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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 March 31, 1994
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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
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AVCO FINANCIAL SERVICES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 13-2530491
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3349 Michelson Drive, Irvine, California 92715
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 553-1200
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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 March 31, 1994, the Registrant had 500,000 shares of common stock ($1 par
value per share) outstanding, all of which are owned by Textron Inc.
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AVCO FINANCIAL SERVICES, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at March 31, 1994
and December 31, 1993..................................... 1
Consolidated Statement of Income for the three months
ended March 31, 1994 and 1993............................. 2
Consolidated Statement of Cash Flows for the
three months ended March 31, 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 .............................................. 6
Item 2. Changes in Seccurities.......................................... 6
Item 3. Defaults Upon Senior Securities................................. 6
Item 4. Submission of Matters to a Vote of Security Holders............. 6
Item 6. Exhibits and Reports on Form 8-K................................ 6
SIGNATURE................................................................ 6
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1994 AND DECEMBER 31, 1993
<TABLE>
<CAPTION>
1994 1993
---------- ---------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,471,769 $5,469,563
Allowance for losses . . . . . . . . . . . . . . . . . . . . . . . . . (156,413) (155,015)
Insurance reserves and claims . . . . . . . . . . . . . . . . . . . . . (230,723) (231,532)
---------- ----------
5,084,633 5,083,016
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654,287 655,690
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 58,718 59,636
Unamortized insurance policy acquisition costs . . . . . . . . . . . . . 33,700 34,265
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,778 23,130
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,866 7,858
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251,616 259,365
---------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $6,117,598 $6,122,960
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Senior debt
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,785,041 $1,933,570
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,047 25,493
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,542 5,032
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,944,886 2,831,419
---------- ----------
4,763,516 4,795,514
Senior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . 19,481 19,980
---------- ----------
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . 4,782,997 4,815,494
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . 253,453 235,029
Insurance reserves and claims
Unearned insurance premiums . . . . . . . . . . . . . . . . . . . . . . 118,479 121,694
Losses and adjustment expenses . . . . . . . . . . . . . . . . . . . . 58,139 59,171
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,227 64,061
---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 5,277,295 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 798,129 778,804
Securities valuation adjustment . . . . . . . . . . . . . . . . . . . . . 28,371 31,980
Currency translation adjustment . . . . . . . . . . . . . . . . . . . . . (124,285) (121,361)
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Total stockholder's equity . . . . . . . . . . . . . . . . . . 840,303 827,511
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY . . . . . . . . . . $6,117,598 $6,122,960
========== ==========
</TABLE>
See accompanying note.
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AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
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(Thousands of dollars)
<S> <C> <C>
REVENUES
Interest, discount and service charges . . . . . . . . . . . . . . . . . . . . . . . . . $251,257 $246,109
Credit life, credit disability and casualty
insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,286 69,186
Investment and other income (including net
capital gains and losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,023 11,829
-------- --------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327,566 327,124
EXPENSES
Interest and debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,278 82,981
Provision for losses on collection of finance
receivables, less recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,901 27,960
Credit life, credit disability and casualty
insurance losses and adjustment expenses,
less recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,449 33,049
Amortization of insurance policy acquisition costs . . . . . . . . . . . . . . . . . . . 12,150 15,962
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,902 112,297
-------- --------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265,680 272,249
-------- --------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,886 54,875
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,061 20,385
-------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,825 $ 34,490
======== ========
</TABLE>
See accompanying note.
