-----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, SGh14wORc50HT4Zlz583pP/j8Qm1ZCnQS1FnM8gizjRQprMbg/bgN43A6tKwqyOl qP2vdHu3xK8Ila//eGP2LQ== 0000892569-97-000795.txt : 19970329 0000892569-97-000795.hdr.sgml : 19970329 ACCESSION NUMBER: 0000892569-97-000795 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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: 97566108 BUSINESS ADDRESS: STREET 1: 600 ANTON BLVD STREET 2: PO BOX 5011 CITY: COSTA MESA STATE: CA ZIP: 92628 BUSINESS PHONE: 7144457860 MAIL ADDRESS: STREET 1: 600 ANTON BLVD STREET 2: PO BOX 5011 CITY: COSTA MESA STATE: CA ZIP: 92628 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, 1996 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, 1996 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, 1996, 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, 1996, the Registrant operated 1,235 finance offices located in all states of the United States (except Arkansas, Kansas, Mississippi, Oklahoma 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. 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, 1996, the Registrant employed approximately 7,600 persons. AVCO FINANCIAL SERVICES GROUP Finance Receivables The Registrant's finance receivable portfolio consisted of the following:
December 31, --------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (Thousands of dollars) Consumer loans....................... $3,206,062 $3,021,227 $2,721,905 $2,389,994 $2,275,016 Real estate loans.................... 2,546,850 2,512,619 2,415,621 2,260,815 2,141,900 Retail installment contracts......... 1,209,330 1,135,830 1,107,282 741,998 656,668 Other loans.......................... 291,496 263,850 91,560 76,756 84,721 ---------- ---------- ---------- ---------- ---------- Total........................... $7,253,738 $6,933,526 $6,336,368 $5,469,563 $5,158,305 ========== ========== ========== ========== ==========
The following table presents the Registrant's outstanding finance receivables by country:
December 31, --------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (Thousands of dollars) Australia............................ $1,053,187 $1,009,345 $ 611,087 $ 489,034 $ 455,771 Canada............................... 1,021,272 967,809 908,339 874,277 835,942 United Kingdom....................... 684,638 607,986 587,972 467,363 434,498 United States........................ 4,146,057 4,115,141 4,140,094 3,638,889 3,432,094 Other Countries*..................... 348,584 233,245 88,876 ---------- ---------- ---------- ---------- ---------- Total........................... $7,253,738 $6,933,526 $6,336,368 $5,469,563 $5,158,305 ========== ========== ========== ========== ==========
- --------------- * Includes the operations of Hong Kong, New Zealand and Spain. 1 3 At December 31, 1996, finance receivables in the United States represented 57% of the Registrant's total finance receivables outstanding. At such date, receivables outstanding in no state exceeded 8% of the United States' portfolio, except California in which outstanding receivables represented 17% 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, 1996 were (in millions): $130.1 in 1996, $(1.1) in 1995, $47.5 in 1994, $(48.2) in 1993, and $(211.2) in 1992. 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 839,648 consumer and real estate loans written during the year ended December 31, 1996, approximately 48% 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, --------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (Thousands of dollars*) New funds advanced Consumer loans Funds advanced.................. $1,868,293 $1,929,581 $1,736,634 $1,474,139 $1,241,420 Average amount.................. $ 2,304 $ 2,272 $ 2,014 $ 1,836 $ 1,705 Real estate loans Funds advanced.................. $ 635,323 $ 709,624 $ 727,139 $ 642,082 $ 630,594 Average amount.................. $ 21,982 $ 23,608 $ 23,714 $ 21,022 $ 20,357 Receivables outstanding at end of period Consumer loans Net balance..................... $3,206,062 $3,021,227 $2,721,905 $2,389,994 $2,275,016 Average amount.................. $ 2,909 $ 2,888 $ 2,725 $ 2,407 $ 2,214 Real estate loans Net balance..................... $2,546,850 $2,512,619 $2,415,621 $2,260,815 $2,141,900 Average amount.................. $ 29,615 $ 27,311 $ 27,450 $ 25,120 $ 23,318
- ------------ * 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, -------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- -------- (Thousands of dollars*) Retail installment contracts purchased........................... $1,298,976 $1,310,373 $1,319,291 $1,041,981 $945,380 Retail installment contracts outstanding at end of period: Net balance...................... $1,209,330 $1,135,830 $1,107,282 $ 741,998 $656,668 Average amount................... $ 1,017 $ 1,067 $ 1,042 $ 859 $ 808
- ------------ * Except average amount. Other Receivables At December 31, 1996, other receivables outstanding of $291.5 million consisted primarily of finance lease receivables generated by the Registrant's Australian, Canadian and Hong Kong 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 is in many cases less than the amount of the related receivable (except for real estate in which case the loan amount is limited to a maximum of 85% of the unencumbered appraised market value). 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 1996, the weighted average maturity of real estate loans written was approximately 10 years. The Registrant purchases retail installment contracts with original contractual terms generally not exceeding 3 years. Nonearning Assets Accrual of interest income is suspended for accounts which are contractually delinquent by more than three payments. Once an account is suspended, subsequent interest income is recognized when collected. Nonearning assets represent those finance receivables on which both the accrual of interest income has been suspended and for which no payment of principal or interest has been received for more than 30 days. Nonearning assets totaled approximately $140.7 million at December 31, 1996 and $115.0 million at December 31, 1995. 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 3 5 transferred and the outstanding loan balance is written off. Subsequent gains and losses on the disposition of real estate owned are reflected in other operating expenses. At December 31, 1996 and 1995, real estate owned was $48.0 million and $43.9 million, respectively. The allowance for losses at December 31, 1996 was $218.4 million or 3.01% of finance receivables then outstanding; such allowance at December 31, 1995 was $195.4 million or 2.82% 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, 1996. 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) 1996.................... $230,155 3.3% $35,480 $194,675 2.8% $203,410 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
The following table presents for the five years ended December 31, 1996 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 - ---------------------------------- -------- ----------- ---------- 1996.................... 1.89% 3.96% 3.25% 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%
- --------------- * 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 1996 through 1992 was as follows: 1996 -- 6.88%; 1995 -- 7.32%; 1994 -- 6.63%; 1993 -- 6.97%; and 1992 -- 8.11%. 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 4 6 companies. During 1996, approximately 74% of the Group's credit life and credit disability insurance business and approximately 18% 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. 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, ------------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (Thousands of dollars) Credit Life, Credit Disability and Other Premiums written.......................... $ 151,048 $ 145,243 $ 151,370 $ 135,218 $ 123,863 ========= ========= ========= ========= ========= Premiums earned........................... $ 145,026 $ 139,105 $ 131,840 $ 127,458 $ 123,122 Investment income......................... 38,258 35,594 20,239 19,793 19,366 Losses and adjustment expenses, less recoveries.............................. (64,211) (61,782) (58,268) (59,306) (56,181) Expenses.................................. (61,218) (58,535) (55,019) (54,826) (51,923) Income taxes.............................. (19,007) (18,043) (11,567) (10,514) (10,840) --------- --------- --------- --------- --------- Income before cumulative effect of changes in accounting principles................ 38,848 36,339 27,225 22,605 23,544 Cumulative effect of changes in accounting principles.............................. (1,788) --------- --------- --------- --------- --------- Net income................................ $ 38,848 $ 36,339 $ 27,225 $ 22,605 $ 21,756 ========= ========= ========= ========= ========= Casualty Premiums written.......................... $ 254,931 $ 240,723 $ 173,380 $ 158,645 $ 151,146 ========= ========= ========= ========= ========= Premiums earned........................... $ 253,615 $ 210,654 $ 155,538 $ 150,954 $ 151,886 Investment income......................... 25,942 19,447 24,085 23,532 23,168 Losses and adjustment expenses, less recoveries.............................. (119,846) (93,695) (69,417) (72,764) (80,957) Expenses.................................. (120,633) (107,870) (82,848) (82,894) (75,369) Income taxes.............................. (13,041) (9,275) (8,966) (5,004) (4,762) --------- --------- --------- --------- --------- Income before cumulative effect of changes in accounting principles................ 26,037 19,261 18,392 13,824 13,966 Cumulative effect of changes in accounting principles.............................. (1,788) --------- --------- --------- --------- --------- Net income................................ $ 26,037 $ 19,261 $ 18,392 $ 13,824 $ 12,178 ========= ========= ========= ========= ========= Total Operations Premiums written.......................... $ 405,979 $ 385,966 $ 324,750 $ 293,863 $ 275,009 ========= ========= ========= ========= ========= Premiums earned........................... $ 398,641 $ 349,759 $ 287,378 $ 278,412 $ 275,008 Investment income(1)...................... 64,200 55,041 44,324 43,325 42,534 Losses and adjustment expenses, less recoveries.............................. (184,057) (155,477) (127,685) (132,070) (137,138) Expenses.................................. (181,851) (166,405) (137,867) (137,720) (127,292) Income taxes.............................. (32,048) (27,318) (20,533) (15,518) (15,602) --------- --------- --------- --------- --------- Income before cumulative effect of changes in accounting principles................ 64,885 55,600 45,617 36,429 37,510 Cumulative effect of changes in accounting principles.............................. (3,576) --------- --------- --------- --------- --------- Net income................................ $ 64,885 $ 55,600 $ 45,617 $ 36,429 $ 33,934 ========= ========= ========= ========= =========
- ------------ (1) Investment income includes capital gains of $11.2 million, $3.2 million, $2.8 million, $4.3 million and $3.1 million for the years 1996 through 1992, respectively. Included in the assets of the Avco Insurance Services Group at December 31, 1996 were investments in securities carried at $798.2 million for which the aggregate cost was $784.4 million. At December 31, 1996, the Avco Insurance Services Group carried a valuation adjustment for its investments totaling $9.0 million. 5 7 This valuation adjustment represents the excess of aggregate estimated fair value over aggregate cost of its securities (net of applicable taxes). The composition of invested assets of the Avco Insurance Services Group at December 31, 1996 and 1995 and the returns on such investments for the years then ended were as follows:
1996 1995 -------------------- -------------------- Amount Percent Amount Percent -------- ------- -------- ------- (Thousands of dollars) Composition of Invested Assets Equities, at market Preferred.............................. $ 7,102 .9% $ 6,831 .9% Common................................. 17,842 2.1 16,772 2.2 Bonds available for sale, at estimated fair value(1).......................... 682,116 84.0 654,961 84.2 Commercial paper, at estimated fair value (approximates cost).................... 89,180 11.0 79,233 10.2 First mortgages on real estate, at cost... 1,975 .2 2,052 .3 -------- -------- Investments............................ 798,215 759,849 Other invested assets..................... 3,507 .5 5,706 .7 Cash...................................... 10,761 1.3 11,912 1.5 -------- ----- -------- ----- Total............................. $812,483 100.0% $777,467 100.0% ======== ===== ======== ===== Return on Invested Assets Investment income (before taxes)(2)....... $ 64,200 $ 55,041 Mean invested assets...................... $765,653 $707,226 Return on mean invested assets, before taxes.................................. 8.4% 7.8% Return on mean invested assets, after taxes.................................. 5.7% 5.1%
- ------------ (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, 1996, the Registrant operated 146 finance offices in Australia, 214 in Canada and 97 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, 1996, 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, in many states limit maximum charges for loans, the maximum amount and terms thereof. In jurisdictions within Australia, the United Kingdom and the United States, laws also require that each office conducting a consumer loan business be separately licensed. Such licenses have limited terms, but are renewable, and are subject to revocation for cause. Laws 6 8 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. 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. 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 1,235 loan offices which the Registrant operated at December 31, 1996, 753 were located in the United States, the Virgin Islands and the Commonwealth of Puerto Rico, 214 in Canada, 146 in Australia and 97 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 $94.9 million and $90.1 million were declared and paid in 1996 and 1995, 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, 1996 and is reported upon in the "Report of Independent Auditors" included on page 12. 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, -------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (Thousands of dollars) REVENUES AND INCOME Revenues Financial Services and Related Insurance....................... $1,499,488 $1,444,893 $1,214,918 $1,145,756 $1,160,637 Nonrelated Insurance............... 260,582 219,094 173,316 178,308 180,197 ---------- ---------- ---------- ---------- ---------- Total Revenues............. $1,760,070 $1,663,987 $1,388,234 $1,324,064 $1,340,834 ========== ========== ========== ========== ========== Income Before Income Taxes Financial Services and Related Insurance....................... $ 278,825 $ 271,299 $ 242,314 $ 217,789 $ 193,782 Nonrelated Insurance............... 19,734 16,160 16,796 7,995 10,131 ---------- ---------- ---------- ---------- ---------- Total income before income taxes.................... 298,559 287,459 259,110 225,784 203,913 Income taxes......................... 111,552 108,056 96,781 83,755 75,887 ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of changes in accounting principles... 187,007 179,403 162,329 142,029 128,026 Cumulative effect of changes in accounting principles(1)........... (24,328) ---------- ---------- ---------- ---------- ---------- Net Income........................... $ 187,007 $ 179,403 $ 162,329 $ 142,029 $ 103,698 ========== ========== ========== ========== ========== Ratio of Income to Fixed Charges(2)......................... 1.7 1.6 1.7 1.7 1.5 ========== ========== ========== ========== ========== FINANCIAL CONDITION Receivables Outstanding.............. $7,253,738 $6,933,526 $6,336,368 $5,469,563 $5,158,305 Investments.......................... 927,571 852,450 704,244 655,690 586,339 Consolidated Assets.................. 8,195,059 7,790,948 7,038,291 6,122,960 5,785,967 Debt (excludes savings deposits) Commercial paper and banks......... 2,766,994 2,413,601 2,430,291 1,959,063 1,580,021 Notes........................... 3,630,889 3,746,652 3,168,178 2,851,399 2,987,467 Stockholder's Equity................. 1,152,686 1,028,230 893,744 827,511 753,071
- ------------ (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 1996 vs. 1995 -- Revenues increased $96 million (6%) and income before income taxes increased $11.1 million (4%), reflecting improved results in both the Financial Services and Related Insurance segment and the Nonrelated Insurance segment of the Registrant's operations. Financial Services and Related Insurance REVENUES of this segment increased $55 million (4%) due primarily to: (i) an increase in finance receivable yields (18.52% in 1996 vs. 18.20% in 1995), which had the effect of increasing revenues by approximately $25 million; (ii) an increase in premiums earned associated with an increase in premiums written; and (iii) an increase in investment and other income, attributable to an increase in capital gains resulting from a higher volume of sales in the bond investment portfolio and a gain on the sale of certain finance receivables. INCOME BEFORE INCOME TAXES of this segment increased $7.5 million (3%) due primarily to: (i) the increase in revenues and (ii) a decrease in the cost of borrowed funds (6.88% in 1996 vs. 7.32% in 1995). These factors were partially offset by an increase in the provision for credit losses attributable to an increase in the ratio of net credit losses to average finance receivables (2.82% in 1996 vs. 2.10% in 1995) and the strengthening of the allowance for credit losses (3.01% of finance receivables outstanding at December 31, 1996 vs. 2.82% at December 31, 1995). The general proliferation of credit cards and the resulting increase in the level of consumer debt in the United States and Canada have continued to burden the consumer finance customer, resulting in higher delinquencies and charge-offs, and such proliferation has provided the consumer an alternative source of funds, thereby reducing the Registrant's receivable growth. Nonrelated Insurance REVENUES of this segment increased $41 million (19%) due primarily to an increase in premiums earned associated with an increase in premiums written (resulting from growth in existing accounts as well as the addition of new accounts in the second half of 1995). INCOME BEFORE INCOME TAXES of this segment increased $3.6 million (22%) due primarily to: (i) an increase in investment income attributable to a higher level of investments outstanding and higher capital gains and (ii) a decrease in underwriting expenses in relation to earned premiums. These favorable factors were partially offset by higher losses in all lines of business. 1995 vs. 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 an increase in the level of receivables outstanding, earned premium, and investment income, partially offset by a slight decrease in yields on finance receivables. 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%). 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% 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. 9 11 Since the latter part of 1995 there has been an increase in delinquencies and net credit losses due to economic slowdowns in the countries in which the Registrant operates and the consumer debt load continued to increase faster than the consumers' ability to pay. 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 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, 1996, the Registrant had interest rate exchange agreements which had the effect of fixing the rate of interest at approximately 7.9% on $1.143 billion of variable rate borrowing. The agreements, which expire through 2000, had a weighted average remaining term of less than 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 56% at December 31, 1996. During the three years ended December 31, 1996, 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 $16.8 million in 1996, $10.9 million in 1995 and $17.2 million in 1994. Such spread had the effect of increasing the Registrant's cost of borrowing by .27% in 1996, .18% in 1995 and .34% in 1994. See Note 5 to the Consolidated Financial Statements of the Registrant for additional information regarding interest rate exchange agreements. For liquidity purposes, the Registrant has a policy of maintaining sufficient unused bank lines of credit to support its outstanding commercial paper. The commercial paper coverage ratio at December 31, 1996, was 109.5%. 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, 1996, $2.55 billion (35.1%) of the Registrant's finance receivables were represented by residential real estate loans, secured primarily by first and second mortgages on single family homes, which averaged $30 thousand in outstanding principal balance per loan. Such loans are geographically dispersed among many customers, and the loan amounts are limited to a maximum of 85% of the unencumbered appraised market value at the date of the loans, although most loans are made at significantly lower loan to value ratios. The Registrant believes that substantially all such loans remain fully secured. 10 12 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, 1996, real estate classified in other assets aggregated $48.0 million. At December 31, 1996, the Registrant had an investment portfolio of $927.6 million, primarily represented by high quality, investment grade debt securities. Such portfolio included $179.5 million ($179.7 million market value) of mortgage-backed securities, including $53.8 million guaranteed by the U.S. Government or agencies thereof. The amount of net assets of the Registrant available for cash dividends and other payments to its parent, Textron Inc., is restricted by the terms of lending agreements and insurance statutory requirements. The Registrant paid dividends of $94.9 million, $90.1 million and $81.0 million to Textron Inc. in 1996, 1995 and 1994, respectively. See Note 8 to the Consolidated Financial Statements of the Registrant for restrictions. 11 13 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, 1996 and 1995 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, 1996. 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, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, 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, 1994, 1993 and 1992, and the related consolidated statements of income, cash flows, and changes in stockholder's equity for the years ended December 31, 1993 and 1992 (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, 1996, 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 23, 1997 12 14 AVCO FINANCIAL SERVICES, INC. CONSOLIDATED BALANCE SHEET
