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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-75
HOUSEHOLD FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 36-1239445
(State of Incorporation) (I.R.S. 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: (708) 564-5000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------------------------------------------------------ ------------------------
<S> <C>
9% SENIOR SUBORDINATED NOTES, DUE SEPTEMBER 28, 2001 NEW YORK STOCK EXCHANGE
9 5/8% SENIOR SUBORDINATED NOTES, DUE JULY 15, 2000 NEW YORK STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. /X/
AS OF MARCH 15, 1995, THERE WERE 1,000 SHARES OF REGISTRANT'S COMMON STOCK
OUTSTANDING, ALL OF WHICH ARE OWNED BY HOUSEHOLD INTERNATIONAL, INC.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)
(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT.
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HOUSEHOLD FINANCE CORPORATION
PART I.
ITEM 1. BUSINESS.
Household Finance Corporation ("HFC" or the "Company") is a subsidiary of
Household International, Inc. ("Household International"). HFC and its
subsidiaries offer a diversified range of financial services. The principal
products of HFC's consumer financial services business are cash loans, including
home equity loans secured by first and second mortgages and unsecured credit
advances (including revolving and closed-end personal loans) to middle-income
consumers in the United States. Loans are made through branch lending offices
and through direct marketing efforts. In 1992, HFC launched a new portfolio
acquisition business. At December 31, 1994, such business serviced approximately
$2 billion in receivables. The Company believes that the portfolio acquisition
business provides an additional source for developing new customer
relationships.
Through banking subsidiaries located in Salinas, California; Wood Dale,
Illinois and Las Vegas, Nevada, the Company issues both VISA* and MasterCard*
credit cards, including the GM CardSM issued from its Las Vegas, Nevada banking
subsidiary. The GM Card is a general-purpose credit card which allows the users
thereof to earn credit toward the purchase of new General Motors vehicles. These
banks engage only in consumer credit card operations.
Household Retail Services ("HRS") is a revolving credit merchant
participation business. Through subsidiaries of HFC, HRS provides sales
financing and purchases, originates and services merchants' private-label
revolving charge accounts. During 1994, portions of HRS' operations began to be
integrated into Household Credit Services (the tradename used for marketing
bankcards issued by various financial institutions affiliated with Household
International) in order to reduce costs and better utilize Household
International's resources.
In conjunction with its consumer finance operations and where applicable
laws permit, HFC makes available to customers credit life, credit accident and
health, and household contents insurance. Credit life and credit accident and
health insurance are generally written directly by, or reinsured with, HFC's
insurance subsidiary, Alexander Hamilton Life Insurance Company of America
("Alexander Hamilton"). Alexander Hamilton is also engaged in the sale of
ordinary life, annuity, and specialty insurance products to the general public
through approximately 10,600 independent agents throughout the United States.
HFC also is engaged in commercial finance involving leveraged leases,
privately placed, limited term preferred stocks, and selected commercial
financing of equipment or property. At December 31, 1991 the Company
discontinued lending in certain commercial product lines. The assets and results
of operations related to such product lines were reported in prior years in a
separate segment called Liquidating Commercial Lines ("LCL"). Because of the
reduced size and potential loss exposure, the Company has eliminated reporting
LCL as a separate segment and has combined the results of operations of LCL
assets with the results of the Finance and Banking segment. See "Management's
Discussion and Analysis" on pages 2 and 3 for further discussion of commercial
product lines.
ITEM 2. PROPERTIES.
Substantially all of HFC's branch office and headquarters space is rented
with the exception of its corporate headquarters in Prospect Heights, Illinois;
Alexander Hamilton's headquarters in Farmington Hills, Michigan; and
administration buildings in Northbrook, Illinois; Salinas, California and Las
Vegas, Nevada.
ITEM 3. LEGAL PROCEEDINGS.
There is no litigation pending which management and counsel for the Company
consider to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted.
---------------
* VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International Incorporated, respectively.
1
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PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All 1,000 shares of HFC's outstanding common stock are owned by Household
International. Consequently, there is no market in HFC's common stock. HFC also
has outstanding 1 million depositary shares which represent 1/3,000 share of
term cumulative preferred stock (with a liquidation value of $.3 million per
share) to institutional investors not affiliated with HFC.
During 1994 HFC paid cash dividends on its common stock to Household
International totaling $115.0 million. During 1993 HFC did not pay cash
dividends on its common stock. In addition, HFC paid cash dividends on its
preferred stock totaling $7.2 and $8.7 million in 1994 and 1993, respectively.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT DATA
As described below, the Company recharacterized its business segment data
in 1994.
As of December 31, 1991, Household Finance Corporation decided to withdraw
from the higher-risk portion of its commercial finance business by discontinuing
selected product lines. The assets and results of operations related to these
product lines were reported in prior years in a separate segment called
Liquidating Commercial Lines ("LCL"). The assets were separately managed and had
a risk profile that was significantly higher than the Company's Finance and
Banking receivables. LCL assets of approximately $2.1 billion at December 31,
1991 and $1.6 billion at December 31, 1993 have been reduced to about $700
million at December 31, 1994. Nonperforming LCL assets of nearly $700 million at
December 31, 1991 and $514 million at December 31, 1993 have been reduced to
$205 million at December 31, 1994. Credit loss reserves as a percent of
nonperforming LCL loans at December 31, 1994 were 94.9 percent.
In 1994 commercial real estate properties totaling approximately $120
million were sold at net book value. In addition, in the fourth quarter the
Company formed a joint venture, maintaining a 50 percent ownership interest, and
entered into an agreement to sell to the venture on a non-recourse basis
performing commercial receivables with a net book value of $398 million, $193
million of which were previously classified as LCL assets. These assets have
been separately disclosed as Assets Pending Sale in the accompanying Balance
Sheet at December 31, 1994. The joint venture received commitments for
third-party, non-recourse financing to complete the transaction, which is
scheduled to close in the first quarter of 1995.
Because of the reduced size and potential loss exposure, the Company
eliminated reporting the separate LCL segment in the accompanying financial
statements. Results of operations of these discontinued product lines have been
combined with the results of the Finance and Banking segment. These
reclassifications streamline reporting results of operations and more accurately
reflect the Company's business.
To better analyze financial condition and results of operations and related
trends, earnings and selected balance sheet data for years prior to 1994 have
been reclassified to reflect the combination of LCL activities into the Finance
and Banking segment. The Company's results of operations are now reported in two
2
<PAGE> 4
segments -- Finance and Banking and Individual Life Insurance. Net income and
assets of these segments were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1994 1993 1992
--------- --------- ---------
(ALL DOLLAR AMOUNTS ARE STATED IN
MILLIONS)
<S> <C> <C> <C>
Net Income:
Finance and Banking..................................... $ 205.3 $ 175.2 $ 197.8
Individual Life Insurance............................... 51.1 45.2 41.7
--------- --------- ---------
Total................................................ $ 256.4 $ 220.4 $ 239.5
======== ======== ========
Return on Average Common Shareholder's Equity(1)(2)....... 13.37% 13.80% 16.13%
Return on Average Owned Assets............................ 1.22 1.16 1.30
Efficiency Ratio(3)....................................... 52.2 50.1 51.7
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------------------------
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Assets:
Finance and Banking..................................... $13,570.0 $12,891.2 $12,220.2
Individual Life Insurance............................... 7,441.4 6,959.0 5,926.2
--------- --------- ---------
Total................................................ $21,011.4 $19,850.2 $18,146.4
======== ======== ========
</TABLE>
Pro forma segment information for 1992 through 1994, assuming such
reclassifications had not been made, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net Income:
Finance and Banking....................................... $ 213.1 $ 196.7 $ 210.1
Liquidating Commercial Lines.............................. (7.8) (21.5) (12.3)
--------- --------- ---------
Subtotal.................................................. 205.3 175.2 197.8
Individual Life Insurance................................. 51.1 45.2 41.7
--------- --------- ---------
Total(4)............................................... $ 256.4 $ 220.4 $ 239.5
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------------------
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Assets:
Finance and Banking....................................... $12,870.7 $11,335.5 $10,369.0
Liquidating Commercial Lines.............................. 699.3 1,555.7 1,851.2
--------- --------- ---------
Subtotal.................................................. 13,570.0 12,891.2 12,220.2
Individual Life Insurance................................. 7,441.4 6,959.0 5,926.2
--------- --------- ---------
Total.................................................. $21,011.4 $19,850.2 $18,146.4
======== ======== ========
</TABLE>
---------------
(1) Effective December 31, 1993 the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("FAS No. 115") and has included unrealized holding
gains and losses on available-for-sale investments as a net amount in a
separate component of common shareholder's equity, net of income taxes and,
for certain investments of the life insurance operation, related unrealized
deferred insurance policy acquisition cost adjustments. The 1994 return on
average common shareholder's equity ratio was 13.12 percent before the
market value adjustment. The 1993 return on average common shareholder's
equity ratio was not materially impacted by the adoption of FAS No. 115.
(2) The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS No. 109") effective January 1, 1993. As
a result of implementing FAS No. 109, retained earnings for all periods
prior to December 31, 1993 have been reduced by approximately $62 million
from the amounts previously reported.
(3) Ratio of salaries and fringe benefits and other operating expenses to net
interest margin and other revenues less policyholders' benefits.
(4) Core earnings, as previously defined, included operating results of the
Finance and Banking and Individual Life Insurance segments. Such earnings
were $264.2, $241.9 and $251.8 million for 1994, 1993 and 1992,
respectively.
3
<PAGE> 5
CONSOLIDATED OVERVIEW
Operations Summary
- Net income in 1994 was $256.4 million, a 16 percent increase over 1993
net income of $220.4 million. Net income in 1993 was down from 1992
earnings of $239.5 million.
- All businesses showed improved results in 1994 compared to 1993 and 1992:
Private-label credit card earnings increased primarily due to growth in
receivables and improved efficiency. Bankcard earnings improved primarily
due to lower credit costs. Improvement in domestic consumer finance
earnings was driven by lower credit costs and growth in receivables. The
commercial business (which includes operations of the former LCL segment)
experienced improved operating results in 1994 compared to 1993 and 1992
primarily due to lower credit costs and real estate owned expenses. See
the Overview section for the Finance and Banking segment on pages 5 and 6
for further discussion of these operations.
- The Company sold its Australian subsidiary as of December 31, 1994. In
the fourth quarter the Company recorded an after-tax loss on sale of $14
million.
- The Company's efficiency ratio (which is defined as the ratio of salaries
and fringe benefits and other operating expenses to net interest margin
and other revenues less policyholders' benefits) was 52.2 percent
compared to 50.1 and 51.7 percent in 1993 and 1992, respectively. The
increase primarily was due to programs undertaken in 1994, including
initiatives to improve future operating efficiency and technology
expenditures to promote and support growth. The 1994 ratio also was
affected by the loss on sale of the Australian subsidiary. The efficiency
ratio excluding this loss was 51.0 percent.
Balance Sheet Review
- Owned assets totaled $21.0 billion at December 31, 1994, up 6 percent
from year-end 1993. The increase primarily was due to a 15 percent
increase in unsecured receivables.
- Managed consumer receivables (owned receivables plus those serviced with
limited recourse) grew 9 percent in 1994. The majority of the growth
occurred in unsecured products, primarily domestic other unsecured
receivables, which grew 34 percent; bankcards, which were up 16 percent;
and private-label credit cards, which increased 15 percent. The home
equity receivable portfolio was flat due to the continued liquidation of
an acquired domestic portfolio, which offset new retail originations.
- Consumer two-months-and-over contractual delinquency ("delinquency")
continued to decline throughout the year due to strict credit standards
and an improving economy. Total consumer delinquency as a percent of
managed consumer receivables was 3.58 percent at December 31, 1994, down
significantly from 4.33 percent at December 31, 1993. The chargeoff
ratio for the managed consumer portfolio was 3.20 percent compared to
3.61 percent in 1993. The ratio of total managed credit loss reserves,
including unallocated amounts, to nonperforming loans for all managed
consumer and commercial products increased to 103.5 percent at December
31, 1994 from 78.6 percent at December 31, 1993. See page 9 for
discussion of credit loss reserve adequacy.
- The Company's debt to equity ratio was 5.9 to 1 at December 31, 1994
compared to 6.2 to 1 at December 31, 1993. These ratios were affected by
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("FAS No. 115") which
requires that unrealized gains and losses on certain debt and equity
securities be recorded as an adjustment to shareholder's equity. The
rise in interest rates during 1994 resulted in a net unrealized loss in
the Company's available-for-sale investment portfolio and a reduction in
shareholder's equity of $83.4 million. While FAS No. 115 provides for
the adjustment of certain debt and equity securities to fair value, it
does not allow for a corresponding adjustment for a change in related
liabilities. Therefore, the unrealized loss does not reflect the total
change in the economic value of shareholder's equity due to higher
interest rates. The Company believes that the change in fair value of
liabilities should offset a significant amount of the reduction in the
fair value of its investment portfolio. Excluding the effect of the FAS
No. 115 component of shareholder's equity, the Company's debt to equity
ratio was 5.6 to 1 at December 31, 1994, compared to 6.3 to 1 at
December 31, 1993.
4
<PAGE> 6
FINANCE AND BANKING
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1994 1993 1992
--------- --------- ---------
(ALL DOLLAR AMOUNTS ARE STATED IN
MILLIONS)
<S> <C> <C> <C>
Finance income.......................................... $ 1,496.8 $ 1,318.1 $ 1,334.6
Interest income from noninsurance investment
securities........................................... 38.7 40.9 34.9
Interest expense........................................ 612.5 500.9 620.3
--------- --------- ---------
Net interest margin..................................... 923.0 858.1 749.2
Provision for credit losses on owned receivables........ 435.9 494.5 368.3
--------- --------- ---------
Net interest margin after provision for credit losses... 487.1 363.6 380.9
--------- --------- ---------
Securitization and servicing fee income................. 373.9 383.4 369.2
Insurance premiums and contract revenues................ 130.9 114.7 109.2
Investment income....................................... 11.7 11.7 10.5
Fee income.............................................. 83.1 60.7 50.5
Other income............................................ 2.3 77.5 63.5
--------- --------- ---------
Total other revenues.................................... 601.9 648.0 602.9
--------- --------- ---------
Salaries and fringe benefits............................ 211.5 196.7 211.5
Other operating expenses................................ 541.3 498.0 447.3
Policyholders' benefits................................. 55.8 60.3 56.4
--------- --------- ---------
Total costs and expenses................................ 808.6 755.0 715.2
--------- --------- ---------
Income before income taxes.............................. 280.4 256.6 268.6
Income taxes............................................ 75.1 81.4 70.8
--------- --------- ---------
Net income.............................................. $ 205.3 $ 175.2 $ 197.8
======== ======== ========
End-of-period receivables:
Owned................................................ $10,151.2 $10,149.8 $ 9,475.8
Serviced with limited recourse....................... 7,808.8 7,131.1 7,946.9
--------- --------- ---------
Managed receivables..................................... 17,960.0 17,280.9 17,422.7
Serviced with no recourse............................... 1,312.9 1,649.5 370.9
--------- --------- ---------
Receivables owned or serviced........................ $19,272.9 $18,930.4 $17,793.6
======== ======== ========
Average receivables:
Owned................................................ $10,824.2 $ 9,876.1 $ 9,912.9
Serviced with limited recourse....................... 6,738.2 7,477.4 6,829.3
--------- --------- ---------
Average managed receivables............................. 17,562.4 17,353.5 16,742.2
Serviced with no recourse............................... 1,352.6 1,055.6 1,071.8
--------- --------- ---------
Average receivables owned or serviced................ $18,915.0 $18,409.1 $17,814.0
======== ======== ========
Return on owned assets.................................. 1.48% 1.38% 1.56%
Net interest margin to average interest-earning
assets............................................... 8.08 8.25 7.09
</TABLE>
OVERVIEW
Finance and Banking earnings increased to $205.3 million from $175.2
million in 1993 and $197.8 million in 1992 as operating results improved in all
businesses.
Private-label credit card earnings increased primarily due to growth in the
managed portfolio and improved efficiency. Bankcard earnings improved primarily
due to lower credit costs. Bankcard earnings also benefited from higher fee
income, partially offset by higher operating expenses, resulting from receivable
growth. During 1994 Household International designated a subsidiary bank of HFC
as the issuer of new
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General Motors ("GM") Card accounts. The GM Card is a co-branded credit card
which was launched in September 1992 as the result of an alliance between
General Motors Corporation and Household International. Household International
previously designated a subsidiary of Household Bank, f.s.b., an affiliate of
the Company, as the issuer of the GM Card.
Consumer finance earnings increased primarily due to higher net interest
margin and lower credit costs. Servicing fee income also increased as a result
of an unsecured consumer loan portfolio which the Company began servicing
without recourse in the third quarter of 1993.
Operating results of the commercial business improved over the prior year
primarily due to lower credit costs, write-downs and net expenses for real
estate owned. Operating results for 1993 reflected the resolution of the
Company's largest nonaccrual commercial loan. The Company reached a cash
settlement on this loan in 1993 which resulted in a higher-than-anticipated
chargeoff. See page 3 for pro forma results of the former LCL segment.
