minimum rental commitments for all noncancelable operating leases in effect at December 31, 1995 approximated $35 million for 1996, $29 million for 1997, $23 million for 1998, $18 million for 1999, $13 million for 2000 and $69 million thereafter. NOTE 10: CONTINGENCIES There is pending or threatened litigation against AFS and its subsidiaries. Among these lawsuits and proceedings are individual and class action proceedings which seek compensatory, treble or punitive damages in substantial amounts. These suits and proceedings are being defended or contested on behalf of AFS. On the basis of information presently available, AFS believes that any such liability from pending or threatened litigation will not have a material effect on AFS' net income or financial condition. The laws of many states in which AFS' insurance subsidiaries are admitted to do business require as a condition of admission that all insurance companies so admitted collectively guarantee to policyholders the benefits payable under policies issued by other insurance companies admitted in the particular state up to statutory levels. AFS' insurance subsidiaries have not been required to date to make any significant payments pursuant to such guarantees. While the amount of any assessments which may be made in the future cannot be predicted, AFS does not believe the total assessments, if any, will be material to its net income or financial condition. NOTE 11: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS AFS has retirement plans, principally non-contributory (defined contribution) which cover substantially all employees. Costs relating to these plans, which are generally funded as accrued, amounted to approximately $16 million, $15 million and $13 million for 1995, 1994 and 1993, respectively. AFS provides certain health care and life insurance benefits for its employees and for certain retired employees. Such benefits are administered by insurance companies or other carriers who determine premiums for insured plans and expected costs to be paid during the year under self-insured plans. In 1989, AFS began phasing out postretirement benefits for future retirees. AFS recognizes the cost of postretirement benefits using the accrual method of accounting over the employees' years of service. Such costs for 1995, 1994 and 1993 were not material. 29 31 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) AFS' postretirement benefit plans other than pensions currently are not funded. The following table sets forth the status of AFS' retiree health care and life insurance plans at December 31, 1995 and 1994:
1995 1994 ------- ------- (Thousands of dollars) Actuarial present value of benefits attributed to: Retirees $24,676 $22,015 Fully eligible active plan participants 5,414 5,738 Other active plan participants 309 355 ------- ------- Accumulated postretirement benefit obligation 30,399 28,108 Unrecognized net actuarial gains 4,539 7,445 ------- ------- Postretirement benefit liability recognized on the consolidated balance sheet $34,938 $35,553 ======= =======
An assumed discount rate of 8.25% for 1995, 7.25% for 1994 and 8% for 1993 was used to determine postretirement benefit costs other than pensions. An assumed discount rate of 7.25% and 8.25% was used to determine the status of AFS' plans at December 31, 1995 and December 31, 1994, respectively. The weighted average annual assumed rate of increase in the per capita cost of covered benefits (that is, health care cost trend rate) is 8% for retirees age 65 and over and 12% for retirees under age 65 in 1996, and both rates are assumed to decrease gradually to 5.5% until 2001 and 2003, respectively, and remain at that rate thereafter. Increasing these rates by one percentage point in each year would have increased the accumulated postretirement benefit obligation as of December 31, 1995 by $1.9 million and increased the aggregate of the service and interest cost components of postretirement benefit costs for 1995 by $100,000. NOTE 12: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly results of operations for the years ended December 31, 1995 and 1994 were as follows:
1995 1994 -------------------------------------------- -------------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter -------- -------- -------- -------- -------- -------- -------- -------- (Thousands of dollars) Revenues $397,595 $406,780 $420,607 $439,005 $327,566 $336,835 $353,206 $370,627 ======== ======== ======== ======== ======== ======== ======== ======== Income before income taxes $ 69,678 $ 69,551 $ 75,603 $ 72,627 $ 61,886 $ 63,970 $ 68,149 $ 65,105 Income taxes 26,349 26,027 28,527 27,153 23,061 24,235 25,520 23,965 -------- -------- -------- -------- -------- -------- -------- -------- Net income $ 43,329 $ 43,524 $ 47,076 $ 45,474 $ 38,825 $ 39,735 $ 42,629 $ 41,140 ======== ======== ======== ======== ======== ======== ======== ========
