<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, 1998
--------------------------------
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 March 31, 1998, 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> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at March 31, 1998
and December 31, 1997........................................................1
Consolidated Statement of Income for the three months ended
March 31, 1998 and 1997......................................................2
Consolidated Statement of Cash Flows for the three months ended
March 31, 1998 and 1997......................................................3
Consolidated Statement of Changes in Stockholder's Equity
for the three months ended March 31, 1998....................................3
Note to Consolidated Financial Statements.......................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................5
Item 3. Quantitative and Qualitative Disclosure about Market Risk.......................7
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings...............................................................7
Item 2. Changes in Securities and Use of Proceeds.......................................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 ................................................................................8
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
- --------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
(Thousands of dollars)
ASSETS
<S> <C> <C>
Finance receivables............................................. $7,731,563 $7,742,641
Allowance for losses.......................................... (239,148) (237,809)
Insurance reserves and claims................................. (300,035) (271,271)
---------- ----------
7,192,380 7,233,561
Investments..................................................... 1,061,484 996,407
Property and equipment.......................................... 88,846 89,982
Insurance policy acquisition costs.............................. 61,092 60,863
Goodwill........................................................ 77,972 78,406
Cash............................................................ 11,470 44,958
Other........................................................... 325,188 305,721
---------- ----------
TOTAL ASSETS.............................................. $8,818,432 $8,809,898
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Senior debt
Commercial paper.............................................. $2,877,762 $2,956,719
Banks......................................................... 209,845 217,471
Savings deposits.............................................. 4,855 6,070
Notes......................................................... 3,899,552 3,735,022
---------- ----------
6,992,014 6,915,282
Senior subordinated debt........................................ 500 500
---------- ----------
Total debt................................................ 6,992,514 6,915,782
Accounts payable and accrued liabilities........................ 332,151 347,796
Insurance reserves and claims
Unearned insurance premiums................................... 189,078 215,968
Losses and adjustment expenses................................ 64,494 64,879
Income taxes.................................................... 67,417 54,958
---------- ----------
Total liabilities......................................... 7,645,654 7,599,383
---------- ----------
Stockholder's equity
Common stock ($1 par value, 500,000 shares
authorized; 500,000 shares outstanding)....................... 500 500
Additional paid-in capital...................................... 257,453 257,453
Retained earnings............................................... 1,047,775 1,089,859
Accumulated other comprehensive income/(loss)
Securities valuation adjustment............................... 10,082 13,056
Currency translation adjustment............................... (143,032) (150,353)
---------- ----------
Total accumulated other comprehensive income/(loss)....... (132,950) (137,297)
---------- ----------
Total stockholder's equity................................ 1,172,778 1,210,515
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................ $8,818,432 $8,809,898
========== ==========
See accompanying note.
</TABLE>
-1-
<PAGE> 4
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(Thousands of dollars)
<S> <C> <C>
REVENUES
Interest, discount and service charges.......................... $330,056 $324,541
Credit life, credit disability and casualty
insurance premiums.......................................... 105,801 103,064
Investment and other income (including net
realized investment gains and losses)....................... 29,878 18,484
-------- --------
Total revenues............................................ 465,735 446,089
-------- --------
EXPENSES
Interest and debt expense....................................... 113,143 103,562
Provision for losses on collection of finance receivables....... 57,953 58,210
Credit life, credit disability and casualty insurance
losses and adjustment expenses, less recoveries............. 47,714 46,331
Amortization of insurance policy acquisition costs.............. 25,626 23,986
Other operating expenses........................................ 147,249 138,455
-------- --------
Total expenses............................................ 391,685 370,544
-------- --------
Income before income taxes.......................................... 74,050 75,545
Income taxes........................................................ 26,584 28,217
--------- --------
NET INCOME.......................................................... $ 47,466 $ 47,328
======== ========
</TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive
Income/(Loss)
-----------------------
Securities Currency
Common Paid-in Retained Valuation Translation
Stock Capital Earnings Adjustment Adjustment Total
------- ------- -------- ---------- ----------- -----
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997.... $500 $257,453 $1,089,859 $13,056 $(150,353) $1,210,515
Net income 47,466 47,466
Change in valuation
adjustment.................. (2,974) (2,974)
Change in translation
adjustment.................. 7,321 7,321
---- -------- ---------- ------- --------- ----------
Comprehensive income/(loss)... 47,466 (2,974) 7,321 51,813
Cash dividends................ (89,550) (89,550)
---- -------- ---------- ------- --------- ----------
Balance at March 31, 1998....... $500 $257,453 $1,047,775 $10,082 $(143,032) $1,172,778
==== ======== ========== ======= ========= ==========
</TABLE>
See accompanying note.
