<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(The Registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.)
Commission file number 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 Identification No.)
incorporation or organization)
3349 Michelson Drive, Irvine, California 92715
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 553-1200
----------------------------
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
--- ---
At June 30, 1994, the Registrant had 500,000 shares of common stock ($1 par
value per share) outstanding, all of which are owned by Textron Inc.
<PAGE> 2
AVCO FINANCIAL SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at June 30, 1994
and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statement of Income for the three and
six months ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Cash Flows for the six months ended
June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Note to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . 7
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1994 AND DECEMBER 31, 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(Thousands of dollars)
ASSETS
<S> <C> <C>
Finance receivables . . . . . . . . . . . . . . . . . . . . . . $5,633,230 $5,469,563
Allowance for losses . . . . . . . . . . . . . . . . . . . . (162,603) (155,015)
Insurance reserves and claims . . . . . . . . . . . . . . . . (237,016) (231,532)
---------- ----------
5,233,611 5,083,016
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 654,399 655,690
Property and equipment . . . . . . . . . . . . . . . . . . . . 60,499 59,636
Unamortized insurance policy acquisition costs . . . . . . . . 35,697 34,265
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,444 23,130
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,447 7,858
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258,727 259,365
---------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . $6,272,824 $6,122,960
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Senior debt
Commercial paper . . . . . . . . . . . . . . . . . . . . . . $1,902,696 $1,933,570
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,115 25,493
Savings deposits . . . . . . . . . . . . . . . . . . . . . . 3,449 5,032
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,969,404 2,831,419
---------- ----------
4,907,664 4,795,514
Senior subordinated debt . . . . . . . . . . . . . . . . . . . 16,080 19,980
---------- ----------
Total debt . . . . . . . . . . . . . . . . . . . . . . . . 4,923,744 4,815,494
Accounts payable and accrued liabilities . . . . . . . . . . . 248,891 235,029
Insurance reserves and claims
Unearned insurance premiums . . . . . . . . . . . . . . . . . 121,448 121,694
Losses and adjustment expenses . . . . . . . . . . . . . . . 56,031 59,171
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 66,001 64,061
---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . 5,416,115 5,295,449
---------- ----------
Stockholder's equity
Common stock ($1 par value, 1,000,000 shares
authorized; 500,000 shares outstanding) . . . . . . . . . . . 500 500
Additional paid-in capital . . . . . . . . . . . . . . . . . . 137,588 137,588
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 817,864 778,804
Securities valuation adjustment . . . . . . . . . . . . . . . . 19,093 31,980
Currency translation adjustment . . . . . . . . . . . . . . . . (118,336) (121,361)
---------- ----------
Total stockholder's equity . . . . . . . . . . . . . . . . 856,709 827,511
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY . . . . . . . . $6,272,824 $6,122,960
========== ==========
</TABLE>
See accompanying note.
- 1 -
<PAGE> 4
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
PERIODS ENDED JUNE 30, 1994 AND 1993
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
1994 1993 1994 1993
-------- -------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C>
REVENUES
Interest, discount and service charges . . . . . . . . . $254,945 $248,183 $506,202 $494,292
Credit life, credit disability and
casualty insurance premiums . . . . . . . . . . . . . 69,478 69,768 132,764 138,954
Investment and other income (including
capital gains and losses) . . . . . . . . . . . . . . 12,412 11,345 25,435 23,174
-------- -------- -------- --------
Total revenues . . . . . . . . . . . . . . . . . . . 336,835 329,296 664,401 656,420
-------- -------- -------- --------
EXPENSES
Interest and debt expense . . . . . . . . . . . . . . 78,595 79,211 156,873 162,192
Provision for losses on collection of finance
receivables, less recoveries . . . . . . . . . . . . 31,735 28,691 61,636 56,651
Credit life, credit disability and casualty
insurance losses and adjustment expenses,
less recoveries . . . . . . . . . . . . . . . . . . 31,200 33,760 61,649 66,809
Amortization of insurance policy
acquisition costs . . . . . . . . . . . . . . . . . . 14,545 16,672 26,695 32,634
Other operating expenses . . . . . . . . . . . . . . . 116,790 114,737 231,692 227,034
-------- -------- -------- --------
Total expenses . . . . . . . . . . . . . . . . . . . 272,865 273,071 538,545 545,320
-------- -------- -------- --------
Income before income taxes . . . . . . . . . . . . . . . 63,970 56,225 125,856 111,100
Income taxes . . . . . . . . . . . . . . . . . . . . . . 24,235 20,852 47,296 41,237
-------- -------- -------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . $ 39,735 $ 35,373 $ 78,560 $ 69,863
======== ======== ======== ========
</TABLE>
See accompanying note.
