<PAGE> 1
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UNITED STATES
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, 1996
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: (847) 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 19, 1997, 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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PART I.
ITEM 1. BUSINESS.
Household Finance Corporation ("HFC" or the "Company") is a wholly-owned
subsidiary of Household International, Inc. ("Household International"). HFC and
its subsidiaries primarily offer consumer lending products to middle-income
customers in the United States. 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 loans). Loan applications are solicited from branch lending
offices and through direct mail and telemarketing solicitations.
Through banking subsidiaries, the Company issues both VISA* and MasterCard*
credit cards, including the GM Card(SM) and the Union Privilege Card. These
banks engage only in consumer credit card operations.
Certain subsidiaries of HFC provide sales financing through the purchase,
origination and servicing of merchants' private-label revolving charge accounts
and closed end sales contracts.
In conjunction with its consumer finance operations and where applicable
laws permit, HFC makes available to customers credit life, credit accident,
health and disability insurance products. Insurance products are generally
written directly by, or reinsured with Household Life Insurance Company or its
affiliates.
ITEM 2. PROPERTIES.
Substantially all of HFC's branch office and headquarters space is operated
under lease, with the exception of a credit card processing facility located in
Las Vegas, Nevada. HFC believes that such properties are in good condition and
are adequate to meet its current and reasonably anticipated needs.
ITEM 3. LEGAL PROCEEDINGS.
HFC and its operating subsidiaries have developed and maintain dedicated
compliance functions to monitor the business operations of the Company and its
subsidiaries with a focus to ensure compliance with all applicable laws.
Notwithstanding, the Company and its subsidiaries are parties to various legal
proceedings resulting from ordinary business activities. Certain of these
actions are or purport to be class actions seeking damages in very large
amounts. Due to the uncertainties in litigation and other factors, no assurance
can be given that the Company or its subsidiaries will ultimately prevail in
each instance. HFC believes that it, or its subsidiary, possesses meritorious
defenses to these actions and any adverse decision should not materially affect
the financial condition of HFC.
During the past several years, the press has widely reported certain
industry related concerns which may impact HFC and its subsidiaries. One such
industry condition has been the litigation activities by the Alabama plaintiff
bar against finance and insurance companies operating in that state, the large
punitive awards obtained from juries in that state, and the failure of the state
Supreme Court to reverse many of those awards. Like other companies in this
industry, HFC and certain of its subsidiaries have litigation in Alabama. There
are a number of lawsuits pending against HFC or its subsidiaries in Alabama,
most of which relate to the financing of satellite television broadcast receiver
dishes, a business HFC and its subsidiaries discontinued in 1995. These cases
generally allege inadequate disclosure of financing terms. In each suit, other
parties are also named as defendants. Unspecified compensatory and punitive
damages are sought. The judicial climate in Alabama is such that the outcome of
all of these cases is unpredictable and, although HFC and its subsidiaries
believe they have substantive legal defenses to these claims and are prepared to
defend each case vigorously, a number of these cases have been settled or
otherwise resolved for amounts that in the aggregate are not material to HFC.
Appropriate insurance carriers have been notified of each claim, and
reservations of rights letters have been received.
- ---------------
* VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International Incorporated, respectively.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted.
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). This preferred stock is held by institutional investors not affiliated
with HFC.
HFC did not pay a cash dividend to Household International in 1996. In
1995, HFC paid cash dividends to Household International totaling $155 million.
In addition, HFC paid cash dividends on its preferred stock totaling $7.2
million in 1996 and 1995.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL HIGHLIGHTS
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(ALL DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
NET INCOME.................................................. $ 369.0 $ 261.8 $ 256.4
========= ========= =========
KEY PERFORMANCE RATIOS
Return on average owned assets.............................. 1.89% 1.22% 1.22%
Return on average common shareholder's equity............... 15.83 12.64 13.37
Managed net interest margin................................. 7.54 7.20 7.57
Managed consumer net chargeoff ratio........................ 3.31 3.25 3.23
--------- --------- ---------
AT DECEMBER 31
Total assets:
Owned..................................................... $20,579.8 $17,793.4 $21,011.4
Managed(1)................................................ 33,089.2 27,005.5 28,820.2
Managed receivables(1)...................................... $28,596.2 $21,647.6 $17,960.0
Debt to equity ratio........................................ 5.9:1 5.5:1 5.9:1
--------- --------- ---------
</TABLE>
- ---------------
(1) Managed data includes the company's owned receivable portfolio and its
portfolio of receivables serviced with limited recourse.
OPERATIONS SUMMARY
- Net income in 1996 was $369.0 million, an increase of 41 percent over
1995 net income of $261.8 million. Net income in 1995 was slightly higher
than 1994 earnings of $256.4 million. The company's return on average
common shareholder's equity ("ROE") improved to 15.83 percent from 12.64
percent in 1995 and 13.37 percent in 1994. The return on average owned
assets ("ROA") was 1.89 percent, up from 1.22 percent in both 1995 and
1994. The increases in income, ROE and ROA in 1996 were due to the
company's continued focus on its higher return businesses and growth in
its consumer receivables.
- Earnings of the domestic consumer finance business increased primarily
due to strong retail receivables growth, particularly in other unsecured
receivables. Growth in receivables and improved pricing led to
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higher net interest margin, partially offset by higher credit losses primarily
due to increased bankruptcies.
Increased earnings for the Visa/MasterCard business were due to receivable
growth, partially offset by higher credit losses resulting primarily from
increased personal bankruptcy filings that have been experienced throughout the
industry. In 1996, receivable growth resulted primarily from the acquisition of
the AFL-CIO's $3.4 billion Union Privilege affinity card portfolio ("Union
Privilege"). Union Privilege was created by the AFL-CIO to market benefits to
union members. In addition, the company purchased approximately $725 million of
receivables from Barnett Banks, Inc. Operating results continued to benefit
from the alliance with General Motors Corporation ("GM") to issue the GM Card,
a co-branded credit card. GM Card managed receivables totaled approximately
$2.0 billion at December 31, 1996, up from $1.3 and $.5 billion at year-end
1995 and 1994, respectively.
Earnings in the company's private-label credit card business improved over
the prior periods primarily due to receivable growth. Operating results of the
commercial business were better due to lower credit losses and increased gains
from the disposition of assets.
- - In October 1995, the company sold the individual life and annuity product
lines of its individual life insurance business, retaining the credit life
insurance business. Assets sold, principally investment securities, totaled
approximately $6.1 billion. The company also discontinued its remaining
individual life insurance lines which include periodic payment annuities and
corporate life insurance products.
In the second quarter of 1995, the company sold its purchased mortgage
servicing rights to a third party. The sale did not have a material impact
on the company's operating results.
- - The company's managed net interest margin increased 34 basis points to 7.54
percent in 1996 from 7.20 percent in 1995 and was essentially unchanged from
7.57 percent in 1994. The increase over the prior year reflects the product
mix change towards unsecured receivables, lower leverage and improved pricing.
BALANCE SHEET REVIEW
- - Managed assets totaled $33.1 billion at December 31, 1996, up 23 percent from
$27.0 billion at year-end 1995 due to receivable growth in consumer
receivables which was partially offset by reduced levels of investment
securities. Owned assets totaled $20.6 billion at December 31, 1996, up 16
percent from $17.8 billion at year-end 1995. Changes in owned assets may vary
from period to period depending on the timing and significance of
securitization transactions. The company securitized approximately $6.2 and
$4.1 billion of receivables during 1996 and 1995, respectively.
- - The company experienced higher growth in its consumer receivables during
1996, as shown in the following table:
<TABLE>
<CAPTION>
INCREASE
(DECREASE) INCREASE
DECEMBER 31, 1996 IN 1996 / 1995 IN 1995 / 1994
----------------- -------------- --------------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C>
Managed receivables:
Home equity.......................... $ 6,851.4 2% 1%
Visa/MasterCard...................... 11,352.4 81 39
Private label........................ 4,324.0 23 29
Other unsecured...................... 5,175.8 33 36
--------- --- --
Total consumer..................... 27,703.6 36 22
Commercial........................... 892.6 (27) 2
--------- --- --
Total.............................. $28,596.2 32% 21%
========= === ==
</TABLE>
3
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In 1996 Visa/MasterCard receivables increased due to the acquisitions of the
$3.4 billion Union Privilege portfolio and approximately $725 million of
receivables from Barnett Banks, Inc., as well as continued growth in the GM
Card program. The private label portfolio benefited from merchant programs
signed in 1995. Other unsecured growth was due to retail originations in the
consumer finance operations.
During the fourth quarter of 1996, the company sold approximately $131 million
of lower margin home equity loans. Excluding the impact of this asset sale,
branch-sourced home equity loans grew 11 percent in 1996.
- - The managed consumer two-months-and-over contractual delinquency ratio
increased to 4.33 percent at December 31, 1996 from 3.88 percent at December
31, 1995. The 1996 managed consumer net chargeoff ratio was 3.31 percent
compared to 3.25 and 3.23 percent in 1995 and 1994, respectively. The
increases were consistent with the company's outlook given overall industry
conditions and portfolio growth.
- - The company increased managed credit loss reserves by $367.1 million, or 42
percent, in 1996 to $1,233.1 million compared to $866.0 million at December
31, 1995. This compares to an increase of 32 percent in total managed
receivables in 1996. The increase in reserves reflected continuing uncertainty
about consumer credit performance and the changing mix in the portfolio to
more unsecured loans. Credit loss reserves as a percent of managed receivables
were 4.31 percent at year-end 1996 compared to 4.00 percent a year ago.
Reserves as a percent of nonperforming managed receivables increased to 131.4
percent from 120.5 percent at December 31, 1995.
- - The company's debt to equity ratio was 5.9 to 1 compared to 5.5 to 1 at
December 31, 1995. The lower ratio in 1995 was primarily due to the sale of
the individual life and annuity product lines. The debt to equity ratio
increased in 1996 as the company reinvested capital from the insurance sale in
its core businesses.
