<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, 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 June 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>
PART I. FINANCIAL INFORMATION PAGE
- ----------------------------------- ----
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at June 30, 1997
and December 31, 1996............................................................1
Consolidated Statement of Income for the three and six months ended
June 30, 1997 and 1996...........................................................2
Consolidated Statement of Cash Flows for the six months ended
June 30, 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
- -------------------------------
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....................................................8
SIGNATURE ....................................................................................8
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
- -----------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(Thousands of dollars)
ASSETS
<S> <C> <C>
Finance receivables ............................................................ $ 7,566,620 $ 7,253,738
Allowance for losses ........................................................ (236,011) (218,416)
Insurance reserves and claims ............................................... (296,929) (272,815)
----------- -----------
7,033,680 6,762,507
Investments .................................................................... 990,843 927,571
Property and equipment ......................................................... 85,071 80,646
Insurance policy acquisition costs ............................................. 60,122 60,480
Goodwill ....................................................................... 47,858 27,086
Cash ........................................................................... 40,802 15,562
Other .......................................................................... 351,231 321,207
----------- -----------
TOTAL ASSETS............................................................. $ 8,609,607 $ 8,195,059
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Senior debt
Commercial paper............................................................. $ 2,853,692 $ 2,651,627
Banks ....................................................................... 163,781 115,367
Savings deposits ............................................................ 3,595 5,465
Notes ....................................................................... 3,750,984 3,629,889
----------- -----------
6,772,052 6,402,348
Senior subordinated debt ....................................................... 1,000 1,000
----------- -----------
Total debt .............................................................. 6,773,052 6,403,348
Accounts payable and accrued liabilities ....................................... 310,790 303,713
Insurance reserves and claims
Unearned insurance premiums ................................................. 194,358 215,768
Losses and adjustment expenses .............................................. 65,281 66,758
Income taxes ................................................................... 59,331 52,786
----------- -----------
Total liabilities ....................................................... 7,402,812 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 .............................................................. 1,086,879 1,041,543
Securities valuation adjustment ................................................ 90,985 65,061
Currency translation adjustment ................................................ (109,157) (92,006)
----------- -----------
Total stockholder's equity .............................................. 1,206,795 1,152,686
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............................... $ 8,609,607 $ 8,195,059
=========== ===========
</TABLE>
See accompanying note.
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<PAGE> 4
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
PERIODS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- ----------------------
1997 1996 1997 1996
------ ------ ------ ------
(Thousands of dollars)
<S> <C> <C> <C> <C>
REVENUES
Interest, discount and service charges...........................$334,056 $317,500 $658,597 $634,021
Credit life, credit disability and casualty
insurance premiums .......................................... 100,789 99,796 203,853 199,178
Investment and other income (including net
realized investment gains and losses) ....................... 22,792 16,185 41,276 32,531
-------- -------- -------- --------
Total revenues .......................................... 457,637 433,481 903,726 865,730
-------- -------- -------- --------
EXPENSES
Interest and debt expense ....................................... 108,543 106,016 212,105 213,155
Provision for losses on collection of finance receivables ....... 56,597 47,050 114,807 92,781
Credit life, credit disability and casualty insurance
losses and adjustment expenses, less recoveries ............. 44,320 46,236 90,651 93,563
Amortization of insurance policy acquisition costs .............. 22,331 21,775 46,317 45,030
Other operating expenses ........................................ 149,771 137,032 288,226 273,615
-------- -------- -------- --------
Total expenses .......................................... 381,562 358,109 752,106 718,144
-------- -------- -------- --------
Income before income taxes ........................................... 76,075 75,372 151,620 147,586
Income taxes ......................................................... 28,067 28,486 56,284 55,491
-------- -------- -------- --------
NET INCOME ...........................................................$ 48,008 $ 46,886 $ 95,336 $ 92,095
======== ======== ======== ========
</TABLE>
See accompanying note.
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<PAGE> 5
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------ -----
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................ $ 95,336 $ 92,095
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on collection of finance receivables .............. 114,807 92,781
Depreciation ........................................................... 10,054 9,394
Gain on sales of investments ........................................... (4,115) (1,746)
Decrease/(increase) in unamortized insurance policy
acquisition costs .................................................... 363 (2,638)
Increase in unearned insurance premiums and
reserves for insurance losses and adjustment expenses ................ 6,499 2,407
Decrease in accounts payable and accrued
liabilities .......................................................... (11,280) (19,255)
Increase in income taxes ............................................... 7,280 3,403
Other, net ............................................................. (11,531) (10,154)
----------- -----------
Net cash provided by operating activities ........................... 207,413 166,287
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased................................ (2,497,422) (2,090,257)
Finance receivables repaid or sold ........................................ 2,196,624 2,065,051
Purchases of investments available for sale ............................... (125,256) (70,610)
Proceeds from sales of investments available for sale ..................... 66,102 28,934
Proceeds from maturities and calls of investments
available for sale ..................................................... 33,950 26,499
Capital expenditures ...................................................... (14,876) (9,498)
Cash used in acquisitions, net of cash acquired ........................... (42,960)
----------- -----------
Net cash used by investing activities .................................. (383,838) (49,881)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term debt ............................................... 94,416 395,663
Proceeds from issuance of notes ........................................... 451,336 80,432
Principal payments on notes ............................................... (292,281) (548,478)
Decrease in savings deposits .............................................. (1,806) (1,131)
Dividends paid ............................................................ (50,000) (50,000)
----------- -----------
Net cash provided (used) by financing activities ....................... 201,665 (123,514)
----------- -----------
Net increase (decrease) in cash ................................................ 25,240 (7,108)
Cash at beginning of period .................................................... 15,562 25,454
----------- -----------
Cash at end of period........................................................... $ 40,802 $ 18,346
=========== ===========
</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.