- 2 -
<PAGE> 5
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78,560 $ 69,863
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on receivables. . . . . . . . . . . . . . . . . . 75,751 70,656
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,920 8,012
Gain on sales of investments . . . . . . . . . . . . . . . . . . . . . (1,029) (516)
Decrease (increase) in unamortized insurance policy
acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . (1,566) 1,810
Increase (decrease) in unearned insurance premiums and
reserves for insurance losses.and adjustment expenses . . . . . . . (556) 83
Increase (decrease) in accounts payable and accrued
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,295 (9,470)
Increase (decrease) in income taxes . . . . . . . . . . . . . . . . . 1,134 (969)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,562 4,319
---------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . 181,071 143,788
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated or purchased . . . . . . . . . . . . . . . . . . . . . . (1,793,320) (1,571,209)
Loans repaid or sold . . . . . . . . . . . . . . . . . . . . . . . . . . 1,579,735 1,433,901
Purchases of investments available for sale . . . . . . . . . . . . . . . (82,504)
Purchases of investments held for investment . . . . . . . . . . . . . . (118,001)
Proceeds from sales of investments available for sale . . . . . . . . . . 29,334 5,356
Proceeds from maturities and calls of investments
available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . 39,083 955
Proceeds from maturities and calls of investments
held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . 94,117
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (8,566) (6,914)
---------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . . . (236,238) (161,795)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt . . . . . . . . . . . . . . . . . (36,025) 258,123
Proceeds from issuance of notes . . . . . . . . . . . . . . . . . . . . 365,230 513,423
Principal payments on notes . . . . . . . . . . . . . . . . . . . . . . (233,363) (713,825)
Decrease in savings deposits . . . . . . . . . . . . . . . . . . . . . . (1,586) (1,777)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39,500) (34,500)
Net cash provided by financing activities. . . . . . . . . . . . . . . . 54,756 21,444
---------- ----------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . (411) 3,437
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . 7,858 318
---------- ----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,447 $ 3,755
========== ==========
</TABLE>
See accompanying note.
- 3 -
<PAGE> 6
AVCO FINANCIAL SERVICES, INC.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
The consolidated financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. Certain reclassifications have been made to prior year amounts to
conform with current year presentation.
The results of operations for interim periods are not necessarily indicative of
the results to be expected for a full year.
The consolidated financial statements should be read in conjunction with the
consolidated financial statements included in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993.
CHANGE IN ACCOUNTING PRINCIPLE
Effective at the beginning of 1994, the Registrant adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (FAS 115). The adoption of FAS 115
had no material effect on the Registrant's consolidated financial statements.
INVESTMENTS
The Registrant's investment portfolio consists of both debt and equity
securities. While it is the Registrant's intention to hold its debt securities
until maturity and its equity securities long-term, the Registrant may sell
certain of these securities in response to market conditions or business
requirements. Therefore, upon adoption of FAS 115, effective January 1, 1994,
the Registrant classified all of its investment portfolio as available for
sale. Following the reclassification, the carrying amount of all debt
securities then classified as available for sale was adjusted to fair value,
and the resulting unrealized gain of $16.5 million, net of applicable income
taxes, was recorded as an increase to the securities valuation adjustment
component of stockholder's equity. At January 1, 1994 and June 30, 1994, the
Registrant's consolidated stockholder's equity included net unrealized
investment portfolio gains of $48.5 million and $19.1 million, net of
applicable taxes, respectively.
- 4 -
<PAGE> 7
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 1994 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1993.