STATEMENT OF INCOME REVIEW
NET INTEREST MARGIN
Net interest margin was $1,052.7 million for 1996, up from $933.9 and
$917.3 million in 1995 and 1994, respectively. As a percent of average owned
interest-earning assets, net interest margin was 6.89, 7.41 and 8.04 percent in
1996, 1995 and 1994, respectively. The dollar increase over 1995 was primarily
due to growth in average owned interest-earning assets and higher interest
spreads. The dollar increase in 1995 compared to 1994 was primarily attributable
to a shift in product mix toward higher-yielding unsecured receivables,
partially offset by higher funding costs.
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 rather than held
in portfolio, net interest income is shifted to securitization income. Net
interest margin on a managed basis, assuming receivables securitized were held
in the portfolio, was $1.9 billion in 1996, up from $1.4 billion in both 1995
and 1994. Net interest margin on a managed basis as a percent of average managed
interest-earning assets was 7.54 percent compared to 7.20 percent in 1995 and
7.57 percent in 1994. The net interest margin percentage on a managed basis in
1996 is greater than on an owned basis because Visa/MasterCard and other
unsecured receivables, which have wider spreads, are a larger portion of the
portfolio serviced with limited recourse than of the owned portfolio. The owned
basis percentages in 1995 and 1994 were larger than the managed basis as home
equity receivables, which have lower spreads than unsecured products, were a
larger proportion of the managed portfolio than of the owned portfolio.
PROVISION FOR CREDIT LOSSES
The provision for credit losses includes current period credit losses and
an amount which, in the judgment of management, is sufficient to maintain
reserves for credit losses at a level that reflects known and inherent
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risks in the portfolio. Provision for credit losses also is made for the
company's estimated recourse liability over the life of the receivables
securitized. This provision is included in securitization income.
The provision for credit losses on receivables on an owned basis totaled
$522.8 million in 1996, up from $511.0 million in 1995 and up 20 percent from
$435.9 million in 1994. As a percent of average owned receivables, the provision
was 3.58 percent compared to 4.22 and 4.03 percent in 1995 and 1994,
respectively. The provision is impacted by the type and amount of receivables
securitized in a given period.
Total unsecured consumer loans, which include Visa/MasterCard,
private-label credit cards and other unsecured receivables, comprised 73 percent
of the managed receivable portfolio at December 31, 1996, up from 63 percent a
year ago. In view of continued uncertainty regarding consumer loss trends,
including higher levels of personal bankruptcies and continuing growth of
unsecured products, the company recorded provisions for credit losses in excess
of current period chargeoffs to increase its credit loss reserves. The provision
in excess of chargeoffs related to owned receivables was approximately $69.1 and
$37.7 million in 1996 and 1995, respectively.
OTHER REVENUES
Securitization income was $720.1, $424.6 and $301.9 million in 1996, 1995
and 1994, respectively, and consists of income associated with the
securitization and sale of receivables with limited recourse, including net
interest margin, fee and other income, and provision for credit losses related
to those receivables. Securitization income increased in 1996 due to growth in
average securitized receivables, which generated higher net interest income, and
an increase in fee and other income from securitized credit card receivables,
resulting from greater transaction volume.
Insurance revenues of $167.9 million in 1996 were down from $251.7 and
$228.3 million in 1995 and 1994, respectively. The decrease was primarily due to
the sale of the individual life and annuity product lines of business in the
fourth quarter of 1995. On a pro forma basis, revenues of the retained insurance
business were $158.7 and $145.0 million in 1995 and 1994, respectively. The
increase in retained insurance revenues was due to higher premiums in domestic
operations related to growth in the company's receivable portfolios.
Investment income includes interest income on investment securities in the
retained insurance lines of business as well as realized capital gains and
losses. Investment income of $145.2 million in 1996 declined compared to $453.8
and $505.8 million in 1995 and 1994, respectively, primarily due to the sale of
the individual life and annuity business. On a pro forma basis, investment
income from the company's retained business was $154.3 million in 1995 and
$141.5 million in 1994. The decrease in 1996 was primarily due to lower average
levels of investments and lower yields. The increase from 1994 to 1995 was
primarily due to higher gains from sales of available-for-sale investments and
higher yields.
Fee income on an owned basis includes revenues from fee-based products such
as Visa/MasterCard and private-label credit cards. Fee income was $178.4 million
in 1996, up from $125.2 million in 1995 and $83.1 million in 1994. The increase
was due to higher interchange and other fees related to growth in owned credit
card receivables in 1996 and greater transaction volume.
Other income was $69.8, $100.2 and $74.3 million during 1996, 1995 and
1994, respectively, and includes gains and losses from the disposition of assets
and businesses and income from servicing receivable portfolios without recourse.
EXPENSES
Salaries and fringe benefits and other operating expenses were $1,057.7
million, up 19 percent from $888.9 million in 1995 and 22 percent from $870.1
million in 1994. The increases were attributable to higher expenses associated
with growth in the company's managed receivable portfolio. Average managed
receivables grew 27 and 42 percent in 1996 compared to 1995 and 1994,
respectively. Also contributing to the increase in expenses in 1996 were
non-operating charges of $19 million related to the rationalization of office
space, the settlement of litigation and other matters.
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Policyholders' benefits were $204.0, $452.3 and $444.7 million in 1996,
1995 and 1994, respectively. The decrease in expense in 1996 was due to the sale
of the individual life and annuity business in late 1995. On a pro forma basis,
policyholders' benefits of the retained insurance business were $189.2 and
$179.8 million in 1995 and 1994, respectively. The increase in 1996 was
primarily due to growth in specialty and credit insurance.
Income taxes. The 1996 effective tax rate was 32.9 percent compared to 40.1
percent in 1995 and 28.8 percent in 1994. The 1995 tax rate was affected by
additional taxes on the sale of the insurance business. Excluding this impact,
the effective tax rate for 1995 would have been 33.1 percent.
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 sale. Excluding the
impact of accumulated losses recognized on this sale, the effective tax rate
would have been 32.1 percent in 1994.
CREDIT QUALITY
The company's delinquency and net chargeoff ratios reflect, among other
factors, the quality of receivables, average seasoning, the success of
collection efforts and general economic conditions.
During 1996 delinquency and net chargeoff levels increased which were
consistent with industry trends. Chargeoff statistics during the year were
impacted by higher consumer bankruptcies in the unsecured portfolios and the
continued seasoning of the receivables. In light of these conditions, the
company continued to tighten and refine credit underwriting throughout the year
and increased the number of collectors in the company's lending businesses.
Delinquency and chargeoff statistics also continued to be impacted by the
ongoing shift in the company's product mix toward unsecured receivables.
Unsecured loans were 75, 67 and 60 percent of the managed consumer receivable
portfolio at December 31, 1996, 1995 and 1994, respectively. Because other
unsecured, private label and Visa/MasterCard receivables have higher delinquency
and chargeoff rates than real estate secured loans, this shift in product mix
has the effect of increasing the overall delinquency and chargeoff statistics of
the portfolio and benefiting the net interest margin through higher pricing.
Delinquency and chargeoff levels are monitored on a managed basis, which
includes both receivables owned and receivables serviced with limited recourse.
The latter portfolio is included since it 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. The company's focus continues to utilize risk-based pricing for
each loan within the context of acceptable risk characteristics. The company has
developed a credit process through the experience of numerous marketing, credit
and risk management tests which provides a reliable basis for predicting the
asset quality of new accounts. The company also believes that its frequent and
early contact with delinquent customers, as well as active portfolio management,
has a significant impact on predicting delinquency trends and managing net
credit losses.
The company's chargeoff policy for consumer receivables varies by product.
Receivables are generally written off, or for secured products written down to
net realizable value, at the following stages of contractual delinquency: home
equity and Visa/MasterCard - 6 months; private-label credit card - 9 months; and
other unsecured - 9 months and no payment received in 6 months. Commercial
receivables are written off when it becomes apparent that an account is
uncollectible.
The company's consumer business lends funds nationwide, with California
accounting for 21 percent of total managed consumer receivables. It is the only
state with more than 10 percent of the company's 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.
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MANAGED CONSUMER TWO-MONTH-AND-OVER
CONTRACTUAL DELINQUENCY RATIOS
<TABLE>
<CAPTION>
1996 QUARTER END 1995 QUARTER END
---------------------------------- ----------------------------------
4 3 2 1 4 3 2 1
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Home equity............................ 3.62% 3.59% 3.47% 3.36% 3.42% 3.27% 2.87% 2.81%
Visa/MasterCard........................ 2.90 2.64 1.99 2.61 2.37 2.64 2.64 2.71
Private label.......................... 5.95 5.68 5.25 4.93 4.75 4.34 4.07 4.67
Other unsecured........................ 7.04 6.79 6.59 6.50 6.31 5.84 6.19 5.34
---- ---- ---- ---- ---- ---- ---- ----
Total........................ 4.33% 4.14% 3.70% 4.01% 3.88% 3.76% 3.60% 3.53%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
The managed consumer delinquency ratio increased from the prior quarter and
from a year ago. The increase in delinquency from the prior quarter was
primarily due to higher delinquencies in credit cards and other unsecured
receivables resulting from portfolio seasoning. The remaining portfolios
experienced delinquency performance in line with the company's expectations and
industry trends.
The increase in the managed delinquency ratio compared to a year ago was
primarily due to seasoning of the portfolios, the company's continued shift in
product mix toward unsecured products, and a slower consumer payment pattern,
including higher personal bankruptcies.
The owned consumer two-month-and-over contractual delinquency ratio was
4.39 and 3.87 percent at December 31, 1996 and 1995, respectively.