NOTE 13: RELATED PARTY TRANSACTIONS During 1990, AFS purchased $25.0 million of Textron Inc. common stock on the open market. The investment is being carried in marketable equity securities. NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used in estimating the fair value of AFS' financial instruments. Investments The estimated fair values of investment securities were based on quoted market prices where available. If quoted market prices were not available, the estimated fair values were based on independent appraisals, 30 32 AVCO FINANCIAL SERVICES, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) prices from independent brokers or discounted cash flow analyses. Independent appraisals and discounted cash flow analyses, using interest rates currently being offered for similar loans to borrowers of similar credit quality, were generally used to estimate the fair value of certain privately placed investments. Finance Receivables The estimated fair values of fixed rate consumer loans and real estate loans were estimated based on discounted cash flow analyses using interest rates currently being offered for similar loans to borrowers of similar credit quality. Estimated future cash flows were adjusted for AFS' estimates of prepayments, refinances, and loan losses based on internal historical data. The estimated fair value of all variable rate receivables and fixed rate retail installment contracts approximated the net carrying value of such receivables. The fair values of AFS' leasing receivables and finance-related insurance reserves and claims ($263.9 million and $261.5 million, net carrying value, respectively, at December 31, 1995 and $81.9 million and $251.0 million, respectively, at December 31, 1994) are not required to be disclosed under generally accepted accounting principles. Debt and Interest Rate Exchange Agreements The estimated fair value of fixed rate debt was determined by independent investment bankers. The fair values of variable rate debt and borrowings under or supported by credit facilities approximated their carrying values. The estimated fair values of interest rate exchange agreements were determined by independent investment bankers as the estimated amounts that AFS would be required to pay to a third party to assume AFS' obligations under the agreements. The carrying values and estimated fair values of AFS' financial instruments for which it is practicable to calculate a fair value are as follows:
December 31, 1995 December 31, 1994 ------------------------ ------------------------ Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value ---------- ---------- ---------- ---------- (Thousands of dollars) ASSETS: Investments $ 852,450 $ 852,450 $ 704,244 $ 704,244 ========= ========= ========= ========= Finance receivables $6,474,263 $6,456,263 $6,073,875 $6,061,875 ========= ========= ========= ========= LIABILITIES: Debt: Variable rate debt $3,310,181 $3,310,181 $3,164,929 $3,164,929 Interest rate exchange agreements 531 (25,585) Fixed rate debt 2,855,256 2,930,534 2,438,344 2,350,844 ---------- ---------- ---------- ---------- Total debt $6,165,437 $6,241,246 $5,603,273 $5,490,188 ========= ========= ========= =========
31 33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Omitted in accordance with General Instruction J(2)(c). ITEM 11. EXECUTIVE COMPENSATION Omitted in accordance with General Instruction J(2)(c). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Omitted in accordance with General Instruction J(2)(c). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Omitted in accordance with General Instruction J(2)(c). 32 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE ---- (a)1. Index to Financial Statements Report of Independent Auditors.................................. 11 Consolidated Balance Sheet at December 31, 1995 and 1994........ 12 Consolidated Statement of Income for the three years ended December 31, 1995............................................... 13 Consolidated Statement of Cash Flows for the three years ended December 31, 1995............................................... 14 Consolidated Statement of Changes in Stockholder's Equity for the three years ended December 31, 1995............................. 