<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, 1997
-----------------------------------
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)
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 March 31, 1997, 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>
<S> <C>
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------- ----
Item 1 Consolidated Financial Statements
Consolidated Balance Sheet at March 31, 1997
and December 31, 1996..........................................................1
Consolidated Statement of Income for the three months ended
March 31, 1997 and 1996........................................................2
Consolidated Statement of Cash Flows for the three months ended
March 31, 1997 and 1996........................................................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
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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>
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PART I. FINANCIAL INFORMATION
- -----------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
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(Thousands of dollars)
<S> <C> <C>
ASSETS
Finance receivables............................................................. $7,491,052 $7,253,738
Allowance for losses ........................................................ (233,761) (218,416)
Insurance reserves and claims ............................................... (293,612) (272,815)
---------- ----------
6,963,679 6,762,507
Investments .................................................................... 934,004 927,571
Property and equipment ......................................................... 81,582 80,646
Insurance policy acquisition costs ............................................. 60,567 60,480
Goodwill ....................................................................... 39,540 27,086
Cash ........................................................................... 38,009 15,562
Other .......................................................................... 346,248 321,207
---------- ----------
TOTAL ASSETS............................................................. $8,463,629 $8,195,059
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Senior debt
Commercial paper............................................................. $2,847,895 $2,651,627
Banks ....................................................................... 244,684 115,367
Savings deposits ............................................................ 3,883 5,465
Notes ....................................................................... 3,574,459 3,629,889
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6,670,921 6,402,348
Senior subordinated debt ....................................................... 1,000 1,000
---------- ----------
Total debt .............................................................. 6,671,921 6,403,348
Accounts payable and accrued liabilities ....................................... 293,782 303,713
Insurance reserves and claims
Unearned insurance premiums ................................................. 198,170 215,768
Losses and adjustment expenses .............................................. 64,118 66,758
Income taxes ................................................................... 69,398 52,786
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Total liabilities ....................................................... 7,297,389 7,042,373
---------- ----------
Stockholder's equity
Common stock ($1 par value, 500,000 shares
authorized; 500,000 shares outstanding) ..................................... 500 500
Additional paid-in capital ..................................................... 137,588 137,588
Retained earnings .............................................................. 1,063,871 1,041,543
Securities valuation adjustment ................................................ 65,416 65,061
Currency translation adjustment ................................................ (101,135) (92,006)
---------- ----------
Total stockholder's equity .............................................. 1,166,240 1,152,686
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............................... $8,463,629 $8,195,059
========== ==========
</TABLE>
See accompanying note.
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AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------- --------
(Thousands of dollars)
<S> <C> <C>
REVENUES
Interest, discount and service charges ........................................... $324,541 $316,521
Credit life, credit disability and casualty
insurance premiums ........................................................... 103,064 99,382
Investment and other income (including net
realized investment gains and losses) ........................................ 18,484 16,346
-------- --------
Total revenues ........................................................... 446,089 432,249
-------- --------
EXPENSES
Interest and debt expense ........................................................ 103,562 107,139
Provision for losses on collection of finance receivables ........................ 58,210 45,731
Credit life, credit disability and casualty insurance
losses and adjustment expenses, less recoveries .............................. 46,331 47,327
Amortization of insurance policy acquisition costs ............................... 23,986 23,255
Other operating expenses ......................................................... 138,455 136,583
-------- --------
Total expenses ........................................................... 370,544 360,035
-------- --------
Income before income taxes ............................................................ 75,545 72,214
Income taxes .......................................................................... 28,217 27,005
-------- --------
NET INCOME ............................................................................ $ 47,328 45,209
======== ========
</TABLE>
See accompanying note.