RECEIVABLES
Managed consumer receivables increased 9 percent in 1994. See Balance Sheet
Review on page 4 for further discussion. Owned consumer receivables were $9.1
billion at December 31, 1994, up 9.5 percent compared to $8.3 billion at
December 31, 1993. Changes in owned receivables from period to period may vary
depending on the timing and significance of securitization transactions. The
Company securitized and sold with limited recourse approximately $2.5 billion of
receivables in 1994 compared to $1.7 billion in 1993.
NET INTEREST MARGIN
Net interest margin was $923.0 million in 1994, up from $858.1 million in
1993 primarily due to higher levels of interest-earning assets and a shift in
product mix towards higher-yielding credit card and other unsecured receivables,
partially offset by higher funding costs. Net interest margin as a percent of
average owned interest-earning assets was 8.08 percent in 1994, compared to 8.25
percent in 1993 and 7.09 percent in 1992. This decrease was attributable to
higher funding costs, narrower spreads on variable rate products, and the impact
of slower repricing of the Company's prime-based assets compared to variable
rate liabilities which reprice on different indices. These factors were
partially offset by the shift in product mix towards higher-yielding
receivables.
Due to the securitization of assets over the past several years, the
comparability of net interest margin between years may be affected by the level
and type of assets securitized. As receivables are securitized and sold rather
than held in portfolio, net interest income is shifted to securitization and
servicing fee income. Net interest margin on a managed basis, assuming
receivables securitized and sold were instead held in the portfolio, was $1.4
billion in both 1994 and 1993. Net interest margin on a managed basis as a
percent of average managed interest-earning assets decreased from 7.84 percent
in 1993 to 7.60 percent in 1994. Net interest margin on an owned basis was
greater than on a managed basis because home equity receivables, which have
lower spreads, were a larger proportion of the portfolio serviced with limited
recourse than of the owned portfolio. See pages 15 and 16 for a discussion of
the Company's interest rate risk management policy.
PROVISION FOR CREDIT LOSSES
The provision for credit losses for receivables totaled $435.9 million,
down 12 percent from $494.5 million in 1993 but up 18 percent from 1992's level.
The level of provision for credit losses may vary from period to period,
depending on the significance of securitizations and sales of receivables in a
particular period, as provision related to the securitized receivables is
transferred to securitization and servicing fee income.
The decrease in the provision in 1994 reflected the underlying improvement
in the credit quality of the commercial portfolio and in the managed consumer
portfolio which experienced lower delinquency and chargeoffs in 1994 compared to
1993. In addition, the 1993 provision reflected a chargeoff recognized in
connection with the cash settlement of the Company's largest commercial credit
exposure at the time. See the
6
<PAGE> 8
credit quality section on pages 10 through 12 for further discussion of factors
affecting the provision for credit losses.
OTHER REVENUES
Securitization and servicing fee income consists of two components: income,
net of provision for credit losses, associated with the securitizations and
sales of receivables with limited recourse and servicing fee income related
primarily to the servicing of unsecured receivables. Securitization income
decreased in 1994 due to lower levels of securitized receivables outstanding.
This decrease was partially offset by an increase in servicing fee income
primarily due to a change in the composition of the serviced portfolio which
occurred in the third quarter of 1993 when the Company began servicing without
recourse an unsecured consumer loan portfolio. This portfolio totaled $692.5
million at December 31, 1994. Servicing fee income also increased in 1994 due to
servicing receivable growth. Average receivables serviced with no recourse
increased to $1.4 billion in 1994, up from $1.1 billion in 1993 and 1992.
Insurance premiums and contract revenues of $130.9 million were up from
$114.7 million in 1993 and $109.2 million in 1992. The increase was due to
higher sales volumes of specialty and credit insurance.
Fee income includes revenues from fee-based products such as bankcards and
private-label credit cards. Fee income was $83.1 million, up from $60.7 million
in 1993 and $50.5 million in 1992. The increase was primarily due to interchange
and other fees related to growth in owned credit card receivables.
Other income in 1994 was down due primarily to the loss on the sale of the
Company's Australian subsidiary and trading losses in 1994, compared to gains in
1993.
EXPENSES
Salaries and fringe benefits were $211.5 million, compared to $196.7
million in 1993 and $211.5 million in 1992. Other operating expenses were up 9
percent over 1993 and 21 percent over 1992. Operating expenses increased
primarily due to the servicing requirements of the larger owned or serviced
receivables portfolio, initiatives undertaken to improve efficiency and
expenditures to promote and support growth.
The effective tax rate in 1994 was 26.8 percent compared to 31.7 percent in
1993 and 26.4 percent in 1992. The 1994 effective tax rate reflected the
favorable resolution of several prior year state tax issues and the recognition
of U.S. tax benefits of accumulated losses of the Australian subsidiary upon its
disposition.
CREDIT MANAGEMENT POLICIES
The Company's receivable portfolios and credit management policies
historically have been divided into two distinct components--consumer and
commercial. For consumer products, credit policies focus on product type and
specific portfolio risk factors. The consumer credit portfolio is diversified by
product and geographic location. The commercial credit portfolio is monitored on
an individual transaction basis and is also evaluated based on overall risk
factors. See Note 3, "Receivables" in the accompanying financial statements for
receivables by product type.
CONSUMER
The consumer credit risk management process has four key elements:
- Computerized scoring systems to assess the risk characteristics of new
applicants and monitor the payment behavior of existing customers for
early warning signs of troubled accounts.
- A centralized credit system for past due accounts to make the collection
process more productive and provide the analytical capability to measure
the effectiveness of collection strategies.
- A chargeoff policy intended to eliminate problem loans early and improve
the quality of the remaining portfolio.
7
<PAGE> 9
- A senior executive position of credit risk manager in each consumer
lending operation which places credit management at a high level of
priority and provides the means for the credit function to interact more
productively with other business functions.
Based on this credit risk management process, expected credit losses for
each consumer product are estimated using a statistical analysis of historical
delinquency and chargeoff levels. Credit loss reserves are based on these
statistical estimates and additional reserves to reflect management's judgment
of portfolio risk factors. These risk factors include overall economic
conditions, regional considerations and current trends in growth, underwriting
or collection practices and changes in product mix which might not be
appropriately considered in historical statistical experience.
The Company suspends accrual of interest on all consumer receivables when
payments are three months contractually past due, except for bankcards and
private-label credit cards. On these credit card receivables, consistent with
industry practice, interest continues to accrue until the receivable is charged
off. Consumer loans are charged off when an account is contractually delinquent
for a preestablished period of time. The period of time is dependent on the
terms, collateral and credit loss experience of each consumer product category.
This period ranges from 6 to 9 months.
The Company's domestic consumer businesses lend funds nationwide, with
California accounting for 22 percent of total domestic managed consumer
receivables. It is the only state with receivables in excess of 10 percent of
domestic managed receivables. Due to its centralized underwriting, collection
and processing functions, the Company is able to quickly revise underwriting
standards and intensify collection efforts for specific geographic locations.
COMMERCIAL
Commercial loans are underwritten based upon specific criteria by product,
including financial characteristics of the borrower, value of underlying
collateral, economic conditions and pricing. All financing commitments in excess
of $1 million must be approved by an investment committee consisting of senior
management.
The Company's ongoing credit monitoring process evaluates the financial and
operating performance of all commercial borrowers. As part of this process, the
Company administers an asset classification policy which requires all assets to
be formally reviewed and assigned a rating on a quarterly basis. This policy
utilizes a process similar to that used by banking regulatory authorities and
specifically addresses the need for chargeoffs. The conclusions of the
monitoring process are reported to senior management on a quarterly basis.
The adequacy of the credit loss reserves is evaluated quarterly based upon
the ongoing credit monitoring process and evaluation of the probability of
future losses in the portfolio as a whole given its geographic and industry
diversification, historical loss experience and the potential impact on the
portfolio of existing and future economic conditions. Substantially all
commercial credit losses have related to assets of the former LCL segment.
Commercial loans are placed on nonaccrual when they become 90 days past
due, or sooner if the Company believes that the loan has experienced significant
adverse developments that could result in a loss of interest or principal. There
are no commercial loans that are 90 days past due and on full accrual status.
Loans are disclosed as renegotiated loans or troubled debt restructurings if the
rate of interest has been reduced because of the inability of the borrower to
meet the original terms of the loan. Such loans continue to accrue interest at
the renegotiated rate, unless they become 90 days past due, because the Company
believes the borrowers will be able to meet their obligations following the
restructuring.
Commercial loans that are modified in the normal course of business, for
which additional consideration is received or significant concessions are not
made, are not reported as renegotiated loans or troubled debt restructurings.
Real estate owned is recorded at the lower of cost or fair value less estimated
costs to sell. These values are periodically reviewed and, if appropriate,
reduced.
8
<PAGE> 10
LOSS RESERVES
The level of reserves for credit losses is maintained in accordance with
the above-mentioned credit risk policy. See Note 1, "Summary of Significant
Accounting Policies" on pages F-7 and F-8 in the accompanying financial
statements for further description of the basis for establishing such reserves.
Because of different loss characteristics of various product lines, industry
reserve comparisons are less meaningful on an overall basis, and reserves should
be evaluated by product. See Note 3, "Receivables" for an analysis of credit
loss reserves. While management allocates reserves, including those in excess of
statistical requirements, among the Company's various products, all credit loss
reserves are considered to be available to cover total loan losses.
CREDIT LOSS RESERVES
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
Owned consumer.............................................................. $271.8 $265.0
Serviced with limited recourse.............................................. 181.7 134.5
------ ------
Managed consumer............................................................ 453.5 399.5
Commercial(1)............................................................... 141.9 187.7
------ ------
Total managed credit loss reserves..................................... $595.4 $587.2
====== ======
</TABLE>
CREDIT LOSS RESERVES (AS A PERCENT OF RECEIVABLES)
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------
1994 1993
------ ------
<S> <C> <C>
Owned consumer.............................................................. 2.99% 3.19%
Commercial(1)............................................................... 13.30 10.14
------ ------
Total owned............................................................ 4.08% 4.46%
====== ======
Managed consumer............................................................ 2.68% 2.59%
Commercial(1)............................................................... 13.30 10.14
------ ------
Total managed.......................................................... 3.32% 3.40%
====== ======
</TABLE>
---------------
(1) Includes reserves of both continuing commercial activities and the former
LCL segment.
The Company's total managed credit loss reserves increased slightly to
$595.4 million from $587.2 million at December 31, 1993. The ratio of managed
credit loss reserves to total managed receivables was 3.32 percent, down
slightly from 3.40 percent at December 31, 1993 due primarily to improved credit
quality in the Company's consumer and commercial portfolios. The ratio of total
managed credit loss reserves to total nonperforming managed loans increased to
103.5 percent from 78.6 percent at December 31, 1993 as the Company continued to
remain cautious about the impact of the economy on the portfolio.
Managed consumer credit loss reserves increased 14 percent compared to a
year ago, while managed consumer receivables grew 9 percent. The ratio of
managed consumer credit loss reserves to managed consumer delinquency increased
to 75.0 percent from 59.8 percent at December 31, 1993. Despite the continued
decline in managed consumer delinquency, the Company strengthened credit loss
reserves related to credit card and other unsecured receivables due to growth in
these products which, historically, have higher chargeoff rates than secured
products.
Credit loss reserves for commercial receivables decreased during 1994
consistent with the decline in the level of commercial receivables. Reserve
coverage for nonperforming commercial receivables increased, as the ratio of
commercial credit loss reserves to nonperforming commercial loans rose from 71.1
percent at December 31, 1993 to 103.1 percent. The Company's commercial
receivables portfolio was reduced by $785 million in 1994 due to repayments and
the anticipated transfer without recourse of $398 million of commercial loans to
a joint venture as described previously.
9
<PAGE> 11
CREDIT QUALITY
During 1994, the Company experienced improved credit quality in virtually
all product categories. This improvement was a result of better domestic
economic conditions and a higher quality of recently originated receivables.
Delinquency at year-end 1994 fell below the year-ago level. Chargeoffs in 1994
also were below the prior year. Nonperforming consumer and commercial assets
also declined during the year due to a stabilized real estate market and the
disposition of several nonperforming commercial assets. Delinquency and
chargeoff statistics continued to be impacted by the growth of unsecured
receivables. Because other unsecured, merchant participation and bankcard
receivables have higher delinquency and chargeoff rates than home equity loans,
this change in product mix has the effect of increasing the overall delinquency
and chargeoff statistics of the Company's portfolio compared to a portfolio of
predominantly secured products.
CONSUMER DELINQUENCY
Delinquency levels are monitored for both receivables owned and receivables
managed. The Company looks at delinquency levels which include receivables
serviced with limited recourse because this portfolio is subjected to
underwriting standards comparable to the owned portfolio; is managed by
operating personnel without regard to portfolio ownership; and results in a
similar credit loss exposure for the Company.
TWO-MONTHS-AND-OVER CONTRACTUAL DELINQUENCY
(AS A PERCENT OF MANAGED CONSUMER RECEIVABLES)
<TABLE>
<CAPTION>
1994 QUARTER END 1993 QUARTER END
---------------------------- ------------------------------
4 3 2 1 4 3 2 1
---- ---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic:
First mortgage...................... .98% -- -- -- -- -- -- --
Home equity......................... 2.89 2.84% 2.98% 3.32% 3.37% 3.62% 3.44% 3.71%
Other secured....................... 1.23 1.18 3.22 1.25 2.22 3.41 6.14 5.25
Bankcard............................ 2.88 3.18 3.40 3.52 3.61 3.87 3.83 3.81
Merchant participation.............. 4.87 5.03 4.53 5.02 5.01 5.43 5.73 6.36
Other unsecured..................... 5.40 6.00 6.42 6.97 7.19 7.70 8.04 8.45
---- ---- ---- ---- ---- ---- ----- -----
Total domestic.............. 3.58 3.77 3.85 4.14 4.21 4.51 4.53 4.80
Foreign:
Australia........................... -- 6.84 7.43 7.98 8.93 9.59 10.95 12.06
---- ---- ---- ---- ---- ---- ----- -----
Total....................... 3.58% 3.85% 3.95% 4.24% 4.33% 4.63% 4.69% 4.99%
==== ==== ==== ==== ==== ==== ===== =====
</TABLE>
Delinquency as a percent of managed consumer receivables fell 17 percent in
1994, driven by improvements in home equity receivables and all unsecured
products.
Improvements in the home equity and other unsecured receivables portfolios
were primarily due to improved economic conditions and growth of higher quality
receivables which were recently underwritten. Vintage analyses of home equity
and other unsecured receivables continued to demonstrate the favorable
performance of these receivables. A new credit scoring system implemented in
1994 for these products has allowed the Company to access a wider customer base
with no significant change to the risk posture of the receivables.
First mortgage delinquency related to a portfolio which the Company entered
into an agreement to underwrite and service with limited recourse, beginning in
the third quarter of 1994.
Bankcard delinquency decreased from September 30, 1994 and from December
31, 1993. Delinquency at year-end 1994 benefited from the issuance of GM Card
receivables since June 1994. This new product positively impacted the
delinquency percent, as new accounts were added to the receivables base but had
only a minimal impact on delinquency. Although the Company believes that
delinquency and credit loss experience for the GM Card program will be better
than industry averages, delinquencies for the portfolio will naturally
10
<PAGE> 12
rise as new accounts age. Excluding the impact of the GM Card program, overall
and bankcard delinquency at December 31, 1994 would have still been below
December 1993 levels.
The Company believes that, although further reductions are possible, the
overall declining delinquency trend has begun to stabilize. Future changes in
delinquency will depend on economic conditions in the regional areas where the
Company operates and the composition of the managed receivable base.
CHARGEOFFS
Chargeoffs decreased in 1994 primarily as a result of improved delinquency
trends. The following table presents chargeoffs on a full year and quarterly
basis by product.
NET CHARGEOFFS OF CONSUMER RECEIVABLES
(AS A PERCENT OF AVERAGE MANAGED CONSUMER RECEIVABLES)
<TABLE>
<CAPTION>
1994 QUARTER ANNUALIZED 1993 QUARTER ANNUALIZED
FULL YEAR ------------------------- FULL YEAR -------------------------- FULL YEAR
1994 4 3 2 1 1993 4 3 2 1 1992
--------- ---- ---- ---- ---- --------- ---- ---- ----- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Home equity........... 1.17% .94% 1.03% 1.43% 1.29% 1.05% 1.26% .89% 1.03% 1.01% .93%
Other secured......... .44 .92 .82 .13 -- 5.46 1.02 9.72 10.94 (.02) 2.04
Bankcard.............. 5.15 4.89 4.78 5.26 5.74 5.99 5.90 6.01 5.74 6.31 6.18
Merchant
participation...... 4.00 4.31 3.91 3.83 3.91 4.32 4.26 4.44 4.02 4.57 4.49
Other unsecured....... 4.97 4.13 4.81 5.52 5.65 6.52 5.89 6.36 7.09 6.76 7.57
--------- ---- ---- ---- ---- --------- ---- ---- ----- ---- ---------
Total
domestic.... 3.22 3.04 3.04 3.37 3.44 3.60 3.54 3.58 3.60 3.68 3.83
Foreign:
Australia............. 2.61 1.83 2.24 3.72 2.74 3.77 3.77 2.61 3.38 5.21 3.33
--------- ---- ---- ---- ---- --------- ---- ---- ----- ---- ---------
Total......... 3.20% 3.00% 3.02% 3.38% 3.42% 3.61% 3.55% 3.56% 3.60% 3.72% 3.81%
====== ==== ==== ==== ==== ====== ==== ==== ===== ==== ======
</TABLE>
Domestic net chargeoffs were 3.22 percent for the year, compared to 3.60
percent in 1993. The year-over-year decrease was primarily due to the favorable
performance of recently underwritten bankcard and other unsecured receivables.
