<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
SEPTEMBER 1, 1998
HOUSEHOLD INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation)
<TABLE>
<S> <C>
1-8198 36-3121988
(Commission File Number) (IRS Employer Identification No.)
2700 SANDERS ROAD 60070
PROSPECT HEIGHTS, ILLINOIS (Zip Code)
(Address of Principal Executive Offices)
</TABLE>
Registrant's telephone number, including area code: (847) 564-5000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
ITEM 5. OTHER EVENTS.
As previously reported by Household International, Inc. on its Current
Report on Form 8-K dated June 30, 1998 as filed on July 2, 1998, subject to the
terms and conditions of the Agreement and Plan of Merger (the "Merger
Agreement") dated as of April 7, 1998 between Household International, Inc.
("Household"), Household Acquisition Corporation II, a wholly-owned subsidiary
of Household, and Beneficial Corporation ("Beneficial"), Household Acquisition
Corporation II was merged with and into Beneficial, with Beneficial being the
surviving corporation (the "Merger"). In accordance with the Merger Agreement,
each share of the common stock, par value $1.00 per share, of Beneficial
("Beneficial Common Stock") outstanding immediately prior to the effective time
of the Merger was converted into the right to receive 3.0666 shares of the
common stock, $1.00 par value, of Household ("Household Common Stock"),
resulting in the issuance of approximately 168.4 million shares of Household
Common Stock. The Merger was accounted for as a "pooling of interests" under
generally accepted accounting principles.
The following consolidated financial statements of Household restate
Household's historical consolidated financial statements as of and for the three
years ended December 31, 1997 to reflect the Merger and are filed as Exhibit
99.1 hereto. These consolidated financial statements are intended to supersede
the supplemental consolidated financial statements of Household previously
included under Item 5 in its Current Report on Form 8-K dated June 30, 1998 as
filed on July 2, 1998.
1. Management's Discussion and Analysis.
2. Consolidated Balance Sheets as of December 31, 1997 and 1996.
3. Consolidated Statements of Income for the three years ended December 31,
1997.
4. Consolidated Statements of Changes in Stockholders' Equity for the three
years ended December 31, 1997.
5. Consolidated Statements of Cash Flows for the three years ended December
31, 1997.
6. Notes to the Consolidated Financial Statements.
The report of Arthur Andersen LLP, independent accountants, on the
consolidated financial statements of Household as of December 31, 1997 and 1996
and for the three years ended December 31, 1997 is filed herewith as part of
Exhibit 99.1 and the related consent is filed herewith as Exhibit 23. Both the
opinion and the consent are incorporated herein by reference.
Household's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998 is also incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
Not applicable.
(b) Pro Forma Financial Information.
Not applicable.
(c) Exhibits.
<TABLE>
<S> <C>
Exhibit 12 Statement on the Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends
Exhibit 23 Consent of Arthur Andersen LLP
Exhibit 27 Restated Financial Data Schedule
Exhibit 99.1 Consolidated Financial Statements of Household
International, Inc. as of December 31, 1997 and 1996 and for
the three years ended December 31, 1997.
</TABLE>
1
<PAGE> 3
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: September 1, 1998 HOUSEHOLD INTERNATIONAL, INC.
By: /s/ JOHN W. BLENKE
------------------------------------
John W. Blenke
Assistant Secretary
2
<PAGE> 1
EXHIBIT 12
HOUSEHOLD INTERNATIONAL, INC.
Computation of Ratio of Earnings to Fixed Charges and
to Combined Fixed Charges and Preferred Stock Dividends
(All dollar amounts are stated in millions.)
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Income from continuing
operations $ 940.3 $ 819.6 $ 603.7 $ 545.3 $ 484.7
Income taxes 462.2 461.2 420.4 309.1 281.2
--------- --------- -------- --------- ---------
Income before income taxes 1,402.5 1,280.8 1,024.1 854.4 765.9
Fixed charges:
Interest expense(1) 2,367.9 2,337.4 2,378.7 1,923.9 1,788.7
Interest portion of
rentals(2) 53.4 55.4 55.8 51.8 49.4
--------- --------- -------- --------- ---------
Total fixed charges 2,421.3 2,392.8 2,434.5 1,975.7 1,838.1
Total earnings as defined $ 3,823.8 $ 3,673.6 $3,458.6 $ 2,830.1 $ 2,604.0
========= ========= ======== ========= =========
Ratio of earnings to fixed
charges 1.58 1.54 1.42 1.43 1.42
========= ========= ======== ========= =========
Preferred stock dividends(3) $ 25.3 $ 34.0 $ 53.4 $ 50.4 $ 55.7
========= ========= ======== ========= =========
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.56 1.51 1.39 1.40 1.38
========= ========= ======== ========= =========
</TABLE>
(1) For financial statement purposes, these amounts are reduced for income
earned on temporary investment of excess funds, generally resulting from
over-subscriptions of commercial paper issuances.
(2) Represents one-third of rentals, which approximates the portion
representing interest.
(3) Preferred stock dividends are grossed up to their pre-tax equivalents.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated June 30, 1998 included in this Current Report on Form 8-K of
Household International, Inc. for the year ended December 31, 1997, into the
Company's previously filed Registration Statements No. 2-86383, No. 33-21343,
No. 2-97495, No. 33-45454, No. 33-45455, No. 33-52211, No. 33-58727, No.
333-00397, No. 33-44066, No. 333-03673, No. 333-39639, No. 333-36589, No.
333-58287, No. 333-58289, No. 333-58291 and No. 333-47073 on Form S-8, and
Registration Statements No. 33-56599, No. 333-1025 and No. 333-27305 on Form
S-3.
ARTHUR ANDERSEN LLP
Chicago, Illinois
September 1, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997<F1> DEC-31-1996<F1> DEC-31-1995<F1>
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 534,300 518,800 543,500
<SECURITIES> 2,898,600 2,843,000 6,130,900
<RECEIVABLES> 38,682,000 38,447,500 35,011,900
<ALLOWANCES> 2,523,000 2,109,000 1,591,500
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0<F2> 0<F2> 0<F2>
<PP&E> 1,279,500 1,294,100 1,316,800
<DEPRECIATION> 740,800 736,100 742,000
<TOTAL-ASSETS> 46,817,000 45,332,000 44,723,000
<CURRENT-LIABILITIES> 0<F2> 0<F2> 0<F2>
<BONDS> 23,736,200 23,433,100 19,020,400
0 0 0
264,500 319,500 319,500
<COMMON> 536,900 511,900 509,300
<OTHER-SE> 5,812,100 4,184,600 3,645,100
<TOTAL-LIABILITY-AND-EQUITY> 46,817,000 45,332,000 44,723,000
<SALES> 0 0 0
<TOTAL-REVENUES> 8,394,600 7,785,000 7,504,800
<CGS> 0 0 0
<TOTAL-COSTS> 3,140,700 3,026,600 3,082,300
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 1,493,000 1,144,200 1,025,100
<INTEREST-EXPENSE> 2,358,400 2,333,400 2,373,300
<INCOME-PRETAX> 1,402,500 1,280,800 1,024,100
<INCOME-TAX> 462,200 461,200 420,400
<INCOME-CONTINUING> 940,300 819,600 603,700
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 940,300 819,600 603,700
<EPS-PRIMARY> 1.97<F3> 1.76<F3> 1.26<F3>
<EPS-DILUTED> 1.93<F4> 1.73<F4> 1.24<F4>
<FN>
<F1>RESTATED
<F2>FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH FINANCIAL
INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S BALANCE SHEETS WERE
NON-CLASSIFIED.
<F3>REPRESENTS BASIC EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE." AMOUNTS HAVE BEEN RESTATED
AS A RESULT OF HOUSEHOLD'S MERGER WITH BENEFICIAL, ACCOUNTED FOR AS A POOLING
OF INTERESTS, AND FOR HOUSEHOLD'S 3-FOR-1 STOCK SPLIT EFFECTED IN THE FORM OF A
STOCK DIVIDEND AND PAID ON JUNE 1, 1998.
<F4>REPRESENTS DILUTED EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE." AMOUNTS HAVE BEEN RESTATED
AS A RESULT OF HOUSEHOLD'S MERGER WITH BENEFICIAL, ACCOUNTED FOR AS A POOLING
OF INTERESTS, AND FOR HOUSEHOLD'S 3-FOR-1 STOCK SPLIT EFFECTED IN THE FORM OF A
STOCK DIVIDEND AND PAID ON JUNE 1, 1998.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
HOUSEHOLD INTERNATIONAL, INC.
INDEX TO FINANCIAL INFORMATION
<TABLE>
<S> <C>
Introduction................................................ 2
Selected Financial Data..................................... 3
Credit Quality Statistics................................... 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 6
Glossary of Terms........................................... 24
Analysis of Credit Loss Reserves Activity--Owned
Receivables............................................... 26
Analysis of Credit Loss Reserves Activity--Managed
Receivables............................................... 27
Net Interest Margin......................................... 28
Selected Quarterly Financial Data........................... 31
Financial Highlights........................................ 32
Consolidated Financial Statements........................... 33
Notes to Consolidated Financial Statements.................. 37
Report of Independent Public Accountants.................... 68
</TABLE>
1
<PAGE> 2
INTRODUCTION
Effective June 30, 1998, Household International, Inc. ("Household")
completed its merger with Beneficial Corporation ("Beneficial") bringing
together two of the oldest brands in the consumer finance industry which we
believe will create a preeminent branch based consumer finance company. At June
30, 1998, the combined company had owned assets of $49.5 billion.
The merger has been accounted for as a pooling of interests and,
accordingly, the amounts for all periods reported in this filing are reported on
a combined basis including both Household and Beneficial.
2
<PAGE> 3
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(ALL DOLLAR AMOUNTS EXCEPT PER SHARE DATA ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA --
YEAR ENDED DECEMBER 31
Net interest margin and other
revenues......................... $ 6,036.2 $ 5,451.6 $ 5,131.5 $ 4,795.9 $ 4,605.4
Provision for credit losses on
owned receivables................ 1,493.0 1,144.2 1,025.1 795.1 898.0
Operating expenses................. 2,884.8 2,714.7 2,527.4 2,595.5 2,326.5
Policyholders' benefits............ 255.9 311.9 554.9 550.9 615.0
Income taxes....................... 462.2 461.2 420.4 309.1 281.2
Extraordinary loss................. -- -- -- -- 2.8
---------- ---------- ---------- ---------- ----------
Net income......................... $ 940.3 $ 819.6 $ 603.7 $ 545.3 $ 481.9
========== ========== ========== ========== ==========
PER COMMON SHARE DATA
Basic earnings per share(1)........ $ 1.97 $ 1.76 $ 1.26 $ 1.15 $ 1.04
Diluted earnings per share(1)...... 1.93 1.73 1.24 1.13 1.01
Dividends declared(1).............. .54 .49 .44 .41 .39
Book value(1)...................... 12.81 9.96 8.96 7.72 7.37
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA AT DECEMBER 31
Total assets(2):
Owned............................ $ 46,817.0 $ 45,332.0 $ 44,723.0 $ 48,527.1 $ 45,728.7
Managed.......................... 71,295.5 66,183.2 60,721.1 61,652.6 55,749.0
---------- ---------- ---------- ---------- ----------
Managed receivables(3):
First mortgage................... $ 396.6 $ 725.6 $ 2,066.9 $ 3,364.2 $ 3,534.1
Home equity...................... 19,824.8 16,197.5 16,506.7 14,734.5 14,532.5
Auto finance(4).................. 883.4 -- -- -- --
MasterCard/Visa.................. 19,211.7 19,528.2 13,894.5 11,458.9 9,048.7
Private label.................... 10,381.9 10,252.5 7,774.3 5,873.1 4,614.1
Other unsecured.................. 11,505.1 11,557.6 9,375.1 7,784.9 6,519.6
Commercial....................... 957.0 1,037.3 1,392.5 2,058.0 3,045.1
---------- ---------- ---------- ---------- ----------
Total managed receivables.......... 63,160.5 59,298.7 51,010.0 45,273.6 41,294.1
Receivables serviced with limited
recourse......................... (24,478.5) (20,851.2) (15,998.1) (13,125.5) (10,020.3)
---------- ---------- ---------- ---------- ----------
Owned receivables.................. $ 38,682.0 $ 38,447.5 $ 35,011.9 $ 32,148.1 $ 31,273.8
========== ========== ========== ========== ==========
Deposits(5)........................ $ 2,344.2 $ 3,000.1 $ 5,351.3 $ 9,093.4 $ 8,132.3
Total other debt................... 34,402.3 34,030.5 29,703.7 25,444.9 24,445.1
Company obligated mandatorily
redeemable preferred securities
of subsidiary trusts............. 175.0 175.0 75.0 -- --
Convertible preferred stock........ -- -- -- 2.6 19.3
Preferred stock.................... 264.5 319.5 319.5 434.6 434.7
Common shareholders' equity(6)..... 6,174.0 4,521.5 4,079.4 3,486.1 3,275.8
---------- ---------- ---------- ---------- ----------
SELECTED FINANCIAL RATIOS
Return on average owned assets..... 2.03% 1.82% 1.25% 1.15% 1.09%
Return on average managed assets... 1.38 1.30 .98 .94 .91
Return on average common
shareholders' equity............. 17.3 18.7 15.1 15.2 14.9
Total shareholders' equity as a
percent of owned assets(7)....... 14.13 11.07 10.00 8.08 8.11
Total shareholders' equity as a
percent of managed assets(7)..... 9.28 7.58 7.37 6.36 6.66
Managed net interest margin........ 7.72 7.45 7.05 7.27 7.47
Managed consumer net chargeoff
ratio(8)......................... 3.84 2.96 2.51 2.36 2.46
Common dividends to net income..... 30.3 30.1 36.8 37.0 38.2
---------- ---------- ---------- ---------- ----------
</TABLE>
3
<PAGE> 4
- ---------------
(1) We adopted Statement of Financial Accounting Standards No. 128, "Earnings
per Share" (FAS No. 128). Under FAS No. 128, basic earnings per common share
is computed excluding dilution caused by common stock equivalents such as
stock options. Diluted earnings per common share includes the effect of
dilutive common stock equivalents. Prior years have been restated. All share
information has been adjusted for our 3-for-1 stock split effected in the
form of a stock dividend and paid on June 1, 1998.
(2) In 1996, Beneficial sold its annuity product line. In late 1995, Household
sold its individual life and annuity product lines of its life insurance
business. In 1995, Household sold its first mortgage servicing portfolio and
servicing business. In 1994, Household sold its Australian subsidiary and
retail securities brokerage business.
(3) In 1997, we acquired the capital stock of Transamerica Financial Services
Holding Company ("TFS"). We paid $1.1 billion for the stock of TFS and
repaid about $2.8 billion of TFS debt owed to its affiliates. The
acquisition included $3.1 billion of home equity receivables. We also sold
our entire portfolio of student loans totaling about $900 million in 1997,
as we exited this business. In 1996, we acquired credit card portfolios with
outstandings of $4.1 billion and sold $1.7 billion of lower margin loans
primarily from the previously divested mortgage and consumer banking
businesses.
(4) In October 1997, we purchased ACC Consumer Finance Corporation, an auto
finance company. Prior to the fourth quarter of 1997, auto finance
receivables were not significant and were included in other unsecured
receivables.
(5) We sold our domestic consumer banking operations, including deposits of $2.8
billion in 1996 and $3.4 billion in 1995. Our Canadian subsidiary also sold
$725 million in deposits in 1995.
(6) In 1997, we issued 27.3 million shares of common stock in a public offering,
raising about $1.0 billion. The net proceeds were used to repay certain
short-term borrowings incurred in connection with the acquisition of TFS.
(7) Total shareholders' equity at December 31, 1997, 1996 and 1995 includes
common shareholders' equity, preferred stock and company obligated
mandatorily redeemable preferred securities of subsidiary trusts. Total
shareholders' equity excludes convertible preferred stock that was fully
converted or redeemed during 1995.
(8) Following the merger with Beneficial, we adopted Beneficial's presentation
of chargeoffs related to private label receivables to reflect interest and
fee chargeoffs as a reversal against the respective line items on the
statement of income rather than as a reduction to the allowance for credit
losses. As a result, the managed consumer net chargeoff ratios have been
restated for all periods presented.
4
<PAGE> 5
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
CREDIT QUALITY STATISTICS
<TABLE>
<CAPTION>
AT DECEMBER 31, UNLESS OTHERWISE INDICATED
--------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------ --------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C>
MANAGED CONSUMER TWO-MONTH-AND-OVER CONTRACTUAL DELINQUENCY
RATIOS
First mortgage.............................................. 10.35% 9.49% 3.29% 1.81% 1.33%
Home equity................................................. 3.69 3.04 2.76 2.49 2.95
Auto finance(1)............................................. 2.09 -- -- -- --
MasterCard/Visa............................................. 3.10 2.73 2.19 2.23 2.42
Private label............................................... 5.81 4.60 3.93 3.50 3.86
Other unsecured............................................. 7.81 6.21 5.68 5.25 6.41
-------- -------- -------- ------ --------
Total................................................... 4.64% 3.92% 3.36% 3.00% 3.38%
======== ======== ======== ====== ========
RATIO OF NET CHARGEOFFS TO AVERAGE MANAGED RECEIVABLES FOR
THE YEAR
First mortgage.............................................. 1.05% .45% .35% .41% .37%
Home equity................................................. .64 .60 .64 .83 .86
Auto finance(1)............................................. 4.60 -- -- -- --
MasterCard/Visa............................................. 5.55 4.54 4.12 4.18 4.18
Private label(2)............................................ 4.62 3.42 3.75 2.24 2.87
Other unsecured............................................. 5.48 4.29 3.60 4.01 5.30
-------- -------- -------- ------ --------
Total consumer(2)....................................... 3.84 2.96 2.51 2.36 2.46
Commercial.................................................. 1.66 .92 2.10 3.10 4.59
-------- -------- -------- ------ --------
Total(2)................................................ 3.80% 2.92% 2.49% 2.40% 2.61%
======== ======== ======== ====== ========
NONACCRUAL OWNED RECEIVABLES
Domestic:
First mortgage............................................ $ 31.7 $ 50.0 $ 39.6 $ 38.6 $ 25.6
Home equity............................................... 378.4 198.3 205.8 155.9 183.4
Private label(3).......................................... 25.0 22.5 58.3 30.2 26.9
Other unsecured........................................... 283.6 240.6 245.2 209.1 210.6
Foreign..................................................... 189.1 177.4 169.2 165.5 179.0
-------- -------- -------- ------ --------
Total consumer.......................................... 907.8 688.8 718.1 599.3 625.5
Commercial.................................................. 31.2 60.0 146.8 117.7 279.2
-------- -------- -------- ------ --------
Total................................................... $ 939.0 $ 748.8 $ 864.9 $717.0 $ 904.7
======== ======== ======== ====== ========
NONACCRUAL MANAGED RECEIVABLES
Domestic:
First mortgage............................................ $ 31.7 $ 50.0 $ 39.6 $ 38.6 $ 25.6
Home equity............................................... 492.1 315.7 310.8 257.8 298.1
Private label(3).......................................... 25.0 22.5 80.4 46.7 31.8
Other unsecured........................................... 565.2 399.1 295.0 209.1 210.6
Foreign..................................................... 219.7 198.8 179.3 165.5 179.0
-------- -------- -------- ------ --------
Total consumer.......................................... 1,333.7 986.1 905.1 717.7 745.1
Commercial.................................................. 31.2 60.0 146.8 117.7 279.2
-------- -------- -------- ------ --------
Total................................................... $1,364.9 $1,046.1 $1,051.9 $835.4 $1,024.3
======== ======== ======== ====== ========
ACCRUING OWNED RECEIVABLES 90 OR MORE DAYS DELINQUENT(4)
Domestic.................................................... $ 468.3 $ 415.9 $ 181.1 $147.3 $ 145.4
Foreign..................................................... 31.3 23.8 12.2 7.5 10.3
-------- -------- -------- ------ --------
Total................................................... $ 499.6 $ 439.7 $ 193.3 $154.8 $ 155.7
======== ======== ======== ====== ========
ACCRUING MANAGED RECEIVABLES 90 OR MORE DAYS DELINQUENT(4)
Domestic.................................................... $ 776.5 $ 621.7 $ 308.1 $239.8 $ 210.6
Foreign..................................................... 31.3 23.8 12.2 7.5 10.3
-------- -------- -------- ------ --------
Total................................................... $ 807.8 $ 645.5 $ 320.3 $247.3 $ 220.9
======== ======== ======== ====== ========
RENEGOTIATED COMMERCIAL LOANS............................... $ 12.4 $ 12.9 $ 21.2 $ 41.8 $ 28.7
-------- -------- -------- ------ --------
REAL ESTATE OWNED
Domestic.................................................... $ 200.0 $ 217.2 $ 208.4 $206.7 $ 439.2
Foreign..................................................... 12.8 19.6 29.3 47.3 62.2
-------- -------- -------- ------ --------
Total................................................... $ 212.8 $ 236.8 $ 237.7 $254.0 $ 501.4
======== ======== ======== ====== ========
</TABLE>
- ---------------
(1) Prior to the fourth quarter of 1997, credit quality statistics for auto
finance receivables were not significant. Credit quality data for these
receivables were included in other unsecured receivables. Net chargeoff data
includes ACC subsequent to our acquisition in October 1997.
(2) Following the merger with Beneficial, we adopted Beneficial's presentation
of chargeoffs related to private label receivables to reflect interest and
fee chargeoffs as a reversal against the respective line items on the
statement of income rather than as a reduction to the allowance for credit
losses. As a result, the managed consumer net chargeoff ratios have been
restated for all periods presented.
(3) Represents nonaccrual sales contract receivables which are included in
private label receivables.
(4) Includes MasterCard and Visa and private label credit card receivables,
consistent with industry practice. There were no commercial loans 90 or more
days past due which remained on accrual status.
5
<PAGE> 6
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Current Report on Form 8-K contains certain estimates and projections
regarding Household International, Inc. and our merger with Beneficial
Corporation, that may be forward-looking in nature, as defined by the Private
Securities Litigation Reform Act of 1995. A variety of factors may cause actual
results to differ materially from the results discussed in these forward-looking
statements. Factors that might cause such a difference are discussed herein and
in Household International's and Beneficial Corporation's Annual Reports on
Forms 10-K, for the year ended December 31, 1997, all filed with the Securities
and Exchange Commission.
Household International, Inc., through its subsidiaries, provides consumers
with several types of loan products. We offer home equity loans, auto finance
loans, MasterCard* and Visa* and private label credit cards, tax refund
anticipation loans and other unsecured loans. We serve middle-market customers
primarily in the United States, Canada and the United Kingdom. At December 31,
1997, we had managed receivables of $63.2 billion. Our managed receivable
portfolio includes receivables on our balance sheet and those that we service
for investors as part of our asset securitization program.
On June 30, 1998, Household International ("Household") completed its
merger with Beneficial Corporation ("Beneficial"), a consumer finance holding
company headquartered in Wilmington, Delaware. Each outstanding share of
Beneficial common stock was converted into 3.0666 shares of Household's common
stock, resulting in the issuance of approximately 168.4 million shares of common
stock. Each share of Beneficial $5.50 Convertible Preferred Stock (the
"Beneficial Convertible Stock") was converted into the number of shares of
Household common stock the holder would have been entitled to receive in the
merger had the Beneficial Convertible Stock been converted into shares of
Beneficial common stock immediately prior to the merger. Additionally, each
other share of Beneficial preferred stock outstanding was converted into one
share of a newly-created series of Household preferred stock with terms
substantially similar to those of existing Beneficial preferred stock. The
merger was accounted for as a pooling of interests and, therefore, the
consolidated financial statements include the results of operations, financial
position and changes in cash flows of Beneficial for all periods presented.
In connection with the merger, Household incurred pre-tax merger and
integration related costs of approximately $1 billion ($751 million after-tax)
in the quarter ended June 30, 1998. These costs included approximately $305
million in lease exit costs, $50 million in fixed asset write-offs related to
closed facilities, $255 million in severance and change in control payments,
$230 million in asset writedowns to reflect modified business plans, $75 million
in investment banking fees, $25 million in legal and other expenses, and $60
million in prepayment premiums related to debt.
The merger and integration related costs included approximately $291
million in non-cash charges. Cash payments of approximately $709 million will be
funded through Household's existing operations, senior debt and other
borrowings. In addition, Household will receive tax benefits of approximately
$249 million. Substantially all of the cash payments are expected to be made by
the end of 1998.
On March 10, 1998, the Board of Directors approved a three-for-one split of
Household's common stock effected in the form of a dividend, issued on June 1,
1998, to shareholders of record as of May 14, 1998. The split was subject to
shareholder approval to increase authorized shares which was received on May 13,
1998. Accordingly, all common share and per common share data in the following
discussion includes the effect of Household's stock split.
OPERATIONS SUMMARY
- Our net income in 1997 was a record $940.3 million, an increase of 15
percent over 1996. Net income in 1996 was $819.6 million, 36 percent
higher than 1995 earnings of $603.7 million. Diluted earnings per share
were $1.93 in 1997, up 12 percent from $1.73 in 1996, which was up 40
percent from $1.24 in
- ---------------
* MasterCard is a registered trademark of MasterCard International, Incorporated
and Visa is a registered trademark of VISA USA, Inc.
6
<PAGE> 7
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
1995. The difference between the percentage increases in net income and
earnings per share in 1997 was due to issuing over 27 million common
shares in late June. Results in 1997 were impacted by an after-tax
provision of $27.8 million for the disposition of Beneficial's German
operations, an $8.2 million after-tax addition to Beneficial's litigation
reserves and a $10.6 million after-tax charge to write down Beneficial's
real estate holdings in Tampa, Florida and Houston, Texas that are being
sold and other Beneficial related reorganization and restructuring
efforts. In addition, the tax anticipation refund loan business ("RAL")
profits decreased in 1997 compared with 1996 which benefited from strong
collections of previously written off loans. Results in 1996 were
impacted from the turnaround of the RAL business whose results were
severely impacted in 1995 due to the Internal Revenue Service releasing
certain portions of refunds directly to taxpayers.
Our return on average common shareholders' equity ("ROE") was 17.3
percent in 1997, compared to 18.7 percent in 1996, and up from 15.1
percent in 1995. The decrease in 1997 was a result of the June common
stock offering which decreased our leverage, resulting in more of our
assets being funded by equity as compared to the prior year. Our return
on average owned assets ("ROA") was 2.03 percent, up from 1.82 percent
in 1996 and 1.25 percent in 1995. Our return on average managed assets
("ROMA") was 1.38 percent, up from 1.30 percent in 1996 and .98 percent
in 1995. Our net income, ROA and ROMA increased over the past three
years because we focused on our core businesses, which earn higher
returns compared to the businesses that we sold or exited beginning in
late 1994.
