<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, 1996
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, 1996, 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 June 30, 1996
and December 31, 1995......................................... 1
Consolidated Statement of Income for the three and
six months ended June 30, 1996 and 1995....................... 2
Consolidated Statement of Cash Flows for the six months ended
June 30, 1996 and 1995........................................ 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......................................................................... 7
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Finance receivables............................................... $6,927,327 $6,933,526
Allowance for losses........................................... (200,265) (195,413)
Insurance reserves and claims.................................. (260,698) (261,499)
---------- ----------
6,466,364 6,476,614
Investments....................................................... 869,457 852,450
Property and equipment............................................ 71,817 72,159
Insurance policy acquisition costs................................ 57,363 54,716
Goodwill.......................................................... 21,704 21,388
Cash .......................................................... 18,346 25,454
Other............................................................. 306,868 288,167
---------- ----------
TOTAL ASSETS.............................................. $7,811,919 $7,790,948
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Senior debt
Commercial paper............................................... $2,507,275 $2,067,722
Banks ......................................................... 332,948 345,879
Savings deposits............................................... 4,172 5,184
Notes.......................................................... 3,297,604 3,742,752
---------- ----------
6,141,999 6,161,537
Senior subordinated debt.......................................... 1,500 3,900
---------- ----------
Total debt................................................ 6,143,499 6,165,437
Accounts payable and accrued liabilities.......................... 269,281 285,909
Insurance reserves and claims
Unearned insurance premiums.................................... 198,864 196,591
Losses and adjustment expenses................................. 65,389 61,557
Income taxes...................................................... 57,484 53,224
---------- ----------
Total liabilities......................................... 6,734,517 6,762,718
---------- ----------
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................................................. 991,531 949,436
Securities valuation adjustment................................... 52,015 56,309
Currency translation adjustment................................... (104,232) (115,603)
---------- ----------
Total stockholder's equity................................ 1,077,402 1,028,230
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................ $7,811,919 $7,790,948
========== ==========
</TABLE>
See accompanying note.
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<PAGE> 4
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
PERIODS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C>
REVENUES
Interest, discount and service charges................ $317,500 $309,739 $634,021 $610,312
Credit life, credit disability and
casualty insurance premiums......................... 99,796 81,999 199,178 162,830
Investment and other income (including net
realized investment gains and losses)............... 16,185 15,042 32,531 31,233
-------- -------- -------- --------
Total revenues.................................. 433,481 406,780 865,730 804,375
-------- -------- -------- --------
EXPENSES
Interest and debt expense............................. 106,016 116,930 213,155 229,502
Provision for losses on collection of finance
receivables......................................... 47,050 33,283 92,781 68,052
Credit life, credit disability and casualty
insurance losses and adjustment expenses,
less recoveries..................................... 46,236 36,738 93,563 69,818
Amortization of insurance policy
acquisition costs................................... 21,775 18,125 45,030 36,446
Other operating expenses.............................. 137,032 132,153 273,615 261,328
-------- -------- -------- --------
Total expenses.................................. 358,109 337,229 718,144 665,146
-------- -------- -------- --------
Income before income taxes............................... 75,372 69,551 147,586 139,229
Income taxes............................................. 28,486 26,027 55,491 52,376
-------- -------- -------- --------
NET INCOME............................................... $ 46,886 $ 43,524 $ 92,095 $ 86,853
======== ======== ======== ========
</TABLE>
See accompanying note.
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<PAGE> 5
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................. $ 92,095 $ 86,853
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on collection of finance receivables................ 92,781 68,052
Depreciation............................................................. 9,394 9,577
Gain on sales of investments............................................. (1,746) (2,149)
Increase in unamortized insurance policy
acquisition costs.................................................... (2,638) (4,686)
Increase in unearned insurance premiums and
reserves for insurance losses and adjustment expenses................ 2,407 18,986
Decrease in accounts payable and accrued liabilities..................... (19,255) (26,177)
Increase (decrease) in income taxes...................................... 3,403 (16,394)
Other, net............................................................... (10,154) (607)
---------- ----------
Net cash provided by operating activities............................ 166,287 133,455
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased................................ (2,090,257) (2,164,902)
Finance receivables repaid or sold......................................... 2,065,051 1,964,101
Purchases of investments available for sale................................ (70,610) (92,855)
Proceeds from sales of investments available for sale...................... 28,934 45,169
Proceeds from maturities and calls of investments
available for sale....................................................... 26,499 26,761
Capital expenditures....................................................... (9,498) (9,108)
Cash used in acquisition of HFCA, net of cash acquired..................... (39,808)
---------- ----------
Net cash used by investing activities................................ (49,881) (270,642)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt..................................... 395,663 (61,784)
Proceeds from issuance of notes............................................ 80,432 918,179
Principal payments on notes ............................................... (548,478) (677,016)
Increase (decrease) in savings deposits.................................... (1,131) 1,595
Dividends paid............................................................. (50,000) (45,400)
---------- ----------
Net cash provided (used) by financing activities..................... (123,514) 135,574
---------- ----------
Net decrease in cash.......................................................... (7,108) (1,613)
Cash at beginning of period................................................... 25,454 21,817
---------- ----------
Cash at end of period......................................................... $ 18,346 $ 20,204
========== ==========
</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, 1995.