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AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................. $ 47,328 $ 45,209
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on collection of finance receivables .............. 58,210 45,731
Depreciation ........................................................... 4,925 4,650
Gain on sales of investments ........................................... (2,366) (1,032)
Increase in unamortized insurance policy
acquisition costs .................................................. (72) (537)
Increase (decrease) in unearned insurance premiums and
reserves for insurance losses and adjustment expenses .............. 4,842 (1,228)
Decrease in accounts payable and accrued liabilities ................... (23,548) (30,617)
Increase in income taxes ............................................... 17,114 18,478
Other, net ............................................................. (16,475) 12,675
----------- -----------
Net cash provided by operating activities .......................... 89,958 93,329
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased ................................ (1,247,632) (946,514)
Finance receivables repaid or sold ......................................... 1,066,349 1,019,008
Purchases of investments available for sale ................................ (49,762) (34,334)
Proceeds from sales of investments available for sale ...................... 33,476 7,536
Proceeds from maturities and calls of investments
available for sale ......................................................... 9,018 9,943
Capital expenditures ....................................................... (5,601) (3,870)
Cash used in acquisitions, net of cash acquired ............................ (24,029)
----------- -----------
Net cash provided (used) by investing activities ........................... (218,181) 51,769
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term debt ................................................ 212,378 109,793
Proceeds from issuance of notes ............................................ 108,981 7,998
Principal payments on notes ................................................ (144,141) (250,566)
Decrease in savings deposits ............................................... (1,548) (630)
Dividends paid ............................................................. (25,000) (25,000)
----------- -----------
Net cash provided (used) by financing activities ........................... 150,670 (158,405)
----------- -----------
Net increase (decrease) in cash ................................................. 22,447 (13,307)
Cash at beginning of period ..................................................... 15,562 25,454
----------- -----------
Cash at end of period........................................................... $ 38,009 $ 12,147
=========== ===========
</TABLE>
See accompanying note.
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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, 1996.
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PART I. FINANCIAL INFORMATION (CONTINUED)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1996.
Revenues for the three months ended March 31, 1997 were $446.1 million compared
to $432.2 million for the three months ended March 31, 1996, an increase of
$13.9 million (3.2%). Income before income taxes for the three months ended
March 31, 1997 was $75.5 million compared to $72.2 million for the like period
in 1996, an increase of $3.3 million (4.6%).
Financial Services and Related Insurance
REVENUES of this segment increased $8.1 million (2.2%) to $376.8 million due
primarily to: (i) an increase in average finance receivables to $7.179 billion
for the first three months in 1997 compared to $6.821 billion for the first
three months in 1996 and (ii) an increase in investment and other income.
Partially offsetting these increases was a decrease in annualized finance
receivables yields to 18.08% for the first three months in 1997 compared to
18.56% for the like period in 1996.
INCOME BEFORE INCOME TAXES of this segment remained relatively unchanged at
$69.1 for the three months ended March 31, 1997 and 1996, respectively. The
results for the three months ending March 31, 1997 were favorably impacted by
the following: (i) an increase in revenues, (ii) a decrease in the annualized
cost of borrowed funds to 6.49% for the first three months in 1997 from 7.01%
for the like period in 1996, and (iii) a decrease in the insurance loss ratio.
These favorable impacts were effectively offset by an increase in the provision
for credit losses due primarily to an increase in the annualized ratio of net
credit losses to average finance receivables to 3.06% for the first three months
in 1997 from 2.61% for the first three months in 1996.
The general proliferation of credit cards has provided the consumer with an
alternative source of funds, and as a result the increase in consumer debt in
the U.S. and Canada has continued to burden the consumer finance customer,
resulting in higher delinquencies and charge-offs.
Nonrelated Insurance
REVENUES of this segment increased $5.8 million (9.1%) to $69.3 million due
primarily to an increase in premiums earned.
INCOME BEFORE INCOME TAXES of this segment increased $3.3 million (108.9%) to
$6.4 million due primarily to: (i) an increase in premiums earned and (ii) a
reduction in total underwriting expenses in relation to premiums earned.
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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 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 1997, the
Registrant had $47.7 million of these agreements go into effect. These
agreements have a weighted average original term of 2.8 years and expire through
2000.
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).
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<PAGE> 9
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 15, 1997 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, 1997
(Thousands of dollars)
<TABLE>
<S> <C>
Income
Income before income taxes ....................... $ 75,545
--------
Fixed charges to be added back to income -
Interest and debt expense ...................... 103,562
Rentals (one-third of all rent and related costs
charged to income) .......................... 3,705
--------
Total fixed charges ...................... 107,267
--------
Income before income taxes and fixed charges ........ $182,812
========
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 MARCH 31, 1997 AND CONSOLIDATED STATEMENT OF
INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 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-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 38,009
<SECURITIES> 0
<RECEIVABLES> 7,491,052
<ALLOWANCES> 233,761
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 81,582
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,463,629
<CURRENT-LIABILITIES> 0
<BONDS> 3,579,342
0
0
<COMMON> 500
<OTHER-SE> 1,165,740
<TOTAL-LIABILITY-AND-EQUITY> 1,166,240
<SALES> 0
<TOTAL-REVENUES> 446,089
<CGS> 0
<TOTAL-COSTS> 70,317
<OTHER-EXPENSES> 138,455
<LOSS-PROVISION> 58,210
<INTEREST-EXPENSE> 103,562
<INCOME-PRETAX> 75,545
<INCOME-TAX> 28,217
<INCOME-CONTINUING> 47,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,328
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