The bankcard chargeoff ratio also benefited from the GM Card receivables, as new
accounts were added to the receivables base but only contributed minimal
chargeoffs. Excluding the impact of the GM Card program, bankcard and overall
chargeoffs for the year would still have declined. The merchant participation
chargeoff ratio for the year improved compared to the prior year primarily due
to growth in receivables resulting from new merchant programs.
Chargeoffs are a lagging indicator of credit quality and generally reflect
prior delinquency trends. As previously discussed, overall delinquency trends
have continued to decline as a result of improved economic conditions and the
effect of the Company's strategy to improve overall credit quality by tightened
underwriting standards. The Company expects that chargeoff trends will continue
to follow the downward trend in consumer delinquency. However, future
improvement in chargeoff trends may be impacted by factors such as a shift in
product mix, economic conditions and the impact of personal bankruptcies.
11
<PAGE> 13
NONPERFORMING CONSUMER ASSETS
<TABLE>
<CAPTION>
DEC. 31, SEPT. 30, DEC. 31, DEC. 31,
1994 1994 1993 1992
-------- --------- -------- --------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C>
Nonaccrual managed consumer receivables.................... $299.6 $ 301.6 $334.4 $439.2
Accruing managed consumer receivables 90 or more days
delinquent............................................... 138.2 135.3 148.8 196.3
-------- --------- -------- --------
Total nonperforming managed consumer receivables...... 437.8 436.9 483.2 635.5
Real estate owned.......................................... 57.0 76.6 89.0 88.7
-------- --------- -------- --------
Total nonperforming consumer assets................... $494.8 $ 513.5 $572.2 $724.2
====== ====== ====== ======
Credit loss reserves for managed consumer receivables as a
percent of nonperforming managed consumer receivables.... 103.6% 94.5% 82.7% 58.2%
Nonperforming managed consumer receivables as a percent of
total managed consumer receivables....................... 2.6 2.7 3.1 4.2
</TABLE>
Consumer real estate owned declined due to improvement in the domestic
consumer finance operation.
NONPERFORMING COMMERCIAL ASSETS (1)
<TABLE>
<CAPTION>
DEC. 31, SEPT. 30, DEC. 31, DEC. 31,
1994 1994 1993 1992
-------- --------- -------- --------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate nonaccrual..................................... $ 36.9 $ 48.5 $ 54.8 $ 80.7
Other nonaccrual........................................... 59.0 74.4 180.4 178.5
-------- --------- -------- --------
Total nonaccrual commercial loans........................ 95.9 122.9 235.2 259.2
Renegotiated............................................... 41.8 44.9 28.7 197.3
-------- --------- -------- --------
Total nonperforming commercial loans..................... 137.7 167.8 263.9 456.5
Real estate owned.......................................... 67.6 241.7 256.6 249.6
Other assets acquired through foreclosure.................. 51.7 58.1 82.9 102.6
-------- --------- -------- --------
Total nonperforming commercial assets.................... $257.0 $ 467.6 $603.4 $808.7
====== ====== ====== ======
Credit loss reserves for commercial loans as a percent of
nonperforming commercial loans........................... 103.1% 103.8% 71.1% 47.0%
</TABLE>
---------------
(1) Includes nonperforming assets of the former LCL segment and nonperforming
assets related to continuing commercial activities.
Nonperforming commercial assets decreased 57 percent during 1994 to $257.0
million. Nonaccrual loans at December 31, 1994 were down 59 percent compared to
the December 31, 1993 level, while renegotiated loans increased by $13.1 million
during the year. Real estate owned declined 72 percent compared to the third
quarter and 74 percent compared to the prior year. The decrease in real estate
owned was primarily due to the sales of properties totaling approximately $120
million. Net operating income on all commercial real estate properties in 1994
was $21.1 million, up from $17.7 and $8.5 million in 1993 and 1992,
respectively. Commercial real estate write-downs and carrying costs on all
commercial real estate properties were $7.6 million in 1994, compared to $30.8
and $23.3 million in 1993 and 1992, respectively.
Other assets acquired through foreclosure consisted of aircraft acquired in
foreclosure of loans and leases. The Company is actively marketing these
aircraft for sale or lease. However, due to the current economic condition of
the airline industry, the Company is uncertain about the timing of the
disposition of these aircraft. These assets declined during 1994 primarily as a
result of cash settlements received from previous borrowers.
12
<PAGE> 14
INDIVIDUAL LIFE INSURANCE
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1994 1993 1992
--------- --------- ---------
(ALL DOLLAR AMOUNTS ARE STATED IN
MILLIONS)
<S> <C> <C> <C>
Investment and other income............................. $ 494.1 $ 540.4 $ 481.7
Contract revenues....................................... 97.4 127.9 111.3
--------- --------- ---------
Total revenues.......................................... 591.5 668.3 593.0
Costs and expenses:
Policyholders' benefits............................... 388.9 456.9 427.7
Operating expenses.................................... 123.0 140.2 102.1
Income taxes.......................................... 28.5 26.0 21.5
--------- --------- ---------
Net income.............................................. $ 51.1 $ 45.2 $ 41.7
======== ======== ========
Sales................................................... $ 936.6 $ 652.2 $ 736.3
Life insurance in-force................................. $36,560.4 $32,371.6 $28,390.4
Return on assets........................................ .71% .72% .73%
</TABLE>
Investment securities for the Individual Life Insurance segment totaled
$6.7 billion, up 5 percent from $6.4 billion at December 31, 1993. This
portfolio represented 92 percent of the Company's total investment portfolio at
December 31, 1994. During 1994 the Company continued to emphasize conservative
investment strategies. Higher-risk securities, which include non-investment
grade bonds, common and preferred stocks, commercial mortgage loans and real
estate, represented 7 percent of the insurance investment portfolio at both
December 31, 1994 and 1993. Commercial real estate loans totaled approximately 1
percent of Individual Life Insurance segment investments at December 31, 1994.
At December 31, 1994 there were no significant nonaccrual or renegotiated loans
and no commercial real estate acquired in foreclosure in this portfolio.
Underwriting standards and credit monitoring procedures for these residential
and commercial real estate loans are similar to those described in the credit
management policy section on page 8.
At December 31, 1994 the fair value of the insurance held-to-maturity
investment portfolio was 99 percent of the amortized cost, compared to 108
percent at December 31, 1993. The decrease in fair value over carrying value
during 1994 was the result of the rising interest rate environment. Reductions
in market value which are determined to be other than temporary are charged to
income as realized losses. There were no unrealized losses in the investment
portfolio at December 31, 1994 which would materially impact current or future
earnings or the capital position of the Company. The Company continuously
monitors the fair value of its available-for-sale investment portfolio in light
of market interest rate conditions and may sell securities in an attempt to
maximize its capital position.
Investment and other income was $494.1 million in 1994, a 9 percent
decrease from 1993, but a 3 percent increase from 1992. The decrease from 1993
primarily was due to lower gains on sales of available-for-sale investments.
These investments were sold consistent with preestablished interest rate
strategies. The decrease in investment income was also the result of lower
yields on investments, as higher-yielding securities were sold, called or
matured in 1993 and replaced with lower-yielding investments prior to the rise
in interest rates which commenced in early 1994, partially offset by a larger
investment portfolio.
In the third quarter of 1994 the Company sold a line of life insurance
business and, as a result, reduced both contract revenues and policyholders'
benefits by $47.8 million. This represented the amount of claim reserves on the
policies which were sold to the new insurer. Excluding the impact of this
transaction, contract revenues increased over both 1993 and 1992 due to higher
levels of insurance in-force. Also, excluding the impact of this transaction,
policyholders' benefits decreased compared to 1993 due to lower interest
credited to policyholders, but increased over 1992 due to increased life
insurance and annuity contracts.
13
<PAGE> 15
Operating expenses for 1994 were $123.0 million compared with $140.2 and
$102.1 million in 1993 and 1992, respectively. The decrease from 1993 was
primarily due to lower amortization of deferred insurance policy acquisition
costs ("DAC"). Amortization rates for DAC are based on estimated lifetime gross
profits and periodically adjusted as required by generally accepted accounting
principles.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally is funded independently. Cash flows, liquidity and
capital are monitored at both the Company and Household International levels.
The decision to invest in or to withdraw capital from specific business segments
is based on their profitability, growth potential and target capital structure.
Household International invested additional capital in HFC of approximately $140
million in 1994 and $70 million in 1993 to strengthen the Company's capital
position and to fund asset growth. HFC paid cash dividends to Household
International of $115 million in 1994. The Company paid no cash dividends to
Household International in 1993.
The Company employs an integrated and comprehensive program to manage
liquidity and capital resources. The major usage of cash by the Company is the
origination or purchase of receivables or investment securities. The main
sources of cash for the Company are the collection and sales of receivable
balances; maturities or sales of investment securities; proceeds from the
issuance of debt; cash received from policyholders; and cash provided from
operations.
The Company obtains a majority of its funding through the issuance of
commercial paper, medium- and long-term debt and through securitizations and
sales of consumer receivables. At December 31, 1994 outstanding commercial paper
of HFC was $3.3 billion compared to $3.7 billion at December 31, 1993. HFC
markets its commercial paper through an in-house sales force, directly reaching
more than 200 investors. HFC also markets medium-term notes through investment
banks and its in-house sales force and issued a total of $2.9 billion in 1994.
During 1994 HFC also issued $800 million of intermediate- and long-term debt to
the public through investment banks and brokerage houses. To facilitate
liquidity, HFC had committed backup lines of credit totaling $3.9 billion at
December 31, 1994, none of which contained a material adverse change clause
which could restrict availability.
HFC's debt to equity ratio was 5.9 to 1 at December 31, 1994 compared to
6.2 to 1 at December 31, 1993. This ratio was affected by FAS No. 115, which
resulted in a reduction in shareholder's equity of $83.4 million at December 31,
1994 versus an increase in shareholder's equity of $35.1 million at December 31,
1993. Excluding the impact of FAS No. 115, HFC's equity increased 16 percent
over the prior year, and HFC's debt to equity ratio was 5.6 to 1, compared to
6.3 to 1 at December 31, 1993.
During 1993 the Company's credit rating was upgraded by one nationally
recognized rating agency, and its credit rating outlook was upgraded by another.
At December 31, 1994, the long-term debt of the Company had been assigned an
"investment grade" rating by four nationally recognized rating agencies.
Furthermore, these agencies included the commercial paper of HFC in their
highest rating category. With these ratings, the Company believes it has
substantial capacity to raise capital from wholesale sources to refinance
maturing obligations and fund business growth.
Securitizations and sales of consumer receivables have been, and will
continue to be, an important source of liquidity for HFC. During 1994 the
Company securitized and sold approximately $2.5 billion of home equity, bankcard
and merchant participation receivables compared to $1.7 billion in 1993.
The Company's life insurance subsidiary, Alexander Hamilton Life Insurance
Company of America ("Alexander Hamilton"), plans for capital needs based on
target leverage ratios. The target leverage ratios are based on Alexander
Hamilton's statutory financial position. At the end of 1994 Alexander Hamilton's
estimated risk based capital ratios, as defined statutorily, were consistent
with their target. Alexander Hamilton has received an A+ (Superior) rating from
A.M. Best Company and an "AA" claims-paying ability rating from Standard &
Poor's Corporation, Duff and Phelps Credit Rating Co. and Fitch Investors
Services, Inc. The Company believes that future growth of the insurance
subsidiary can be funded through its own operations.
14
<PAGE> 16
Risk Management
Household International has a comprehensive program which addresses the
management and diversification of financial risk, such as interest rate,
funding, liquidity, counterparty and currency risk, at all of its entities.
Household International manages these risks for the Company through an
asset/liability management committee ("ALCO") composed of senior management.
Interest rate risk is the exposure of earnings to changes in interest rates. The
ALCO sets and monitors policy so that the potential impact on earnings from
future changes in interest rates is managed within approved limits. Simulation
models are utilized to measure the impact on net interest margin of changes in
interest rates. By policy, no more than 6 percent of the Company's expected
full-year net interest margin on a managed basis can be at risk to an immediate
200 basis point increase or decrease in interest rates for 12 months, assuming
no additional interest rate risk management actions are taken. Limits also apply
beyond the initial 12-month period. Historically, the Company has managed its
interest rate risk to levels substantially below those allowed by this policy.
The Company, whenever possible, funds its assets with liability instruments
of similar interest rate sensitivity, thereby reducing structural interest rate
risk. Over time, customer demand for the Company's receivable products shifts
from fixed rate to floating rate, and vice versa, based on market conditions and
preferences. These shifts result in different funding strategies and produce
different interest rate exposures. To manage these exposures, as well as its
liquidity position, the Company may use derivatives to synthetically alter
assets/liabilities. The Company does not use any exotic or leveraged
derivatives. The Company does not serve as a financial intermediary to make
markets in any off-balance sheet financial instruments.
At December 31, 1994 the Company managed approximately $12.6 billion of
domestic receivables with variable interest rates, including floating rate
credit card, home equity and other unsecured products. To manage liquidity to
acceptable levels, these receivables have been funded with short-term debt, and
to a greater extent, by longer duration liabilities. This situation exposes the
Company to interest rate risk. The Company utilizes derivatives, primarily
interest rate swaps, to synthetically alter its exposure to interest rate risk
while still controlling liquidity risk. Interest rate swaps are also used to
synthetically alter the Company's exposure to basis risk, or the risk due to the
difference in movement of market rate indices on which assets and liabilities
are priced (primarily prime and LIBOR, respectively). Synthetic alteration and
hedge transactions are specifically designated to particular assets/liabilities
or off-balance sheet items of a similar characteristic. Specific assets or
liabilities synthetically altered/hedged may consist of groups of individually
small dollar homogeneous items.
While the notional amount of the Company's interest rate swap portfolio is
large, the economic exposure underlying these instruments is substantially less.
The notional amount is used to determine the fixed or variable rate interest
payment due by each counterparty but does not result in an exchange of principal
payments. The Company's exposure on its interest rate swap portfolio is
counterparty risk, or the risk that a counterparty may default on a contract
when the Company is owed money. The potential for economic loss is the interest
rate differential determined by reference to the notional amount. Certain
interest rate swap agreements entered into by the Company require that payments
be made to or received from the counterparty when the market value of the
agreement reaches a predetermined level. This serves to minimize the Company's
counterparty risk. Counterparty limits have been established and are closely
monitored as part of the overall risk management process. These limits ensure
that the Company does not have significant exposure to any individual
counterparty. Based on estimated peak exposure at December 31, 1994 all of the
Company's derivative instrument counterparties were rated A- or better, and
approximately 69 percent were rated AA- or better. The Company has never
suffered a loss due to counterparty failure.
The Company also utilizes exchange traded U.S. dollar interest rate futures
and purchased put and call options to hedge the resets of interest rates on the
Company's variable rate assets and liabilities. For example, short-term
borrowings expose the Company to interest rate risk. The hedges used reduce that
risk, and at the inception of the contract, the Company designates these futures
and options as hedges. The contracts are held until the applicable variable rate
asset or liability reset occurs, at which time the contracts are terminated.
These terminations are necessary to close out the contract, as the date the rate
resets usually does not coincide with the exchange's contract expiration date.
15
<PAGE> 17
While attempting to eliminate structural interest rate risk, the Company
stays abreast of the market to reduce funding costs and occasionally attempts to
benefit from profit opportunities available in short-term interest rate
movements. This is done principally using exchange traded futures and options
and liquid fixed income securities. Limits have been established for each
instrument based on potential daily changes in market values due to interest
rate movements, volatility and market liquidity. Positions are monitored daily
to ensure compliance with established policies and limits. Income or loss from
these trading activities has not been material to the Company. In late 1994, the
Company discontinued its trading activities and hedged its open positions.
See Note 6, "Derivative Financial Instruments and Other Financial
Instruments with Off-Balance Sheet Risk" in the accompanying financial
statements for additional information related to interest rate risk management.
In the accompanying financial statements, Note 8, "Fair Value of Financial
Instruments" provides information regarding the fair value of certain financial
instruments.
During 1994, the Company invested $61.0 million in capital expenditures, up
compared to the prior year level of $30.5 million. The increase was primarily
due to the development of a comprehensive customer service computer system for
the domestic consumer finance business. Capital expenditures are expected to be
lower in 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the list of financial statements under Item 14(a)
herein for the financial statements required by this Item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Inapplicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted.
16
<PAGE> 18
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<S> <C>
(a) Financial Statements.
Report of Independent Public Accountants.
Statements of Income for the Three Years Ended December 31, 1994.
Balance Sheets, December 31, 1994 and 1993.
Statements of Cash Flows for the Three Years Ended December 31, 1994.
Statements of Changes in Preferred Stock and Common Shareholder's Equity for the Three
Years Ended December 31, 1994.
Business Segment Data for the Three Years Ended December 31, 1994.
Notes to Financial Statements.
Selected Quarterly Financial Data (Unaudited).
(b) Reports on Form 8-K
During the three months ended December 31, 1994, HFC did not file with the Securities and
Exchange Commission any Current Report on Form 8-K.
(c) Exhibits.