December 31, ------------------------- 1996 1995 ---------- ---------- (Thousands of dollars) ASSETS Finance receivables -- net.......................................... $6,762,507 $6,476,614 Investments......................................................... 927,571 852,450 Property and equipment.............................................. 80,646 72,159 Insurance policy acquisition costs.................................. 60,480 54,716 Goodwill............................................................ 27,086 21,388 Cash................................................................ 15,562 25,454 Other............................................................... 321,207 288,167 ---------- ---------- TOTAL ASSETS.............................................. $8,195,059 $7,790,948 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Debt................................................................ $6,403,348 $6,165,437 Accounts payable and accrued liabilities............................ 303,713 285,909 Insurance reserves and claims....................................... Unearned insurance premiums....................................... 215,768 196,591 Losses and adjustment expenses.................................... 66,758 61,557 Income taxes........................................................ 52,786 53,224 ---------- ---------- Total liabilities......................................... 7,042,373 6,762,718 ---------- ---------- Stockholder's equity Common stock ($1 par value, 500,000 shares authorized; 500,000 shares outstanding).................................... 500 500 Additional paid-in capital........................................ 137,588 137,588 Retained earnings................................................. 1,041,543 949,436 Securities valuation adjustment................................... 65,061 56,309 Currency translation adjustment................................... (92,006) (115,603) ---------- ---------- Total stockholder's equity................................ 1,152,686 1,028,230 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................ $8,195,059 $7,790,948 ========== ==========
See accompanying notes to consolidated financial statements. 13 15 AVCO FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, -------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (Thousands of dollars) REVENUES Interest, discount and service charges.................. $1,276,687 $1,249,438 $1,047,783 Credit life, credit disability and casualty insurance premiums............................................. 398,641 349,759 287,378 Investment and other income (including net realized investment gains).................................... 84,742 64,790 53,073 ---------- ---------- ---------- Total revenues.................................. 1,760,070 1,663,987 1,388,234 EXPENSES Interest and debt expense Interest on notes.................................... 240,687 261,223 212,422 Amortization of debt expense......................... 4,731 4,740 3,555 Interest on commercial paper, bank loans and other indebtedness....................................... 180,842 189,416 119,717 ---------- ---------- ---------- Total........................................... 426,260 455,379 335,694 Salaries, wages, and other employee benefits............ 307,224 293,273 263,670 Provision for losses on collection of finance receivables.......................................... 203,410 149,143 136,101 Credit life, credit disability and casualty insurance losses and adjustment expenses, less recoveries...... 184,057 155,477 127,685 Amortization of insurance policy acquisition costs...... 90,808 79,168 61,531 Other operating expenses................................ 249,752 244,088 204,443 ---------- ---------- ---------- Total expenses.................................. 1,461,511 1,376,528 1,129,124 ---------- ---------- ---------- Income before income taxes 298,559 287,459 259,110 Income taxes.............................................. 111,552 108,056 96,781 ---------- ---------- ---------- NET INCOME................................................ $ 187,007 $ 179,403 $ 162,329 ========== ========== ========== Ratio of income to fixed charges.......................... 1.7 1.6 1.7 === === ===
See accompanying notes to consolidated financial statements. 14 16 AVCO FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (Thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................ $ 187,007 $ 179,403 $ 162,329 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on collection of finance receivables...................................... 203,410 149,143 136,101 Depreciation....................................... 19,301 19,249 16,329 Gain on sales of investments....................... (11,218) (3,167) (2,845) Increase in insurance policy acquisition costs..... (5,872) (11,720) (8,844) Increase in unearned insurance premiums and reserves for insurance losses and adjustment expenses......................................... 27,125 68,365 34,702 Increase in accounts payable and accrued liabilities...................................... 13,822 4,881 34,984 Increase (decrease) in income taxes................ (2,012) (14,540) 2,624 Other - net........................................ (17,173) (20,370) (654) ----------- ----------- ----------- Net cash provided by operating activities..... 414,390 371,244 374,726 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Finance receivables originated or purchased........... (4,610,664) (4,272,148) (4,143,681) Finance receivables repaid or sold.................... 4,222,535 3,957,343 3,210,085 Purchases of investments available for sale........... (288,544) (179,210) (187,444) Proceeds from sales of investments available for sale............................................... 198,562 65,513 55,384 Proceeds from maturities and calls of investments available for sale................................. 49,669 54,935 56,306 Capital expenditures.................................. (31,249) (22,108) (19,897) Cash used in acquisition of assets of HFC of Australia, Ltd., net of cash acquired.............. (39,808) ----------- ----------- ----------- Net cash used by investing activities......... (459,691) (435,483) (1,029,247) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in short-term debt................ 282,940 (307,542) 446,121 Proceeds from issuance of notes....................... 839,294 1,376,393 1,029,764 Principal payments on notes........................... (992,045) (911,255) (726,158) Increase (decrease) in savings deposits............... 120 380 (247) Dividends paid........................................ (94,900) (90,100) (81,000) ----------- ----------- ----------- Net cash provided by financing activities..... 35,409 67,876 668,480 ----------- ----------- ----------- Net increase (decrease) in cash......................... (9,892) 3,637 13,959 Cash at beginning of year............................... 25,454 21,817 7,858 ----------- ----------- ----------- Cash at end of year..................................... $ 15,562 $ 25,454 $ 21,817 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest.............................................. $ 433,607 $ 461,587 $ 329,753 Income taxes.......................................... $ 111,193 $ 122,310 $ 100,711
See accompanying notes to consolidated financial statements. 15 17 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, 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 Net income........................ 187,007 187,007 Cash dividends declared ($189.80 per common share)............ (94,900) (94,900) Change in valuation adjustment................... 8,752 8,752 Change in translation adjustment................... 23,597 23,597 ---- -------- ---------- -------- ---------- ---------- Balance at December 31, 1996...... $500 $137,588 $1,041,543 $ 65,061 $ (92,006) $1,152,686 ==== ======== ========== ======== ========== ==========
See accompanying notes to consolidated financial statements. 16 18 AVCO FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION Avco Financial Services, Inc. is a wholly-owned subsidiary of Textron Inc. The consolidated financial statements include the accounts of Avco Financial Services, Inc. and its subsidiaries (AFS). All significant intercompany transactions are eliminated. Certain reclassifications have been made to prior year amounts to conform with current year presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in those statements and accompanying notes. Actual results may differ from such estimates. FINANCE RECEIVABLES Revenue and Acquisition Cost Recognition For finance receivables, interest income is recognized in revenues using the interest method so as to produce a constant rate of return over the terms of the receivables. Accrual of interest income is suspended for accounts which are contractually delinquent by more than three payments. Once an account is suspended, subsequent interest income is recognized when collected. Fees received and direct loan origination costs are deferred and recognized in income over the contractual lives of the respective loans. Unamortized amounts are recognized in income when loans are sold or paid in full. Credit Losses Provisions for losses on receivables are charged to income in amounts sufficient to maintain the allowance at a level considered adequate to cover the losses of principal and interest in the existing receivable portfolio. The determination of an appropriate allowance for losses is based upon loss experience and payment history. Finance receivables are written off when they are deemed uncollectible, but in any event, all accounts for which an amount aggregating a full contractual payment has not been received for six consecutive months are written off. Foreclosed real estate loans are transferred out of finance receivables into other assets at the lower of fair value (less estimated costs to sell) or the outstanding loan balance. The difference between the amount transferred and the outstanding loan balance is written off. The carrying value of real estate owned is periodically reevaluated and, where appropriate, adjustments are made to reflect subsequent decreases in fair value. Subsequent gains and losses on the disposition of real estate owned are reflected in other operating expenses. INSURANCE OPERATIONS Recognition of Revenues and Expenses Unearned insurance premiums are deferred and subsequently recognized in revenues over the lives of the policies (a) on the interest method for decreasing term credit life insurance coverage and on the pro rata method for level term credit life coverage, (b) in relation to anticipated claims for credit disability insurance and (c) on the pro rata method for casualty insurance. Deferred Policy Acquisition Costs Costs, which vary with, and are primarily related to, the production of new business, have been deferred to the extent such costs are deemed recoverable from future profits. Such costs primarily include commissions and premium taxes. These costs are amortized in proportion to premiums over the estimated lives of the 17 19 AVCO FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) policies. Anticipated investment income is considered in determining if a premium deficiency relating to short-term contracts exists. Insurance Reserves and Claims Insurance reserves and claims represent the estimated ultimate cost of settling claims incurred as of the balance sheet date. The reserves for casualty losses are based upon estimates for losses and loss adjustment expenses reported prior to the close of the accounting period and estimates of incurred but not reported losses and adjustment expenses based upon past experience and adjusted for current conditions, net of reinsurance recoverable and salvage and subrogation. The reserves for credit life and credit disability losses represent estimates of those claims due and unpaid, in the course of settlement, and incurred but not reported, computed using historical liquidation patterns adjusted for changes in portfolio composition, net of reinsurance recoverable. Due to the short-term nature of AFS' loss development and the effect of reinsurance agreements, casualty insurance losses and adjustment expenses in 1996, 1995 and 1994 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, 1996. 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. 18 20 AVCO FINANCIAL SERVICES, INC. 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, 1996 and 1995 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 1996, 1995 and 1994 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. 19 21 AVCO FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2: FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES Contractual maturities of finance receivables outstanding at December 31, 1996 and total finance receivables outstanding at that date and at December 31, 1995 were as follows:
Contractual maturities Less Receivables outstanding ------------------------------------ finance ----------------------- 1997 1998 1999-2011 charges 1996 1995 ---------- ---------- ---------- ---------- ---------- ---------- (Thousands of dollars) Consumer loans............ $1,879,966 $1,273,746 $1,296,638 $1,244,288 $3,206,062 $3,021,227 Real estate loans......... 682,549 471,648 3,728,497 2,335,844 2,546,850 2,512,619 Retail installment contracts............... 881,130 373,352 384,780 429,932 1,209,330 1,135,830 Other loans............... 146,126 74,970 116,124 45,724 291,496 263,850 ---------- ---------- ---------- ---------- ---------- ---------- $3,589,771 $2,193,716 $5,526,039 $4,055,788 7,253,738 6,933,526 ========== ========== ========== ========== Less allowance for credit losses............................................. (218,416) (195,413) Less finance-related insurance reserves and claims........................... (272,815) (261,499) ---------- ---------- Finance receivables -- net................................................... $6,762,507 $6,476,614 ========== ==========
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 1996 and 1995, cash collections of receivables (excluding finance charges) were $4.2 billion and $3.9 billion, respectively. The ratio of cash collections to average finance receivables was approximately 61% and 57%, 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 $140.7 million at December 31, 1996 and $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, 1996, committed lines totaled approximately $1.022 billion of which approximately $430 million remained unused. 20 22 AVCO FINANCIAL SERVICES, INC. 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, ------------------------------------------------------------- 1996 1995 1994 1993(a) 1992(a) --------- --------- --------- --------- --------- (Thousands of dollars) Balance of the allowance for credit losses at beginning of year...... $ 195,413 $ 180,573 $ 155,015 $ 147,088 $ 135,330 Add -- charged to income: Real estate................... 20,430 19,457 21,106 25,487 17,616 Other......................... 182,980 129,686 114,995 95,207 100,635 --------- --------- --------- --------- --------- Total......................... 203,410 149,143 136,101 120,694 118,251 Deduct -- balances charged off: Gross charge offs: Real estate................... (22,483) (21,939) (20,845) (25,125) (15,394) Other......................... (207,672) (154,865) (121,041) (112,979) (121,401) --------- --------- --------- --------- --------- Total......................... (230,155) (176,804) (141,886) (138,104) (136,795) Recoveries: Real estate................... 1,906 1,786 1,591 1,588 1,117 Other......................... 33,574 31,128 26,861 25,023 25,680 --------- --------- --------- --------- --------- Total......................... 35,480 32,914 28,452 26,611 26,797 --------- --------- --------- --------- --------- Net charge offs.................. (194,675) (143,890) (113,434) (111,493) (109,998) Other.............................. 14,268 9,587 2,891 (1,274) 3,505 --------- --------- --------- --------- --------- Balance of the allowance for credit losses at end of year............ $ 218,416 $ 195,413 $ 180,573 $ 155,015 $ 147,088 ========= ========= ========= ========= ========= Balance of the allowance for credit losses at the end of each year applicable to: Real estate...................... $ 35,028 $ 34,291 $ 34,017 $ 32,048 $ 30,316 Other............................ 183,388 161,122 146,556 122,967 116,772 --------- --------- --------- --------- --------- Total............................ $ 218,416 $ 195,413 $ 180,573 $ 155,015 $ 147,088 ========= ========= ========= ========= =========
- ------------ (a) The above data for the two years ended 1993 is not reported upon herein by independent auditors. 21 23 AVCO FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3: INVESTMENTS
1996 1995 -------- -------- (Thousands of dollars) Debt securities: Commercial paper, at estimated fair value (approximates cost)........ $ 89,180 $ 79,233 Bonds available for sale at estimated fair value (cost: $686,140,000 in 1996 and $637,497,000 in 1995)............. 697,844 666,184 -------- -------- Total............................................................. 787,024 745,417 -------- -------- Marketable equity securities, at market: Preferred stocks (cost: $6,484,000 in 1996 and $6,513,000 in 1995)... 7,102 6,831 Common stocks, industrial, miscellaneous and all other (cost: $41,332,000 in 1996 and $39,771,000 in 1995)............... 131,470 98,150 -------- -------- Total............................................................. 138,572 104,981 -------- -------- First mortgages on real estate, at cost................................ 1,975 2,052 -------- -------- Total........................................................ $927,571 $852,450 ======== ========
The amortized cost and estimated fair value of debt securities and marketable equity securities at December 31, 1996 and 1995 were as follows:
December 31, 1996 ----------------------------------------------- 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................. $ 56,007 $ 1,547 $ 161 $ 57,393 Obligations of states, municipalities and political subdivisions........................................ 74,849 4,038 697 78,190 Obligations of foreign governments and agencies....... 96,336 4,573 90 100,819 Public utility securities............................. 53,289 730 434 53,585 Mortgage-backed securities............................ 179,484 829 583 179,730 Corporate securities.................................. 315,355 4,106 2,154 317,307 Marketable equity securities.......................... 47,816 90,777 21 138,572 -------- -------- ------ -------- Debt and marketable equity securities available for sale....................................... $823,136 $106,600 $4,140 $925,596 ======== ======== ====== ========
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 ======== ======== ====== ========
22 24 AVCO FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3: INVESTMENTS (CONTINUED) The amortized cost and estimated fair value of debt securities at December 31, 1996, 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 1997............................................ $ 145,897 $ 146,454 Due 1998 to 2001....................................... 260,573 265,912 Due 2002 to 2006....................................... 133,282 137,103 Due after 2006......................................... 56,084 57,825 Mortgage-backed securities............................. 179,484 179,730 --------- --------- $ 775,320 $ 787,024 ========= =========
Gross realized gains and (losses) on sales of securities were (in millions), $9.8 and ($.4) in 1996, $6.7 and ($3.5) in 1995, and $4.5 and ($1.7) in 1994. NOTE 4: INCOME TAXES AFS' provision for income tax is based upon including all eligible U.S. subsidiaries in the consolidated U.S. federal income tax return filed by its parent, Textron Inc. Such provision does not differ materially from the amount which AFS would have provided if it and its eligible subsidiaries were filing their own consolidated federal income tax return. The provision for income tax also includes amounts for AFS' foreign subsidiaries which file their own separate income tax returns. AFS recognizes deferred income taxes for temporary differences between the financial reporting basis and income tax basis of assets and liabilities based on enacted tax rates expected to be in effect when amounts are likely to be realized or settled. For years beginning after December 31, 1995, the Puerto Rican government decreased its corporate tax rate from 42% to 39%. 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 1996. 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 $405 million at the end of 1996. Management intends to reinvest those earnings for an indefinite period, except for distributions upon which incremental taxes would not be material. If such earnings were distributed, taxes (net of foreign tax credits) would have increased by approximately $28 million, principally due to foreign withholding taxes. At December 31, 1996, 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. 23 25 AVCO FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4: INCOME TAXES (CONTINUED) Income taxes (benefit) are summarized as follows:
