<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, 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
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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
incorporation or organization) Identification No.)
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, 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>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at September 30, 1998
and December 31, 1997........................................................1
Consolidated Statement of Income for the three and nine months ended
September 30, 1998 and 1997..................................................2
Consolidated Statement of Cash Flows for the nine months ended
September 30, 1998 and 1997..................................................3
Notes 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..............................................................10
Item 2. Changes in Securities and Use of Proceeds......................................10
Item 3. Defaults Upon Senior Securities................................................10
Item 4. Submission of Matters to a Vote of Security Holders............................10
Item 6. Exhibits and Reports on Form 8-K...............................................10
SIGNATURE ...............................................................................11
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Finance receivables ............................................. $ 8,014,313 $ 7,742,641
Allowance for losses .......................................... (271,008) (237,809)
Insurance reserves and claims ................................. (305,605) (271,271)
----------- -----------
7,437,700 7,233,561
Investments ..................................................... 1,084,920 996,407
Property and equipment .......................................... 86,863 89,982
Insurance policy acquisition costs .............................. 58,143 60,863
Goodwill ........................................................ 72,538 78,406
Cash ............................................................ 29,757 44,958
Other ........................................................... 338,935 305,721
----------- -----------
TOTAL ASSETS .............................................. $ 9,108,856 $ 8,809,898
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Senior debt
Commercial paper .............................................. $ 3,750,981 $ 2,956,719
Banks ......................................................... 223,315 217,471
Savings deposits .............................................. 5,438 6,070
Notes ......................................................... 3,372,268 3,735,022
----------- -----------
7,352,002 6,915,282
Senior subordinated debt ........................................ 500
----------- -----------
Total debt ................................................ 7,352,002 6,915,782
Accounts payable and accrued liabilities ........................ 283,223 347,796
Insurance reserves and claims
Unearned insurance premiums ................................... 168,580 215,968
Losses and adjustment expenses ................................ 59,863 64,879
Income taxes .................................................... 50,042 54,958
----------- -----------
Total liabilities ......................................... 7,913,710 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 ............................................... 1,086,976 1,089,859
Accumulated other comprehensive income/(loss)
Securities valuation adjustment ............................... 25,998 13,056
Currency translation adjustment ............................... (175,781) (150,353)
----------- -----------
Total accumulated other comprehensive income/(loss) ....... (149,783) (137,297)
----------- -----------
Total stockholder's equity ................................ 1,195,146 1,210,515
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ................ $ 9,108,856 $ 8,809,898
=========== ===========
</TABLE>
See accompanying note.
-1-
<PAGE> 4
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C>
REVENUES
Interest, discount and service charges ........... $ 338,642 $ 333,369 $1,001,254 $ 991,966
Credit life, credit disability and casualty
insurance premiums ............................ 103,292 104,688 309,949 308,541
Investment and other income (including net
realized investment gains and losses) ......... 21,046 26,246 86,116 67,522
---------- ---------- ---------- ----------
Total revenues ............................ 462,980 464,303 1,397,319 1,368,029
---------- ---------- ---------- ----------
EXPENSES
Interest and debt expense ........................ 113,196 108,196 336,028 320,301
Provision for losses on collection of
finance receivables ............................ 70,903 58,275 187,720 173,082
Credit life, credit disability and
casualty insurance losses and adjustment
expenses, less recoveries ...................... 41,509 45,329 132,248 135,980
Amortization of insurance policy acquisition costs 25,872 24,566 74,665 70,883
Other operating expenses ......................... 152,416 150,759 452,231 438,985
---------- ---------- ---------- ----------
Total expenses ............................ 403,896 387,125 1,182,892 1,139,231
---------- ---------- ---------- ----------
Income before income taxes ......................... 59,084 77,178 214,427 228,798
Income taxes ....................................... 21,420 28,101 77,760 84,385
---------- ---------- ---------- ----------
NET INCOME ......................................... $ 37,664 $ 49,077 $ 136,667 $ 144,413
========== ========== ========== ==========
</TABLE>
See accompanying note.