3(i) Restated Certificate of Incorporation of Household Finance Corporation ("HFC"), as
amended (incorporated by reference to Exhibit 3(a) of HFC's Annual Report on Form
10-K for the fiscal year ended December 31, 1992).
3(ii) Bylaws of Household Finance Corporation (incorporated by reference to Exhibit 3(b)
of HFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).
4(a) Indenture dated as of May 15, 1989, between HFC and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4 to HFC's Current Report on Form 8-K
dated August 3, 1989), as supplemented by a First Supplemental Indenture dated as
of June 15, 1989 (incorporated by reference to Exhibit 4 of HFC's Current Report on
Form 8-K dated June 15, 1989), as amended by Amendment No. 1 dated October 18, 1990
to the First Supplemental Indenture dated as of June 15, 1989 (incorporated by
reference to Exhibit 4 of HFC's Current Report on Form 8-K dated October 18, 1990).
4(b) The principal amount of debt outstanding under each other instrument defining the
rights of holders of long-term debt of HFC and its subsidiaries does not exceed 10
percent of the total assets of HFC and its subsidiaries on a consolidated basis.
HFC agrees to furnish to the Securities and Exchange Commission, upon request, a
copy of each instrument defining the rights of holders of long-term debt of HFC and
its subsidiaries.
12 Statement of Computation of Ratios of Earnings to Fixed Charges and to Combined
Fixed Charges and Preferred Stock Dividends.
23 Consent of Arthur Andersen LLP, Certified Public Accountants.
27 Financial Data Schedule.
(d) Schedules.
Household Finance Corporation and Subsidiaries:
VIII Valuation and Qualifying Accounts.
X Supplementary Income Statement Information.
</TABLE>
17
<PAGE> 19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, HOUSEHOLD FINANCE CORPORATION HAS DULY CAUSED THIS REPORT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
HOUSEHOLD FINANCE CORPORATION
Dated: March 24, 1995
By: /s/ R. F. ELLIOTT
------------------------------------
R. F. Elliott, President and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF HOUSEHOLD
FINANCE CORPORATION AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------------------------------------------- -------------------------
<S> <C> <C>
/s/ R. F. ELLIOTT President and Chief
--------------------------------------------- Executive Officer,
R. F. Elliott Director
/s/ D. A. SCHOENHOLZ Vice President, Chief
--------------------------------------------- Accounting Officer and
D. A. Schoenholz Chief Financial Officer,
Director Dated: March 24, 1995
/s/ W. F. ALDINGER Director
---------------------------------------------
W. F. Aldinger
/s/ D. C. CLARK Director
---------------------------------------------
D. C. Clark
</TABLE>
18
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
HOUSEHOLD FINANCE CORPORATION:
We have audited the accompanying balance sheets of Household Finance
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1994
and 1993, and the related statements of income, changes in preferred stock and
common shareholder's equity and cash flows for each of the three years in the
period ended December 31, 1994. These financial statements and the schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 financial statements referred to above present fairly,
in all material respects, the financial position of Household Finance
Corporation and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules listed in Item
14(d) are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not a required part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 3, 1995
F-1
<PAGE> 21
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1994 1993 1992
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Finance income............................................... $1,496.8 $1,318.1 $1,334.6
Interest income from noninsurance investment securities...... 38.7 40.9 34.9
Interest expense............................................. 618.2 510.2 633.2
-------- -------- --------
Net interest margin.......................................... 917.3 848.8 736.3
Provision for credit losses on owned receivables............. 435.9 494.5 368.3
-------- -------- --------
Net interest margin after provision for credit losses........ 481.4 354.3 368.0
-------- -------- --------
Securitization and servicing fee income...................... 373.9 383.4 369.2
Insurance premiums and contract revenues..................... 228.3 242.6 220.5
Investment income............................................ 505.8 552.1 492.2
Fee income................................................... 83.1 60.7 50.5
Other income................................................. 2.3 77.5 63.5
-------- -------- --------
Total other revenues......................................... 1,193.4 1,316.3 1,195.9
-------- -------- --------
Salaries and fringe benefits................................. 236.7 221.9 234.7
Other operating expenses..................................... 633.4 603.7 513.3
Policyholders' benefits...................................... 444.7 517.2 484.1
-------- -------- --------
Total costs and expenses..................................... 1,314.8 1,342.8 1,232.1
-------- -------- --------
Income before income taxes................................... 360.0 327.8 331.8
Income taxes................................................. 103.6 107.4 92.3
-------- -------- --------
Net income................................................... $ 256.4 $ 220.4 $ 239.5
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 22
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------
1994 1993
--------- ---------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Cash.................................................................. $ 97.3 $ 27.8
Investment securities (fair value of $7,205.7 and $7,317.8)........... 7,249.6 7,082.0
Receivables, net...................................................... 10,476.3 10,364.6
Assets pending sale................................................... 398.3 --
Advances to parent company and affiliates............................. 482.3 361.7
Deferred insurance policy acquisition costs........................... 621.4 381.6
Acquired intangibles.................................................. 357.2 246.7
Properties and equipment.............................................. 211.5 202.2
Assets acquired through foreclosure................................... 176.3 428.5
Other assets.......................................................... 941.2 755.1
--------- ---------
Total assets................................................ $21,011.4 $19,850.2
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt:
Commercial paper, bank and other borrowings......................... $ 3,800.6 $ 4,321.8
Senior and senior subordinated debt (with original maturities over
one year)........................................................ 7,728.3 6,813.7
--------- ---------
Total debt.................................................. 11,528.9 11,135.5
Insurance policy and claim reserves................................... 6,643.4 5,981.5
Other liabilities..................................................... 880.0 942.7
--------- ---------
Total liabilities........................................... 19,052.3 18,059.7
Preferred stock....................................................... 100.0 100.0
Common shareholder's equity*.......................................... 1,859.1 1,690.5
--------- ---------
Total liabilities and shareholder's equity.................. $21,011.4 $19,850.2
======== ========
</TABLE>
---------------
* See the Statements of Changes in Preferred Stock and Common Shareholder's
Equity on page F-5 for number of shares issued and outstanding.
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 23
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income.......................................................... $ 256.4 $ 220.4 $ 239.5
Adjustments to reconcile net income to net cash provided by
operations:
Provision for credit losses on owned receivables................ 435.9 494.5 368.3
Insurance policy and claim reserves............................. 259.8 226.4 171.3
Depreciation and amortization................................... 146.8 158.1 107.4
Net realized (gains) losses from sales of assets................ 29.2 (1.4) (33.4)
Deferred insurance policy acquisition costs..................... (94.7) (86.6) (85.2)
Deferred income tax provision................................... 4.4 1.0 14.4
Other, net...................................................... (106.7) 289.5 (86.0)
--------- --------- ---------
Cash provided by operations......................................... 931.1 1,301.9 696.3
--------- --------- ---------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased......................................................... (2,423.9) (2,992.0) (2,733.5)
Matured........................................................... 519.0 1,172.9 841.7
Sold.............................................................. 1,460.7 1,205.2 1,209.2
Short-term investment securities, net change........................ (73.5) (224.1) 98.0
Receivables, excluding bankcard:
Originated or purchased........................................... (7,281.3) (6,288.3) (6,148.9)
Collected......................................................... 4,168.7 3,772.5 3,390.5
Sold.............................................................. 2,520.9 1,934.4 3,086.4
Bankcard receivables:
Originated or collected, net...................................... (2,885.7) (2,629.3) (2,766.2)
Purchased......................................................... (16.9) (32.7) (437.4)
Sold.............................................................. 2,222.8 1,912.8 2,389.2
Acquisition of businesses, net...................................... (145.6) -- --
Properties and equipment purchased.................................. (61.0) (30.5) (37.5)
Properties and equipment sold....................................... .6 4.6 .4
Advances to parent company and affiliates........................... (120.6) 31.6 (196.2)
--------- --------- ---------
Cash decrease from investments in operations........................ (2,115.8) (2,162.9) (1,304.3)
--------- --------- ---------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change......................................... (210.3) 107.1 1,189.8
Senior and senior subordinated debt issued.......................... 3,840.5 2,289.9 2,260.3
Senior and senior subordinated debt retired......................... (2,792.0) (2,084.3) (3,291.5)
Policyholders' benefits paid........................................ (558.3) (332.8) (330.6)
Cash received from policyholders.................................... 956.5 848.9 882.4
Dividends on preferred stock........................................ (7.2) (8.7) (10.3)
Issuance of preferred stock......................................... -- -- 99.1
Repurchase of preferred stock....................................... -- (50.0) (100.0)
Dividends paid to parent company.................................... (115.0) -- (175.3)
Capital contributions from parent company........................... 140.0 70.0 --
--------- --------- ---------
Cash increase from financing and capital transactions............... 1,254.2 840.1 523.9
--------- --------- ---------
Effect of exchange rate changes on cash............................. -- -- (.1)
--------- --------- ---------
Increase (decrease) in cash......................................... 69.5 (20.9) (84.2)
Cash at January 1................................................... 27.8 48.7 132.9
--------- --------- ---------
Cash at December 31................................................. $ 97.3 $ 27.8 $ 48.7
========= ========= =========
Supplemental cash flow information:
Interest paid....................................................... $ 656.4 $ 510.5 $ 697.1
========= ========= =========
Income taxes paid................................................... $ 230.0 $ 49.4 $ 95.7
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 24
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN PREFERRED STOCK
AND COMMON SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON SHAREHOLDER'S EQUITY
----------------------------------------------------
COMMON TOTAL
STOCK AND COMMON
PREFERRED PAID-IN RETAINED SHAREHOLDER'S
STOCK CAPITAL(1) EARNINGS OTHER(2) EQUITY
--------- ---------- -------- --------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1991............... $ 150.0 $482.1 $ 860.4 $ (9.6) $ 1,332.9
Net income............................... 239.5 239.5
Dividends to parent company.............. (175.3) (175.3)
Dividends on preferred stock............. (10.3) (10.3)
Foreign currency translation
adjustments........................... (10.3) (10.3)
Issuance of preferred stock.............. 100.0 (.9) (.9)
Repurchase of preferred stock............ (100.0) --
Unrealized gain on investments, net...... 1.7 1.7
-------- ------ -------- ------- ---------
BALANCE AT DECEMBER 31, 1992............... 150.0 481.2 914.3 (18.2) 1,377.3
Net income............................... 220.4 220.4
Dividends on preferred stock............. (8.7) (8.7)
Contribution of capital from parent
company............................... 70.0 70.0
Foreign currency translation
adjustments........................... (5.0) (5.0)
Repurchase of preferred stock............ (50.0) --
Unrealized gain on investments, net...... 36.5 36.5
-------- ------ -------- ------- ---------
BALANCE AT DECEMBER 31, 1993............... 100.0 551.2 1,126.0 13.3 1,690.5
Net income............................... 256.4 256.4
Dividends to parent company.............. (115.0) (115.0)
Dividends on preferred stock............. (7.2) (7.2)
Contribution of capital from parent
company............................... 140.0 140.0
Foreign currency translation
adjustments........................... 12.9 12.9
Unrealized loss on investments, net...... (118.5) (118.5)
-------- ------ -------- ------- ---------
BALANCE AT DECEMBER 31, 1994............... $ 100.0 $691.2 $1,260.2 $ (92.3) $ 1,859.1
======== ====== ======== ======= =========
</TABLE>
---------------
(1) At December 31, 1994 and 1993, the Company had authorized, issued and
outstanding 1,000 shares of common stock, all of which are owned by
Household International.
(2) At December 31, 1994, 1993, 1992 and 1991 items in the other column include
cumulative adjustments for unrealized gains (losses) on marketable equity
securities and available-for-sale investments of $(83.4), $35.1, $(1.4) and
$(3.1) million, respectively. Effective December 31, 1993 the Company
adopted Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("FAS No. 115"). As a
result of implementing FAS No. 115, the gross unrealized gain (loss) on
available-for-sale investments at December 31, 1994 and 1993 of $(259.5) and
$144.9 million, respectively, is recorded net of income taxes (benefit) of
$(44.8) and $19.6 million, respectively and, for certain available-for-sale
investments of the life insurance operation, related unrealized deferred
insurance policy acquisition cost adjustments of $(131.3) and $90.2 million,
respectively.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 25
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
BUSINESS SEGMENT DATA
<TABLE>
<CAPTION>
REVENUES OPERATING PROFIT NET INCOME
------------------------------ ------------------------ ------------------------
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
-------- -------- -------- ------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Finance and Banking.......... $2,137.4 $2,007.0 $1,972.4 $280.4 $256.6 $268.6 $205.3 $175.2 $197.8
Individual Life Insurance.... 591.5 668.3 593.0 79.6 71.2 63.2 51.1 45.2 41.7
-------- -------- -------- ------ ------ ------ ------ ------ ------
Total...................... $2,728.9 $2,675.3 $2,565.4 $360.0 $327.8 $331.8 $256.4 $220.4 $239.5
======== ======== ======== ====== ====== ====== ====== ====== ======
</TABLE>
PRESENTATION OF INCOME DATA
The Company reassessed the significance of its Liquidating Commercial Lines
("LCL") segment in 1994. In recognition of the significant 1994 decline in the
level of LCL assets and a reduced risk posture for these assets, the LCL segment
has been combined with the Finance and Banking segment. To better analyze
financial condition and results of operations and related trends, earnings and
selected balance sheet data for years prior to 1994 have been reclassified to
reflect this combination. See further discussion in Management's Discussion and
Analysis on pages 2 and 3.
Operating profit represents income before income taxes but includes
interest expense, as financing costs are integral to the Company's operations.
Income by segment assumes each business services its own debt. The segments
generally provide for income taxes as if separate tax returns were filed subject
to certain consolidated return limitations and benefits. Equity is allocated to
the business segments based on underlying regulatory and business requirements.
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS
-------------------------------------
AT DECEMBER 31
-------------------------------------
1994 1993 1992
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Finance and Banking....................................... $13,570.0 $12,891.2 $12,220.2
Individual Life Insurance................................. 7,441.4 6,959.0 5,926.2
--------- --------- ---------
Total................................................... $21,011.4 $19,850.2 $18,146.4
======== ======== ========
</TABLE>
PRESENTATION OF BUSINESS SEGMENT DATA
The Finance and Banking segment consists of the following types of loans:
home equity, other secured, bankcards, merchant participation, other unsecured,
equipment and other commercial loans and leases, as well as credit and specialty
insurance. In addition, the Finance and Banking segment includes the
discontinued commercial product lines which consist of commercial real estate,
acquisition finance and other loans, and other commercial assets being
liquidated. The Individual Life Insurance segment provides ordinary life,
universal life and annuity insurance products.
GEOGRAPHIC AREA
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS REVENUES OPERATING PROFIT
----------------------------------- -------------------------------- --------------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
--------- --------- --------- -------- -------- -------- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States.... $21,011.4 $19,430.6 $17,691.5 $2,655.6 $2,603.8 $2,476.4 $358.1 $328.4 $329.5
Australia........ -- 419.6 454.9 73.3 71.5 89.0 1.9 (.6) 2.3
--------- --------- --------- -------- -------- -------- ------ ------ ------
Total.......... $21,011.4 $19,850.2 $18,146.4 $2,728.9 $2,675.3 $2,565.4 $360.0 $327.8 $331.8
========= ========= ========= ======== ======== ======== ====== ====== ======
</TABLE>
F-6
<PAGE> 26
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Household Finance Corporation ("HFC" or the "Company") is a subsidiary of
Household International, Inc. ("Household International" or the "parent
company").
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The financial statements include the accounts of
the Company and all subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain prior year amounts
have been reclassified to conform with the current year's presentation.
Investment Securities. The Company maintains investment portfolios in both
its noninsurance and insurance operations. These portfolios are comprised
primarily of debt securities. The insurance portfolio also includes mortgage and
policyholder loans and other real estate investments. In accordance with FAS No.
115, investment securities in both the noninsurance and insurance operations are
classified in three separate categories: trading, available-for-sale or
held-to-maturity. Trading investments are bought and held principally for the
purpose of selling them in the near term and are carried at fair value.
Adjustments to the carrying value of trading investments are included in current
earnings. Investments which the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and carried at amortized
cost. Investments not classified as trading or held-to-maturity are classified
as available-for-sale. They 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 shareholder's equity, net of income taxes and, for certain investments of
the insurance operation, related unrealized deferred insurance policy
acquisition cost adjustments (see 'Insurance' on pages F-8 and F-9). Any decline
in the fair value of available-for-sale or held-to-maturity investments which is
deemed to be other than temporary is charged against current earnings.
Cost of investment securities sold by the insurance operation generally is
determined using the first-in, first-out ("FIFO") method, and cost of
noninsurance investment securities sold is determined by specific
identification. 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 noninsurance portfolio and investment income from the
insurance portfolio are recorded in investment income. Gains and losses on
trading investments are recorded in other 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, bankcard and merchant
participation portfolios. Because these receivables were originated with
variable rates of interest or rates comparable to those currently offered by the
Company for such receivables, carrying value approximates fair value.
Finance income is recognized using the effective yield method and
classified on the balance sheets, to the extent not collected, with the related
receivables. 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 on bankcards are netted with direct
lending costs associated with the issuance of the cards. The net amount is
deferred and amortized on a straight-line basis over one year. Net deferred
direct lending costs/(income) related to bankcard receivables totaled $.9 and
$(.3) million at December 31, 1994 and 1993, respectively.
