<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, 1995
----------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(The Registrant meets the conditions set forth in General Instruction
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)
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
--------------------------
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, 1995, 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>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at June 30, 1995
and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statement of Income for the three and
six months ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Cash Flows for the six months ended
June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
June 30, 1995 and December 31, 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Finance receivables . . . . . . . . . . . . . . . . . . . . . . . $6,892,937 $6,336,368
Allowance for losses . . . . . . . . . . . . . . . . . . . . . (193,978) (180,573)
Insurance reserves and claims . . . . . . . . . . . . . . . . . (229,384) (250,954)
---------- ----------
6,469,575 5,904,841
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 782,833 704,244
Property and equipment . . . . . . . . . . . . . . . . . . . . . 67,723 65,188
Insurance policy acquisition costs . . . . . . . . . . . . . . . 47,609 42,932
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,690 21,770
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,204 21,817
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284,113 277,499
---------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $7,699,747 $7,038,291
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Senior debt
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . $2,280,298 $2,380,039
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384,530 50,252
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . 6,387 4,804
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,511,417 3,160,378
---------- ----------
6,182,632 5,595,473
Senior subordinated debt . . . . . . . . . . . . . . . . . . . . 4,400 7,800
---------- ----------
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . 6,187,032 5,603,273
Accounts payable and accrued liabilities . . . . . . . . . . . . 264,773 271,480
Insurance reserves and claims
Unearned insurance premiums . . . . . . . . . . . . . . . . . . 177,943 146,163
Losses and adjustment expenses . . . . . . . . . . . . . . . . 61,685 55,297
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 50,709 68,334
---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . 6,742,142 6,144,547
---------- ----------
Stockholder's equity
Common stock ($1 par value, 1,000,000 shares
authorized; 500,000 shares outstanding) . . . . . . . . . . . . 500 500
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 137,588 137,588
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 901,586 860,133
Securities valuation adjustment . . . . . . . . . . . . . . . . . 39,223 8,278
Currency translation adjustment . . . . . . . . . . . . . . . . . (121,292) (112,755)
---------- ----------
Total stockholder's equity . . . . . . . . . . . . . . . . . 957,605 893,744
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY . . . . . . . . . $7,699,747 $7,038,291
========== ==========
</TABLE>
See accompanying note.
- 1 -
<PAGE> 4
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
Periods Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- -------------------
1995 1994 1995 1994
-------- -------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C>
REVENUES
Interest, discount and service charges . . . $309,739 $254,945 $610,312 $506,202
Credit life, credit disability and
casualty insurance premiums . . . . . . . . 81,999 69,478 162,830 132,764
Investment and other income (including net
realized investment gains and losses) . . . 15,042 12,412 31,233 25,435
-------- -------- -------- --------
Total revenues . . . . . . . . . . . . . 406,780 336,835 804,375 664,401
-------- -------- -------- --------
EXPENSES
Interest and debt expense . . . . . . . . . . 116,930 78,595 229,502 156,873
Provision for losses on collection of finance
receivables, less recoveries . . . . . . . 33,283 31,735 68,052 61,636
Credit life, credit disability and casualty
insurance losses and adjustment expenses,
less recoveries . . . . . . . . . . . . . . 36,738 31,200 69,818 61,649
Amortization of insurance policy
acquisition costs . . . . . . . . . . . . . 18,125 14,545 36,446 26,695
Other operating expenses . . . . . . . . . . 132,153 116,790 261,328 231,692
-------- -------- -------- --------
Total expenses . . . . . . . . . . . . . 337,229 272,865 665,146 538,545
-------- -------- -------- --------
Income before income taxes . . . . . . . . . . 69,551 63,970 139,229 125,856
Income taxes . . . . . . . . . . . . . . . . . 26,027 24,235 52,376 47,296
-------- -------- -------- --------
NET INCOME . . . . . . . . . . . . . . . . . . $ 43,524 $ 39,735 $ 86,853 $ 78,560
======== ======== ======== ========
</TABLE>
See accompanying note.