1996 1995 1994 -------- -------- -------- (Thousands of dollars) Current Federal.......................................... $ 49,950 $ 56,628 $ 53,299 State............................................ 6,038 8,227 8,005 Foreign.......................................... 59,734 42,073 41,732 -------- -------- -------- 115,722 106,928 103,036 Deferred Federal.......................................... (4,792) (2,826) (3,650) State............................................ (276) (938) (503) Foreign.......................................... 898 4,892 (2,102) -------- -------- -------- (4,170) 1,128 (6,255) -------- -------- -------- Total income tax provision............... $111,552 $108,056 $ 96,781 ======== ======== ========
The following reconciles the federal statutory income tax rate to the effective income tax rate applicable to pretax income, as reflected in the consolidated statement of income:
1996 1995 1994 ---- ---- ---- U.S. federal statutory tax rate................................ 35.0% 35.0% 35.0% Increases (decreases) in taxes resulting from: Residual tax on foreign dividends............................ .8 .1 .6 Higher tax on foreign income................................. 1.0 1.2 .7 State income taxes........................................... 1.3 1.6 1.9 Nontaxable investment income................................. (0.9) (1.0) (.8) Other, net................................................... .2 .7 ---- ---- ---- Effective income tax rate...................................... 37.4% 37.6% 37.4% ==== ==== ====
AFS' net deferred tax asset consisted of gross deferred tax assets and gross deferred tax liabilities of $120.9 million and $63.5 million, respectively, at December 31, 1996 and $106.8 million and $46.4 million, respectively, at December 31, 1995. The components of AFS' net deferred tax asset as of December 31, 1996 and 1995 were as follows:
1996 1995 -------- -------- (Thousands of Dollars) Allowance for credit losses.................................. $ 56,673 $ 51,005 Liabilities for future policy benefits....................... 21,628 20,160 Unrealized gain on marketable equity securities.............. (36,717) (30,430) Obligation for postretirement benefits other than pensions... 13,877 13,664 Depreciation................................................. (8,703) (6,703) Insurance policy acquisition costs........................... (484) (6,613) Lease financing transactions................................. 789 (2,616) Other -- principally timing of expense deductions............ 10,314 21,967 -------- -------- Total net deferred tax asset....................... $ 57,377 $ 60,434 ======== ========
24 26 AVCO FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5: DEBT AND CREDIT FACILITIES At December 31, 1996 and 1995, consolidated debt consisted of the following:
1996 1995 ---------- ---------- (Thousands of dollars) Senior Commercial paper.......................................... $2,651,627 $2,067,722 Banks..................................................... 115,367 345,879 Savings deposits.......................................... 5,465 5,184 4.90% to 5.99% due 1996 to 2000(a)........................ 1,124,414 730,777 6.00% to 7.99% due 1996 to 2002(a)........................ 1,819,816 2,076,114 8.00% to 9.99% due 1996 to 2000(a)........................ 664,676 834,218 10.00% to 11.85% due 1996 to 1998......................... 20,983 101,643 ---------- ---------- Total senior debt................................. 6,402,348 6,161,537 ---------- ---------- Senior subordinated 10.28% to 11.4% due 1996 to 1998.......................... 1,000 3,900 ---------- ---------- Total debt........................................ $6,403,348 $6,165,437 ========== ==========
- ------------ (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, 1996, 1995 and 1994, without giving effect to the costs of maintaining the lines of credit, were 6.5%, 7.5% and 6.3%, respectively, for bank borrowings (primarily consisting of borrowings in foreign operations) and 5.4%, 6.2% and 6.1%, respectively, for commercial paper. The weighted average interest rate on bank borrowings and commercial paper outstanding during the three years ended December 31, 1996 was 5.9%, 6.6% and 4.8%, respectively. The weighted average interest rate is determined primarily by reference to daily outstanding principal amounts and excludes the cost of maintaining the lines of credit. At December 31, 1996 and 1995, AFS had lines of credit with various banks amounting to $3.50 billion and $3.28 billion, respectively, of which the unused portion of these lines amounted to $2.90 billion and $2.64 billion, respectively. AFS generally pays fees in support of these lines. During the years ended December 31, 1996 and 1995, AFS issued the following notes:
1996 1995 -------- ---------- (Thousands of dollars) Senior notes due 1996 to 1998 (Australia).................... $422,187 $ 55,775 Senior notes due 1996 to 2000 (Canada)....................... 36,675 139,702 Senior notes due 1999 to 2000 (Hong Kong).................... 71,111 77,544 Senior notes due 1996 to 1998 (United Kingdom)............... 9,321 153,372 Senior notes due 1996 to 2002 (United States)................ 300,000 950,000 -------- ---------- Total.............................................. $839,294 $1,376,393 ======== ==========
Under interest rate exchange agreements, AFS makes periodic fixed payments in exchange for periodic variable payments. AFS has entered into such agreements to mitigate its exposure to increases in interest rates on a portion of its variable rate debt. These agreements had weighted average remaining terms of less than 2 years and had the effect of fixing the rate of interest at 7.9% and 8.2% on $1.143 billion and $1.063 billion 25 27 AVCO FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5: DEBT AND CREDIT FACILITIES (CONTINUED) of variable rate borrowing at December 31, 1996 and 1995, respectively. The spread between the variable rate AFS received and the fixed rate AFS paid increased the reported interest expense by $16.8 million in 1996, $10.9 million in 1995, and $17.2 million in 1994. Such spread had the effect of increasing AFS' cost of borrowing by .27% in 1996, .18% in 1995, and .34% in 1994. The following details AFS' "fixed-pay" interest rate exchange agreement activity for the years 1996 and 1995:
1996 1995 ---------- ---------- (Thousands of dollars) Beginning notional amount................................... $1,063,118 $ 748,517 Notional amount of new contracts............................ 412,407 509,035 Notional amount of terminated and expired contracts......... (332,156) (194,434) ---------- ---------- Ending notional amount...................................... $1,143,369 $1,063,118 ========== ==========
The notional amount of fixed-pay interest rate swap agreements at December 31, 1996 categorized by annual maturity, along with the related weighted average interest rates paid are as follows: $377.9 million (8.4%) in 1997; $402.9 million (8.1%) in 1998; $336.7 million (7.0%) in 1999; and $25.9 million (6.8%) in 2000. In 1996, AFS entered into additional fixed-pay interest rate exchange agreements which become effective in 1997. These agreements expire through 2000 and will fix the rate of interest at 7.3% on $12 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. 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, 1996, 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, 1996, for the five years ending December 31, 2001, were (in millions): $853.0 in 1997; $744.2 in 1998; $875.2 in 1999; $758.5 in 2000; and $200.0 in 2001. 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, 1996. Reinsurance receivables with a carrying value of $2.4 million and prepaid reinsurance premiums of $36.6 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 $42.5 million at December 31, 1996. Additionally, AFS holds collateral under certain 26 28 AVCO FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6: REINSURANCE (CONTINUED) other reinsurance agreements in the forms of letters of credit and trust accounts. Reinsurance receivables and prepaid reinsurance premiums were $7.2 million and $38.1 million respectively at December 31, 1996 and $6.8 million and $24.2 million respectively at December 31, 1995. The effect of reinsurance on premiums written, premiums earned and losses incurred for the three years ended December 31, 1996 were as follows:
1996 1995 1994 -------- -------- -------- (Thousands of Dollars) Premiums Written Direct........................................... $387,343 $382,592 $290,961 Assumed.......................................... 64,039 50,784 47,133 Ceded............................................ (45,403) (47,410) (13,344) -------- -------- -------- Total premiums written................... $405,979 $385,966 $324,750 ======== ======== ======== Premiums Earned Direct........................................... $397,753 $330,902 $254,741 Assumed.......................................... 60,693 44,195 47,114 Ceded............................................ (59,805) (25,338) (14,477) -------- -------- -------- Total premiums earned.................... $398,641 $349,759 $287,378 ======== ======== ======== Losses Incurred Direct........................................... $170,855 $143,248 $115,218 Assumed.......................................... 20,210 16,626 15,176 Ceded............................................ (7,008) (4,397) (2,709) -------- -------- -------- Total losses incurred.................... $184,057 $155,477 $127,685 ======== ======== ========
27 29 AVCO FINANCIAL SERVICES, INC. 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 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, 1996, AFS operated 1,235 finance offices located in all states of the United States (except Arkansas, Kansas, Mississippi, Oklahoma 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, ------------------------------------------------------------------ 1996 1995 1994 1993* 1992* ---------- ---------- ---------- ---------- ---------- (Thousands of dollars) Revenues Financial Services and Related Insurance........................... $1,499,488 $1,444,893 $1,214,918 $1,145,756 $1,160,637 Nonrelated Insurance.................. 260,582 219,094 173,316 178,308 180,197 ---------- ---------- ---------- ---------- ---------- Total revenues................. $1,760,070 $1,663,987 $1,388,234 $1,324,064 $1,340,834 ========== ========== ========== ========== ========== Income Before Income Taxes Financial Services and Related Insurance........................... $ 278,825 $ 271,299 $ 242,314 $ 217,789 $ 193,782 Nonrelated Insurance.................. 19,734 16,160 16,796 7,995 10,131 ---------- ---------- ---------- ---------- ---------- Total income before income taxes........................ $ 298,559 $ 287,459 $ 259,110 $ 225,784 $ 203,913 ========== ========== ========== ========== ========== Identifiable Assets Financial Services and Related Insurance........................... $7,802,766 $7,437,119 $6,582,978 $5,681,416 $5,360,280 Nonrelated Insurance.................. 392,293 353,829 455,313 441,544 425,687 ---------- ---------- ---------- ---------- ---------- Total identifiable assets...... $8,195,059 $7,790,948 $7,038,291 $6,122,960 $5,785,967 ========== ========== ========== ========== ==========
- --------------- * The above data for the two years ended 1993 is not reported upon herein by independent auditors. 28 30 AVCO FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7: OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA (CONTINUED) Geographic Area The following is a summary of revenues, income before income taxes and identifiable assets by geographic area:
Year ended December 31, ------------------------------------------------------------------ 1996 1995 1994 1993* 1992* ---------- ---------- ---------- ---------- ---------- (Thousands of dollars) Revenues Australia............................. $ 258,899 $ 240,683 $ 148,264 $ 133,080 $ 137,054 Canada................................ 235,197 221,175 204,068 210,423 234,964 United Kingdom........................ 147,349 144,675 127,813 112,607 119,351 United States......................... 1,071,412 1,028,907 900,023 867,954 849,465 Other Countries**..................... 47,213 28,547 8,066 ---------- ---------- ---------- ---------- ---------- Total revenues................. $1,760,070 $1,663,987 $1,388,234 $1,324,064 $1,340,834 ========== ========== ========== ========== ========== Income (Loss) Before Income Taxes Australia............................. $ 58,236 $ 53,801 $ 43,796 $ 34,542 $ 30,125 Canada................................ 55,853 48,236 47,029 42,503 37,776 United Kingdom........................ 31,044 22,737 21,572 14,819 14,364 United States......................... 144,354 158,592 147,274 133,920 121,648 Other Countries**..................... 9,072 4,093 (561) ---------- ---------- ---------- ---------- ---------- Total income before income taxes........................ $ 298,559 $ 287,459 $ 259,110 $ 225,784 $ 203,913 ========== ========== ========== ========== ========== Identifiable Assets Australia............................. $1,130,930 $1,081,286 $ 646,958 $ 526,410 $ 473,424 Canada................................ 1,105,794 1,031,678 963,689 937,339 895,050 United Kingdom........................ 679,761 606,857 585,736 465,820 435,661 United States......................... 4,911,331 4,823,918 4,735,989 4,193,391 3,981,832 Other Countries**..................... 367,243 247,209 105,919 ---------- ---------- ---------- ---------- ---------- Total identifiable assets...... $8,195,059 $7,790,948 $7,038,291 $6,122,960 $5,785,967 ========== ========== ========== ========== ==========
- ------------ * The above data for the two years ended 1993 is not reported upon herein by independent auditors. ** Includes the operations of Hong Kong, New Zealand and Spain. At December 31, 1996, finance receivables in the United States represented 57% of AFS' total finance receivables outstanding. At such date, receivables outstanding in no state exceeded 8% of the United States' portfolio, except California in which outstanding receivables represented 17% of the United States' portfolio and 9% of the consolidated portfolio. Capital expenditures and depreciation expense for each of the five years ended 1996 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, 1996, approximately $364.4 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. 29 31 AVCO FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8: CERTAIN PROVISIONS CONTAINED IN NOTES, LOAN AGREEMENTS AND CERTIFICATE OF INCORPORATION AND OTHER RESTRICTIONS (CONTINUED) 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 $270 million at December 31, 1996. 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, $51 million and $47 million in 1996, 1995 and 1994, respectively. Future minimum rental commitments for all noncancelable operating leases in effect at December 31, 1996 approximate $36 million in 1997, $30 million in 1998, $25 million in 1999, $20 million in 2000, $17 million in 2001 and $81 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 $17 million, $16 million and $15 million for 1996, 1995 and 1994, 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 1996, 1995 and 1994 were not material. 30 32 AVCO FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) AFS' postretirement benefit plans other than pensions currently are not funded. The following table sets forth the status of AFS' retiree health care and life insurance plans at December 31, 1996 and 1995:
1996 1995 ------- ------- (Thousands of dollars) Actuarial present value of benefits attributed to: Retirees....................................................... $23,149 $24,676 Fully eligible active plan participants........................ 5,056 5,414 Other active plan participants................................. 777 309 ------- ------- Accumulated postretirement benefit obligation.................... 28,982 30,399 Unrecognized net actuarial gains................................. 6,479 4,539 ------- ------- Postretirement benefit liability recognized on the consolidated balance sheet................................ $35,461 $34,938 ======= =======
An assumed discount rate of 7.5% for 1996, 8.25% for 1995 and 7.25% for 1994 was used to determine postretirement benefit costs other than pensions. An assumed discount rate of 7.5% and 7.25% was used to determine the status of AFS' plans at December 31, 1996 and December 31, 1995, 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 7% for retirees age 65 and over and 11% for retirees under age 65 in 1997, 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, 1996 by $2.2 million and increased the aggregate of the service and interest cost components of postretirement benefit costs for 1996 by $200,000. NOTE 12: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly results of operations for the years ended December 31, 1996 and 1995 were as follows:
1996 1995 -------------------------------------------- -------------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter -------- -------- -------- -------- -------- -------- -------- -------- (Thousands of dollars) Revenues....................... $432,249 $433,481 $442,088 $452,252 $397,595 $406,780 $420,607 $439,005 ======== ======== ======== ======== ======== ======== ======== ======== Income before income taxes..... $ 72,214 $ 75,372 $ 75,711 $ 75,262 $ 69,678 $ 69,551 $ 75,603 $ 72,627 Income taxes................... 27,005 28,486 28,233 27,828 26,349 26,027 28,527 27,153 -------- -------- -------- -------- -------- -------- -------- -------- Net income..................... $ 45,209 $ 46,886 $ 47,478 $ 47,434 $ 43,329 $ 43,524 $ 47,076 $ 45,474 ======== ======== ======== ======== ======== ======== ======== ========
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. 31 33 AVCO FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 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 ($291.5 million and $272.8 million, net carrying value, respectively, at December 31, 1996 and $263.9 million and $261.5 million, respectively, at December 31, 1995) 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, 1996 December 31, 1995 ------------------------ ------------------------ Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value ---------- ---------- ---------- ---------- (Thousands of dollars) ASSETS: Investments......................... $ 927,571 $ 927,571 $ 852,450 $ 852,450 ========== ========== ========== ========== Finance receivables................. $6,471,011 $6,451,011 $6,474,263 $6,456,263 ========== ========== ========== ========== LIABILITIES: Debt: Variable rate debt.................. $3,989,901 $3,989,901 $3,310,181 $3,310,181 Interest rate exchange agreements... 18,811 531 Fixed rate debt..................... 2,413,447 2,443,804 2,855,256 2,930,534 ---------- ---------- ---------- ---------- Total debt................ $6,403,348 $6,452,516 $6,165,437 $6,241,246 ========== ========== ========== ==========
32 34 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Omitted in accordance with General Instruction J(2)(c). ITEM 11. EXECUTIVE COMPENSATION Omitted in accordance with General Instruction J(2)(c). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Omitted in accordance with General Instruction J(2)(c). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Omitted in accordance with General Instruction J(2)(c). 33 35 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............................... 12 Consolidated Balance Sheet at December 31, 1996 and 1995..... 13 Consolidated Statement of Income for the three years ended December 31, 1996............................................ 14 Consolidated Statement of Cash Flows for the three years ended December 31, 1996...................................... 15 Consolidated Statement of Changes in Stockholder's Equity for the three years ended December 31, 1996...................... 16 Notes to Consolidated Financial Statements................... 17 2. Index to Financial Statement Schedules I. Condensed Financial Information of the Registrant........ S-1 All other schedules are omitted since the required information is not present or not present in amounts sufficient to require the submission of the schedules, or because the information required is included in the consolidated financial statements or the notes thereto. (b) No reports on Form 8-K were filed during the quarter ended December 31, 1996. (c) Exhibits *(3) (a) Certificate of incorporation of the Registrant, as amended. (b) Bylaws of the Registrant, as amended. (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 No. 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. 34 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AVCO FINANCIAL SERVICES, INC. Dated: March 27, 1997 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, 1997.
