<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, 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
AVCO FINANCIAL SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 13-2530491
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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, 1997, 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>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at September 30, 1997 and December 31, 1996...... 3
Consolidated Statement of Income for the three and nine months ended
September 30, 1997 and 1996............................................... 4
Consolidated Statement of Cash Flows for the nine months ended
September 30, 1997 and 1996............................................... 5
Note to Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 9
Item 2. Changes in Securities....................................................... 9
Item 3. Defaults Upon Senior Securities............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders......................... 9
Item 6. Exhibits and Reports on Form 8-K............................................ 9
SIGNATURE........................................................................... 10
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Finance receivables ........................................ $ 7,516,569 $ 7,253,738
Allowance for losses .................................... (235,533) (218,416)
Insurance reserves and claims ........................... (294,758) (272,815)
----------- -----------
6,986,278 6,762,507
Investments ................................................ 1,002,265 927,571
Property and equipment ..................................... 91,154 80,646
Insurance policy acquisition costs ......................... 61,264 60,480
Goodwill ................................................... 46,901 27,086
Cash ....................................................... 25,779 15,562
Other ...................................................... 376,877 321,207
----------- -----------
TOTAL ASSETS ........................................ $ 8,590,518 $ 8,195,059
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Senior debt
Commercial paper ........................................ $ 2,950,537 $ 2,651,627
Banks ................................................... 190,678 115,367
Savings deposits ........................................ 3,360 5,465
Notes ................................................... 3,608,583 3,629,889
----------- -----------
6,753,158 6,402,348
Senior subordinated debt ................................... 500 1,000
----------- -----------
Total debt .......................................... 6,753,658 6,403,348
Accounts payable and accrued liabilities ................... 298,747 303,713
Insurance reserves and claims
Unearned insurance premiums ............................. 197,067 215,768
Losses and adjustment expenses .......................... 63,591 66,758
Income taxes ............................................... 59,417 52,786
----------- -----------
Total liabilities ................................... 7,372,480 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 .......................................... 1,110,956 1,041,543
Securities valuation adjustment ............................ 94,657 65,061
Currency translation adjustment ............................ (125,663) (92,006)
----------- -----------
Total stockholder's equity .......................... 1,218,038 1,152,686
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY .......... $ 8,590,518 $ 8,195,059
=========== ===========
</TABLE>
See accompanying note.
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<PAGE> 4
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
Periods ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- -------------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C>
REVENUES
Interest, discount and service charges.......................... $333,369 $319,782 $ 991,966 $ 953,803
Credit life, credit disability and casualty
insurance premiums.......................................... 104,688 99,591 308,541 298,769
Investment and other income (including net
realized investment gains and losses)....................... 26,246 22,715 67,522 55,246
-------- -------- ---------- ----------
Total revenues.......................................... 464,303 442,088 1,368,029 1,307,818
-------- -------- ---------- ----------
EXPENSES
Interest and debt expense....................................... 108,196 107,383 320,301 320,538
Provision for losses on collection of finance receivables....... 58,275 53,183 173,082 145,964
Credit life, credit disability and casualty insurance
losses and adjustment expenses, less recoveries............. 45,329 46,172 135,980 139,735
Amortization of insurance policy acquisition costs.............. 24,566 23,616 70,883 68,646
Other operating expenses........................................ 150,759 136,023 438,985 409,638
-------- -------- ---------- ----------
Total expenses.......................................... 387,125 366,377 1,139,231 1,084,521
-------- -------- ---------- ----------
Income before income taxes........................................... 77,178 75,711 228,798 223,297
Income taxes ........................................................ 28,101 28,233 84,385 83,724
-------- -------- ---------- ----------
NET INCOME........................................................... $ 49,077 $ 47,478 $ 144,413 $ 139,573
======== ======== ========== ==========
</TABLE>
See accompanying note.