MANAGED CONSUMER NET CHARGEOFF RATIOS
<TABLE>
<CAPTION>
1996 QUARTER ANNUALIZED 1995 QUARTER ANNUALIZED
FULL YEAR ------------------------- FULL YEAR -------------------------- FULL YEAR
1996 4 3 2 1 1995 4 3 2 1 1994
--------- ---- ---- ---- ---- --------- ---- ---- ----- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Home equity............. .99% 1.22% .96% .91% .85% .99% .93% 1.15% 1.04% .82% 1.16%
Visa/MasterCard......... 4.17 3.90 3.99 4.40 4.67 4.66 4.88 4.65 4.34 4.73 5.15
Private label........... 3.30 3.78 3.78 4.08 5.05 5.28 5.80 5.05 5.30 4.85 3.96
Other unsecured......... 5.10 5.53 5.57 4.31 4.85 3.89 4.15 4.06 3.76 3.54 4.96
---- ---- ---- ---- ---- ---- ---- ---- ----- ---- ----
Total......... 3.31% 3.51% 3.45% 3.29% 3.50% 3.25% 3.53% 3.32% 3.11% 2.99% 3.23%
==== ==== ==== ==== ==== ==== ==== ==== ===== ==== ====
</TABLE>
The managed consumer net chargeoff ratio was 3.31 percent, up from 3.25
percent in 1995 and 3.23 percent in 1994. This performance is consistent with
the company's expectations and industry trends. The company expects increases in
its managed consumer net chargeoff ratios in the near future based on changes in
portfolio mix and anticipated consumer payment patterns.
The owned consumer net chargeoff ratio was 3.35, 4.37 and 4.81 percent for
1996, 1995 and 1994, respectively.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1996 1995 1994
-------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Nonaccrual managed receivables.............................. $ 519.9 $547.9 $395.5
Accruing managed consumer receivables 90 or more days
delinquent................................................ 405.7 149.7 138.2
Renegotiated commercial loans............................... 12.9 21.2 41.8
-------- ------ ------
Total nonperforming managed receivables................... 938.5 718.8 575.5
Real estate owned........................................... 112.1 105.6 124.6
-------- ------ ------
Total nonperforming managed assets........................ $1,050.6 $824.4 $700.1
======== ====== ======
Managed credit loss reserves as a percent of nonperforming
managed receivables....................................... 131.4% 120.5% 103.5%
</TABLE>
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Nonperforming managed receivables increased primarily due to an increase in
accruing managed receivables 90 days or more delinquent in the Visa/MasterCard
business.
CREDIT LOSS RESERVES
The provision for credit losses on owned receivables is made in an amount
sufficient to maintain credit loss reserves at a level considered adequate to
cover probable losses of principal and interest in the existing portfolio of
owned receivables. Probable losses are estimated for consumer receivables based
on contractual delinquency status and historical loss experience. In addition,
general loss reserves on consumer receivables are maintained to reflect
management's judgment of portfolio risk factors. For commercial loans, probable
losses are calculated using estimates of amounts and timing of future cash flows
expected to be received on loans, as well as management's assessment of general
reserve requirements. Loss reserve estimates are reviewed periodically and
adjustments are reported in earnings when they become known. As these estimates
are influenced by factors outside the company's control, such as economic
conditions and consumer payment patterns, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change.
Certain home equity, Visa/MasterCard, private label and other unsecured
receivables have been securitized and sold to investors with limited recourse.
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 resulting gain is adjusted by
establishing a reserve for estimated probable losses under the recourse
provisions.
Owned credit loss reserves increased 26 percent to $671.5 million from
$531.8 million at December 31, 1995. The ratio of credit loss reserves to total
owned receivables was 4.17 and 4.28 percent at December 31, 1996 and 1995,
respectively.
Total managed credit loss reserves increased 42 percent to $1,233.1 million
from $866.0 million at December 31, 1995. The ratio of credit loss reserves to
total managed receivables was 4.31 percent, up from 4.00 percent at December 31,
1995. The company has continually increased credit loss reserves due to
continued growth and seasoning of unsecured products, coupled with uncertainty
over the strength of the economy and increased personal bankruptcies. The ratio
of total credit loss reserves to total managed nonperforming loans increased to
131.4 percent from 120.5 percent at December 31, 1995. The company will continue
to monitor its credit loss reserves and make additional provisions to the
reserve as it deems appropriate.
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 businesses is
based on their profitability, growth potential and target capital structure.
During 1996 Household International contributed $200 million of additional
capital to HFC to strengthen the company's capital position and to fund asset
growth. No cash dividends were paid by HFC to Household International in 1996.
HFC paid cash dividends to Household International of $155 million in 1995 and
$115 million in 1994.
The company employs an integrated and comprehensive program to manage
liquidity and capital resources. In managing capital, the company develops
targets for each of its key capital ratios based on discussions with rating
agencies, regulatory requirements, competitor analysis and projected changes in
the operating environment. These targets include capital levels against both
on-balance sheet assets and receivables serviced with limited recourse. As a
result of management's decision to improve capital levels, the company has set
increasingly restrictive targets in each of the last several years.
The major use of cash by the company is the origination or purchase of
receivables or purchases of investment securities. The main sources of cash for
the company are the collection and securitization of receivable balances;
maturities or sales of investment securities; proceeds from the issuance of
debt; and cash provided by operations.
8
<PAGE> 10
The company obtains a majority of its funding through the issuance of
commercial paper, medium- and long-term debt and through securitizations of
consumer receivables. At December 31, 1996 HFC's outstanding commercial paper
totaled $4.8 billion compared to $4.0 billion at December 31, 1995. HFC markets
its commercial paper through an in-house sales force, directly reaching more
than 275 investors. HFC also markets domestic medium-term notes through
investment banks and its in-house sales force and issued a total of $3.2 billion
in 1996. HFC and its subsidiary, Household Bank (Nevada) N.A., issued $897
million in Euro medium-term notes in 1996. These notes were issued in various
local currencies and currency swaps were entered to convert the notes to U.S.
dollars. During 1996, HFC also issued $1.1 billion of long-term debt with
average remaining maturities of seven years. To facilitate liquidity, HFC had
committed back-up lines of credit totaling $5.2 billion at December 31, 1996,
$400 million of which was limited by the amount the parent company may utilize.
None of these back-up lines were utilized by HFC at December 31, 1996 and none
contained a material adverse change clause which could restrict availability.
These back-up lines expire on various dates from 1997 through 2001. The only
financial covenant contained in the terms of HFC's debt agreements is the
maintenance of minimum shareholder's equity of $1.5 billion.
During the fourth quarter of 1996, HFC sold approximately $131 million of
lower margin home equity loans. The cash proceeds from the sales were used to
repay debt.
Securitizations of consumer receivables have been, and will continue to be,
an important source of liquidity for HFC. The market for securities backed by
receivables is a reliable, efficient and cost-effective source of funds, which
HFC plans to utilize in the future. During 1996 HFC securitized approximately
$6.2 billion of home equity, Visa/MasterCard and other unsecured receivables
compared to $4.1 billion in 1995 and $2.5 billion in 1994. At December 31, 1996,
HFC had $12.5 billion of receivables sold under securitization transactions. At
December 31, 1996, the expected weighted average remaining life of these
securitization transactions was 2.9 years.
The following table summarizes the expected amortization of HFC's
securitizations by type:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 THEREAFTER
-------- -------- -------- -------- ------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Home equity.......................... $ 909.3 $ 804.7 $ 726.1 $ 448.1 $269.4 $1,179.9
Visa/MasterCard...................... -- 487.5 2,612.5 1,750.0 193.5 --
Private label........................ 142.0 213.5 161.5 -- -- --
Other unsecured...................... 730.9 544.9 409.6 306.3 299.3 320.4
-------- -------- -------- -------- ------ --------
Total...................... $1,782.2 $2,050.6 $3,909.7 $2,504.4 $762.2 $1,500.3
======== ======== ======== ======== ====== ========
</TABLE>
For Visa/MasterCard and private label securitizations, early amortization
begins if the annualized portfolio yield (defined as the sum of finance income
and applicable fees, less net chargeoffs) for a certain period drops below a
base rate (generally equal to the sum of the weighted average certificate and
servicing fee rates), or if certain other events occur. For home equity and
other unsecured securitizations, early amortization begins if the annualized
portfolio yield falls below various specified thresholds, or if certain other
events occur. The company does not presently anticipate the occurrence of any
such early amortization event. If any such event occurred, the company's funding
requirements would increase. These additional requirements could be met through
securitizations, issuance of various types of debt or drawdowns of existing
back-up lines of credit. The company believes it would continue to have adequate
available liquidity if an early amortization event occurred.
HFC and its affiliate, Household Bank, f.s.b., have facilities with
commercial banks under which they may securitize up to $4.5 billion of credit
card receivables. These facilities are renewable on an annual basis. At December
31, 1996, $3.8 billion of credit card receivables were securitized under these
programs, of which the company had securitized $3.1 billion.
At December 31, 1996, the long-term debt and preferred stock of the company
had been assigned an "investment grade" rating by four nationally recognized
statistical rating organizations. Furthermore, these agencies included the
commercial paper of HFC in their highest rating category. With these ratings,
back-up
9
<PAGE> 11
lines of credit and securitization programs, the company believes it has
sufficient funding capacity to refinance maturing obligations and fund business
growth.
During 1996 the company invested $69 million in capital expenditures
compared to the prior-year level of $46 million.
RISK MANAGEMENT
Household International and its subsidiaries have comprehensive programs
which address the management and diversification of financial risk, such as
interest rate, counterparty and currency risk. Acceptable limits for each of
these risks are established by the Finance Committee of Household
International's Board of Directors on an annual basis and reviewed
semi-annually. Interest rate risk is the exposure of earnings to changes in
interest rates. The company manages the potential impact on earnings from future
changes in interest rates. Simulation models are utilized to measure the impact
on net interest margin of changes in interest rates. At December 31, 1996, the
company has managed its interest rate risk to levels substantially below those
allowed by its policy.
The company generally 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 risk exposures. To manage these exposures, as well as
its liquidity position, the company may use derivatives to synthetically alter
the terms of assets or liabilities. The company does not use any exotic or
leveraged derivatives.
At December 31, 1996 the company managed approximately $18 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 $5.2 billion of
short-term debt, with the remainder funded 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.
The economic exposure underlying the company's interest rate swap portfolio
is minimal. 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 primary 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 peak exposure at December 31, 1996, approximately 86
percent of the company's derivative instrument counterparties 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.
10
<PAGE> 12
In order to minimize currency risk, the company enters into currency swaps
to convert both principal and interest payments on debt issued from one currency
to the appropriate functional currency.
In late 1994 the company discontinued its trading activities. Income or
loss from trading activities was not material to the company.
