<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 September 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 September 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
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------- ----
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at September 30, 1994
and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statement of Income for the three and
nine months ended September 30, 1994 and 1993 . . . . . . . . . . . . . . 2
Consolidated Statement of Cash Flows for the nine months ended
September 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . 7
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1994 AND DECEMBER 31, 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Finance receivables . . . . . . . . . . . . . . . . $5,974,261 $5,469,563
Allowance for losses . . . . . . . . . . . . . . . (172,087) (155,015)
Insurance reserves and claims . . . . . . . . . . . (243,743) (231,532)
---------- ----------
5,558,431 5,083,016
Investments . . . . . . . . . . . . . . . . . . . . 675,762 655,690
Property and equipment . . . . . . . . . . . . . . 62,069 59,636
Unamortized insurance policy acquisition costs . . 39,430 34,265
Goodwill . . . . . . . . . . . . . . . . . . . . . 22,120 23,130
Cash . . . . . . . . . . . . . . . . . . . . . . . 15,745 7,858
Other . . . . . . . . . . . . . . . . . . . . . . . 265,876 259,365
---------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . $6,639,433 $6,122,960
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Senior debt
Commercial paper . . . . . . . . . . . . . . . . . $2,018,260 $1,933,570
Banks . . . . . . . . . . . . . . . . . . . . . . 8,558 25,493
Savings deposits . . . . . . . . . . . . . . . . . 4,954 5,032
Notes . . . . . . . . . . . . . . . . . . . . . . . 3,215,402 2,831,419
---------- ----------
5,247,174 4,795,514
Senior subordinated debt . . . . . . . . . . . . . 7,800 19,980
---------- ----------
Total debt . . . . . . . . . . . . . . . . . . . . 5,254,974 4,815,494
Accounts payable and accrued liabilities . . . . . 247,068 235,029
Insurance reserves and claims
Unearned insurance premiums . . . . . . . . . . . . 134,248 121,694
Losses and adjustment expenses . . . . . . . . . . 57,442 59,171
Income taxes . . . . . . . . . . . . . . . . . . . 64,729 64,061
---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . 5,758,461 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 . . . . . . . . . . . . . . . . . 840,493 778,804
Securities valuation adjustment . . . . . . . . . . 12,873 31,980
Currency translation adjustment . . . . . . . . . . (110,482) (121,361)
---------- ----------
Total stockholder's equity . . . . . . . . . . . . 880,972 827,511
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY . . . . $6,639,433 $6,122,960
========== ==========
</TABLE>
See accompanying note.
- 1 -
<PAGE> 4
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
PERIODS ENDED SEPTEMBER 30, 1994 AND 1993
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
1994 1993 1994 1993
-------- -------- ---------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C>
REVENUES
Interest, discount and service charges . . . . . . . . . . . $263,577 $249,140 $ 769,779 $743,432
Credit life, credit disability and
casualty insurance premiums . . . . . . . . . . . . . . . . . 75,547 69,173 208,311 208,127
Investment and other income (including net
capital gains and losses) . . . . . . . . . . . . . . . . . . 14,082 14,951 39,517 38,125
-------- -------- ---------- --------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . 353,206 333,264 1,017,607 989,684
-------- -------- ---------- --------
EXPENSES
Interest and debt expense . . . . . . . . . . . . . . . . . . . 83,861 81,588 240,734 243,780
Provision for losses on collection of finance
receivables, less recoveries . . . . . . . . . . . . . . . . 33,976 29,491 95,612 86,142
Credit life, credit disability and casualty
insurance losses and adjustment expenses,
less recoveries . . . . . . . . . . . . . . . . . . . . . . . 32,930 32,935 94,579 99,744
Amortization of insurance policy
acquisition costs . . . . . . . . . . . . . . . . . . . . . . 16,731 18,385 43,426 51,019
Other operating expenses . . . . . . . . . . . . . . . . . . . 117,559 112,313 349,251 339,347
-------- -------- ---------- --------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . 285,057 274,712 823,602 820,032
-------- -------- ---------- --------
Income before income taxes . . . . . . . . . . . . . . . . . . 68,149 58,552 194,005 169,652
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 25,520 21,728 72,816 62,965
-------- -------- ---------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,629 $ 36,824 $ 121,189 $106,687
======== ======== ========== ========
</TABLE>
See accompanying note.