- 2 -
<PAGE> 5
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,853 $ 78,560
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on receivables . . . . . . . . . . . . 84,350 75,751
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 9,577 7,920
Gain on sales of investments . . . . . . . . . . . . . . . (2,149) (1,029)
Increase in unamortized insurance policy
acquisition costs . . . . . . . . . . . . . . . . . . . . (4,686) (1,566)
Increase (decrease) in unearned insurance premiums and
reserves for insurance losses and adjustment expenses . . 18,986 (556)
Increase (decrease) in accounts payable and accrued
liabilities . . . . . . . . . . . . . . . . . . . . . . . (26,177) 13,295
Increase (decrease) in income taxes . . . . . . . . . . . . (16,394) 1,134
Other, net . . . . . . . . . . . . . . . . . . . . . . . . (607) 7,562
---------- ----------
Net cash provided by operating activities . . . . . . . . 149,753 181,071
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased . . . . . . . . . (2,164,902) (1,793,320)
Finance receivables repaid or sold . . . . . . . . . . . . . 1,947,803 1,579,735
Purchases of investments available for sale . . . . . . . . . (92,855) (82,504)
Proceeds from sales of investments available for sale . . . . 45,169 29,334
Proceeds from maturities and calls of investments
available for sale . . . . . . . . . . . . . . . . . . . . 26,761 39,083
Capital expenditures . . . . . . . . . . . . . . . . . . . . (9,108) (8,566)
Cash used in acquisition of HFCA, net of cash acquired . . . (39,808)
---------- ----------
Net cash used by investing activities . . . . . . . . . . (286,940) (236,238)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term debt . . . . . . . . . . . . . . . . . (61,784) (36,025)
Proceeds from issuance of notes . . . . . . . . . . . . . . . 918,179 365,230
Principal payments on notes . . . . . . . . . . . . . . . . (677,016) (233,363)
Increase (decrease) in savings deposits . . . . . . . . . . . 1,595 (1,586)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . (45,400) (39,500)
---------- ----------
Net cash provided by financing activities . . . . . . . . 135,574 54,756
---------- ----------
Net decrease in cash . . . . . . . . . . . . . . . . . . . . . (1,613) (411)
Cash at beginning of period . . . . . . . . . . . . . . . . . . 21,817 7,858
---------- ----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . $ 20,204 $ 7,447
========== ==========
</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.
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, 1994.
ACQUISITIONS
In January 1995, the Registrant purchased the stock of HFC of Australia
Ltd. and its Australian subsidiaries (HFCA), subsidiaries of
Household International, Inc. The Registrant paid $39.8 million in
cash and assumed liabilities of approximately $435 million.
This acquisition added approximately $436 million to the Registrant's
finance receivable portfolio.
- 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, 1995 COMPARED
TO THE SIX MONTHS ENDED JUNE 30, 1994.
Income before income taxes for the six months ended June 30, 1995 was
$139.2 million compared to $125.9 million for the six months ended June
30, 1994, an increase of $13.3 million (10.6%). This increase resulted
primarily from: (i) an increase in the level of receivables
outstanding as average finance receivables were $6.826 billion for the
first six months of 1995 compared to $5.470 billion during the first six
months of 1994; (ii) an increase in earned premium and a decrease in
the ratio of insurance losses to earned premium; (iii) a decrease in
the ratio of charge-offs to average finance receivables; and (iv) an
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 7.41% for the
first six months in 1995 from 6.43% for the like period in 1994; (ii)
an increase in contingent commissions in the independent insurance
lines due primarily to improved loss experience; and (iii) lower
receivable yields due primarily to an increase in the percent of the
finance receivable portfolio representing retail installment contracts,
which are lower yielding. Interest income as a percent of average
finance receivables (on an annualized basis) was 17.88% for the first six
months of 1995 compared to 18.51% for the like period in 1994.
Revenues for the six months ended June 30, 1995 were $804.4 million
compared to $664.4 million for the six months ended June 30, 1994,
an increase of $140.0 million (21.1%). This increase resulted primarily
from the increase in the level of receivables outstanding, earned
premium, and investment income, partially offset by a decrease of
approximately $12.9 million from the decline in yields on finance
receivables.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 1995
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1994.