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<PAGE> 5
AVCO FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................ $ 136,667 $ 144,413
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on collection of finance receivables .. 187,720 173,082
Depreciation ............................................... 15,716 15,039
Gain on sales of investments ............................... (8,207) (4,776)
(Increase)/decrease in unamortized insurance policy
acquisition costs ..................................... 2,886 (821)
Increase/(decrease) in unearned insurance premiums and
reserves for insurance losses and adjustment expenses . (14,349) 9,373
Decrease in accounts payable and accrued liabilities ....... (58,856) (22,855)
Increase/(decrease) in income taxes ........................ (8,012) 7,980
Other, net ................................................. (11,475) (9,142)
----------- -----------
Net cash provided by operating activities ............. 242,090 312,293
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated or purchased ....................... (5,054,553) (3,746,136)
Finance receivables repaid or sold ................................ 4,468,035 3,341,092
Purchases of investments available for sale ....................... (364,096) (177,954)
Proceeds from sales of investments available for sale ............. 189,363 85,400
Proceeds from maturities and calls of investments
available for sale............................................... 95,599 56,033
Capital expenditures .............................................. (17,508) (26,511)
Cash used in acquisitions, net of cash acquired ................... -- (42,960)
----------- -----------
Net cash used by investing activities ............................. (683,160) (511,036)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term debt ....................................... 850,926 244,670
Proceeds from issuance of notes ................................... 961,106 469,494
Principal payments on notes ....................................... (1,246,096) (428,209)
Decrease in savings deposits ...................................... (517) (1,995)
Dividends paid .................................................... (139,550) (75,000)
----------- -----------
Net cash provided by financing activities ......................... 425,869 208,960
----------- -----------
Net increase/(decrease) in cash ..................................... (15,201) 10,217
Cash at beginning of period ......................................... 44,958 15,562
----------- -----------
Cash at end of period ............................................... $ 29,757 $ 25,779
=========== ===========
</TABLE>
See accompanying note.
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<PAGE> 6
AVCO FINANCIAL SERVICES, INC.
NOTES 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.
SALE OF THE BUSINESS OF THE REGISTRANT
- --------------------------------------
On June 4, 1998, the Registrant's parent company, Textron, Inc., announced that
it was reviewing its strategic options with respect to the Registrant. As a
result of that review, Textron announced on August 11, 1998, that it had reached
an agreement to sell substantially all of the assets and liabilities of the
Registrant to Associates First Capital Corporation for $3.9 billion in cash.
Pending regulatory approvals, the sale is expected to close by the end of the
year or early 1999.
COMPREHENSIVE INCOME
- --------------------
In 1998, the Registrant adopted FAS 130, "Reporting Comprehensive Income." FAS
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on the
Registrant's net income or shareholder's equity. FAS 130 requires unrealized
gains or losses on the Registrant's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of FAS 130.
During the first nine months of 1998 and 1997, total comprehensive income
amounted to $124 million and $140 million, respectively. For the three month
period ending September 30, 1998 and 1997 total comprehensive income amounted to
$41 million and $36 million, respectively.
-4-
<PAGE> 7
PART I. FINANCIAL INFORMATION (CONTINUED)
- -----------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1997.
Revenues for the nine months ended September 30, 1998 were $1.397 billion
compared to $1.368 billion for the nine months ended September 30, 1997, an
increase of $29 million (2%). Income before income taxes for the nine months
ended September 30, 1998 was $214 million compared to $229 million for the like
period in 1997, a decrease of $15 million (6%).
Financial Services and Related Insurance
REVENUES of this segment increased $23 million (2%) to $1.183 billion, due
primarily to: (i) an increase in average finance receivables to $7.711 billion
for the first nine months in 1998 compared to $7.376 billion for the like period
in 1997, primarily resulting from growth in the Registrant's international
commercial finance operations in the fourth quarter of 1997; and (ii) a $10
million gain on the sale of centralized real estate receivables. These increases
to revenues were partially offset by: (i) a decrease of approximately $27
million due to a decrease in annualized finance receivable yields to 17.31% for
the first nine months in 1998 compared to 17.93% for the like period in 1997
(reflecting decreases in yields in both the consumer and commercial finance
portfolios, as well as the impact of an increase in commercial receivables,
which have lower yields than the Registrant's consumer finance portfolio); (ii)
a decrease in gains on the sale of under performing branches ($8 million for the
nine months ended September 30, 1998 compared to $11 million for the like period
in 1997); and (iii) a decrease of approximately $40 million due to the impact of
changes in foreign exchange rates.