SIGNATURE TITLE --------- ----- *WARREN R. LYONS Chairman of the Board of Directors - ---------------------------------------------- (Principal Executive Officer) Warren R. Lyons *RONALD BUKOW Executive Vice President and Director - ---------------------------------------------- (Principal Financial Officer) Ronald Bukow *LEWIS B. CAMPBELL Director - ---------------------------------------------- Lewis B. Campbell *STEPHEN J. DAVIS Vice Chairman of the Board of Directors - ---------------------------------------------- Stephen J. Davis *GARY L. FITE Executive Vice President, Controller and - ---------------------------------------------- Director (Principal Accounting Officer) Gary L. Fite *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
35 37
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)
36 38 AVCO FINANCIAL SERVICES, INC. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
December 31, -------------------------- 1996 1995 ----------- ----------- (Thousands of dollars) BALANCE SHEET ASSETS Demand notes receivable from Avco Financial Services Group subsidiaries...................................................... $ 3,868,329 $ 3,807,690 Investments in subsidiaries, at equity.............................. 1,468,045 1,443,003 Other............................................................... 167,655 129,293 ----------- ----------- Total assets................................................... $ 5,504,029 $ 5,379,986 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Debt................................................................ $ 4,295,970 $ 4,293,732 Other............................................................... 55,373 58,024 ----------- ----------- Total liabilities.............................................. 4,351,343 4,351,756 Stockholder's equity................................................ 1,152,686 1,028,230 ----------- ----------- Total liabilities and stockholder's equity..................... $ 5,504,029 $ 5,379,986 =========== ===========
See accompanying note. S-1 39 AVCO FINANCIAL SERVICES, INC. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (CONTINUED)
Year ended December 31, ------------------------------------- 1996 1995 1994 --------- --------- --------- (Thousands of dollars) STATEMENT OF INCOME Revenues (primarily interest from Avco Financial Services Group subsidiaries).......................... $ 268,171 $ 295,315 $ 231,116 Expenses (primarily interest expense)................... (275,087) (305,314) (245,092) --------- --------- --------- Loss before items shown below........................... (6,916) (9,999) (13,976) Income tax benefits..................................... 2,378 3,450 4,868 Equity in income of subsidiaries........................ 191,545 185,952 171,437 --------- --------- --------- Net income.............................................. $ 187,007 $ 179,403 $ 162,329 ========= ========= ========= STATEMENT OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES Net income.............................................. $ 187,007 $ 179,403 $ 162,329 Adjustments to reconcile net income to net cash provided by (used in) operating activities..................... (34,611) 3,854 31,395 --------- --------- --------- Net cash provided by operating activities.......... 152,396 183,257 193,724 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES (Increase) decrease in demand notes receivable.......... (35,004) 20,207 (450,704) Increase in investments in subsidiaries................. (12,607) (9,784) (122,505) --------- --------- --------- Net cash provided/(used) by investing activities... (47,611) 10,423 (573,209) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES (Decrease)/increase in short-term debt.................. 295,055 (426,815) 151,255 Proceeds from issuance of notes......................... 300,000 950,000 850,000 Principal payments on notes............................. (604,940) (626,765) (540,770) Dividends paid.......................................... (94,900) (90,100) (81,000) --------- --------- --------- Net cash provided/(used) by financing activities... (104,785) (193,680) 379,485 --------- --------- --------- 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, 1996 for the five years ending December 31, 2001 were (in millions): $600.0 in 1997; $333.7 in 1998; $434.9 in 1999; $525.0 in 2000; and $200.0 in 2001. At December 31, 1996 and 1995, the parent company was guarantor for payment of all its foreign subsidiaries' commercial paper and bank line borrowings of $1.261 billion and $1.223 billion, respectively, and senior notes of $1.337 billion and $1.148 billion, respectively. The Registrant received cash dividends from its subsidiaries aggregating $187.6 million in 1996, $194.6 million in 1995, and $45.5 million in 1994. S-2 EX-3.(A) 2 AMENDED CERTIFICATE OF INC. 1 EXHIBIT 3(a) STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 12/30/1996 960388624 - 0613412 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF AVCO FINANCIAL SERVICES, INC. Pursuant to Section 242 of the Delaware Corporation Law It is hereby certified that: 1. The name of the corporation (hereinafter called the "corporation") is Avco Financial Services, Inc. 2. The certificate of incorporation of the corporation is hereby amended by amending FOURTH to read as follows: FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is Five hundred thousand (500,000). All said shares shall be of a class designated as Common Stock with a par value of One Dollar ($1) each. The holders of the Common Stock shall possess full voting power for the election of directors and all other purposes, and shall, subject to the provisions of the laws of the State of Delaware relating to the fixing of the record date, be entitled to one (1) vote for each share held by them, respectively, for all purposes. Signed and attested to on December 27, 1996. /s/ HERBERT F. SMITH ------------------------ Herbert F. Smith, Executive Vice President Attest: /s/ LAILA B. SOARES - ------------------------------------ Laila B. Soares, Assistant Secretary STATE OF CALIFORNIA COUNTY OF ORANGE BE IT REMEMBERED that on December 27, 1996, before me, a Notary Public duly authorized by law to take acknowledgment of deeds, personally came Herbert F. Smith, Executive Vice President of Avco Financial Services, Inc. who duly signed the foregoing instrument before me and acknowledged that such signing is his act and deed, that such instrument as executed is the act and deed of said corporation, and that the facts stated therein are true. GIVEN under my hand on December 27, 1996. [illegible] - ------------------------------------ Notary Public [seal] 2 [LOGO] STATE OF DELAWARE Office of SECRETARY OF STATE I, Robert H. Reed, Secretary of State of the State of Delaware, do hereby certify that the above and foregoing corresponds with and includes all the provisions of the Certificate of Incorporation of the "AVCO FINANCIAL SERVICES, INC.", as received and filed in this office the seventeenth day of July, A.D. 1964, at 10 o'clock A.M. as amended and in effect August 13, 1975. In Testimony Whereof, I have hereunto set my hand and official seal at Dover this thirteenth day of August in the year of our Lord one thousand nine hundred and seventy-five. /s/ ROBERT H. REED ---------------------------------------------------- Robert H. Reed Secretary of State [LOGO] /s/ GROVER A. BIDDLE ---------------------------------------------------- Grover A. Biddle Assistant Secretary of State FORM 122 3 PAGE 1 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE -------------------------------- I, MICHAEL RATCHFORD, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF INCORPORATION OF "AVCO DELTA FINANCIAL CORPORATION" FILED IN THIS OFFICE ON THE SEVENTEENTH DAY OF JULY, A.D. 1964, AT 10 O'CLOCK A.M. * * * * * * * * * * /s/ MICHAEL RATCHFORD ------------------------------------- [LOGO] Michael Ratchford, Secretary of State AUTHENTICATION: *3693515 923455205 DATE: 12/10/1992 4 CERTIFICATE OF INCORPORATION OF AVCO DELTA FINANCIAL CORPORATION WE, THE UNDERSIGNED, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do hereby certify as follows: FIRST. The name of the corporation is AVCO DELTA FINANCIAL CORPORATION. SECOND. The corporation's principal office in the State of Delaware is located at 100 West Tenth Street, in the City of Wilmington, County of New Castle. The name and address of its resident agent is The Corporation Trust Company, 100 West Tenth Street, Wilmington 99, Delaware. THIRD. The nature of the business, or objects or purposes to be transacted, promoted or carried on by the corporation are: To purchase or otherwise acquire, hold, deal in and with, discount, collect, realize on, negotiate, pledge, charge, hypothecate, sell, transfer or otherwise dispose of, and turn to account and lend money on the security of, conditional sale agreements, promissory notes, lien notes, chattel mortgages, trade paper, bills of lading, warehouse receipts, bills of exchange, choses in action and other securities. To guarantee, with or without security, the performance of any contracts, obligations or undertakings of any other person, firm, association or corporation, including the payment of dividends or interest on and principal and premium, if any, of shares of capital stock, bonds, debentures, debenture stock and other securities, notes, obligations and liabilities of such person, firm, association or corporation, and to accept as security for any loans and guarantees made or given by the corporation any security that may be offered by any person, firm, association or corporation, including shares of capital stock, bonds, debentures, debenture stock and other securities, and mortgages, pledges, liens and other charges of or upon the property of 5 of such person, firm, association or corporation. To manufacture, purchase or otherwise acquire, invest in, own, mortgage, pledge, sell, assign and transfer or otherwise dispose of, trade, deal in and with goods, wares and merchandise and personal property of every class and description. To acquire, and pay for in cash, stock or bonds of the corporation or otherwise, the good will, rights, assets and property, and to undertake or assume the whole, or any part of the obligations or liabilities, of any person, firm, association or corporation. To acquire, hold, use, sell, assign, lease, grant licenses in respect of, mortgage or otherwise dispose of letters patent of the United States or any foreign country, patent rights, licenses and privileges, inventions, improvements and processes, copyrights, trade-marks and trade names, relating to or useful in connection with any business of the corporation. To acquire by purchase, subscription or otherwise, and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in and with any of the shares of the capital stock, or any voting trust certificates in respect of the shares of capital stock, scrip, warrants, rights, bonds, debentures, notes, trust receipts, and other securities, obligations, choses in action and evidences of indebtedness or interest issued or created by any corporations, joint stock companies, syndicates, associations, firms, trusts or persons, public or private, or by the government, or by any state, territory, province, municipality or other political subdivision or by any governmental agency, and as owner thereof to possess and exercise all the rights, powers and privileges of ownership, including the right to execute consents and vote thereon, and to do any and all acts and things necessary or advisable for the preservation, protection, improvement and enhancement in value thereof. To enter into, make and perform contracts of every kind and description with any person, firm, association, corporation, municipality, county, state, body politic or government or colony or dependency thereof. To borrow or raise moneys for any of the purposes of the corporation and, from time to time without limit as -2- 6 to amount, to draw, make, accept, endorse, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures and other negotiable or non-negotiable instruments and evidences of indebtedness, and to secure the payment of any thereof and of the interest thereon by mortgage upon or pledge, conveyance or assignment in trust of the whole or any part of the property of the corporation, whether at the time owned or thereafter acquired, and to sell, pledge or otherwise dispose of such bonds or other obligations of the corporation for its corporate purposes. To loan to any person, firm or corporation any of the surplus funds of the corporation, either with or without security. To purchase, hold, sell and transfer shares of its own capital stock; provided that the corporation shall not use its funds or property for the purchase of its own shares of capital stock where such use would be otherwise prohibited by law, and provided, further, that shares of its own capital stock belonging to it shall not be voted upon directly or indirectly. To have one or more offices, to carry on all or any of its operations and business and, without restriction or limit as to amount, to purchase or otherwise acquire, hold, own, mortgage, sell, convey or otherwise dispose of, real and personal property of every class and description in any of the states, districts, territories or colonies of the United States, and in any and all foreign countries, subject to the laws of such state, district, territory, colony or country. In general, to carry on any other business in connection with the foregoing, and to have and exercise all the powers conferred by the laws of the State of Delaware upon corporations formed under the General Corporation Law of the State of Delaware, and to do any or all of the things hereinbefore set forth to the same extent as natural persons might or could do. The objects and purposes specified in the foregoing clauses shall, except where otherwise expressed, be in nowise limited or restricted by reference to, or inference from, the terms of any other clause in this certificate of incorporation, but the objects and purposes specified in each of the foregoing clauses of this article shall be regarded as independent objects and purposes. FOURTH. The total number of shares of stock which the corporation shall have authority to issue is one thousand -3- 7 (1,000) and all of such shares shall be without par value. All such shares are of one class, and the holders thereof shall have no pre-emptive rights of subscription in the event the corporation issues additional equity shares. FIFTH. The minimum amount of capital with which the corporation will commence business is One Thousand Dollars ($1,000). SIXTH. The names and places of residence of the incorporators are as follows: NAMES RESIDENCES ----- ---------- S. H. Livesay Wilmington, Delaware J. F. Cook Wilmington, Delaware A. D. Grier Wilmington, Delaware SEVENTH. The corporation is to have perpetual existence. EIGHTH. The private property of the stockholders of the corporation shall not be subject to the payment of corporate debts to any extent whatever. NINTH. In furtherance and not in limitation of the powers conferred by law, the board of directors of the corporation is expressly authorized: To make, alter or repeal the by-laws of the corporation. To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created. By resolution passed by a majority of the whole board, to designate one or more committees, each committee to consist of two or more of the directors of the corporation, which committees, to the extent provided in the resolution or in the by-laws of the corporation, shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. Such committees shall have such name or names -4- 8 as may be stated in the by-laws of the corporation or as may be determined from time to time by resolution adopted by the board of directors. When and as authorized by the affirmative vote of the holders of a majority of each class of stock issued and outstanding having voting power given at a stockholders' meeting duly called for that purpose, or when authorized by the written consent of the holders of a majority of each class of voting stock issued and outstanding, to sell, lease or exchange all of the property and assets of the corporation, including its good will and its corporate franchises, upon such terms and conditions and for such consideration, which may be in whole or in part shares of stock in, and/or other securities of, any other corporation or corporations, as its board of directors shall deem expedient and for the best interests of the corporation. TENTH. Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. ELEVENTH. Meetings of stockholders may be held outside the State of Delaware, if the by-laws so provide. The books of the corporation may be kept (subject to any applicable provision of law) outside the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the by-laws of the corporation. Elections of directors need not be by ballot unless the by-laws of the corporation shall so provide. -5- 9 TWELFTH. The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, by the affirmative vote of the holders of at least a majority of each class of stock issued and outstanding in the manner now or hereafter prescribed by law, and all rights conferred upon stockholders herein are granted subject to this reservation. IN WITNESS WHEREOF, we, the undersigned, being all of the incorporators hereinabove named, have hereunto set our hands and seals this 17th day of July, A. D. 1964. /s/ S. H. Livesay (L.S.) -------------------------------- /s/ J. F. Cook (L.S.) -------------------------------- /s/ A. D. Grier (L.S.) -------------------------------- -6- 10 STATE OF DELAWARE ) ) SS. ) COUNTY OF NEW CASTLE ) BE IT REMEMBERED that on this 17th day of July, A.D. 1964, personally came before me, a Notary Public in and for the State of Delaware, S. H. Livesay, J. F. Cook, and A. D. Grier all of the parties to the foregoing certificate of incorporation, known to me personally to be such, and they did severally acknowledge the said certificate to be the act and deed of the signers, respectively, and that the facts therein stated are truly set forth. GIVEN under my hand and seal of office the day and year aforesaid. /s/ [ILLEGIBLE] ------------------------- Notary Public [NOTARY PUBLIC SEAL] 11 Page 1 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE I MICHAEL RATCHFORD, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT BEFORE PAYMENT FOR STOCK OF "AVCO DELTA FINANCIAL CORPORATION" FILED IN THIS OFFICE ON THE TWENTIETH DAY OF AUGUST, A.D. 1964, AT 2:30 O'CLOCK P.M. * * * * * * * * * * /s/ MICHAEL RATCHFORD -------------------------------------- Michael Ratchford, Secretary of State [SECRETARY OF STATE SEAL] AUTHENTICATION: *3693514 DATE: 12/10/1992 923455205 12 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION BEFORE PAYMENT OF CAPITAL OF AVCO DELTA FINANCIAL CORPORATION * * * * We, the undersigned, being all of the incorporators of AVCO DELTA FINANCIAL CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DO HEREBY CERTIFY: FIRST: That the first Article of the certificate of incorporation be and it hereby is amended to read as follows: FIRST. The name of the corporation is AVCO DELTA CORPORATION SECOND: That no part of the capital of said corporation has been paid. IN WITNESS WHEREOF, we have signed this certificate this 17th day of August, 1964. /s/ S. H. Livesay ------------------------------ S. H. Livesay /s/ J. F. COOK ------------------------------ J. F. Cook /s/ A. D. GRIER ------------------------------ A. D. Grier 13 STATE OF DELAWARE ) ) SS: COUNTY OF NEW CASTLE ) BE IT REMEMBERED that on this 17th day of August, 1964, personally came before me, a Notary Public for the State of Delaware, S. H. LIVESAY, J.F. COOK and A. D. GRIER, all of the incorporators of the foregoing corporation, known to me personally to be such and severally acknowledged the said amended certificate to be the act and deed of the signers respectively, and that the facts therein stated are truly set forth. GIVEN under my hand and seal of office the day and year aforesaid. /s/ [ILLEGIBLE] ------------------------------ Notary Public [SEAL] 14 STATE OF DELAWARE PAGE 1 OFFICE OF THE SECRETARY OF STATE ________________________________ I, MICHAEL RATCHFORD, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "AVCO DELTA CORPORATION" FILED IN THIS OFFICE ON THE TWENTY-FIRST DAY OF APRIL, A.D. 1971, AT 1 O'CLOCK P.M. * * * * * * * * * * /s/ MICHAEL RATCHFORD [SEAL] ---------------------------------------- Michael Ratchford, Secretary of State AUTHENTICATION: *3693513 923455205 DATE: 12/10/1992 15 CERTIFICATE OF AMENDMENT of the CERTIFICATE OF INCORPORATION of AVCO DELTA CORPORATION AVCO DELTA CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: A. An amendment to the Certificate of Incorporation of the Corporation has, in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware, been duly proposed and declared to be advisable by the Board of Directors of the Corporation in a duly adopted resolution of said Board setting forth the amendment proposed and the stockholders of the Corporation entitled to vote in respect thereof have given their unanimous written consent to said amendment in accordance with the provisions of Section 228 of said General Corporation Law, amending the Certificate of Incorporation of the Corporation in its entirety so that said Certificate as so amended shall read as follows: FIRST: The name of the corporation (hereinafter referred to as the Corporation) is AVCO DELTA CORPORATION SECOND: The Corporation's registered office in the State of Delaware is located at 100 West Tenth Street, in the City of Wilmington, County of New Castle. The name and address of its registered agent at such address is The Corporation Trust Company, 100 West Tenth Street, Wilmington, Delaware. THIRD: The nature of the business, or objects or purposes to be transacted, promoted or carried on by the Corporation are: (a) To engage in the business of loaning money with or without security and in any amount deemed advisable, for the purpose of earning interest on said loans, or otherwise, and to engage in the business of negotiating, guaranteeing, or endorsing loans in any amount with or without security for the purpose of charging fees therefor, or otherwise. (b) To engage in any other lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. 