<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, 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 September 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.
<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, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statement of Income for the three and
nine months ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . 2
Consolidated Statement of Cash Flows for the nine months ended
September 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
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
--------- ----------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Finance receivables . . . . . . . . . . . . $6,981,082 $6,933,526
Allowance for losses. . . . . . . . . . . (204,476) (195,413)
Insurance reserves and claims . . . . . . (261,049) (261,499)
---------- ----------
6,515,557 6,476,614
Investments . . . . . . . . . . . . . . . . 881,617 852,450
Property and equipment . . . . . . . . . . 74,353 72,159
Insurance policy acquisition costs . . . . 58,598 54,716
Goodwill . . . . . . . . . . . . . . . . . 21,357 21,388
Cash . . . . . . . . . . . . . . . . . . . 27,425 25,454
Other . . . . . . . . . . . . . . . . . . . 321,012 288,167
---------- ----------
TOTAL ASSETS . . . . . . . . . . . . $7,899,919 $7,790,948
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Senior debt
Commercial paper . . . . . . . . . . . . $2,548,063 $2,067,722
Banks . . . . . . . . . . . . . . . . . . 220,392 345,879
Savings deposits. . . . . . . . . . . . . 4,220 5,184
Notes . . . . . . . . . . . . . . . . . . 3,400,572 3,742,752
---------- ----------
6,173,247 6,161,537
Senior subordinated debt . . . . . . . . . 1,000 3,900
---------- ----------
Total debt. . . . . . . . . . . . . . 6,174,247 6,165,437
Accounts payable and accrued liabilities . 288,201 285,909
Insurance reserves and claims
Unearned insurance premiums . . . . . . . 204,502 196,591
Losses and adjustment expenses. . . . . . 67,464 61,557
Income taxes . . . . . . . . . . . . . . . 58,607 53,224
---------- ----------
Total liabilities . . . . . . . . . . 6,793,021 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 . . . . . . . . . . . . . 1,017,009 949,436
Securities valuation adjustment . . . . . . 53,469 56,309
Currency translation adjustment . . . . . . (101,668) (115,603)
---------- ----------
Total stockholder's equity. . . . . . 1,106,898 1,028,230
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY . . . . . . . . . . . . . . $7,889,919 $7,790,948
========== ==========
</TABLE>
See accompanying note.
- 1 -
<PAGE> 4
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
1996 1995 1996 1995
-------- -------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C>
REVENUES
Interest, discount and service
charges . . . . . . . . . . . . . . $319,782 $317,231 $953,803 $ 927,543
Credit life, credit disability and
casualty insurance premiums. . . . 99,591 87,316 298,769 250,146
Investment and other income (including
net realized investment gains and
losses) . . . . . . . . . . . . . 22,715 16,060 55,246 47,293
-------- -------- --------- ---------
Total revenues . . . . . . . . . . . 442,088 420,607 1,307,818 1,224,982
-------- -------- --------- ---------
EXPENSES
Interest and debt expense . . . . . 107,383 113,040 320,538 342,542
Provision for losses on collection of
finance receivables . . . . . . 53,183 39,033 145,964 107,085
Credit life, credit disability and
casualty insurance losses and
adjustment expenses,
less recoveries. . . . . . . . . . 46,172 38,704 139,735 108,522
Amortization of insurance policy
acquisition costs . . . . . . . 23,616 18,929 68,646 55,375
Other operating expenses . . . . . . 136,023 135,298 409,638 396,626
-------- -------- --------- ---------
Total expenses . . . . . . . . . . . 366,377 345,004 1,084,521 1,010,150
-------- -------- --------- ---------
Income before income taxes . . . . . . 75,711 75,603 223,297 214,832
Income taxes . . . . . . . . . . . . . 28,233 28,527 83,724 80,903
-------- -------- --------- ---------
NET INCOME . . . . . . . . . . . . . . $ 47,478 $ 47,076 $ 139,573 $ 133,929
======== ======== ========= =========
</TABLE>
See accompanying note.
- 2 -
<PAGE> 5
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 139,573 $ 133,929
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on collection of finance receivables. . 145,964 107,085
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 14,190 14,346
Gain on sales of investments . . . . . . . . . . . . . . . . (9,055) (2,725)
Increase in unamortized insurance policy
acquisition costs . . . . . . . . . . . . . . . . . . . . . (3,882) (7,511)
Increase in unearned insurance premiums and
reserves for insurance losses.and adjustment expenses. . . 9,664 42,957
Decrease in accounts payable and accrued liabilities . . . . (763) (19,224)
Increase (decrease) in income taxes. . . . . . . . . . . . . 4,389 (6,541)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (22,440) (1,153)
---------- ----------
Net cash provided by operating activities . . . . . . . . 277,640 261,163
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased . . . . . . . . . (3,239,365) (3,246,899)
Finance receivables repaid or sold . . . . . . . . . . . . . 3,123,049 2,930,075
Purchases of investments available for sale. . . . . . . . . . (199,289) (146,449)
Proceeds from sales of investments available for sale. . . . . 141,257 60,933
Proceeds from maturities and calls of investments
available for sale . . . . . . . . . . . . . . . . . . . . 41,109 43,109
Capital expenditures . . . . . . . . . . . . . . . . . . . . (16,544) (13,263)
Cash used in acquisition of HFCA, net of cash acquired . . . . (39,808)
---------- ----------
Net cash used by investing activities . . . . . . . . . . (149,783) (412,302)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt . . . . . . . . . . . 317,110 (135,892)
Proceeds from issuance of notes . . . . . . . . . . . . . . . 193,373 1,176,393
Principal payments on notes . . . . . . . . . . . . . . . . . (563,270) (831,734)
Increase (decrease) in savings deposits. . . . . . . . . . . . (1,099) 1,224
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . (72,000) (67,750)
---------- ----------
Net cash provided (used) by financing activities. . . . . (125,886) 142,241
---------- ----------
Net increase(decrease) in cash . . . . . . . . . . . . . . . . . 1,971 (8,898)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . 25,454 21,817
---------- ----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . $ 27,425 $ 12,919
========== ==========
</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, 1995.