INCOME BEFORE INCOME TAXES of this segment decreased $16 million (8%) to $190
million, due primarily to: (i) the decrease in annualized finance receivable
yields; (ii) a decrease in the Registrant's Hong Kong operation of $7.6 million
due primarily to a weakening economy which resulted in a higher cost of funds
and provision for losses; (iii) an increase in the provision for losses
excluding Hong Kong due primarily to higher growth in consumer finance
receivables (which require a higher allowance for losses) in 1998, partially
offset by a decline in the ratio of net credit losses to average finance
receivables to 2.83% for the first nine months in 1998 from 2.96% for the like
period in 1997; (iv) the decrease in gains on the sale of under performing
branches; and (v) a decrease of approximately $10 million due to the impact of
changes in foreign exchange rates. Partially offsetting these decreases were:
(i) the increase in average finance receivables; (ii) the gain on the sale of
centralized real estate receivables; and (iii) a decrease of approximately $8
million due to a decrease in the cost of borrowed funds to 6.34% for the first
nine months of 1998 compared to 6.45% for the like period in 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 organic receivable growth has slowed. In order
to make better use of its capital resources, the Registrant was in the process
of conducting a strategic review of its U.S. branch operations until the
Registrant's parent, Textron Inc., announced in June 1998 that it was conducting
a strategic review of the Registrant which resulted in the August 1998
announcement of the pending sale of the Registrant's business to Associates
First Capital Corporation.
-5-
<PAGE> 8
PART I. FINANCIAL INFORMATION (CONTINUED)
- -----------------------------------------
The result of the Registrant's strategic review that began in June 1997 has
resulted in the sale of 67 branches, 47 branches in 1997 and 20 branches in the
first six months of 1998.
Nonrelated Insurance
REVENUES of this segment increased $7 million (3%) to $214 million, due
primarily to an increase in investment income resulting from a higher level of
invested assets and an increase in capital gains of $4 million.
INCOME BEFORE INCOME TAXES of this segment increased $1 million (5%) to $24
million, due primarily to the increased revenues described above, partially
offset by an increase in underwriting expenses (primarily policy acquisition
costs and other operating expenses).
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997.
Revenues for the three months ended September 30, 1998 were $463 million
compared to $464 million for the three months ended September 30, 1997. Income
before income taxes for the three months ended September 30, 1998 was $59
million compared to $77 million for the like period in 1997, a decrease of $18
million (23%).
Financial Services and Related Insurance
REVENUES of this segment were flat for the three months ended September 30,
1998, at $393 million compared to the like period for 1997. Increases resulting
from an increase in average finance receivables (related primarily to the
Registrant's international commercial finance operations) to $7.839 billion for
the three months ended September 30, 1998 compared to $7.485 billion for the
like period in 1997, were offset by: (i) a decrease due to a decrease in
annualized finance receivable yields to 17.28% for the three months ended
September 30, 1998 compared to 17.82% for the like period in 1997 (reflecting
decreases in yields in both the consumer and commercial finance portfolios, as
well as the impact of an increase in commercial receivables, which have lower
yields than the Registrant's consumer finance portfolio); (ii) gains in the 1997
third quarter of $8 million from the sale of under performing branches; and
(iii) a decrease due to the impact of changes in foreign exchange rates.
INCOME BEFORE INCOME TAXES of this segment decreased $19 million (27%) to $50
million, due primarily to: (i) the gains in the 1997 third quarter on the sale
of under performing branches; (ii) an increase in the provision for loan losses
due primarily to higher growth in consumer finance receivables in the third
quarter of 1998; and (iii) the decrease in finance receivable yields. Partially
offsetting these decreases to income were: (i) the increase in average finance
receivables; (ii) a decrease in the cost of borrowed funds to 6.25% for the
three months ended September 30, 1998 compared to 6.41% for the like period in
1997; and (iii) a decrease in the ratio of insurance losses to earned premiums.
Nonrelated Insurance
REVENUES of this segment decreased $1 million (2%) to $70 million, due primarily
to a decrease in earned premiums due to lower written premium volume.
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<PAGE> 9
PART I. FINANCIAL INFORMATION (CONTINUED)
- -----------------------------------------
INCOME BEFORE INCOME TAXES of this segment increased $1 million (7%) to $9
million due primarily to a decrease in the ratio of insurance losses to earned
premiums. Partially offsetting the increase in income was the decrease in
revenues described above and an increase in other operating expenses.
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 1998, the
Registrant had $371.2 million of these agreements go into effect. These
agreements have a weighted average original term of 2.9 years and expire through
2003.