Income before income taxes for the three months ended June 30, 1995 was
$69.5 million compared to $64.0 million for the three months ended June
30, 1994, an increase of $5.5 million (8.7%). This increase in income
resulted primarily from: (i) an increase in the level of receivables
outstanding; (ii) an increase in earned premium; and (iii) an
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 and
(ii) a decrease in yields on finance receivables.
Revenues for the three months ended June 30, 1995 were $406.8 million
compared to $336.8 million for the three months ended June 30, 1994,
an increase of $70.0 million (20.8%). This increase resulted primarily
from the higher level of receivables outstanding, earned premium, and
investment income, partially offset by the decrease in finance receivable
yields.
- 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.
Under certain interest rate exchange agreements, the Registrant makes
periodic fixed payments in exchange for periodic variable payments.
The Registrant enters into such agreements to mitigate its exposure to
increases in interest rates on a portion of its variable rate debt.
During the first six months of 1995, the Registrant had $305.7 million
of these agreements go into effect. These agreements have a weighted
average original term of 2.1 years and expire through 1999. In
addition, the Registrant had $250.0 million in basis swap agreements
go into effect during the first six months of 1995. These
agreements, which expire in 1996, had the effect of exchanging the
indices used to determine interest expense under certain variable
rate borrowings. These agreements serve to better match the rate of
interest the Registrant incurred on its financing with the rate of
interest earned on certain of its variable rate receivables. The
effect of the basis swap agreements on the Registrant's average annual
cost of borrowed funds is not material.
- 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) 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 June 30, 1995, the Registrant
filed two reports on Form 8-K:
Report dated May 1, 1995, relating to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 to describe the
purpose and effects of the Registrant's use of
interest rate exchange agreements (swaps) to manage
its ratio of short-term variable rate debt to fixed
rate long-term debt.
Report dated June 29, 1995, relating to the
Registrant's Registration Statement No. 33-55953 with
respect to which the Registrant commenced an
offering from time to time of $700,000,000 of Medium
Term Notes, Series G, due from more than nine months
to 10 years from date of issues.
- 7 -
<PAGE> 10
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, 1995 By GARY L. FITE
-----------------------------------
GARY L. FITE
Executive Vice President & Controller
(Chief Accounting Officer)
- 8 -
<PAGE> 1
EXHIBIT 12
AVCO FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF NUMBER OF TIMES
FIXED CHARGES EARNED
SIX MONTHS ENDED JUNE 30, 1995
(Thousands of dollars)
<TABLE>
<S> <C>
Income
Income before income taxes . . . . . . . . . . . . . . . . . . . . $139,229
--------
Fixed charges to be added back to income -
Interest and debt expense . . . . . . . . . . . . . . . . . . . . 229,502
Rentals (one-third of all rent and related costs
charged to income) . . . . . . . . . . . . . . . . . . . . . . 7,655
--------
Total fixed charges . . . . . . . . . . . . . . . . . . . . . 237,157
--------
Income before income taxes and fixed charges . . . . . . . . . . . . $376,386
========
Ratio
Number of times fixed charges covered by income
before income taxes and fixed charges . . . . . . . . . . . . . . 1.6
===
</TABLE>
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AFS'
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1995 AND CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 20,204
<SECURITIES> 0
<RECEIVABLES> 6,892,937
<ALLOWANCES> (193,978)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 67,723
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,699,747
<CURRENT-LIABILITIES> 0
<BONDS> 3,522,204
<COMMON> 500
0
0
<OTHER-SE> 957,105
<TOTAL-LIABILITY-AND-EQUITY> 7,699,747
<SALES> 0
<TOTAL-REVENUES> 804,375
<CGS> 0
<TOTAL-COSTS> 106,264
<OTHER-EXPENSES> 261,328
<LOSS-PROVISION> 68,052
<INTEREST-EXPENSE> 229,502
<INCOME-PRETAX> 139,229
<INCOME-TAX> 52,376
<INCOME-CONTINUING> 86,853
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,853
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