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. Provisions
for credit losses are made in amounts sufficient to maintain reserves at a level
considered adequate to cover probable losses of principal and earned interest in
the existing portfolio of owned receivables. Probable losses are estimated for
consumer receivables based on contractual delinquency status and historical loss
experience and, for commercial loans, based on a specific loan review process as
well as management's assessment of general reserve requirements. These estimates
are reviewed periodically and
F-7
<PAGE> 27
adjustments are reported in earnings when they become known. The Company's
chargeoff policy for all consumer receivables is based on contractual
delinquency over periods ranging from 6 to 9 months. Commercial loans 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 consumer and commercial
loans when principal or interest payments are more than three months
contractually past due, except for bankcards and private-label credit cards,
which are included in the merchant participation product line. On these credit
card receivables, interest continues to accrue until the receivable is charged
off. There were no commercial loans at December 31, 1994 which were 90 days or
more contractually 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. Accrual of income on nonaccrual
commercial loans is not resumed until such loans become contractually current.
Receivables Sold and Serviced with Limited Recourse and Securitization
Income. Certain home equity, bankcard and merchant participation 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, normal servicing fees, operating
expenses and other factors. The resulting gain is reduced 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 statements of income as securitization and
servicing fee income.
Purchased Mortgage Servicing Rights. In 1993 the Company acquired
purchased mortgage servicing rights ("PMSRs") from an affiliate (see Note 12,
"Transactions With Parent Company and Affiliates" for a description of the
transaction). PMSRs are amortized in a manner which corresponds to the estimated
net servicing revenue stream over their estimated useful lives not to exceed 15
years. The Company periodically evaluates the carrying value of its PMSRs on a
disaggregated pool basis in light of the actual repayment experience of the
underlying loans and makes adjustments to reduce the carrying value where
appropriate. Servicing income and amortization of PMSRs are included in
securitization and servicing fee income in the statements of income.
Properties and Equipment. Properties and equipment are recorded at cost
and depreciated over their estimated useful lives principally using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes.
Real Estate Owned. Real estate owned, which is included in assets acquired
through foreclosure on the accompanying balance sheets, is valued at the lower
of cost or fair value less estimated costs to sell. Costs of holding this real
estate, and related gains and losses on disposition, are credited or charged to
operations as incurred. These values are periodically reviewed and reduced, if
appropriate.
Insurance. Premiums for ordinary life policies are recognized when due.
Premiums for credit insurance are recognized over the period at risk in
relationship to anticipated claims. Premiums received on single premium life,
universal life and annuity policies ("interest-sensitive policies") are
considered insurance deposits. Revenues on interest-sensitive policies consist
of contract charges against policyholders' accounts and are reported in the
period assessed. Costs associated with acquisition of insurance risks are
deferred and generally amortized in relation to premium revenues on ordinary and
credit insurance and in relation to gross profits on interest-sensitive
policies. Deferred insurance policy acquisition costs are adjusted for
unrealized gains or losses on available-for-sale investments on the same basis
as if the gains or losses were realized.
The liability for future contract benefits on interest-sensitive policies
is computed in accordance with the retrospective deposit method using interest
rates which vary with rates credited to policyholders' accounts. Liabilities for
future policy benefits on other life insurance products generally are computed
using the net level
F-8
<PAGE> 28
premium method, based upon estimated future investment yields, mortality, and
withdrawals appropriate when the policies were issued. Mortality and withdrawal
assumptions principally are based on industry tables. Policy and contract claim
reserves are based on estimated settlement amounts for both reported and
incurred but not reported losses.
Acquired Intangibles. Acquired intangibles consist of the cost of
investments in excess of net tangible assets acquired and acquired credit card
relationships. Acquired credit card relationships are amortized on a
straight-line basis over their estimated remaining lives, not to exceed 10
years. Other intangible assets are amortized using straight-line and other
methods over their estimated useful lives, not to exceed 15 years. The average
amortization period for acquired intangibles was approximately 6 years in both
1994 and 1993 and 7 years in 1992.
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 in the
management of its interest rate exposure and in its trading activities. 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.
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. The related accrual is classified as other liabilities
on the accompanying balance sheets.
Interest rate futures, forwards, options, caps and floors used in hedging
the Company's exposure to interest rate fluctuations are designated, and
effective, as hedges of balance sheet items. Anticipatory hedges are designated,
and effective, as hedges of identified transactions which are probable to occur.
During 1994, 1993 and 1992 the Company's use of anticipatory hedges was
insignificant. If interest rate contracts are terminated early, the realized
gains and losses are deferred and amortized over the life of the hedged items as
adjustments to net interest margin in the statements of income. These deferred
gains and losses are recorded on the accompanying balance sheets as adjustments
of the carrying amount of the hedged items. Interest rate contracts not used in
the Company's trading activities are recorded at amortized cost.
Interest rate contracts used in the Company's trading activities are
carried at fair value. Changes in fair value are included in other income.
Income Taxes. The Company and its eligible subsidiaries are included in
Household International's consolidated Federal income tax return and in various
consolidated state income tax returns. In addition, the Company files some
unconsolidated state tax returns. Under the tax-sharing agreement with Household
International, the Company's Federal and consolidated state tax provisions are
determined based on the Company's effect on Household International's
consolidated return. Tax benefits are paid to the Company as they are utilized
in Household International's consolidated return. Investment tax credits
generated by leveraged leases are accounted for using the deferral method.
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting For Income Taxes" ("FAS No. 109") effective January 1, 1993 which
requires that deferred tax assets and liabilities, other than those associated
with leveraged leasing transactions, be adjusted to the tax rates expected to
apply in the periods in which the deferred tax assets and liabilities are
expected to be realized or settled.
As a result of implementing FAS No. 109, retained earnings for all periods
between 1986 and 1992 have been reduced by approximately $62 million from
amounts previously reported. The statements of income for those periods
subsequent to December 31, 1986 have not been restated as the impact of FAS No.
109 on net income was immaterial to any such year and in total.
F-9
<PAGE> 29
2. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------------------------------
1994 1993
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
TRADING INVESTMENTS
Government securities and other....................... $ 2.9 $ 2.9 $ 11.9 $ 11.9
-------- -------- -------- --------
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities.......................... 53.9 53.9 76.2 76.2
Corporate debt securities............................. 2,545.9 2,545.9 2,099.7 2,099.7
Government debt securities............................ 211.3 211.3 326.1 326.1
Mortgage-backed securities............................ 817.9 817.9 1,075.5 1,075.5
Other................................................. 62.5 62.5 244.1 244.1
-------- -------- -------- --------
Subtotal............................................ 3,691.5 3,691.5 3,821.6 3,821.6
-------- -------- -------- --------
HELD-TO-MATURITY INVESTMENTS
Corporate debt securities............................. 1,827.4 1,818.3 1,739.0 1,930.7
Government debt securities............................ 23.1 20.6 23.2 25.4
Mortgage-backed securities............................ 1,063.1 1,041.9 772.2 809.0
Mortgage loans on real estate......................... 161.9 158.5 222.4 226.0
Policy loans.......................................... 72.7 72.7 81.6 81.6
Other................................................. 298.1 290.4 310.5 312.0
-------- -------- -------- --------
Subtotal............................................ 3,446.3 3,402.4 3,148.9 3,384.7
-------- -------- -------- --------
Accrued investment income............................. 108.9 108.9 99.6 99.6
-------- -------- -------- --------
Total investment securities......................... $7,249.6 $7,205.7 $7,082.0 $7,317.8
======== ======== ======== ========
</TABLE>
The Company's insurance subsidiaries held $6.8 and $6.5 billion of the
investment securities at December 31, 1994 and 1993, respectively. Policy loans
and mortgage loans on real estate held by the Company's insurance subsidiaries
are classified as investment securities, consistent with insurance industry
practice.
There were no unrealized holding gains (losses) in 1994 from trading
investments. Included in the Company's earnings for 1993 and 1992 were changes
in net unrealized holding gains (losses) of $.7 and $(3.4) million,
respectively, from trading investments.
Proceeds from the sales of available-for-sale investments totaled
approximately $1,460.7, $448.3 and $235.1 million in 1994, 1993 and 1992,
respectively. Gross gains of $34.8, $35.8 and $8.8 million and gross losses of
$25.4, $7.5 and $18.1 million in 1994, 1993 and 1992, respectively, were
realized on those sales.
There were no investments transferred from held-to-maturity to
available-for-sale in 1994. The amortized cost of held-to-maturity investments
transferred to available-for-sale in 1993 was $2.8 billion. There were no sales
of held-to-maturity investments in 1994. Proceeds from sales of held-to-maturity
investments were $756.9 and $825.4 million in 1993 and 1992, respectively. Sales
and transfers of held-to-maturity investments in 1993 were due to the
restructuring of the investment security portfolio in anticipation of the
adoption of FAS No. 115 on December 31, 1993. Approximately $400 million of
sales proceeds in 1992 were related to a decision made in 1991 to restructure
held-to-maturity investments to significantly reduce exposure in the Company's
non-investment grade bond portfolio. Gross gains of $46.5 and $34.9 million and
gross losses of $9.6 and $15.8 million were realized on sales of
held-to-maturity investments in 1993 and 1992, respectively.
F-10
<PAGE> 30
The gross unrealized gains (losses) of investment securities were as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993
---------------------------------------------- ----------------------------------------------
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................. $ 55.4 $ 1.7 $ (3.2) $ 53.9 $ 70.6 $ 5.9 $ (.3) $ 76.2
Corporate debt securities.... 2,721.6 3.7 (179.4) 2,545.9 2,013.0 95.9 (9.2) 2,099.7
Government debt securities... 226.2 .2 (15.1) 211.3 321.9 6.1 (1.9) 326.1
Mortgage-backed securities... 885.2 4.3 (71.6) 817.9 1,027.1 51.9 (3.5) 1,075.5
Other........................ 62.7 -- (.2) 62.5 244.1 -- -- 244.1
--------- ------ -------- -------- --------- ------ ------ --------
Total
available-for-sale
investments....... $ 3,951.1 $ 9.9 $ (269.5) $3,691.5 $ 3,676.7 $159.8 $(14.9) $3,821.6
========= ====== ======== ======== ========= ====== ====== ========
HELD-TO-MATURITY INVESTMENTS
Corporate debt securities.... $ 1,827.4 $ 33.6 $ (42.7) $1,818.3 $ 1,739.0 $197.5 $ (5.8) $1,930.7
Government debt securities... 23.1 .1 (2.6) 20.6 23.2 2.2 -- 25.4
Mortgage-backed securities... 1,063.1 13.4 (34.6) 1,041.9 772.2 39.3 (2.5) 809.0
Mortgage loans on real
estate..................... 161.9 1.8 (5.2) 158.5 222.4 6.2 (2.6) 226.0
Policy loans................. 72.7 -- -- 72.7 81.6 -- -- 81.6
Other........................ 298.1 .3 (8.0) 290.4 310.5 1.5 -- 312.0
--------- ------ -------- -------- --------- ------ ------ --------
Total
held-to-maturity
investments....... $ 3,446.3 $ 49.2 $ (93.1) $3,402.4 $ 3,148.9 $246.7 $(10.9) $3,384.7
========= ====== ======== ======== ========= ====== ====== ========
</TABLE>
See Note 8, "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.
As of December 31, 1994 the Company did not hold any debt or equity
securities from a single issuer that exceeded 10 percent of the Company's total
shareholder's equity.
Contractual maturities and yields of investments in debt securities
available-for-sale and held-to-maturity were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
-------------------------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES GOVERNMENT DEBT SECURITIES ALL OTHER DEBT SECURITIES
------------------------------- ----------------------------- -------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE YIELD(1) COST VALUE YIELD(1) COST VALUE YIELD(1)
--------- -------- -------- --------- ------ -------- --------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
INVESTMENTS
Due within 1 year.......... $ 350.3 $ 350.3 5.29% $ 38.5 $ 37.8 4.32% -- -- --
After 1 but within 5
years.................... 462.9 434.9 6.78 30.7 29.6 6.95 $ 142.2 $ 131.5 6.12%
After 5 but within 10
years.................... 1,489.0 1,390.8 7.77 92.6 82.9 5.92 181.6 166.1 6.46
After 10 years............. 419.4 369.9 7.63 64.4 61.0 7.50 566.3 524.9 7.48
--------- -------- ---- ------- ------ ---- --------- -------- ----
Total............. $ 2,721.6 $2,545.9 7.26% $ 226.2 $211.3 6.24% $ 890.1 $ 822.5 7.05%
========= ======== ==== ======= ====== ==== ========= ======== ====
HELD-TO-MATURITY
INVESTMENTS
Due within 1 year.......... $ 53.6 $ 53.9 9.12% $ 1.6 $ 1.6 4.35% $ 16.3 $ 16.4 7.91%
After 1 but within 5
years.................... 218.7 221.7 8.94 .8 .9 8.08 224.0 208.1 7.10
After 5 but within 10
years.................... 586.1 586.6 8.70 .8 .8 10.53 400.0 384.1 6.51
After 10 years............. 969.0 956.1 8.75 19.9 17.3 7.07 531.3 534.1 8.14
--------- -------- ---- ------- ------ ---- --------- -------- ----
Total............. $ 1,827.4 $1,818.3 8.77% $ 23.1 $ 20.6 7.04% $ 1,171.6 $1,142.7 7.38%
========= ======== ==== ======= ====== ==== ========= ======== ====
</TABLE>
---------------
(1) Computed by dividing annualized interest by the amortized cost of the
respective investment securities.
F-11
<PAGE> 31
3. RECEIVABLES
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------
1994 1993
--------- ---------
(IN MILLIONS)
<S> <C> <C>
First mortgage................................................. $ 132.9 --
Home equity.................................................... 1,437.5 $ 1,557.1
Other secured.................................................. 141.9 347.1
Bankcard....................................................... 2,663.0 2,103.8
Merchant participation......................................... 1,843.4 2,054.4
Other unsecured................................................ 2,865.9 2,236.1
Equipment financing and other commercial....................... 1,066.6 1,851.3
--------- ---------
Total receivables owned.............................. 10,151.2 10,149.8
Accrued finance charges........................................ 176.5 151.6
Credit loss reserve for owned receivables...................... (413.7) (452.7)
Unearned credit insurance premiums and claims reserves......... (45.9) (49.8)
Amounts due and deferred from receivables sales................ 789.9 700.2
Reserve for receivables serviced with limited recourse......... (181.7) (134.5)
--------- ---------
Total receivables owned, net......................... 10,476.3 10,364.6
Receivables serviced with limited recourse..................... 7,808.8 7,131.1
Receivables serviced with no recourse.......................... 1,312.9 1,649.5
--------- ---------
Total receivables owned or serviced, net............. $19,598.0 $19,145.2
======== ========
</TABLE>
Receivables of the Australian operation included in receivables owned at
December 31, 1993 were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1993
---------------
(IN MILLIONS)
<S> <C>
Home equity........................................................... $ 76.6
Other secured......................................................... 161.1
Merchant participation................................................ 30.7
Other unsecured....................................................... 106.6
-------
Total....................................................... $ 375.0
============
</TABLE>
The Company has securitized and sold certain receivables which it services
with limited recourse. Securitizations and sales of receivables, including
replenishments of certificate holder interests, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1994 1993 1992
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Home equity............................................ $1,418.6 $1,667.5 $1,986.4
Bankcard............................................... 2,222.8 1,881.8 2,335.6
Merchant participation................................. 1,093.6 213.6 484.9
-------- -------- --------
Total........................................ $4,735.0 $3,762.9 $4,806.9
======= ======= =======
</TABLE>
F-12
<PAGE> 32
The outstanding balance of receivables serviced with limited recourse
consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------
1994 1993
-------- --------
(IN MILLIONS)
<S> <C> <C>
First mortgage................................................... $ 168.4 --
Home equity...................................................... 4,906.2 $5,029.5
Bankcard......................................................... 1,866.0 1,789.0
Merchant participation........................................... 868.2 312.6
-------- --------
Total.................................................. $7,808.8 $7,131.1
======= =======
</TABLE>
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
----------------------
1994 1993
--------- ---------
(IN MILLIONS)
<S> <C> <C>
First mortgage................................................. $ 301.3 --
Home equity.................................................... 6,343.7 $ 6,586.6
Other secured.................................................. 141.9 347.1
Bankcard....................................................... 4,529.0 3,892.8
Merchant participation......................................... 2,711.6 2,367.0
Other unsecured................................................ 2,865.9 2,236.1
Equipment financing and other commercial....................... 1,066.6 1,851.3
--------- ---------
Receivables managed.................................. $17,960.0 $17,280.9
======== ========
</TABLE>
For certain securitizations, wholly-owned subsidiaries were created (HFC
Revolving Corporation, HRSI Funding, Inc., HFS Funding Corporation, Household
Finance Receivables Corporation II, Household Receivables Funding Corporation,
Household Receivables Funding Corporation II, and HFC Funding Corporation) for
the limited purpose of consummating such transactions.
The amount due and deferred from receivables sales of $789.9 million at
December 31, 1994 included unamortized excess servicing assets and funds
established pursuant to the recourse provisions and holdback reserves for
certain sales totaling $644.8 million. The amount due and deferred also included
customer payments not yet remitted by the securitization trustee to the Company.
In addition, the Company has made guarantees relating to certain securitizations
of $281.3 million plus unpaid interest and has subordinated interests in certain
transactions, which are recorded as receivables, for $83.9 million at December
31, 1994. 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 $181.7
million at December 31, 1994 and represent the Company's best estimate of
probable losses on receivables serviced with limited recourse.