- In June, we purchased Transamerica Financial Services Holding Company
("TFS"), the branch-based consumer finance subsidiary of Transamerica
Corporation, for $1.1 billion. We also repaid $2.8 billion of debt that
TFS owed to affiliates of Transamerica Corporation. This acquisition
included $3.1 billion of home equity receivables secured primarily by
home mortgages, and $100 million of other unsecured receivables. The
acquisition strengthened our core consumer finance operations by adding
new markets, new customer accounts, seasoned employees and receivables
secured by collateral. This type of security helps to reduce the amount
of loss we might incur if borrowers do not pay off their loans. The
integration of TFS into Household Finance Corporation, our wholly-owned
subsidiary, is complete. We closed all redundant branches and
consolidated back office operations.
In connection with this acquisition, in June 1997, we completed a public
offering of 27.3 million shares of common stock for $1.0 billion. We
used the net proceeds from the offering to repay short-term borrowings
related to the acquisition.
In October 1997, we purchased all of the outstanding capital stock of
ACC Consumer Finance Corporation ("ACC"), an auto finance company, for
about 4.2 million shares of our common stock and cash. ACC makes loans
to non-prime borrowers secured by automobiles, primarily used vehicles
sold through franchised dealers. This purchase increased our market
share in the non-prime auto finance market and added key managers to
grow this business.
In late December 1997, Beneficial acquired Endeavour Personal Finance
Ltd., including receivables of approximately $250 million for cash,
expanding our presence in the United Kingdom.
We accounted for each of these acquisitions as purchases. Thus, we have
included the results of operations of TFS, ACC and Endeavour in our
statement of income for 1997 from the closing dates of the transactions.
These acquisitions were not material to our financial statements.
In 1997, Beneficial announced its intent to sell the German operations
and recorded an after-tax loss of approximately $27.8 million after
consideration of a $31.0 million tax benefit primarily generated by the
expected utilization of capital losses. The sale of Beneficial's German
operations was completed in April 1998. No additional losses were
realized as a result of the sale. During the first quarter of 1998, the
sale of Beneficial's Canadian operations was completed. An after-tax
gain of approximately
7
<PAGE> 8
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
$118.5 million was recorded. As of December 31, 1997, the net assets of
these sold operations were $121.5 million for Canada and $15.7 million
for Germany. In 1997, the sold Canadian operations reported pre-tax
earnings of $21.2 million, while the German operating pre-tax loss was
$6.7 million.
- In 1996, 1995 and late 1994, we also exited several businesses that were
providing insufficient returns on our investment.
Over the course of 1996 and 1995, we sold our consumer banking branches
in Illinois, California, Maryland, Virginia, Ohio and Indiana. This
included the sale of about $6.2 billion of deposits and $340 million of
home equity and other unsecured receivables. We wrote off acquired
intangibles related to these deposits of $110 million in 1996 and $93
million in 1995.
On March 31, 1996, Beneficial sold a $957 million annuity portfolio
through a co-insurance agreement. Approximately $900 million of
investment securities were sold as part of this disposition.
In October 1995, we sold certain of the individual life and annuity
product lines of our individual life insurance business. However, we
retained our credit life insurance business, which complements our
consumer lending and provides us additional revenue. We sold $6.1 billion
of assets, which were virtually all investment securities. We retained
two product lines of the individual life insurance business, but are no
longer pursuing new business in this area.
From late 1994 through 1995, we also exited our first mortgage
origination and servicing businesses in the United States and Canada.
Because we no longer originate first mortgage loans, this portfolio
continues to decrease as loans pay off or are sold.
- The following summarizes operating results for our key businesses for
1997 compared to 1996 and 1995:
Our domestic consumer finance business reported higher earnings due
mainly to higher levels of average managed receivables, particularly in
unsecured loans. These loans typically carry higher rates than secured
products because they carry more risk. More receivables, coupled with
higher interest rates charged on loans, resulted in higher net interest
margin. The increase in margin was partially offset by higher credit
losses because more of our borrowers declared personal bankruptcy.
Personal bankruptcy filings in the U.S. were at an all-time high in 1997.
Our MasterCard and Visa credit card business achieved higher earnings due
to higher net interest margin and fee income, and improved efficiency.
These factors were offset to some degree by higher credit losses
resulting primarily from increased personal bankruptcy filings. In late
1996 we started a program designed to increase the return on our
MasterCard and Visa portfolio. We sold certain non-strategic portfolios,
increased fees, and systematically eliminated unprofitable accounts. This
business continued to benefit from our co-branding and affinity
relationship strategies. This includes our alliance with General Motors
Corporation ("GM") to issue the GM Card, a co-branded credit card. The GM
Card continues to represent a substantial portion of our credit card
portfolio. The MasterCard and Visa business also includes the AFL-CIO's
Union Privilege affinity relationship which we acquired in June 1996.
Union Privilege was created by the AFL-CIO to market benefits to union
members.
Our private label credit card business reported higher income resulting
from a wider net interest margin and higher late fees, partially offset
by higher credit losses due to the end of certain special promotions and
increased personal bankruptcies. Results in 1997 also benefited from the
renegotiation of contracts with several merchant partners. Additionally,
in 1997, we began to implement various initiatives to control the mix and
increase the profitability of promotional activity. Results in 1996 were
impacted by Beneficial's $65 million up-front loan loss provision on
strong receivables growth and $10 million in start-up costs relating to
two of its merchants.
8
<PAGE> 9
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
The RAL program reported lower profits in 1997 as compared with 1996,
which benefited from very strong collections on loans previously written
off during the 1995 season. Additionally, 1997 earnings were reduced by
the July 1996 agreement with H&R Block Tax Services Inc. that gave them a
share in both the revenue and credit risk of certain RAL's. RAL program
fundamentals, however, remained strong as the number of loans made in
1997 increased by 12% to 2.96 million from 2.65 million in 1996, while
gross revenues grew 31%. The RAL business incurred a pre-tax loss in
1995, which was severely impacted by the Internal Revenue Service sending
certain refunds directly to taxpayers.
Our United Kingdom operation's net income increased because of revenue
growth from a larger receivable base. Managed receivables increased to
$5.4 billion at year-end 1997, up 25 percent from the end of 1996. The
majority of this increase was due to the success of the United Kingdom's
co-branded credit card relationships, including the Goldfish Card issued
in alliance with the Centrica Group and the Beneficial acquisition of
Endeavour Personal Finance Ltd.
Profits from our Canadian operation were relatively unchanged from 1996
as higher net interest margin and improved efficiency were offset by
higher credit losses and higher operating expenses from Beneficial's
Canadian operations which were sold during the first quarter of 1998.
Harbour Island, Inc., our real estate subsidiary in Tampa, Florida,
recorded pre-tax losses in each of the prior three years, representing
interest cost to carry and non cash depreciation charges. The 1997
results reflected the sale of the Athletic Club and residential land, and
a writedown from the anticipated loss on the sale of a People Mover
System and its infrastructure.
Our commercial operations benefited from gains on the disposition of
assets while continuing to minimize credit losses.
- Our managed net interest margin expanded to 7.72 percent in 1997 from
7.45 percent in 1996 and 7.05 percent in 1995. Our margins have increased
over the past three years because we have continued to raise the interest
rates we charge on most of our products. In addition, Household's product
mix has shifted towards unsecured receivables, which have higher rates
than secured products because they carry more risk. The overall rate of
increase has been tempered by the impact of Beneficial's product mix
which carries a higher percentage of real estate secured receivables
which carry a lower yield compared to unsecured products.
- Our capital ratios improved over the past three years because of our
issuance of common stock in 1997, the sale of businesses and assets in
1996 and 1995 and strong earnings growth.
- Our combined normalized managed basis efficiency ratio was 41.0 percent
in 1997, 45.0 percent in 1996 and 50.7 percent in 1995. The efficiency
ratio is the ratio of operating expenses to the sum of our managed net
interest margin and other revenues less policyholders' benefits. We
normalize, or adjust for, items that are not indicative of ongoing
operations. The improvement in the 1997 ratio was due to continued cost
control in our remaining businesses and to the sales of less-efficient
businesses in 1996 and 1995.
BALANCE SHEET REVIEW
- Managed assets (total assets on our balance sheet plus receivables
serviced with limited recourse) increased to $71.3 billion at December
31, 1997 from $66.2 billion at year-end 1996. The increase was due to
receivable growth in our core businesses. Owned assets totaled $46.8
billion at December 31, 1997, up slightly from $45.3 billion at year-end
1996. Owned assets may vary from period to period depending on the timing
and size of asset securitization transactions. We securitized $8.3
billion of receivables in 1997 and $8.8 billion of receivables during
1996. We refer to the securitized receivables that are serviced for
investors and not on our balance sheet as our off-balance sheet
portfolio.
9
<PAGE> 10
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
- Our core products and total portfolio grew during 1997, as shown in the
following table:
<TABLE>
<CAPTION>
INCREASE INCREASE
DECEMBER 31, (DECREASE) IN (DECREASE) IN
1997 1997 / 1996 1996 / 1995
------------ -------------- --------------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C>
MANAGED RECEIVABLES:
Home equity............................................ $19,492.8 24% (2)%
Auto finance(1)........................................ 883.4 -- --
MasterCard/Visa........................................ 19,211.7 (2) 41
Private label.......................................... 9,997.2 1 33
Other unsecured........................................ 11,210.2 7 26
--------- --- ---
CORE PRODUCTS.......................................... 60,795.3 9 22
--------- --- ---
First mortgage......................................... 396.6 (45) (65)
Commercial............................................. 882.6 (15) (26)
Discontinued products(2)............................... 1,086.0 (42) 3
--------- --- ---
Total............................................. $63,160.5 7% 16%
========= === ===
</TABLE>
- ---------------
(1) Prior to 1997, auto finance receivables were not significant and were
included in other unsecured receivables.
(2) Discontinued products include receivables relating to Beneficial's disposed
Canadian operations in March 1998 and German operations in April 1998 and
Household's student loan receivables sold in the fourth quarter of 1997.
Growth in home equity and auto finance receivables benefited from
acquisitions during 1997. MasterCard and Visa receivables were down
somewhat from 1996 due to the sale and planned runoff of non-strategic
and less profitable receivables. Private label credit card receivables
were up slightly from last year. Other unsecured receivables experienced
steady growth in 1997 in both the domestic consumer finance and United
Kingdom businesses.
- The managed consumer two-months-and-over contractual delinquency ratio
increased to 4.64 percent at December 31, 1997 from 3.92 percent at
December 31, 1996. The 1997 managed consumer net chargeoff ratio was 3.84
percent compared to 2.96 percent in 1996 and 2.51 percent in 1995.
- We increased managed credit loss reserves 19 percent in 1997, to $2.5
billion compared to $2.1 billion at December 31, 1996. This compares to
an increase of 7 percent in total managed receivables in 1997. The
increase in managed reserves was due to continuing uncertainty about
consumer payment patterns, the maturing of our unsecured loan portfolios
and the increase in our off-balance sheet portfolio. Credit loss reserves
as a percent of managed receivables increased to 3.99 percent at year-end
1997 from 3.56 percent a year ago. Reserves as a percent of nonperforming
managed receivables were 115.5 percent compared to 123.7 percent at
December 31, 1996.
- The ratio of total shareholders' equity to owned assets was 14.13
percent, an increase from 11.07 percent at year-end 1996. The ratio of
total shareholders' equity to managed assets was 9.28 percent, up from
7.58 percent at December 31, 1996. The increase in the ratios was
primarily due to our issuance of common stock in June 1997.
PRO FORMA MANAGED STATEMENTS OF INCOME
Securitizations of consumer receivables have been, and will continue to be,
an important source of funding. We continue to service securitized receivables
after they have been sold and retain a limited recourse liability for future
credit losses. We include revenues and credit-related expenses related to the
off-balance sheet portfolio in one line item in our owned statements of income.
Specifically, we report net interest margin,
10
<PAGE> 11
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
fee and other income, and provision for credit losses for securitized
receivables as a net amount in securitization income.
We monitor our operations on a managed basis as well as on the owned basis
shown in our statements of income. The managed basis assumes that the
securitized receivables have not been sold and are still on our balance sheet.
The income and expense items discussed above are reclassified from
securitization income into the appropriate caption. Pro forma managed statements
of income, which reflect these reclassifications, are presented below. For
purposes of this analysis, the managed results do not reflect the differences
between our accounting policies for owned receivables and the off-balance sheet
portfolio. Therefore, net income on a pro forma managed basis equals net income
on an owned basis.
PRO FORMA MANAGED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Finance income....................................... $ 8,362.7 $ 7,524.3 $ 6,671.3
Other interest income................................ 49.8 93.3 136.6
Interest expense..................................... 3,692.2 3,413.2 3,262.5
--------- --------- ---------
Net interest margin.................................. 4,720.3 4,204.4 3,545.4
Provision for credit losses.......................... 2,620.6 2,033.3 1,538.7
--------- --------- ---------
Net interest margin after provision for credit
losses............................................. 2,099.7 2,171.1 2,006.7
--------- --------- ---------
Insurance revenues................................... 454.2 422.1 474.8
Investment income.................................... 173.1 220.7 524.8
Fee income........................................... 1,460.5 1,073.9 780.7
Other income......................................... 355.7 419.6 319.4
--------- --------- ---------
Total other revenues............................ 2,443.5 2,136.3 2,099.7
--------- --------- ---------
Salaries and fringe benefits......................... 1,074.4 976.9 939.9
Occupancy and equipment expense...................... 327.4 328.7 337.9
Other marketing expenses............................. 449.6 431.5 307.9
Other servicing and administrative expenses.......... 875.0 833.9 831.9
Amortization of acquired intangibles and goodwill.... 158.4 143.7 109.8
Policyholders' benefits.............................. 255.9 311.9 554.9
--------- --------- ---------
Total costs and expenses........................ 3,140.7 3,026.6 3,082.3
--------- --------- ---------
Income before income taxes........................... 1,402.5 1,280.8 1,024.1
Income taxes......................................... 462.2 461.2 420.4
--------- --------- ---------
Net income........................................... $ 940.3 $ 819.6 $ 603.7
========= ========= =========
Average managed receivables.......................... $60,447.2 $54,959.0 $48,024.3
Average noninsurance investments..................... 661.4 1,477.6 2,252.4
--------- --------- ---------
Average managed interest-earning assets.............. $61,108.6 $56,436.6 $50,276.7
========= ========= =========
</TABLE>
The following discussion on revenues, where applicable, and provision for
credit losses includes comparisons to amounts reported on our historical owned
statements of income ("Owned Basis"), as well as on the above pro forma managed
statements of income ("Managed Basis").
Net Interest Margin. Net interest margin on an Owned Basis was $2,822.4
million for 1997, up from $2,695.7 million in 1996 and $2,522.8 million in 1995.
As a percent of average owned interest-earning assets, net interest margin was
7.16 percent in 1997, 7.02 percent in 1996 and 6.89 percent in 1995. The dollar
increase over 1996 and 1995 was due to growth in average owned interest-earning
assets and higher interest
11
<PAGE> 12
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
spreads. The interest spread represents the difference between the yield earned
on interest-earning assets and the cost of the debt used to fund the assets. See
pages 28 and 29 for an analysis of our Owned Basis net interest margin.
Net interest margin on a Managed Basis increased to $4,720.3 million for
1997 from $4,204.4 million in 1996. The increase was due to receivable growth
and higher interest spreads. The net interest margin percentage on a Managed
Basis increased to 7.72 percent from 7.45 percent in 1996 and 7.05 percent in
1995. The increase over the prior two years was due to higher interest rates
charged on loans and the continued shift in Household's product mix towards
unsecured receivables, somewhat tempered by the impact of Beneficial's product
mix which carries a higher percentage of secured receivables.
Net interest margin on a Managed Basis is greater than on an Owned Basis
because MasterCard and Visa and other unsecured receivables, which have wider
spreads, are a larger portion of the off-balance sheet portfolio than of the
owned portfolio.
Provision for Credit Losses. The provision for credit losses includes
current period credit losses. It also includes an amount which, in our judgment,
is sufficient to maintain reserves for credit losses at a level that reflects
known and inherent risks in the portfolio. The Managed Basis provision for
credit losses also includes the over-the-life reserve requirement established on
the off-balance sheet portfolio when receivables are securitized.
The provision for credit losses on an Owned Basis totaled $1,493.0 million
in 1997, compared to $1,144.2 million in 1996 and $1,025.1 million in 1995. As a
percent of average owned receivables, the provision was 3.85 percent compared to
3.10 percent in 1996 and 2.98 percent in 1995. The increase in 1997 was due to
higher chargeoffs on our unsecured portfolios. Over the past three years, we
recorded provisions for credit losses in excess of chargeoffs because of
continued uncertainty regarding consumer payment patterns, high levels of
personal bankruptcies and the maturing of our unsecured products. In 1996,
Beneficial recorded a $65 million up-front loan loss provision for the strong
private label receivables growth experienced during the year. The maturing or
seasoning of a product is the effect of a growing portfolio reaching expected
levels of chargeoffs as loans age. Owned provision in excess of owned chargeoffs
was $197 million in 1997, $184 million in 1996 and $171 million in 1995.
The provision for credit losses on a Managed Basis totaled $2,620.6 million
in 1997, $2,033.3 million in 1996 and $1,538.7 million in 1995. The provision as
a percent of average managed receivables was 4.34 percent in 1997, 3.70 percent
in 1996 and 3.20 percent in 1995. Managed provision in excess of managed
chargeoffs was $323 million in 1997, $430 million in 1996 and $292 million in
1995.
Other Revenues. Securitization income was $1,638.4 million in 1997,
$1,341.3 million in 1996 and $997.2 million in 1995. Securitization income
increased over the three year period because of growth in average securitized
receivables. The components of securitization income are reclassified to the
appropriate caption in the statements of income on a Managed Basis.
Insurance revenues of $454.2 million in 1997 were up from $422.1 million in
1996 but down from $474.8 million in 1995. The increase in 1997 was primarily
due to increased insurance sales on a larger portfolio. The decrease in 1996
from 1995 was due to the sale of Beneficial's annuity product line in the first
quarter of 1996 and Household's individual life and annuity product lines in the
fourth quarter of 1995.
Investment income includes interest income on investment securities in the
retained insurance business as well as realized gains and losses from the sale
of investment securities. Investment income was $173.1 million in 1997 compared
to $220.7 million in 1996 and $524.8 million in 1995. The decrease in 1997 from
1996 was due to lower average investment balances and lower yields on the
securities in the portfolio. The large decline in 1996 from 1995 was because of
the sale of our insurance businesses.
12
<PAGE> 13
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Fee income on an Owned Basis includes revenues from fee-based products such
as credit cards and, through mid-1996, consumer banking deposits. Fee income was
$592.4 million in 1997, up from $352.2 million in 1996 and $292.5 million in
1995. The increase in fee income in 1997 reflected higher credit card fees and
interchange income.
Fee income on a Managed Basis which, in addition to the items discussed
above, includes fees and other income related to the off-balance sheet
portfolio. Managed Basis fee income increased to $1,460.5 million in 1997 from
$1,073.9 million in 1996 and $780.7 million in 1995. The increases were
primarily due to higher credit card fees and interchange income as a result of
increased average managed credit card receivables. In addition, fee income for
1997 included higher securitization gains which were offset by establishing
higher over-the-life provisions related to securitizations.
Other income was $355.7 million in 1997, $419.6 million in 1996 and $319.4
million in 1995. Other income includes earnings from the RAL program, gains and
losses from the disposition of assets and businesses and, in 1995, income from
servicing receivable portfolios without recourse. Other income was down in 1997
reflecting a decrease in RAL income from the prior year somewhat offset by gains
on sales of certain non-strategic assets which included the sale of certain non
co-branded MasterCard and Visa receivables and student loans. RAL income in 1996
benefited from very strong collections on loans previously written off during
the 1995 season. Other income in 1996 included the premium from the sale of our
Illinois banking operations and the gain related to the sale of our annuity
portfolio in the first quarter. Other income for 1995 included the premium from
our non-Illinois banking operations and first mortgage servicing business which
we exited in 1995.
Expenses. Operating expenses were $2,884.8 million in 1997, $2,714.7
million in 1996 and $2,527.4 million in 1995. During 1997, we recorded
non-operating pretax charges of $90 million. These charges included a $59
million provision for the planned disposition of Beneficial's German operations,
a $13 million addition to Beneficial's litigation reserves, a $14 million
writedown of Beneficial's real estate holdings in both Tampa, Florida, and
Houston, Texas, that are being sold, and a $4 million charge for other
Beneficial related reorganization and restructuring efforts. During 1996, we
recorded non-operating charges of $78 million related to settling legal matters
with a former subsidiary, closing office space and other matters. In 1995, we
recorded non-operating charges of $40 million. These charges included a $15
million provision for Beneficial's additional potential losses relating to a
significant liquidating loan portfolio in Germany, a $10 million restructuring
charge related to Beneficial's annuity business and a $15 million charge to
combine space and staff in certain operations. The combined company's overall
managed normalized efficiency ratio was 41.0% in 1997 compared to 45.0% in 1996.
Excluding the impact of Beneficial, our managed normalized efficiency ratio was
36.2% in 1997 and 40.9% in 1996.
Salaries and fringe benefits were $1,074.4 million in 1997, up from $976.9
million in 1996 and $939.9 million in 1995. The increase was mostly due to a
higher number of sales people in our consumer finance branch network and a
higher number of collectors. The average number of employees during 1997 was
24,950 compared to 22,950 in 1996 and 22,750 in 1995.
Occupancy and equipment expense was $327.4 million in 1997, about the same
as $328.7 million in 1996 and down from $337.9 million in 1995. Excluding
non-recurring costs of $14 million in 1996, these expenses were up 4 percent
from 1996 because of the new branches we operated in the last half of 1997. Both
1997 and 1996 expenses were lower than 1995 due to initiatives to reduce office
space and sell less efficient businesses.
Other marketing expenses include payments for advertising, direct mail
programs and other marketing expenditures. These expenses were $449.6 million in
1997, compared to $431.5 million in 1996 and $307.9 million in 1995. Although we
deferred major mailings during the first six months of 1997 as we worked on
individual marketing plans with the participating AFL-CIO unions in the Union
Privilege program, we
13
<PAGE> 14
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
increased our marketing spending during the last half of the year. The increases
from 1995 were primarily due to marketing initiatives for our credit card
portfolio.
Other servicing and administrative expenses were $875.0 million in 1997,
$833.9 million in 1996 and $831.9 million in 1995. Excluding non-recurring costs
of $90 million in 1997, $64 million in 1996 and $40 million in 1995, these
expenses were up slightly compared to 1996 and relatively unchanged from 1995.
The increase from 1996 was due to higher expenses related to the TFS and ACC
acquisitions.
Amortization of acquired intangibles and goodwill was $158.4 million in
1997, $143.7 million in 1996 and $109.8 million in 1995. The increase reflects
our acquisitions of TFS in mid-1997 and ACC in late 1997, and the Union
Privilege portfolio in mid-1996.
Policyholders' benefits were $255.9 million in 1997, $311.9 million in 1996
and $554.9 million in 1995. Expense was lower in 1997 compared to 1996 because
we have fewer policies in our retained life insurance business. The decrease in
1996 from 1995 was due to the sale of our annuity product lines in 1996 and late
1995.
Income taxes. The 1997 effective tax rate was 33.0 percent compared to 36.0
percent in 1996 and 41.1 percent in 1995. The effective rate in 1997 recognized
tax benefits related to the anticipated sale of Beneficial's German operations.
The 1995 effective rate was affected by additional taxes on the sale of certain
of our insurance operations.
In 1992, the Internal Revenue Service ("IRS") completed its examination of
Beneficial's federal income tax returns for 1984 through 1987. The IRS proposed
$142 million in adjustments that relate principally to activities of a former
subsidiary, American Centennial Insurance Company ("ACIC"), prior to its sale in
1987.
In order to limit the further accrual of interest on the proposed
adjustments, Beneficial paid $105.5 million of tax and interest during 1992.
The issues were not resolved during the administrative appeals process, and
the IRS issued a statutory Notice of Deficiency asserting the unresolved
adjustments and increased the disallowance to $195 million in 1996.
Beneficial has initiated litigation in the United States Tax Court to
oppose the disallowance. While the conclusion of this matter in its entirety
cannot be predicted with certainty, we do not anticipate the ultimate resolution
to differ materially from amounts accrued.
CREDIT QUALITY
Our delinquency and net chargeoff ratios reflect, among other factors, the
quality of receivables, the average age of our loans, the success of our
collection efforts and general economic conditions. Specifically, the high
levels of personal bankruptcies experienced by our industry over the last two
years has had a direct effect on the asset quality of our overall portfolio.
During 1997 our delinquency and net chargeoff levels were impacted by
higher consumer bankruptcies in our unsecured portfolios and the continued
maturing of our receivables. We continued to tighten and refine our credit
standards throughout the year and increased the number of collectors. During the
fourth quarter of 1997, we recognized the first drop in our quarterly chargeoff
ratio since the first quarter of 1996, due to a decrease in our MasterCard and
Visa portfolio.
14
<PAGE> 15
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Until June 1997, when we acquired virtually all secured loans from TFS, the
percentage of unsecured loans in our portfolio had been increasing. Unsecured
loans were 66 percent of our managed consumer receivables at year-end 1997
compared to 71 percent in 1996 and 63 percent in 1995. Generally, unsecured
loans have higher delinquency and chargeoff rates than secured loans. The high
proportion of unsecured receivables increases the delinquency and chargeoff
statistics of the entire portfolio. We compensate for this by charging higher
interest rates and fees on these loans, which benefits our revenue.
We track delinquency and chargeoff levels on a managed basis. We include
the off-balance sheet portfolio since we apply the same credit and portfolio
management procedures as on our owned portfolio. This results in a similar
credit loss exposure for us. Our focus is to continue using risk-based pricing
and effective collection efforts for each loan. We have a process that gives us
a reasonable basis for predicting the asset quality of new accounts. This
process is based on our experience with numerous marketing, credit and risk
management tests. We also believe that our frequent and early contact with
delinquent customers is helpful in managing net credit losses. Despite these
efforts to manage the current credit environment, bankruptcies remain an
industry-wide issue and are unpredictable.
Our chargeoff policy for consumer receivables varies by product.
Receivables for Household are written off, or for secured products written down
to net realizable value, at the following stages of contractual delinquency:
auto finance--5 months; first mortgage, home equity and MasterCard and Visa--6
months; private label--9 months; and other unsecured--9 months and no payment
received in 6 months. Beneficial, in general, charges off unsecured receivables
after no payment has been made in six months and secured receivables are written
down to net realizable value at the time of foreclosure. Commercial receivables
are written off when it becomes apparent that an account is uncollectible.