See Note 6, "Derivative Financial Instruments and Other Financial
Instruments With Off-Balance Sheet Risk," for additional information related to
interest rate risk management.
In the accompanying consolidated financial statements, Note 8, "Fair Value
of Financial Instruments," provides information regarding the fair value of
certain financial instruments.
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.
Not applicable.
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.
11
<PAGE> 13
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.
Consolidated Statements of Income for the Three Years Ended
December 31, 1996.
Consolidated Balance Sheets, December 31, 1996 and 1995.
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1996.
Consolidated Statements of Changes in Preferred Stock and Common
Shareholder's Equity for the Three Years Ended December 31,
1996.
Notes to Consolidated Financial Statements.
Selected Quarterly Financial Data (Unaudited).
(b) Reports on Form 8-K
No Current Report on Form 8-K was filed by HFC during the three
months ended December 31, 1996.
(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) Standard Multiple-Series Indenture Provisions for Senior
Debt Securities dated as of June 1, 1992 (incorporated by
reference to Exhibit 4(b) to HFC's Registration Statement on
Form S-3, No. 33-48854).
4(c) Indenture dated as of December 1, 1993 for Senior Debt
Securities between HFC and The Chase Manhattan Bank
(National Association), as Trustee (incorporated by
reference to Exhibit 4(b) to HFC's Registration Statement on
Form S-3, No. 33-55561).
4(d) 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:
II Valuation and Qualifying Accounts.
</TABLE>
12
<PAGE> 14
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 26, 1997
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/ G. O. FICK Executive Vice President
- ----------------------------------------------------- and Director
G. O. Fick Dated: March 26, 1997
/s/ D. A. SCHOENHOLZ Vice President, Chief
- ----------------------------------------------------- Accounting Officer and
D. A. Schoenholz Chief Financial Officer,
Director
/s/ W. F. ALDINGER Director
- -----------------------------------------------------
W. F. Aldinger
</TABLE>
13
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
Household Finance Corporation:
We have audited the accompanying consolidated balance sheets of Household
Finance Corporation (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated 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, 1996. These financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial position of Household
Finance Corporation and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 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 schedule listed in Item
14(d) is presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states 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
January 23, 1997
F-1
<PAGE> 16
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Finance income............................................. $1,927.9 $1,724.6 $1,496.8
Interest income from noninsurance investment securities.... 35.9 33.9 38.7
Interest expense........................................... 911.1 824.6 618.2
-------- -------- --------
Net interest margin........................................ 1,052.7 933.9 917.3
Provision for credit losses on owned receivables........... 522.8 511.0 435.9
-------- -------- --------
Net interest margin after provision for credit losses...... 529.9 422.9 481.4
-------- -------- --------
Securitization income...................................... 720.1 424.6 301.9
Insurance revenues......................................... 167.9 251.7 228.3
Investment income.......................................... 145.2 453.8 505.8
Fee income................................................. 178.4 125.2 83.1
Other income............................................... 69.8 100.2 74.3
-------- -------- --------
Total other revenues....................................... 1,281.4 1,355.5 1,193.4
-------- -------- --------
Salaries and fringe benefits............................... 375.0 289.3 236.7
Other operating expenses................................... 682.7 599.6 633.4
Policyholders' benefits.................................... 204.0 452.3 444.7
-------- -------- --------
Total costs and expenses................................... 1,261.7 1,341.2 1,314.8
-------- -------- --------
Income before income taxes................................. 549.6 437.2 360.0
Income taxes............................................... 180.6 175.4 103.6
-------- -------- --------
Net income................................................. $ 369.0 $ 261.8 $ 256.4
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 17
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------
1996 1995
--------- ---------
(IN MILLIONS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash........................................................ $ 228.5 $ 154.7
Investment securities....................................... 1,720.0 3,233.0
Receivables, net............................................ 16,391.7 12,665.0
Advances to (from) parent company and affiliates............ (7.6) 119.6
Acquired intangibles, net................................... 938.2 418.7
Properties and equipment, net............................... 268.7 286.2
Real estate owned........................................... 112.1 105.6
Other assets................................................ 928.2 810.6
--------- ---------
Total assets................................................ $20,579.8 $17,793.4
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt:
Commercial paper, bank and other borrowings............... $ 5,223.5 $ 4,154.2
Senior and senior subordinated debt (with original
maturities over one year).............................. 10,648.3 8,257.5
--------- ---------
Total debt........................................ 15,871.8 12,411.7
Insurance policy and claim reserves......................... 1,021.7 2,212.9
Other liabilities........................................... 993.5 931.7
--------- ---------
Total liabilities................................. 17,887.0 15,556.3
Preferred stock............................................. 100.0 100.0
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding at December 31, 1996 and 1995,
and additional paid-in capital......................... 892.8 692.6
Retained earnings......................................... 1,721.6 1,359.8
Foreign currency translation adjustments.................. (8.9) (9.0)
Unrealized gain (loss) on investments, net................ (12.7) 93.7
--------- ---------
Total common shareholder's equity................. 2,592.8 2,137.1
--------- ---------
Total liabilities and shareholder's equity........ $20,579.8 $17,793.4
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 18
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1996 1995 1994
---------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income.................................................. $ 369.0 $ 261.8 $ 256.4
Adjustments to reconcile net income to net cash provided by
operations:
Provision for credit losses on owned receivables.......... 522.8 511.0 435.9
Insurance policy and claim reserves....................... 40.5 408.2 259.8
Depreciation and amortization............................. 196.0 176.8 146.8
Net realized (gains) losses from sales of assets.......... (11.3) (36.4) 29.2
Deferred income tax provision............................. -- 26.8 4.4
Other, net................................................ 89.8 132.2 (201.4)
---------- --------- ---------
Cash provided by operations................................. 1,206.8 1,480.4 931.1
---------- --------- ---------
INVESTMENTS IN OPERATIONS
Investment securities available-for-sale:
Purchased................................................. (1,594.9) (3,176.8) (1,749.1)
Matured................................................... 318.4 116.9 122.9
Sold...................................................... 1,873.6 2,428.4 1,460.7
Investment securities held-to-maturity:
Purchased................................................. -- (341.8) (674.8)
Matured................................................... -- 242.7 396.1
Sold...................................................... -- 31.9 --
Short-term investment securities, net change................ (63.1) 273.6 (73.5)
Receivables:
Originations, net......................................... (12,518.6) (8,935.6) (5,686.4)
Purchased................................................. (4,384.3) (1,414.9) (229.3)
Sold...................................................... 12,570.7 8,042.5 4,644.2
Disposition of product lines of life insurance business..... -- 575.0 --
(Acquisition) disposition of portfolios, net................ (640.7) (135.0) (145.6)
Properties and equipment purchased.......................... (68.8) (45.5) (61.0)
Properties and equipment sold............................... 5.6 3.4 .6
Advances to parent company and affiliates, net.............. 127.2 362.7 (120.6)
---------- --------- ---------
Cash decrease from investments in operations................ (4,374.9) (1,972.5) (2,115.8)
---------- --------- ---------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change................................. 1,069.3 353.6 (210.3)
Senior and senior subordinated debt issued.................. 5,289.1 2,493.7 3,840.5
Senior and senior subordinated debt retired................. (2,897.3) (2,047.9) (2,792.0)
Policyholders' benefits paid................................ (510.4) (741.7) (558.3)
Cash received from policyholders............................ 98.2 652.6 956.5
Dividends on preferred stock................................ (7.2) (7.2) (7.2)
Dividends paid to parent company............................ -- (155.0) (115.0)
Capital contributions from parent company................... 200.2 1.4 140.0
---------- --------- ---------
Cash increase from financing and capital transactions....... 3,241.9 549.5 1,254.2
---------- --------- ---------
Increase in cash............................................ 73.8 57.4 69.5
Cash at January 1........................................... 154.7 97.3 27.8
---------- --------- ---------
Cash at December 31......................................... $ 228.5 $ 154.7 $ 97.3
========== ========= =========
Supplemental cash flow information:
Interest paid............................................... $ 1,131.0 $ 740.4 $ 656.4
---------- --------- ---------
Income taxes paid (received)................................ 318.4 (110.3) 230.0
---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 19
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK
AND COMMON SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON SHAREHOLDER'S EQUITY
----------------------------------------------------
COMMON
STOCK AND TOTAL
ADDITIONAL COMMON
PREFERRED PAID-IN RETAINED SHAREHOLDER'S
STOCK CAPITAL(1) EARNINGS OTHER(2) EQUITY
--------- ---------- -------- --------- -------------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C>
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
Net income............................... 261.8 261.8
Dividends to parent company.............. (155.0) (155.0)
Dividends on preferred stock............. (7.2) (7.2)
Contribution of capital from parent
company............................... 1.4 1.4
Foreign currency translation
adjustments........................... (.1) (.1)
Unrealized gain on investments, net...... 177.1 177.1
------ ------ -------- ------- --------
BALANCE AT DECEMBER 31, 1995............... 100.0 692.6 1,359.8 84.7 2,137.1
Net income............................... 369.0 369.0
Dividends on preferred stock............. (7.2) (7.2)
Contribution of capital from parent
company............................... 200.2 200.2
Foreign currency translation
adjustments........................... .1 .1
Unrealized loss on investments, net...... (106.4) (106.4)
------ ------ -------- ------- --------
BALANCE AT DECEMBER 31, 1996............... $100.0 $892.8 $1,721.6 $ (21.6) $2,592.8
====== ====== ======== ======= ========
</TABLE>
- ---------------
(1) At December 31, 1996 and 1995, the company had authorized, issued and
outstanding 1,000 shares of common stock, all of which are owned by
Household International, Inc.
(2) At December 31, 1996, 1995, 1994 and 1993 items in the other column include
cumulative adjustments for unrealized gains (losses) on available-for-sale
investments of $(12.7), $93.7, $(83.4) and $35.1 million, respectively. The
gross unrealized gain (loss) on available-for-sale investments at December
31, 1996, 1995, 1994 and 1993 of $(19.5), $141.5, $(259.5) and $144.9
million, respectively, is recorded net of income taxes (benefit) of $(6.8),
$47.8, $(44.8) and $19.6 million, respectively. At December 31, 1994 and
1993, the unrealized gain (loss) on certain available-for-sale investments
of the life insurance operation were recorded net of 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 consolidated financial
statements.