- 2 -
<PAGE> 5
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 121,189 $ 106,687
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on receivables . . . . . . . . . . . . . 116,798 106,614
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 11,951 12,025
Gain on sales of investments . . . . . . . . . . . . . . . . (2,823) (3,460)
Decrease (increase) in unamortized insurance policy
acquisition costs . . . . . . . . . . . . . . . . . . . . . . (5,236) 977
Increase in unearned insurance premiums and
reserves for insurance losses and adjustment expenses . . . . 17,480 6,921
Increase in accounts payable and accrued
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 10,139 6,284
Increase (decrease) in income taxes . . . . . . . . . . . . . (700) 10,322
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 12,236 21,593
---------- ----------
Net cash provided by operating activities . . . . . . . . 281,034 267,963
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated or purchased . . . . . . . . . . . . . . . . . (2,935,368) (2,468,985)
Loans repaid or sold . . . . . . . . . . . . . . . . . . . . . 2,387,887 2,183,708
Purchases of investments available for sale . . . . . . . . . . (142,996) (6,447)
Purchases of investments held for investment . . . . . . . . . (189,659)
Proceeds from sales of investments available for sale . . . . . 55,754 5,568
Proceeds from sales of investments held for investment . . . . 24,306
Proceeds from maturities and calls of investments
available for sale . . . . . . . . . . . . . . . . . . . . . 46,269 4,414
Proceeds from maturities and calls of investments
held for investment . . . . . . . . . . . . . . . . . . . . . 135,779
Capital expenditures . . . . . . . . . . . . . . . . . . . . . (13,759) (13,125)
---------- ----------
Net cash used in investing activities . . . . . . . . . . (602,213) (324,441)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term debt . . . . . . . . . . . . . . . . . . 41,343 228,680
Proceeds from issuance of notes . . . . . . . . . . . . . . . . 945,722 820,898
Principal payments on notes . . . . . . . . . . . . . . . . . (598,395) (934,228)
Decrease in savings deposits . . . . . . . . . . . . . . . . . (104) (1,939)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (59,500) (52,000)
---------- ----------
Net cash provided by financing activities . . . . . . . . . . 329,066 61,411
---------- ----------
Net increase in cash . . . . . . . . . . . . . . . . . . . . . 7,887 4,933
Cash at beginning of period . . . . . . . . . . . . . . . . . . 7,858 318
---------- ----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . $ 15,745 $ 5,251
========== ==========
</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 September 30, 1994,
the Registrant's consolidated stockholder's equity included net unrealized
investment portfolio gains of $48.5 million and $12.9 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 NINE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1993.
Income before income taxes for the nine months ended September 30, 1994 was
$194.0 million compared to $169.7 million for the nine months ended September
30, 1993, an increase of $24.3 million (14.3%). The increase resulted
primarily from: (i) an increase in the level of receivables outstanding as
average finance receivables were $5.564 billion for the first nine months of
1994 compared to $5.169 billion during the first nine months of 1993; (ii) a
decrease in the cost of borrowed funds to 6.46% for the first nine months of
1994 from 7.02% for the like period in 1993; (iii) a decrease in insurance
losses; (iv) a decrease in policy acquisition costs due to a reduction in
non-related insurance operation premiums earned; and (v) an increase in
investment income due to higher yields. This increase in income was partially
offset by: (i) an increase in the provision for losses associated with the
increase in finance receivables outstanding and (ii) a decline 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 18.45% for the first nine months of 1994 compared to 19.18% for the
like period in 1993.