The state of California accounts for 20 percent of our managed domestic
consumer portfolio. It is the only state with more than 10 percent of this
portfolio. Because of our centralized underwriting, collections and processing
functions, we can quickly change our credit standards and intensify collection
efforts in specific locations. We will be able to extend this capability as the
centralization of underwriting, collections and processing functions contained
within the Beneficial branch network is completed.
Our foreign consumer operations located in the United Kingdom and Canada
accounted for 9 and 3 percent, respectively, of managed consumer receivables at
December 31, 1997. German receivables accounted for less than one percent of
managed consumer receivables at year-end 1997.
MANAGED CONSUMER TWO-MONTH-AND-OVER CONTRACTUAL DELINQUENCY RATIOS
<TABLE>
<CAPTION>
1997 QUARTER END 1996 QUARTER END
--------------------------- -------------------------
4 3 2 1 4 3 2 1
----- ---- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage.............................. 10.35% 9.27% 10.27% 8.19% 9.49% 3.82% 3.64% 3.28%
Home equity................................. 3.69 3.16 2.97 3.23 3.04 3.17 2.94 2.85
Auto finance(1)............................. 2.09 -- -- -- -- -- -- --
MasterCard/Visa............................. 3.10 3.20 3.13 3.15 2.73 2.60 2.07 2.38
Private label............................... 5.81 5.72 5.15 4.78 4.60 4.70 4.33 4.04
Other unsecured............................. 7.81 7.14 6.70 6.68 6.21 6.13 6.08 5.86
----- ---- ----- ---- ---- ---- ---- ----
Total.................................. 4.64% 4.47% 4.18% 4.25% 3.92% 3.84% 3.47% 3.51%
===== ==== ===== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) Prior to the fourth quarter of 1997, delinquency statistics for auto finance
receivables were not significant. For prior periods, delinquency data for
these receivables were included in other unsecured receivables.
15
<PAGE> 16
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Our managed consumer delinquency ratio at year end was 17 basis points
higher than the third quarter level. This increase was lower than the third
quarter increase of 29 basis points. The increases in these two quarters were
due to the expiration of certain special no-interest and no-payment promotions
in our private label portfolio, and seasoning of the other unsecured portfolio.
Home equity delinquency was up due to the maturing of acquired receivables.
MasterCard and Visa delinquency was down in the quarter. Dollars of delinquency
in the first mortgage portfolio were down as this portfolio continues to
liquidate.
The increase in the managed delinquency ratio from a year ago was mainly
due to the seasoning of all portfolios and the expiration of certain special
no-interest and no-payment promotions in our private label portfolio.
The owned consumer delinquency ratio was 4.87 percent at December 31, 1997
and 4.15 percent at December 31, 1996.
MANAGED CONSUMER NET CHARGEOFF RATIOS
<TABLE>
<CAPTION>
1997 QUARTER ANNUALIZED 1996 QUARTER ANNUALIZED
FULL YEAR ---------------------------- FULL YEAR ------------------------- FULL YEAR
1997 4 3 2 1 1996 4 3 2 1 1995
--------- ---- ---- ---- ---- --------- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage....... 1.05% 1.29% 1.21% .87% .94% .45% .30% .50% .46% .51% .35%
Home equity.......... .64 .62 .53 .67 .75 .60 .76 .60 .51 .54 .64
Auto finance(1)...... 4.60 5.31 -- -- -- -- -- -- -- -- --
MasterCard/Visa...... 5.55 5.56 6.22 5.66 4.79 4.54 4.58 4.57 4.70 4.28 4.12
Private label(2)..... 4.62 5.19 4.79 4.37 4.16 3.42 3.90 3.64 3.72 3.94 3.75
Other unsecured...... 5.48 5.85 5.66 5.23 5.09 4.29 4.46 4.60 3.85 4.20 3.60
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total(2)........ 3.84% 3.94% 3.98% 3.86% 3.55% 2.96% 3.24% 3.11% 2.88% 2.81% 2.51%
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) Includes ACC net chargeoffs subsequent to our acquisition in October 1997.
Prior to the fourth quarter of 1997, chargeoff statistics for auto finance
receivables were not significant and were included in other unsecured
receivables.
(2) Following the merger with Beneficial, we adopted Beneficial's presentation
of chargeoffs related to private label receivables to reflect interest and
fee chargeoffs as a reversal against the respective line items on the
statement of income rather than as a reduction to the allowance for credit
losses. As a result, the managed consumer net chargeoff ratios have been
restated for all periods presented.
The annualized fourth quarter chargeoff ratio was down slightly from the
third quarter. The improvement was driven by a 66 basis point decline in the
MasterCard and Visa chargeoff ratio to 5.56 percent. For the MasterCard and Visa
portfolio, actual dollars of chargeoffs were down over $25 million in the
quarter, reflecting reductions in both bankruptcies and credit chargeoffs. In
the private label portfolio, increased chargeoffs reflected the maturing of
promotional balances and higher personal bankruptcies. In our other unsecured
portfolio, higher chargeoffs resulted from continued seasoning and high levels
of personal bankruptcies.
The managed consumer net chargeoff ratio for full year 1997 was 3.84
percent, up from 2.96 percent in 1996 and 2.51 percent in 1995. The increase was
due to higher bankruptcy chargeoffs in our MasterCard and Visa portfolio, the
expiration of certain private label promotional programs and seasoning of other
unsecured receivables. The owned consumer net chargeoff ratio was 3.39 percent
in 1997, 2.66 percent in 1996 and 2.51 percent in 1995.
16
<PAGE> 17
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------------------
1997 1996 1995
-------- -------- --------
(ALL DOLLAR AMOUNTS ARE
STATED IN MILLIONS)
<S> <C> <C> <C>
Nonaccrual managed receivables.............................. $1,364.9 $1,046.1 $1,051.9
Accruing managed consumer receivables 90 or more days
delinquent................................................ 807.8 645.5 320.3
Renegotiated commercial loans............................... 12.4 12.9 21.2
-------- -------- --------
Total nonperforming managed receivables................ 2,185.1 1,704.5 1,393.4
Real estate owned........................................... 212.8 236.8 237.7
-------- -------- --------
Total nonperforming managed assets..................... $2,397.9 $1,941.3 $1,631.1
======== ======== ========
Managed credit loss reserves as a percent of nonperforming
managed receivables....................................... 115.5% 123.7% 114.2%
-------- -------- --------
</TABLE>
CREDIT LOSS RESERVES
We maintain credit loss reserves to cover probable losses of principal and
interest in both our owned and off-balance sheet portfolios. We estimate losses
for consumer receivables based on delinquency status and past loss experience.
For securitized receivables, we also record a provision for estimated probable
losses that we will incur over the life of the transaction. For commercial
loans, we calculate probable losses by using expected amounts and timing of
future cash flows to be received on loans. In addition, we provide for general
loss reserves on consumer and commercial receivables to reflect our assessment
of portfolio risk factors. Loss reserve estimates are reviewed periodically and
adjustments are reported in earnings when they become known. These estimates are
influenced by factors outside of our control, such as economic conditions and
consumer payment patterns. As a result, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change.
Owned credit loss reserves increased 17 percent to $1,642.1 million from
$1,398.4 million at December 31, 1996. The ratio of credit loss reserves to
total owned receivables was 4.25 percent, up from 3.64 percent at December 31,
1996.
Total managed credit loss reserves increased 20 percent to $2,523.0 million
from $2,109.0 million at December 31, 1996. The ratio of credit loss reserves to
total managed receivables was 3.99 percent, up from 3.56 percent at December 31,
1996. We increased credit loss reserves because of seasoning of unsecured
products and increased personal bankruptcies. Additionally, in 1996, Beneficial
recorded a $65 million up-front loan loss provision for the strong private label
receivables growth experienced during the year. The ratio of total credit loss
reserves to total nonperforming managed receivables was 115.5 percent compared
to 123.7 percent at December 31, 1996.
Over the past five years, we have increased our credit loss reserves for
managed receivables to reflect the change in mix to unsecured products and
seasoning. Unsecured products historically have higher chargeoff rates than
secured products. We have continued to refine and improve our underwriting
standards and account management techniques to better manage our credit risk.
17
<PAGE> 18
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
The following table sets forth the managed credit loss reserves for the
periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Managed credit loss reserves.............. $2,523.0 $2,109.0 $1,591.5 $1,219.2 $1,123.7
Reserves as a % of managed receivables.... 3.99% 3.56% 3.12% 2.69% 2.72%
======== ======== ======== ======== ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
We continued to strengthen our capital ratios in 1997 by issuing additional
common stock, increasing our retained earnings and controlling asset growth. In
managing capital, both Household and Beneficial develop targets for equity to
managed assets based on discussions with rating agencies, reviews of regulatory
requirements and competitor capital positions, credit loss reserve strength,
risks inherent in the projected operating environment and acquisition
objectives. We also specifically consider the level of intangibles arising from
completed acquisitions. Targets are set for each legal entity that raises funds
to protect debt investors. These targets include capital levels against both
on-balance sheet assets and our off-balance sheet portfolio.
Consolidated capital ratios were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------
1997 1996
----- -----
<S> <C> <C>
Total shareholders' equity(1) as a percent of owned
assets.................................................... 14.13% 11.07%
Total shareholders' equity(1) as a percent of managed
assets.................................................... 9.28 7.58
Tangible equity to tangible managed assets.................. 6.93 6.18
----- -----
</TABLE>
- ---------------
(1) Includes trust preferred securities.
Parent Company. Household International, Inc. is the holding or parent
company that owns the outstanding stock of its subsidiaries. The parent
company's main source of funds is cash received from its subsidiaries in the
form of dividends and intercompany borrowings. The parent company received
dividends from its subsidiaries of $313 million in 1997 and $265 million in
1996. In addition, the parent company receives cash from third parties by
issuing debt and common stock. This includes commercial paper that we sell
through an in-house sales force totaling $281.5 million at December 31, 1997 and
$203.3 million at December 31, 1996. At December 31, 1997, the parent company
had $400 million in committed back-up lines of credit that it can use on short
notice. These lines are available either to the parent company or its
subsidiary, Household Finance Corporation ("HFC"). None of these back-up lines
were utilized at December 31, 1997. The lines of credit expire in 1998 and they
do not contain material adverse change clauses that could restrict availability.
The only financial covenant contained in the terms of the parent company's
credit agreements is that we must maintain minimum shareholders' equity of $2.0
billion.
The parent company has a number of obligations it has to meet with its
available cash. It must be able to service its debt and meet the capital needs
of its subsidiaries. It also must pay dividends on its preferred stock and may
pay dividends to the holders of its common stock. The parent company made
capital contributions of $1.2 billion to a subsidiary in 1997 and $200 million
in 1996. The parent company paid $302.0 million in common and preferred
dividends to shareholders in 1997 and $268.9 million in 1996. Beneficial paid
cash dividends of $120.7 million in 1997, $110.5 million in 1996 and $99.7
million in 1995.
In connection with the Beneficial merger, the parent company has
repurchased or has commitments to repurchase approximately $1.1 billion of
senior and senior subordinated debt and bank and other borrowings. The debt
repurchase was funded with senior debt and other borrowings. Cash payments of
approximately $709 million for merger and integration related costs will be
funded through the parent company's existing operations, senior debt and other
borrowings.
18
<PAGE> 19
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
In October 1997, the parent company and a wholly-owned subsidiary purchased
all of the outstanding capital stock of ACC for about 4.2 million shares of our
common stock and cash. After the purchase was completed, the parent company
contributed the capital stock of ACC to HFC.
In June 1997, the parent company issued 27.3 million shares of common
stock, raising $1.0 billion. The parent company contributed this amount to HFC
to pay off debt related to the purchase of TFS.
In January 1997, the parent company redeemed, at par of $55 million, all
outstanding shares of its 9.50% Preferred Stock, Series 1991-A, for $10 per
depositary share plus accrued and unpaid dividends.
In July 1996, the parent company issued junior preferred share purchase
rights for its common stock which may be exercised in the event of the expressed
intent to acquire or actual acquisition of 15 percent or more of our common
stock by a third party or an associated group.
Subsidiaries. We have three major subsidiaries: HFC, Household Bank, f.s.b.
("the Bank"), and Household Global Funding ("Global"). These subsidiaries use
cash to originate loans, purchase loans or investment securities or acquire
businesses. Their main sources of cash are the collection of receivable
balances; maturities or sales of investment securities; proceeds from the
issuance of debt and deposits and securitization of receivables; capital
contributions from the parent company; and cash provided by operations.
HFC
HFC, along with its wholly-owned subsidiary, Beneficial Corporation, funds
its operations by issuing commercial paper, medium- and long-term debt to mainly
wholesale investors, securitizing consumer receivables and receiving capital
contributions from its parent. HFC's outstanding commercial paper totaled $9.1
billion at December 31, 1997 and 1996. HFC markets its commercial paper through
an in-house sales force. HFC actively manages the level of commercial paper
outstanding to ensure availability to core investors and proper utilization of
any excess capacity within internally established targets. Beneficial is in the
third year of a five year, $3 billion syndicated revolving credit agreement
supporting commercial paper issuances.
HFC also markets domestic medium-term notes through investment banks and
its in-house sales force, issuing a total of $5.1 billion in 1997. To obtain a
broader investment base, HFC and its subsidiary, Household Bank (Nevada) N.A.,
periodically issue medium-term notes in European and Asian markets. These
markets provide HFC with a broader investor base as compared with domestic
markets. During 1997, $1.9 billion in medium-term notes were issued in European
and Asian markets compared to $.9 billion in European markets in 1996. These
notes were issued in various European and Asian currencies and currency swaps
were used to convert the notes to U.S. dollars in order to eliminate future
foreign exchange risk. During 1997, HFC also issued $.3 billion of long-term
debt with an original maturity of 10 years. In August 1997, HFC redeemed, at par
of $100 million, all outstanding shares of its 7.25% term cumulative preferred
Series 1992-A, for $100 per depositary share plus accrued and unpaid dividends.
HFC had committed back-up lines of credit totaling $10.5 billion at
December 31, 1997, of which $400 million were also available to its parent
company. Unused back-up lines at December 31, 1997 totaled $10.1 billion. In
addition, none of these lines contained a material adverse change clause which
could restrict availability. These back-up lines expire on various dates from
1998 through 2002. The only financial covenants contained in the terms of HFC's
credit agreements are the maintenance of minimum shareholder's equity of $1.5
billion as well as a $1 billion net worth test for Beneficial Corporation, an
HFC subsidiary.
HFC paid $1.1 billion for the stock of TFS and repaid about $2.7 billion of
TFS debt owed to affiliates of Transamerica Corporation. HFC funded this
acquisition through the issuance of commercial paper, bank and other borrowings.
In addition, HFC received a capital contribution of $1.0 billion from the parent
company to repay debt.
19
<PAGE> 20
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
HFC also has foreign operating subsidiaries located in the United Kingdom,
Canada and Germany. These operating subsidiaries are directly owned by
Beneficial Corporation, a wholly owned subsidiary of HFC and represent
Beneficial's operations in these countries prior to its merger with Household
International, HFC's parent, and subsequent contribution to HFC.
Each foreign subsidiary conducts its operations using its local currency,
raising funds chiefly on its own, with the guarantee of Beneficial Corporation
attached to maximize market depth and minimize cost. The Canadian and United
Kingdom subsidiaries both issue commercial paper through dealers. Canadian
commercial paper outstandings totaled $346 million at year-end 1997 and $230
million at year-end 1996. United Kingdom commercial paper outstanding totaled
$181 million at year-end 1997 and $267 million at year-end 1996. During 1997,
the Canadian and United Kingdom subsidiaries issued $110 million and $315
million, respectively, in medium-term notes and other public debt offerings. The
German subsidiary obtains funding primarily through deposits.
As previously discussed, Beneficial sold its Canadian and German operations
during the first and second quarters of 1998.
THE BANK
The Bank primarily uses wholesale funding for its operations. At December
31, 1997, these sources included securitizations of credit card receivables,
domestic and European medium-term notes, deposits, Federal Home Loan Bank
advances and Federal funds borrowings.
The Bank is subject to the capital adequacy guidelines adopted by the
Office of Thrift Supervision. At December 31, 1997, the leverage, tier 1 and
total risk-based capital ratio levels for a "well capitalized" institution were
5.0, 6.0 and 10.0 percent, respectively. The Bank's ratios for each of these
categories at December 31, 1997 were 18.4, 20.8 and 31.0 percent, respectively.
In the fourth quarter of 1997, the Bank sold its entire portfolio of
student loans totaling about $900 million and exited this business. We used the
proceeds from the sale to repay debt.
During the fourth quarter of 1996, HFC and the Bank sold around $1.7
billion of lower margin loans, primarily from the previously divested mortgage
and consumer banking businesses. The cash proceeds from the sales were used to
repay debt.
During 1996 and 1995, we sold all of our consumer banking branch
operations. These transactions did not have a material impact on our ability to
raise funds sufficient to operate the business.
GLOBAL
Other foreign subsidiaries are also located in the United Kingdom and
Canada. Global was formed to combine ownership of these businesses which were in
existence prior to the merger with Beneficial Corporation. Global's assets were
$4.3 billion at year-end 1997. Consolidated shareholders' equity reflects the
increase or decrease from translating our foreign subsidiaries' assets,
liabilities and operating results from their local currency into U.S. dollars.
We have entered into foreign exchange contracts to hedge portions of our
investment in foreign subsidiaries to protect ourselves from fluctuations in
foreign currencies that are beyond our control. The potential loss in net
income, including Beneficial's foreign operations, associated with a 10 percent
adverse change in the British pound/US dollar or Canadian dollar/US dollar
exchange rates is not material.
Each foreign subsidiary conducts its operations using its local currency.
While each foreign subsidiary usually borrows funds in their local currency,
both our United Kingdom and Canadian subsidiaries have borrowed funds directly
in the United States capital markets. This allowed the subsidiaries to achieve a
lower cost of funds than that available at that time in their local markets.
These borrowings were converted from U.S. dollars to their local currencies
using currency swaps. Net realized gains and losses in foreign currency
20
<PAGE> 21
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
swap transactions were not material to our results of operations or financial
position in any of the three years presented.
Global's United Kingdom operation is funded with wholesale deposits,
short-and intermediate-term bank lines of credit, long-term debt and
securitizations of consumer receivables. Deposits at year-end 1997 were $777
million compared to $815 million a year earlier. Borrowings from bank lines of
credit at year-end 1997 were $864 million compared to $838 million a year ago.
Long-term debt at year-end 1997 was $592 million compared to $512 million a year
earlier. The parent company has guaranteed payment of all debt obligations,
except for certain deposits, of Global's United Kingdom subsidiary. Committed
back-up lines of credit for the United Kingdom were approximately $1.8 billion
at December 31, 1997. These lines have varying maturities from 1998 through
2004.
Global's Canadian operation is funded with commercial paper, intermediate-
and long-term debt. Intermediate- and long-term debt totaled $749 million at
year-end 1997 compared with $856 million a year ago. Committed back-up lines of
credit for Canada were approximately $471 million at December 31, 1997. The
parent company has guaranteed payment of the debt obligations of Global's
subsidiaries.
ASSET SECURITIZATIONS
Securitizations of consumer receivables have been, and will continue to be,
an important source of funds for HFC, the Bank and Global's United Kingdom
subsidiary. The market for securities backed by receivables is a reliable and
cost-effective source of funds. These subsidiaries plan to use securitizations
in the future. During 1997 these subsidiaries securitized about $8.3 billion of
home equity, MasterCard and Visa, private label and other unsecured receivables.
As of December 31, 1997, we have not securitized new auto loan originations
subsequent to the acquisition of ACC. The 1997 total securitization volume
compares to $8.8 billion in sales in 1996 and $6.5 billion in 1995. At December
31, 1997, HFC, the Bank and Global's United Kingdom subsidiary had $24.5 billion
of receivables sold under securitization transactions. At December 31, 1997, the
expected weighted average remaining life of these transactions was 2.3 years.
The following table summarizes the expected amortization of our
securitizations by type:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER
-------- -------- -------- -------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Home equity........................ $1,985.8 $1,374.7 $ 823.9 $ 577.8 $ 458.8 $ 817.6
Auto finance(1).................... 144.8 124.6 79.2 36.7 10.6 --
MasterCard/Visa.................... 1,305.8 5,568.0 3,699.0 1,195.8 568.4 --
Private label...................... 213.5 161.5 -- 650.0 -- --
Other unsecured.................... 1,001.5 758.7 783.4 661.3 583.4 893.7
-------- -------- -------- -------- -------- --------
Total......................... $4,651.4 $7,987.5 $5,385.5 $3,121.6 $1,621.2 $1,711.3
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Auto finance receivables were previously securitized by ACC before its
acquisition in October 1997.
For MasterCard and Visa and private label securitizations, the issued
securities may pay off sooner than originally scheduled if certain events occur.
One example of such an event is if the annualized portfolio yield (defined as
the sum of finance income and applicable fees, less net chargeoffs) for a
certain period drops below a base rate (generally equal to the sum of the rate
paid to the investors and the servicing fee). For home equity and other
unsecured securitizations, early pay off of the securities begins if the
annualized portfolio yield falls below various limits, or if certain other
events occur. We do not presently believe that any of these events will take
place. If any such event occurred, our funding requirements would increase.
These additional requirements could be met through securitizations, issuance of
various types of debt or borrowings under existing back-up lines of credit. We
believe we would continue to have adequate sources of funds if an early payoff
event occurred.
21
<PAGE> 22
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
HFC and the Bank have facilities with commercial banks under which they may
securitize up to $6.6 billion of receivables. These facilities are renewable on
an annual basis. At December 31, 1997, these facilities were fully utilized. The
amount available under these facilities will vary based on the timing and volume
of public securitization transactions.
At December 31, 1997, the long-term debt of the parent company, HFC, the
Bank and Beneficial and the preferred stock of the parent company, have been
assigned an investment grade rating by four rating agencies. Furthermore, these
agencies included the commercial paper of HFC in their highest rating category.
Three of these agencies also include the parent company's commercial paper in
their highest rating category. With our back-up lines of credit and
securitization programs, we believe we have sufficient funding of the parent
company, HFC, the Bank and Beneficial capacity to refinance maturing debts and
fund business growth.
Capital Expenditures. During 1997 we made $128 million in capital
expenditures compared to the prior-year level of $160 million.
Year 2000. The conversion of certain computer systems to permit continued
use in the Year 2000 and beyond began in prior years. The Year 2000 issue exists
because many computer systems and applications currently use two-digit date
fields to designate a year. As the century date change occurs, date-sensitive
systems may recognize the Year 2000 as 1900, or not at all. The inability to
recognize or properly treat the Year 2000 may cause systems to process critical
financial and operational information incorrectly. We have identified our Year
2000 issues and are scheduled to complete conversion and substantially complete
testing of our significant systems by the end of 1998. The costs for Year 2000
compliance have not been, and are not expected to be, material to our
operations. We currently estimate these costs to be approximately $20 million
after tax. While we are reviewing our third-party vendors' Year 2000 compliance,
we cannot assure that the systems of our vendors (RAL program being dependent on
the Internal Revenue Service), upon which we rely, will be converted in a timely
manner, or that their failure to convert would not have an adverse effect on our
systems. In a worst case scenario, one or more of our third-party vendors would
not be Year 2000 compliant by the end of 1998. We are currently developing
contingency plans, which we expect to have completed by the end of 1998, to
address the potential noncompliance of each of our third-party vendors. Such
contingency plans will be implemented immediately, if necessary. For each system
provided by a third-party vendor, there are alternative suppliers of such
systems in the marketplace. The economical and operational costs of converting
to such alternative vendors have not been specifically quantified but would not
be expected to have a material impact on our operations or financial results.
RISK MANAGEMENT
We have a comprehensive program to address potential financial risks. These
risks include interest rate, counterparty and currency risk. The Finance
Committee of the Board of Directors sets acceptable limits for each of these
risks annually and reviews the limits semi-annually.
Interest rate risk is defined as the impact of changes of market interest
rates on our earnings. Household utilizes simulation models to measure the
impact on net interest margin of changes in interest rates. The key assumptions
used in this model include the rate at which we expect our loans to pay off,
loan volumes and pricing, cash flows from derivative financial instruments and
changes in market conditions. The assumptions we make are based on our best
estimates of actual conditions. The model cannot precisely predict the actual
impact of changes in interest rates on net income because these assumptions are
highly uncertain. At December 31, 1997, the combined company's interest rate
risk levels were substantially below those allowed by Household's policy.
We generally fund our assets with liabilities that have similar interest
rate features. This reduces structural interest rate risk. Over time, customer
demand for our receivable products shifts between fixed rate and floating rate
products, based on market conditions and preferences. These shifts result in
different funding strategies and produce different interest rate risk exposures.
To manage these exposures, as well as our
22
<PAGE> 23
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
liquidity position, we may use derivatives to synthetically alter the terms of
our assets or liabilities, or off-balance sheet transactions. We do not use any
exotic or leveraged derivatives.
At December 31, 1997, we managed about $31 billion of domestic receivables
that have variable interest rates, including credit card, home equity and other
unsecured products. These receivables have been funded with $8.3 billion of
short-term debt, with the remainder funded by long-term liabilities. This
position exposes us to interest rate risk. We primarily use interest rate swaps
to alter our exposure to interest rate risk while still controlling liquidity
risk. Interest rate swaps also are used sometimes to synthetically alter our
exposure to basis risk. This type of risk exists because the pricing of some of
our assets is tied to the prime rate, while the funding for these assets is tied
to LIBOR. The prime rate and LIBOR react differently to changes in market
interest rates; that is, the prime rate does not change as quickly as LIBOR. We
assign all of our synthetic alteration and hedge transactions to specific groups
of assets, liabilities or off-balance sheet items.
The economic risk related to our interest rate swap portfolio is minimal.
The face amount of a swap transaction is referred to as the notional amount. The
notional amount is used to determine the interest payment to be paid by each
counterparty, but does not result in an exchange of principal payments. For
example, let's assume we have entered into a swap with the counterparty whom we
will call Bank A. Bank A agrees to pay us a fixed interest rate while we agree
to pay a variable rate. If variable rates for the accrual period are below the
fixed rate in the swap, Bank A owes us the difference between the fixed rate and
variable rate multiplied by the notional amount.
The primary exposure on our interest rate swap portfolio is the risk that
the counterparty (Bank A in this example) does not pay us the money they owe us.
We protect ourselves against counterparty risk in several ways. Counterparty
limits have been set and are closely monitored as part of the overall risk
management process. These limits ensure that we do not have significant exposure
to any individual counterparty. Based on peak exposure at December 31, 1997,
about 79 percent of our derivative counterparties were rated AA- or better.
(Virtually all of our derivative counterparties are rated A+ or better.) We have
never suffered a loss due to counterparty failure. Certain swap agreements that
we have entered into require that payments be made to, or received from, the
counterparty when the fair value of the agreement reaches a certain level.