F-5
<PAGE> 20
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Household Finance Corporation ("HFC" or the "company") is a wholly-owned
subsidiary of Household International, Inc. ("Household International" or the
"parent company"). The company is a leading provider of consumer financial
services, primarily consumer lending products to "middle-market" customers in
the United States, with $28.6 billion of managed receivables outstanding at
December 31, 1996. The company's lending products include: home equity loans,
Visa/MasterCard* and private-label credit cards and other unsecured loans. The
company's portfolio also includes commercial loans and leases, which the company
no longer originates.
The company also offers credit and specialty insurance in the United States
and Canada. In October 1995 the company sold the individual life and annuity
product lines of its individual life insurance business. Remaining insurance
lines include periodic payment annuities and corporate owned life insurance
products which are no longer being offered by the company. Due to the
insignificance of the remaining insurance product lines, the company reports
results for its consumer lending operations and the remaining insurance product
lines on a combined basis.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include the
accounts of Household Finance Corporation and all subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Certain prior year
amounts have been reclassified to conform with the current year's presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Investment Securities. The company maintains investment portfolios in both
its noninsurance and insurance operations. These portfolios are comprised
primarily of debt securities. The company's entire investment securities
portfolio was classified as available-for-sale at December 31, 1996 and 1995.
Available-for-sale investments are intended to be invested for an indefinite
period but may be sold in response to events reasonably expected in the
foreseeable future. These investments are carried at fair value. Unrealized
holding gains and losses on available-for-sale investments are recorded as
adjustments to common shareholder's equity, net of income taxes. Any decline in
the fair value of investments which is deemed to be other than temporary is
charged against current earnings.
Cost of investment securities sold is determined using the specific
identification method. Interest income earned on the noninsurance investment
portfolio is classified in the statements of income in net interest margin.
Realized gains and losses from the noninsurance portfolio and investment income
from the insurance portfolio are recorded in investment income. Accrued
investment income is classified with investment securities.
Receivables. Receivables are carried at amortized cost. The company
periodically sells receivables from its home equity, Visa/MasterCard, private
label and other unsecured portfolios. Because these receivables were originated
with variable rates of interest or rates comparable to those currently offered
by the company, carrying value approximates fair value.
Finance income is recognized using the effective yield method. Origination
fees are deferred and amortized to finance income over the estimated life of the
related receivables, except to the extent they offset directly related lending
costs. Annual fees are netted with direct lending costs associated with the
issuance of the Visa/MasterCard receivables and are deferred and amortized on a
straight-line basis over one year.
- ---------------
* Visa and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International, Incorporated, respectively.
F-6
<PAGE> 21
Insurance reserves applicable to credit risks on consumer receivables are
treated as a reduction of receivables in the balance sheets, since payments on
such policies generally are used to reduce outstanding receivables.
Provision and Credit Loss Reserves. Provision for credit losses on owned
receivables is made in an amount sufficient to maintain credit loss reserves at
a level considered adequate to cover probable losses of principal and interest
in the existing owned portfolio. Probable losses are estimated for consumer
receivables based on contractual delinquency status and historical loss
experience. In addition, general loss reserves on consumer receivables are
maintained to reflect management's judgment of portfolio risk factors. For
commercial loans, probable losses are calculated using estimates of amounts and
timing of future cash flows expected to be received on loans, as well as
management's assessment of general reserve requirements. Loss reserve estimates
are reviewed periodically and adjustments are reported in earnings when they
become known. As these estimates are influenced by factors outside the company's
control, such as economic conditions and consumer payment patterns, there is
uncertainty inherent in these estimates, making it reasonably possible that they
could change.
The company's chargeoff policy for consumer receivables varies by product.
Receivables are generally written off, or for secured products, written down to
net realizable value, at the following stages of contractual delinquency: home
equity and Visa/MasterCard - 6 months; private-label credit card - 9 months; and
other unsecured - 9 months and no payment received in 6 months. Commercial
receivables are written off when it becomes apparent that an account is
uncollectible.
Nonaccrual Loans. Nonaccrual loans are loans on which accrual of interest
has been suspended. Interest income is suspended on all loans when principal or
interest payments are more than three months contractually past due, except for
Visa/MasterCard receivables and private-label credit cards. On these credit card
receivables, interest continues to accrue until the receivable is charged off.
There were no commercial loans at December 31, 1996 which were 90 days or more
past due which remained on accrual status. Accrual of income on nonaccrual
consumer receivables is not resumed until such receivables become less than
three months contractually past due. Accrual of income on nonaccrual commercial
loans is not resumed until such loans become contractually current. Cash
payments received on nonaccrual commercial loans are either applied against
principal or reported as interest income, according to management's judgment as
to the collectibility of principal.
Receivables Sold and Serviced with Limited Recourse and Securitization
Income. Certain home equity, Visa/MasterCard, private label and other unsecured
receivables have been securitized and sold to investors with limited recourse.
The servicing rights to these receivables have been retained by the company.
Upon sale, the receivables are removed from the balance sheet, and a gain on
sale is recognized for the difference between the carrying value of the
receivables and the adjusted sales proceeds. The adjusted sales proceeds are
based on a present value estimate of future cash flows to be received over the
lives of the receivables. Future cash flows are based on estimates of
prepayments, the impact of interest rate movements on yields of receivables sold
and securities issued, delinquency of receivables sold, normal servicing fees,
operating expenses and other factors. The resulting gain is adjusted by
establishing a reserve for estimated probable losses under the recourse
provisions. Gains on sale, recourse provisions and servicing cash flows on
receivables sold are reported in the accompanying consolidated statements of
income as securitization income.
In June 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("FAS No. 125"), which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on an approach that
focuses on control of the assets and extinguishment of the liabilities. The
statement is effective for securitization transactions occurring subsequent to
December 31, 1996. The company believes the adoption of FAS No. 125 will have no
material impact on its consolidated financial statements.
Properties and Equipment. Properties and equipment, which include leasehold
improvements, are recorded at cost, net of accumulated depreciation and
amortization of $344.2 and $353.6 million at December 31, 1996 and 1995,
respectively. Depreciation is provided on a straight-line basis for financial
F-7
<PAGE> 22
reporting purposes and accelerated methods for tax purposes. Leasehold
improvements are amortized over the lesser of the economic useful life of the
improvement or the term of the lease.
Real Estate Owned. Real estate owned is valued at the lower of cost or fair
value less estimated costs to sell. These values are periodically reviewed and
reduced, if appropriate. Costs of holding this real estate, and related gains
and losses on disposition, are credited or charged to operations as incurred.
Insurance. Insurance revenues on revolving credit insurance policies are
recognized when billed. Insurance revenues on the remaining insurance contracts
are recorded as unearned premiums and recognized into income based on the nature
and term of the underlying contracts. Liabilities for credit insurance policies
are based upon estimated settlement amounts for both reported and incurred but
not yet reported losses. Liabilities for future benefits on annuity contracts
and specialty and corporate owned life insurance products are based on actuarial
assumptions as to investment yields, mortality and withdrawals.
Acquired Intangibles. Acquired intangibles consist of acquired credit card
relationships and are amortized on a straight-line basis over their estimated
remaining lives, not to exceed 10 years.
Interest Rate Contracts. The nature and composition of the company's assets
and liabilities and off-balance sheet items expose the company to interest rate
risk. The company enters into a variety of interest rate contracts for managing
its interest rate exposure. Interest rate swaps are the principal vehicle used
to manage interest rate risk; however, interest rate futures, options, caps and
floors, and forward contracts also are utilized.
Interest rate swaps are designated, and effective, as synthetic alterations
of specific assets or liabilities (or specific groups of assets or liabilities)
and off-balance sheet items. The interest rate differential to be paid or
received on these contracts is accrued and included in net interest margin in
the statements of income.
Interest rate futures, forwards, options, and caps and floors used in
hedging the company's exposure to interest rate fluctuations are designated, and
effective, as hedges of balance sheet items. Interest rate contracts are
recorded at amortized cost. If interest rate contracts are terminated early, the
realized gains and losses are deferred and amortized over the life of the hedged
items as adjustments to net interest margin in the statements of income. These
deferred gains and losses are recorded on the accompanying consolidated balance
sheets as adjustments to the carrying amount of the hedged items.
In late 1994, the company discontinued its trading activities. Prior to
that, interest rate contracts used in the company's trading activities were
carried at fair value. Changes in fair value were included in other income.
Income Taxes. The company and its 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. Federal income taxes are accounted for
utilizing the liability method. Deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
F-8
<PAGE> 23
2. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------
1996 1995
-------- --------
(IN MILLIONS)
<S> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities................................ $ 213.1 $ 323.8
Corporate debt securities................................... 1,058.5 1,533.6
U.S. government and federal agency debt securities.......... 243.7 295.0
Other....................................................... 180.5 1,044.3
-------- --------
Subtotal.......................................... 1,695.8 3,196.7
-------- --------
Accrued investment income................................... 24.2 36.3
-------- --------
Total investment securities....................... $1,720.0 $3,233.0
======== ========
</TABLE>
Proceeds from the sale of available-for-sale investments totaled
approximately $1.9, $2.4 and $1.5 billion in 1996, 1995 and 1994, respectively.
Gross gains of $21.4, $6.8 and $34.8 million and gross losses of $3.7 and $25.4
million in 1996 and 1994, respectively, were realized on those sales. There were
no gross losses on sales of available-for-sale investments in 1995. The sales in
1995 were exclusive of the sale of investment securities in connection with the
disposition of the individual life and annuity lines of business.
During 1995 the company sold $31.4 million of held-to-maturity investment
securities due to the significant deterioration in the creditworthiness of the
issuers of the securities. Because of the disposition of the individual life and
annuity product lines and the company's decision to discontinue its remaining
life insurance product lines, the company reassessed the classification of the
remaining held-to-maturity portfolio and reclassified the entire
held-to-maturity investment portfolio to available-for-sale in the fourth
quarter of 1995. Gross gains of $.5 million were realized on sales of
held-to-maturity investments in 1995. There were no gross losses on sales of
held-to-maturity investments in 1995. There were no investments transferred from
held-to-maturity to available-for-sale in 1994. There were no sales of
held-to-maturity investments in 1994.
