<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 March 31, 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
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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
(Former principal executive offices address of the Registrant was
3349 Michelson Drive, Irvine, California 92715)
- -----------------------------------------------------------------------------
(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 March 31, 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 March 31, 1995
and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statement of Income for the three months ended
March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Cash Flows for the three months ended
March 31, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . 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
MARCH 31, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Finance receivables . . . . . . . . . . . . . . . . . . . . . . $6,912,611 $6,336,368
Allowance for losses . . . . . . . . . . . . . . . . . . . . (197,402) (180,573)
Insurance reserves and claims . . . . . . . . . . . . . . . (250,463) (250,954)
---------- ----------
6,464,746 5,904,841
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 760,003 704,244
Property and equipment . . . . . . . . . . . . . . . . . . . . . 69,640 65,188
Insurance policy acquisition costs . . . . . . . . . . . . . . . 44,909 42,932
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,103 21,770
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,765 21,817
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280,275 277,499
---------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . $7,660,441 $7,038,291
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Senior debt
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . .$2,257,909 $2,380,039
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407,483 50,252
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . 6,343 4,804
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,532,001 3,160,378
---------- ----------
6,203,736 5,595,473
Senior subordinated debt . . . . . . . . . . . . . . . . . . . 7,800 7,800
---------- ----------
Total debt . . . . . . . . . . . . . . . . . . . . . . . . 6,211,536 5,603,273
Accounts payable and accrued liabilities . . . . . . . . . . . . 248,604 271,480
Insurance reserves and claims
Unearned insurance premiums . . . . . . . . . . . . . . . . . 152,381 146,163
Losses and adjustment expenses . . . . . . . . . . . . . . . . 54,970 55,297
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 67,556 68,334
---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . 6,735,047 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 . . . . . . . . . . . . . . . . . . . . . . . . 880,412 860,133
Securities valuation adjustment . . . . . . . . . . . . . . . . 24,418 8,278
Currency translation adjustment . . . . . . . . . . . . . . . . (117,524) (112,755)
---------- ----------
Total stockholder's equity . . . . . . . . . . . . . . . 925,394 893,744
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY . . . . . . . $7,660,441 $7,038,291
========== ==========
</TABLE>
See accompanying note.
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<PAGE> 4
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------- --------
(Thousands of dollars)
<S> <C> <C>
REVENUES
Interest, discount and service charges . . . . . . . . . . . . . $300,573 $251,257
Credit life, credit disability and casualty
insurance premiums . . . . . . . . . . . . . . . . . . . . . 80,831 63,286
Investment and other income (including net
realized investment gains and losses) . . . . . . . . . . . . 16,191 13,023
-------- --------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . 397,595 327,566
-------- --------
EXPENSES
Interest and debt expense . . . . . . . . . . . . . . . . . . . 112,572 78,278
Provision for losses on collection of finance
receivables, less recoveries . . . . . . . . . . . . . . . . . 34,769 29,901
Credit life, credit disability and casualty
insurance losses and adjustment expenses,
less recoveries . . . . . . . . . . . . . . . . . . . . . . . 33,080 30,449
Amortization of insurance policy acquisition costs . . . . . . . 18,321 12,150
Other operating expenses . . . . . . . . . . . . . . . . . . . . 129,175 114,902
-------- --------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . 327,917 265,680
-------- --------
Income before income taxes . . . . . . . . . . . . . . . . . . . . 69,678 61,886
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,349 23,061
-------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,329 $ 38,825
======== ========
</TABLE>
See accompanying note.