F-13
<PAGE> 33
Contractual maturities of owned receivables were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
-------------------------------------------------------------------------------
1995 1996 1997 1998 1999 THEREAFTER TOTAL
-------- -------- -------- ------ ------ ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage.............. $ 7.2 $ 1.0 $ 1.1 $ 1.2 $ 1.3 $ 121.1 $ 132.9
Home equity................. 432.6 285.7 190.2 127.3 85.7 316.0 1,437.5
Other secured............... 14.2 8.1 21.4 3.9 1.5 92.8 141.9
Bankcard.................... 614.4 442.0 346.4 271.5 212.9 775.8 2,663.0
Merchant participation...... 913.3 568.8 285.7 75.6 -- -- 1,843.4
Other unsecured............. 1,205.6 683.1 395.9 232.6 138.0 210.7 2,865.9
Equipment financing and
other commercial.......... 80.1 134.7 147.9 92.6 87.6 523.7 1,066.6
-------- -------- -------- ------ ------ ------- ---------
Total............. $3,267.4 $2,123.4 $1,388.6 $804.7 $527.0 $2,040.1 $10,151.2
======= ======= ======= ====== ====== ======= ========
</TABLE>
A substantial portion of all consumer receivables, based on the Company's
experience, will be paid prior to contractual maturity. This tabulation,
therefore, is not to be regarded as a forecast of future cash collections. The
ratio of annual cash collections of principal to average principal balances,
excluding bankcard receivables, approximated 47 and 44 percent in 1994 and 1993,
respectively.
The following table summarizes contractual maturities of owned receivables
due after one year by repricing characteristic:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
-------------------------
OVER 1 BUT
WITHIN 5 OVER 5
YEARS YEARS
----------- --------
(IN MILLIONS)
<S> <C> <C>
Receivables at predetermined interest rates.......................... $ 2,332.5 $ 853.0
Receivables at floating or adjustable rates.......................... 2,511.2 1,187.1
--------- --------
Total...................................................... $ 4,843.7 $2,040.1
========= =======
</TABLE>
Nonaccrual owned receivables totaled $275.9 million at December 31, 1994.
Interest income that would have been recorded in 1994 if such nonaccrual
receivables had been current and in accordance with contractual terms was
approximately $46 million. Interest income that was included in net income for
1994 on those receivables was approximately $17 million. Renegotiated commercial
loans at December 31, 1994 totaled $41.8 million. The Company recorded $1.2
million of interest earned on such loans in 1994. Had the loans been performing
in accordance with their original terms, interest income in 1994 would have been
approximately $2 million higher. There were $.5 million of commitments at
December 31, 1994 to lend additional funds to borrowers whose loans were
renegotiated.
For further information on nonperforming assets, see page 12.
F-14
<PAGE> 34
A rollforward of the Company's credit loss reserves for the years ended
December 31, 1994, 1993 and 1992 is shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1994 1993 1992
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Credit loss reserves for owned receivables at January 1.......... $ 452.7 $ 423.3 $ 488.9
Provision for credit losses -- owned receivables................. 435.9 494.5 368.3
Owned receivables charged off.................................... (517.8) (567.7) (473.4)
Recoveries on owned receivables.................................. 78.1 68.7 60.7
Credit loss reserves on receivables purchased, net............... (30.6) 1.9 (16.0)
Other, net (1)................................................... (4.6) 32.0 (5.2)
------- ------- -------
Total credit loss reserves for owned receivables at December
31 (2).................................................... 413.7 452.7 423.3
------- ------- -------
Credit loss reserves for receivables serviced with limited
recourse at January 1.......................................... 134.5 160.9 91.6
Provision for credit losses -- receivables serviced with limited
recourse....................................................... 187.9 176.0 251.1
Receivables charged off.......................................... (150.0) (176.3) (192.2)
Recoveries....................................................... 5.6 4.7 3.5
Other, net (1)................................................... 3.7 (30.8) 6.9
------- ------- -------
Total credit loss reserves for receivables serviced with
limited recourse at December 31........................... 181.7 134.5 160.9
------- ------- -------
Total credit loss reserves for managed receivables at
December 31 (2)........................................... $ 595.4 $ 587.2 $ 584.2
======= ======= =======
</TABLE>
---------------
(1) The 1993 amount includes the transfer, from serviced with limited recourse
to owned, of credit loss reserves associated with the return of receivables
to the owned portfolio upon the culmination of a securitization
transaction.
(2) Includes reserves of $172.9 and $203.3 million in 1993 and 1992,
respectively, on receivables previously classified as liquidating
commercial receivables.
F-15
<PAGE> 35
4. 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>
1994
Balance............................................ $3,268.4 $ 532.2 $3,800.6
Highest aggregate month-end balance................ -- -- 5,053.2
Average borrowings................................. 3,964.4 487.1 4,451.5
Weighted average interest rate:
At year end...................................... 6.2% 6.0% 6.2%
Paid during year................................. 4.4 6.9 4.6
1993
Balance............................................ $3,731.7 $ 590.1 $4,321.8
Highest aggregate month-end balance................ -- -- 4,789.6
Average borrowings................................. 3,459.5 598.7 4,058.2
Weighted average interest rate:
At year end...................................... 3.5% 4.0% 3.6%
Paid during year................................. 3.5 4.8 3.7
1992
Balance............................................ $3,176.7 $1,041.2 $4,217.9
Highest aggregate month-end balance................ -- -- 4,701.7
Average borrowings................................. 3,300.7 673.4 3,974.1
Weighted average interest rate:
At year end...................................... 4.0% 4.4% 4.1%
Paid during year................................. 3.8 7.1 4.4
</TABLE>
---------------
* Included in outstanding balances at year-end 1993 and 1992 were commercial
paper obligations of the Australian operation of $191.5 and $144.4 million,
respectively.
Interest expense for commercial paper, bank and other borrowings totaled
$206.4, $151.0 and $174.2 million for 1994, 1993 and 1992, respectively.
The Company maintains various bank credit agreements primarily to support
commercial paper borrowings. At December 31, 1994 the Company had total bank
credit agreements of $3.9 billion, all of which were unused. Formal credit lines
are reviewed annually, and revolving credit agreements expire at various dates
from 1995 to 1999. Borrowings under credit agreements generally are available at
the prime rate or at a surcharge over the London Interbank Offered Rate (LIBOR).
Annual commitment fee requirements to support availability of credit agreements
at December 31, 1994 totaled $5.5 million.
F-16
<PAGE> 36
5. SENIOR AND SENIOR SUBORDINATED DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR)
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------
1994 1993
-------- --------
(IN MILLIONS)
<S> <C> <C>
SENIOR DEBT
3.75% to 7.49%; due 1995 to 2005.............................. $1,365.5 $1,236.3
7.5% to 7.99%; due 1995 to 2004............................... 1,324.1 1,394.1
8.0% to 8.99%; due 1995 to 2004............................... 1,085.6 769.9
9.0% to 9.99%; due 1995 to 2001............................... 608.8 1,099.8
10.0% and greater; due 1995 to 2001........................... 38.3 50.7
Variable interest rate debt; 3.26% to 6.69%; due 1995 to
2015....................................................... 2,870.5 1,778.5
SENIOR SUBORDINATED DEBT
9.00% to 9.63%; due 2000 to 2001.............................. 400.0 400.0
10.13%; due 1996.............................................. 100.0 100.0
Unamortized discount............................................ (64.5) (15.6)
-------- --------
Total senior and senior subordinated debt.................. $7,728.3 $6,813.7
======== ========
</TABLE>
Weighted average interest rates, excluding the impact of interest rate swap
agreements, were 7.1 percent at both December 31, 1994 and 1993, and 7.7 percent
at December 31, 1992. Interest expense for senior and senior subordinated debt,
including the impact of interest rate swap agreements, was $411.8, $359.2 and
$459.0 million for 1994, 1993 and 1992, respectively.
Maturities of senior and senior subordinated debt were:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1994
---------------
(IN MILLIONS)
<S> <C>
1995........................................ $ 1,635.1
1996........................................ 1,582.4
1997........................................ 1,383.9
1998........................................ 294.5
1999........................................ 782.4
Thereafter.................................. 2,050.0
---------
Total..................................... $ 7,728.3
=========
</TABLE>
At December 31, 1994 there were no significant restrictions on retained
earnings in any of HFC's various indentures and agreements. Cash dividends or
advances to HFC by certain of its subsidiaries are limited by government or
statutory regulation. At December 31, 1994 approximately $1.2 billion of
consolidated net assets were so restricted.
6. DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
In connection with its asset/liability management program and in the normal
course of business, the Company enters into various transactions involving
derivative and other off-balance sheet financial instruments. These instruments
are primarily 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 Liquidity and Capital Resources on pages 15 and
16.
The financial instruments used by the Company, which include interest rate
contracts and foreign exchange rate contracts, as well as off-balance sheet
financial instruments such as commitments to extend credit, financial guarantees
and recourse obligations, have varying degrees of credit risk and/or market
risk.
F-17
<PAGE> 37
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 risk 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.
The Company's exposure to credit loss under commitments to extend credit,
financial guarantees and recourse obligations is represented by the contract
amount. The Company's credit quality and collateral policies for commitments and
guarantees are the same as those for receivables that are recorded on the
balance sheet.
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 and by entering into counterbalancing
positions.
INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS
The following tables summarize the activity in interest rate and foreign
exchange contracts for the years 1994, 1993 and 1992:
HEDGING/SYNTHETIC ALTERATION INSTRUMENTS
<TABLE>
<CAPTION>
NON EXCHANGE TRADED
EXCHANGE TRADED --------------------------------------------------------
--------------------------------------------- INTEREST
RATE
INTEREST RATE FOREIGN EXCHANGE FORWARD
FUTURES CONTRACTS OPTIONS INTEREST RATE CONTRACTS CONTRACTS OTHER RISK
--------------------- --------------------- RATE ------------------- --------- MANAGEMENT
PURCHASED SOLD PURCHASED WRITTEN SWAPS PURCHASED SOLD PURCHASED INSTRUMENTS
--------- --------- --------- --------- --------- --------- ------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Notional amount, 1991... -- -- -- -- $ 5,089.9 $ 32.2 $ (75.0) -- $ 302.5
New contracts........... $ 8,071.0 $(7,452.0) $ 370.9 $ (370.9) 6,434.2 904.4 (917.8) -- 117.4
Matured or expired
contracts............. (1,485.0) 1,036.0 -- -- (2,646.5) (25.3) .5 -- --
Terminated contracts.... -- -- -- -- (585.0) (205.0) 205.0 -- --
In-substance maturities
(1)................... (6,416.0) 6,416.0 (370.9) 370.9 -- (678.8) 678.8 -- --
--------- --------- --------- --------- --------- --------- ------- --------- ----------
Notional amount, 1992... $ 170.0 -- -- -- $ 8,292.6 $ 27.5 $(108.5) -- $ 419.9
======== ======== ======== ======== ======== ======== ======= ======== ==========
Fair value, 1992 (2).... -- -- -- -- $ 115.9 -- $ .4 -- $ .9
--------- --------- --------- --------- --------- --------- ------- --------- ----------
Notional amount, 1992... $ 170.0 -- -- -- $ 8,292.6 $ 27.5 $(108.5) -- $ 419.9
New contracts........... 5,780.5 $(3,200.5) $ 2,084.7 $(2,363.5) 8,453.5 881.0 (882.4) -- 893.9
Matured or expired
contracts............. (2,750.0) -- (1,236.2) 1,515.9 (2,756.5) (37.7) 31.8 -- (115.0)
Terminated contracts.... (475.0) 475.0 -- -- (275.0) (60.0) 60.0 -- --
In-substance maturities
(1)................... (2,725.5) 2,725.5 (818.9) 807.6 -- (807.4) 807.4 -- --
--------- --------- --------- --------- --------- --------- ------- --------- ----------
Notional amount, 1993... -- -- $ 29.6 $ (40.0) $13,714.6 $ 3.4 $ (91.7) -- $ 1,198.8
======== ======== ======== ======== ======== ======== ======= ======== ==========
Fair value, 1993 (2).... -- -- -- -- $ 220.8 -- $ .1 -- $ 57.7
--------- --------- --------- --------- --------- --------- ------- --------- ----------
Notional amount, 1993... -- -- $ 29.6 $ (40.0) $13,714.6 $ 3.4 $ (91.7) -- $ 1,198.8
New contracts........... $ 8,009.9 $(8,799.2) 8,867.9 (5,707.5) 7,916.3 1,026.6 (949.3) $ 180.0 372.9
Matured or expired
contracts............. -- -- (3,150.0) -- (5,481.1) -- -- -- (1,043.9)
Terminated contracts.... (63.5) 759.8 -- -- (2,075.0) (46.5) 43.9 -- (130.5)
In-substance maturities
(1)................... (7,946.4) 7,946.4 (5,747.5) 5,747.5 -- (983.5) 928.1 -- --
--------- --------- --------- --------- --------- --------- ------- --------- ----------
Notional amount, 1994... -- $ (93.0) -- -- $14,074.8 -- $ (69.0) $ 180.0 $ 397.3
======== ======== ======== ======== ======== ======== ======= ======== ==========
Fair value, 1994 (2).... -- $ .8 -- -- $ (341.5) -- -- $ .1 $ 90.0
--------- --------- --------- --------- --------- --------- ------- --------- ----------
</TABLE>
F-18
<PAGE> 38
TRADING INSTRUMENTS(3)
<TABLE>
<CAPTION>
EXCHANGE TRADED
---------------------------------------------- NON EXCHANGE TRADED
-------------------------------------------
INTEREST RATE INTEREST RATE
FUTURES CONTRACTS OPTIONS FORWARD CONTRACTS OTHER RISK
--------------------- ---------------------- INTEREST ------------------- MANAGEMENT
PURCHASED SOLD PURCHASED WRITTEN RATE SWAPS PURCHASED SOLD INSTRUMENTS
--------- --------- --------- ---------- ---------- --------- ------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional amount, 1991... $ 4,508.5 $(3,303.0) $ 875.1 $ (5,895.2) $ 100.0 $ 21.0 -- $ 505.3
Net change.............. (2,059.3) 456.0 1,813.0 (4,710.4) -- 240.0 $(261.0) 294.7
--------- --------- --------- ---------- ---------- --------- ------- ----------
Notional amount, 1992... $ 2,449.2 $(2,847.0) $ 2,688.1 $(10,605.6) $ 100.0 $ 261.0 $(261.0) $ 800.0
========= ========= ========= ========== ========== ========= ======== ===========
Fair value, 1992 (2).... $ .9 $ (.9) $ 1.4 $ (5.9) $ (.3) $ 232.7 $(232.9) --
--------- --------- --------- ---------- ---------- --------- ------- ----------
Notional amount, 1992... $ 2,449.2 $(2,847.0) $ 2,688.1 $(10,605.6) $ 100.0 $ 261.0 $(261.0) $ 800.0
Net change.............. (2,117.2) 1,970.0 7,020.9 (5,840.5) -- (261.0) 261.0 (300.0)
--------- --------- --------- ---------- ---------- --------- ------- ----------
Notional amount, 1993... $ 332.0 $ (877.0) $ 9,709.0 $(16,446.1) $ 100.0 -- -- $ 500.0
========= ========= ========= ========== ========== ========= ======== ===========
Fair value, 1993 (2).... $ 45.1 $ (45.8) $ 2.8 $ (2.0) $ 0.6 -- -- --
--------- --------- --------- ---------- ---------- --------- ------- ----------
Notional amount, 1993... $ 332.0 $ (877.0) $ 9,709.0 $(16,446.1) $ 100.0 -- -- $ 500.0
Net change.............. 2,660.0 257.0 (9,709.0) 15,981.1 (100.0) -- -- (700.0)
--------- --------- --------- ---------- ---------- --------- ------- ----------
Notional amount, 1994... $ 2,992.0 $ (620.0) -- $ (465.0) -- -- -- $ (200.0)
========= ========= ========= ========== ========== ========= ======== ===========
Fair value, 1994 (2).... $ (2.2) $ 1.1 -- $ 1.4 -- -- -- $ (.3)
Average fair value,
1994.................. (2.8) 2.7 $ 2.8 (2.5) $ (1.0) -- -- (.1)
--------- --------- --------- ---------- ---------- --------- ------- ----------
</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 item 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 8, "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.
(3) The results of trading activities were immaterial to the financial results
of the Company for 1994, 1993 and 1992. In late 1994, the Company decided
to discontinue its trading activities and hedged its open positions.
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
F-19
<PAGE> 39
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, 1994:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Investment securities, held-to-maturity................................. $ 195.0
Receivables:
Home equity........................................................... 1,414.3
Bankcard.............................................................. 1,490.5
Merchant participation................................................ 450.0
Other unsecured....................................................... 750.0
---------
Total receivables owned.......................................... 4,104.8
Commercial paper, bank and other borrowings............................. 912.4
Senior and senior subordinated debt..................................... 5,312.6
Receivables serviced with limited recourse.............................. 3,550.0
---------
Total items synthetically altered with interest rate swaps....... $14,074.8
=========
</TABLE>
---------------
Note: In all instances, the notional amount is less than the carrying value of
the related asset/liability or off-balance sheet item.
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, or
floating rate assets or debt from one floating rate index to another.