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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 SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1995.
Income before income taxes for the six months ended June 30, 1996 was $147.6
million compared to $139.2 million for the six months ended June 30, 1995, an
increase of $8.4 million (6.0%). This increase resulted primarily from: (i) an
increase in yields on finance receivables (interest income as a percent of
average finance receivables) to 18.59% for the first six months in 1996 compared
to 17.88% for the like period in 1995; (ii) a decrease in the cost of borrowed
funds to 6.95% for the first six months in 1996 compared to 7.41% for the like
period in 1995; and (iii) an increase in investment income due to a higher level
of invested assets. Partially offsetting these increases were: (i) an increase
in the ratio of net credit losses to average finance receivables to 2.64% for
the first six months in 1996 from 1.89% for the like period in 1995 and (ii) an
increase in the ratio of insurance losses to earned premiums in the independent
insurance operations.
Revenues for the six months ended June 30, 1996 were $865.7 million compared to
$804.4 million for the six months ended June 30, 1995, an increase of $61.3
million (7.6%). This increase resulted primarily from an increase in yields on
finance receivables and an increase in earned premiums in both the finance
related and independent insurance operations.
Throughout the first six months of 1996, the economic conditions have continued
to burden the consumer finance customer and, as a result, receivable volume has
been negatively affected and delinquencies and charge-offs have remained higher
than historical norms.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1995.
Income before income taxes for the three months ended June 30, 1996 was $75.4
million compared to $69.6 million for the three months ended June 30, 1995, an
increase of $5.8 million (8.3%). This increase resulted primarily from: (i) an
increase in yields on finance receivables (interest income as a percent of
average finance receivables); (ii) a decrease in the cost of borrowed funds; and
(iii) an increase in investment income due to a higher level of invested assets.
Partially offsetting these increases were: (i) an increase in the ratio of net
credit losses to average finance receivables and (ii) an increase in the ratio
of insurance losses to earned premiums in the independent insurance operations.
Revenues for the three months ended June 30, 1996 were $433.5 million compared
to $406.8 million for the three months ended June 30, 1995, an increase of $26.7
million (6.6%). This increase resulted primarily from an increase in yields on
finance receivables and an increase in earned premiums in both the finance
related and independent insurance operations.
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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 six months of 1996, the
Registrant had $282.7 million of these agreements go into effect. These
agreements have a weighted average original term of 2.1 years and expire through
1999.
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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
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 August 12, 1996 By /s/ 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
SIX MONTHS ENDED JUNE 30, 1996
(Thousands of dollars)
<TABLE>
<S> <C>
Income
Income before income taxes.................................. $147,586
--------
Fixed charges to be added back to income -
Interest and debt expense................................ 213,155
Rentals (one-third of all rent and related costs
charged to income)..................................... 7,348
--------
Total fixed charges.................................. 220,503
--------
Income before income taxes and fixed charges................... $368,089
========
Ratio
Number of times fixed charges covered by income
before income taxes and fixed charges...................... 1.7
========
</TABLE>
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AFS'
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1996 AND CONSOLIDATED STATEMENT OF INCOME
FOR THIS SIX MONTHS ENDED JUNE 30, 1996 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-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 18,346
<SECURITIES> 0
<RECEIVABLES> 6,927,327
<ALLOWANCES> (200,265)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 71,817
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,811,919
<CURRENT-LIABILITIES> 0
<BONDS> 3,303,276
0
0
<COMMON> 500
<OTHER-SE> 1,076,902
<TOTAL-LIABILITY-AND-EQUITY> 7,811,919
<SALES> 0
<TOTAL-REVENUES> 865,730
<CGS> 0
<TOTAL-COSTS> 138,593
<OTHER-EXPENSES> 273,615
<LOSS-PROVISION> 92,781
<INTEREST-EXPENSE> 213,155
<INCOME-PRETAX> 147,586
<INCOME-TAX> 55,491
<INCOME-CONTINUING> 92,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,095
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