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AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,329 $ 38,825
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on receivables . . . . . . . . . . . 42,890 36,835
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 4,329 3,972
Gain on sales of investments . . . . . . . . . . . . . . . (1,784) (1,034)
Decrease (increase) in unamortized insurance policy
acquisition costs . . . . . . . . . . . . . . . . . . . (2,034) 459
Increase (decrease) in unearned insurance premiums and
reserves for insurance losses and adjustment expenses . 6,194 (4,479)
Increase (decrease) in accounts payable and accrued
liabilities . . . . . . . . . . . . . . . . . . . . . . (42,516) 19,053
Increase (decrease) in income taxes . . . . . . . . . . . (53) 79
Other, net . . . . . . . . . . . . . . . . . . . . . . . . 11,247 7,770
--------- ----------
Net cash provided by operating activities . . . . . . . . 61,602 101,480
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased . . . . . . . . (1,072,615) (828,859)
Finance receivables repaid or sold . . . . . . . . . . . . . 890,048 772,248
Purchases of investments available for sale . . . . . . . . (38,578) (60,957)
Proceeds from sales of investments available for sale . . . 9,913 19,179
Proceeds from maturities and calls of investments
available for sale . . . . . . . . . . . . . . . . . . . 9,717 37,880
Capital expenditures . . . . . . . . . . . . . . . . . . . . (3,308) (3,199)
Cash used in acquisition of HFCA, net of cash acquired . . . (39,808)
---------- ---------
Net cash used by investing activities . . . . . . . . . . (244,631) (63,708)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term debt . . . . . . . . . . . . . . . . (68,753) (140,004)
Proceeds from issuance of notes . . . . . . . . . . . . . . 606,571 150,745
Principal payments on notes . . . . . . . . . . . . . . . . (342,338) (23,529)
Decrease (increase) in savings deposits . . . . . . . . . . 1,547 (1,476)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . (23,050) (19,500)
---------- ----------
Net cash provided (used) by financing activities . . . 173,977 (33,764)
---------- ----------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . (9,052) 4,008
Cash at beginning of period . . . . . . . . . . . . . . . . . . 21,817 7,858
---------- ----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . $ 12,765 $ 11,866
========== ==========
</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. 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, 1994.
ACQUISITION
- -----------
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 THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1994.
Income before income taxes for the three months ended March 31, 1995 was $69.7
million compared to $61.9 million for the three months ended March 31, 1994, an
increase of $7.8 million (12.6%). This increase resulted primarily from: (i)
an increase in the level of receivables outstanding as average finance
receivables were $6.787 billion for the first three months of 1995 compared to
$5.438 billion for the like period in 1994; (ii) an increase in earned premium
and a decrease in the ratio of insurance losses to earned premium in both the
finance related and independent insurance operations; 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 to 7.38% for the first three months in 1995 from
6.44% for the like period in 1994; (ii) an increase in the provision for losses
associated with the increase in receivables outstanding; (iii) an increase in
contingent insurance commissions in the independent insurance lines due
primarily to improved loss experience; and (iv) a decline in yields on finance
receivables 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 was
17.72% for the first three months of 1995 compared to 18.48% for the like
period in 1994.
Revenues for the three months ended March 31, 1995 were $397.6 million compared
to $327.6 million for the three months ended March 31, 1994, an increase of $70
million (21.4%). 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 $8.5 million 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.
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 three months of
1995, the Registrant had $168.4 million of these agreements go into effect.
These agreements have a weighted average original term of 2.0 years and expire
through 1999. In addition, the Registrant had $150.0 million in basis swap
agreements go into effect during the first three 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 borrowing. 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 immaterial.
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 -
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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
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, 1995 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, 1995
(Thousands of dollars)
<TABLE>
<S> <C>
Income
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $69,678
-------
Fixed charges to be added back to income -
Interest and debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,572
Rentals (one-third of all rent and related costs
charged to income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,813
--------
Total fixed charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,385
--------
Income before income taxes and fixed charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . $186,063
========
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 MARCH 31, 1995 AND CONSOLIDATED STATEMENT OF
INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1995, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 12,765
<SECURITIES> 0
<RECEIVABLES> 6,912,611
<ALLOWANCES> 197,402
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 69,640
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,660,441
<CURRENT-LIABILITIES> 0
<BONDS> 3,546,144
<COMMON> 500
0
0
<OTHER-SE> 924,894
<TOTAL-LIABILITY-AND-EQUITY> 925,394
<SALES> 0
<TOTAL-REVENUES> 397,595
<CGS> 0
<TOTAL-COSTS> 51,401
<OTHER-EXPENSES> 129,175
<LOSS-PROVISION> 34,769
<INTEREST-EXPENSE> 112,572
<INCOME-PRETAX> 69,678
<INCOME-TAX> 26,349
<INCOME-CONTINUING> 43,329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,329
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