In the three months ended September 30, 1998, the Registrant also entered into
several short-duration agreements to exchange Hong Kong dollars for U.S. dollars
at specified exchange rates during the three months ended September 30, 1998.
These foreign exchange forward contracts were entered into as a hedge against
currency fluctuations on a HK$1.0 billion intercompany loan from the
Registrant's U.S. operation to its Hong Kong subsidiary. The intercompany loans
are expected to remain outstanding during the period over which the forward
contracts are in effect.
On June 4, 1998, the Registrant's parent company, Textron, Inc., announced that
it was reviewing its strategic options with respect to the Registrant. As a
result of that review, Textron announced on August 11, 1998, that it had reached
an agreement to sell substantially all of the assets and liabilities of the
Registrant to Associates First Capital Corporation for $3.9 billion in cash.
Pending regulatory approvals, the sale is expected to close by the end of the
year or early 1999.
YEAR 2000 READINESS DISCLOSURES
INTRODUCTION
Much of the world's computer hardware and software is not designed to process
date information after 1999. This is largely because computer programs have
historically used only two digits to identify the year in a date, but problems
related to processing of date information also may arise because some software
assigns special meaning to certain dates. This Year 2000 problem could, if
uncorrected, cause computers and other equipment used by the Registrant and the
Registrant's suppliers and customers to fail to operate properly.
YEAR 2000 PROGRAM
In early 1997, in conjunction with its parent, Textron Inc., the Registrant
began a company-wide program (the "Program") to assess the possible
vulnerability of the Registrant to the Year 2000 problem and to minimize the
effect of the problem on the Registrant's operations.
-7-
<PAGE> 10
PART I. FINANCIAL INFORMATION (CONTINUED)
- -----------------------------------------
The Program is centrally directed from the Year 2000 Program Office at the
Registrant's corporate headquarters and is executed at each of the Registrant's
business units. The Program addresses four "Major Elements" at the corporate
headquarters and each business unit:
o BUSINESS SYSTEMS: management information systems and personal computer
applications, including the computing environments that support them.
o FACILITIES EQUIPMENT: equipment that uses a computer to control its operation
for providing services.
o SUPPLIERS: assurance that those who sell goods and services to the Registrant
will not interrupt the Registrant's operations due to the Year 2000 problem.
o CUSTOMER: assurance that the products financed by the Registrant's commercial
customers will not interrupt the Registrant's operation due to the Year 2000
problem.
For each of the Major Elements, the Program measures five "Readiness Levels":
Level (I) Management has become aware of the issue. An inventory is
being taken of the items that the Year 2000 problem may affect.
Level (II) The inventory of Year 2000 items has been completed. The
priority of each item is being assessed. Actions are being
planned to assure that each item is ready for the Year 2000.
Resources are being committed to do the work.
Level (III) Planning has been completed. The prescribed actions are
being performed, including testing to verify that the actions are
effective. Suppliers and customers are being surveyed and their
progress is being tracked.
Level (IV) Items critical to operations have been remediated and have
been put in normal operation. Surveys of critical suppliers and
customers have been completed. Core business systems continue to
be tested. Follow-up checking of suppliers and customers is in
process. Contingency plans are being prepared. Audits to verify
readiness are being performed. Remediation of items that are
important to operations, but not critical, is being performed.
Level (V) Systems critical to operations have been tested. Audits and
associated corrective actions have been completed. Contingency
plans have been completed. Follow-up checking of suppliers and
customers has been completed. In all material respects, the
Registrant is ready for Year 2000.
Based on information currently available, the Registrant estimates that it will
substantially reach Readiness Level IV by December 31, 1998, and achieve full
Readiness Level IV by June 30, 1999. The Registrant estimates that it will
substantially reach Readiness Level V by June 30, 1999, and achieve full
Readiness Level V by September 30, 1999. The Registrant intends to have its
internal audit department complete an assessment of the implementation of the
Program at the corporate headquarters and each business unit by March 31, 1999.
The Readiness Level of the Major Elements items that have been inventoried as of
September 1, 1998, is shown in the following table. Major Element inventories
are under continuous review, and additional items may be identified in the
future. For the Major Element of "Suppliers" and "Customers" the indicated
Readiness Level refers to the Registrant's progress in assessing the readiness
of customers and suppliers, and not to the Registrant's assessment of their
readiness.