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AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
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(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,825 $ 34,490
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on receivables . . . . . . . . . . . . . . . 36,835 34,952
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 3,972 3,983
Gain on sales of investments . . . . . . . . . . . . . . . . . . (1,034) (458)
Decrease in unamortized insurance policy
acquisition costs . . . . . . . . . . . . . . . . . . . . . . . 459 7
Increase (decrease) in unearned insurance premiums and
reserves for insurance losses and adjustment expenses . . . . . (4,479) 1,246
Increase in accounts payable and accrued liabilities . . . . . . 19,053 6,434
Increase (decrease) in income taxes . . . . . . . . . . . . . . . 79 (3,888)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,770 14,591
--------- ---------
Net cash provided by operating activities . . . . . . . . . . 101,480 91,357
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated or purchased . . . . . . . . . . . . . . . . . . . (828,859) (747,497)
Loans repaid or sold . . . . . . . . . . . . . . . . . . . . . . . 772,248 691,774
Purchases of investments available for sale . . . . . . . . . . . . (60,957)
Purchases of investments held for investment . . . . . . . . . . . (55,999)
Proceeds from sales of investments available for sale . . . . . . . 19,179 4,840
Proceeds from maturities and calls of investments
available for sale . . . . . . . . . . . . . . . . . . . . . . . 37,880
Proceeds from maturities and calls of investments
held for investment . . . . . . . . . . . . . . . . . . . . . . . 29,893
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (3,199) (3,125)
--------- ---------
Net cash used in investing activities. . . . . . . . . . . . . (63,708) (80,114)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt . . . . . . . . . . . . . . (140,004) 184,075
Proceeds from issuance of notes . . . . . . . . . . . . . . . . . . 150,745 274,991
Principal payments on notes . . . . . . . . . . . . . . . . . . . (23,529) (451,945)
Decrease in savings deposits . . . . . . . . . . . . . . . . . . . (1,476) (1,664)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (19,500) (17,000)
--------- ---------
Net cash used in financing activities . . . . . . . . . . . . (33,764) (11,543)
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Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . 4,008 (300)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . 7,858 318
--------- ---------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,866 $ 18
========= =========
</TABLE>
See accompanying note.
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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 March 31, 1994, the
Registrant's consolidated stockholder's equity included net unrealized
investment portfolio gains of $48.5 million and $28.4 million, net of
applicable taxes, respectively.
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PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED MARCH 31, 1994 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1993.
Income before income taxes for the three months ended March 31, 1994 was $61.9
million compared to $54.9 million for the three months ended March 31, 1993, an
increase of $7.0 million (12.8%). The increase resulted primarily from: (i) an
increase in the level of receivables outstanding as average finance receivables
were $5.438 billion for the first three months of 1994 compared to $5.125
billion during the first three months of 1993 and (ii) a decrease in the cost
of borrowed funds to 6.44% for the first three months of 1994 from 7.21% for
the like period in 1993. 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 has lowered the rate of interest it charges customers on finance
receivables. As a result, interest income as a percent of average finance
receivables (on an annualized basis) was 18.48% for the first three months of
1994 compared to 19.21% for the like period in 1993.
Revenues for the three months ended March 31, 1994 were $327.6 million compared
to $327.1 million for the three months ended March 31, 1993. Although total
revenues were relatively unchanged, revenues for the first three months of 1994
reflect an increase of approximately $16.7 million due to the higher level of
receivables outstanding described above, largely offset by: (i) a decrease of
approximately $9.7 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.
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 three months of 1994, the Registrant had $128.1 million of
interest rate exchange agreements go into effect. These agreements, which have
a weighted average original term of 4.7 years and expire through 1999, had the
effect of fixing the rate of interest at approximately 6.1% on $128.1 million
of variable rate borrowings at March 31, 1994.
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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 May 12, 1994 By GARY L. FITE
------------------ -------------------------------------
GARY L. FITE
Executive Vice President & Controller
(Chief Accounting Officer)
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EXHIBIT 12
AVCO FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF NUMBER OF TIMES
FIXED CHARGES EARNED
THREE MONTHS ENDED MARCH 31, 1994
(Thousands of dollars)
<TABLE>
<S> <C>
Income
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . $ 61,886
--------
Fixed charges to be added back to income -
Interest and debt expense . . . . . . . . . . . . . . . . . . . . . . 76,612
Rentals (one-third of all rent and related costs
charged to income) . . . . . . . . . . . . . . . . . . . . . . . . 3,190
--------
Total fixed charges . . . . . . . . . . . . . . . . . . . . . . . 79,802
--------
Income before income taxes and fixed charges . . . . . . . . . . . . . . $141,688
========
Ratio
Number of times fixed charges covered by income
before income taxes and fixed charges . . . . . . . . . . . . . . . . 1.8
===
</TABLE>
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