<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, 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)
<TABLE>
<S> <C>
DELAWARE 13-2530491
- ----------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
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 September 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 September 30, 1995
and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statement of Income for the three and
nine months ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . 2
Consolidated Statement of Cash Flows for the nine months ended
September 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
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . $7,017,206 $6,336,368
Allowance for losses . . . . . . . . . . . . . . . . . . . . . . . . (197,494) (180,573)
Insurance reserves and claims . . . . . . . . . . . . . . . . . . . (261,310) (250,954)
---------- ----------
6,558,402 5,904,841
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827,525 704,244
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . 67,453 65,188
Insurance policy acquisition costs . . . . . . . . . . . . . . . . . . 50,551 42,932
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,277 21,770
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,919 21,817
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282,379 277,499
---------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,826,506 $7,038,291
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Senior debt
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . $2,279,284 $2,380,039
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324,734 50,252
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 6,044 4,804
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,637,801 3,160,378
---------- ----------
6,247,863 5,595,473
Senior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . 3,900 7,800
---------- ----------
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,251,763 5,603,273
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . 272,942 271,480
Insurance reserves and claims
Unearned insurance premiums . . . . . . . . . . . . . . . . . . . . 177,857 146,163
Losses and adjustment expenses . . . . . . . . . . . . . . . . . . . 57,486 55,297
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,681 68,334
---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 6,821,729 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 926,312 860,133
Securities valuation adjustment . . . . . . . . . . . . . . . . . . . . 48,476 8,278
Currency translation adjustment . . . . . . . . . . . . . . . . . . . . (108,099) (112,755)
---------- ----------
Total stockholder's equity . . . . . . . . . . . . . . . . . . . . 1,004,777 893,744
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY . . . . . . . . . . . . $7,826,506 $7,038,291
========== ==========
</TABLE>
See accompanying note.
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<PAGE> 4
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ------------------------
1995 1994 1995 1994
-------- -------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C>
REVENUES
Interest, discount and service charges . . . . . . . . . . . $317,231 $263,577 $ 927,543 $ 769,779
Credit life, credit disability and
casualty insurance premiums . . . . . . . . . . . . . . . 87,316 75,547 250,146 208,311
Investment and other income (including net
realized investment gains and losses) . . . . . . . . . . 16,060 14,082 47,293 39,517
-------- -------- ---------- ----------
Total revenues . . . . . . . . . . . . . . . . . . . . . 420,607 353,206 1,224,982 1,017,607
-------- -------- ---------- ----------
EXPENSES
Interest and debt expense . . . . . . . . . . . . . . . . . 113,040 83,861 342,542 240,734
Provision for losses on collection of finance
receivables, less recoveries . . . . . . . . . . . . . . . 39,033 33,976 107,085 95,612
Credit life, credit disability and casualty
insurance losses and adjustment expenses,
less recoveries . . . . . . . . . . . . . . . . . . . . . 38,704 32,930 108,522 94,579
Amortization of insurance policy
acquisition costs . . . . . . . . . . . . . . . . . . . . 18,929 16,731 55,375 43,426
Other operating expenses . . . . . . . . . . . . . . . . . . 135,298 117,559 396,626 349,251
-------- -------- ---------- ----------
Total expenses . . . . . . . . . . . . . . . . . . . . . 345,004 285,057 1,010,150 823,602
-------- -------- ---------- ----------
Income before income taxes . . . . . . . . . . . . . . . . . . 75,603 68,149 214,832 194,005
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 28,527 25,520 80,903 72,816
-------- -------- ---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,076 $ 42,629 $ 133,929 $ 121,189
======== ======== ========== ==========
</TABLE>
See accompanying note.