16 2 FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is One million five hundred thousand (1,500,000). Of said shares, Five hundred thousand (500,000) shall be of a class designated as Preferred Stock without par value and One million (1,000,000) shares shall be of a class designated as Common Stock with a par value of One Dollar ($1) each. The description of the Preferred Stock and Common Stock, and the voting powers, designations, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof are as hereinafter in this Article FOURTH set forth: DIVISION A -- THE PREFERRED STOCK 1. Series and Variations Between Series: The Preferred Stock may be issued from time to time in series as may from time to time be determined by resolution or resolutions of the Board of Directors of this Corporation and the Board of Directors is hereby expressly vested with authority to provide by resolution or resolutions for the issue of the Preferred Stock in series with variations between series and with such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as shall be stated and expressed in such resolution or resolutions, including (but without limitation) one or more of the following particulars: (a) The designation of such series, which may be distinguishing number, letter or title: (b) The rate (to be expressed in terms of dollars) at which dividends are to be payable and to accrue in respect of the shares of such series, hereinafter referred to as the "fixed dividend rate"; (c) The amount (to be expressed in terms of dollars) payable in respect of the shares of such series, in addition to dividends accrued or in arrears, upon a voluntary liquidation, dissolution, winding up or reduction of capital of this Corporation, which amount in respect of any series may, but need not, vary according to the time or circumstances of such action, the amount or amounts so fixed as of any given time or for any given period being hereinafter sometimes referred to as the "fixed voluntary liquidation amount"; (d) The amount (to be expressed in terms of dollars) payable in respect of the shares of such series, in addition to dividends accrued 17 3 or in arrears, upon an involuntary liquidation, dissolution, winding up or reduction of capital of this Corporation, the amount so fixed being hereinafter sometimes referred to as the "fixed involuntary liquidation amount"; (e) The amount, if any (to be expressed in terms of dollars), payable in respect of the shares of such series, in addition to dividends accrued or in arrears, in case of the redemption thereof, which amount in respect of any series may, but need not, vary according to the time or circumstances of such action, the amount or amounts so fixed as of any given time or for any given period being hereinafter sometimes referred to as the "fixed voluntary redemption price"; (f) The right, if any, of the holders of shares of such series to convert the same into or exchange the same for shares of Common Stock of the Corporation, and the terms and conditions of such conversion or exchange; (g) The provisions, if any, for a sinking or purchase fund (including any fund or requirement for the periodic retirement of shares) with respect to the shares of such series; Provided, however, that such variations shall not be inconsistent with the provisions of this Article FOURTH applicable to all series of the Preferred Stock or with the laws of Delaware. If and whenever from time to time the Board of Directors shall determine to issue Preferred Stock of any series, it shall, prior to the issuance of any shares of each such series, by resolution or resolutions fix the terms of such series and shall cause the same to be set forth or summarized in the certificates therefor and to be set forth in such additional certificate or certificates, if any, as shall at the time be required by law. 2. Dividends: The holders of the Preferred Stock of each series shall be entitled to receive, out of any funds of the Corporation lawfully available for dividends under the laws of the State of Delaware, if, when, and as declared by the Board of Directors in its discretion, preferential cumulative dividends in cash at the fixed dividend rate for such series and no more, payable quarterly as herinafter provided, before any dividends shall be declared or paid upon, or set apart for, or other distribution shall be ordered or made in respect of the Common Stock. Such dividends on the Preferred Stock shall be payable on the tenth day of January, April, July and October in each year (the periods between 18 4 such dates, commencing on such dates, being hereby designated as "dividend periods"). Dividends on all shares of each series shall be cumulative from the first day of the dividend period in which the first shares of such series shall have been originally issued, so that, if full cumulative dividends on all the outstanding Preferred Stock at the rate or rates aforesaid for all past dividend periods and also full cumulative dividends on such stock for the then current dividend period shall not have been paid thereon or declared and a sum sufficient for the payment thereof set apart, the amount of the deficiency (but without interest thereon) shall be fully paid or dividends upon the Preferred Stock in such amount shall be declared and a sum sufficient for the payment thereof set apart before any dividends shall be declared or paid upon, or set apart for, or any other distribution shall be ordered or made in respect of the Common Stock and before any sums shall be paid or set apart for the redemption of less than all of the Preferred Stock then outstanding or for the purchase or retirement of any of the Preferred Stock or the Common Stock. In the event of the issue of additional shares of the Preferred Stock of any series subsequent to the date of the issue of the first shares of such series, all dividends paid on the Preferred Stock of such series prior to the issue of such additional shares and all dividends payable to the holders of record of Preferred Stock of such series of a date prior to such issue shall be deemed to have been paid in respect of the additional shares so issued. Any dividends paid upon the Preferred Stock in an amount less than full cumulative dividends accrued or in arrears upon all Preferred Stock outstanding shall, if more than one series be outstanding, be divided between the different series in proportion to the aggregate amounts which would be distributable to the Preferred Stock of each series if full cumulative dividends were declared and paid thereon. 3. Liquidation Rights and Preferences: In the event of any liquidation, dissolution or winding up of the Corporation, or any reduction of its capital resulting in any distribution of its assets to its stockholders, the holders of each series of Preferred Stock shall be entitled to receive, for each share thereof, out of the assets of the Corporation whether from capital, surplus or earnings, available for distribution to its stockholders an amount equal to the fixed involuntary liquidation amount applicable to each share of such series if such liquidation, dissolution, winding up or reduction of capital shall have been involuntary, and equal to the then current fixed voluntary liquidation amount applicable to each share of such series if such liquida- 19 5 tion, dissolution, winding up or reduction of capital shall have been voluntary, together in each case with an amount equal to all dividends accrued or in arrears thereon, whether or not earned, before any distribution of assets of the Corporation shall be made to the holders of the Common Stock; but the holders of the Preferred Stock shall be entitled to no further participation in such distribution. If, upon any such liquidation, dissolution, winding up or reduction of capital, the assets of the Corporation, distributable as aforesaid among the holders of the Preferred Stock, shall be insufficient to permit of the payment to them of the full preferential amounts aforesaid, then the entire assets of the Corporation available for distribution to stockholders shall be distributed ratably among the holders of the Preferred Stock in proportion to the full preferential amounts to which they are respectively entitled. As used herein, the expression "dividends accrued or in arrears" means, in respect of each share of the Preferred Stock, an amount equal to the fixed dividend rate per annum for such share (without interest thereon), from the date from which cumulative dividends commenced to accrue in respect to such share to the date as of which the computation is to be made, less the aggregate amount (without interest) of all dividends theretofore paid (or deemed to have been paid) thereon, or declared and set aside for payment in respect thereof. A consolidation or merger of the Corporation with any other corporation or corporations shall not be regarded as a liquidation, dissolution or winding up of the Corporation within the meaning of this Paragraph 3, unless such consolidation or merger shall substantially impair the rights and preferences of the Preferred Stock in which event it shall be considered as a voluntary liquidation; nor shall any purchase or redemption of Preferred Stock or the purchase of Common Stock in any manner herein authorized or permitted be considered as a reduction of capital within the meaning of this Paragraph 3. 4. Redemption and Purchase of Preferred Stock: The Corporation may, at its option, expressed by resolution of its Board of Directors, or for the purposes of the sinking or purchase fund for any series, at any time or from time to time redeem the whole or any part of the Preferred Stock, or the whole or any part of any series thereof, at a price for each share so to be redeemed equal to the sum of the then current fixed voluntary redemption price applicable to such share if such redemption be voluntary at the option of the Corporation, or, in the case of any redemption for the purposes of any sinking or purchase fund, at the then applicable sinking or purchase fund redemp- 20 6 tion price as provided in the resolution or resolutions of the Board of Directors providing for a sinking or purchase fund for such series of the Preferred Stock, plus, in any case, all dividends accrued or in arrears thereon, whether or not earned. Notice of the intention of the Corporation to redeem shares of the Preferred Stock and of the date and place of redemption shall be given by the Corporation by mailing a copy of such notice at least forty-five (45) days prior to the date fixed for such redemption to the holders of record of the Preferred Stock to be redeemed at their respective addresses appearing on the books of the Corporation. If less than all shares of any series of the Preferred Stock is to be redeemed as herein provided, the redemption shall be made in such amount, at such place, by such method, either by lot or pro rata, and subject to such provisions of convenience as shall, from time to time, be provided by the By-laws of the Corporation or be determined by resolution of the Board of Directors. From and after the date fixed in any such notice as the date of redemption, unless default shall be made by the Corporation in providing moneys at the time and place specified for the payment of the redemption price pursuant to said notice, all dividends on the shares of Preferred Stock thereby called for redemption shall cease to accrue; and, from and after the date so fixed (unless default be made as aforesaid) or from and after the date of the earlier deposit by the Corporation in a special account with a solvent bank or trust company of funds sufficient for such redemption (a statement of the intention so to deposit having been included in said notice), all rights of the holders of said shares of Preferred Stock so called for redemption as stockholders of the Corporation, except only (a) the right to receive the redemption price, or (b) if such shares shall be convertible into Common Stock, the right to convert such shares into shares of Common Stock prior to the close of business on the date fixed for such redemption, shall cease and determine, and such shares shall be deemed no longer to be outstanding. Any moneys so deposited for the purpose of said redemption and not required therefor because of the conversion of the shares of Preferred Stock for the redemption of which said moneys were deposited, shall forthwith, upon demand by the Corporation after the redemption date, be paid by the depositary to the Corporation, and any other moneys deposited for such redemption which shall remain unclaimed by the holders of such Preferred Stock at the end of six (6) years after the redemption date, shall, at the conclusion of such six-year period, be paid by the depositary to the 21 7 Corporation, in either case together with any interest thereon that shall have been allowed by the bank or trust company with which the deposit shall have been made. No redemption of Preferred Stock, as herein provided, shall be made or ordered unless full cumulative dividends at the applicable fixed dividend rate or rates hereinabove specified, upon all Preferred Stock then outstanding which is not to be redeemed from the date upon which dividends thereon became cumulative to the end of the then current dividend period shall have been paid (or deemed to have been paid) or declared and a sum sufficient for the payment thereof set apart. So long as (a) all cumulative dividends on the Preferred Stock are paid or declared and set apart for payment for all past dividend periods, and the dividend is either paid or declared and set apart for payment for the current dividend period, (b) all funds at the time required to be paid or set apart for the sinking or purchase funds, if any, provided by resolution or resolutions of the Board of Directors for any series of Preferred Stock have been paid or set apart, and (c) the Corporation shall not be otherwise in default as provided in this Article Fourth, then, and in such events, the Corporation shall have the right at any time, or from time to time, to purchase out of funds legally available for such purpose, Preferred Stock, either at public or private sale, at not exceeding the then current fixed voluntary redemption price applicable to such shares, plus accrued dividends and plus an amount equal to the usual and customary brokerage commissions payable in connection with the purchase thereof: provided, however, that the foregoing restrictions shall not be applicable to prevent the Corporation from utilizing any funds then set apart for any sinking or purchase fund for the purchase of Preferred Stock; and provided, further, that, so long as any shares of Preferred Stock remain outstanding, the Corporation shall not purchase or retire any shares of Common Stock or any shares of any class of stock, whether now or hereafter authorized, ranking in payment of dividends or distribution of assets subordinate to the Preferred Stock unless required by law in connection with corporate action, except as authorized or permitted by the provisions of Paragraph 1 of Division B hereof. Shares of Preferred Stock redeemed or purchased, or otherwise acquired by the Corporation, may be cancelled and retired or shall retain the status of authorized shares. 5. Voting Rights and Restrictions on Certain Corporate Action: Except as hereinafter in this Paragraph 5 expressly provided, the 22 8 holders of the Preferred Stock shall, together with the holders of the Common Stock (neither class voting as a class), possess full voting rights for the election of directors and for all other purposes, and for such purposes the holders of the Preferred Stock shall, subject to the provisions of the By-laws of the Corporation and of the statutes of the State of Delaware relating to the fixing of the record date, be entitled to one vote for each share held by them respectively. Anything hereinbefore to the contrary notwithstanding, in case at any time the Corporation shall fail to declare and pay or declare and set apart for payment in full any quarter yearly dividend on any shares of Preferred Stock and shall not, on or before the fourth succeeding quarter yearly dividend payment date, have paid or declared and set apart for payment in full such dividend, and also all subsequently accruing dividends on all the outstanding Preferred Stock, then the holders of the Preferred Stock shall, thereupon, have the right, voting as one class to the exclusion of the holders of the Common Stock, by plurality vote, to elect such number of directors of the Corporation as shall constitute one-third of the entire number of directors the Corporation is then authorized to have (any fraction less than one-half to be disregarded and any fraction of one-half or more to be considered as one), and such right shall continue (and may be exercised at any annual or other meeting of stockholders for the election of Directors) until all accrued dividends on the Preferred Stock shall have been paid or declared and set apart for payment; and, during the continuance of such right of the Preferred stockholders, the holders of the Common Stock, voting as another class to the exclusion of the Preferred stockholders, shall have the right, by plurality vote, to elect the remaining members of the Board of Directors. The term of office of all persons who may be Directors of the Corporation at any time when such rights shall accrue to the holders of the Preferred Stock shall terminate upon the election (followed by qualification) of their successors at a special meeting of the stockholders of the Corporation which shall be held, at any time after the accrual of such right, upon the notice provided in the By-laws of the Corporation for the annual meeting of the stockholders, at the request in writing of the holders of record of at least five per cent. (5%) of the number of shares of Preferred Stock then outstanding. In default of the calling of said meeting by a proper officer of the Corporation, within thirty (30) days after the making of such request, such meeting may be called on like notice by the holders of record of at least five per cent. (5%) of the Preferred Stock, for which pur- 23 pose such Preferred stockholders shall have the right to have access to the stock books of the Corporation. If such special meeting be not called prior to the next annual meeting, the Preferred stockholders, voting as one class to the exclusion of the holders of the Common Stock shall be entitled to elect at such annual meeting a number of the Directors of the Corporation as above provided, and the Common stockholders, as a second class, shall be entitled to elect the remaining Directors at such annual meeting unless previous thereto all such dividend defaults shall have been cured. Upon the termination at any time of such right of the Preferred stockholders to elect Directors, the term of office of all Directors then in office shall end upon the election (followed by qualification) of their successors by the Preferred stockholders and the Common stockholders, voting together but not by classes, which election may be held on like notice at a special meeting of the stockholders called at the request in writing of the holders of record of at least five per cent. (5%) of the number of shares of the Corporation then outstanding or, if such special meeting is not called prior to the next annual meeting, at such next annual meeting; and such special meeting may be called by the holders of record of at least five per cent. (5%) of the outstanding shares, if not called promptly by a proper officer of the Corporation upon such request, for which purpose such holders shall have access to the stock books of the Corporation. In addition to any other approvals or consents herein required, or required by the laws of the State of Delaware, the Corporation shall not without the consent of the holders of record of at least two-thirds of the shares of Preferred Stock of the Corporation at the time outstanding, given either by their affirmative vote as a separate class at a meeting called for that purpose or in writing without a meeting, (a) authorize any stock or class of stock or obligation or security convertible into stock having priority or preference over, or ranking on a parity with the Preferred Stock as to dividends or assets, or authorize any additional Preferred Stock; or (b) amend the provisions hereof or of any resolution or resolutions adopted by the Board of Directors pursuant to the provisions of Paragraph 1 of this Division A so as to affect adversely any of the preferences or other rights given to the Preferred Stock; provided, however, that if any such amendment would affect adversely one or more, but not all series of Preferred Stock at the time outstanding, the consent of the holders of record of at 24 least two-thirds of the shares of each such series so affected, similarly given, each voting as a separate series, shall be required in lieu of the consent of the holders of record of two-thirds of the shares of Preferred Stock voting as a class; or (c) issue any shares of Preferred Stock, provided that no such consent for the issue of shares of the Preferred Stock either of any outstanding series or of any new series shall be required if, (i) prior to the issue thereof and prior to the adoption of the resolution of the Board of Directors authorizing each such additional issue of Preferred Stock, the President or Treasurer of the Corporation shall have certified to said Board, and each such resolution shall declare it to be the opinion of the Board of Directors, that the consolidated net earnings of the Corporation (as hereinafter defined) for a period of twelve (12) consecutive calendar months out of the fifteen (15) consecutive calendar months immediately preceding the month in which the issuance of additional shares of Preferred Stock is authorized, shall have been equal to at least three (3) times the annual dividend requirements on all shares of Preferred Stock then outstanding, and on any shares of any class of stock having preference or priority over or ranking on a parity with the Preferred Stock as to dividends and/or assets, and on the shares of Preferred Stock proposed to be issued; (ii) immediately after the issue thereof the net worth of the Corporation (as hereinafter defined) shall be in excess of 200% of the fixed involuntary liquidating amount of each share of Preferred Stock then outstanding and of each share of any class of stock having preference or priority over or ranking on a parity with the Preferred Stock as to dividends or assets and of each share of Preferred Stock proposed to be issued; (iii) immediately after the issue thereof the consolidated net current assets of the Corporation (as hereinafter defined) shall be in excess of 150% of the fixed involuntary liquidating amount of each share of Preferred Stock then outstanding and of each share of any class of stock