- 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, 1996 COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995.
Income before income taxes for the nine months ended September 30, 1996 was
$223.3 million compared to $214.8 million for the nine months ended September
30, 1995, an increase of $8.5 million (3.9%). This increase resulted primarily
from: (i) an increase in yields on finance receivables (interest income as a
percent of average finance receivables) to 18.58% for the first nine months in
1996 from 18.04% for the like period in 1995; (ii) a decrease in the cost of
borrowed funds to 6.93% for the first nine months in 1996 compared to 7.35% for
the like period in 1995; (iii) an increase in capital gains of $6.3 million due
to a higher volume of sales in the bond investment portfolio; and (iv) an
increase in investment income due to a higher level of invested assets.
Partially offsetting these increases were: (i) an increase in the provision
for losses due primarily to an increase in the ratio of net credit losses to
average finance receivables to 2.74% for the first nine months in 1996 from
1.99% for the like period in 1995 and (ii) an increase in the ratio of
insurance losses to earned premiums.
Revenues for the nine months ended September 30, 1996 were $1.308 billion
compared to $1.225 billion for the nine months ended September 30, 1995, an
increase of $83 million (6.8%). This increase resulted primarily from: (i) an
increase in yields on finance receivables; (ii) an increase in earned premiums
in both the finance related and independent insurance operations; and (iii) an
increase in capital gains.
The proliferation of credit cards and the resulting increase in the level of
consumer debt has not only overburdened the consumer, resulting in higher
delinquencies and charge-offs, but has provided the consumer an alternate
source of funds, thereby reducing our receivable growth.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995.
Income before income taxes for the three months ended September 30, 1996 was
$75.7 million compared to $75.6 million for the three months ended September
30, 1995. While income before income taxes remained flat, the results for the
three months ended September 30, 1996 were impacted by the following: (i) an
increase in the provision for losses due primarily to an increase in the ratio
of net credit losses to average finance receivables; (ii) an increase in
capital gains of $6.7 million due primarily to a higher volume of sales in the
bond investment portfolio; (iii) an increase in yields on finance receivables
(interest income as a percent of average finance receivables); (iv) a decrease
in the cost of borrowed funds; and (v) an increase in the ratio of insurance
losses to earned premiums.
Revenues for the three months ended September 30, 1996 were $442.1 million
compared to $420.6 million for the three months ended September 30, 1995, an
increase of $21.5 million (5.1%). This increase resulted primarily from: (i)
an increase in capital gains; (ii) an increase in yields on finance
receivables; and (iii) an increase in earned premiums in both the finance
related and independent insurance operations.
- 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 nine months of
1996, the Registrant had $367.7 million of these agreements go into effect.
These agreements have a weighted average original term of 2.1 years and expire
through 1999.
- 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
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 November 12, 1996 By GARY L. FITE
----------------- -------------------------------------
GARY L. FITE
Executive Vice President & Controller
(Chief Accounting Officer)
- 7 -
<PAGE> 10
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 November 12, 1996 By
----------------- --------------------------------------
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, 1996
(Thousands of dollars)
<TABLE>
<S> <C>
Income
Income before income taxes . . . . . . . . . . . . . . . . . $223,297
--------
Fixed charges to be added back to income -
Interest and debt expense . . . . . . . . . . . . . . . . 320,538
Rentals (one-third of all rent and related costs
charged to income) . . . . . . . . . . . . . . . . . . 11,116
--------
Total fixed charges . . . . . . . . . . . . . . . . . 331,654
--------
Income before income taxes and fixed charges . . . . . . . . . $554,951
========
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 SEPTEMBER 30, 1996 AND CONSOLIDATED STATEMENT OF
INCOME FOR THIS NINE MONTHS ENDED SEPTEMBER 30, 1996 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-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 27,425
<SECURITIES> 0
<RECEIVABLES> 6,981,082
<ALLOWANCES> (204,476)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 74,353
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,899,919
<CURRENT-LIABILITIES> 0
<BONDS> 3,405,792
0
0
<COMMON> 500
<OTHER-SE> 1,106,398
<TOTAL-LIABILITY-AND-EQUITY> 7,889,919
<SALES> 0
<TOTAL-REVENUES> 1,307,818
<CGS> 0
<TOTAL-COSTS> 208,381
<OTHER-EXPENSES> 409,638
<LOSS-PROVISION> 145,964
<INTEREST-EXPENSE> 320,538
<INCOME-PRETAX> 223,297
<INCOME-TAX> 83,724
<INCOME-CONTINUING> 139,573
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 139,573
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