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<PAGE> 5
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................... $ 144,413 $ 139,573
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on collection of finance receivables............. 173,082 145,964
Depreciation.......................................................... 15,039 14,190
Gain on sales of investments.......................................... (4,776) (9,055)
Increase in unamortized insurance policy acquisition costs............ (821) (3,882)
Increase in unearned insurance premiums and
reserves for insurance losses and adjustment expenses............... 9,373 9,664
Decrease in accounts payable and accrued liabilities.................. (22,855) (763)
Increase in income taxes.............................................. 7,980 4,389
Other, net............................................................ (9,142) (22,440)
----------- -----------
Net cash provided by operating activities.......................... 312,293 277,640
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased.............................. (3,746,136) (3,239,365)
Finance receivables repaid or sold....................................... 3,341,092 3,123,049
Purchases of investments available for sale.............................. (177,954) (199,289)
Proceeds from sales of investments available for sale.................... 85,400 141,257
Proceeds from maturities and calls of investments available for sale..... 56,033 41,109
Capital expenditures..................................................... (26,511) (16,544)
Cash used in acquisitions, net of cash acquired.......................... (42,960)
----------- -----------
Net cash used by investing activities................................. (511,036) (149,783)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term debt.............................................. 244,670 317,110
Proceeds from issuance of notes.......................................... 469,494 193,373
Principal payments on notes.............................................. (428,209) (563,270)
Decrease in savings deposits............................................. (1,995) (1,099)
Dividends paid........................................................... (75,000) (72,000)
----------- -----------
Net cash provided (used) by financing activities...................... 208,960 (125,886)
----------- -----------
Net increase in cash.......................................................... 10,217 1,971
Cash at beginning of period................................................... 15,562 25,454
----------- -----------
Cash at end of period......................................................... $ 25,779 $ 27,425
=========== ===========
</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, 1996.
SUBSEQUENT EVENT
In October 1997, the Registrant purchased all of the stock of Bridge Wholesale
Acceptance Corporation, a privately held company with commercial lending
operations in Australia and New Zealand. This acquisition will add approximately
$325 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, 1997 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1996.
Revenues for the nine months ended September 30, 1997 were $1.368 billion
compared to $1.308 billion for the nine months ended September 30, 1996, an
increase of $60 million (4.6%). Income before income taxes for the nine months
ended September 30, 1997 was $228.8 million compared to $223.3 million for the
like period in 1996, an increase of $5.5 million (2.5%).
Financial Services and Related Insurance
REVENUES of this segment increased $47 million (4.2%) to $1.161 billion, due
primarily to: (i) an increase in investment and other income due primarily to an
$11 million gain on the sale of certain underperforming branches, partially
offset by a $1.7 million decrease in capital gains; (ii) an increase in average
finance receivables to $7.376 billion for the first nine months in 1997 from
$6.845 billion for the first nine months in 1996, reflecting the benefit of the
acquisition of approximately $580 million of consumer and commercial receivables
in late 1996 and the first half of 1997. Partially offsetting these increases
was a decrease in annualized finance receivable yields to 17.93% for the first
nine months in 1997 from 18.58% for the like period in 1996, reflecting both
decreases in finance yields and the impact of the increase in commercial
receivables, which have lower yields.
The impact of the reduction in yields was to lower revenues by approximately $25
million.
INCOME BEFORE INCOME TAXES of this segment decreased $3.9 million (1.9%) to
$205.5 million, due primarily to: (i) a decrease in annualized finance
receivable yields;(ii) 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 2.96% for the first nine months in 1997 from 2.74% for
the like period in 1996; and (iii) higher operating expenses due primarily to
international expansion and the start up of centralized sales processing centers
in the U.S. and Canada. Partially offsetting these decreases were: (i) an
increase in average finance receivables; (ii) a reduction in the annualized cost
of borrowed funds to 6.45% for the first nine months in 1997 from 6.93% for the
like period in 1996; (iii) an increase in investment and other income due
primarily to an $11 million gain on the sale of certain branches, partially
offset by a $1.7 million decrease in capital gains; and (iv) a decrease in the
ratio of insurance losses to earned premiums.
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 has
continued to burden the consumer finance customer, resulting in higher
delinquencies and charge-offs. This has been particularly true in the U.S. where
charge-offs have increased and receivables outstanding have decreased $87
million. In order to make better use of its capital resources, the Registrant
has undertaken a strategic review of its U.S. operations. This review, which
encompasses underperforming branches, started in June of 1997 and will take 12
to 18 months. When it is determined that these underperforming branches will not
meet certain profitability standards, they will be sold. We do not anticipate
these actions to result in any losses.
-7-
<PAGE> 8
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Nonrelated Insurance
REVENUES of this segment increased $13 million (6.8%) to $207 million, due
primarily to an increase in premiums earned, partially offset by a $2.6 million
decrease in capital gains.