having preference or priority over or ranking on a parity with the Preferred Stock as to dividends or assets and of each share of Preferred Stock proposed to be issued; and (iv) full cumulative dividends for all past dividend periods and the then current dividend period on the Preferred Stock shall have been paid or declared and set apart for payment; or (d) merge or consolidate with any other corporation or sell, lease or transfer or otherwise dispose of all or substantially all of its assets if such transaction would affect adversely any of the 25 11 preferences or other rights of the Preferred Stock or the holders thereof, except that the Corporation may merge or consolidate, or sell or dispose of all or substantially all of its assets, provided that (i) the Corporation shall be the continuing or surviving corporation or the successor or acquiring corporation shall be organized under the laws of any state of the United States of America, and (ii) the Corporation as the continuing or surviving corporation or the successor or acquiring corporation, as the case may be, shall not, immediately after such merger or consolidation, or such sale or other disposition, be in default under any of the provisions of this Paragraph 5; and (iii) the surviving corporation, in the event of a consolidation or merger, will be a corporation primarily engaged in the finance business. Provided, however, that the exercise by the holders of the Preferred Stock of their right to vote, as a class, upon any of the matters set forth in subparagraphs (a) through (d) above shall not limit their general rights to vote upon such matters, or any of them, together with the holders of the Common Stock, neither class voting as a class. The term "consolidated net earnings of the Corporation", as used herein and in Paragraph 1 of Division B hereof, means the net income of the Corporation and its finance and insurance subsidiaries available for dividends for the period in question, calculated to a date not earlier than the last day of the fourth calendar month preceding the month in which the contemplated action requiring the computation of consolidated net earnings is to be authorized, as shown by a consolidated income statement prepared in accordance with generally accepted accounting principles, duly certified or verified by the President or the Treasurer of the Corporation or by the principal accounting officer of the Corporation or by a firm of independent certified public accountants (who may be the regular accountants of the Corporation) approved by the Board of Directors of the Corporation, and said Board shall be fully ????????? in relying in good faith thereon: provided, however, that, for the purposes of this Paragraph 5 only, each computation of consolidated net earnings may include, in the discretion of the Corporation, the ??????? of operations of ????? or insurance subsidiaries for the period in question applicable to stock of such subsidiaries about to be acquired and which are to be owned by the Corporation at the time of the taking, or as a ??????? of the proposed action in connection with which consolidated not earnings are to be ascertained: and provided, further, that, for the purposes of this Paragraph 5 only, the Corporation shall be entitled to (but need not) include in the total gross income and the total operating expenses of itself or its finance or insurance subsidiaries the results of the operation of any finance or insurance business previously operated by others, notwithstanding that such finance or insur- 26 12 ance business shall have been or is about to be acquired by it or a finance or insurance subsidiary during or subsequent to the period for which consolidated net earnings are being computed, if such property is about to be acquired and is to be owned by the Corporation or a finance or insurance subsidiary at the time of the taking, or as a result, of the proposed action in connection with which consolidated net earnings of the Corporation are to be ascertained, but in any such event the results of such operation for the whole of such period shall be included as nearly as may be possible in the same manner as if such business had been operated during such period by the Corporation or such subsidiary. The term "net worth of the Corporation", as used herein and in Paragraph 1 of Division B hereof, means the aggregate of the consolidated assets of the Corporation and its finance and insurance subsidiaries, exclusive of deferred charges (other than prepaid interest and taxes) and intangibles, including, but not in limitation, good will, trade marks, trade names, patents and all other intangibles, of the Corporation and its subsidiaries, less the aggregate of its and their consolidated liabilities, excluding capital and surplus, all computed in accordance with generally accepted accounting principles as of a date not earlier than the last day of the fourth calendar month preceding the month in which the contemplated action requiring the computation of the net worth of the corporation is to be authorized. The term "consolidated net current assets of the Corporation", as used herein and in Paragraph 1 of Division B hereof, means the net current assets of the Corporation and its finance and insurance subsidiaries as of a date not earlier than the last day of the fourth calendar month preceding the month in which the contemplated action requiring the computation of consolidated net current assets is to be authorized, as determined in accordance with generally accepted accounting principles by deducting from the value of the cash, notes and accounts receivable (less reserves), and marketable securities (taken at cost or market value, whichever is less), all liabilities of the Corporation and its subsidiaries other than capital and surplus. The term "subsidiary or subsidiaries", as used herein and in Paragraph 1 of Division B hereof, means any corporation of which the Corporation owns, either directly or indirectly through one or more subsidiaries, more than 50% of the stock having ordinary voting power for the election of directors; the term "finance subsidiary" shall mean any subsidiary substantially nil of the business of which shall be the acquisition and holding of notes, receivables and other obligations; and the term "insurance subsidiary" shall mean any subsidiary substantially all of the business of which shall be the insuring or reinsuring of life insurance risks, accident and health risks, and multiple line risks, and of acting as agent for the procuring of any such insurance business. 27 13 Division B -- Common Stock 1. Dividend Rights: After full cumulative dividends for all past dividend periods and the then current dividend period on the Preferred Stock shall have been paid or declared and set apart for payment in accordance with Paragraph 2 of Division A above, and after all funds at the time required to be paid or set apart to provide for any purchase or sinking fund or funds which may be prescribed pursuant to subparagraph (g) of Paragraph 1 of Division A above by resolution or resolutions of the Board of Directors with respect to any series of Preferred Stock have been so paid or set apart, dividends may be paid out of any funds lawfully available therefor upon the Common Stock and upon any class of stock ranking as to dividends or assets subordinate to the Preferred Stock if, when and as declared by the Board of Directors in its discretion, and shares of any outstanding class of stock of the Corporation ranking as to dividends or assets subordinate to the Preferred Stock may be purchased, acquired, redeemed or retired by the Corporation; provided that, so long as any shares of Preferred Stock are outstanding, no dividends (other than a dividend payable in stock of any class ranking as to dividends and assets subordinate to the Preferred Stock) shall be paid on any stock other than the Preferred Stock and no expenditure on account of the purchase, acquisition, redemption or other retirement (except in exchange for other shares of stock, by conversion or otherwise, of the Corporation or from the proceeds of the issue and sale of shares of any class of stock ranking as to dividends and assets subordinate to the Preferred Stock) of any outstanding stock of the Corporation, other than the Preferred Stock, shall be made (a) if the aggregate amount of payments for all dividends on and expenditures for the purchase, acquisition, redemption, or retirement of any class of stock ranking subordinate to the Preferred Stock as to dividends or assets (including the payment or expenditure then to be made but excluding dividends paid in stock ranking subordinate to the Preferred Stock in both the foregoing respects and after deducting from such expenditures any amounts received by the Corporation from the issue and sale of any class of stock ranking subordinate to the Preferred Stock as to dividends and assets) made subsequent to November 30, 1964, shall exceed the consolidated net earnings of the Corporation from and after November 30, 1964, after deducting therefrom all dividends on the Preferred Stock and all dividends on any class of stock having preference or priority over or ranking on a parity with the Preferred Stock either as to dividends or assets. 28 14 (b) if the payment of such dividend or the making of such expenditures shall or would thereby decrease the consolidated net current assets of the Corporation below an amount equal to 150% of the fixed involuntary liquidating amount of each share of Preferred Stock then outstanding and of each share of any class of stock having preference or priority or ranking on a parity with Preferred Stock as to dividends and assets and then outstanding; (c) if the payment of such dividend or the making of such expenditures shall or would thereby decrease the net worth of the Corporation below an amount equal to 200% of the fixed involuntary liquidating amount of each share of Preferred Stock then outstanding and of each share of any class of stock having preference or priority over or ranking on a parity with Preferred Stock as to dividends and assets and then outstanding; and (d) if the payment of such dividend or the making of such expenditures shall or would decrease the earned surplus of the Corporation, computed in accordance with generally accepted accounting principles, to an amount less than one year's dividend requirements on all outstanding shares of Preferred Stock and on all shares of each class of stock having preference or priority over or ranking on a parity with the Preferred Stock as to dividends or assets and then outstanding. Earned surplus accumulated prior to November 30, 1964, out of which dividends may not be paid pursuant to subparagraph (a) of this Paragraph 1, may be included in calculating the earned surplus of the Corporation for the purposes of this subparagraph (d). For the purposes of the foregoing proviso, the terms (i) "consolidated net earnings of the Corporation", (ii) "consolidated net current assets of the Corporation", (iii) "net worth of the Corporation" and (iv) "subsidiary or subsidiaries" shall have the same meanings as provided in Paragraph 5 of Division A. 2. Distribution of Assets: In the event of any liquidation, dissolution or winding up of the Corporation, or any reduction of its capital, resulting in a distribution of its assets to its stockholders, whether voluntary or involuntary, after there shall have been paid or set apart for the holders of the Preferred Stock the full preferential amounts to which they are entitled under the provisions of Paragraph 3 of Division A above, the holders of the Common Stock shall be entitled to receive as a class, pro rata, the remaining assets of the Corporation available for distribution to its stockholders. 29 15 3. Voting Power: Except as provided in Paragraph 5 of Division A above or as required by the laws of the State of Delaware, the holders of the Common Stock shall, together with the holders of the Preferred Stock (neither class voting as a class), possess full voting power for the election of directors and all other purposes, and the holders of the Common Stock shall, subject to the provisions of the By-laws of the Corporation and of the laws of the State of Delaware relating to the fixing of the record date, be entitled to one (1) vote for each share held by them, respectively, for all purposes. FIFTH: The minimum amount of capital with which the Corporation will commence business is One Thousand Dollars ($1,000.00). SIXTH: The names and places of residence of the incorporators are as follows: Names Residences ----- ---------- S. H. Livesay Wilmington, Delaware J. F. Cook Wilmington, Delaware A. D. Grier Wilmington, Delaware SEVENTH: The Corporation is to have perpetual existence. EIGHTH: In furtherance and not in limitation of the powers conferred by law, the Board of Directors of the Corporation is expressly authorized to make, alter, amend or repeal the By-laws of the Corporation. NINTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute and all rights conferred upon stockholders herein are granted subject to this reservation. B. Said amendment was duly adopted in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware. 30 16 C. The capital of the Corporation will not be reduced under or by reason of said amendment. IN WITNESS WHEREOF, said AVCO DELTA CORPORATION has caused its corporate seal to be affixed and this certificate to be signed by A. E. Weidman, its Chairman of the Board of Directors, and Philip J. Cullen, its Secretary, this 14th day of April, 1971. AVCO DELTA CORPORATION AVCO DELTA CORPORATION By /s/ A. E. WEIDMAN INCORPORATED ----------------------------- JULY 17, 1964 A. E. Weidman, Chairman CORPORATE SEAL of the Board of Directors Attest: By /s/ PHILIP J. CULLEN ------------------------------- Philip J. Cullen, Secretary 31 17 STATE OF CALIFORNIA ) ) SS.: COUNTY OF ORANGE ) BE IT REMEMBERED, that on this 14th day of April, A.D. 1971, personally came before me, Earline Loop, a Notary Public, A. E. Weidman, Chairman of the Board of Directors of Avco Delta Corporation, a corporation of the State of Delaware, the corporation described in and which executed the foregoing certificate, known to me personally to be such, and he, the said A. E. Weidman, as such Chairman, duly executed said certificate before me and acknowledged the said certificate to be his act and deed and the act and deed of said corporation; that the signatures of the said Chairman and of the Secretary of said corporation to the said foregoing certificate are in the handwriting of the said Chairman and Secretary of said corporation, respectively; that the seal affixed to said certificate is the common or corporation seal of said corporation; and that the facts stated therein are true. IN WITNESS WHEREOF, I have hereunto set my hand and seal of office the day and year aforesaid. /s/ EARLINE M. LOOP --------------------------------- Notary Public My Commission Expires [OFFICIAL SEAL EARLINE M. LOOP NOTARY PUBLIC, CALIFORNIA PRINCIPAL OFFICE IN LOS ANGELES COUNTY My Commission Expires July 28, 1974] 32 PAGE 1 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE -------------------------------- I, MICHAEL RATCHFORD, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AGREEMENT OF MERGER (DELAWARE CORPORATIONS) OF "AVCO DELTA FINANCIAL CORPORATION" FILED IN THIS OFFICE ON THE FIFTH DAY OF MAY, A.D. 1971, AT 8:30 O'CLOCK A.M. * * * * * * * * * * /s/ MICHAEL RATCHFORD ------------------------------------- [LOGO] Michael Ratchford, Secretary of State AUTHENTICATION: *3693508 923455205 DATE: 12/10/1992 33 AGREEMENT AND LIQUIDATION AND MERGER AGREEMENT OF LIQUIDATION AND MERGER, dated this 30th day of April, 1971, between AVCO AND DELTA CORPORATION ("Delta"), a Delaware corporation, AVCO FINANCIAL SERVICES, INC. ("AFS"), a Delaware corporation, and AVCO CORPORATION ("Avco"), a Delaware corporation; W I T N E S S E T H T H A T: WHEREAS Avco acquired more than 90% of the outstanding shares of common and preferred stock of AFS in a taxable transaction which became effective on January 21, 1969 and has since acquired the remaining outstanding common shares of AFS; WHEREAS Avco wishes to acquire all of the assets of AFS in accordance with the provisions of Section 334(b)(2) of the Internal Revenue Code of 1954; WHEREAS AFS adopted a plan of liquidation on January 15, 1971 whereby its assets will be transferred either to Avco or to such of its subsidiaries or affiliates as Avco may direct, in complete cancellation of all of the outstanding common stock of AFS; WHEREAS Avco has heretofore directed that all assets of AFS to be received by it pursuant to the foregoing plan of liquidation, in complete cancellation of all of the outstanding common stock of AFS, be transferred to Delta, its wholly-owned subsidiary, and Delta has agreed to accept such assets; WHEREAS the respective Boards of Directors of Avco, Delta and AFS have agreed that the method to be used to accomplish the transfer of assets pursuant to the foregoing plan of liquidation shall be a satisfactory merger of AFS into Delta pursuant to the terms hereof; 1 34 WHEREAS both Delta and AFS have 500,000 shares of common stock which are issued and outstanding; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. AFS will be merged into Delta in accordance with the provisions of Section 251 of the General Corporation Law of Delaware, with Delta being the surviving corporation (the "Surviving Corporation"). 2. The Certificate of Incorporation of Delta, as in effect immediately prior to the merger, shall remain and continue to be the Certificate of Incorporation of the Surviving Corporation, except that Article First thereof shall be amended as of the effective date of the merger (the "Effective Date") to read as follows: "First: The name of the Corporation (hereinafter referred to as the Corporation) is AVCO FINANCIAL SERVICES, INC." 3. The By-laws of Delta, as in effect immediately prior to the merger, shall remain and continue to be the By-laws of the Surviving Corporation, and Delta's present directors and officers shall continue to be the directors and officers of the Surviving Corporation. 4. On the Effective Date, (a) Each outstanding share of common stock of AFS shall be cancelled. (b) Each outstanding share of each class and series of preferred stock of AFS shall be changed and automatically converted into one preferred share of the same class and series of the Surviving Corporation, having the identical rights and preferences. (c) Each outstanding share of common stock of Delta shall be unaffected by the merger and the same shall continue and remain outstanding as common shares of the Surviving Corporation. -2- 35 5. The Effective Date of the merger shall be the date this Agreement is filed with the Secretary of State of the State of Delaware pursuant to Section 103 of the Delaware General Corporation Law. 6. This Agreement embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof, and shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of such parties. 7. This Agreement may be executed in several counterparts, each of which shall be an original but all of which together shall continue one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed in their respective corporate names by their respective duly authorized officers and their respective corporate seals to be affixed hereto, all as of the date and year first above written. [SEAL] AVCO Attest: By ------------------------------------ President - ------------------------------ Secretary AVCO DELTA CORPORATION Attest: By ------------------------------------ President - ------------------------------ Assistant Secretary [SEAL] AVCO FINANCIAL SERVICES, INC. Attest: By ------------------------------------ President - ------------------------------ Secretary 36 I, WILLIAM D. GAILLARD, Assistant Secretary of Avco Delta Corporation, a corporation organized and existing under the laws of the State of Delaware, hereby certify, as such assistant secretary and under the seal of the said corporation, that the Agreement to which this certificate is attached, after having been first duly signed on behalf of the said corporation and having been signed on behalf of Avco Financial Services, Inc., a corporation of the State of Delaware, was duly adopted pursuant to section 228 of Title 8 of the Delaware Code of 1953 by the unanimous written consent of the stockholders holding all of the issued and outstanding shares of capital stock of the corporation having voting power, and said Agreement was thereby adopted as the act of the stockholders of said Avco Delta Corporation and is the duly adopted agreement and act of the said corporation. WITNESS my hand and the seal of said Avco Delta Corporation on this 30th day of April, 1971. [Corporate Seal] /s/ WILLIAM D. GAILLARD ------------------------------------ Assistant Secretary 37 I, PHILIP J. CULLEN, Secretary of Avco Financial Services, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certify, as such secretary and under the seal of the said corporation, that the Agreement to which this certificate is attached, after having been first duly signed on behalf of the said corporation and having been signed on behalf of Avco Delta Corporation, a corporation of the State of Delaware, was duly adopted pursuant to section 228 of Title 8 of the Delaware Code of 1953 by the written consent of the stockholders holding in excess of 90% of the issued and outstanding shares of the capital stock of the corporation having voting power, and written notice of adoption of the Agreement was given as provided in section 228 of Title 8 of the Delaware Code of 1953 to every stockholder entitled to such notice, and said Agreement was thereby adopted as the act of the stockholders of said Avco Financial Services, Inc. and is the duly adopted agreement and act of the said corporation. WITNESS my hand and the seal of said Avco Financial Services, Inc. on this 30th day of April, 1971. [Corporate Seal] /s/ PHILIP J. CULLEN ------------------------------------ Secretary 38 THE ABOVE AGREEMENT, having been executed on behalf of each corporate party thereto, and having been adopted separately by each corporate party to the merger described therein, in accordance with the provisions of the General Corporation Law of the State of Delaware, and that fact having been certified on said Agreement by the Secretary or Assistant Secretary of each corporate party to the merger, the President or Chairman of the Board of Directors or each corporate party to the merger does now hereby execute the said Agreement and the Secretary or Assistant Secretary of each