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<PAGE> 5
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 133,929 $ 121,189
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on receivables . . . . . . . . . . . . . . 131,903 116,798
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 14,346 11,951
Gain on sales of investments . . . . . . . . . . . . . . . . . . (2,725) (2,823)
Increase in unamortized insurance policy
acquisition costs . . . . . . . . . . . . . . . . . . . . . . . (7,511) (5,236)
Increase in unearned insurance premiums and
reserves for insurance losses and adjustment expenses . . . . . 42,957 17,480
Increase (decrease) in accounts payable and accrued
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . (19,224) 10,139
Decrease in income taxes . . . . . . . . . . . . . . . . . . . . (6,541) (700)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,153) 12,236
---------- ----------
Net cash provided by operating activities . . . . . . . . . . . 285,981 281,034
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased . . . . . . . . . . . (3,246,899) (2,935,368)
Finance receivables repaid or sold . . . . . . . . . . . . . . . . 2,905,257 2,387,887
Purchases of investments available for sale . . . . . . . . . . . (146,449) (142,996)
Proceeds from sales of investments available for sale . . . . . . 60,933 55,754
Proceeds from maturities and calls of investments
available for sale . . . . . . . . . . . . . . . . . . . . . . . 43,109 46,269
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (13,263) (13,759)
Cash used in acquisition of HFCA, net of cash acquired . . . . . . (39,808)
---------- ----------
Net cash used by investing activities . . . . . . . . . . . . . (437,120) (602,213)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt . . . . . . . . . . . . . . (135,892) 41,343
Proceeds from issuance of notes . . . . . . . . . . . . . . . . . 1,176,393 945,722
Principal payments on notes . . . . . . . . . . . . . . . . . . . (831,734) (598,395)
Increase (decrease) in savings deposits . . . . . . . . . . . . . 1,224 (104)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (67,750) (59,500)
---------- ----------
Net cash provided by financing activities . . . . . . . . . . . 142,241 329,066
---------- ----------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . (8,898) 7,887
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . 21,817 7,858
---------- ----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 12,919 $ 15,745
========== ==========
</TABLE>
See accompanying note.
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<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.
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<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, 1995 COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994.
Income before income taxes for the nine months ended September 30, 1995 was
$214.8 million compared to $194.0 million for the nine months ended September
30, 1994, an increase of $20.8 million (10.7%). This increase resulted
primarily from: (i) an increase in the level of receivables outstanding as
average finance receivables were $6.855 billion for the first nine months of
1995 compared to $5.564 billion during the first nine 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 other operating expenses to
revenues in both the finance and insurance operations; 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 7.35% for the first nine months in 1995 from
6.46% for the like period in 1994 and (ii) 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 (on
an annualized basis) was 18.04% for the first nine months of 1995 compared to
18.45% for the like period in 1994.
Revenues for the nine months ended September 30, 1995 were $1.225 billion
compared to $1.018 billion for the nine months ended September 30, 1994, an
increase of $207 million (20.3%). 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 $10.3
million from the decline in yields on finance receivables.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1994.
Income before income taxes for the three months ended September 30, 1995 was
$75.6 million compared to $68.1 million for the three months ended September
30, 1994, an increase of $7.5 million (10.9%). This increase 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 September 30, 1995 were $420.6 million
compared to $353.2 million for the three months ended September 30, 1994, an
increase of $67.4 million (19.1%). This increase resulted primarily from the
higher level of receivables outstanding, earned premium, and investment income,
partially offset by the decrease in yields on finance receivables.
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<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 nine months of
1995, the Registrant had $376.6 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 nine 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.
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<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 September 30, 1995, the
Registrant filed one report on Form 8-K:
Report dated September 20, 1995, relating to Registrant's
Registration Statement Nos. 33-50547 and 33-55953 on
Form S-3 with respect to which the Registrant commenced
an offering on September 14, 1995 of $200,000,000 of 6.35%
Senior Notes due September 15, 2000.
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<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 November 10, 1995 By GARY L. FITE
-------------------------------------
GARY L. FITE
Executive Vice President & Controller
(Chief Accounting Officer)
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<PAGE> 1
EXHIBIT 12
AVCO FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF NUMBER OF TIMES
FIXED CHARGES EARNED
NINE MONTHS ENDED SEPTEMBER 30, 1995
(Thousands of dollars)
<TABLE>
<S> <C>
Income
Income before income taxes . . . . . . . . . . . . . . . . . . . . $214,832
--------
Fixed charges to be added back to income -
Interest and debt expense . . . . . . . . . . . . . . . . . . . 342,754
Rentals (one-third of all rent and related costs
charged to income) . . . . . . . . . . . . . . . . . . . . . 11,310
--------
Total fixed charges . . . . . . . . . . . . . . . . . . . . 354,064
--------
Income before income taxes and fixed charges . . . . . . . . . . . . $568,896
========
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 SEPTEMBER 30, 1995 AND CONSOLIDATED STATEMENT OF
INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 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-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 12,919
<SECURITIES> 0
<RECEIVABLES> 7,017,206
<ALLOWANCES> (197,494)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 67,453
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,826,506
<CURRENT-LIABILITIES> 0
<BONDS> 3,647,745
<COMMON> 500
0
0
<OTHER-SE> 1,004,277
<TOTAL-LIABILITY-AND-EQUITY> 7,826,506
<SALES> 0
<TOTAL-REVENUES> 1,224,982
<CGS> 0
<TOTAL-COSTS> 163,897
<OTHER-EXPENSES> 396,626
<LOSS-PROVISION> 107,085
<INTEREST-EXPENSE> 342,542
<INCOME-PRETAX> 214,832
<INCOME-TAX> 80,903
<INCOME-CONTINUING> 133,929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 133,929
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