Revenues for the nine months ended September 30, 1994 were $1,017.6 million
compared to $989.7 million for the nine months ended September 30, 1993. The
increase resulted primarily from : (i) an increase of approximately $59.3
million from the higher level of receivables outstanding and (ii) an increase
in investment income due to higher yields. These increases were largely offset
by: (i) a decrease of approximately $29.9 million from the decline in yields on
finance receivables and (ii) a reduction in non-related insurance operation
premiums earned.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1993.
Income before income taxes for the three months ended September 30, 1994 was
$68.1 million compared to $58.6 million for the three months ended September
30, 1993, an increase of $9.5 million (16.2%). The increase resulted primarily
from: (i) an increase in the level of receivables outstanding; (ii) a decrease
in the cost of borrowed funds; and (iii) a decrease in policy acquisition
costs. This increase in income was partially offset by: (i) an increase in the
provision for losses associated with the increase in receivables outstanding
and (ii) a decline in yields on finance receivables.
Revenues for the three months ended September 30, 1994 were $353.2 million
compared to $333.3 million for the three months ended September 30, 1993. This
increase resulted primarily from an increase of approximately $24.1 million
from the higher level of receivables outstanding, partially offset by a
decrease of approximately $11.2 from the decline in yields on finance
receivables.
- 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 nine months of 1994, the Registrant had $421.6 million of
interest rate exchange agreements go into effect. Of these, $150.0 million
expire in 1995 and had the effect of exchanging the indices used to determine
interest expense under certain variable rate borrowings at September 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 3.8 years and expire
through 1999, had the effect of fixing the rate of interest at approximately
7.0% on $271.6 million of variable rate borrowings at September 30, 1994.
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).
- 6 -
<PAGE> 9
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*(12) Statement of Computation of Number of Times Fixed
Charges Earned
*(27) Financial Data Schedule
----------------
* Filed herewith.
(b) Reports on Form 8-K
During the quarter ended September 30, 1994, the
Registrant filed a report on Form 8-K dated July 26, 1994,
relating to the Registrant's Registration Statement No.
33-50547 with respect to which the Registrant commenced an
offering on July 20, 1994 of $200,000,000 of 7 1/4% Senior
Notes due July 15, 1999 and a report on Form 8-K dated
August 23, 1994, relating to the Registrant's Registration
Statement No. 33-50547 with respect to which the
Registrant commenced an offering on August 17, 1994 of
$200,000,000 of 7 3/8% Senior Notes due August 15, 2001.
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 November 9, 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
NINE MONTHS ENDED SEPTEMBER 30, 1994
(Thousands of dollars)
<TABLE>
<S> <C>
Income
Income before income taxes . . . . . . . . . . . . . . . . . . . . $194,005
--------
Fixed charges to be added back to income -
Interest and debt expense . . . . . . . . . . . . . . . . . . . 239,124
Rentals (one-third of all rent and related costs
charged to income) . . . . . . . . . . . . . . . . . . . . . 10,286
--------
Total fixed charges . . . . . . . . . . . . . . . . . . . . 249,410
--------
Income before income taxes and fixed charges . . . . . . . . . . . . $443,415
========
Ratio
Number of times fixed charges covered by income
before income taxes and fixed charges . . . . . . . . . . . . . . 1.8
===
</TABLE>
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AFS'
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1994 AND CONSOLIDATED STATEMENT
OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 15,745
<SECURITIES> 0
<RECEIVABLES> 5,558,431
<ALLOWANCES> 172,087
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 62,069
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,639,433
<CURRENT-LIABILITIES> 0
<BONDS> 3,228,156
<COMMON> 500
0
0
<OTHER-SE> 880,472
<TOTAL-LIABILITY-AND-EQUITY> 6,639,433
<SALES> 0
<TOTAL-REVENUES> 1,017,607
<CGS> 0
<TOTAL-COSTS> 138,005
<OTHER-EXPENSES> 349,251
<LOSS-PROVISION> 95,612
<INTEREST-EXPENSE> 240,734
<INCOME-PRETAX> 194,005
<INCOME-TAX> 72,816
<INCOME-CONTINUING> 121,189
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121,189
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