Income before income taxes for the six months ended June 30, 1994 was $125.9
million compared to $111.1 million for the six months ended June 30, 1993, an
increase of $14.8 million (13.3%). The increase resulted primarily from:
(i) an increase in the level of receivables outstanding as average finance
receivables were $5.470 billion for the first six months of 1994 compared to
$5.149 billion during the first six months of 1993; (ii) a decrease in the cost
of borrowed funds to 6.43% for the first six months of 1994 from 7.02% for the
like period in 1993; (iii) a decrease in insurance losses and policy
acquisition costs; and (iv) an increase in investment income due to improving
yields. This increase in income was partially offset by a decrease in yields
on finance receivables. Due to declines in the cost of borrowed funds in all
of the countries in which the Registrant operates, the Registrant lowered the
rate of interest it charged to customers on finance receivables. As a result,
interest income as a percent of average finance receivables (on an annualized
basis) was 18.51% for the first six months of 1994 compared to 19.20% for the
like period in 1993.
Revenues for the six months ended June 30, 1994 were $664.4 million compared to
$656.4 million for the six months ended June 30, 1993. The net increase
resulted primarily from: (i) an increase of approximately $35.2 million from
the higher level of receivables outstanding described above and (ii) an
increase in investment income due to improving yields. These increases were
largely offset by: (i) a decrease of approximately $18.7 million from the
aforementioned decline in yields on finance receivables and (ii) a reduction in
non-related insurance operation revenues due to a decrease in premiums earned.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 1994 COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 1993.
Income before income taxes for the three months ended June 30, 1994 was $64.0
million compared to $56.2 million for the three months ended June 30, 1993, an
increase of $7.8 million (13.8%). The increase in income resulted primarily
from: (i) an increase in the level of receivables outstanding; (ii) a decrease
in the cost of borrowed funds; (iii) a decrease in insurance losses and policy
acquisition costs; and (iv) an increase in investment income due to improving
yields. This increase in income was partially offset by a decrease in yields
on finance receivables.
Revenues for the three months ended June 30, 1994 were $336.8 million compared
to $329.3 million for the three months ended June 30, 1993. This increase
resulted primarily from: (i) an increase of approximately $18.5 million from
the higher level of receivables outstanding described above and (ii) an
increase in investment income due to improving yields. These increases were
largely offset by: (i) a decrease of approximately $9.0 million from the
aforementioned decline in yields on finance receivables and (ii) a reduction in
non-related insurance operation revenues due to a decrease in premiums earned.
- 5 -
<PAGE> 8
PART I. FINANCIAL INFORMATION (CONTINUED)
FINANCIAL CONDITION
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.
During the first six months of 1994, the Registrant had $295.0 million of
interest rate exchange agreements go into effect. Of these, $100.0 million
expire in 1995 and had the effect of exchanging the indices used to determine
interest expense under certain variable rate borrowings at June 30, 1994 for
the purpose of better matching the rate of interest incurred on the
Registrant's financing with the rate of interest earned on certain of the
Registrant's variable rate finance receivables. The remainder of the
agreements, which have a weighted average original term of 4.2 years and expire
through 1999, had the effect of fixing the rate of interest at approximately
6.6% on $195.0 million of variable rate borrowings at June 30, 1994.
- 6 -
<PAGE> 9
PART II. OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES
Omitted in accordance with General Instruction H(2)(b).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Omitted in accordance with General Instruction H(2)(b).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted in accordance with General Instruction H(2)(b).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 12
Statement of Computation of Number of Times
Fixed Charges Earned
(b) Reports on Form 8-K
No Report on Form 8-K has been filed during the
quarter for which this report is filed.
SIGNATURE
Pursuant to the requirements 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.
(Registrant)
Date August 10, 1994 By GARY L. FITE
-------------------------------------
GARY L. FITE
Executive Vice President & Controller
(Chief Accounting Officer)
- 7 -
<PAGE> 1
EXHIBIT 12
AVCO FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF NUMBER OF TIMES
FIXED CHARGES EARNED
SIX MONTHS ENDED JUNE 30, 1994
(Thousands of dollars)
<TABLE>
<S> <C>
Income
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125,856
--------
Fixed charges to be added back to income -
Interest and debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,207
Rentals (one-third of all rent and related costs
charged to income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,322
--------
Total fixed charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,529
--------
Income before income taxes and fixed charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . $287,385
========
Ratio
Number of times fixed charges covered by income
before income taxes and fixed charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8
===
</TABLE>
S-1