corporate party thereto does now hereby attest the said Agreement under the corporate seals of their respective corporations, as the respective act, deed and agreement of each of said corporations, on this 30th day of April, 1971. AVCO DELTA CORPORATION [Corporate Seal] By [SIG] ---------------------------------- President Attest: [SIG] - -------------------------------- Assistant Secretary AVCO FINANCIAL SERVICES, INC. [Corporate Seal] By [SIG] ---------------------------------- Chairman Attest: [SIG] - -------------------------------- Secretary 39 STATE OF CALIFORNIA ) ) ss: COUNTY OF ORANGE ) BE IT REMEMBERED that on this 30th day of April, 1971, personally came before me, a Notary Public in and for the County and State aforesaid, H. W. MERRYMAN, President of Avco Delta Corporation, a corporation of the State of Delaware, and he duly executed said Agreement before me and acknowledged the said Agreement to be his act and deed and the act and deed of said corporation and the facts stated therein are true; and that the seal affixed to said Agreement and attested by the Assistant Secretary of said corporation is the common or corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal of office the day and year aforesaid. /s/ CARMEN ARREDONDO (Seal) -------------------------------- Notary Public 40 STATE OF CALIFORNIA ) ) ss: COUNTY OF ORANGE ) BE IT REMEMBERED that on this 30th day of April, 1971, personally came before me, a Notary Public in and for the County and State aforesaid, A. A. WEIDMAN, Chairman of the Board of Directors of Avco Financial Services, Inc., a corporation of the State of Delaware, and he duly executed said Agreement before me and acknowledged the said Agreement to be his act and deed and the act and deed of said corporation and the facts stated therein are true; and that the seal affixed to said Agreement and attested by the Assistant Secretary of said corporation is the common or corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal of office the day and year aforesaid. /s/ CARMEN ARREDONDO (Seal) -------------------------------- Notary Public 41 BOOK Y113 PAGE 339 12328 PAGE 1 STATE OF DELAWARE [LOGO] OFFICE OF SECRETARY OF STATE -------------------- I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF AVCO FINANCIAL SERVICES, INC. FILED IN THIS OFFICE ON THE THIRTY-FIRST DAY OF MAY, A.D. 1988, AT 9 O'CLOCK A.M. * * * * * * * * * * RECEIVED FOR RECORD JUNE 20 A.D. 1988 [NAME] RECORDER $3.00 STATE DOCUMENT FEE PAID /s/ MICHAEL HARKINS ----------------------------------- [SEAL] Michael Harkins, Secretary of State AUTHENTICATION: 11738371 881520068 DATE: 06/04/1988 42 [F I L E D] May 31, 1988 [sig] CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION of AVCO FINANCIAL SERVICES, INC. It is hereby certified that: 1. The name of the corporation (hereinafter called the "corporation") is Avco Financial Services, Inc. 2. The certificate of incorporation of the corporation is hereby amended by adding Articles TENTH and ELEVENTH, as follows: "TENTH: No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director provided, however, that this Article Tenth shall not eliminate or limit the liability of a director to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware (as in effect and as hereafter amended), or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article Tenth to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of each director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Neither the amendment nor repeal of this Article Tenth nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article Tenth shall eliminate or reduce the effect of this Article Tenth in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article Tenth, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision." "ELEVENTH: This Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or 43 otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Signed and attested to on May 18, 1988. /s/ Herbert F. Smith ----------------------------- Herbert F. Smith, Senior Vice President Attest: /s/ Laila B. Soares - -------------------------- Laila B. Soares, Assistant Secretary STATE OF ) ) SS: COUNTY OF ) BE IT REMEMBERED that, on May 18, 1988, before me, a Notary Public duly authorized by law to take acknowledgment of deeds, personally came Herbert F. Smith, Senior Vice President of Avco Financial Services, Inc. who duly signed the foregoing instrument before me and acknowledged that such signing is his act and deed, that such instrument as executed is the act and deed of said corporation, and that the facts stated therein are true. GIVEN under my hand on May 18, 1988. [SEAL] /s/ Marilyn L. Havens ------------------------------ Notary Public 44 COMPOSITE CERTIFICATE OF INCORPORATION of AVCO FINANCIAL SERVICES, INC. AVCO FINANCIAL SERVICES, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: FIRST: The name of the corporation (hereinafter referred to as the Corporation) is AVCO FINANCIAL SERVICES, INC. SECOND: The Corporation's registered office in the State of Delaware is located at 100 West Tenth Street, in the City of Wilmington, County of New Castle. The name and address of its registered agent at such address is The Corporation Trust Company, 100 West Tenth Street, Wilmington, Delaware. THIRD: The nature of the business, or objects or purposes to be transacted, promoted or carried on by the Corporation are: (a) To engage in the business of loaning money with or without security and in any amount deemed advisable, for the purpose of earning interest on said loans, or otherwise, and to engage in the business of negotiating, guaranteeing, or endorsing loans in any amount with or without security for the purpose of charging fees therefore, or otherwise. (b) To engage in any other lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. 45 2 FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is One million five hundred thousand (1,500,000). Of said shares, Five hundred thousand (500,000) shall be of a class designated as Preferred Stock without par value and One million (1,000,000) shares shall be of a class designated as Common Stock with a par value of One Dollar ($1) each. The description of the Preferred Stock and Common Stock, and the voting powers, designations, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof are as hereinafter in this Article FOURTH set forth: DIVISION A -- THE PREFERRED STOCK 1. Series and Variations Between Series: The Preferred Stock may be issued from time to time in series as may from time to time be determined by resolution or resolutions of the Board of Directors of this Corporation, and the Board of Directors is hereby expressly vested with authority to provide by resolution or resolutions for the issue of the Preferred Stock in series with variations between series and with such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as shall be stated and expressed in such resolution or resolutions, including (but without limitation) one or more of the following particulars: (a) The designation of such series, which may be by distinguishing number, letter or title; (b) The rate (to be expressed in terms of dollars) at which dividends are to be payable and to accrue in respect of the shares of such series, hereinafter referred to as the "fixed dividend rate"; (c) The amount (to be expressed in terms of dollars) payable in respect of the shares of such series, in addition to dividends accrued or in arrears, upon a voluntary liquidation, dissolution, winding up or reduction of capital of this Corporation, which amount in respect of any series may, but need not, vary according to the time or circumstances of such action, the amount or amounts so fixed as of any given time or for any given period being hereinafter sometimes referred to as the "fixed voluntary liquidation amount"; (d) The amount (to be expressed in terms of dollars) payable in respect of the shares of such series, in addition to dividends accrued 46 3 or in arrears, upon an involuntary liquidation, dissolution, winding up or reduction of capital of this Corporation, the amount so fixed being hereinafter sometimes referred to as the "fixed involuntary liquidation amount"; (e) The amount, if any (to be expressed in terms of dollars), payable in respect of the shares of such series, in addition to dividends accrued or in arrears, in case of the redemption thereof, which amount in respect of any series may, but need not, vary according to the time or circumstances of such action, the amount or amounts so fixed as of any given time or for any given period being hereinafter sometimes referred to as the "fixed voluntary redemption price"; (f) The right, if any, of the holders of shares of such series to convert the same into or exchange the same for shares of Common Stock of the Corporation, and the terms and conditions of such conversion or exchange; (g) The provisions, if any, for a sinking or purchase fund (including any fund or requirement for the periodic retirement of shares) with respect to the shares of such series; Provided, however, that such variations shall not be inconsistent with the provisions of this Article Fourth applicable to all series of the Preferred Stock or with the laws of Delaware. If and whenever from time to time the Board of Directors shall determine to issue Preferred Stock of any series, it shall, prior to the issuance of any shares of each such series, by resolution or resolutions fix the terms of such series and shall cause the same to be set forth or summarized in the certificates therefor and to be set forth in such additional certificate or certificates, if any, as shall at the time be required by law. 2. Dividends: The holders of the Preferred Stock of each series shall be entitled to receive, out of any funds of the Corporation lawfully available for dividends under the laws of the State of Delaware, if, when, and as declared by the Board of Directors in its discretion, preferential cumulative dividends in cash at the fixed dividend rate for such series and no more, payable quarterly as hereinafter provided, before any dividends shall be declared or paid upon, or set apart for, or other distribution shall be ordered or made in respect of the Common Stock. Such dividends on the Preferred Stock shall be payable on the tenth day of January, April, July and October in each year (the periods between 47 4 such dates, commencing on such dates, being hereby designated as "dividend periods"). Dividends on all shares of each series shall be cumulative from the first day of the dividend period in which the first shares of such series shall have been originally issued, so that, if full cumulative dividends on all the outstanding Preferred Stock at the rate or rates aforesaid for all past dividend periods and also full cumulative dividends on such stock for the then current dividend period shall not have been paid thereon, or declared and a sum sufficient for the payment thereof set apart, the amount of the deficiency (but without interest thereon) shall be fully paid or dividends upon the Preferred Stock in such amount shall be declared and a sum sufficient for the payment thereof set apart before any dividends shall be declared or paid upon, or set apart for, or any other distribution shall be ordered or made in respect of the Common Stock and before any sums shall be paid or set apart for the redemption of less than all of the Preferred Stock then outstanding or for the purchase or retirement of any of the Preferred Stock or the Common Stock. In the event of the issue of additional shares of the Preferred Stock of any series subsequent to the date of the issue of the first shares of such series, all dividends paid on the Preferred Stock of such series prior to the issue of such additional shares and all dividends payable to the holders of record of Preferred Stock of such series of a date prior to such issue shall be deemed to have been paid in respect of the additional shares so issued. Any dividends paid upon the Preferred Stock in an amount less than full cumulative dividends accrued or in arrears upon all Preferred Stock outstanding shall, if more than one series be outstanding, be divided between the different series in proportion to the aggregate amounts which would be distributable to the Preferred Stock of each series if full cumulative dividends were declared and paid thereon. 3. Liquidation Rights and Preferences: In the event of any liquidation, dissolution or winding up of the Corporation, or any reduction of its capital, resulting in any distribution of its assets to its stockholders, the holders of each series of Preferred Stock shall be entitled to receive, for each share thereof, out of the assets of the Corporation, whether from capital, surplus or earnings, available for distribution to its stockholders, an amount equal to the fixed involuntary liquidation amount applicable to each share of such series if such liquidation, dissolution, winding up or reduction of capital shall have been involuntary, and equal to the then current fixed voluntary liquidation amount applicable to each share of such series if such liquida- 48 5 tion, dissolution, winding up or reduction of capital shall have been voluntary, together in each case with an amount equal to all dividends accrued or in arrears thereon, whether or not earned, before any distribution of assets of the Corporation shall be made to the holders of the Common Stock; but the holders of the Preferred Stock shall be entitled to no further participation in such distribution. If, upon any such liquidation, dissolution, winding up or reduction of capital, the assets of the Corporation, distributable as aforesaid among the holders of the Preferred Stock, shall be insufficient to permit of the payment to them of the full preferential amounts aforesaid, then the entire assets of the Corporation available for distribution to stockholders shall be distributed ratably among the holders of the Preferred Stock in proportion to the full preferential amounts to which they are respectively entitled. As used herein, the expression "dividends accrued or in arrears" means, in respect of each share of the Preferred Stock, an amount equal to the fixed dividend rate per annum for such share (without interest thereon), from the date from which cumulative dividends commenced to accrue in respect to such share to the date as of which the computation is to be made, less the aggregate amount (without interest) of all dividends theretofore paid (or deemed to have been paid) thereon, or declared and set aside for payment in respect thereof. A consolidation or merger of the Corporation with any other corporation or corporations shall not be regarded as a liquidation, dissolution or winding up of the Corporation within the meaning of this Paragraph 3, unless such consolidation or merger shall substantially impair the rights and preferences of the Preferred Stock, in which event it shall be considered as a voluntary liquidation; nor shall any purchase or redemption of Preferred Stock or the purchase of Common Stock in any manner herein authorized or permitted be considered as a reduction of capital within the meaning of this Paragraph 3. 4. Redemption and Purchase of Preferred Stock: The Corporation may, at its option, expressed by resolution of its Board of Directors, or for the purposes of the sinking or purchase fund for any series, at any time or from time to time redeem the whole or any part of the Preferred Stock, or the whole or any part of any series thereof, at a price for each share so to be redeemed equal to the sum of the then current fixed voluntary redemption price applicable to such share if such redemption be voluntary at the option of the Corporation, or, in the case of any redemption for the purposes of any sinking or purchase fund, at the then applicable sinking or purchase fund redemp- 49 tion price as provided in the resolution or resolutions of the Board of Directors providing for a sinking or purchase fund for such series of the Preferred Stock, plus, in any case, all dividends accrued or in arrears thereon, whether or not earned. Notice of the intention of the Corporation to redeem shares of the Preferred Stock and of the date and place of redemption shall be given by the Corporation by mailing a copy of such notice at least forty-five (45) days prior to the date fixed for such redemption to the holders of record of the Preferred Stock to be redeemed at their respective addresses appearing on the books of the Corporation. If less than all shares of any series of the Preferred Stock is to be redeemed as herein provided, the redemption shall be made in such amount, at such place, by such method, either by lot or pro rata, and subject to such provisions of convenience as shall, from time to time, be provided by the By-laws of the Corporation or be determined by resolution of the Board of Directors. From and after the date fixed in any such notice as the date of redemption, unless default shall be made by the Corporation in providing moneys at the time and place specified for the payment of the redemption price pursuant to said notice, all dividends of the shares of Preferred Stock thereby called for redemption shall cease to accrue; and, from and after the date so fixed (unless default be made as aforesaid) or from and after the date of the earlier deposit by the Corporation in a special account with a solvent bank or trust company of funds sufficient for such redemption (a statement of the intention so to deposit having been included in said notice), all rights of the holders of said shares of Preferred Stock so called for redemption as stockholders of the Corporation, except only (a) the right to receive the redemption price, or (b) if such shares shall be convertible into Common Stock, the right to convert such shares into shares of Common Stock prior to the close of business on the date fixed for such redemption, shall cease and determine, and such shares shall be deemed no longer to be outstanding. Any moneys so deposited for the purpose of said redemption and not required therefor because of the conversion of the shares of Preferred Stock for the redemption of which said moneys were deposited, shall forthwith, upon demand by the Corporation after the redemption date, be paid by the depositary to the Corporation, and any other moneys deposited for such redemption which shall remain unclaimed by the holders of such Preferred Stock at the end of six (6) years after the redemption date, shall, at the conclusion of such six-year period, be paid by the depositary to the 50 7 Corporation, in either case together with any interest thereon that shall have been allowed by the bank or trust company with which the deposit shall have been made. No redemption of Preferred Stock, as herein provided, shall be made or ordered unless full cumulative dividends at the applicable fixed dividend rate or rates hereinabove specified, upon all Preferred Stock then outstanding which is not to be redeemed from the date upon which dividends thereon became cumulative to the end of the then current dividend period shall have been paid (or deemed to have been paid) or declared and a sum sufficient for the payment thereof set apart. So long as (a) all cumulative dividends on the Preferred Stock are paid or declared and set apart for payment for all past dividend periods, and the dividend is either paid or declared and set apart for payment for the current dividend period, (b) all funds at the time required to be paid or set apart for the sinking or purchase funds, if any, provided by resolution or resolutions of the Board of Directors for any series of Preferred Stock have been paid or set apart, and (c) the Corporation shall not be otherwise in default as provided in this Article Fourth, then, and in such events, the Corporation shall have the right at any time, or from time to time, to purchase out of funds legally available for such purpose, Preferred Stock, either at public or private sale, at not exceeding the then current fixed voluntary redemption price applicable to such shares, plus accrued dividends and plus an amount equal to the usual and customary brokerage commissions payable in connection with the purchase thereof; provided, however, that the foregoing restrictions shall not be applicable to prevent the Corporation from utilizing any funds then set apart for any sinking or purchase fund for the purchase of Preferred Stock; and provided, further, that, so long as any shares of Preferred Stock remain outstanding, the Corporation shall not purchase or retire any shares of Common Stock or any shares of any class of stock, whether now or hereafter authorized, ranking in payment of dividends or distribution of assets subordinate to the Preferred Stock unless required by law in connection with corporate action, except as authorized or permitted by the provisions of Paragraph 1 of Division B hereof. Shares of Preferred Stock redeemed or purchased, or otherwise acquired by the Corporation, may be cancelled and retired or shall retain the status of authorized shares. 