INCOME BEFORE INCOME TAXES of this segment increased $9.4 million (67.8%) to
$23.3 million, due primarily to an increase in premiums earned and a decrease in
underwriting expenses (primarily insurance losses) in relation to premiums
earned, partially offset by a $2.6 million decrease in capital gains.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996.
Revenues for the three months ended September 30, 1997 were $464.3 million
compared to $442.1 million for the three months ended September 30, 1996, an
increase of $22.2 million (5.0%). Income before income taxes for the three
months ended September 30, 1997 was $77.2 million compared to $75.7 million for
the like period in 1996, an increase of $1.5 million (2%).
Financial Services and Related Insurance
REVENUES of this segment increased $18.7 million (5.0%) to $393 million, due
primarily to: (i) an increase in average finance receivables to $7.485 billion
for the three months ended September 30, 1997 from $6.889 billion for the like
period in 1996, reflecting the benefit of the acquisition of approximately $580
million of consumer and commercial receivables in late 1996 and the first half
of 1997 and (ii) an increase in investment and other income due primarily to an
$8 million gain on the sale of certain underperforming branches, partially
offset by a $3.5 million decrease in capital gains. Partially offsetting these
increases was a decrease in annualized finance receivable yields to 17.82% for
the three months ended September 30, 1997 from 18.57% for the like period in
1996, reflecting both decreases in finance yields and the impact of the increase
in commercial receivables, which have lower yields.
INCOME BEFORE INCOME TAXES of this segment increased $1.7 million (2.6%) to
$68.9 million, due primarily to: (i) an increase in investment and other income,
due primarily to an $8 million gain on the sale of certain branches, partially
offset by a $3.5 million decrease in capital gains (ii) an increase in average
finance receivables; and (iii) a reduction in the annualized cost of borrowed
funds to 6.41% for the three months ended September 30, 1997 from 6.88% for the
like period in 1996. Partially offsetting these increases were: (i) a decrease
in annualized finance receivable yields and (ii) higher operating expenses due
primarily to international expansion and the start up of centralized sales
processing centers in the U.S. and Canada.
Nonrelated Insurance
REVENUES of this segment increased $3.5 million (5.1%) to $71.3 million, due
primarily to increases in premiums earned, partially offset by a $3.1 million
decrease in capital gains.
INCOME BEFORE INCOME TAXES of this segment decreased $.2 million (3%) to $8.3
million, due primarily to a $3.1 million decrease in capital gains, partially
offset by an increase in premiums earned and a decrease in underwriting expenses
(primarily insurance losses) in relation to premiums earned.
-8-
<PAGE> 9
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 1997, the
Registrant had $319.2 million of these agreements go into effect.
These agreements have a weighted average original term of 2.8 years and expire
through 2002.
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> 10
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: November 12, 1997 By: /s/ GARY L. FITE
-----------------------------
Gary L. Fite
Executive Vice President
and 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, 1997
(Thousands of dollars)
<TABLE>
<CAPTION>
<S> <C>
Income
Income before income taxes............................................. $228,798
Fixed charges to be added back to income -
Interest and debt expense............................................ 320,301
Rentals (one-third of all rent and related costs charged to income).. 11,167
--------
Total fixed charges............................................ 331,468
Income before income taxes and fixed charges.............................. $560,266
========
Ratio
Number of times fixed charges covered by income
before income taxes and fixed charges............................... 1.69
========
</TABLE>
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AFS'
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997 AND CONSOLIDATED STATEMENT OF
INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 25,779
<SECURITIES> 0
<RECEIVABLES> 7,516,569
<ALLOWANCES> 235,533
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 91,154
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,590,518
<CURRENT-LIABILITIES> 0
<BONDS> 3,611,943
0
0
<COMMON> 500
<OTHER-SE> 1,217,538
<TOTAL-LIABILITY-AND-EQUITY> 8,590,518
<SALES> 0
<TOTAL-REVENUES> 1,368,029
<CGS> 0
<TOTAL-COSTS> 206,863
<OTHER-EXPENSES> 438,985
<LOSS-PROVISION> 173,082
<INTEREST-EXPENSE> 320,301
<INCOME-PRETAX> 228,798
<INCOME-TAX> 84,385
<INCOME-CONTINUING> 144,413
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 144,413
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