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<PAGE> 7
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 SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1996.
Revenues for the six months ended June 30, 1997 were $903.7 million compared to
$865.7 million for the six months ended June 30, 1996, an increase of $38
million (4.4%). Income before income taxes for the six months ended June 30,
1997 was $151.6 million compared to $147.6 million for the like period in 1996,
an increase of $4 million (2.7%).
Financial Services and Related Insurance
REVENUES of this segment increased $28.2 million (3.8%) due primarily to an
increase in average finance receivables to $7.322 billion for the first six
months in 1997 from $6.823 billion for the first six months in 1996, partially
offset by a decrease in annualized finance receivable yields to 17.99% for the
first six months in 1997 from 18.59% for the like period in 1996. The impact of
the reduction in yields was to lower revenues by approximately $16 million.
INCOME BEFORE INCOME TAXES of this segment decreased $5.6 million (4%) due
primarily to: (i) an increase in the provision for credit losses resulting
principally from an increase in the annualized ratio of net credit losses to
average finance receivables to 2.98% for the first six months in 1997 from 2.64%
for the like period in 1996; (ii) a decrease in finance receivable yields; and
(iii) higher operating expenses due primarily to international expansion and the
start up of a centralized sales processing center in Canada. Partially
offsetting these decreases were: (i) an increase in average finance receivables
and (ii) a reduction in the annualized cost of borrowed funds to 6.48% for the
first six months in 1997 compared to 6.95% for the like period 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 $9.8 million (7.7%) due primarily to
increases in premiums earned and investment income.
INCOME BEFORE INCOME TAXES of this segment increased $9.6 million (182.1%) due
primarily to: (i) an increase in premiums earned and investment income and (ii)
a decrease in underwriting expenses (primarily insurance losses) in relation to
earned premiums. The increase in investment income was due to a higher level of
investments outstanding and higher capital gains.
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<PAGE> 8
PART I. FINANCIAL INFORMATION (CONTINUED)
- ------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1996.
Revenues for the three months ended June 30, 1997 were $457.6 million compared
to $433.5 million for the three months ended June 30, 1996, an increase of $24.1
million (5.6%). Income before income taxes for the three months ended June 30,
1997 was $76.1 million compared to $75.4 million for the like period in 1996, an
increase of $.7 million (.9%).
Financial Services and Related Insurance
REVENUES of this segment increased $20.1 million (5.4%) due primarily to: (i) an
increase in average finance receivables to $7.467 billion for the three months
ended June 30, 1997 from $6.825 billion for the like period in 1996, partially
offset by a decrease in annualized finance receivable yields to 17.89% for the
three months ended June 30, 1997 from 18.61% for the like period in 1996.
INCOME BEFORE INCOME TAXES of this segment decreased $5.6 million (7.7%) due
primarily to: (i) an increase in the provision for credit losses resulting
principally from an increase in the annualized ratio of net credit losses to
average finance receivables to 2.90% for the three months ended June 30, 1997
from 2.67% for the like period in 1996; (ii) a decrease in finance receivable
yields; and (iii) higher operating expenses due primarily to international
expansion and the start up of a centralized sales processing center in Canada.
Partially offsetting these decreases were: (i) an increase in average finance
receivables and (ii) a reduction in the annualized cost of borrowed funds to
6.49% for the three months ended June 30, 1997 compared to 6.89% for the like
period in 1996.
Nonrelated Insurance
REVENUES of this segment increased $4.0 million (6.4%) due primarily to
increases in premiums earned and investment income.
INCOME BEFORE INCOME TAXES of this segment increased $6.3 million (282.8%) due
primarily to: (i) an increase in premiums earned and investment income and (ii)
a decrease in underwriting expenses (primarily insurance losses) in relation to
earned premiums. The increase in investment income was due to a higher level of
investments outstanding and higher capital gains.
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<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 six months of 1997, the
Registrant had $204.7 million of these agreements go into effect.
These agreements have a weighted average original term of 2.5 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> 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: August 12, 1997 By: GARY L. FITE
--------------- -------------------------------------
GARY L. FITE
Executive Vice President & Controller
(Chief Accounting Officer)
-8-
<PAGE> 1
EXHIBIT 12
AVCO FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF NUMBER OF TIMES
FIXED CHARGES EARNED
SIX MONTHS ENDED JUNE 30, 1997
(Thousands of dollars)
<TABLE>
<S> <C>
Income
Income before income taxes............................................... $151,620
--------
Fixed charges to be added back to income -
Interest and debt expense ............................................. 212,105
Rentals (one-third of all rent and related costs
charged to income) ................................................. 7,472
--------
Total fixed charges ............................................. 219,577
--------
Income before income taxes and fixed charges................................ $371,197
========
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, 1997 AND CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 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-END> JUN-30-1997
<CASH> 40,802
<SECURITIES> 0
<RECEIVABLES> 7,566,620
<ALLOWANCES> 236,011
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 85,071
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,609,607
<CURRENT-LIABILITIES> 0
<BONDS> 3,755,579
0
0
<COMMON> 500
<OTHER-SE> 1,206,295
<TOTAL-LIABILITY-AND-EQUITY> 8,609,607
<SALES> 0
<TOTAL-REVENUES> 903,726
<CGS> 0
<TOTAL-COSTS> 136,968
<OTHER-EXPENSES> 288,226
<LOSS-PROVISION> 114,807
<INTEREST-EXPENSE> 212,105
<INCOME-PRETAX> 151,620
<INCOME-TAX> 56,284
<INCOME-CONTINUING> 95,336
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,336
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