-2-
<PAGE> 5
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ---------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 47,466 $ 47,328
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on collection of finance receivables 57,953 58,210
Depreciation.......................................... 5,466 4,925
Gain on sales of investments.......................... (6,237) (2,366)
Increase in unamortized insurance policy
acquisition costs................................... (669) (72)
Increase in unearned insurance premiums and reserves
for insurance losses and adjustment expenses........ 891 4,842
Decrease in accounts payable and accrued liabilities.. (16,563) (23,548)
Increase in income taxes.............................. 12,576 17,114
Other, net............................................ (14,219) (16,475)
----------- -----------
Net cash provided by operating activities........... 86,664 89,958
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased............... (1,369,549) (1,247,632)
Finance receivables repaid or sold........................ 1,355,510 1,066,349
Purchases of investments available for sale............... (215,306) (49,762)
Proceeds from sales of investments available for sale..... 130,181 33,476
Proceeds from maturities and calls of investments
available for sale........................................ 23,721 9,018
Capital expenditures...................................... (4,537) (5,601)
Cash used in acquisitions, net of cash acquired........... (24,029)
----------- -----------
Net cash used by investing activities..................... (79,980) (218,181)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt.................... (99,781) 212,378
Proceeds from issuance of notes........................... 470,781 108,981
Principal payments on notes............................... (320,385) (144,141)
Decrease in savings deposits.............................. (1,237) (1,548)
Dividends paid............................................ (89,550) (25,000)
----------- -----------
Net cash provided (used) by financing activities.......... (40,172) 150,670
----------- -----------
Net increase (decrease) in cash............................... (33,488) 22,447
Cash at beginning of period................................... 44,958 15,562
----------- -----------
Cash at end of period......................................... $ 11,470 $ 38,009
=========== ===========
</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.
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, 1997.
-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 THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1997.
REVENUES for the three months ended March 31, 1998 were $466 million compared to
$446 million for the three months ended March 31, 1997, an increase of $20
million (4%). Income before income taxes for the three months ended March 31,
1998 was $74 million compared to $76 million for the like period in 1997, a
decrease of $2 million (2%).
Financial Services and Related Insurance
REVENUES of this segment increased $13 million (3%) to $389 million, due
primarily to: (i) an increase in average finance receivables to $7.683 billion
for the first three months in 1998 from $7.179 billion for the like period in
1997, reflecting the benefit of the acquisition of approximately $534 million of
commercial receivables during 1997 and (ii) gains of $4 million on the sale of
underperforming branches in 1998. Partially offsetting these increases were: (i)
a decrease in annualized finance receivable yields to 17.18% for the first three
months in 1998 from 18.08% for the like period in 1997, reflecting both
decreases in consumer finance yields and the impact of an increase in commercial
receivables, which have lower yields and (ii) a decrease in investment income
due to lower yields.
INCOME BEFORE INCOME TAXES of this segment decreased $5 million (7%) to $64
million, due primarily to: (i) a decrease in annualized receivable yields and
lower yields on investments and (ii) an increase in interest expense due both to
a slight increase in the average annualized cost of borrowed funds (6.55% for
the first three months in 1998 compared to 6.49% for the like period in 1997)
and a higher level of debt. These decreases to income were partially offset by:
(i) an increase in average finance receivables; (ii) gains on the sale of
certain underperforming branches in 1998; and (iii) a decrease in the provision
for credit losses, due primarily to a decrease in the ratio of net credit losses
to average finance receivables to 2.86% for the first three months in 1998 from
3.06% for the like period in 1997. The decrease in the loss ratio was
attributable to the impact of the increase in commercial receivables, which have
a lower loss ratio, partially offset by a slight increase in the loss ratio in
the consumer finance business (3.20% in the first quarter 1998 vs. 3.17% in the
first quarter 1997).
The proliferation of credit cards continues to provide 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 than
historical delinquencies and charge-offs. This has been particularly true in the
U.S. where the ratio of net charge-offs to average finance receivables is higher
than recent historical levels and receivables outstanding have decreased. In
order to make better use of its capital resources, the Registrant is conducting
a strategic review of its U.S. branch operations. This review started in June
1997 and should be completed by year-end 1998. Each branch is being reviewed and
if it is determined that a branch will not meet certain profitability standards,
it will be sold. The Registrant does not anticipate these actions to result in
any losses. To date, this strategic review has resulted in the sale of 56
branches (47 branches in 1997 and 9 branches in the first quarter of 1998).
-5-
<PAGE> 8
PART I. FINANCIAL INFORMATION (CONTINUED)
- --------------------------------------------
Nonrelated Insurance
REVENUES of this segment increased $7 million (11%) to $77 million, due
primarily to both a higher level of premiums earned and to an increase in
investment income resulting from a higher level of invested assets and increased
capital gains.