We also utilize interest rate futures, and purchased put and call options
in our hedging strategy to reduce interest rate risk. We use these instruments
to hedge the changes in interest rates on our variable rate assets and
liabilities. For example, short-term borrowings expose us to interest rate risk
because the interest rate we must pay to others may change faster than the rate
we received from borrowers on the asset our borrowings are funding. We use
futures and options to fix our interest cost on these borrowings at a desired
rate. We hold these contracts until the interest rate on the variable rate asset
or liability change. We then terminate, or close out the contracts. These
terminations are necessary because the date the interest rate changes is usually
not the same as the expiration date of the futures contract or option.
At December 31, 1997, we estimate that our earnings would decline by about
$45 million following a gradual 200 basis point increase in interest rates over
a twelve month period and would increase by about $53 million following a
gradual 200 basis point decrease in interest rates. These estimates assume we
would not take any corrective action to lessen the impact and, therefore, exceed
what most likely would occur if rates were to change.
We enter into currency swaps in order to minimize currency risk. These
swaps convert both principal and interest payments on debt issued from one
currency to another. For example, we may issue debt based on the French franc
and then execute a currency swap to convert the obligation to U.S. dollars.
See Note 9, "Derivative Financial Instruments and Other Financial
Instruments With Off-Balance Sheet Risk," for additional information related to
interest rate risk management.
In the accompanying consolidated financial statements, Note 13, "Fair Value
of Financial Instruments," provides information regarding the fair value of
certain financial instruments.
23
<PAGE> 24
HOUSEHOLD INTERNATIONAL, INC.
GLOSSARY OF TERMS
ACQUIRED INTANGIBLES AND GOODWILL--Intangible assets reflected on our
consolidated balance sheet resulting from the market value premium attributable
to our credit card accounts in excess of the aggregate outstanding managed
credit card loans acquired. Goodwill represents the purchase price over the fair
value of identifiable assets acquired less liabilities assumed from business
combinations.
AFFINITY CREDIT CARD--A MasterCard or Visa account that is jointly
sponsored by an organization that has a membership with a common interest (e.g.,
the AFL-CIO Union Privilege Credit Card Program).
ASSET SECURITIZATION--The process where interests in a pool of financial
assets, such as credit card or home equity receivables, are sold to investors.
Typically, the receivables are sold to a trust that issues interests that are
sold to investors.
AUTO FINANCE LOANS--Closed-end loans secured by a first lien on a vehicle.
CO-BRANDED CREDIT CARD--A MasterCard or Visa account that is jointly
sponsored by the issuer of the card and another corporation. The account holder
typically receives some form of added benefit for using the card (e.g., the GM
Card).
CONSUMER NET CHARGEOFF RATIO--Net chargeoffs of receivables divided by
average receivables outstanding.
CONTRACTUAL DELINQUENCY--A method of determining delinquent accounts based
on the contractual terms of the original loan agreement.
CREDIT LIFE INSURANCE--Insurance products that either pay off or continue
repaying a debt in the event of death, or temporary or permanent disability of
the borrower.
DIVIDEND PAYOUT RATIO--Dividends divided by net income.
FEE INCOME--Income associated with interchange on credit cards and annual,
late and other fees and from the origination or acquisition of loans.
FIRST MORTGAGE--Loan secured by a first lien on residential real estate.
FOREIGN EXCHANGE CONTRACT--A contract used to minimize our exposure to
changes in foreign currency exchange rates.
FUTURES CONTRACT--An exchange-traded contract to buy or sell a stated
amount of a financial instrument or index at a specified future date and price.
HOME EQUITY LOAN--Closed-end loans and revolving lines of credit secured by
first or second mortgages on residential real estate.
INTERCHANGE FEES--Fees received for processing a credit card transaction
through the MasterCard or Visa network.
INTEREST RATE SWAP--Contract between two parties to exchange interest
payments on a stated principal amount (notional principal) for a specified
period. Typically, one party makes fixed rate payments while the other party
makes payments using a variable rate.
LIBOR--London Interbank Offered Rate. A widely-quoted market rate which is
frequently the index used to determine that rate at which we borrow funds.
LIQUIDITY--A measure of how quickly we can convert assets to cash or raise
additional cash by issuing debt.
MANAGED BASIS--Method of reporting whereby net interest margin, other
revenues and credit losses on securitized receivables are reported as if those
receivables were still held on our balance sheet.
24
<PAGE> 25
HOUSEHOLD INTERNATIONAL, INC.
GLOSSARY OF TERMS -- (CONTINUED)
MANAGED EFFICIENCY RATIO--Ratio of operating expenses to managed net
interest margin and other revenues less policyholders' benefits. The normalized
efficiency ratio excludes nonrecurring gains, losses and charges.
MANAGED NET INTEREST MARGIN--Interest income from managed receivables and
noninsurance investment securities reduced by interest expense.
MANAGED RECEIVABLES--The sum of receivables on our balance sheet and those
that we service for investors as part of our asset securitization program.
MASTERCARD/VISA RECEIVABLES--Receivables generated through customer usage
of MasterCard and Visa credit cards.
NONACCRUAL LOANS--Loans on which we no longer accrue interest because
ultimate collection is unlikely.
OPTIONS--A contract giving the owner the right, but not the obligation, to
buy or sell a specified item at a fixed price for a specified period.
OTHER UNSECURED RECEIVABLES--Unsecured lines of credit or closed-end loans
made to individuals.
OVER-THE-LIFE RESERVES--Credit loss reserves established for securitized
receivables to cover the estimated probable losses that we expect to incur over
the life of the transaction.
PRIVATE LABEL CREDIT CARD--A line of credit made available to customers of
retail merchants evidenced by a credit card bearing the merchant's name.
PROMOTIONAL ACCOUNT--A private label credit card account that allows for
limited or deferred interest and/or principal payments for a certain period.
RAL PROGRAM--A cooperative program with H&R Block Tax Services, Inc. and
certain of its franchises, along with other independent tax preparers, to
provide loans to customers who are entitled to tax refunds and who
electronically file their returns with the Internal Revenue Service.
RECEIVABLES OWNED--Those receivables held on our balance sheet.
RECEIVABLES SERVICED WITH LIMITED RECOURSE--Those receivables that we have
securitized and for which we have some level of potential loss if defaults
occur.
RETURN ON ASSETS--Net income divided by average assets.
RETURN ON AVERAGE COMMON SHAREHOLDERS' EQUITY--Net income less dividends on
preferred stock divided by average common shareholders' equity.
SYNTHETIC ALTERATION--Process by which derivative financial instruments are
used to alter the risk characteristics of an asset, liability or off-balance
sheet item.
TOTAL SHAREHOLDERS' EQUITY--Includes company obligated mandatorily
redeemable preferred securities of subsidiary trusts, preferred stock and common
shareholders' equity.
25
<PAGE> 26
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--
OWNED RECEIVABLES
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C>
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT
JANUARY 1......................................... $1,398.4 $1,126.5 $ 877.6 $ 900.9 $ 826.5
PROVISION FOR CREDIT LOSSES--OWNED RECEIVABLES...... 1,493.0 1,144.2 1,025.1 795.1 898.0
OWNED RECEIVABLES CHARGED OFF
Domestic:
First mortgage.................................... (8.2) (8.6) (6.6) (10.3) (13.5)
Home equity....................................... (46.3) (47.1) (45.7) (61.8) (60.6)
Auto finance(1)................................... (6.4) -- -- -- --
MasterCard/Visa................................... (415.8) (270.0) (260.0) (204.4) (172.4)
Private label(2).................................. (407.9) (238.6) (175.5) (125.2) (107.4)
Other unsecured................................... (384.6) (374.7) (328.1) (314.5) (314.1)
Foreign............................................. (197.6) (172.2) (160.5) (129.1) (163.5)
-------- -------- -------- ------- -------
Total consumer................................ (1,466.8) (1,111.2) (976.4) (845.3) (831.5)
Commercial.......................................... (18.6) (15.4) (41.0) (87.7) (148.2)
-------- -------- -------- ------- -------
Total owned receivables charged off........... (1,485.4) (1,126.6) (1,017.4) (933.0) (979.7)
-------- -------- -------- ------- -------
RECOVERIES ON OWNED RECEIVABLES
Domestic:
First mortgage.................................... 2.3 2.5 2.2 2.9 2.6
Home equity....................................... 3.0 2.6 3.3 5.2 4.3
Auto finance(1)................................... .3 -- -- -- --
MasterCard/Visa................................... 46.9 17.2 19.8 17.6 12.5
Private label..................................... 47.4 24.8 24.1 30.9 24.5
Other unsecured................................... 38.0 70.7 74.5 60.1 56.2
Foreign............................................. 50.9 43.9 36.7 31.6 27.1
-------- -------- -------- ------- -------
Total consumer................................ 188.8 161.7 160.6 148.3 127.2
Commercial.......................................... 1.0 4.4 2.9 3.2 2.7
-------- -------- -------- ------- -------
Total recoveries on owned receivables......... 189.8 166.1 163.5 151.5 129.9
Portfolio acquisitions, net......................... 46.3 88.2 77.7 (36.9) 26.2
-------- -------- -------- ------- -------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES
Domestic:
First mortgage.................................... 2.4 4.3 4.1 5.1 4.1
Home equity....................................... 172.4 62.4 52.9 50.1 51.2
Auto finance(1)................................... 14.6 -- -- -- --
MasterCard/Visa................................... 290.4 268.6 134.5 127.5 124.0
Private label..................................... 396.2 363.1 281.4 152.3 123.3
Other unsecured................................... 499.4 388.5 358.2 289.2 262.3
Foreign............................................. 179.2 172.1 141.2 99.2 97.5
-------- -------- -------- ------- -------
Total consumer................................ 1,554.6 1,259.0 972.3 723.4 662.4
Commercial.......................................... 87.5 139.4 154.2 154.2 213.5
Unallocated corporate............................... -- -- -- -- 25.0
-------- -------- -------- ------- -------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT
DECEMBER 31....................................... $1,642.1 $1,398.4 $1,126.5 $ 877.6 $ 900.9
======== ======== ======== ======= =======
RATIO OF CREDIT LOSS RESERVES TO OWNED RECEIVABLES
Consumer............................................ 4.12% 3.37% 2.89% 2.40% 2.35%
Commercial.......................................... 9.14 13.44 11.07 7.49 7.01
-------- -------- -------- ------- -------
Total(3)...................................... 4.25% 3.64% 3.22% 2.73% 2.88%
======== ======== ======== ======= =======
RATIO OF CREDIT LOSS RESERVES TO OWNED NONPERFORMING
LOANS
Consumer............................................ 110.5% 111.6% 106.7% 95.9% 84.8%
Commercial.......................................... 200.7 191.2 91.8 96.7 69.3
-------- -------- -------- ------- -------
Total(3)...................................... 113.2% 116.4% 104.4% 96.1% 82.7%
======== ======== ======== ======= =======
</TABLE>
- ---------------
(1) Includes ACC subsequent to our acquisition in October 1997. Prior to the
fourth quarter of 1997, auto finance receivables were not significant and
were included in other unsecured receivables.
(2) Following the merger with Beneficial, we adopted Beneficial's presentation
of chargeoffs related to private label receivables to reflect interest and
fee chargeoffs as a reversal against the respective line items on the
statement of income rather than as a reduction to the allowance for credit
losses. As a result, the owned consumer net chargeoffs have been restated
for all periods presented.
(3) 1993 amount includes the unallocated corporate reserve.
26
<PAGE> 27
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--MANAGED RECEIVABLES
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- --------- --------- --------- ---------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C>
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES
AT JANUARY 1..................................... $2,109.0 $ 1,591.5 $ 1,219.2 $ 1,123.7 $ 987.2
PROVISION FOR CREDIT LOSSES--MANAGED RECEIVABLES... 2,620.6 2,033.3 1,538.7 1,163.2 1,179.0
MANAGED RECEIVABLES CHARGED OFF
Domestic:
First mortgage................................... (8.2) (8.6) (6.6) (10.3) (13.5)
Home equity...................................... (106.3) (86.4) (92.4) (107.2) (99.7)
Auto finance(1).................................. (13.6) -- -- -- --
MasterCard/Visa.................................. (1,106.7) (771.3) (563.7) (401.1) (284.6)
Private label(2)................................. (436.0) (269.9) (232.9) (146.3) (132.4)
Other unsecured.................................. (639.8) (465.7) (332.5) (314.5) (330.7)
Foreign............................................ (225.8) (186.6) (160.5) (129.1) (163.5)
-------- --------- --------- --------- ---------
Total consumer............................... (2,536.4) (1,788.5) (1,388.6) (1,108.5) (1,024.4)
Commercial......................................... (18.6) (15.4) (41.0) (87.7) (148.2)
-------- --------- --------- --------- ---------
Total managed receivables charged off........ (2,555.0) (1,803.9) (1,429.6) (1,196.2) (1,172.6)
-------- --------- --------- --------- ---------
RECOVERIES ON MANAGED RECEIVABLES
Domestic:
First mortgage................................... 2.3 2.5 2.2 2.9 2.6
Home equity...................................... 5.8 2.8 3.6 5.2 4.3
Auto finance(1).................................. .6 -- -- -- --
MasterCard/Visa.................................. 94.8 42.5 33.6 25.7 15.8
Private label.................................... 50.0 28.2 29.4 32.7 26.0
Other unsecured.................................. 50.3 75.5 74.4 60.1 56.2
Foreign............................................ 52.8 44.4 36.7 31.6 27.1
-------- --------- --------- --------- ---------
Total consumer............................... 256.6 195.9 179.9 158.2 132.0
Commercial......................................... 1.0 4.4 2.9 3.2 2.7
-------- --------- --------- --------- ---------
Total recoveries on managed receivables...... 257.6 200.3 182.8 161.4 134.7
Portfolio acquisitions, net........................ 90.8 87.8 80.4 (32.9) (4.6)
-------- --------- --------- --------- ---------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES
Domestic:
First mortgage................................... 2.4 4.3 4.1 5.1 4.1
Home equity...................................... 235.7 169.0 139.7 132.9 109.8
Auto finance(1).................................. 49.7 -- -- -- --
MasterCard/Visa.................................. 704.9 568.7 347.5 319.8 275.9
Private label.................................... 462.1 383.2 312.7 205.2 135.6
Other unsecured.................................. 759.6 639.1 470.9 289.2 262.3
Foreign............................................ 221.1 205.3 162.4 112.8 97.5
-------- --------- --------- --------- ---------
Total consumer............................... 2,435.5 1,969.6 1,437.3 1,065.0 885.2
Commercial......................................... 87.5 139.4 154.2 154.2 213.5
Unallocated corporate.............................. -- -- -- -- 25.0
-------- --------- --------- --------- ---------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES
AT DECEMBER 31................................... $2,523.0 $ 2,109.0 $ 1,591.5 $ 1,219.2 $ 1,123.7
======== ========= ========= ========= =========
RATIO OF CREDIT LOSS RESERVES TO MANAGED
RECEIVABLES
Consumer........................................... 3.92% 3.38% 2.90% 2.46% 2.31%
Commercial......................................... 9.14 13.44 11.07 7.49 7.01
-------- --------- --------- --------- ---------
Total(3)..................................... 3.99% 3.56% 3.12% 2.69% 2.72%
======== ========= ========= ========= =========
RATIO OF CREDIT LOSS RESERVES TO MANAGED
NONPERFORMING LOANS
Consumer........................................... 113.7% 120.7% 117.3% 110.4% 91.6%
Commercial......................................... 200.7 191.2 91.8 96.7 69.3
-------- --------- --------- --------- ---------
Total(3)..................................... 115.5% 123.7% 114.2% 108.4% 88.2%
======== ========= ========= ========= =========
</TABLE>
- ---------------
(1) Includes ACC subsequent to our acquisition in October 1997. Prior to the
fourth quarter of 1997, auto finance receivables were not significant and
were included in other unsecured receivables.
(2) Following the merger with Beneficial, we adopted Beneficial's presentation
of chargeoffs related to private label receivables to reflect interest and
fee chargeoffs as a reversal against the respective line items on the
statement of income rather than as a reduction to the allowance for credit
losses. As a result, the managed consumer net chargeoffs have been restated
for all periods presented.
(3) 1993 amount includes the unallocated corporate reserve.
27
<PAGE> 28
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NET INTEREST MARGIN--
1997 COMPARED TO 1996 (OWNED BASIS)
<TABLE>
<CAPTION>
FINANCE AND INTEREST
AVERAGE INCOME/ INTEREST INCREASE/(DECREASE) DUE TO:
OUTSTANDING(2) AVERAGE RATE EXPENSE ------------------------------------
--------------------- ------------ --------------------- VOLUME RATE
1997 1996 1997 1996 1997 1996 VARIANCE VARIANCE(3) VARIANCE(3)
--------- --------- ---- ---- --------- --------- -------- ----------- -----------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables:
First mortgage........... $ 565.8 $ 1,717.8 7.5% 7.6% $ 42.6 $ 130.7 $(88.1) $(86.4) $ (1.7)
Home equity.............. 11,695.2 10,573.0 11.6 11.5 1,361.9 1,216.1 145.8 130.5 15.3
MasterCard/Visa.......... 7,693.7 7,663.5 11.4 12.8 880.3 980.8 (100.5) 4.0 (104.5)
Private label............ 8,809.0 7,071.7 13.7 13.1 1,203.7 924.3 279.4 235.8 43.6
Other unsecured.......... 8,921.4 8,665.9 17.8 18.7 1,583.7 1,619.8 (36.1) 45.5 (81.6)
Commercial............... 1,057.2 1,219.4 5.6 5.3 58.8 64.1 (5.3) (8.9) 3.6
--------- --------- ---- ---- -------- -------- ------ ------ -------
Total receivables.... $38,742.3 $36,911.3 13.2% 13.4% $5,131.0 $4,935.8 $195.2 $242.9 $ (47.7)
Noninsurance investments... 661.4 1,477.6 7.5 6.3 49.8 93.3 (43.5) (58.7) 15.2
--------- --------- ---- ---- -------- -------- ------ ------ -------
Total
interest-earning
assets (excluding
insurance
investments)....... $39,403.7 $38,388.9 13.1% 13.1% $5,180.8 $5,029.1 $151.7 $133.4 $ 18.3
Insurance investments...... 2,555.0 2,946.4
Other assets............... 4,366.5 3,622.2
--------- ---------
TOTAL ASSETS......... $46,325.2 $44,957.5
========= =========
Debt:
Deposits................. $ 2,976.1 $ 4,520.0 5.2% 5.2% $ 155.3 $ 235.2 $(79.9) $(79.9) --
Commercial paper......... 8,974.7 8,846.5 5.6 5.3 499.9 472.7 27.2 5.5 $ 21.7
Bank and other
borrowings............. 1,458.8 1,597.9 6.3 7.0 92.5 111.7 (19.2) (8.9) (10.3)
Senior and senior
subordinated debt (with
original maturities
over one year)......... 23,743.4 21,340.7 6.8 7.1 1,610.7 1,513.8 96.9 163.6 (66.7)
--------- --------- ---- ---- -------- -------- ------ ------ -------
Total debt........... $37,153.0 $36,305.1 6.3% 6.4% $2,358.4 $2,333.4 $ 25.0 $ 58.5 $ (33.5)
Other liabilities.......... 3,380.9 3,945.7
--------- ---------
Total liabilities.... 40,533.9 40,250.8
Preferred securities....... 442.1 449.0
Common shareholders'
equity................... 5,349.2 4,257.7
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY............. $46,325.2 $44,957.5
========= =========
NET INTEREST MARGIN--OWNED
BASIS(1)(5).............. 7.2% 7.0% $2,822.4 $2,695.7 $126.7 $ 74.9 $ 51.8
==== ==== ======== ======== ====== ====== =======
INTEREST SPREAD--OWNED
BASIS(4)................. 6.8% 6.7%
==== ====
</TABLE>
- ---------------
(1) Represents net interest margin as a percent of average interest-earning
assets. See page 30 for net interest margin on a managed basis for 1997,
1996 and 1995.
(2) Nonaccrual loans are included in average outstanding balances.
(3) Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the total interest variance. For
total receivables, total interest-earning assets and total debt, the rate
and volume variances are calculated based on the relative weighting of the
individual components comprising these totals. These totals do not represent
an arithmetic sum of the individual components.
(4) Represents the difference between the yield earned on interest-earning
assets and the cost of the debt used to fund the assets.
(5) The net interest margin analysis includes the following for foreign
businesses:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Average interest-earning assets.......................... $6,274.2 $5,334.8 $5,697.7
Average interest-bearing liabilities..................... 5,274.8 4,734.2 5,189.4
Net interest margin...................................... 513.1 464.0 426.6
Net interest margin percentage........................... 8.2% 8.7% 7.5%
</TABLE>
28
<PAGE> 29
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NET INTEREST MARGIN--
1996 COMPARED TO 1995 (OWNED BASIS)
<TABLE>
<CAPTION>
FINANCE AND
AVERAGE AVERAGE INTEREST INCOME/ INCREASE/(DECREASE) DUE TO:
OUTSTANDING(2) RATE INTEREST EXPENSE ------------------------------------
--------------------- ------------ ------------------- VOLUME RATE
1996 1995 1996 1995 1996 1995 VARIANCE VARIANCE(3) VARIANCE(3)
--------- --------- ---- ---- -------- -------- -------- ----------- -----------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables:
First mortgage......... $ 1,717.8 $ 2,941.1 7.6% 8.1% $ 130.7 $ 237.1 $(106.4) $ (93.7) $ (12.7)
Home equity............ 10,573.0 10,194.7 11.5 11.9 1,216.1 1,211.1 5.0 44.2 (39.2)
MasterCard/Visa........ 7,663.5 5,545.7 12.8 14.2 980.8 786.8 194.0 277.6 (83.6)
Private label.......... 7,071.7 4,915.1 13.1 14.6 924.3 719.6 204.7 288.5 (83.8)
Other unsecured........ 8,665.9 8,939.5 18.7 18.9 1,619.8 1,687.7 (67.9) (50.5) (17.4)
Commercial............. 1,219.4 1,825.4 5.3 6.4 64.1 117.2 (53.1) (35.0) (18.1)
--------- --------- ---- ---- -------- -------- ------- ------- -------
Total
receivables..... $36,911.3 $34,361.5 13.4% 13.9% $4,935.8 $4,759.5 $ 176.3 $ 344.8 $(168.5)
Noninsurance
investments............ 1,477.6 2,252.4 6.3 6.1 93.3 136.6 (43.3) (47.8) 4.5
--------- --------- ---- ---- -------- -------- ------- ------- -------
Total
interest-earning
assets
(excluding
insurance
investments).... $38,388.9 $36,613.9 13.1% 13.4% $5,029.1 $4,896.1 $ 133.0 $ 234.0 $(101.0)
Insurance investments.... 2,946.4 7,508.4
Other assets............. 3,622.2 4,124.5
--------- ---------
TOTAL ASSETS....... $44,957.5 $48,246.8
========= =========
Debt:
Deposits............... $ 4,520.0 $ 7,768.7 5.2% 5.2% $ 235.2 $ 404.5 $(169.3) $(169.3) --
Commercial paper....... 8,846.5 7,475.4 5.3 6.1 472.7 453.3 19.4 81.1 $ (61.7)
Bank and other
borrowings........... 1,597.9 2,041.1 7.0 7.4 111.7 150.1 (38.4) (30.7) (7.7)
Senior and senior
subordinated debt
(with original
maturities over one
year)................ 21,340.7 17,878.6 7.1 7.6 1,513.8 1,365.4 148.4 244.2 (95.8)
--------- --------- ---- ---- -------- -------- ------- ------- -------
Total debt......... $36,305.1 $35,163.8 6.4% 6.7% $2,333.4 $2,373.3 $ (39.9) $ 71.9 $(111.8)
Other liabilities........ 3,945.7 8,862.2
--------- ---------
Total
liabilities..... 40,250.8 44,026.0
Preferred securities..... 449.0 423.9
Common shareholders'
equity................. 4,257.7 3,796.9
--------- ---------
TOTAL LIABILITIES
AND
SHAREHOLDERS'
EQUITY.......... $44,957.5 $48,246.8
========= =========
Net Interest Margin--
Owned Basis(1)(5)...... 7.0% 6.9% $2,695.7 $2,522.8 $ 172.9 $ 162.1 $ 10.8
==== ==== ======== ======== ======= ======= =======
Interest Spread--Owned
Basis(4)............... 6.7% 6.7%
==== ====
</TABLE>
29
<PAGE> 30
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NET INTEREST MARGIN--
1997 COMPARED TO 1996 AND 1995 (MANAGED BASIS)
Net Interest Margin on a Managed Basis--As receivables are securitized
rather than held in our portfolio, net interest income is reclassified to
securitization income. We retain a substantial portion of the profit inherent in
the receivable while increasing liquidity. Due to the growing level of
securitized receivables, the comparability of net interest margin between
periods may be impacted by the level and type of receivables securitized. The
following table presents a summarized net interest margin analysis on a managed
basis.
<TABLE>
<CAPTION>
FINANCE AND INTEREST
AVERAGE OUTSTANDING(1) AVERAGE RATE INCOME/INTEREST EXPENSE
--------------------------------- --------------------- ------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
--------- --------- --------- ----- ----- ----- -------- -------- --------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables:
First mortgage.............. $ 565.8 $ 1,717.8 $ 2,941.1 7.5% 7.6% 8.1% $ 42.6 $ 130.7 $ 237.1
Home equity................. 18,011.5 16,625.0 16,175.8 12.2 12.1 12.5 2,200.0 2,005.1 2,014.4
MasterCard/Visa............. 18,506.2 16,385.2 11,874.4 13.1 13.5 14.3 2,431.1 2,212.7 1,699.9
Private label............... 9,245.5 7,747.8 5,734.0 13.8 13.7 14.7 1,279.9 1,058.2 845.6
Other unsecured............. 13,061.0 11,263.8 9,473.6 18.1 18.3 18.7 2,363.3 2,066.2 1,770.3
Commercial.................. 1,057.2 1,219.4 1,825.4 5.6 5.3 6.4 58.8 64.1 117.2
--------- --------- --------- ----- ----- ----- -------- -------- --------
Total receivables....... 60,447.2 54,959.0 48,024.3 13.9 13.7 13.9 8,375.7 7,537.0 6,684.5
Noninsurance investments...... 661.4 1,477.6 2,252.4 5.6 5.5 5.5 36.8 80.6 123.4
--------- --------- --------- ----- ----- ----- -------- -------- --------
Total interest-earning
assets (excluding
insurance
investments)......... 61,108.6 56,436.6 50,276.7 13.8 13.5 13.5 8,412.5 7,617.6 6,807.9
--------- --------- --------- ----- ----- ----- -------- -------- --------
Total debt.............. $58,857.9 $54,352.4 $48,826.5 6.3 6.3 6.7 3,692.2 3,413.2 3,262.5
--------- --------- --------- ----- ----- ----- -------- -------- --------
NET INTEREST MARGIN--MANAGED
BASIS(2).................... 7.7% 7.4% 7.1% $4,720.3 $4,204.4 $3,545.4
===== ===== ===== ======== ======== ========
INTEREST SPREAD--MANAGED
BASIS(3).................... 7.5% 7.2% 6.8%
===== ===== =====
</TABLE>
- ---------------
(1) Nonaccrual loans are included in average outstanding balances.