The gross unrealized gains (losses) of investment securities were as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
---------------------------------------------- ----------------------------------------------
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................. $ 212.7 $ 1.9 $ (1.5) $ 213.1 $ 318.3 $ 7.3 $ (1.8) $ 323.8
Corporate debt securities.... 1,069.5 16.9 (27.9) 1,058.5 1,406.9 130.9 (4.2) 1,533.6
U.S. government and federal
agency debt securities..... 252.6 1.0 (9.9) 243.7 287.0 12.9 (4.9) 295.0
Other........................ 180.5 -- -- 180.5 1,043.0 1.3 -- 1,044.3
-------- ----- ------ -------- -------- ------ ------ --------
Total
available-for-sale
investments....... $1,715.3 $19.8 $(39.3) $1,695.8 $3,055.2 $152.4 $(10.9) $3,196.7
======== ===== ====== ======== ======== ====== ====== ========
</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.
F-9
<PAGE> 24
Contractual maturities and yields of investments in debt securities were as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------------------------------------------------
U.S. GOVERNMENT AND FEDERAL
CORPORATE DEBT SECURITIES AGENCY DEBT SECURITIES
------------------------------- -----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE YIELD* COST VALUE YIELD*
--------- ----- ------ --------- ----- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Due within 1 year.......................... $ 80.0 $ 80.0 6.62% $ 5.4 $ 5.4 5.94%
After 1 but within 5 years................. 101.6 98.1 6.55 28.6 28.4 5.74
After 5 but within 10 years................ 164.9 166.3 7.49 64.5 62.4 7.94
After 10 years............................. 723.0 714.1 7.45 154.1 147.5 7.31
-------- -------- ---- ------ ------ ----
Total............................ $1,069.5 $1,058.5 7.31% $252.6 $243.7 7.26%
======== ======== ==== ====== ====== ====
</TABLE>
- ---------------
* Computed by dividing annualized interest by the amortized cost of the
respective investment securities.
3. RECEIVABLES
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------
1996 1995
---- ----
(IN MILLIONS)
<S> <C> <C>
Home equity................................................. $ 2,513.9 $ 2,072.1
Visa/MasterCard............................................. 6,308.9 3,596.7
Private label............................................... 3,807.0 2,753.7
Other unsecured............................................. 2,564.4 2,786.3
Commercial.................................................. 892.6 1,226.7
--------- ---------
Total owned receivables........................... 16,086.8 12,435.5
Accrued finance charges..................................... 215.8 241.0
Credit loss reserve for owned receivables................... (671.5) (531.8)
Unearned credit insurance premiums and claims reserves...... (82.6) (78.4)
Amounts due and deferred from receivables sales............. 1,404.8 932.9
Reserve for receivables serviced with limited recourse...... (561.6) (334.2)
--------- ---------
Total owned receivables, net...................... 16,391.7 12,665.0
Receivables serviced with limited recourse.................. 12,509.4 9,212.1
--------- ---------
Total managed receivables, net.................... $28,901.1 $21,877.1
========= =========
</TABLE>
The company has securitized certain receivables which it services with
limited recourse. Securitizations of receivables, including replenishments of
certificate holder interests, were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1996 1995 1994
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Home equity......................................... $ 1,755.8 $ 1,135.2 $ 1,418.6
Visa/MasterCard..................................... 7,875.1 4,755.8 2,222.8
Private label....................................... 697.4 644.0 1,093.6
Other unsecured..................................... 2,255.1 1,074.8 --
--------- --------- ---------
Total..................................... $12,583.4 $ 7,609.8 $ 4,735.0
========= ========= =========
</TABLE>
F-10
<PAGE> 25
The outstanding balance of receivables serviced with limited recourse
consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------
1996 1995
--------- --------
(IN MILLIONS)
<S> <C> <C>
Home equity................................................. $ 4,337.5 $4,661.9
Visa/MasterCard............................................. 5,043.5 2,685.8
Private label............................................... 517.0 750.0
Other unsecured............................................. 2,611.4 1,114.4
--------- --------
Total............................................. $12,509.4 $9,212.1
========= ========
</TABLE>
At December 31, 1996, the expected weighted average remaining life of these
securitization transactions was 2.9 years.
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
---------------------
1996 1995
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Home equity................................................. $ 6,851.4 $ 6,734.0
Visa/MasterCard............................................. 11,352.4 6,282.5
Private label............................................... 4,324.0 3,503.7
Other unsecured............................................. 5,175.8 3,900.7
Commercial.................................................. 892.6 1,226.7
--------- ---------
Managed receivables............................... $28,596.2 $21,647.6
========= =========
</TABLE>
For certain securitizations, wholly-owned subsidiaries were created for the
limited purpose of consummating such transactions. At December 31, 1996, these
subsidiaries were: HFC Revolving Corporation, HRSI Funding, Inc., HFS Funding
Corporation, Household Finance Receivables Corporation II, Household Receivables
Funding Corporation, Household Receivables Funding Corporation II, HFC Funding
Corporation, Household Receivables Funding, Inc., Household Consumer Loan
Corporation, Household Pooling Corporation and Household Card Funding
Corporation.
At December 31, 1996 and 1995, the amounts due and deferred from
receivables sales of $1,404.8 and $932.9 million, respectively, included
unamortized excess servicing assets and funds established pursuant to the
recourse provisions for certain sales totaling $894.2 and $600.6 million,
respectively. The amounts due and deferred also included customer payments not
yet remitted by the securitization trustee to the company of $478.0 and $290.9
million at December 31, 1996 and 1995, respectively. In addition, the company
has made guarantees relating to certain securitizations of $90.2 and $265.1
million plus unpaid interest at December 31, 1996 and 1995, respectively. The
company has subordinated interests in certain transactions, which are recorded
as receivables, of $388.5 and $358.5 million at December 31, 1996 and 1995,
respectively. The company has agreements with a "AAA"-rated third party who will
indemnify the company for up to $21.2 million in losses related to certain
securitization transactions. The company maintains credit loss reserves pursuant
to the recourse provisions for receivables serviced with limited recourse which
are based on estimated probable losses under such provisions. These reserves
totaled $561.6 and $334.2 million at December 31, 1996 and 1995, respectively,
and represent the company's best estimate of possible losses on receivables
serviced with limited recourse.
The providers of the credit enhancements have no recourse to the company.
The company does not receive collateral from any party to the securitizations,
nor does the company have any risk of counterparty nonperformance. In addition,
the company, with its affiliate, Household Bank, f.s.b., maintains facilities
which provide for the securitization of receivables on a revolving basis
totaling $4.5 billion through the issuance of
F-11
<PAGE> 26
commercial paper, of which $3.8 billion were securitized at December 31, 1996.
HFC's portion of securitized receivables at year end totaled $3.1 billion.
Contractual maturities of owned receivables were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------------------------------------------------
1997 1998 1999 2000 2001 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Home equity.............. $ 662.7 $ 497.5 $ 358.8 $ 262.3 $ 192.1 $ 540.5 $ 2,513.9
Visa/MasterCard.......... 542.6 570.3 459.5 421.8 384.5 3,930.2 6,308.9
Private label............ 480.3 378.9 311.2 263.8 228.9 2,143.9 3,807.0
Other unsecured.......... 635.0 450.8 324.1 250.4 230.2 673.9 2,564.4
Commercial............... 135.3 131.3 78.1 34.9 60.5 452.5 892.6
-------- -------- -------- -------- -------- -------- ---------
Total.......... $2,455.9 $2,028.8 $1,531.7 $1,233.2 $1,096.2 $7,741.0 $16,086.8
======== ======== ======== ======== ======== ======== =========
</TABLE>
A substantial portion of consumer receivables, based on the company's
experience, will be renewed or repaid prior to contractual maturity. The above
maturity schedule should not be regarded as a forecast of future cash
collections. The ratio of annual cash collections of principal to average
principal balances, excluding Visa/MasterCard receivables, approximated 38 and
44 percent in 1996 and 1995, respectively.
The following table summarizes contractual maturities of owned receivables
due after one year by repricing characteristic:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-------------------------
OVER 1 BUT
WITHIN OVER
5 YEARS 5 YEARS
---------- --------
(IN MILLIONS)
<S> <C> <C>
Receivables at predetermined interest rates................. $2,783.4 $3,042.6
Receivables at floating or adjustable rates................. 3,106.6 4,698.3
-------- --------
Total............................................. $5,890.0 $7,740.9
======== ========
</TABLE>
Nonaccrual owned consumer receivables totaled $204.8 million at December
31, 1996. Interest income that would have been recorded in 1996 if such
nonaccrual receivables had been current and in accordance with contractual terms
was approximately $35.2 million. Interest income that was included in net income
for 1996, prior to these loans being placed on nonaccrual status, was
approximately $19.5 million.
F-12
<PAGE> 27
The following table sets forth the activity in the company's credit loss
reserves for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1996 1995 1994
-------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Credit loss reserves for owned receivables at January 1..... $ 531.8 $ 413.7 $ 452.7
Provision for credit losses-owned receivables............... 522.8 511.0 435.9
Owned receivables charged off............................... (528.4) (555.3) (517.8)
Recoveries on owned receivables............................. 74.7 82.0 78.1
Portfolio acquisitions, net................................. 70.6 80.4 (35.2)
-------- ------- -------
Total credit loss reserves for owned receivables at
December 31.......................................... 671.5 531.8 413.7
-------- ------- -------
Credit loss reserves for receivables serviced with limited
recourse at January 1..................................... 334.2 181.7 134.5
Provision for credit losses-receivables serviced with
limited recourse.......................................... 568.1 322.3 187.9
Receivables charged off..................................... (356.0) (181.1) (150.0)
Recoveries.................................................. 17.1 8.5 5.6
Other, net.................................................. (1.8) 2.8 3.7
-------- ------- -------
Total credit loss reserves for receivables serviced
with limited recourse at December 31................. 561.6 334.2 181.7
-------- ------- -------
Total credit loss reserves for managed receivables at
December 31.......................................... $1,233.1 $ 866.0 $ 595.4
======== ======= =======
</TABLE>
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>
1996
Balance............................................ $4,825.2 $ 398.3 $5,223.5
Highest aggregate month-end balance................ 5,961.7
Average borrowings................................. 4,864.0 105.8 4,969.8
Weighted average interest rate:
At year end...................................... 5.6% 6.8% 5.7%
Paid during year................................. 5.4 5.1 5.4
1995
Balance............................................ $4,042.4 $ 111.8 $4,154.2
Highest aggregate month-end balance................ 4,733.8
Average borrowings................................. 4,244.2 126.5 4,370.7
Weighted average interest rate:
At year end...................................... 5.8% 6.0% 5.8%
Paid during year................................. 5.9 6.0 5.9
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
</TABLE>
Interest expense for commercial paper, bank and other borrowings totaled
$268.8, $259.6 and $206.4 million for 1996, 1995 and 1994, respectively.