INCOME BEFORE INCOME TAXES of this segment increased $3 million (50%) to $10
million, due primarily to an increase in investment income resulting from a
higher level of invested assets and increased capital gains.
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 1998, the
Registrant had $49.8 million of these agreements go into effect. These
agreements have a weighted average original term of 2.5 years and expire through
2001.
In the first three months of 1998, the Registrant also entered into an agreement
to exchange U.S. dollars for Hong Kong dollars at a specified exchange rate in
April, 1998. This one-month forward contract was entered into as a hedge against
currency fluctuations on a HK$400 million intercompany loan from the
Registrant's U.S. operation to its Hong Kong subsidiary. In April, the
Registrant increased its intercompany loan to its Hong Kong subsidiary to HK$1.2
billion. Concurrently, the Registrant entered one-month forward contracts
aggregating HK$1.2 billion to hedge against currency risk on the cumulative
intercompany advance.
* * * * *
Forward-looking Information: Certain statements in this Form 10-Q are
forward-looking statements, including those that discuss strategies, goals,
outlook, projected revenues, income, return and other financial measures, and
other non-historical statements. These forward-looking statements are subject to
risk and uncertainties that may cause actual results to differ materially from
those contained in the statements, including the following: (i) continued market
demand for the types of financial services offered by the Registrant; (ii)
increased contractual delinquencies or credit losses; (iii) ability of the
Registrant to utilize a broad base of financial sources for liquidity and
capital requirements; (iv) changes in laws or regulations governing the
Registrant's finance operations or insurance operations; (v) increased
competition; and (vi) changes in worldwide economic and political conditions and
the associated impact on interest and foreign exchange rates and consumer
bankruptcies and delinquencies. In addition, the words "believe," "expect,"
"anticipate," "intend," "aim," "will" and similar words identify forward-looking
statements in this Form 10-Q.
-6-
<PAGE> 9
PART I. FINANCIAL INFORMATION (CONTINUED)
- --------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
Omitted in accordance with General Instruction H(2)(b).
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. The
outcome of specific legal proceedings could be unfavorable to the
Registrant or any subsidiaries. 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 AND USE OF PROCEEDS
-----------------------------------------
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.
-7-
<PAGE> 10
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, 1998 By /s/ GARY L. FITE
--------------------- ------------------------------------------
GARY L. FITE
Executive Vice President & Controller
(Chief Accounting Officer)
-8-
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
*(12) Statement of Computation of Number of Times Fixed Charges Earned
*(27) Financial Data Schedule
</TABLE>
- --------------------
* Filed herewith.
<PAGE> 12
EXHIBIT 12
AVCO FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF NUMBER OF TIMES
FIXED CHARGES EARNED
THREE MONTHS ENDED MARCH 31, 1998
(Thousands of dollars)
<TABLE>
<CAPTION>
<S> <C>
Income
Income before income taxes....................................................$ 74,050
---------
Fixed charges to be added back to income -
Interest and debt expense................................................... 113,143
Rentals (one-third of all rent and related costs
charged to income)....................................................... 3,678
---------
Total fixed charges.................................................... 116,821
Income before income taxes and fixed charges....................................$ 190,871
=========
Ratio
Number of times fixed charges covered by income
before income taxes and fixed charges...................................... 1.6
=========
</TABLE>
<PAGE> 1
EXHIBIT 12
AVCO FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF NUMBER OF TIMES
FIXED CHARGES EARNED
THREE MONTHS ENDED MARCH 31, 1998
(Thousands of dollars)
<TABLE>
<CAPTION>
<S> <C>
Income
Income before income taxes....................................................$ 74,050
---------
Fixed charges to be added back to income -
Interest and debt expense................................................... 113,143
Rentals (one-third of all rent and related costs
charged to income)....................................................... 3,678
---------
Total fixed charges.................................................... 116,821
Income before income taxes and fixed charges....................................$ 190,871
=========
Ratio
Number of times fixed charges covered by income
before income taxes and fixed charges...................................... 1.6
=========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AFS
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1998 AND CONSOLIDATED STATEMENT OF
INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,470
<SECURITIES> 0
<RECEIVABLES> 7,731,563
<ALLOWANCES> 239,148
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 88,846
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,818,432
<CURRENT-LIABILITIES> 0
<BONDS> 3,904,407
0
0
<COMMON> 500
<OTHER-SE> 1,172,279
<TOTAL-LIABILITY-AND-EQUITY> 8,818,432
<SALES> 0
<TOTAL-REVENUES> 465,735
<CGS> 0
<TOTAL-COSTS> 73,340
<OTHER-EXPENSES> 147,249
<LOSS-PROVISION> 57,953
<INTEREST-EXPENSE> 113,143
<INCOME-PRETAX> 74,050
<INCOME-TAX> 26,584
<INCOME-CONTINUING> 47,466
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,466
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