Occasionally, interest rate swaps are used to convert fixed rate assets to a
floating rate. Interest rate swaps are also used to synthetically alter interest
rate characteristics on certain receivables 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). Further, in other transactions the underlying
receivables reprice on one index while the pass-through rate reprices on another
index. See Note 3, "Receivables" for additional information on securitizations
and sales of receivables.
F-20
<PAGE> 40
The following table summarizes the maturities of interest rate swaps
outstanding at December 31, 1994:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999 2000 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........... $ 188.5 $ 250.0 $ 300.0 $150.0 -- -- -- $ 888.5
Weighted average receive
rate................... 5.88% 5.93% 5.69% 5.94% -- -- -- 5.84%
Weighted average pay
rate................... 7.70 5.92 6.31 5.52 -- -- -- 6.36
Pay a floating rate/receive
a fixed rate:
Notional value........... $1,046.2 $1,600.7 $1,367.8 $335.5 $1,366.7 $140.0 $2,094.7 $ 7,951.6
Weighted average receive
rate................... 5.38% 6.39% 6.10% 5.43% 7.21% 6.29% 7.09% 6.49%
Weighted average pay
rate................... 5.90 6.33 6.07 6.15 6.02 5.77 5.87 6.03
Pay a floating rate/receive
a different floating
rate:
Notional value........... $3,454.9 $ 554.6 $ 578.7 -- $ 646.5 -- -- $ 5,234.7
Weighted average receive
rate................... 5.78% 5.14% 6.17% -- 6.02% -- -- 5.78%
Weighted average pay
rate................... 6.21 5.85 5.91 -- 5.84 -- -- 6.09
-------- -------- -------- ------ -------- ------ --------- ---------
Total notional value....... $4,689.6 $2,405.3 $2,246.5 $485.5 $2,013.2 $140.0 $2,094.7 $14,074.8
======== ======== ======== ====== ======== ====== ========= =========
Total average rates on
swaps:
Receive rate............... 5.69% 6.06% 6.06% 5.58% 6.82% 6.29% 7.09% 6.19%
Pay rate................... 6.20 6.17 6.06 5.96 5.96 5.77 5.87 6.08
</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 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 have impacted
in the past, and will impact in the future, 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. Without
the use of these instruments, net interest margin would have declined by 71, 160
and 96 basis points in 1994, 1993 and 1992, respectively.
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 forward contracts and interest rate futures contracts.
Foreign exchange rate forward contracts were also utilized by the Company to
reduce exposure in its Australian operation to fluctuations in exchange rates.
Interest rate forward and interest rate futures contracts primarily are used in
the Company's trading activities. Interest rate forward and futures contracts
also are used to hedge resets of interest rates on the Company's floating rate
assets and liabilities. For futures used in both hedging and trading activities,
the Company's exposure to credit risk is limited, as these contracts are traded
on organized exchanges. Each day, changes in contract values are settled in
cash. In contrast, forward contracts used in both hedging and trading activities
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 for 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. The Company
uses options, both written and purchased,
F-21
<PAGE> 41
for its trading activities. For written options, the Company is exposed to
market risk but generally not credit risk. The credit risk and market risk
associated with purchased options are limited to the premium paid, which is
included in the balance sheets in other assets.
Other risk management instruments used in the Company's hedging and trading
activities consist of caps and floors and foreign currency swaps. Caps and
floors written expose the Company to market risk but not to credit risk. Credit
and 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 $8.5 and $9.7 million and deferred losses of $53.0 and
$7.8 million from hedging/synthetic alteration instruments were recorded on the
balance sheets at December 31, 1994 and 1993, respectively. The weighted average
amortization period associated with the deferred gains was 3.4 and 3.8 years at
December 31, 1994 and 1993, respectively. The weighted average amortization
period for the deferred losses was 3.4 and 4.2 years at December 31, 1994 and
1993, respectively.
At December 31, 1994 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 $63.0 million.
COMMITMENTS AND GUARANTEES
The Company enters into various commitments and guarantees to meet the
financing needs of its customers. However, the Company expects a substantial
portion of these agreements to expire unexercised, and as a result, the amounts
below do not necessarily represent future cash requirements.
The Company's significant commitments and guarantees consisted of the
following:
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------
1994 1993
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Bank and private-label credit cards................... $ 31,336.1 $ 20,956.6
Other consumer lines of credit........................ 2,544.2 1,264.8
Other loan commitments and guarantees................. 76.5 390.3
</TABLE>
Commitments to extend credit to consumers represent the unused credit
limits on bank and private-label credit cards and on other lines of credit.
Commitments on bank and private-label credit cards are cancelable at any time.
The Company does not require collateral to secure credit card agreements. Other
consumer lines of credit include home equity lines of credit, which are secured
by residential real estate, and other unsecured lines of credit. Commitments on
these lines of credit generally are cancelable by the Company when a
determination is made that a borrower may not be able to meet the terms of the
credit agreement.
Other loan commitments include commitments to fund commercial loans and
letters of credit, and guarantees for the payment of principal and interest on
municipal industrial development bonds.
Commercial loan commitments, including working capital lines and letters of
credit, totaled $24.3 and $150.7 million at December 31, 1994 and 1993,
respectively. These commitments are collateralized to varying extents by
inventory, receivables, property and equipment and other assets of the
borrowers. These commitments were entered into prior to the Company's decision
to exit these product lines.
The Company has issued guarantees of $52 and $136 million at December 31,
1994 and 1993, respectively, for the payment of principal and interest on
municipal industrial development bonds. The guarantees expire from 1995 through
1996. The Company has security interests in underlying properties for these
guarantees, with an average collateral value of 105 and 101 percent of the
guarantees at December 31, 1994 and 1993, respectively.
F-22
<PAGE> 42
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, 1994 and 1993. The Company lends nationwide;
the following geographic areas comprised more than 10 percent of total managed
domestic receivables at December 31, 1994: California--22 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)--15 percent, Northeast (CT, ME, MA, NH, NY, RI, VT)--14
percent and Southeast (AL, FL, GA, KY, MS, NC, SC, TN)--13 percent.
7. PREFERRED STOCK
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
7.25% term cumulative preferred Series 1992-A,
1,000,000 depositary shares (1)........................................... $100.0 $100.0
</TABLE>
---------------
(1) Depositary share represents 1/3,000 share of preferred stock.
The term cumulative preferred stock is non-voting and has a dividend rate
of 7.25 percent, is not redeemable at the option of the Company prior to the
mandatory redemption date of August 15, 1997, and has a liquidation value of
$300,000 per share.
8. 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").
Financial instruments include cash, receivables, investments, debt, insurance
reserves related to periodic payment annuities and guaranteed investment
contracts and off-balance sheet financial instruments. Financial instruments
specifically exclude leases and other insurance reserves, as required by FAS No.
107. Additionally, 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 sheet (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 value of financial instruments, as
disclosed, does not fully represent the entire value, nor the changes in the
entire value, of the Company.
Approximately 30 percent in both 1994 and 1993 of the fair value of
financial instruments disclosed was determined using quoted market prices.
Because no actively traded market exists, however, 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.
F-23
<PAGE> 43
The following is a summary of the carrying value and estimated fair value
of the Company's financial instruments:
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------------------------------------------------------------
1994 1993
----------------------------------- -----------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE DIFFERENCE VALUE VALUE DIFFERENCE
-------- --------- ---------- -------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Cash........................... $ 97 $ 97 -- $ 28 $ 28 --
Investment securities.......... 7,250 7,206 $ (44) 7,082 7,318 $ 236
Receivables.................... 10,476 10,730 254 10,894 11,046 152
Assets pending sale............ 398 398 -- -- -- --
-------- --------- ---------- -------- --------- ----------
Subtotal..................... 18,221 18,431 210 18,004 18,392 388
-------- --------- ---------- -------- --------- ----------
Commercial paper, bank and
other borrowings............. (3,801) (3,801) -- (4,322) (4,322) --
Senior and senior subordinated
debt......................... (7,728) (7,665) 63 (6,814) (7,077) (263)
Insurance reserves............. (6,643) (6,683) (40) (5,982) (6,352) (370)
-------- --------- ---------- -------- --------- ----------
Subtotal..................... (18,172) (18,149) 23 (17,118) (17,751) (633)
-------- --------- ---------- -------- --------- ----------
Interest rate and foreign
exchange contracts........... 51 (251) (302) 51 279 228
Commitments to extend credit
and guarantees............... -- 35 35 -- 36 36
-------- --------- ---------- -------- --------- ----------
Subtotal..................... 51 (216) (267) 51 315 264
-------- --------- ---------- -------- --------- ----------
Total........................ $ 100 $ 66 $ (34) $ 937 $ 956 $ 19
======== ======== ======= ======== ======== =======
</TABLE>
The fair value in excess of the carrying value (the "Difference") declined
from $19 million at December 31, 1993 to $(34) million at December 31, 1994, a
decrease of $53 million. The relationship between the rise in the overall
interest rate environment from year-end 1993 to year-end 1994 and the repricing
characteristics of the Company's financial instruments was the most significant
factor in causing the decline in the Difference. The Company believes that in
the rising interest rate environment of 1994 the Difference for the Company's
insurance reserves of interest-sensitive products totaling $5.3 billion (which
are not required to be valued by FAS No. 107) would increase and therefore
offset a portion of the decline in the total Difference.
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: Quoted market prices were used to determine fair
value for investment securities.
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.
F-24
<PAGE> 44
The fair value of consumer receivables included an estimate, on a present
value basis, of future excess servicing cash flows associated with
securitizations and sales of certain home equity, bankcard and merchant
participation receivables.
Assets pending sale: In the fourth quarter of 1994 the Company entered into
an agreement to sell these assets at net book value to a third party, as
described on page 2 of Management's Discussion and Analysis. Accordingly,
estimated fair value was the carrying value at December 31, 1994.
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: Quoted market prices where available
were used to determine fair value. For those instruments for which quoted market
prices were not available, the estimated fair value 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 and guaranteed investment contracts was estimated by
discounting future expected cash flows at interest rates offered by the Company
on such products at December 31, 1994 and 1993. 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 6, "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.
9. LEASES
The Company leases certain offices, buildings and equipment for periods of
up to 10 years with various renewal options. The majority of such leases are
noncancelable operating leases. Net rental expense under operating leases was
$19.2, $26.6 and $25.9 million for 1994, 1993 and 1992, respectively.
Future net minimum lease commitments under noncancelable operating lease
arrangements were:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1994
---------------
(IN MILLIONS)
<S> <C>
1995........................................................... $16.4
1996........................................................... 12.9
1997........................................................... 10.8
1998........................................................... 7.9
1999........................................................... 4.0
Thereafter..................................................... 1.9
------
Net minimum lease commitments.................................. $53.9
======
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company and its U.S. subsidiaries participate in Household
International's Retirement Income Plan ("RIP"), which covers substantially all
U.S. full-time employees. No separate actuarial valuation has been
F-25
<PAGE> 45
made for the Company's participation in RIP. The fair value of plan assets in
RIP exceeded Household International's projected benefit obligation by $199.3
and $212.6 million at December 31, 1994 and 1993, respectively. The 1994 and
1993 projected benefit obligations for RIP were determined using an assumed
weighted average discount rate of 8.25 and 7.25 percent, respectively; an
assumed compensation increase of 4.75 and 3.75 percent, respectively; and an
assumed weighted average long-term rate of return on plan assets of 10.00 and
9.50 percent, respectively. At December 31, 1994 and 1993, the Company's
estimated share of prepaid pension cost was $121.2 and $113.2 million,
respectively. Plan benefits are based primarily on years of service and
compensation of participants. The Company's share of total pension income due to
the overfunded status of RIP was $8.0, $11.4 and $22.4 million for 1994, 1993
and 1992, respectively.
The Company participates in Household International's defined contribution
plan where each participant's contribution is matched by the Company up to a
maximum of 6 percent of the participant's compensation. For 1994, 1993 and 1992
the Company's costs totaled $9.6, $9.2 and $9.2 million, respectively.
The Company also participates in Household International's plans which
provide medical, dental and life insurance benefits to retirees and eligible
dependents. The plans are funded on a pay-as-you-go basis and cover
substantially all employees who meet certain age and vested service
requirements. Household International has instituted dollar limits on its
payments under the plans to control the cost of future medical benefits.
Effective January 1, 1993 Household International adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("FAS No. 106"). FAS No. 106
requires the recognition of 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. Household
International is recognizing the transition obligation, which represents the
unfunded and unrecognized accumulated postretirement benefit obligation at that
date, over 20 years.
While no separate actuarial valuation has been made for the Company's
participation in Household International's plans for postretirement medical,
dental and life benefits, its share of the liability and expense has been
estimated. Household International's accumulated postretirement benefit
obligation was $123.7 and $152.5 million at December 31, 1994 and 1993,
respectively. The Company's estimated share of Household International's accrued
postretirement benefit obligation was $25.7 and $10.1 million at December 31,
1994 and 1993, respectively. In addition, both the Company's estimated share of
postretirement benefit expense recognized in 1994 and 1993 was $15.8 and $13.9
million, respectively.
Through 1992, it had been the Company's policy to charge the cost of
retiree health care and life insurance benefits to expense when benefits were
paid. The cost of these plans to Household International totaled $2.9 million in
1992.
In 1994, the Company established a special purpose corporation to hold
certain investments designated as available to satisfy its postretirement
benefit obligations. These assets, with a carrying value of $63 million at
December 31, 1994, remain general assets of the Company and have not been used
to reduce the accumulated postretirement benefit obligation.
Household International's accumulated postretirement benefit obligation at
December 31, 1994 and 1993 was determined using an assumed weighted average
discount rate of 8.5 and 7.5 percent, respectively, and an assumed annual
compensation increase of 4.75 and 3.75 percent, respectively. A 14.2 and 15.0
percent annual rate of increase in the gross cost of covered health care
benefits is assumed for 1995 and 1994. This rate of increase is assumed to
decline by 1 percentage point in each year after 1995.
The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rate by 1
percentage point would have increased the Company's share of both the 1994 and
1993 net periodic postretirement benefit cost by $.7 million and its share of
the accumulated postretirement benefit obligation at December 31, 1994 by $6.5
and $8.5 million, respectively. A 1 percentage point increase would have
increased Household International's accumulated postretirement benefit
obligation at December 31, 1994 and 1993 by $8.5 and $12.3 million,
respectively.
F-26
<PAGE> 46
11. INCOME TAXES
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1994 1993 1992
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Provision for income taxes related to operations.......... $103.6 $107.4 $92.3
Income taxes related to adjustments included in common
shareholder's equity:
Unrealized gain (loss) on investments, net.............. (64.4) 19.6 .8
Foreign currency translation adjustments................ (4.4) .2 .7
------ ------ -----
Total................................................ $ 34.8 $127.2 $93.8
====== ====== =====
</TABLE>
Provisions for income taxes related to operations were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1994 1993 1992
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
CURRENT
United States........................................... $ 97.9 $105.8 $78.4
Foreign................................................. 1.3 .6 (.5)
------ ------ -----
Total current........................................ 99.2 106.4 77.9
------ ------ -----
DEFERRED
United States........................................... 2.8 10.3 14.4
Foreign................................................. 1.6 (9.3) --
------ ------ -----
Total deferred....................................... 4.4 1.0 14.4
------ ------ -----
Total income taxes................................... $103.6 $107.4 $92.3
====== ====== =====
</TABLE>
The significant components of deferred income tax provisions attributable
to income from operations were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1994 1993 1992
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Deferred income tax provision (exclusive of the effects of
other components listed below)............................ $(2.4) $ 3.6 $ 3.1
Adjustment of deferred tax assets and liabilities for
enacted changes in tax rates.............................. -- 4.4 --
Operating loss carryforwards................................ 6.4 1.2 18.2
Investment tax credits...................................... .4 .5 --
Adjustment of valuation allowance........................... -- (8.7) (6.9)
----- ----- -----
Deferred income tax provision.......................... $ 4.4 $ 1.0 $14.4
===== ===== =====
</TABLE>
Income before income taxes from foreign operations was $7.8, $1.0 and $14.0
million in 1994, 1993 and 1992, respectively.
F-27
<PAGE> 47
Effective tax rates are analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................ 35.0% 35.0% 34.0%
Increase (decrease) in rate resulting from:
Amortization of intangible assets...................... 2.0 .3 1.2
State and local taxes, net of federal benefit.......... 1.4 1.7 1.7
Leveraged lease tax benefits........................... (4.3) (4.2) (2.5)
Noncurrent tax requirement............................. (1.3) 2.0 --
Foreign loss carryforwards............................. (.4) (1.8) (.7)
Dividends received deduction applicable to term
preferred stocks.................................... (1.5) (1.9) (2.2)
Sale of foreign subsidiary............................. (2.5) -- --
Impact of purchase accounting.......................... -- -- (3.2)
Other.................................................. .4 1.7 (.5)
---- ---- ----
Effective tax rate.................................. 28.8% 32.8% 27.8%
==== ==== ====
</TABLE>
In accordance with the Company's accounting policy, provisions for U.S.
income taxes had not been made at December 31, 1994 on $85.9 million of
undistributed earnings of its U.S. life insurance subsidiary accumulated as
policyholders' surplus under tax laws in effect prior to 1984. 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. The amount of deferred tax
liability not recognized was $30.1 million at December 31, 1994.