15 Notes to Consolidated Financial Statements...................... 16 2. Index to Financial Statement Schedules I. Condensed Financial Information of the Registrant........... S-1 All other schedules are omitted since the required information is not present or not present in amounts sufficient to require the submission of the schedules, or because the information required is included in the consolidated financial statements or the notes thereto. (b) Reports on Form 8-K During the quarter ended December 31, 1995, the Registrant filed a report on Form 8-K dated December 8, 1995 relating to the Registrant's Registration Statement Nos. 33-50547 and 33-55953 with respect to which the Registrant commenced an offering on December 5, 1995 of $200,000,000 of 6% Senior Notes due August 15, 2002. The report included as an exhibit a form of 6% senior note. (c) Exhibits (3) (a) Certificate of incorporation of the Registrant, as amended, incorporated by reference to Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988. (b) Bylaws of the Registrant, as amended, incorporated by reference to Exhibit 3(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988. (4) Instruments with respect to issues of long-term debt have not been filed as exhibits to this Annual Report Form 10-K as the authorized principal amount of any one of such issues does not exceed 10% of the total assets of the Registrant and its consolidated subsidiaries. Registrant agrees to furnish to the Commission a copy of each such instrument upon request. In addition, instruments with respect to issues of long-term debt being registered have been filed as exhibits to the Registrant's Registration Statement Nos. 33-50547 and 33-55953, with the respective form of note relating to specific issues filed as an exhibit to the relevant current report on Form 8-K, which are herein incorporated by reference. *(12) Statement of Computation of Number of Times Fixed Charges Earned. (21) Omitted in accordance with General Instruction J(2)(b). *(23) Consent of Independent Auditors. *(24) Powers of Attorney. *(27) Financial Data Schedule.
- ------------ * Filed herewith. 33 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AVCO FINANCIAL SERVICES, INC. Dated March 27, 1996 By WARREN R. LYONS -------------------------------------- Warren R. Lyons Chairman (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 27, 1996.
SIGNATURE TITLE - ----------------------------------------------- -------------------------------------------- *WARREN R. LYONS Chairman of the Board of Directors - ----------------------------------------------- (Principal Executive Officer) Warren R. Lyons *RONALD BUKOW Executive Vice President, Treasurer and - ----------------------------------------------- Director (Principal Financial Officer) Ronald Bukow *LEWIS B. CAMPBELL Director - ----------------------------------------------- Lewis B. Campbell *STEPHEN J. DAVIS Vice Chairman of the Board of Directors - ----------------------------------------------- Stephen J. Davis *GARY L. FITE Executive Vice President, Controller and - ----------------------------------------------- Director (Principal Accounting Officer) Gary L. Fite *GAYLORD E. FRANCIS Executive Vice President and Director - ----------------------------------------------- Gaylord E. Francis *STEPHEN A. GILIOTTI Director - ----------------------------------------------- Stephen A. Giliotti *JAMES F. HARDYMON Director - ---------------------------------------------- James F. Hardymon *DAVID R. HEVIA Senior Vice President and Director - ---------------------------------------------- David R. Hevia
34 36
SIGNATURE TITLE - ----------------------------------------------- -------------------------------------------- *WAYNE W. JUCHATZ Director - ----------------------------------------------- Wayne W. Juchatz *STEPHEN L. KEY Director - ----------------------------------------------- Stephen L. Key *WILLIAM J. PEARSON Executive Vice President and Director - ----------------------------------------------- William J. Pearson *MARK A. SCHIMBOR Executive Vice President and Director - ----------------------------------------------- Mark A. Schimbor *EUGENE R. SCHUTT, JR. Executive Vice President and Director - ----------------------------------------------- Eugene R. Schutt, Jr. *HERBERT F. SMITH Executive Vice President, Secretary and - ----------------------------------------------- Director (General Counsel) Herbert F. Smith *JOHN C. SPENCE Director - ----------------------------------------------- John C. Spence *RICHARD A. WATSON Director - ----------------------------------------------- Richard A. Watson *By HERBERT F. SMITH ------------------------------------------- (Herbert F. Smith, on behalf of himself and as attorney-in-fact for each of the other persons indicated above)