(2) As a percent of average interest-earning assets.
(3) Represents the difference between the yield earned on interest-earning
assets and cost of the debt used to fund the assets.
30
<PAGE> 31
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997--THREE MONTHS ENDED 1996--THREE MONTHS ENDED
----------------------------------------- -----------------------------------------
DEC. SEPT. JUNE MARCH DEC. SEPT. JUNE MARCH
-------- -------- -------- -------- -------- -------- -------- --------
(ALL DOLLAR AMOUNTS EXCEPT PER SHARE DATA ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance income............ $1,304.7 $1,313.7 $1,239.2 $1,273.4 $1,313.1 $1,252.1 $1,182.9 $1,187.7
Other interest income..... 10.3 9.5 18.8 11.2 12.3 15.0 42.4 23.6
Interest expense.......... 598.9 605.4 574.3 579.8 602.3 586.8 581.9 562.4
-------- -------- -------- -------- -------- -------- -------- --------
Net interest margin....... 716.1 717.8 683.7 704.8 723.1 680.3 643.4 648.9
Provision for credit
losses on owned
receivables............. 387.0 376.5 351.0 378.5 361.0 260.0 255.2 268.0
-------- -------- -------- -------- -------- -------- -------- --------
Net interest margin after
provision for credit
losses.................. 329.1 341.3 332.7 326.3 362.1 420.3 388.2 380.9
-------- -------- -------- -------- -------- -------- -------- --------
Securitization income..... 401.1 448.9 422.2 366.2 345.6 349.5 341.8 304.4
Insurance revenues........ 121.7 109.9 111.3 111.3 113.4 104.9 99.8 104.0
Investment income......... 44.1 43.9 39.9 45.2 36.4 46.3 47.0 91.0
Fee income................ 197.6 156.2 119.7 118.9 105.1 90.9 81.3 74.9
Other income.............. 59.6 68.5 61.6 166.0 55.6 50.4 185.0 128.6
-------- -------- -------- -------- -------- -------- -------- --------
Total other
revenues........... 824.1 827.4 754.7 807.6 656.1 642.0 754.9 702.9
-------- -------- -------- -------- -------- -------- -------- --------
Salaries and fringe
benefits................ 279.5 277.6 264.6 252.7 261.6 242.3 234.6 238.4
Occupancy and equipment
expense................. 82.0 81.5 79.2 84.7 78.0 78.1 92.1 80.5
Other marketing
expenses................ 123.9 112.1 98.8 114.8 110.1 113.6 117.6 90.2
Other servicing and
administrative
expenses................ 296.7 187.2 179.0 212.1 192.1 192.5 246.8 202.5
Amortization of acquired
intangibles and
goodwill................ 42.1 42.4 37.1 36.8 36.7 35.9 41.5 29.6
Policyholders' benefits... 59.1 61.9 65.1 69.8 66.2 76.8 73.0 95.9
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and
expenses........... 883.3 762.7 723.8 770.9 744.7 739.2 805.6 737.1
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes................... 269.9 406.0 363.6 363.0 273.5 323.1 337.5 346.7
Income taxes.............. 65.1 141.3 125.0 130.8 86.6 115.3 130.5 128.8
-------- -------- -------- -------- -------- -------- -------- --------
Net income................ $ 204.8 $ 264.7 $ 238.6 $ 232.2 $ 186.9 $ 207.8 $ 207.0 $ 217.9
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per
share(1)(2)............. $ .41 $ .54 $ .51 $ .50 $ .40 $ .45 $ .44 $ .47
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per
share(1)(2)............. .41 .53 .50 .49 .39 .44 .44 .46
======== ======== ======== ======== ======== ======== ======== ========
Weighted average common
and common equivalent
shares outstanding(1)... 493.2 492.3 465.9 465.5 463.6 462.3 462.6 461.4
======== ======== ======== ======== ======== ======== ======== ========
Dividends declared(1)..... $ .14 $ .14 $ .13 $ .13 $ .13 $ .13 $ .11 $ .11
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) We adopted Statement of Financial Accounting Standards No. 128, "Earnings
per Share" (FAS No. 128). Under FAS No. 128, basic earnings per common share
is computed excluding dilution caused by common stock equivalents such as
stock options. Diluted earnings per common share includes the effect of
dilutive common stock equivalents. For comparative purposes, all common
share and per common share amounts have been restated to reflect the
adoption of FAS No. 128 and for our 3-for-1 common stock split effected in
the form of a stock dividend and paid on June 1, 1998.
(2) Quarterly earnings per share amounts are computed on the basis of the
weighted average number of shares outstanding for each quarter. Changes
between quarters in the number of shares outstanding result in the annual
computation differing from the aggregate of the quarterly amounts.
31
<PAGE> 32
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
UNLESS OTHERWISE INDICATED
------------------------------------------
PERCENT
1997 1996 CHANGE
------------ ------------ ----------
(ALL DOLLAR AMOUNTS EXCEPT PER SHARE DATA
ARE STATED IN MILLIONS)
<S> <C> <C> <C>
NET INCOME.................................................. $ 940.3 $ 819.6 15%
--------- ---------
PER COMMON SHARE(1)
Basic earnings.............................................. $ 1.97 $ 1.76 12%
Diluted earnings............................................ 1.93 1.73 12
Dividends declared.......................................... .54 .49 10
Book value.................................................. 12.81 9.96 29
--------- ---------
KEY PERFORMANCE RATIOS
Return on average owned assets.............................. 2.03% 1.82% 12%
Return on average managed assets(2)......................... 1.38 1.30 6
Return on average common shareholders' equity............... 17.3 18.7 (7)
Total shareholders' equity as a percent of managed
assets(2)(3).............................................. 9.28 7.58 22
Managed net interest margin................................. 7.72 7.45 4
Managed consumer net chargeoff ratio........................ 3.84 2.96 30
Managed basis efficiency ratio, normalized.................. 41.0 45.0 (9)
--------- ---------
AT DECEMBER 31
Total assets:
Owned..................................................... $46,817.0 $45,332.0 3%
Managed(2)................................................ 71,295.5 66,183.2 8
Managed receivables(2)...................................... 63,160.5 59,298.7 7
--------- ---------
</TABLE>
- ---------------
(1) All per share information has been adjusted for Household's 3-for-1 stock
split effected in the form of a stock dividend and paid on June 1, 1998.
(2) Our managed data includes assets on our balance sheet and those assets that
we service for investors as part of our asset securitization program.
(3) Total shareholders' equity includes common shareholders' equity, preferred
stock and company obligated mandatorily redeemable preferred securities of
subsidiary trusts.
32
<PAGE> 33
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Finance income.............................................. $5,131.0 $4,935.8 $4,759.5
Other interest income....................................... 49.8 93.3 136.6
Interest expense............................................ 2,358.4 2,333.4 2,373.3
-------- -------- --------
Net interest margin......................................... 2,822.4 2,695.7 2,522.8
Provision for credit losses on owned receivables............ 1,493.0 1,144.2 1,025.1
-------- -------- --------
Net interest margin after provision for credit losses....... 1,329.4 1,551.5 1,497.7
-------- -------- --------
Securitization income....................................... 1,638.4 1,341.3 997.2
Insurance revenues.......................................... 454.2 422.1 474.8
Investment income........................................... 173.1 220.7 524.8
Fee income.................................................. 592.4 352.2 292.5
Other income................................................ 355.7 419.6 319.4
-------- -------- --------
Total other revenues................................... 3,213.8 2,755.9 2,608.7
-------- -------- --------
Salaries and fringe benefits................................ 1,074.4 976.9 939.9
Occupancy and equipment expense............................. 327.4 328.7 337.9
Other marketing expenses.................................... 449.6 431.5 307.9
Other servicing and administrative expenses................. 875.0 833.9 831.9
Amortization of acquired intangibles and goodwill........... 158.4 143.7 109.8
Policyholders' benefits..................................... 255.9 311.9 554.9
-------- -------- --------
Total costs and expenses............................... 3,140.7 3,026.6 3,082.3
-------- -------- --------
Income before income taxes.................................. 1,402.5 1,280.8 1,024.1
Income taxes................................................ 462.2 461.2 420.4
-------- -------- --------
Net income.................................................. $ 940.3 $ 819.6 $ 603.7
======== ======== ========
EARNINGS PER COMMON SHARE
Net income.................................................. $ 940.3 $ 819.6 $ 603.7
Preferred dividends......................................... (17.0) (21.9) (31.6)
-------- -------- --------
Earnings available to common shareholders................... $ 923.3 $ 797.7 $ 572.1
======== ======== ========
Average common and common equivalent shares................. 479.1 462.3 462.0
-------- -------- --------
Basic earnings per common share............................. $ 1.97 $ 1.76 $ 1.26
-------- -------- --------
Diluted earnings per common share........................... $ 1.93 $ 1.73 $ 1.24
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 34
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------
1997 1996
---------- ----------
(IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash........................................................ $ 534.3 $ 518.8
Investment securities....................................... 2,898.6 2,843.0
Receivables, net............................................ 38,337.6 38,188.1
Acquired intangibles and goodwill, net...................... 1,798.4 984.0
Properties and equipment, net............................... 538.7 558.0
Real estate owned........................................... 212.8 236.8
Other assets................................................ 2,496.6 2,003.3
--------- ---------
Total assets......................................... $46,817.0 $45,332.0
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Deposits.................................................. $ 2,344.2 $ 3,000.1
Commercial paper, bank and other borrowings............... 10,666.1 10,597.4
Senior and senior subordinated debt (with original
maturities over one year).............................. 23,736.2 23,433.1
--------- ---------
Total debt........................................... 36,746.5 37,030.6
Insurance policy and claim reserves......................... 1,382.6 1,366.8
Other liabilities........................................... 2,074.4 1,918.6
--------- ---------
Total liabilities.................................... 40,203.5 40,316.0
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts (Note 10)*................ 175.0 175.0
Preferred stock (Note 11)................................... 264.5 319.5
Common shareholders' equity:
Common stock, $1.00 par value, 750,000,000 shares
authorized (increased as of May 13, 1998); 536,870,946
and 511,925,714 shares issued at December 31, 1997 and
1996, respectively..................................... 536.9 511.9
Additional paid-in capital................................ 1,423.5 360.2
Retained earnings......................................... 4,978.6 4,340.3
Foreign currency translation adjustments.................. (176.5) (172.1)
Unrealized gain (loss) on investments, net................ 8.8 (10.3)
Less common stock in treasury, 51,519,429 and 54,497,763
shares at December 31, 1997 and 1996, respectively, at
cost................................................... (597.3) (508.5)
--------- ---------
Total common shareholders' equity.................... 6,174.0 4,521.5
--------- ---------
Total liabilities and shareholders' equity........... $46,817.0 $45,332.0
========= =========
</TABLE>
- ---------------
* The sole assets of the two trusts are Junior Subordinated Deferrable Interest
Notes issued by Household International, Inc. in June 1996 and June 1995,
bearing interest at 8.70 and 8.25 percent, respectively, with principal
balances of $103.1 and $77.3 million, respectively, and due June 30, 2036 and
June 30, 2025, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 35
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income.................................................. $ 940.3 $ 819.6 $ 603.7
Adjustments to reconcile net income to net cash provided by
operations:
Provision for credit losses on owned receivables.......... 1,493.0 1,144.2 1,025.1
Provision for loss on German disposal..................... 58.8 -- 15.0
Insurance policy and claim reserves....................... 98.3 (862.5) 585.5
Depreciation and amortization............................. 303.5 290.1 312.5
Net realized gains from sales of assets................... (102.5) (137.3) (188.7)
Deferred income tax provision............................. 75.9 (116.1) (37.5)
Other, net................................................ (439.3) 308.4 (258.2)
---------- ---------- ----------
Cash provided by operations................................. 2,428.0 1,446.4 2,057.4
---------- ---------- ----------
INVESTMENTS IN OPERATIONS
Investment securities available-for-sale:
Purchased................................................. (2,028.0) (2,712.3) (4,613.2)
Matured................................................... 399.9 1,229.2 1,056.6
Sold...................................................... 1,721.3 3,705.5 3,178.6
Investment securities held-to-maturity:
Purchased................................................. -- -- (636.9)
Matured................................................... -- -- 486.2
Sold...................................................... -- -- 34.2
Short-term investment securities, net change................ (49.0) 117.2 348.5
Receivables:
Originations, net......................................... (29,356.5) (31,269.3) (26,474.2)
Purchased................................................. (1,737.5) (5,514.7) (2,533.6)
Sold...................................................... 32,621.0 31,915.2 25,489.6
Purchase of Transamerica Financial Services Holding Company
capital stock............................................. (1,065.0) -- --
Disposition of consumer banking operations:
Assets sold, net.......................................... -- 472.3 975.6
Deposits and other liabilities sold, net.................. -- (2,809.8) (4,061.9)
Disposition of product lines of life insurance business..... -- -- 575.0
(Acquisition) disposition of portfolios, net................ -- (640.7) (58.7)
Properties and equipment purchased.......................... (127.7) (159.7) (113.6)
Properties and equipment sold............................... 8.6 14.9 35.9
---------- ---------- ----------
Cash increase (decrease) from investments in operations..... 387.1 (5,652.2) (6,311.9)
---------- ---------- ----------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt and demand deposits, net change............. (332.2) (78.7) 2,483.7
Time certificates, net change............................... (438.2) 395.0 728.8
Senior and senior subordinated debt issued.................. 7,730.0 10,378.6 6,360.1
Senior and senior subordinated debt retired................. (7,383.3) (6,052.6) (5,075.7)
Repayment of Transamerica Financial Services Holding Company
debt...................................................... (2,795.0) -- --
Policyholders' benefits paid................................ (123.5) (512.4) (805.3)
Cash received from policyholders............................ 98.0 258.5 669.0
Shareholders' dividends..................................... (186.5) (163.6) (159.2)
Shareholders' dividends--pooled affiliate................... (115.5) (105.3) (94.5)
Issuance of company obligated mandatorily redeemable
preferred securities of subsidiary trusts................. -- 100.0 75.0
Redemption of preferred stock............................... (55.0) -- (115.0)
Purchase of treasury stock.................................. (155.7) (56.7) (59.7)
Treasury stock activity--pooled affiliate................... (80.0) -- --
Issuance of common stock.................................... 1,022.3 15.2 24.7
---------- ---------- ----------
Cash increase (decrease) from financing and capital
transactions.............................................. (2,814.6) 4,178.0 4,031.9
---------- ---------- ----------
Effect of exchange rate changes on cash..................... 15.0 3.1 35.4
---------- ---------- ----------
Increase (decrease) in cash................................. 15.5 (24.7) (187.2)
Cash at January 1........................................... 518.8 543.5 730.7
---------- ---------- ----------
Cash at December 31......................................... $ 534.3 $ 518.8 $ 543.5
========== ========== ==========
Supplemental Cash Flow Information:
Interest paid............................................... $ 2,348.9 $ 2,371.6 $ 2,331.6
Income taxes paid........................................... 308.7 544.8 325.8
---------- ---------- ----------
Supplemental Non-Cash Investing and Financing Activities:
Common stock issued for acquisition......................... $ 157.3 -- --
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 36
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
PREFERRED STOCK AND COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON SHAREHOLDERS' EQUITY
---------------------------------------------------------
ADDITIONAL TOTAL COMMON
PREFERRED COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS OTHER(1) EQUITY
--------- ------ ---------- -------- -------- -------------
(ALL AMOUNTS EXCEPT PER SHARE DATA ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994.......................... $ 434.6 $506.6 $ 269.8 $3,439.6 $(729.9) $3,486.1
Net income............................................ 603.7 603.7
Cash dividends:
Preferred at stated rates............................ (31.7) (31.7)
Common, $.44 per share............................... (127.5) (127.5)
Pooled affiliate(2).................................. (94.5) (94.5)
Foreign currency translation adjustments.............. (2.9) (2.9)
Conversion of preferred stock......................... .6 3.1 3.7
Exercise of stock options............................. 2.1 27.3 21.7 51.1
Issuance of common stock.............................. 12.6 13.4 26.0
Purchase of treasury stock............................ (59.7) (59.7)
Redemption of preferred stock......................... (115.1)
Unrealized gain on investments, net................... 225.1 225.1
------- ------ -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1995.......................... 319.5 509.3 312.8 3,789.6 (532.3) 4,079.4
Net income............................................ 819.6 819.6
Cash dividends:
Preferred at stated rates............................ (21.9) (21.9)
Common, $.49 per share............................... (141.7) (141.7)
Pooled affiliate(2).................................. (105.3) (105.3)
Foreign currency translation adjustments.............. 1.4 1.4
Exercise of stock options............................. 2.6 38.6 11.9 53.1
Issuance of common stock.............................. 8.8 7.8 16.6
Purchase of treasury stock............................ (56.7) (56.7)
Unrealized loss on investments, net................... (123.0) (123.0)
------- ------ -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1996.......................... 319.5 511.9 360.2 4,340.3 (690.9) 4,521.5
Net income............................................ 940.3 940.3
Cash dividends:
Preferred at stated rates............................ (17.0) (17.0)
Common, $.54 per share............................... (169.5) (169.5)
Pooled affiliate(2).................................. (115.5) (115.5)
Foreign currency translation adjustments.............. (4.4) (4.4)
Exercise of stock options............................. 1.4 36.5 16.2 54.1
Issuance of common stock.............................. 27.3 984.1 12.4 1,023.8
Purchase of treasury stock, net....................... (3.7) 42.7 (117.4) (78.4)
Redemption of preferred stock......................... (55.0)
Unrealized gain on investments, net................... 19.1 19.1
------- ------ -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1997.......................... $ 264.5 $536.9 $1,423.5 $4,978.6 $(765.0) $6,174.0
======= ====== ======== ======== ======= ========
</TABLE>
- ---------------
(1) At December 31, 1997, 1996, 1995 and 1994 items in the other column include
cumulative adjustments for: foreign currency translation adjustments of
$(176.5), $(172.1), $(173.5) and $(170.6) million, respectively; common
stock in treasury of $(597.3), $(508.5), $(471.5) and $(446.9) million,
respectively; and unrealized gains (losses) on marketable equity securities
and available-for-sale investments of $8.8, $(10.3), $112.7 and $(112.4)
million, respectively. The gross unrealized gain (loss) on
available-for-sale investments at December 31, 1997, 1996 and 1995 of $13.1,
$(16.0) and $170.5 million, respectively, is recorded net of income taxes
(benefit) of $4.3, $(5.7) and $57.8 million, respectively.
(2) Represents historical common stock dividends of Beneficial Corporation.
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------
SHARES OUTSTANDING PREFERRED STOCK ISSUED IN TREASURY NET OUTSTANDING
------------------ --------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994.............................. 3,198,279 506,669,727 (55,218,423) 451,451,304
Exercise of common stock options.......................... 2,719,556 2,719,556
Conversion of $6.25 preferred stock....................... 2,437,728 2,437,728
Issuance of common stock.................................. 1,571,757 1,571,757
Purchase of treasury stock................................ (3,000,000) (3,000,000)
Redemption of preferred stock............................. (1,150,000)
---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1995.............................. 2,048,279 509,389,283 (54,208,938) 455,180,345
Exercise of common stock options.......................... 2,536,431 1,389,636 3,926,067
Issuance of common stock.................................. 844,539 844,539
Purchase of treasury stock................................ (2,523,000) (2,523,000)
---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1996.............................. 2,048,279 511,925,714 (54,497,763) 457,427,951
Exercise of common stock options.......................... 1,390,283 1,618,671 3,008,954
Issuance of common stock.................................. 27,340,697 1,359,738 28,700,435
Issuance of common stock--ACC............................. 4,101,825 4,101,825
Purchase of treasury stock................................ (4,101,900) (4,101,900)
Purchase of stock--pooled affiliates...................... (3,785,748) (3,785,748)
Redemption of preferred stock............................. (550,000)
---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1997.............................. 1,498,279 536,870,946 (51,519,429) 485,351,517
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE> 37
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Household International, Inc. and subsidiaries (the "company") is a leading
provider of consumer lending products to middle-market customers in the United
States, Canada and the United Kingdom, with $63.2 billion of managed receivables
at December 31, 1997. The company's lending products include: home equity loans,
auto finance loans, MasterCard* and Visa* and private label credit cards, tax
refund anticipation loans and other unsecured loans. The company also offers
credit and specialty insurance in the United States, the United Kingdom and
Canada. The company also has traditional first mortgages, commercial loans and
leases, periodic payment annuities, and corporate owned life insurance products,
which it no longer offers.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include the
accounts of Household International, Inc. and all subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Certain prior year
amounts have been reclassified to conform with the current year's presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
On March 10, 1998, the Board of Directors approved a three-for-one split of
the company's common stock, effected in the form of a dividend, issued on June
1, 1998, to shareholders of record as of May 14, 1998. The split was subject to
shareholders approval to increase authorized shares which was received on May
13, 1998. Accordingly, all common share and per common share data in these
supplemental consolidated financial statements includes the effect of the
company's stock split.
Investment Securities. The company maintains investment portfolios in both
its noninsurance and insurance operations. These portfolios are comprised
primarily of debt securities. The company's entire investment securities
portfolio was classified as available-for-sale at December 31, 1997 and 1996.
Available-for-sale investments are intended to be invested for an indefinite
period but may be sold in response to events reasonably expected in the
foreseeable future. These investments are carried at fair value. Unrealized
holding gains and losses on available-for-sale investments are recorded as
adjustments to common shareholders' equity, net of income taxes. Any decline in
the fair value of investments which is deemed to be other than temporary is
charged against current earnings.
Cost of investment securities sold is determined using the specific
identification method. Interest income earned on the noninsurance investment
portfolio is classified in the statements of income in net interest margin.
Realized gains and losses from the investment portfolio and investment income
from the insurance portfolio are recorded in investment income. Accrued
investment income is classified with investment securities.
Receivables. Receivables are carried at amortized cost. The company
periodically sells receivables from its home equity, auto finance, MasterCard
and Visa, private label and other unsecured portfolios. Because these
receivables were originated with variable rates of interest or rates comparable
to those currently offered by the company, carrying value approximates fair
value.
Finance income is recognized using the effective yield method. Origination
fees are deferred and amortized to finance income over the estimated life of the
related receivables, except to the extent they offset directly related lending
costs. Annual fees are netted with direct lending costs associated with the
issuance of MasterCard and Visa receivables and are deferred and amortized on a
straight-line basis over one year. Net deferred lending costs (fees) related to
these receivables totaled $7.8 and $(5.7) million at December 31,
- ---------------
* MasterCard and Visa are registered trademarks of MasterCard International,
Incorporated and VISA USA, Inc., respectively.
37
<PAGE> 38
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 and 1996, respectively. Premiums and discounts on purchased receivables are
recognized as adjustments of the yield of the related receivables.
Insurance reserves applicable to credit risks on consumer receivables are
treated as a reduction of receivables in the balance sheets, since payments on
such policies generally are used to reduce outstanding receivables.
Provision and Credit Loss Reserves. Provision for credit losses on owned
receivables is made in an amount sufficient to maintain credit loss reserves at
a level considered adequate to cover probable losses of principal and interest
in the existing owned portfolio. Probable losses are estimated for consumer
receivables based on contractual delinquency status and historical loss
experience. For commercial loans, probable losses are calculated using estimates
of amounts and timing of future cash flows expected to be received on loans. In
addition, general loss reserves on consumer and commercial receivables are
maintained to reflect management's judgment of portfolio risk factors. Loss
reserve estimates are reviewed periodically and adjustments are reported in
earnings when they become known. As these estimates are influenced by factors
outside the company's control, such as consumer payment patterns and economic
conditions, there is uncertainty inherent in these estimates, making it
reasonably possible that they could change.
The company's chargeoff policy for consumer receivables varies by product.
Receivables for Household are written off, or for secured products written down
to net realizable value, at the following stages of contractual delinquency:
auto finance--5 months; first mortgage, home equity and MasterCard and Visa--6
months; private label--9 months; and other unsecured--9 months and no payment
received in 6 months. Beneficial, in general, charges off unsecured receivables
after no payment has been made in six months and secured receivables are written
down to net realizable value at the time of foreclosure. Commercial receivables
are written off when it becomes apparent that an account is uncollectible.
Nonaccrual Loans. Nonaccrual loans are loans on which accrual of interest
has been suspended. Interest income is suspended on all loans when principal or
interest payments are more than three months contractually past due, except for
MasterCard and Visa and private label credit cards and auto finance receivables.
On credit card receivables, interest continues to accrue until the receivable is
charged off. On auto finance receivables, accrual of interest income is
discontinued when payments are more than two months contractually past due.
There were no commercial loans at December 31, 1997 which were 90 days or more
past due which remained on accrual status. Accrual of income on nonaccrual
consumer receivables is not resumed until such receivables become less than
three months contractually past due (two months for auto finance receivables).
Accrual of income on nonaccrual commercial loans is not resumed until such loans
become contractually current. Cash payments received on nonaccrual commercial
loans are either applied against principal or reported as interest income,
according to management's judgment as to the collectibility of principal.
Receivables Sold and Serviced with Limited Recourse and Securitization
Income. Certain home equity, auto finance, MasterCard and Visa, private label
and other unsecured receivables have been securitized and sold to investors with
limited recourse. The servicing rights to these receivables have been retained
by the company. Upon sale, the receivables are removed from the balance sheet,
and a gain on sale is recognized for the difference between the carrying value
of the receivables and the adjusted sales proceeds. The adjusted sales proceeds
are based on a present value estimate of future cash flows to be received over
the lives of the receivables. Future cash flows are based on estimates of
prepayments, the impact of interest rate movements on yields of receivables sold
and securities issued, delinquency of receivables sold, servicing fees,
operating expenses and other factors. The resulting gain is adjusted by
establishing a reserve for estimated probable losses under the recourse
provisions. Gains on sale, recourse provisions and servicing cash flows on
receivables sold are reported in the accompanying supplemental consolidated
statements of income as securitization income. Unamortized securitization assets
are reviewed for impairment whenever events indicate that the carrying value may
not be recovered.