F-13
<PAGE> 28
The company maintains various bank credit agreements primarily to support
commercial paper borrowings. The company had committed back-up lines of $5.2
billion at December 31, 1996, $400 million of which was limited by the amount
the parent company may utilize. None of these back-up lines were utilized by HFC
at December 31, 1996. Formal credit lines are reviewed annually, and expire at
various dates from 1997 to 2001. Borrowings under these lines generally are
available at a surcharge over the London Interbank Offered Rate (LIBOR). Annual
commitment fee requirements to support availability of these lines at December
31, 1996 totaled $4.4 million.
5. SENIOR AND SENIOR SUBORDINATED DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR)
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------
1996 1995
---------- ---------
(ALL DOLLAR AMOUNTS ARE
STATED IN MILLIONS)
<S> <C> <C>
SENIOR DEBT
3.50% to 7.49%; due 1997 to 2009.......................... $ 3,672.8 $2,315.7
7.50% to 7.99%; due 1997 to 2007.......................... 1,309.1 1,709.2
8.00% to 8.99%; due 1997 to 2005.......................... 956.8 1,294.1
9.00% to 9.99%; due 1997 to 2001.......................... 71.6 282.3
10.00% and greater; due 1997 to 2001...................... 69.3 38.3
Variable interest rate debt; 4.75% to 8.50%; due 1997 to
2015................................................... 4,173.8 2,111.5
SENIOR SUBORDINATED DEBT
9.00% to 9.63%; due 2000 to 2001.......................... 400.0 400.0
10.13%; paid in 1996...................................... -- 100.0
Unamortized premium (discount).............................. (5.1) 6.4
--------- --------
Total senior and senior subordinated debt.............. $10,648.3 $8,257.5
========= ========
</TABLE>
Weighted average coupon interest rates were 6.7 and 7.2 percent at December
31, 1996 and 1995, respectively. Interest expense for senior and senior
subordinated debt was $642.3, $565.0 and $411.8 million for 1996, 1995 and 1994,
respectively.
Maturities of senior and senior subordinated debt were:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996
---------------
(IN MILLIONS)
<S> <C>
1997........................................ $ 2,322.7
1998........................................ 1,368.6
1999........................................ 1,689.0
2000........................................ 1,099.1
2001........................................ 1,281.6
Thereafter.................................. 2,887.3
---------
Total.................................. $10,648.3
=========
</TABLE>
At December 31, 1996 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, 1996 approximately $1.3 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
primarily are used to manage the company's exposure to fluctuations in interest
F-14
<PAGE> 29
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 Risk Management on pages 10 and 11.
The financial instruments used by the company include interest rate
contracts and foreign exchange rate contracts and have varying degrees of credit
risk and/or market risk.
Credit Risk. Credit risk is the possibility that a loss may occur because
the counterparty to a transaction fails to perform according to the terms of the
contract. The company's exposure to credit loss related to interest rate swaps,
cap and floor transactions, forward and futures contracts and options is the
amount of uncollected interest or premium related to these instruments. These
interest rate related instruments are generally expressed in terms of notional
principal or contract amounts which are much larger than the amounts potentially
at risk for nonpayment by counterparties. The company controls the credit risk
of its off-balance sheet financial instruments through established credit
approvals, risk control limits and ongoing monitoring procedures. The company
has never experienced nonperformance by any derivative instrument counterparty.
Market Risk. Market risk is the possibility that a change in interest rates
or foreign exchange rates will cause a financial instrument to decrease in value
or become more costly to settle. The company mitigates this risk by establishing
limits for positions and other controls.
Interest Rate and Foreign Exchange Contracts. The following table
summarizes the activity in interest rate and foreign exchange contracts for
1996, 1995 and 1994:
HEDGING/SYNTHETIC ALTERATION INSTRUMENTS
<TABLE>
<CAPTION>
NON EXCHANGE TRADED
------------------------------------------
EXCHANGE TRADED
---------------------------------------------
INTEREST RATE FOREIGN EXCHANGE
FUTURES CONTRACTS OPTIONS INTEREST RATE CONTRACTS
--------------------- --------------------- RATE CURRENCY -------------------
PURCHASED SOLD PURCHASED WRITTEN SWAPS SWAPS PURCHASED SOLD
--------- --------- --------- --------- --------- -------- --------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994
Notional amount, 1993...... -- -- $ 29.6 $ (40.0) $13,714.6 $ 118.3 $ 3.4 $ (91.7)
New contracts.............. $8,009.9 $(8,799.2) 8,867.9 (5,707.5) 7,916.3 179.0 1,026.6 (949.3)
Matured or expired
contracts................. -- -- (3,150.0) -- (5,481.1) -- -- --
Terminated contracts....... (63.5) 759.8 -- -- (2,075.0) -- (46.5) 43.9
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 $ 297.3 -- $ (69.0)
========= ========= ========= ========= ========= ======= ======== =======
Fair value, 1994(2)........ -- $ .8 -- -- $ (341.5) $ 90.0 -- --
--------- --------- --------- --------- --------- ------- -------- -------
1995
Notional amount, 1994...... -- $ (93.0) -- -- $14,074.8 $ 297.3 -- $ (69.0)
New contracts.............. $2,003.0 (1,850.0) $ 300.0 $ (300.0) 790.0 -- $ 809.9 (885.2)
Matured or expired
contracts................. -- 290.0 -- -- (4,932.8) -- (36.7) 40.9
Terminated contracts....... -- -- -- -- (4,275.3) -- -- --
In-substance
maturities(1)............. (1,653.0) 1,653.0 (300.0) 300.0 -- -- (773.2) 913.3
--------- --------- --------- --------- --------- ------- -------- -------
Notional amount, 1995...... $ 350.0 -- -- -- $ 5,656.7 $ 297.3 -- --
========= ========= ========= ========= ========= ======= ======== =======
Fair value, 1995(2)........ $ .1 -- -- -- $ 136.6 $ 80.2 -- --
--------- --------- --------- --------- --------- ------- -------- -------
1996
Notional amount, 1995...... $ 350.0 -- -- -- $ 5,656.7 $ 297.3 -- --
New contracts.............. 6,611.9 $(4,202.9) $ 440.0 $ (440.0) 3,845.8 674.3 -- --
Matured or expired
contracts................. (1,471.0) 50.0 -- -- (1,392.1) (117.0) -- --
Terminated contracts....... -- -- -- -- (1,215.0) -- -- --
In-substance
maturities(1)............. (4,152.9) 4,152.9 (440.0) 440.0 -- -- -- --
--------- --------- --------- --------- --------- ------- -------- -------
Notional amount, 1996...... $1,338.0 -- -- -- $ 6,895.4 $ 854.6 -- --
========= ========= ========= ========= ========= ======= ======== =======
Fair value, 1996(2)........ -- -- -- -- $ 45.7 $ (43.2) -- --
--------- --------- --------- --------- --------- ------- -------- -------
<CAPTION>
NON EXCHANGE TRADED
-----------------------
INTEREST
RATE
FORWARD
CONTRACTS OTHER RISK
--------- MANAGEMENT
PURCHASED INSTRUMENTS
--------- -----------
(IN MILLIONS)
<S> <C> <C>
1994
Notional amount, 1993...... -- $ 1,080.5
New contracts.............. $ 180.0 193.9
Matured or expired
contracts................. -- (1,043.9)
Terminated contracts....... -- (130.5)
In-substance
maturities(1)............. -- --
------- ---------
Notional amount, 1994...... $ 180.0 $ 100.0
======= =========
Fair value, 1994(2)........ $ .1 $ --
------- ---------
1995
Notional amount, 1994...... $ 180.0 $ 100.0
New contracts.............. -- --
Matured or expired
contracts................. -- --
Terminated contracts....... (180.0) --
In-substance
maturities(1)............. -- --
------- ---------
Notional amount, 1995...... -- $ 100.0
======= =========
Fair value, 1995(2)........ -- $ .8
------- ---------
1996
Notional amount, 1995...... -- $ 100.0
New contracts.............. -- 1,250.0
Matured or expired
contracts................. -- --
Terminated contracts....... -- --
In-substance
maturities(1)............. -- --
------- ---------
Notional amount, 1996...... -- $ 1,350.0
======= =========
Fair value, 1996(2)........ -- $ 7.0
------- ---------
</TABLE>
- ---------------
(1) Represent contracts terminated as the market execution technique of closing
the transaction either (a) just prior to maturity to avoid delivery of the
underlying instrument, or (b) at the maturity of the underlying items being
hedged.
(2) (Bracketed) unbracketed amounts represent amounts to be (paid) received by
the company had these positions been closed out at the respective balance
sheet date. Bracketed amounts do not necessarily
F-15
<PAGE> 30
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) There were no trading activities during 1996 or 1995. The results of trading
activities were immaterial to the financial results of the company for 1994.