35 37 AVCO FINANCIAL SERVICES, INC. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
December 31, -------------------------- 1995 1994 ----------- ----------- (Thousands of dollars) BALANCE SHEET ASSETS Demand notes receivable from Avco Financial Services Group subsidiaries $ 3,807,690 $ 3,880,641 Investments in subsidiaries, at equity 1,443,003 1,400,785 Other 129,293 97,894 ----------- ----------- Total assets $ 5,379,986 $ 5,379,320 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Debt $ 4,293,732 $ 4,397,312 Other 58,024 88,264 ----------- ----------- Total liabilities 4,351,756 4,485,576 Stockholder's equity 1,028,230 893,744 ----------- ----------- Total liabilities and stockholder's equity $ 5,379,986 $ 5,379,320 ========= =========
See accompanying note. S-1 38 AVCO FINANCIAL SERVICES, INC. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (CONTINUED)
Year ended December 31, ------------------------------------- 1995 1994 1993 --------- --------- --------- (Thousands of dollars) STATEMENT OF INCOME Revenues (primarily interest from Avco Financial Services Group subsidiaries) $ 295,315 $ 231,116 $ 218,396 Expenses (primarily interest expense) (305,314) (245,092) (229,512) --------- --------- --------- Loss before items shown below (9,999) (13,976) (11,116) Income tax benefits 3,450 4,868 3,605 Equity in income of subsidiaries 185,952 171,437 149,540 --------- --------- --------- Net income $ 179,403 $ 162,329 $ 142,029 ========= ========= ========= STATEMENT OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 179,403 $ 162,329 $ 142,029 Adjustments to reconcile net income to net cash provided by operating activities 3,854 31,395 (4,771) --------- --------- --------- Net cash provided by operating activities 183,257 193,724 137,258 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Decrease/(increase) in demand notes receivable 20,207 (450,704) (178,923) Increase in investments in subsidiaries (9,784) (122,505) (116,490) --------- --------- --------- Net cash provided/(used) by investing activities 10,423 (573,209) (295,413) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Decrease/(increase) in short-term debt (426,815) 151,255 258,412 Proceeds from issuance of notes 950,000 850,000 705,000 Principal payments on notes (626,765) (540,770) (734,257) Dividends paid (90,100) (81,000) (71,000) --------- --------- --------- Net cash provided/(used) by financing activities (193,680) 379,485 158,155 --------- --------- --------- Net change in cash Cash at beginning of year --------- --------- --------- Cash at end of year $ -- $ -- $ -- ========= ========= =========
NOTE TO CONDENSED FINANCIAL INFORMATION The parent company is the primary financing entity for the U.S. Avco Financial Services Group. See Note 1 to the Consolidated Financial Statements for significant accounting policies. The aggregate maturities, required prepayments, redemptions and sinking fund requirements with respect to the Registrant's debt outstanding (excluding commercial paper, bank notes and savings deposits) at December 31, 1995 for the five years ending December 31, 2000 were (in millions): $603.1 in 1996; $300.0 in 1997; $335.6 in 1998; $434.9 in 1999; and $525.0 in 2000. At December 31, 1995 and 1994, the parent company was guarantor for payment of all its foreign subsidiaries' commercial paper and bank line borrowings of $1.223 billion and $938.3 million, respectively, and senior notes of $1.148 billion and $892.9 million, respectively. The Registrant received cash dividends from its subsidiaries aggregating $194.6 million in 1995, $45.5 million in 1994, and $48.0 million in 1993. S-2 EX-12 2 COMPUTATION OF NUMBER OF TIMES FIXED CHARGES EARNE 1 EXHIBIT 12 AVCO FINANCIAL SERVICES, INC. STATEMENT OF COMPUTATION OF NUMBER OF TIMES FIXED CHARGES EARNED