5. Voting Rights and Restrictions on Certain Corporate Action: Except as hereinafter in this Paragraph 5 expressly provided, the 51 8 holders of the Preferred Stock shall, together with the holders of the Common Stock (neither class voting as a class), possess full voting rights for the election of directors and for all other purposes, and for such purposes the holders of the Preferred Stock shall, subject to the provisions of the By-laws of the Corporation and of the statutes of the State of Delaware relating to the fixing of the record date, be entitled to one vote for each share held by them respectively. Anything hereinbefore to the contrary notwithstanding, in case at any time the Corporation shall fail to declare and pay or declare and set apart for payment in full any quarter yearly dividend on any shares of Preferred Stock and shall not, on or before the fourth succeeding quarter yearly dividend payment date, have paid or declared and set apart for payment in full such dividend, and also all subsequently accruing dividends on all the outstanding Preferred Stock, then the holder of the Preferred Stock shall, thereupon, have the right, voting as one class to the exclusion of the holders of the Common Stock, by plurality vote, to elect such number of directors of the Corporation as shall constitute one-third of the entire number of directors the Corporation is then authorized to have (any fraction less than one-half to be disregarded and any fraction of one-half or more to be considered as one), and such right shall continue (and may be exercised at any annual or other meeting of stockholders for the election of Directors) until all accrued dividends on the Preferred Stock shall have been paid or declared and set apart for payment; and, during the continuance of such right of the Preferred stockholders, the holders of the Common Stock, voting as another class to the exclusion of the Preferred stockholders, shall have the right, by plurality vote, to elect the remaining members of the Board of Directors. The term of office of all persons who may be Directors of the Corporation at any time when such rights shall accrue to the holders of the Preferred Stock shall terminate upon the election (followed by qualification) of their successors at a special meeting of the stockholders of the Corporation, which shall be held, at any time after the accrual of such right, upon the notice provided in the By-laws of the Corporation for the annual meeting of the stockholders, at the request in writing of the holders of record of at least five per cent (5%) of the number of shares of Preferred Stock then outstanding. In default of the calling of said meeting by a proper officer of the Corporation, within thirty (30) days after the making of such request, such meeting may be called on like notice by the holders of record of at least five per cent. (5%) of the Preferred Stock, for which pur- 52 9 pose such Preferred stockholders shall have the right to have access to the stock books of the Corporation. If such special meeting be not called prior to the next annual meeting, the Preferred stockholders, voting as one class to the exclusion of the holders of the Common Stock shall be entitled to elect at such annual meeting a number of the Directors of the Corporation as above provided, and the Common stockholders, as a second class, shall be entitled to elect the remaining Directors as such annual meeting unless previous thereto all such dividend defaults shall have been cured. Upon the termination at any time of such right of the Preferred stockholders to elect Directors, the term of office of all Directors then in office shall end upon the election (followed by qualification) of their successors by the Preferred stockholders and the Common stockholders, voting together but not by classes, which election may be held on like notice at a special meeting of the stockholders called at the request in writing of the holders of record of a least fie per cent. (5%) of the number of shares of the Corporation then outstanding or, if such special meeting is not called prior to the next annual meeting, at such next annual meeting; and such special meeting may be called by the holders of record of at least five per cent. (5%) of the outstanding shares, if not called promptly by a proper officer of the Corporation upon such request, for which purpose such holders shall have access to the stock books of the Corporation. In addition to any other approvals or consents herein required, or required by the laws of the State of Delaware, the Corporation shall not, without the consent of the holders of record of at least two-thirds of the shares of Preferred Stock of the Corporation at the time outstanding, given either by their affirmative vote as a separate class at a meeting called for that purpose or in writing without a meeting, (a) authorize any stock or class of stock or obligation or security convertible into stock having priority or preference over, or ranking on a parity with, the Preferred Stock as to dividends or assets, or authorize any additional Preferred Stock; or (b) amend the provisions hereof or of any resolution or resolutions adopted by the Board of Directors pursuant to the provisions of Paragraph 1 of this Division A so as to affect adversely any of the preferences or other rights given to the Preferred Stock; provided, however, that if any such amendment would affect adversely one or more, but not all, series of Preferred Stock at the time outstanding, the consent of the holders of record of at 53 10 least two-thirds of the shares of each such series so affected, similarly given, each voting as a separate series, shall be required in lieu of the consent of the holders of record of two-thirds of the shares of Preferred Stock voting as a class; or (c) issue any shares of Preferred Stock, provided that no such consent for issue of shares of the Preferred Stock either of any outstanding series or of any new series shall be required if, (i) prior to the issue thereof and prior to the adoption of the resolution of the Board of Directors authorizing each such additional issue of Preferred Stock, the President or Treasurer of the Corporation shall have certified to said Board, and each such resolution shall declare it to be the opinion of the Board of Directors, that the consolidated net earnings of the Corporation (as hereinafter defined) for a period of twelve (12) consecutive calendar months out of the fifteen (15) consecutive calendar months immediately preceding the month in which the issuance of additional shares of Preferred Stock is authorized, shall have been equal to at least three (3) times the annual dividend requirements on all shares of Preferred Stock then outstanding, and on any shares of any class of stock having preference or priority over or ranking on a party with the Preferred Stock as to dividends and/or assets, and on the shares of Preferred Stock proposed to be issued; (ii) immediately after the issue thereof the net worth of the Corporation (as hereinafter defined) shall be in excess of 200% of the fixed involuntary liquidating amount of each share of Preferred Stock then outstanding and of each share of any class of stock having preference or priority over or ranking on a parity with the Preferred Stock as to dividends or assets and of each share of Preferred Stock proposed to be issued; (iii) immediately after the issue thereof the consolidated net current assets of the Corporation (as hereinafter defined) shall be in excess of 150% of the fixed involuntary liquidating amount of each share of Preferred Stock then outstanding and of each share of any class of stock having preference or priority over or ranking on a parity with the Preferred Stock as to dividends or assets and of each share of Preferred Stock proposed to be issued; and (iv) full cumulative dividends for all past dividend periods and the then current dividend period on the Preferred Stock shall have been paid or declared and set apart for payment; or (d) merge or consolidate with any other corporation or sell, lease or transfer or otherwise dispose of all or substantially all of its assets if such transaction would affect adversely any of the 54 11 preferences or other rights of the Preferred Stock or the holders thereof, except that the corporation may merge or consolidate, or sell or dispose of all or substantially all of its assets, provided that (i) the Corporation shall be the continuing or surviving corporation, or the successor or acquiring corporation shall be organized under the laws of any state of the United States of America, and (ii) the Corporation as the continuing or surviving corporation or the successor or acquiring corporation, as the case may be, shall not, immediately after such merger or consolidation, or such sale or other disposition, be in default under any of the provisions of this Paragraph 5; and (iii) the surviving corporation, in the event of a consolidation or merger, will be a corporation primarily engaged in the finance business. Provided, however, that the exercise by the holders of the Preferred Stock of their right to vote, as a class, upon any of the matters set forth in subparagraphs (a) through (d) above shall not limit their general rights to vote upon such matters, or any of them, together with the holders of the Common Stock, neither class voting as a class. The term "consolidated net earnings of the Corporation", as used herein and in Paragraph 1 of Division B hereof, means the net income of the Corporation and its finance and insurance subsidiaries available for dividends for the period in question, calculated to a date not earlier than the last day of the fourth calendar month preceding the month in which the contemplated action requiring the computation of consolidated net earnings is to be authorized, as shown by a consolidated income statement prepared in accordance with generally accepted accounting principles, duly certified or verified by the President or the Treasurer of the Corporation or by the principal accounting officer of the Corporation or by a firm of independent certified public accountants (who may be the regular accountants of the Corporation) approved by the Board of Directors of the Corporation, and said Board shall be fully protected in relying in good faith thereon; provided, however, that, for the purposes of this Paragraph 5 only, each computation of consolidated net earnings may include, in the discretion of the Corporation, the results of operations of finance or insurance subsidiaries for the period in question applicable to stock of such subsidiaries about to be acquired and which are to be owned by the Corporation at the time of the taking, or as a result, of the proposed action in connection with which consolidated net earnings are to be ascertained; and provided, further, that, for the purposes of this Paragraph 5 only, the Corporation shall be entitled to (but need not) include in the total gross income and the total operating expenses of itself or its finance or insurance subsidiaries the results of the operation of any finance or insurance business previously operated by others, notwithstanding that such finance or insur- 55 12 ance business shall have been or is about to be acquired by it or a finance or insurance subsidiary during or subsequent to the period for which consolidated net earnings are being computed, if such property is about to be acquired and is to be owned by the Corporation or a finance or insurance subsidiary at the time of the taking, or as a result, of the proposed action in connection with which consolidated net earnings of the Corporation are to be ascertained, but in any such event the results of such operation for the whole of such period shall be included as nearly as may be possible in the same manner as if such business had been operated during such period by the Corporation or such subsidiary. The term "net worth of the Corporation", as used herein and in Paragraph 1 of Division B hereof, means the aggregate of the consolidated assets of the Corporation and its finance and insurance subsidiaries, exclusive of deferred charges (other than prepaid interest and taxes) and intangibles, including, but not in limitation, good will, trade marks, trade names, patents and all other intangibles, of the Corporation and its subsidiaries, less the aggregate of its and their consolidated liabilities, excluding capital and surplus, all computed in accordance with generally accepted accounting principles as of a date not earlier than the last day of the fourth calendar month preceding the month in which the contemplated action requiring the computation of the net worth of the corporation is to be authorized. The term "consolidated net current assets of the Corporation", as used herein and in Paragraph 1 of Division B hereof, means the net current assets of the Corporation and its finance and insurance subsidiaries as of a date not earlier than the last day of the fourth calendar month preceding the month in which the contemplated action requiring the computation of consolidated net current assets is to be authorized, as determined in accordance with generally accepted accounting principles by deducting from the value of the cash, notes and accounts receivable (less reserves), and marketable securities (taken at cost or market value, whichever is less), all liabilities of the Corporation and its subsidiaries other than capital and surplus. The term "subsidiary or subsidiaries", as used herein and in Paragraph 1 of Division B hereof, means any corporation of which the Corporation owns, either directly or indirectly through one or more subsidiaries, more than 50% of the stock having ordinary voting power for the election of directors; the term "finance subsidiary" shall mean any subsidiary substantially all of the business of which shall be the acquisition and holding of notes, receivables and other obligations; and the term "insurance subsidiary" shall mean any subsidiary substantially all of the business of which shall be the insuring or reinsuring of life insurance risks, accident and health risks, and multiple line risks, and of acting as agent for the procuring of any such insurance business. 56 13 Division B -- Common Stock 1. Dividend Rights: After full cumulative dividends for all past dividend periods and the then current dividend period on the Preferred Stock shall have been paid or declared and set apart for payment in accordance with Paragraph 2 of Division A above, and after all funds at the time required to be paid or set apart to provide for any purchase or sinking fund or funds which may be prescribed pursuant to subparagraph (g) of Paragraph 1 of Division A above by resolution or resolutions of the Board of Directors with respect to any series of Preferred Stock have been so paid or set apart, dividends may be paid out of any funds lawfully available therefor upon the Common Stock and upon any class of stock ranking as to dividends or assets subordinate to the Preferred Stock if, when and as declared by the Board of Directors in its discretion, and shares of any outstanding class of stock of the Corporation ranking as to dividends or assets subordinate to the Preferred Stock may be purchased, acquired, redeemed or retired by the Corporation; provided that, so long as any shares of Preferred Stock are outstanding, no dividends (other than a dividend payable in stock of any class ranking as to dividends and assets subordinate to the Preferred Stock) shall be paid on any stock other than the Preferred Stock and no expenditure on account of the purchase, acquisition, redemption or other retirement (except in exchange for other shares of stock, by conversion or otherwise, of the Corporation or from the proceeds of the issue and sale of shares of any class of stock ranking as to dividends and assets subordinate to the Preferred Stock) of any outstanding stock of the Corporation, other than the Preferred Stock, shall be made (a) if the aggregate amount of payments for all dividends on and expenditures for the purchase, acquisition, redemption, or retirement of any class of stock ranking subordinate to the Preferred Stock as to dividends or assets (including the payment or expenditure then to be made but excluding dividends paid in stock ranking subordinate to the Preferred Stock in both the foregoing respects and after deducting from such expenditures any amounts received by the corporation from the issue and sale of any class of stock ranking subordinate to the Preferred Stock as to dividends and assets) made subsequent to November 30, 1964, shall exceed the consolidated net earnings of the Corporation from and after November 30, 1964, after deducting therefrom all dividends on the Preferred Stock and all dividends on any class of stock having preference or priority over or ranking on a parity with the Preferred Stock either as to dividends or assets. 57 14 (b) if the payment of such dividend or the making of such expenditures shall or would thereby decrease the consolidated net current assets of the Corporation below an amount equal to 150% of the fixed involuntary liquidating amount of each share of Preferred Stock then outstanding and of each share of any class of stock having preference or priority or ranking on a parity with Preferred Stock as to dividends and assets and then outstanding; (c) if the payment of such dividend or the making of such expenditures shall or would thereby decrease the net worth of the Corporation below an amount equal to 200% of the fixed involuntary liquidating amount of each share of Preferred Stock then outstanding and of each share of any class of stock having preference or priority over or ranking on a parity with the Preferred Stock as to dividends and assets and then outstanding; and (d) if the payment of such dividend or the making of such expenditures shall or would decrease the earned surplus of the Corporation, computed in accordance with generally accepted accounting principles, to an amount less than one year's dividend requirements on all outstanding shares of Preferred Stock and on all shares of each class of stock having preference or priority over or ranking on a parity with the Preferred Stock as to dividends or assets and then outstanding. Earned surplus accumulated prior to November 30, 1964, out of which dividends may not be paid pursuant to subparagraph (a) of this Paragraph 1, may be included in calculating the earned surplus of the Corporation for the purposes of this subparagraph (d). For the purposes of the foregoing proviso, the terms (i) "consolidated net earnings of the Corporation", (ii) "consolidated net current assets of the Corporation", (iii) "net worth of the Corporation" and (iv) "subsidiary or subsidiaries" shall have the same meanings as provided in Paragraph 5 of Division A. 2. Distribution of Assets: In the event of any liquidation, dissolution or winding up of the Corporation, or any reduction of its capital, resulting in a distribution of its assets to its stockholders, whether voluntary or involuntary, after there shall have been paid or set apart for the holders of the Preferred Stock the full preferential amounts to which they are entitled under the provisions of Paragraph 3 of Division A above, the holders of the Common Stock shall be entitled to receive as a class, pro rata, the remaining assets of the Corporation available for distribution to its stockholders. 58 15 3. Voting Power: Except as provided in Paragraph 5 of Division A above or as required by the laws of the State of Delaware, the holders of the Common Stock shall, together with the holders of the Preferred Stock (neither class voting as a class), possess full voting power for the election of directors and all other purposes, and the holders of the Common Stock shall, subject to the provisions of the By-laws of the Corporation and of the laws of the State of Delaware relating to the fixing of the record date, be entitled to one (1) vote for each share held by them, respectively, for all purposes. FIFTH: The minimum amount of capital with which the Corporation will commence business is One Thousand Dollars ($1,000.00). SIXTH: The names and places of residence of the incorporators are as follows:
S. H. Livesay Wilmington, Delaware J. F. Cook Wilmington, Delaware A. D. Grier Wilmington, Delaware
SEVENTH: The Corporation is to have perpetual existence. EIGHT: In furtherance and not in limitation of the powers conferred by law, the Board of Directors of the Corporation is expressly authorized to make, alter, amend or repeal the By-laws of the Corporation. NINTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute and all rights conferred upon stockholders herein are granted subject to this reservation. 59 IN WITNESS WHEREOF, we, the undersigned, being all of the incorporators hereinabove named, have hereunto set our hands and seals this 17th day of July, A. D. 1964. S. H. Livesay (L.S.) -------------------------------------- J. F. Cook (L.S.) -------------------------------------- A. D. Grier (L.S.) -------------------------------------- 16 60 STATE OF DELAWARE ) ) SS. COUNTY OF NEW CASTLE ) BE IT REMEMBERED that on this 17th day of July, A. D. 1964, personally came before me, a Notary Public in and for the State of Delaware, S. H. Livesay, J. F. Cook, and A. D. Grier, all of the parties to the foregoing certificate of incorporation, known to me personally to be such, and they did severally acknowledge the said certificate to be the act and deed of the signers, respectively, and that the facts therein stated are truly set forth. GIVEN under my hand and seal of office the day and year aforesaid. Howard K. Webb --------------------------------- Notary Public HOWARD K WEBB NOTARY PUBLIC APPOINTED JUNE 27, 1964 STATE OF DELAWARE TERM 2 YEARS 17 EX-12 3 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, ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (Thousands of dollars) Income Income before income taxes and cumulative effect of changes in accounting principles............................. $298,559 $287,459 $259,110 $225,784 $203,913 -------- -------- -------- -------- -------- Fixed charges to be added back to income -- Interest and debt expense.............. 426,260 455,379 334,084 324,211 370,884 Rentals (one-third of all rent and related costs charged to income)..... 15,015 14,905 13,942 14,378 15,460 -------- -------- -------- -------- -------- Total fixed charges............... 441,275 470,284 348,026 338,589 386,344 -------- -------- -------- -------- -------- Income before income taxes, cumulative effect of changes in accounting principles and fixed charges......................... $739,834 $757,743 $607,136 $564,373 $590,257 ======== ======== ======== ======== ======== Ratio Number of times fixed charges covered by income before income taxes, cumulative effect of changes in accounting principles, and fixed charges.......... 1.7 1.6 1.7 1.7 1.5 === === === === ===
S-3 EX-23 4 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 No. 33-55953) of Avco Financial Services, Inc. and in the related Prospectuses of our report dated January 23, 1997, 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, 1996. ERNST & YOUNG LLP Orange County, California March 27, 1997 S-4 EX-24 5 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 1996 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 19th day of February, 1997. /s/ L. B. CAMPBELL Director - --------------------------------- L. B. Campbell /s/ J. F. HARDYMON Director - --------------------------------- J. F. Hardymon /s/ S. A. GILIOTTI Director - --------------------------------- S. A. Giliotti /s/ W. W. JUCHATZ Director - --------------------------------- W. W. JUCHATZ /s/ S. L. KEY Director - --------------------------------- S. L. Key /s/ R. A. WATSON Director - --------------------------------- R. A. Watson S-5 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AFS' CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 DEC-31-1996 15,562 0 7,253,738 218,416 0 0 80,646 0 8,195,059 0 3,636,354 0 0 500 1,152,186 8,195,059 0 1,760,070 0 274,865 556,976 203,410 426,260 298,559 111,552 187,007 0 0 0 187,007 0 0
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