-8-
<PAGE> 11
PART I. FINANCIAL INFORMATION (CONTINUED)
- -----------------------------------------
<TABLE>
<CAPTION>
Percent of Identified Major Element Items at Readiness Level
------------------------------------------------------------
Major Element II III IV V
------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
Business Systems 10% 47% 13% 30%
Facilities Equipment 1% 34% 50% 15%
Suppliers 1% 80% 18% 1%
Customers 18% 76% 3% 3%
</TABLE>
YEAR 2000 COSTS
The total cost of the Year 2000 Program is estimated to be approximately $28
million. Approximately $15 million is for modifications to existing items and
other program expenses, and $13 million is for replacement systems which have
been or are expected to be capitalized. Through August 31, 1998, total
expenditures were $12 million. The estimated future cost to complete the Program
is estimated to be approximately $16 million including approximately $7 million
for replacements. Funds for the Program are provided from special project
appropriations totaling approximately $12 million and from normal operating
budgets. The Year 2000 Program has delayed certain other information management
projects of the Registrant. Delay of these projects is not expected to have an
adverse impact on the Registrant.
RISKS AND CONTINGENCY PLANS
Year 2000 issues have the potential, if not remediated, to severely disrupt the
Registrant's business operations and to adversely affect the Registrant's
financial condition. The Year 2000 Program is expected to significantly reduce
the Registrant's exposure to these issues, particularly with respect to the
Registrant's Business Systems and Facilities Equipment. However, it is possible
that unanticipated problems may arise in the course of the Registrant's
implementation of the Year 2000 Program. In addition, while monitoring of Year
2000 readiness by the Registrant's suppliers and customers is a major part of
the Year 2000 Program, the Registrant has very limited ability to ensure Year
2000 readiness by such parties. The Registrant is developing contingency plans
to cover situations in which Year 2000 problems arise despite the Registrant's
efforts. Such plans are expected to be substantially ready by June 30, 1999.
Forward-looking statements contained in this report relating to Year 2000
issues, including expectations of readiness, possible effects on the Registrant
and similar matters, are subject to the risks described in this section.
* * * * *
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.
-9-
<PAGE> 12
PART I. FINANCIAL INFORMATION (CONTINUED)
- -----------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
See the Registrant's most recent annual report filed on Form 10-K
(Management's Discussion and Analysis on pages 12 through 15).
There has been no material change in this information.
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
During the quarter ended September 30, 1998, the Registrant
filed a report on Form 8-K dated August 11, 1998, relating
to the announcement by Textron Inc. of its pending sale of
the Registrant to Associates First Capital Corporation.
-10-
<PAGE> 13
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, 1998 By /s/ GARY L. FITE
----------------- -------------------------------------
GARY L. FITE
Executive Vice President & Controller
(Chief Accounting Officer)
-11-
<PAGE> 14
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
(12) Statement of Computation of Number of Times Fixed
Charges Earned.
(27) Financial Data Schedule.
<PAGE> 1
EXHIBIT 12
AVCO FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF NUMBER OF TIMES
FIXED CHARGES EARNED
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Thousands of dollars)
<TABLE>
<CAPTION>
<S> <C>
Income
Income before income taxes....................................................$214,427
--------
Fixed charges to be added back to income --
Interest and debt expense................................................... 336,028
Rentals (one-third of all rent and related costs
charged to income)....................................................... 10,912
--------
Total fixed charges.................................................... 346,940
Income before income taxes and fixed charges....................................$561,367
========
Ratio
Number of times fixed charges covered by income
before income taxes and fixed charges...................................... 1.6
===
</TABLE>
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AFS
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 AND CONSOLIDATED STATEMENT OF
INCOME FOR THE PERIODS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 29,757
<SECURITIES> 0
<RECEIVABLES> 8,014,313
<ALLOWANCES> 271,008
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 86,863
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,108,856
<CURRENT-LIABILITIES> 0
<BONDS> 3,377,706
0
0
<COMMON> 500
<OTHER-SE> 1,195,146
<TOTAL-LIABILITY-AND-EQUITY> 9,108,856
<SALES> 0
<TOTAL-REVENUES> 1,397,319
<CGS> 0
<TOTAL-COSTS> 206,913
<OTHER-EXPENSES> 452,231
<LOSS-PROVISION> 187,720
<INTEREST-EXPENSE> 336,028
<INCOME-PRETAX> 214,427
<INCOME-TAX> 77,760
<INCOME-CONTINUING> 136,667
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136,667
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