Temporary differences which gave rise to a significant portion of deferred
tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
DEFERRED TAX LIABILITIES
Leveraged lease transactions, net............................ $395.8 $400.9
Insurance policy acquisition costs........................... 126.9 132.1
Pension plan assets.......................................... 46.8 42.7
Receivables sold............................................. 65.7 25.9
Deferred loan origination costs.............................. 38.0 24.0
Other........................................................ 84.9 71.6
------ ------
Total deferred tax liabilities............................ 758.1 697.2
------ ------
DEFERRED TAX ASSETS
Credit loss reserves......................................... 263.9 212.5
Insurance reserves........................................... 165.4 145.7
Other........................................................ 118.3 77.1
------ ------
Total deferred tax assets................................. 547.6 435.3
------ ------
Net deferred tax liability at end of year................. $210.5 $261.9
====== ======
</TABLE>
F-28
<PAGE> 48
12. TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
HFC periodically advances funds to Household International and affiliates
or receives amounts in excess of the parent company's current requirements.
Advances to parent company and affiliates consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
Parent company and other subsidiaries............................... $444.7 $329.6
Household Bank, f.s.b............................................... 35.1 29.6
Household Global Funding, Inc....................................... 2.5 2.5
------ ------
Advances to parent company and affiliates...................... $482.3 $361.7
====== ======
</TABLE>
These advances bear interest at various market interest rates. Interest
income on advances to parent company and affiliates is reported with interest
expense and includes the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1994 1993 1992
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Parent company and other subsidiaries......................... $30.6 $12.7 $17.1
Household Bank, f.s.b......................................... .2 .2 .1
Household Global Funding, Inc................................. -- 3.8 4.2
----- ----- -----
Interest income on advances to parent company and
affiliates............................................. $30.8 $16.7 $21.4
===== ===== =====
</TABLE>
Throughout 1994, 1993 and 1992 certain wholly-owned bank subsidiaries of
the Company borrowed monies from Household Bank f.s.b. ("the Bank") at arm's
length interest rates. The balance at December 31, 1994 was $350 million and was
included in commercial paper, bank and other borrowings for financial statement
purposes. Interest expense on these borrowings totaled $1.7, $2.6 and $18.2
million during 1994, 1993 and 1992, respectively.
On June 1, 1994 Household International designated a wholly-owned bank
subsidiary of the Company as the issuer of the GM Card. These accounts were
previously issued by the Bank. The Company pays a monthly fee, at fair market
value, to Household International for this designation.
In November 1993 the Company purchased approximately $133 million of
purchased mortgage servicing rights ("PMSRs") from the Bank. These rights were
purchased at net book value which approximated market value. The Bank will
continue to act as a subservicer for the Company and will be paid a subservicing
fee based on the Bank's estimated costs of servicing the loans. Due to a
restructuring of Bank operations which began in the fourth quarter of 1994, the
Company may pursue the sale of these PMSRs. During 1994 the Company paid $7.6
million in subservicing fees to the Bank.
The Company has an agreement with the Bank to originate loans using the
Bank's lending criteria. These loans are originated via direct mail programs and
are serviced by the Company for an arm's length fee. In 1994 and 1993, the
Company originated approximately $51 and $73 million, respectively, of loans for
the Bank under this program. The Company received approximately $4 and $5
million in 1994 and 1993, respectively, from the Bank for servicing these loans.
Household International has entered into a Regulatory Capital
Maintenance/Dividend Agreement with the Office of Thrift Supervision. Under this
agreement, as amended, as long as Household International is the parent company
of the Bank, Household International and the Company agree to maintain the
capital of the Bank at the levels currently required or any subsequent
regulatory capital requirements. The agreement also requires that any capital
deficiency be cured by Household International and/or the Company within thirty
days. Household International made cash capital contributions of $30 million in
both 1994 and 1993, and $54
F-29
<PAGE> 49
million in 1992 to maintain the regulatory capital of the Bank at levels
consistent with management's objectives.
Certain support services of the Company are performed by a wholly-owned
subsidiary of Household International. This subsidiary was established to
maximize the efficiency and consolidate the back room operating functions of
various subsidiaries of Household International. The Company has negotiated an
arms-length agreement with this subsidiary for services such as item processing,
collections and billings, accounts payable, and payroll processing.
Additionally, the Company was allocated and/or billed for costs incurred on its
behalf by Household International for expenses including insurance, credit, and
legal and other fees. These expenses were recorded in other operating expenses
and totaled approximately $288, $261 and $207 million in 1994, 1993 and 1992,
respectively.
13. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business there are various legal proceedings
pending against the Company. Management considers that the aggregate
liabilities, if any, resulting from such actions would not have a material
adverse effect on the consolidated financial position of the Company. See Note
6, "Derivative Financial Instruments and Other Financial Instruments with
Off-Balance Sheet Risk" for a discussion regarding commitments and contingent
liabilities related to off-balance sheet financial instruments. See Note 9,
"Leases" for discussion of lease commitments.
F-30
<PAGE> 50
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1994--THREE MONTHS ENDED 1993--THREE MONTHS ENDED
------------------------------------ ------------------------------------
DEC. SEPT. JUNE MAR. DEC. SEPT. JUNE MAR.
------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance income............................... $400.4 $381.5 $366.9 $348.0 $336.0 $332.2 $323.7 $326.2
Interest income from noninsurance investment
securities................................. 10.4 10.3 8.4 9.6 10.0 11.4 11.5 8.0
Interest expense............................. 183.0 163.3 148.4 123.5 128.6 123.1 119.2 139.3
------ ------ ------ ------ ------ ------ ------ ------
Net interest margin.......................... 227.8 228.5 226.9 234.1 217.4 220.5 216.0 194.9
Provision for credit losses on owned
receivables................................ 91.9 126.0 94.1 123.9 124.0 145.6 107.1 117.8
------ ------ ------ ------ ------ ------ ------ ------
Net interest margin after provision for
credit losses.............................. 135.9 102.5 132.8 110.2 93.4 74.9 108.9 77.1
------ ------ ------ ------ ------ ------ ------ ------
Securitization and servicing fee income...... 108.6 92.9 86.5 85.9 92.2 103.7 87.1 100.4
Insurance premiums and contract revenues..... 70.6 21.9 66.7 69.1 60.4 66.8 57.1 58.3
Investment income............................ 124.2 127.1 118.2 136.3 130.2 153.1 132.8 136.0
Fee income................................... 24.7 22.1 18.2 18.1 18.8 15.9 14.9 11.1
Other income................................. (40.4) 19.0 6.0 17.7 33.1 15.4 10.9 18.1
------ ------ ------ ------ ------ ------ ------ ------
Total other revenues......................... 287.7 283.0 295.6 327.1 334.7 354.9 302.8 323.9
------ ------ ------ ------ ------ ------ ------ ------
Salaries and fringe benefits................. 57.5 60.0 61.5 57.7 57.3 53.3 56.2 55.1
Other operating expenses..................... 160.1 145.7 150.7 176.9 133.8 166.0 153.5 150.4
Policyholders' benefits...................... 115.8 80.7 124.0 124.2 128.7 133.7 129.4 125.4
------ ------ ------ ------ ------ ------ ------ ------
Total costs and expenses..................... 333.4 286.4 336.2 358.8 319.8 353.0 339.1 330.9
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes................... 90.2 99.1 92.2 78.5 108.3 76.8 72.6 70.1
Income taxes................................. 15.4 32.6 30.2 25.4 37.1 26.6 21.4 22.3
------ ------ ------ ------ ------ ------ ------ ------
Net income................................... $ 74.8 $ 66.5 $ 62.0 $ 53.1 $ 71.2 $ 50.2 $ 51.2 $ 47.8
====== ====== ====== ====== ====== ====== ====== ======
Segment Net Income:
Finance and Banking........................ $ 63.4 $ 49.1 $ 51.4 $ 41.4 $ 61.0 $ 36.7 $ 41.4 $ 36.1
Individual Life Insurance.................. 11.4 17.4 10.6 11.7 10.2 13.5 9.8 11.7
------ ------ ------ ------ ------ ------ ------ ------
Net income................................... $ 74.8 $ 66.5 $ 62.0 $ 53.1 $ 71.2 $ 50.2 $ 51.2 $ 47.8
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
FOURTH QUARTER RESULTS
Net income for the 1994 fourth quarter was $74.8 million, up 12 percent
from the third quarter and 5 percent from the fourth quarter of 1993. As
described in Management's Discussion and Analysis, the Company recorded a $14
million after-tax loss on the sale of its Australian subsidiary in the fourth
quarter. This loss was substantially offset by the effect of lower loan loss
provision due to improved credit quality and higher securitization income from
the sale of private-label credit card receivables. Income for the quarter also
benefited from continued strong growth in the domestic consumer finance and
credit card operations.
Net interest margin was flat compared to the third quarter but up 5 percent
from the fourth quarter of 1993. The provision for credit losses on owned
receivables declined by over 25 percent compared to the prior and year-ago
quarters. The provision is affected by the significance of securitizations and
sales of receivables in a particular period, as the provision related to
securitized receivables is transferred to securitization and servicing fee
income. The Company securitized and sold approximately $1.8 billion of
receivables in the fourth quarter compared to no sales in the third quarter and
$.6 billion last year. The fourth quarter provision also benefited from sharp
reductions in commercial receivables and overall strong performance of the
consumer and commercial portfolios.
Securitization and servicing fee income rose 17 and 18 percent,
respectively, from the previous quarter and fourth quarter of 1993 due to higher
amounts of receivables sold and serviced with limited recourse outstanding and
gains associated with the securitization and sale of receivables in the quarter.
Insurance
F-31
<PAGE> 51
premiums and contract revenues were up in the quarter due to the sale of a line
of life insurance in the third quarter which reduced these revenues and related
policyholders' benefits by $47.8 million during that period. Investment income
fell slightly primarily due to lower gains on sale of available-for-sale
investment securities in the current quarter. Fee income increased slightly
during the quarter and was up 31 percent from the prior year due to higher
transaction volume on bankcard receivables. Other income was down substantially
in the current quarter due to the loss incurred on the sale of the Company's
Australian subsidiary, and was down compared to the prior year quarter due to
higher prepayment fees on commercial assets and higher income on the Company's
equity investment in a commercial joint venture in the prior year quarter.
Other operating expenses increased 10 and 20 percent from third quarter
1994 and fourth quarter 1993 levels, respectively, due to servicing requirements
of the larger owned or serviced receivables portfolio and initiatives undertaken
to improve efficiency. The Company's efficiency ratio was 54.4 percent in the
1994 fourth quarter, compared to 47.7 percent in the third quarter and 45.1
percent in the 1993 fourth quarter. Excluding the loss on sale of the Australian
operation, the efficiency ratio was 49.5 percent for the quarter. The effective
tax rate in the 1994 fourth quarter was 17.1 percent, down substantially from
32.9 percent in the third quarter due to tax benefits associated with the sale
of the Australian operation. The effective rate was flat with the third quarter
rate excluding the effect of this sale.
F-32
<PAGE> 52
SCHEDULE VIII
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Insurance reserves applicable to finance receivables:
Policy:
Balance at January 1.......................................... $ 6.8 $ 9.6 $ 14.2
Earned premiums............................................... (103.6) (93.6) (89.9)
Net premiums written and reinsurance assumed.................. 103.0 91.7 85.6
Other items................................................... (.9) (.9) (.3)
------- ------ ------
Balance at December 31........................................ 5.3 6.8 9.6
------- ------ ------
Claims:
Balance at January 1.......................................... 43.0 36.1 31.3
Provision for claims.......................................... 49.3 53.0 49.9
Benefits paid................................................. (47.0) (46.1) (45.1)
Other Items................................................... (4.7) -- --
------- ------ ------
Balance at December 31........................................ 40.6 43.0 36.1
------- ------ ------
Total insurance reserves at December 31.......................... $ 45.9 $ 49.8 $ 45.7
======= ====== ======
</TABLE>
F-33
<PAGE> 53
SCHEDULE X
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
COLUMN B
---------------------------
CHARGED TO COSTS AND
EXPENSES
---------------------------
COLUMN A 1994 1993 1992
------------------------------------------------------------------ ------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Depreciation and amortization of intangible assets and similar
deferrals:
Amortization of insurance policy acquisition costs.............. $ 47.8 $ 67.8 $30.3
Amortization of acquired intangibles............................ 56.1 48.0 43.6
------ ------ -----
$103.9 $115.8 $73.9
====== ====== =====
Taxes other than payroll and income taxes......................... $ * $ * $28.0
====== ====== =====
</TABLE>
---------------
* Represents less than 1 percent of total revenues as reported in the related
statements of income.
F-34
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
----------- -------------------------------------------------------------------- ------------
<S> <C> <C>
3(i) Restated Certificate of Incorporation of Household Finance
Corporation ("HFC"), as amended (incorporated by reference to
Exhibit 3(a) of HFC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992).
3(ii) Bylaws of Household Finance Corporation (incorporated by reference
to Exhibit 3(b) of HFC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992).
4(a) Indenture dated as of May 15, 1989, between HFC and Bankers Trust
Company, as Trustee (incorporated by reference to Exhibit 4 to HFC's
Current Report on Form 8-K dated August 3, 1989), as supplemented by
a First Supplemental Indenture dated as of June 15, 1989
(incorporated by reference to Exhibit 4 of HFC's Current Report on
Form 8-K dated June 15, 1989), as amended by Amendment No. 1 dated
October 18, 1990 to the First Supplemental Indenture dated as of
June 15, 1989 (incorporated by reference to Exhibit 4 of HFC's
Current Report on Form 8-K dated October 18, 1990).
4(b) The principal amount of debt outstanding under each other instrument
defining the rights of holders of long-term debt of HFC and its
subsidiaries does not exceed 10 percent of the total assets of HFC
and its subsidiaries on a consolidated basis. HFC agrees to furnish
to the Securities and Exchange Commission, upon request, a copy of
each instrument defining the rights of holders of long-term debt of
HFC and its subsidiaries.
12 Statement of Computation of Ratios of Earnings to Fixed Charges and
to Combined Fixed Charges and Preferred Stock Dividends.
23 Consent of Arthur Andersen LLP, Certified Public Accountants.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 12
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
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 1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income from continuing operations $ 256.4 $220.4 $ 239.5 $ 156.7 $ 230.6
Income taxes 103.6 107.4 92.3 32.5 94.2
-------------------------------------------------------------------------------------------------------------------------
Fixed charges:
Interest expense (1) 656.6 532.9 665.8 930.6 994.8
Interest portion of rentals (2) 8.6 4.9 9.5 12.5 12.6
-------------------------------------------------------------------------------------------------------------------------
Total fixed charges 665.2 537.8 675.3 943.1 1,007.4
-------------------------------------------------------------------------------------------------------------------------
Total earnings as defined $1,025.2 $865.6 $1,007.1 $1,132.3 $1,332.2
=========================================================================================================================
Ratio of earnings to fixed charges 1.54 1.61 1.49 1.20 1.32
=========================================================================================================================
Preferred stock dividends (3) $ 10.1 $ 12.9 $ 14.2 $ 13.7 $ 14.9
=========================================================================================================================
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.52 1.57 1.46 1.18 1.30
=========================================================================================================================
</TABLE>
(1) On December 15, 1989, the Company transferred all the issued and
outstanding stock of its wholly owned subsidiary, Household Financial
Corporation Limited, its Canadian operations, to a subsidiary of
Household International, Inc., the parent of the Company.
The ratio calculation for all years excludes the net income (loss),
income taxes, and fixed charges of the Canadian operations.
(2) For financial statement purposes, interest expense includes income
earned on temporary investment of excess funds (resulting from over-
subscriptions of commercial paper), gains (losses) on purchases of
sinking fund debentures, and interest earned on advances to parent
company and affiliates.
(3) Represents one-third of rentals which approximates the portion
representing interest.
(4) Preferred stock dividends are grossed up to their pre-tax equivalents
based on effective tax rates of 28.8, 32.8, 27.8, 17.2 and 29.0 percent
for the years ended December 31, 1994, 1993, 1992, 1991 and 1990,
respectively.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Household Finance Corporation:
As independent public accountants, we hereby consent to the incorporation of
our report dated February 3, 1995, included in this annual report on Form 10-K
of Household Finance Corporation for the year ended December 31, 1994, into the
Company's previously filed Registration Statements No. 33-48854, No. 33-51451,
No. 33-55043, and No. 33-55561 on Form S-3.
Arthur Andersen LLP
Chicago, Illinois
March 24, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND ITS SUBSIDIARIES
IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL
STATEMENTS PREVIOUSLY FILED WITH THE SECURITIES & EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 97,300
<SECURITIES> 7,249,600
<RECEIVABLES> 10,151,200
<ALLOWANCES> 595,400
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 456,400
<DEPRECIATION> 244,900
<TOTAL-ASSETS> 21,011,400
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 7,728,300
<COMMON> 1
0
100,000
<OTHER-SE> 1,859,099
<TOTAL-LIABILITY-AND-EQUITY> 21,011,400
<SALES> 0
<TOTAL-REVENUES> 2,728,900
<CGS> 0
<TOTAL-COSTS> 1,314,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 435,900
<INTEREST-EXPENSE> 618,200
<INCOME-PRETAX> 360,000
<INCOME-TAX> 103,600
<INCOME-CONTINUING> 256,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 256,400
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH
FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S BALANCE
SHEETS WERE NON-CLASSIFIED.
</FN>
</TABLE>