38
<PAGE> 39
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1997, the company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FAS No. 125"), which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on a derecognition
approach that focuses on control of the assets and extinguishment of the
liabilities. The statement was effective for securitization transactions
occurring subsequent to December 31, 1996. The adoption of FAS No. 125 did not
have a material impact on the company's consolidated financial statements.
Properties and Equipment. Properties and equipment, which include leasehold
improvements, are recorded at cost, net of accumulated depreciation and
amortization of $740.8 and $736.1 million at December 31, 1997 and 1996,
respectively. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets for financial reporting purposes. Leasehold
improvements are amortized over the lesser of the economic useful life of the
improvement or the term of the lease.
Repossessed Collateral. Real estate owned is valued at the lower of cost or
fair value less estimated costs to sell. These values are periodically reviewed
and reduced, if appropriate. Costs of holding real estate, and related gains and
losses on disposition, are credited or charged to operations as incurred.
Vehicles acquired for nonpayment of indebtedness are recorded at the lower
of the estimated fair market value or the outstanding receivable balance. Such
assets are generally sold within 60 days of repossession and any difference
between the sales price, net of expenses, and the carrying value is credited or
charged to operations as incurred.
Insurance. Insurance revenues on revolving credit insurance policies are
recognized when billed. Insurance revenues on the remaining insurance contracts
are recorded as unearned premiums and recognized into income based on the nature
and term of the underlying contracts. Liabilities for credit insurance policies
are based upon estimated settlement amounts for both reported and incurred but
not yet reported losses. Liabilities for future benefits on annuity contracts
and specialty and corporate owned life insurance products are based on actuarial
assumptions as to investment yields, mortality and withdrawals.
Acquired Intangibles and Goodwill. Acquired intangibles consist of acquired
credit card relationships which are amortized on a straight-line basis over
their estimated remaining lives, not to exceed 10 years.
Goodwill represents the purchase price over the fair value of identifiable
assets acquired less liabilities assumed from business combinations and is
amortized over 25 years on a straight-line basis. Goodwill is reviewed for
impairment whenever events indicate that the carrying amount may not be
recoverable.
Treasury Stock. The company accounts for repurchases of common stock using
the cost method with common stock in treasury classified in the balance sheets
as a reduction of common shareholders' equity. Treasury stock reissued is
removed from the accounts at average cost.
Interest Rate Contracts. The nature and composition of the company's assets
and liabilities and off-balance sheet items expose the company to interest rate
risk. The company enters into a variety of interest rate contracts for managing
its interest rate exposure. Interest rate swaps are the principal vehicle used
to manage interest rate risk; however, interest rate futures, options, caps and
floors, and forward contracts also are utilized. The company also has entered
into currency swaps to convert both principal and interest payments on debt
issued from one currency to the appropriate functional currency.
Interest rate swaps are designated, and effective, as synthetic alterations
of specific assets or liabilities (or specific groups of assets or liabilities)
and off-balance sheet items. The interest rate differential to be paid or
received on these contracts is accrued and included in net interest margin in
the statements of income. Interest rate futures, forwards, options, and caps and
floors used in hedging the company's exposure to interest rate fluctuations are
designated, and effective, as hedges of balance sheet items.
39
<PAGE> 40
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Correlation between all interest rate contracts and the underlying asset,
liability or off-balance sheet item is direct because the company uses interest
rate contracts which mirror the underlying item being hedged/ synthetically
altered. If correlation between the hedged/synthetically altered item and
related interest rate contract would cease to exist, the interest rate contract
would be recorded at fair value and the associated unrealized gain or loss would
be included in net interest margin, with any future realized and unrealized
gains or losses recorded in other income.
Interest rate contracts are recorded at amortized cost. If interest rate
contracts are terminated early, the realized gains and losses are deferred and
amortized over the life of the hedged/synthetically altered item as adjustments
to net interest margin. These deferred gains and losses are recorded on the
accompanying supplemental consolidated balance sheets as adjustments to the
carrying value of the hedged items. In circumstances where the underlying assets
or liabilities are sold, any remaining carrying value adjustments or cumulative
change in value on any open positions are recognized immediately as a component
of the gain or loss upon disposition. Any remaining interest rate contracts
previously designated to the sold hedged/ synthetically altered item are
recorded at fair value with realized and unrealized gains and losses included in
other income.
Foreign Currency Translation. Foreign subsidiary assets and liabilities are
located in the United Kingdom and Canada. The functional currency for each
subsidiary is its local currency. Assets and liabilities of these subsidiaries
are translated at the rate of exchange in effect on the balance sheet date;
income and expenses are translated at the average rate of exchange prevailing
during the year. Resulting translation adjustments are accumulated as a separate
component of common shareholders' equity.
The company enters into forward exchange contracts to hedge its investment
in foreign subsidiaries. After-tax gains and losses on contracts to hedge
foreign currency fluctuations are included in the foreign currency translation
adjustment in common shareholders' equity. Effects of foreign currency
translation in the statements of cash flows are offset against the cumulative
foreign currency adjustment, except for the impact on cash. Foreign currency
transaction gains and losses are included in income as they occur.
Stock-Based Compensation. The company accounts for stock option and stock
purchase plans in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). In accordance with APB
25, no compensation expense is recognized for stock options issued.
Income Taxes. Federal income taxes are accounted for utilizing the
liability method. Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The company and its subsidiaries
file a consolidated federal income tax return. Beneficial Corporation will be
included in Household International's consolidated federal and state income tax
returns for periods subsequent to the merger. Investment tax credits generated
by leveraged leases are accounted for using the deferral method.
2. HOUSEHOLD INTERNATIONAL MERGER WITH BENEFICIAL CORPORATION
On June 30, 1998, Household International ("Household") completed its
merger with Beneficial Corporation ("Beneficial"), a consumer finance holding
company headquartered in Wilmington, Delaware. Beneficial's total assets were
$16.1 billion and common shareholders' equity was $2.0 billion on the date of
the merger, excluding the impact of the merger and integration related costs.
Each outstanding share of Beneficial common stock was converted into 3.0666
shares of Household's common stock, resulting in the issuance of approximately
168.4 million common shares to the former Beneficial shareholders. Each share of
Beneficial $5.50 Convertible Preferred Stock was converted into the number of
shares of Household common stock the holder would have been entitled to receive
in the merger had the holder converted his or her shares of Beneficial $5.50
Convertible Preferred Stock into shares of Beneficial common stock immediately
prior to the
40
<PAGE> 41
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
merger. Additionally, each other share of preferred stock of Beneficial
outstanding immediately prior to the merger was converted into one share of a
newly-created series of preferred stock of Household with terms substantially
similar to those of existing Beneficial preferred stock. The merger has been
accounted for as a pooling of interests and therefore, these consolidated
financial statements include the results of operations, financial position, and
changes in cash flows of Beneficial for all periods presented.
The separate results of operations for Household and Beneficial were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Net interest margin and other revenues(1)
Household...................................... $3,780.6 $3,294.9 $3,096.4
Beneficial..................................... 1,999.7 1,844.8 1,480.2
-------- -------- --------
Total..................................... $5,780.3 $5,139.7 $4,576.6
======== ======== ========
Net Income
Household...................................... $ 686.6 $ 538.6 $ 453.2
Beneficial..................................... 253.7 281.0 150.5
-------- -------- --------
Total..................................... $ 940.3 $ 819.6 $ 603.7
======== ======== ========
</TABLE>
- ---------------
(1) Policyholders' benefits have been netted against other revenues.
In connection with the merger, the company incurred pre-tax merger and
integration related costs of approximately $1 billion ($751 million after-tax)
in the quarter ended June 30, 1998. These costs included approximately $305
million in lease exit costs, $50 million in fixed asset write-offs related to
closed facilities, $255 million in severance and change in control payments,
$230 million in asset writedowns to reflect modified business plans, $75 million
in investment banking fees, $25 million in legal and other expenses, and $60
million in prepayment premiums related to debt.
3. OTHER BUSINESS COMBINATIONS AND DIVESTITURES
On April 28, 1998, the sale of Beneficial's German operations was
completed. An after-tax loss of $27.8 million was recorded in the fourth quarter
of 1997. This loss was recorded after consideration of a $31.0 million tax
benefit, primarily generated by the expected utilization of capital losses to
cover the expected loss associated with disposing of the German operations. No
additional losses were realized in 1998 as a result of the sale.
On March 2, 1998, the sale of Beneficial's Canadian operations was
completed. An after-tax gain of $118.5 million was recorded upon consummation of
the transaction.
On June 23, 1997, Household International and a wholly-owned subsidiary of
Household Finance Corporation (a wholly-owned subsidiary of Household
International) acquired the capital stock of Transamerica Financial Services
Holding Company ("TFS"), the branch-based consumer finance subsidiary of
Transamerica Corporation ("TA"). The company paid $1.1 billion for the stock of
TFS and repaid approximately $2.8 billion of TFS debt owed to affiliates of TA.
The acquisition added approximately $3.2 billion of receivables, of which
approximately $3.1 billion were home equity loans secured primarily by home
mortgages. The acquisition of TFS was accounted for as a purchase, and
accordingly, earnings from TFS' operations have been included in the company's
results of operations from June 24, 1997. The acquisition of TFS was not
material to the company's consolidated financial statements.
41
<PAGE> 42
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, the company completed a public underwritten offering of 27.3
million shares of its common stock for approximately $1.0 billion. Net proceeds
from the offering were used to repay certain short-term borrowings in connection
with the acquisition of TFS.
On October 21, 1997, Household International and a wholly-owned subsidiary
acquired the capital stock of ACC Consumer Finance Corporation ("ACC"), a
non-prime auto finance company, for approximately 4.2 million shares of common
stock and cash. The acquisition of ACC was accounted for as a purchase, and
accordingly, earnings from ACC's operations have been included in the company's
results of operations from October 22, 1997. The acquisition of ACC was not
material to the company's consolidated financial statements.
In December 1997, Beneficial acquired Endeavour Personal Finance Ltd.,
("Endeavour") a consumer lending business in the United Kingdom for cash. The
acquisition of Endeavour was accounted for as a purchase, and accordingly
earnings from Endeavour's operations have been included in the company's results
of operations from the acquisition date. The acquisition of Endeavour was not
material to the company's consolidated financial statements.
4. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------
1997 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities................................ $ 132.5 $ 213.7
Corporate debt securities................................... 1,600.5 1,394.9
U.S. government and federal agency debt securities.......... 380.5 425.1
Other....................................................... 746.5 768.4
-------- --------
Subtotal.................................................... 2,860.0 2,802.1
Accrued investment income................................... 38.6 40.9
-------- --------
Total investment securities............................ $2,898.6 $2,843.0
======== ========
</TABLE>
Proceeds from the sale of available-for-sale investments totaled
approximately $1.7, $4.1 and $3.2 billion in 1997, 1996 and 1995, respectively.
Gross gains of $27.4, $50.5 and $22.4 million and gross losses of $3.3, $5.9 and
$5.3 million in 1997, 1996 and 1995, respectively, were realized on those sales.
The gross unrealized gains (losses) of investment securities were as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------------------------------------------------------------------------------------
1997 1996
----------------------------------------------- -----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
INVESTMENTS
Marketable equity
securities................ $ 129.0 $ 3.7 $ (.2) $ 132.5 $ 213.3 $ 1.9 $ (1.5) $ 213.7
Corporate debt securities... 1,581.8 36.9 (18.2) 1,600.5 1,403.9 22.3 (31.3) 1,394.9
U.S. government and federal
agency debt securities.... 390.3 3.3 (13.1) 380.5 433.0 2.9 (10.8) 425.1
Other....................... 745.8 .8 (.1) 746.5 767.9 .6 (.1) 768.4
-------- ----- ------ -------- -------- ----- ------ --------
Total
available-for-sale
investments........ $2,846.9 $44.7 $(31.6) $2,860.0 $2,818.1 $27.7 $(43.7) $2,802.1
======== ===== ====== ======== ======== ===== ====== ========
</TABLE>
See Note 13, "Fair Value of Financial Instruments," for further discussion
of the relationship between the fair value of the company's assets, liabilities
and off-balance sheet financial instruments.
42
<PAGE> 43
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contractual maturities of and yields on investments in debt securities were
as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------------------------------------------
U.S. GOVERNMENT AND FEDERAL
CORPORATE DEBT SECURITIES AGENCY DEBT SECURITIES
------------------------------- -----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE YIELD* COST VALUE YIELD*
--------- -------- ------ --------- ------ ------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Due within 1 year......................... $ 178.9 $ 178.6 6.23% $ 30.7 $ 30.7 5.50%
After 1 but within 5 years................ 187.1 189.4 6.88 79.5 81.1 6.63
After 5 but within 10 years............... 433.1 439.5 6.82 145.8 146.0 6.64
After 10 years............................ 782.7 793.0 7.64 134.3 122.7 6.49
-------- -------- ---- ------ ------ ----
Total................................ $1,581.8 $1,600.5 7.17% $390.3 $380.5 6.48%
======== ======== ==== ====== ====== ====
</TABLE>
- ---------------
* Computed by dividing annualized interest by the amortized cost of the
respective investment securities.
5. RECEIVABLES
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
First mortgage.............................................. $ 396.6 $ 725.6
Home equity................................................. 13,786.2 9,535.2
Auto finance(1)............................................. 487.5 --
MasterCard/Visa............................................. 6,874.7 9,378.5
Private label............................................... 9,356.9 9,735.5
Other unsecured............................................. 6,823.1 8,035.4
Commercial.................................................. 957.0 1,037.3
--------- ---------
Total owned receivables................................ 38,682.0 38,447.5
Accrued finance charges..................................... 536.7 553.3
Credit loss reserve for owned receivables................... (1,642.1) (1,398.4)
Unearned credit insurance premiums and claims reserves...... (452.3) (381.8)
Amounts due and deferred from receivables sales............. 2,094.2 1,678.1
Reserve for receivables serviced with limited recourse...... (880.9) (710.6)
--------- ---------
Total owned receivables, net........................... 38,337.6 38,188.1
Receivables serviced with limited recourse.................. 24,478.5 20,851.2
--------- ---------
Total managed receivables, net......................... $62,816.1 $59,039.3
========= =========
</TABLE>
- ---------------
(1) Prior to the fourth quarter of 1997, auto finance receivables were not
significant and were included in other unsecured receivables.
At December 31, 1997 net receivables relating to Beneficial's disposed
Canadian and German operations were $775.1 million and $271.6 million,
respectively.
43
<PAGE> 44
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign receivables included in owned receivables were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------------------------------------------
UNITED KINGDOM CANADA GERMANY
------------------- ------------------- ---------------
1997 1996 1997 1996 1997 1996
-------- -------- -------- -------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
First mortgage......................... $ 3.1 $ 3.7 $ 7.8 $ 22.1
Home equity............................ 784.0 473.8 632.8 625.2 $ 20.9 $145.2
MasterCard/Visa........................ 1,350.8 1,101.2 -- -- .5 --
Private label.......................... 975.4 857.1 790.2 773.6 134.3 112.2
Other unsecured........................ 1,133.2 969.2 617.9 568.6 53.3 131.7
Commercial............................. -- -- 18.7 43.2 74.4 --
-------- -------- -------- -------- ------ ------
Total............................. $4,246.5 $3,405.0 $2,067.4 $2,032.7 $283.4 $389.1
======== ======== ======== ======== ====== ======
</TABLE>
Foreign managed receivables represented 12 and 11 percent of total managed
receivables at December 31, 1997 and 1996, respectively.
The company has securitized certain receivables which it services with
limited recourse. Securitizations of receivables, including replenishments of
certificateholder interests, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Home equity................................................. $ 1,920.4 $ 3,675.2 $ 2,239.0
MasterCard/Visa............................................. 23,439.6 22,828.3 20,181.2
Private label............................................... 2,270.2 697.4 644.0
Other unsecured............................................. 2,912.2 2,851.2 1,535.3
--------- --------- ---------
Total.................................................. $30,542.4 $30,052.1 $24,599.5
========= ========= =========
</TABLE>
The outstanding balance of receivables serviced with limited recourse
consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Home equity................................................. $ 6,038.6 $ 6,662.3
Auto finance(1)............................................. 395.9 --
MasterCard/Visa............................................. 12,337.0 10,149.7
Private label............................................... 1,025.0 517.0
Other unsecured............................................. 4,682.0 3,522.2
--------- ---------
Total.................................................. $24,478.5 $20,851.2
========= =========
</TABLE>
- ---------------
(1) Auto finance receivables were previously securitized by ACC before its
acquisition in October 1997.
At December 31, 1997, the expected weighted average remaining life of these
securitization transactions was 2.3 years.
44
<PAGE> 45
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The combination of receivables owned and receivables serviced with limited
recourse, which the company considers its managed portfolio, is shown below:
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
First mortgage.............................................. $ 396.6 $ 725.6
Home equity................................................. 19,824.8 16,197.5
Auto finance(1)............................................. 883.4 --
MasterCard/Visa............................................. 19,211.7 19,528.2
Private label............................................... 10,381.9 10,252.5
Other unsecured............................................. 11,505.1 11,557.6
Commercial.................................................. 957.0 1,037.3
--------- ---------
Managed receivables......................................... $63,160.5 $59,298.7
========= =========
</TABLE>
- ---------------
(1) Prior to the fourth quarter of 1997, auto finance receivables were not
significant and were included in other unsecured receivables.
At December 31, 1997 and 1996, the amounts due and deferred from
receivables sales of $2,094.2 and $1,678.1 million, respectively, included
unamortized securitization assets and funds established pursuant to the recourse
provisions for certain sales totaling $1,819.0 and $1,304.9 million,
respectively. The amounts due and deferred also included customer payments not
yet remitted by the securitization trustee to the company of $226.1 and $174.8
million at December 31, 1997 and 1996, respectively. The company made guarantees
relating to certain securitizations of $90.2 million plus unpaid interest at
December 31, 1996. The company made no such guarantees at December 31, 1997. The
company has subordinated interests in certain transactions, which were recorded
as receivables, of $1,098.1 and $485.0 million at December 31, 1997 and 1996,
respectively. The company has agreements with a "AAA"-rated third party who will
indemnify the company for up to $21.2 million in losses related to certain
securitization transactions. The company maintains credit loss reserves pursuant
to the recourse provisions for receivables serviced with limited recourse which
are based on estimated probable losses under such provisions. These reserves
totaled $880.9 and $710.6 million at December 31, 1997 and 1996, respectively,
and represent the company's best estimate of probable losses on receivables
serviced with limited recourse.
The providers of the credit enhancements have no recourse to the company.
The company maintains facilities with third parties which provide for the
securitization of receivables on a revolving basis totaling $6.6 billion through
the issuance of commercial paper. These facilities were fully utilized at
December 31, 1997. The amount available under these facilities will vary based
on the timing and volume of public securitization transactions.
45
<PAGE> 46
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contractual maturities of owned receivables were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
------------------------------------------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER TOTAL
--------- -------- -------- -------- -------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage......... $ 17.6 $ 3.3 $ 1.0 $ 1.5 $ 1.7 $ 371.5 $ 396.6
Home equity............ 3,359.4 2,222.6 1,786.3 1,551.8 1,347.4 3,518.7 13,786.2
Auto finance........... 79.8 94.2 106.5 110.0 84.1 12.9 487.5
MasterCard/Visa........ 1,108.7 680.8 550.3 478.2 408.7 3,648.0 6,874.7
Private label.......... 3,522.1 1,044.2 703.8 506.7 454.9 3,125.2 9,356.9
Other unsecured........ 2,691.5 1,674.1 995.2 438.6 328.9 694.8 6,823.1
Commercial............. 221.3 101.7 55.4 68.1 44.7 465.8 957.0
--------- -------- -------- -------- -------- --------- ---------
Total............. $11,000.4 $5,820.9 $4,198.5 $3,154.9 $2,670.4 $11,836.9 $38,682.0
========= ======== ======== ======== ======== ========= =========
</TABLE>
A substantial portion of consumer receivables, based on the company's
experience, will be renewed or repaid prior to contractual maturity. The above
maturity schedule should not be regarded as a forecast of future cash
collections. The ratio of annual cash collections of principal to average
principal balances, excluding MasterCard and Visa receivables, approximated 57
and 50 percent in 1997 and 1996, respectively.
The following table summarizes contractual maturities of owned receivables
due after one year by repricing characteristic:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------
OVER 1
BUT WITHIN OVER
5 YEARS 5 YEARS
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Receivables at predetermined interest rates................. $ 9,119.4 $ 5,190.1
Receivables at floating or adjustable rates................. 8,522.0 5,385.6
--------- ---------
Total.................................................. $17,641.4 $10,575.7
========= =========
</TABLE>
Nonaccrual owned consumer receivables totaled $907.8 and $688.8 million at
December 31, 1997 and 1996, respectively, including $189.1 and $177.4 million,
respectively, relating to foreign operations. Interest income that would have
been recorded in 1997 and 1996 if such nonaccrual receivables had been current
and in accordance with contractual terms was approximately $132.4 and $98.4
million, respectively, including $32.4 and $30.6 million, respectively, relating
to foreign operations. Interest income that was included in net income for 1997
and 1996, prior to these loans being placed on nonaccrual status, was
approximately $73.3 and $52.4 million, respectively, including $15.3 and $14.0
million, respectively, relating to foreign operations.
For an analysis of reserves for credit losses, see our Analysis of Credit
Loss Reserves Activity on an owned and managed basis.
46
<PAGE> 47
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEPOSITS
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------------------------------
1997 1996
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
--------- --------- --------- ---------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C>
DOMESTIC
Time certificates...................................... $ 936.7 6.9% $1,382.7 6.8%
Savings accounts....................................... 181.6 4.5 212.8 4.4
Demand accounts........................................ 82.6 -- 136.3 --
-------- --- -------- ---
Total domestic deposits........................... 1,200.9 6.0 1,731.8 6.0
-------- --- -------- ---
FOREIGN
Time certificates...................................... 564.3 6.4 727.4 5.9
Savings accounts....................................... 474.1 6.5 428.3 5.9
Demand accounts........................................ 104.9 5.7 112.6 5.4
-------- --- -------- ---
Total foreign deposits............................ 1,143.3 6.4 1,268.3 5.9
-------- --- -------- ---
Total deposits.................................... $2,344.2 6.2% $3,000.1 5.9%
======== === ======== ===
</TABLE>
Average deposits and related weighted average interest rates for 1997, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
DEPOSITS RATE DEPOSITS RATE DEPOSITS RATE
-------- -------- -------- -------- -------- --------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC
Time certificates.................... $1,167.1 6.8% $1,997.2 6.6% $3,107.2 6.2%
Savings and demand accounts.......... 617.3 1.4 1,305.5 2.3 2,805.7 3.0
-------- --- -------- --- -------- ---
Total domestic deposits......... 1,784.4 4.9 3,302.7 4.9 5,912.9 4.6
-------- --- -------- --- -------- ---
FOREIGN
Time certificates.................... 609.0 6.0 719.1 6.1 1,392.8 7.2
Savings and demand accounts.......... 582.7 5.6 498.2 5.0 353.8 5.9
-------- --- -------- --- -------- ---
Total foreign deposits.......... 1,191.7 5.8 1,217.3 5.7 1,746.6 6.9
-------- --- -------- --- -------- ---
Total deposits.................. $2,976.1 5.3% $4,520.0 5.2% $7,659.5 5.1%
======== === ======== === ======== ===
</TABLE>
47
<PAGE> 48
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense on deposits was $155.3, $235.2 and $404.5 million for
1997, 1996 and 1995, respectively. Interest expense on domestic deposits was
$90.4, $167.1 and $275.3 million for 1997, 1996 and 1995, respectively.
Maturities of time certificates in amounts of $100,000 or more were:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------------
DOMESTIC FOREIGN TOTAL
-------- ------- ------
(ALL DOLLAR AMOUNTS ARE
STATED IN MILLIONS)
<S> <C> <C> <C>
3 months or less................................ $13.0 $ 36.7 $ 49.7
Over 3 months through 6 months.................. 4.3 2.0 6.3
Over 6 months through 12 months................. 4.8 5.6 10.4
Over 12 months.................................. 9.1 244.7 253.8
----- ------ ------
Total...................................... $31.2 $289.0 $320.2
===== ====== ======
</TABLE>
Contractual maturities of time certificates within each interest rate range
were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER TOTAL
------ ------ ------ ------ ---- ---------- --------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE
< 4.00%...................... $111.4 $ .9 -- -- -- -- $ 112.3
4.00% - 5.99%...................... 158.2 73.6 $ 7.7 $ 12.0 $5.3 $ .6 257.4
6.00% - 7.99%...................... 141.9 281.5 256.7 303.9 2.3 78.3 1,064.6
8.00% - 9.99%...................... 4.4 7.4 54.5 -- -- .4 66.7
------ ------ ------ ------ ---- ----- --------
Total......................... $415.9 $363.4 $318.9 $315.9 $7.6 $79.3 $1,501.0
====== ====== ====== ====== ==== ===== ========
</TABLE>
48
<PAGE> 49
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------------------------------
BANK AND
COMMERCIAL OTHER
PAPER* BORROWINGS TOTAL
---------- ---------- ---------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C>
1997
Balance................................................. $9,064.7 $1,601.4 $10,666.1
Highest aggregate month-end balance..................... 11,654.6
Average borrowings...................................... 8,992.5 1,419.5 10,412.0
Weighted average interest rate:
At year end........................................... 5.7% 7.5% 6.0%
Paid during year...................................... 5.6 6.5 5.7
-------- -------- ---------
1996
Balance................................................. $9,114.1 $1,483.3 $10,597.4
Highest aggregate month-end balance..................... 12,027.4
Average borrowings...................................... 8,743.7 1,584.1 10,327.8
Weighted average interest rate:
At year end........................................... 5.4% 7.1% 5.6%
Paid during year...................................... 5.4 7.0 5.7
-------- -------- ---------
1995
Balance................................................. $8,104.7 $2,578.6 $10,683.3
Highest aggregate month-end balance..................... 10,863.6
Average borrowings...................................... 7,462.0 2,020.5 9,482.5
Weighted average interest rate:
At year end........................................... 5.8% 6.9% 6.1%
Paid during year...................................... 6.1 7.4 6.4
-------- -------- ---------
</TABLE>
- ---------------
* Included in outstanding balances at year-end 1997, 1996 and 1995 were
commercial paper obligations of foreign subsidiaries of $958.4, $881.4 and
$715.8 million, respectively.
Interest expense for commercial paper, bank and other borrowings totaled
$592.4, $584.4 and $603.4 million for 1997, 1996 and 1995, respectively.
The company maintains various bank credit agreements primarily to support
commercial paper borrowings. At December 31, 1997 and 1996, the company had
committed back-up lines of $12.7 and $11.7 billion, respectively, including a $3
billion syndicated revolving credit agreement, of which $11.8 and $10.4 billion,
respectively, were unused. Formal credit lines are reviewed annually, and expire
at various dates from 1998 to 2004. Borrowings under these lines generally are
available at a surcharge over LIBOR. Annual commitment fee requirements to
support availability of these lines at December 31, 1997 totaled $10.1 million.