Year ended December 31, ----------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- (Thousands of dollars) Income Income before income taxes and cumulative effect of changes in accounting principles $ 287,459 $ 259,110 $ 225,784 $ 203,913 $ 196,886 --------- --------- --------- --------- --------- Fixed charges to be added back to income -- Interest and debt expense 455,379 334,084 324,211 370,884 395,703 Rentals (one-third of all rent and related costs charged to income) 14,905 13,942 14,378 15,460 14,915 --------- --------- --------- --------- --------- Total fixed charges 470,284 348,026 338,589 386,344 410,618 --------- --------- --------- --------- --------- Income before income taxes, cumulative effect of changes in accounting principles and fixed charges $ 757,743 $ 607,136 $ 564,373 $ 590,257 $ 607,504 ======== ======== ======== ======== ======== Ratio Number of times fixed charges covered by income before income taxes, cumulative effect of changes in accounting principles, and fixed charges 1.6 1.7 1.7 1.5 1.5 --- --- --- --- --- --- --- --- --- ---
S-3 EX-23 3 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 33-50547 and 33-55953) of Avco Financial Services, Inc. and in the related Prospectuses of our report dated January 25, 1996, with respect to the consolidated financial statements and schedules of Avco Financial Services, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1995. ERNST & YOUNG LLP Orange County, California March 27, 1996 S-4 EX-24 4 POWER OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that each of the undersigned, an officer or director, or both, of AVCO FINANCIAL SERVICES, INC., a Delaware corporation, does hereby constitute and appoint HERBERT F. SMITH or LAILA B. SOARES with full power of substitution to said attorney, as the true and lawful attorney and agent of the undersigned, to do any and all acts and things and to execute any and all instruments which said attorney and agent deems advisable, of AVCO FINANCIAL SERVICES, INC. to comply with the Securities Act of 1934, as amended, and any requirements of the Securities and Exchange Commission with respect thereto in connection with the filing under the Securities Act of 1934 of an Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K for the 1995 year of AVCO FINANCIAL SERVICES, INC., as well as any and all amendments to said Report, including specifically, but without limitation of the authority hereby granted, the power and authority to sign his or her name as an officer or director, or both, of AVCO FINANCIAL SERVICES, INC., as indicated opposite his or her signature below, to said Report, and any such amendments, and each of the undersigned does fully ratify and confirm all that said attorney, or any of them, or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents this 27th day of March, 1996. /s/ W. R. LYONS Chairman and Director - --------------------------------- W. R. Lyons /s/ S. J. DAVIS Vice Chairman and Director - --------------------------------- S. J. Davis /s/ E. R. SCHUTT, JR. Executive Vice President, - --------------------------------- President International E. R. Schutt, Jr. Operations and Director /s/ G. E. FRANCIS Executive Vice President, - --------------------------------- President Strategic Business G. E. Francis Operations and Director /s/ R. BUKOW Executive Vice President, - --------------------------------- Treasurer, Chief Financial R. Bukow Officer and Director S-5 2 /s/ G. L. FITE Executive Vice President, - --------------------------------- Controller and Director G. L. Fite /s/ W. J. PEARSON Executive Vice President and - --------------------------------- Director W. J. Pearson /s/ M. A. SCHIMBOR Executive Vice President, - --------------------------------- President U.S. Finance M. A. Schimbor and Director /s/ H. F. SMITH Executive Vice President, - --------------------------------- Secretary and Director H. F. Smith /s/ J. C. SPENCE Director - --------------------------------- J. C. Spence /s/ DAVID HEVIA Senior Vice President and - --------------------------------- Director David Hevia /s/ L. B. CAMPBELL Director - --------------------------------- L. B. Campbell /s/ JAMES F. HARDYMON Director - --------------------------------- J. F. Hardymon /s/ S. A. GILIOTTI Director - --------------------------------- S. A. Giliotti /s/ W. W. JUCHATZ Director - --------------------------------- W. W. Juchatz /s/ S. I. KEY Director - --------------------------------- S. I. KEY /s/ R. A. WATSON Director - --------------------------------- R. A. Watson S-6 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AFS' CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1995 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 DEC-31-1995 25,454 0 6,933,526 195,413 0 0 72,159 0 7,790,948 0 3,751,836 500 0 0 1,027,730 7,790,948 0 1,663,987 0 234,645 537,361 149,143 455,379 287,459 108,056 179,403 0 0 0 179,403 0 0
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