49
<PAGE> 50
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SENIOR AND SENIOR SUBORDINATED DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR)
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------
1997 1996
---------- ----------
(ALL DOLLAR AMOUNTS ARE
STATED IN MILLIONS)
<S> <C> <C>
SENIOR DEBT
3.50% to 6.49%; due 1998 to 2009............................ $ 2,529.0 $ 3,101.8
6.50% to 6.99%; due 1998 to 2013............................ 3,421.1 2,441.7
7.00% to 7.49%; due 1998 to 2023............................ 1,782.6 1,597.0
7.50% to 7.99%; due 1998 to 2012............................ 1,612.7 1,817.9
8.00% to 8.99%; due 1998 to 2005............................ 1,962.4 2,008.5
9.00% and greater; due 1998 to 2013......................... 1,353.2 1,765.8
Variable interest rate debt; 3.85% to 9.00%; due 1998 to
2034...................................................... 10,372.4 9,850.5
SENIOR SUBORDINATED DEBT
9.00% to 9.63%; due 2000 to 2001............................ 685.0 685.0
10.25%; due 2003............................................ 20.0 75.0
PREFERRED STOCK OF SUBSIDIARY
Household Finance Corporation 7.25% term cumulative
preferred Series 1992-A................................... -- 100.0
Unamortized discount........................................ (2.2) (10.1)
--------- ---------
Total senior and senior subordinated debt.............. $23,736.2 $23,433.1
========= =========
</TABLE>
Weighted average coupon interest rates were 6.8 and 6.6 percent at December
31, 1997 and 1996, respectively. Interest expense for senior and senior
subordinated debt was $1,610.7, $1,513.8 and $1,365.4 million for 1997, 1996 and
1995, respectively. The only financial covenants contained in the terms of the
company's debt agreements are the maintenance of a minimum shareholders' equity
of $2.0 billion for Household International, Inc., the maintenance of a minimum
shareholder's equity of $1.5 billion for Household Finance Corporation ("HFC"),
a wholly-owned subsidiary of the company, and a $1 billion net worth test for an
HFC subsidiary.
Maturities of senior and senior subordinated debt were:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997
---------------
(IN MILLIONS)
<S> <C>
1998........................................................ $ 4,627.5
1999........................................................ 5,042.3
2000........................................................ 3,049.4
2001........................................................ 3,092.7
2002........................................................ 2,454.7
Thereafter.................................................. 5,469.6
---------
Total.................................................. $23,736.2
=========
</TABLE>
On August 15, 1997, the company redeemed at par of $100 million, plus
accrued and unpaid dividends, all outstanding shares of the 7.25 percent term
cumulative preferred Series 1992-A of Household Finance Corporation.
50
<PAGE> 51
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
In the normal course of business and in connection with its asset/liability
management program, the company enters into various transactions involving
derivative and other off-balance sheet financial instruments. These instruments
primarily are used to manage the company's exposure to fluctuations in interest
rates and foreign exchange rates. The company does not serve as a financial
intermediary to make markets in any derivative financial instruments. For
further information on the company's strategies for managing interest rate and
foreign exchange rate risk, see the Risk Management section within the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The financial instruments used by the company include interest rate
contracts and foreign exchange rate contracts and have varying degrees of credit
risk and/or market risk.
Credit Risk. Credit risk is the possibility that a loss may occur because
the counterparty to a transaction fails to perform according to the terms of the
contract. The company's exposure to credit loss related to interest rate swaps,
cap and floor transactions, forward and futures contracts and options is the
amount of uncollected interest or premium related to these instruments. These
interest rate related instruments are generally expressed in terms of notional
principal or contract amounts which are much larger than the amounts potentially
at risk for nonpayment by counterparties. The company controls the credit risk
of its off-balance sheet financial instruments through established credit
approvals, risk control limits and ongoing monitoring procedures. The company
has never experienced nonperformance by any derivative instrument counterparty.
Market Risk. Market risk is the possibility that a change in interest rates
or foreign exchange rates will cause a financial instrument to decrease in value
or become more costly to settle. The company mitigates this risk by establishing
limits for positions and other controls.
51
<PAGE> 52
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest Rate and Foreign Exchange Contracts The following table summarizes
the activity in interest rate and foreign exchange contracts for 1997, 1996 and
1995:
<TABLE>
<CAPTION>
EXCHANGE TRADED NON-EXCHANGE TRADED
------------------------------------------- ---------------------------------------------
INTEREST RATE FOREIGN EXCHANGE
FUTURES CONTRACTS OPTIONS RATE CONTRACTS
--------------------- ------------------- INTEREST CURRENCY ---------------------
PURCHASED SOLD PURCHASED WRITTEN RATE SWAPS SWAPS PURCHASED SOLD
--------- --------- --------- ------- ---------- -------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HEDGING/SYNTHETIC
ALTERATION INSTRUMENTS
1995
Notional amount, 1994.......... -- $ (96.0) -- -- $19,605.6 $1,158.8 $ 530.6 $(1,319.5)
New contracts.................. $2,003.0 (2,100.0) $ 300.0 $(300.0) 3,312.5 152.6 5,029.5 (5,426.7)
Matured or expired contracts... -- 293.0 -- -- (7,069.3) (231.0) (1,245.3) 1,510.8
Terminated contracts........... -- -- -- -- (4,983.7) -- (545.0) 553.1
In-substance
maturities(1)................. (1,653.0) 1,653.0 (300.0) 300.0 -- -- (3,345.3) 3,477.1
--------- --------- ------- ------- --------- -------- --------- ---------
NOTIONAL AMOUNT, 1995.......... $ 350.0 $ (250.0) -- -- $10,865.1 $1,080.4 $ 424.5 $(1,205.2)
========= ========= ======= ======= ========= ======== ========= =========
Fair value, 1995(2)............ $ .1 -- -- -- $ 124.7 $ 63.5 $ 4.2 $ 1.7
--------- --------- ------- ------- --------- -------- --------- ---------
1996
Notional amount, 1995.......... $ 350.0 $ (250.0) -- -- $10,865.1 $1,080.4 $ 424.5 $(1,205.2)
New contracts.................. 6,611.9 (4,202.9) $ 440.0 $(440.0) 5,379.8 1,494.5 5,723.6 (6,150.0)
Matured or expired contracts... (1,471.0) 300.0 -- -- (3,779.8) (117.0) (894.1) 1,319.1
Terminated contracts........... -- -- -- -- (1,690.5) -- (391.6) 391.6
In-substance
maturities(1)................. (4,152.9) 4,152.9 (440.0) 440.0 -- -- (4,692.7) 4,692.7
--------- --------- ------- ------- --------- -------- --------- ---------
NOTIONAL AMOUNT, 1996.......... $1,338.0 -- -- -- $10,774.6 $2,457.9 $ 169.7 $ (951.8)
========= ========= ======= ======= ========= ======== ========= =========
Fair value, 1996(2)............ -- -- -- -- $ 50.5 $(156.1) $ (.1) $ (57.0)
--------- --------- ------- ------- --------- -------- --------- ---------
1997
Notional amount, 1996.......... $1,338.0 -- -- -- $10,774.6 $2,457.9 $ 169.7 $ (951.8)
New contracts.................. 8,584.0 $(7,350.0) -- -- 3,854.0 988.5 4,256.6 (4,548.5)
Matured or expired contracts... (2,020.0) 120.0 -- -- (3,168.3) (397.3) (652.6) 843.4
Terminated contracts........... -- -- -- -- (1,175.9) (205.4) (95.6) 95.6
In-substance
maturities(1)................. (7,030.0) 7,030.0 -- -- -- -- (3,242.2) 3,242.2
--------- --------- ------- ------- --------- -------- --------- ---------
NOTIONAL AMOUNT, 1997.......... $ 872.0 $ (200.0) -- -- $10,284.4 $2,843.7 $ 435.9 $(1,319.1)
========= ========= ======= ======= ========= ======== ========= =========
Fair value, 1997(2)............ $ -- $ -- -- -- $ 152.4 $(126.0) $ 4.5 $ (6.4)
--------- --------- ------- ------- --------- -------- --------- ---------
<CAPTION>
NON-EXCHANGE TRADED
-----------------------------------
INTEREST RATE
FORWARD CONTRACTS OTHER RISK
--------------------- MANAGEMENT
PURCHASED SOLD INSTRUMENTS
--------- --------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
HEDGING/SYNTHETIC
ALTERATION INSTRUMENTS
1995
Notional amount, 1994.......... $ 936.1 $ (140.8) $ 613.9
New contracts.................. 1,887.2 (173.7) 180.4
Matured or expired contracts... (1,840.4) 167.9 (351.4)
Terminated contracts........... (255.9) 53.5 --
In-substance
maturities(1)................. -- -- --
--------- --------- --------
NOTIONAL AMOUNT, 1995.......... $ 727.0 $ (93.1) $ 442.9
========= ========= ========
Fair value, 1995(2)............ $ (1.0) -- $ 2.2
--------- --------- --------
1996
Notional amount, 1995.......... $ 727.0 $ (93.1) $ 442.9
New contracts.................. 3,641.8 (1,036.0) 2,242.2
Matured or expired contracts... (2,636.9) 859.9 (8.9)
Terminated contracts........... -- -- --
In-substance
maturities(1)................. -- -- --
--------- --------- --------
NOTIONAL AMOUNT, 1996.......... $1,731.9 $ (269.2) $2,676.2
========= ========= ========
Fair value, 1996(2)............ $ (1.2) $ .2 $ 24.6
--------- --------- --------
1997
Notional amount, 1996.......... $1,731.9 $ (269.2) $2,676.2
New contracts.................. 6,055.8 (1,326.3) 372.4
Matured or expired contracts... (4,477.7) 1,489.5 (495.9)
Terminated contracts........... -- -- (85.3)
In-substance
maturities(1)................. -- -- --
--------- --------- --------
NOTIONAL AMOUNT, 1997.......... $3,310.0 $ (106.0) $2,467.4
========= ========= ========
Fair value, 1997(2)............ $ 1.7 $ -- $ 11.3
--------- --------- --------
</TABLE>
- ---------------
(1) Represent contracts terminated as the market execution technique of closing
the transaction either (a) just prior to maturity to avoid delivery of the
underlying instrument, or (b) at the maturity of the underlying items being
hedged.
(2) (Bracketed) unbracketed amounts represent amounts to be (paid) received by
the company had these positions been closed out at the respective balance
sheet date. Bracketed amounts do not necessarily represent risk of loss for
hedging instruments, as the fair value of the hedging instrument and the
items being hedged must be evaluated together. See Note 13, "Fair Value of
Financial Instruments" for further discussion of the relationship between
the fair value of the company's assets, liabilities and off-balance sheet
financial instruments.
52
<PAGE> 53
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company operates in three functional currencies, the US dollar, the
British pound and the Canadian dollar. Of the above instruments the US dollar is
the functional currency for exchange traded interest rate futures and options.
The remaining instruments are restated in US dollars by country as follows:
<TABLE>
<CAPTION>
FOREIGN EXCHANGE INTEREST RATE FORWARD
INTEREST FORWARD CONTRACTS CONTRACTS OTHER RISK
RATE CURRENCY --------------------- --------------------- MANAGEMENT
SWAPS SWAPS PURCHASED SOLD PURCHASED SOLD INSTRUMENTS
--------- -------- --------- --------- ---------- -------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
1995
United States............. $ 9,516.6 $ 207.7 $424.5 $(1,203.2) -- -- $ 100.0
Canada.................... 415.6 295.1 -- (2.0) $ 606.8 -- 38.1
United Kingdom............ 932.9 577.6 -- -- 120.2 $ (93.1) 304.8
--------- -------- ------ --------- -------- ------- --------
$10,865.1 $1,080.4 $424.5 $(1,205.2) $ 727.0 $ (93.1) $ 442.9
========= ======== ====== ========= ======== ======= ========
1996
United States............. $ 9,519.5 $1,128.5 $169.7 $ (951.8) -- -- $1,350.0
Canada.................... 518.1 450.1 -- -- $ 472.1 $(252.2) 135.0
United Kingdom............ 737.0 879.3 -- -- 1,259.8 (17.0) 1,191.2
--------- -------- ------ --------- -------- ------- --------
$10,774.6 $2,457.9 $169.7 $ (951.8) $1,731.9 $(269.2) $2,676.2
========= ======== ====== ========= ======== ======= ========
1997
United States............. $ 8,883.5 $1,762.1 $435.9 $(1,319.1) -- -- $1,350.0
Canada.................... 361.6 427.3 -- -- $ 447.5 $(106.0) 7.0
United Kingdom............ 1,039.3 654.3 -- -- 2,862.5 -- 1,110.4
--------- -------- ------ --------- -------- ------- --------
$10,284.4 $2,843.7 $435.9 $(1,319.1) $3,310.0 $(106.0) $2,467.4
========= ======== ====== ========= ======== ======= ========
</TABLE>
Interest rate swaps are contractual agreements between two counterparties
for the exchange of periodic interest payments generally based on a notional
principal amount and agreed-upon fixed or floating rates. The company primarily
enters into interest rate swap transactions to synthetically alter balance sheet
items. These transactions are specifically designated to a particular
asset/liability, off-balance sheet item or anticipated transaction of a similar
characteristic. Specific assets or liabilities may consist of groups of
individually small dollar homogeneous assets or liabilities of similar economic
characteristics. Credit and market risk exists with respect to these
instruments. The following table reflects the items so altered at December 31,
1997:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Investment securities....................................... $ 70.7
Receivables:
Home equity............................................... 775.0
MasterCard/Visa........................................... 550.0
Private label............................................. 20.3
Other unsecured........................................... 19.3
---------
Total owned receivables................................ 1,364.6
Deposits.................................................... 150.0
Commercial paper, bank and other borrowings................. 2,816.2
Senior and senior subordinated debt......................... 5,849.5
Receivables serviced with limited recourse.................. 33.4
---------
Total items synthetically altered with interest rate
swaps................................................. $10,284.4
=========
</TABLE>
- ---------------
Note: In all instances, the notional amount is not greater than the carrying
value of the related asset/liability or off-balance sheet item.
53
<PAGE> 54
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company manages its exposure to interest rate risk primarily through
the use of interest rate swaps. These swaps synthetically alter the interest
rate risk inherent in balance sheet assets, liabilities or off-balance sheet
items. The majority of the company's interest rate swaps are used to convert
floating rate assets to fixed rate, fixed rate debt to floating rate, floating
rate assets or debt from one floating rate index to another, fixed rate assets
to a floating rate, or floating rate debt to fixed rate. Interest rate swaps
also are used to synthetically alter interest rate characteristics on certain
receivables that are sold and serviced with limited recourse. These off-balance
sheet items expose the company to the same interest rate risk as on-balance
sheet items. Interest rate swaps are used to synthetically alter the interest
rate provisions of the securitization transaction whereby the underlying
receivables pay a fixed (floating) rate and the pass-through rate to the
investor is floating (fixed). The company also has entered into currency swaps
to convert both principal and interest payments on debt issued from one currency
to the appropriate functional currency.
The following table summarizes the maturities and related weighted average
receive/pay rates of interest rate swaps outstanding at December 31, 1997:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003 THEREAFTER TOTAL
-------- -------- -------- -------- ------ ------ ---------- ---------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay a fixed rate/receive a
floating rate:
Notional value.............. $ 756.8 $ 773.3 $ 565.1 $ 214.6 $181.7 -- -- $ 2,491.5
Weighted average receive
rate...................... 6.00% 6.20% 7.20% 7.51% 7.54% -- -- 6.57%
Weighted average pay rate... 6.67 6.90 7.22 7.41 7.07 -- -- 6.96
Pay a floating rate/receive a
fixed rate:
Notional value.............. $ 667.9 $ 313.9 $ 375.6 $ 881.8 $315.9 $430.0 $1,927.8 $ 4,912.9
Weighted average receive
rate...................... 6.72% 7.04% 6.47% 6.59% 6.42% 6.68% 6.93% 6.76%
Weighted average pay rate... 5.92 5.60 5.47 5.69 5.78 5.93 5.93 5.82
Pay a floating rate/receive a
different floating rate:
Notional value.............. $ 980.0 $1,598.0 $ 237.0 $ 55.0 $ 10.0 -- -- $ 2,880.0
Weighted average receive
rate...................... 5.70% 6.02% 5.85% 6.05% 6.50% -- -- 5.90%
Weighted average pay rate... 5.88 5.96 5.91 6.02 5.81 -- -- 5.93
-------- -------- -------- -------- ------ ------ -------- ---------
Total notional value...... $2,404.7 $2,685.2 $1,177.7 $1,151.4 $507.6 $430.0 $1,927.8 $10,284.4
======== ======== ======== ======== ====== ====== ======== =========
Total weighted average
rates on swaps:
Receive rate.................. 6.08% 6.11% 6.38% 6.73% 7.05% 6.74% 6.93% 6.45%
-------- -------- -------- -------- ------ ------ -------- ---------
Pay rate...................... 6.06 6.23 6.40 6.26 6.52 5.97 5.93 6.14
-------- -------- -------- -------- ------ ------ -------- ---------
</TABLE>
The floating rates paid or received by the company are based on spot rates
from independent market sources for the index contained in each interest rate
swap contract, which generally are based on either 1-, 3-or 6-month LIBOR. These
current floating rates are different than the floating rates in effect when the
contracts were initiated. Changes in spot rates impact the variable rate
information disclosed above. However, these changes in spot rates also impact
the interest rate on the underlying assets or liabilities. Hedging/ synthetic
alteration instruments are used by the company to manage the volatility of net
interest margin resulting from changes in interest rates on the underlying
hedged/synthetically altered items. Owned net interest margin would have
declined by 9 and 14 basis points in 1997 and 1996, respectively, had these
instruments not been utilized. These instruments did not impact owned net
interest margin in 1995.
Forwards and futures are agreements between two parties, committing one to
sell and the other to buy a specific quantity of an instrument on some future
date. The parties agree to buy or sell at a specified price in the future, and
their profit or loss is determined by the difference between the arranged price
and the level of the spot price when the contract is settled. The company has
both interest rate and foreign exchange rate forward contracts and interest rate
futures contracts. Foreign exchange contracts are utilized by the company
54
<PAGE> 55
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to reduce its exposure to foreign currency exchange risk. Interest rate forward
and futures contracts are used to hedge resets of interest rates on the
company's floating rate assets and liabilities. The company's exposure to credit
risk for futures is limited, as these contracts are traded on organized
exchanges. Each day, changes in contract values are settled in cash. In
contrast, forward contracts have credit risk relating to the performance of the
counterparty. These instruments also are subject to market risk. Cash
requirements for forward contracts include the receipt or payment of cash upon
the sale or purchase of the instrument.
Purchased options grant the purchaser the right, but not the obligation, to
either purchase or sell a financial instrument at a specified price within a
specified period. The seller of the option has written a contract which creates
an obligation to either sell or purchase the financial instrument at the
agreed-upon price if, and when, the purchaser exercises the option.
Other risk management instruments consist of caps and floors. Caps and
floors written expose the company to market risk but not to credit risk. Market
risk associated with caps and floors purchased is limited to the premium paid
which is recorded on the balance sheets in other assets.
Deferred gains of $41.8 and $45.8 million and deferred losses of $4.1 and
$13.0 million from hedging/synthetic alteration instruments were recorded on the
balance sheets at December 31, 1997 and 1996, respectively. The weighted average
amortization period associated with the deferred gains was 5.1 and 6.6 years at
December 31, 1997 and 1996, respectively. The weighted average amortization
period for the deferred losses was 1.3 and 1.5 years at December 31, 1997 and
1996, respectively.
At December 31, 1997 and 1996, the accrued interest, unamortized premium
and other assets recorded for agreements which would be written off should all
related counterparties fail to meet the terms of their contracts was $65.4 and
$53.3 million, respectively.
Concentrations of Credit Risk. A concentration of credit risk is defined as
a significant credit exposure with an individual or group engaged in similar
activities or affected similarly by economic conditions.
Because the company primarily lends to consumers, it does not have
receivables from any industry group that equal or exceed 10 percent of total
managed receivables at December 31, 1997 and 1996. The company lends nationwide,
with the following geographic areas comprising more than 10 percent of total
managed domestic receivables at December 31, 1997: California -20 percent;
Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI) -23 percent; Middle
Atlantic (DE, DC, MD, NJ, PA, VA, WV) -14 percent; Northeast (CT, ME, MA, NH,
NY, RI, VT) -12 percent; and Southeast (AL, FL, GA, KY, MS, NC, SC, TN) -15
percent.
10. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS
In June 1996 Household Capital Trust II ("HCT II"), a wholly-owned
subsidiary of the company, issued 4 million 8.70 percent Trust Preferred
Securities ("preferred securities") at $25 per preferred security. The sole
asset of HCT II is $103.1 million of 8.70 percent Junior Subordinated Deferrable
Interest Notes issued by the company. The junior subordinated notes held by HCT
II mature on June 30, 2036 and are redeemable by the company in whole or in part
beginning on June 30, 2001, at which time the HCT II preferred securities are
callable. Net proceeds from the issuance of preferred securities were used for
general corporate purposes.
In June 1995 Household Capital Trust I ("HCT I"), a wholly-owned subsidiary
of the company, issued 3 million 8.25 percent preferred securities at $25 per
preferred security. The sole asset of HCT I is $77.3 million of 8.25 percent
Junior Subordinated Deferrable Interest Notes issued by the company. The junior
subordinated notes held by HCT I mature on June 30, 2025 and are redeemable by
the company in whole or in part beginning on June 30, 2000, at which time the
HCT I preferred securities are callable. HCT I may elect to extend the maturity
of the preferred securities to June 30, 2044.
55
<PAGE> 56
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The obligations of the company with respect to the junior subordinated
notes, when considered together with certain undertakings of the company with
respect to HCT I and HCT II, constitute full and unconditional guarantees by the
company of HCT I's and HCT II's obligations under the respective preferred
securities. The preferred securities are classified in the company's balance
sheets as company obligated mandatorily redeemable preferred securities of
subsidiary trusts (representing the minority interest in the trusts) at their
face and redemption amount of $175 million at December 31, 1997 and 1996. The
preferred securities have a liquidation value of $25 per preferred security.
Dividends on the preferred securities are cumulative, payable quarterly in
arrears and are deferrable at the company's option for up to five years from
date of issuance. The company cannot pay dividends on its preferred and common
stocks during such deferments. Dividends on the preferred securities have been
classified as interest expense in the statements of income.
11. PREFERRED STOCK
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------
1997 1996
-------- --------
(ALL DOLLAR AMOUNTS
ARE STATED IN MILLIONS)
<S> <C> <C>
$4.30 Preferred Stock, 836,585 shares....................... $ 83.7 $ 83.7
$4.50 Preferred Stock, 103,976 shares....................... 10.4 10.4
5.00% Preferred Stock, 407,718 shares....................... 20.4 20.4
7.35% Preferred Stock, Series 1993-A, 4,000,000 depositary
shares(1)................................................. 100.0 100.0
8.25% Preferred Stock, Series 1992-A, 2,000,000 depositary
shares(1)................................................. 50.0 50.0
9.50% Preferred Stock, Series 1991-A, 5,500,000 depositary
shares(2)................................................. -- 55.0
------ ------
Total preferred stock.................................. $264.5 $319.5
====== ======
</TABLE>
- ---------------
(1) Depositary share represents 1/40 share of preferred stock.
(2) Depositary share represents 1/10 share of preferred stock.
Dividends on the $4.30 preferred stock are cumulative and payable
semiannually. The company may, at its option, redeem in whole or in part the
$4.30 preferred stock for $100 per share plus accrued and unpaid dividends. This
stock has a liquidation value of $100 per share plus accrued and unpaid
dividends in the event of an involuntary liquidation or $100 in the event of a
voluntary liquidation.
Dividends on the $4.50 preferred stock are cumulative and payable
semiannually. The company may, at its option, redeem in whole or in part the
$4.50 preferred stock for $103 per share plus accrued and unpaid dividends. This
stock has a liquidation value of $100 per share.
Dividends on the 5.00 percent preferred stock are cumulative and payable
semiannually. The company may, at its option, redeem in whole or in part the
5.00 percent preferred stock for $50 per share plus accrued and unpaid
dividends. This stock has a liquidation value of $50 per share.
Dividends on the 7.35 percent preferred stock, Series 1993-A, are
cumulative and payable quarterly. The company may, at its option, redeem in
whole or in part the 7.35 percent preferred stock, Series 1993-A, on any date
after October 15, 1998 for $25 per depositary share plus accrued and unpaid
dividends. This stock has a liquidation value of $1,000 per share.
Dividends on the 8.25 percent preferred stock, Series 1992-A, are
cumulative and payable quarterly. The company may, at its option, redeem in
whole or in part the 8.25 percent preferred stock, Series 1992-A, on any date
after October 15, 2002 for $25 per depositary share plus accrued and unpaid
dividends. This stock has a liquidation value of $1,000 per share.
56
<PAGE> 57
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Holders of all issues of preferred stock are entitled to payment before any
capital distribution is made to common shareholders. All issues of preferred
shares are nonvoting except for the $4.30 preferred, $4.50 preferred and 5%
preferred stock classes. Holders of these voting classes of preferred stock will
be entitled to vote as a separate class to elect two directors if the equivalent
of three or more semiannual dividends shall be in arrears, until the dividends
in arrears are paid in full.
On January 23, 1997, the company redeemed, at par, all outstanding shares
of its 9.50 percent $55 million preferred stock, Series 1991-A, for $10 per
depositary share, plus accrued and unpaid dividends.
The company's Board of Directors has adopted a resolution creating an
Offering Committee of the Board with the power to authorize the issuance and
sale of one or more series of preferred stock. The Offering Committee has the
authority to determine the particular designations, powers, preferences and
relative, participating, optional or other special rights (other than voting
rights which shall be fixed by the Board of Directors) and qualifications,
limitations or restrictions of such issuance. At December 31, 1997, up to $4.3
million shares of preferred stock were authorized for issuance.
12. JUNIOR PREFERRED SHARE PURCHASE RIGHTS
In 1996, the company issued one preferred share purchase right (a "Right")
for each outstanding share of common stock of the company. Under certain
conditions, each Right may be exercised to purchase one three-thousandth of a
share of a new series of junior participating preferred stock at an exercise
price of $100 per one three-thousandth of a share, subject to further
adjustment. The Rights may be exercised only after the earlier of: (a) a public
announcement that a party or an associated group acquired 15 percent or more of
the company's common stock and (b) ten business days (or later date as
determined by the Board of Directors of the company) after a party or an
associated group initiates or announces its intention to make an offer to
acquire 15 percent or more of the company's common stock. The Rights, which
cannot vote or receive dividends, expire on July 31, 2006 and may be redeemed by
the company at a price of $.0033 per Right at any time prior to expiration or
acquisition of 15 percent of the company's common stock.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The company has estimated the fair value of its financial instruments in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments" ("FAS No. 107"). Fair
value estimates, methods and assumptions set forth below for the company's
financial instruments are made solely to comply with the requirements of FAS No.
107 and should be read in conjunction with the financial statements and notes in
this Annual Report.
For a significant portion of the company's financial instruments, fair
values for items lacking a quoted market price were estimated by discounting
estimated future cash flows at estimated current market discount rates.
Assumptions used to estimate future cash flows are consistent with management's
assessments regarding ultimate collectibility of assets and related interest and
with estimates of product lives and repricing characteristics used in the
company's asset/liability management process. All assumptions are based on
historical experience adjusted for future expectations. Assumptions used to
determine fair values for financial instruments for which no active market
exists are inherently judgmental, and changes in these assumptions could
significantly affect fair value calculations.
As required under generally accepted accounting principles, a number of
other assets recorded on the balance sheets (such as acquired credit card
relationships) and other intangible assets not recorded on the balance sheets
(such as the value of consumer lending relationships for originated receivables
and the franchise values of the company's business units) are not considered
financial instruments and, accordingly, are not valued for purposes of this
disclosure. The company believes there is substantial value associated with
these assets based on current market conditions and historical experience.
Accordingly, the estimated fair
57
<PAGE> 58
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of financial instruments, as disclosed, does not fully represent the
entire value, nor the changes in the entire value, of the company.
The following is a summary of the carrying value and estimated fair value
of the company's financial instruments:
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE DIFFERENCE VALUE VALUE DIFFERENCE
-------- --------- ---------- -------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Cash............................. $ 534 $ 534 -- $ 519 $ 519 --
Investment securities............ 2,899 2,899 -- 2,843 2,843 --
Receivables...................... 38,338 39,632 $1,294 38,188 39,625 $1,437
-------- -------- ------ -------- -------- ------
Subtotal......................... 41,771 43,065 1,294 41,550 42,987 1,437
-------- -------- ------ -------- -------- ------
Deposits......................... (2,344) (2,351) (7) (3,000) (3,016) (16)
Commercial paper, bank and other
borrowings..................... (10,666) (10,666) -- (10,597) (10,597) --
Senior and senior subordinated
debt........................... (23,736) (24,125) (389) (23,433) (23,834) (401)
Insurance reserves............... (1,383) (1,612) (229) (1,367) (1,584) (217)
-------- -------- ------ -------- -------- ------
Subtotal......................... (38,129) (38,754) (625) (38,397) (39,031) (634)
-------- -------- ------ -------- -------- ------
Interest rate and foreign
exchange contracts............. 41 38 (3) 38 (139) (177)
Commitments to extend credit and
guarantees..................... -- 50 50 -- 40 40
-------- -------- ------ -------- -------- ------
Subtotal......................... 41 88 47 38 (99) (137)
-------- -------- ------ -------- -------- ------
Total..................... $ 3,683 $ 4,399 $ 716 $ 3,191 $ 3,857 $ 666
======== ======== ====== ======== ======== ======
</TABLE>
The following methods and assumptions were used to estimate the fair value
of the company's financial instruments:
Cash: The carrying value approximates fair value for this instrument due to
its liquid nature.
Investment securities: Investment securities are classified as
available-for-sale and are carried at fair value on the balance sheets.
Receivables: The fair value of adjustable rate consumer receivables was
determined to approximate existing carrying value because interest rates on
these receivables adjust with changing market interest rates. The fair value of
fixed rate consumer receivables was estimated by discounting future expected
cash flows at interest rates approximating those offered by the company on such
products at the respective valuation dates. This approach to estimating fair
value for fixed rate receivables results in a disclosed fair value that is less
than amounts the company believes could be currently realizable on a sale of
these receivables. These receivables are relatively insensitive to changes in
overall market interest rates and, therefore, have additional value compared to
alternative uses of funds. The fair value of commercial receivables was
determined by discounting estimated future cash flows at estimated market
interest rates.
The fair value of consumer receivables also included an estimate, on a
present value basis, of cash flows associated with securitizations of certain
home equity, auto finance, MasterCard and Visa, private label and other
unsecured receivables.
58
<PAGE> 59
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deposits: The fair value of the company's savings and demand accounts
equaled the carrying amount as stipulated in FAS No. 107. The fair value of
fixed rate time certificates was estimated by discounting future expected cash
flows at interest rates offered by the company on such products at the
respective valuation dates.
Commercial paper, bank and other borrowings: The fair value of these
instruments was determined to approximate existing carrying value because
interest rates on these instruments adjust with changes in market interest rates
due to their short-term maturity or repricing characteristics.
Senior and senior subordinated debt: The estimated fair value of these
instruments was computed by discounting future expected cash flows at interest
rates offered for similar types of debt instruments.
Insurance reserves: The fair value of insurance reserves for periodic
payment annuities was estimated by discounting future expected cash flows at
estimated market interest rates at December 31, 1997 and 1996. The fair value of
other insurance reserves is not required to be determined in accordance with FAS
No. 107.
Interest rate and foreign exchange contracts: Where practical, quoted
market prices were used to determine fair value of these instruments. For
non-exchange traded contracts, fair value was determined through the use of
accepted and established valuation methods (including input from independent
third parties) which consider the terms of the contracts and market expectations
on the valuation date for forward interest rates (for interest rate contracts)
or forward foreign currency exchange rates (for foreign exchange contracts). See
Note 9, "Derivative Financial Instruments and Other Financial Instruments with
Off-Balance Sheet Risk," for a discussion of the nature of these items.
Commitments to extend credit and guarantees: These commitments were valued
by considering the company's relationship with the counterparty, the
creditworthiness of the counterparty and the difference between committed and
current interest rates.
14. LEASES
The company leases certain offices, buildings and equipment for periods of
up to 47 years with various renewal options. The office space leases generally
require the company to pay certain operating expenses. The majority of the
company's leases are noncancelable operating leases. Net rental expense under
operating leases was $135.5, $122.5 and $123.3 million for 1997, 1996 and 1995,
respectively.
Future net minimum lease commitments under noncancelable operating lease
arrangements were:
<TABLE>
<CAPTION>
AT
DECEMBER 31, 1997
--------------------
(IN MILLIONS)
<S> <C>
1998........................................................ $126.0
1999........................................................ 105.4
2000........................................................ 84.8
2001........................................................ 68.4
2002........................................................ 59.2
Thereafter.................................................. 387.0
------
Net minimum lease commitments............................... $830.8
======
</TABLE>
15. INCENTIVE COMPENSATION AND STOCK OPTION PLANS
The company's executive compensation plans provide for issuance of
nonqualified stock options and restricted stock rights (RSRs). Stock options
permit the holder to purchase, under certain limitations, the company's common
stock at a price not less than 100 percent of the market value of the stock on
the date the option is granted. Employee stock options vest equally over four
years and expire 10 years from the date of grant.
59
<PAGE> 60
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
An equity participation plan was adopted in 1997 by Beneficial that
provides for grants of options to each eligible employee. Under the plan, the
option price is 120% of the fair market value on the date the option is granted.
Options are fully exercisable when granted and expire after 10 years. This plan
has been terminated effective with the merger of Household and Beneficial.
Beginning in 1997, non-employee directors annually receive an option to
purchase 7,500 shares of the company's common stock at the stock's fair market
value the day the option is granted. The first option grant was made in November
1997. Prior to this, directors received an annual grant of 7,500 options each
May ending with the May 1997 grant. Director options have a term of ten years
and one day, fully vest six months from the date granted, and once vested are
exercisable at any time during the option term.
Common stock data for the stock option plans is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
PRICE PER PRICE PER PRICE PER
SHARES SHARE SHARES SHARE SHARES SHARE
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year.......................... 23,779,041 $14.81 23,480,063 $12.13 21,948,509 $10.13
Granted......................... 11,362,485 29.03 4,736,971 24.04 7,247,802 16.01
Exercised....................... (3,081,428) 11.35 (3,926,067) 10.11 (4,492,053) 8.83
Expired or canceled............. (1,893,621) 23.49 (511,926) 13.43 (1,224,195) 11.30
---------- ------ ---------- ------ ---------- ------
Outstanding at end of year...... 30,166,477 $19.90 23,779,041 $14.81 23,480,063 $12.13
========== ====== ========== ====== ========== ======
Exercisable at end of year...... 17,870,085 $17.24 11,254,478 $11.09 9,651,033 $ 9.37
========== ====== ========== ====== ========== ======
Weighted average fair value of
options granted............... $10.82 $10.55 $ 5.84
====== ====== ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ----------------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE AVERAGE OUTSTANDING AT AVERAGE
EXERCISE PRICES DECEMBER 31, 1997 REMAINING LIFE EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE
- ----------------------- ----------------- -------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$5.90-$15.81........... 11,940,966 5.7 years $11.29 10,071,659 $11.01
$16.92-$39.06.......... 18,225,511 9.2 years $25.55 7,798,426 $25.29
</TABLE>
RSRs entitle an employee to receive a stated number of shares of the
company's common stock if the employee satisfies the conditions set by the
Compensation Committee for the award.
Household maintains an Employee Stock Purchase Plan (the "ESPP"). The ESPP
provides a means for employees to purchase shares of the company's common stock
at 85% of the lesser of its market price at the beginning or end of a one year
subscription period.
Beneficial previously maintained an Employee Stock Purchase Plan ("BESPP")
whereby participants could elect to purchase stock subject to certain
limitations. Employee stock purchases were eligible to be matched by Beneficial
up to certain amounts and vested over a three year period. This plan has been
terminated effective with the merger of Household and Beneficial.
The company accounts for options and shares issued under the ESPP in
accordance with APB 25, pursuant to which no compensation cost has been
recognized. Under the BESPP, compensation cost on
60
<PAGE> 61
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
matching contributions was recognized. Had compensation cost been determined
consistent with FAS No. 123, the company's net income and earnings per share, on
a pro forma basis, would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
DILUTED BASIC DILUTED BASIC DILUTED BASIC
------- ------ ------- ------ ------- ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Earnings available to common shareholders:
As Reported............................... $923.3 $923.3 $797.7 $797.7 $572.1 $572.1
Pro Forma................................. 902.9 902.9 789.6 789.6 569.6 569.6
Earnings per share:
As Reported............................... $ 1.93 $ 1.97 $ 1.73 $ 1.76 $ 1.24 $ 1.26
Pro Forma................................. 1.88 1.92 1.71 1.74 1.23 1.25
</TABLE>
The compensation expense recognized in pro forma net income for 1997, 1996
and 1995 may not be representative of the effects on pro forma net income for
future years.
The fair value of each option granted was estimated as of the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1996 and 1995 grants:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate.............................. 5.86% 6.03% 6.77%
Expected dividend yield.............................. 1.45 1.55 1.59
Expected life........................................ 5 YEARS 5 years 5 years
Expected volatility.................................. 23.9% 28.2% 27.8%
</TABLE>
The Black-Scholes model uses different assumptions that can significantly
effect the fair value of the options. As a result, the derived fair value
estimates cannot be substantiated by comparison to independent markets.
16. EMPLOYEE BENEFIT PLANS
The combined company is now in the process of reviewing its pension and
postretirement benefit plans with a view to providing uniform benefits.
Completion and approval is expected sometime in 1999.
The combined company sponsors several defined benefit pension plans
covering substantially all of its employees. Plan benefits are based primarily
on years of service. Plan assets primarily consist of common and preferred
stocks including those of foreign issuers and corporate and government
obligations. At December 31, 1997, plan assets included an investment in
1,258,807 shares of the company's common stock with a fair value of $160.7
million.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost--benefits earned during the period............. $(21.1) $(20.5) $(21.2)
Interest cost on projected benefit obligation............... (38.1) (38.6) (40.1)
Actual return on assets..................................... 98.4 106.9 128.7
Net amortization and deferral............................... (15.3) (28.5) (47.8)
------ ------ ------
Pension income.............................................. $ 23.9 $ 19.3 $ 19.6
====== ====== ======
</TABLE>
61
<PAGE> 62
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The funded status of the combined defined benefit pension plans was as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of:
Vested benefits obligation................................ $402.5 $393.1
Nonvested benefits obligation............................. 64.7 59.9
------ ------
Accumulated benefit obligation.............................. 467.2 453.0
Effects of anticipated future compensation levels........... 79.5 71.4
------ ------
Projected benefit obligation................................ 546.7 524.4
Plan assets at fair value................................... 826.7 769.7
------ ------
Plan assets in excess of projected benefit obligation....... $280.0 $245.3
====== ======
</TABLE>
Each plan was separately valued based on the individual plan's underlying
terms and asset mix. The range of assumptions used in determining the projected
benefit obligation and pension income of the domestic defined benefit plans at
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Discount rate...................................... 7.0% - 7.5% 7.5% 7.3%
Salary increase assumption......................... 4.0% - 4.5% 4.0% - 4.5% 3.8% - 4.5%
Expected long-term rate of return on plan assets... 9.0% - 10.0% 9.0% - 10.0% 9.0% - 10.0%
</TABLE>
The projected benefit obligation of the foreign benefit plans totaled $51.3
and $45.8 million at December 31, 1997 and 1996, respectively. Plan assets in
excess of the projected benefit obligation for these plans totaled $4.0 and $5.6
million at December 31, 1997 and 1996, respectively.
The excess of plan assets over the projected benefit obligation included
the following components:
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Unamortized prior service cost.............................. $ (1.9) $ (2.6)
Net unrecognized loss from past experience different from
assumed and effects of changes in assumptions............. (48.3) (62.3)
Unamortized assets.......................................... 13.8 27.2
Prepaid pension cost........................................ 316.4 283.0
------ ------
Plan assets in excess of projected benefit obligation....... $280.0 $245.3
====== ======
</TABLE>
The straight-line method of amortization is used for prior service costs
and unrecognized gains and losses.
The company maintains various 401(k) savings plans and profit sharing plans
for employees meeting certain eligibility requirements. Under the existing
Household International plan, each participant's contribution is matched by the
company up to a maximum of 6 percent of the participant's compensation. The
existing Beneficial 401(k) savings plans provide for annual employer
contributions up to 2.5% of each eligible employee's annual compensation. For
1997, 1996 and 1995, total expense for these plans was $23.9, $22.1 and $21.8
million, respectively.
The company has several plans which provide medical, dental and life
insurance benefits to retirees and eligible dependents. These plans are funded
on a pay-as-you-go basis and cover substantially all employees
62
<PAGE> 63
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
who meet certain age and vested service requirements. The company has instituted
dollar limits on its payments under the plans to control the cost of future
medical benefits.
The company recognizes the expected postretirement costs on an accrual
basis, similar to pension accounting. The expected cost of postretirement
benefits is required to be recognized over the employees' years of service with
the company instead of the period in which the benefits are paid. Under the
existing Household International plans, the transition obligation is being
recognized over a period of 20 years. The transition obligation represents the
unfunded and unrecognized accumulated postretirement benefit obligation. Under
the existing Beneficial plan, the transition obligation was recognized up front
at the time Statements of Financial Accounting Standards No. 106 was adopted.
The net postretirement benefit cost included the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost-benefits earned during the period.............. $ (4.8) $ (4.8) $ (4.6)
Interest cost on accumulated postretirement benefit
obligation................................................ (12.1) (11.5) (14.7)
Net amortization and deferral............................... (2.8) (3.0) (4.7)
------ ------ ------
Net periodic postretirement benefit cost.................... $(19.7) $(19.3) $(24.0)
====== ====== ======
</TABLE>
The actuarial and recorded liabilities for postretirement benefit plans,
none of which have been funded, were:
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of postretirement obligation for:
Retirees.................................................. $120.7 $106.8
Fully eligible active participants........................ 21.0 19.9
Other active participants................................. 42.2 39.3
------ ------
Accumulated postretirement benefit obligation............... 183.9 166.0
Net unrecognized gain from past experience different from
assumed and effects of changes in assumptions............. 45.6 49.2
Unamortized liability....................................... (94.3) (100.6)
------ ------
Accrued postretirement benefit obligation................... $135.2 $114.6
====== ======
</TABLE>
Each plan was separately valued based on the individual plan's underlying
terms. The range of assumptions used in determining the projected benefit
obligation and pension cost of such plans at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 7.0%-7.5% 7.5% 7.3%
</TABLE>
The existing Household International plans assumed an annual compensation
increase of 4.0 percent. A 10.0 and 11.0 percent annual rate of increase in the
gross cost of covered health care benefits was assumed for 1998 and 1997,
respectively. This rate of increase is assumed to decline by 1 percent in each
year after 1998.
Under the existing Beneficial plans, a 10.2 percent pre-65 trend rate was
used for 1997 and 1996, with an ultimate rate of 5.0 percent in 2013. In
addition, a 9.7 percent post-64 trend rate was used for 1997 and 1996 with an
ultimate rate of 5.0 percent in 2018.
63
<PAGE> 64
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A one percentage point increase in the health care trend rate would have
increased the 1997 and 1996 accumulated postretirement benefit obligation by
$10.0 and $13.2 million, respectively, and the net periodic postretirement
benefit cost for 1997 and 1996 by $1.2 and $1.6 million, respectively.
17. INCOME TAXES
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Provision for income taxes related to operations............ $462.2 $461.2 $420.4
Income taxes related to adjustments included in common
shareholders' equity:
Unrealized gain (loss) on investments, net................ 10.0 (63.5) 119.9
Foreign currency translation adjustments.................. 19.7 (23.8) (7.7)
Exercise of stock options................................. (21.1) (14.3) (10.3)
------ ------ ------
Total................................................ $470.8 $359.6 $522.3
====== ====== ======
</TABLE>
Provisions for income taxes related to operations were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1997 1996 1995
------ ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
CURRENT
United States............................................... $326.3 $ 522.4 $406.9
Foreign..................................................... 60.0 54.9 51.0
------ ------- ------
Total current.......................................... 386.3 577.3 457.9
------ ------- ------
DEFERRED
United States............................................... 66.8 (114.4) (26.3)
Foreign..................................................... 9.1 (1.7) (11.2)
------ ------- ------
Total deferred......................................... 75.9 (116.1) (37.5)
------ ------- ------
Total income taxes..................................... $462.2 $ 461.2 $420.4
====== ======= ======
</TABLE>
The significant components of deferred income tax provisions attributable
to income from operations were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1997 1996 1995
----- ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Deferred income tax provision............................... $67.9 $ (90.3) $(19.9)
Adjustment of valuation allowance........................... (4.7) (19.5) (19.2)
Change in operating loss carryforwards...................... 12.7 (6.3) 1.6
----- ------- ------
Deferred income tax provision............................... $75.9 $(116.1) $(37.5)
===== ======= ======
</TABLE>
Income before income taxes from foreign operations was $143.2, $166.3 and
$99.6 million in 1997, 1996 and 1995, respectively.
64
<PAGE> 65
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective tax rates are analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit............. 2.3 2.0 2.2
Capital losses--Germany................................... (2.0) -- --
Leveraged lease tax benefits.............................. (1.9) (1.1) (1.4)
Recapture of life insurance policyholders' surplus account
balance................................................ -- -- 2.9
Other..................................................... (.4) .1 2.4
----- ----- -----
Effective tax rate.......................................... 33.0% 36.0% 41.1%
===== ===== =====
</TABLE>
Provision for U.S. income taxes had not been made at December 31, 1997 and
1996 on $160.7 and $181.5 million, respectively, of undistributed earnings of
foreign subsidiaries. Determination of the amount of unrecognized deferred tax
liability related to investments in foreign subsidiaries is not practicable. In
addition, provision for U.S. income taxes had not been made at December 31, 1997
and 1996 on $77.8 million of undistributed earnings of life insurance
subsidiaries accumulated as policyholders' surplus under tax laws in effect
prior to 1984. If this amount was distributed, the additional income tax payable
would be approximately $27.2 million. The company's U.S. savings and loan
subsidiary has credit loss reserves for tax purposes that arose in years
beginning before December 31, 1987 in the amount of $55.3 million. The amount of
deferred tax liability on the aforementioned credit loss reserves not recognized
totaled $20.4 million at December 31, 1997. Because this amount would become
taxable only in the event of certain circumstances which the company does not
expect to occur within the foreseeable future, no deferred tax liability has
been established for this item. At December 31, 1997 the company had net
operating loss carryforwards for tax purposes of $45.7 million, of which $8.0
million expire in 2000; $11.3 million expire in 2001; $12.7 million expire in
2002; $6.8 million expire in 2003; and $6.9 million expire in 2004.
Temporary differences which gave rise to a significant portion of deferred
tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------
1997 1996
------- -------
(IN MILLIONS)
<S> <C> <C>
DEFERRED TAX LIABILITIES
Receivables sold............................................ $ 456.6 $ 261.3
Leveraged lease transactions, net........................... 312.7 383.3
Pension plan assets......................................... 123.1 111.0
Other....................................................... 269.5 175.3
------- -------
Total deferred tax liabilities......................... 1,161.9 930.9
------- -------
DEFERRED TAX ASSETS
Credit loss reserves........................................ 864.0 700.0
Other....................................................... 368.5 371.5
------- -------
Total deferred tax assets.............................. 1,232.5 1,071.5
Valuation allowance......................................... (3.3) (8.0)
------- -------
Total deferred tax assets net of valuation allowance... 1,229.2 1,063.5
------- -------
Net deferred tax asset at end of year....................... $ 67.3 $ 132.6
======= =======
</TABLE>
65
<PAGE> 66
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. EARNINGS PER COMMON SHARE
In December 1997, the company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS No. 128"), which supersedes APB
Opinion No. 15 "Earnings Per Share" and simplifies the standards for computing
and presenting earnings per share ("EPS"). Under the new standards, the
presentation of primary EPS has been replaced with a presentation of basic EPS.
Basic EPS is computed excluding dilution caused by common stock equivalents such
as stock options. The presentation of fully diluted EPS has been replaced with a
presentation of diluted EPS, which is calculated in a similar fashion to how
fully diluted EPS had been computed. Previously reported EPS has been restated
to conform to the new rules.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
DILUTED BASIC DILUTED BASIC DILUTED BASIC
------- ------ ------- ------ ------- ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Net income.................................. $940.3 $940.3 $819.6 $819.6 $603.7 $603.7
Preferred dividends......................... (17.0) (17.0) (21.9) (21.9) (31.6) (31.6)
------ ------ ------ ------ ------ ------
Earnings available to common shareholders... $923.3 $923.3 $797.7 $797.7 $572.1 $572.1
====== ====== ====== ====== ====== ======
AVERAGE SHARES
Common...................................... 470.2 470.2 454.6 454.6 454.0 454.0
Common equivalents.......................... 8.9 -- 7.7 -- 8.0 --
------ ------ ------ ------ ------ ------
Total.................................. 479.1 470.2 462.3 454.6 462.0 454.0
====== ====== ====== ====== ====== ======
Earnings per common share................... $ 1.93 $ 1.97 $ 1.73 $ 1.76 $ 1.24 $ 1.26
====== ====== ====== ====== ====== ======
</TABLE>
19. COMMITMENTS AND CONTINGENT LIABILITIES
In 1992, the Internal Revenue Service ("IRS") completed its examination of
Beneficial's federal income tax returns for 1984 through 1987. The IRS proposed
$142.0 million in adjustments that relate principally to activities of a former
subsidiary, American Centennial Insurance Company ("ACIC"), prior to its sale in
1987.
In order to limit the further accrual of interest on the proposed
adjustments, Beneficial paid $105.5 million of tax and interest during the third
quarter of 1992.
The issues were not resolved during the administrative appeals process, and
the IRS issued a statutory Notice of Deficiency asserting the unresolved
adjustments and increased the disallowance to $195.0 million in the third
quarter of 1996.
Beneficial has initiated litigation in the United States Tax Court to
oppose the disallowance. While the conclusion of this matter in its entirety
cannot be predicted with certainty, management does not anticipate the ultimate
resolution to differ materially from amounts accrued.
The company and subsidiaries are involved in various other legal
proceedings in the normal course of business. Management believes the aggregate
liabilities, if any, resulting from such actions would not have a material
adverse effect on the consolidated financial position of the company. However,
as the ultimate resolution of these proceedings is influenced by factors that
are outside of the company's control, it is reasonably possible the company's
estimated liability under these proceedings may change. See Note 14 for
discussion of lease commitments.
66
<PAGE> 67
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. GEOGRAPHIC DATA
The following is a summary of assets, revenues and operating profit of the
company by country:
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS REVENUES OPERATING PROFIT
--------------------------------- ------------------------------ ------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
--------- --------- --------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States........ $39,133.1 $38,630.7 $39,082.7 $7,229.2 $6,753.4 $6,446.0 $1,278.0 $1,138.5 $ 936.4
United Kingdom....... 5,071.3 4,086.5 3,084.1 760.6 630.4 583.5 146.2 108.8 93.3
Canada............... 2,142.6 2,163.5 2,090.6 339.8 328.1 403.2 39.2 39.0 21.7
Germany.............. 401.0 413.7 455.1 31.2 55.2 67.4 (65.5) (2.0) (26.2)
Ireland.............. 69.0 37.6 10.5 33.8 17.9 4.7 4.6 (3.5) (1.1)
--------- --------- --------- -------- -------- -------- -------- -------- --------
Total............ $46,817.0 $45,332.0 $44,723.0 $8,394.6 $7,785.0 $7,504.8 $1,402.5 $1,280.8 $1,024.1
========= ========= ========= ======== ======== ======== ======== ======== ========
</TABLE>
21. ACCOUNTING PRONOUNCEMENTS
In March 1998, Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), was
issued. This statement, effective for financial statements issued for fiscal
years beginning after December 15, 1998, provides guidance on accounting for the
costs of computer software developed or obtained for internal use. We do not
expect the adoption of SOP 98-1 to have a material impact on our consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. FAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. FAS No.
133 is effective for fiscal years beginning after June 15, 1999, and can be
implemented as of the beginning of any fiscal quarter after issuance (that is,
fiscal quarters beginning June 16, 1998 and thereafter). FAS No. 133 cannot be
applied retroactively. We expect to adopt FAS No. 133 on January 1, 2000 and
have not yet quantified the impacts of adopting this statement on our financial
statements.
67
<PAGE> 68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Household International, Inc.
We have audited the accompanying consolidated balance sheets of Household
International, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
preferred stock and common shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. The consolidated statements
give retroactive effect to the merger of Household International, Inc. and
Beneficial Corporation on June 30, 1998, which has been accounted for as a
pooling of interests as described in Note 2. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Household International, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997, after giving retroactive
effect to the merger of Household International Inc. and Beneficial Corporation
as described in Note 2, all in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
June 30, 1998
68