Interest rate swaps are contractual agreements between two counterparties
for the exchange of periodic interest payments generally based on a notional
principal amount and agreed-upon fixed or floating rates. The company primarily
enters into interest rate swap transactions to synthetically alter balance sheet
items. These transactions are specifically designated to a particular
asset/liability, off-balance sheet item or anticipated transaction of a similar
characteristic. Specific assets or liabilities may consist of groups of
individually small dollar homogeneous assets or liabilities of similar economic
characteristics. Credit and market risk exists with respect to these
instruments. The following table reflects the items so altered:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996
---------------
(IN MILLIONS)
<S> <C>
Investment securities....................................... $ 28.3
Receivables:
Home equity............................................... 200.0
Visa/MasterCard........................................... 500.0
Private label............................................. 150.0
Other unsecured........................................... 25.0
--------
Total owned receivables.............................. 875.0
Commercial paper, bank and other borrowings................. 1,307.0
Senior and senior subordinated debt......................... 4,566.5
Receivables serviced with limited recourse.................. 118.6
--------
Total items synthetically altered with interest rate
swaps............................................... $6,895.4
========
</TABLE>
- ---------------
Note: In all instances, the notional amount is not greater than the carrying
value of the related asset/liability or off-balance sheet item.
The company manages its exposure to interest rate risk primarily through
the use of interest rate swaps. These swaps synthetically alter the interest
rate risk inherent in balance sheet assets, liabilities or off-balance sheet
items. The majority of the company's interest rate swaps are used to convert
floating rate assets to fixed rate, fixed rate debt to floating rate, floating
rate assets or debt from one floating rate index to another, fixed rate assets
to a floating rate, or floating rate debt to fixed rate. The company also has
entered into currency swaps to convert both principal and interest payments on
debt issued from one currency to the appropriate functional currency. Interest
rate swaps are also used to synthetically alter interest rate characteristics on
certain receivables that are sold and serviced with limited recourse. These
off-balance sheet items expose the company to the same interest rate risk as
on-balance sheet items. Interest rate swaps are used to synthetically alter the
interest rate provisions of the securitization transaction whereby the
underlying receivables pay a fixed (floating) rate and the pass-through rate to
the investor is floating (fixed).
F-16
<PAGE> 31
The following table summarizes the maturities and related weighted average
receive/pay rates of interest rate swaps outstanding at December 31, 1996:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 2002 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................ $ 550.0 $ 50.0 $ 150.0 $ 25.0 -- -- -- $ 775.0
Weighted average receive
rate........................ 5.51% 5.62% 5.73% 5.50% -- -- -- 5.56%
Weighted average pay rate..... 5.96 6.16 8.88 6.45 -- -- -- 6.55
Pay a floating rate/receive a
fixed rate:
Notional value................ $ 602.8 $211.4 $ 769.3 $150.0 $697.5 $28.3 $1,598.8 $4,058.1
Weighted average receive
rate........................ 6.30% 5.24% 6.47% 6.60% 6.54% 6.04% 7.04% 6.62%
Weighted average pay rate..... 5.56 5.65 5.55 5.32 5.56 5.64 5.61 5.58
Pay a floating rate/receive a
different floating rate:
Notional value................ $ 657.3 $370.0 $1,035.0 -- -- -- -- $2,062.3
Weighted average receive
rate........................ 5.50% 5.52% 5.86% -- -- -- -- 5.68%
Weighted average pay rate..... 5.55 5.54 5.56 -- -- -- -- 5.55
-------- ------ -------- ------ ------ ----- -------- --------
Total notional value............ $1,810.1 $631.4 $1,954.3 $175.0 $697.5 $28.3 $1,598.8 $6,895.4
======== ====== ======== ====== ====== ===== ======== ========
Total weighted average rates on
swaps:
Receive rate.................... 5.77% 5.43% 6.09% 6.44% 6.54% 6.04% 7.04% 6.22%
Pay rate........................ 5.68 5.63 5.81 5.48 5.56 5.64 5.61 5.68
</TABLE>
The floating rates paid or received by the company are based on spot rates
from independent market sources for the index contained in each interest rate
swap contract, which generally are based on either 1- or 3-month LIBOR. These
current floating rates are different than the floating rates in effect when the
contracts were initiated. Changes in spot rates impact the variable rate
information disclosed above. However, these changes in spot rates also impact
the interest rate on the underlying assets or liabilities. Hedging/synthetic
alteration instruments are used by the company to manage the volatility of net
interest margin resulting from changes in interest rates on the underlying
hedged/synthetically altered items. Owned net interest margin would have
declined by 30 and 71 basis points in 1996 and 1994, respectively, had these
instruments not been utilized. These instruments had a negligible impact on
owned net interest margin in 1995.
Forwards and futures are agreements between two parties, committing one to
sell and the other to buy a specific quantity of an instrument on some future
date. The parties agree to buy or sell at a specified price in the future, and
their profit or loss is determined by the difference between the arranged price
and the level of the spot price when the contract is settled. Foreign exchange
contracts have been utilized by the company to reduce its exposure to foreign
currency exchange risk. Interest rate forward and futures contracts are used to
hedge resets of interest rates on the company's floating rate assets and
liabilities. The company's exposure to credit risk for futures is limited, as
these contracts are traded on organized exchanges. Each day, changes in contract
values are settled in cash. In contrast, forward contracts have credit risk
relating to the performance of the counterparty. These instruments also are
subject to market risk. Cash requirements for forward contracts include the
receipt or payment of cash upon the sale or purchase of the instrument.
Purchased options grant the purchaser the right, but not the obligation, to
either purchase or sell a financial instrument at a specified price within a
specified period. The seller of the option has written a contract which creates
an obligation to either sell or purchase the financial instrument at the
agreed-upon price if, and when, the purchaser exercises the option.
Other risk management instruments consist of caps and floors. Caps and
floors written expose the company to market risk but not to credit risk. Credit
and market risk associated with caps and floors purchased are limited to the
premium paid which is recorded on the balance sheets in other assets.
F-17
<PAGE> 32
Deferred gains of $43.6 and $65.9 million and deferred losses of $8.5 and
$26.8 million from hedging/synthetic alteration instruments were recorded on the
balance sheets at December 31, 1996 and 1995, respectively. The weighted average
amortization period associated with the deferred gains was 6.8 and 7.6 years at
December 31, 1996 and 1995, respectively. The weighted average amortization
period for the deferred losses was 1.5 and 1.8 years at December 31, 1996 and
1995, respectively.
At December 31, 1996 the accrued interest, unamortized premium and other
assets recorded for agreements which would be written off should all related
counterparties fail to meet the terms of their contracts was $47.6 million.
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, 1996 and 1995. The company lends nationwide,
with the following geographic areas comprising more than 10 percent of total
managed domestic receivables at December 31, 1996: California -21 percent;
Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI) -24 percent; Middle
Atlantic (DE, DC, MD, NJ, PA, VA, WV) -14 percent; Northeast (CT, ME, MA, NH,
NY, RI, VT) -13 percent; and Southeast (AL, FL, GA, KY, MS, NC, SC, TN) -15
percent.
7. PREFERRED STOCK
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------
1996 1995
-------- --------
(ALL DOLLAR
AMOUNTS ARE STATED
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 1/3000 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 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 sheets
(such as the value of consumer lending relationships for originated receivables
and the franchise values of the company's business units) are not considered
financial instruments and, accordingly, are not valued for purposes of this
disclosure. The company believes there is substantial value associated with
these assets based on current market conditions and historical experience.
Accordingly, the estimated fair value of financial instruments, as disclosed,
does not fully represent the entire value, nor the changes in the entire value,
of the company.
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
F-18
<PAGE> 33
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.
The following is a summary of the carrying value and estimated fair value
of the company's financial instruments:
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------------------------------------------------------
1996 1995
--------------------------------- ---------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE DIFFERENCE VALUE VALUE DIFFERENCE
-------- --------- ---------- -------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Cash........................... $ 229 $ 229 -- $ 155 $ 155 --
Investment securities.......... 1,720 1,720 -- 3,233 3,233 --
Receivables.................... 16,392 17,063 $ 671 12,665 13,009 $ 344
-------- -------- ----- -------- -------- -----
Subtotal..................... 18,341 19,012 671 16,053 16,397 344
-------- -------- ----- -------- -------- -----
Commercial paper, bank and
other borrowings............. (5,224) (5,224) -- (4,154) (4,154) --
Senior and senior subordinated
debt......................... (10,648) (10,775) (127) (8,258) (8,770) (512)
Insurance reserves............. (1,022) (1,238) (216) (2,213) (2,346) (133)
-------- -------- ----- -------- -------- -----
Subtotal..................... (16,894) (17,237) (343) (14,625) (15,270) (645)
-------- -------- ----- -------- -------- -----
Interest rate and foreign
exchange contracts........... 33 10 (23) 21 218 197
Commitments to extend credit
and guarantees............... -- 40 40 -- 40 40
-------- -------- ----- -------- -------- -----
Subtotal..................... 33 50 17 21 258 237
-------- -------- ----- -------- -------- -----
Total........................ $ 1,480 $ 1,825 $ 345 $ 1,449 $ 1,385 $ (64)
======== ======== ===== ======== ======== =====
</TABLE>
The following methods and assumptions were used to estimate the fair value
of the company's financial instruments:
Cash: The carrying value approximates fair value for this instrument due to
its liquid nature.
Investment securities: Investment securities are classified as
available-for-sale and are carried at fair value on the balance sheets.
Receivables: The fair value of adjustable rate consumer receivables was
determined to approximate existing carrying value because interest rates on
these receivables adjust with changing market interest rates. The fair value of
fixed rate consumer receivables was estimated by discounting future expected
cash flows at interest rates approximating those offered by the company on such
products at the respective valuation dates. This approach to estimating fair
value for fixed rate receivables results in a disclosed fair value that is less
than amounts the company believes could be currently realizable on a sale of
these receivables. These receivables are relatively insensitive to changes in
overall market interest rates and, therefore, have additional value compared to
alternative uses of funds. The fair value of commercial receivables was
determined by discounting estimated future cash flows at estimated market
interest rates.
The fair value of consumer receivables included an estimate, on a present
value basis, of future excess servicing cash flows associated with
securitizations of certain home equity, Visa/MasterCard, private label and other
unsecured receivables.
F-19
<PAGE> 34
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 was estimated by discounting future expected cash flows at
estimated market interest rates at December 31, 1996 and 1995. 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 23 years with various renewal options. The office space leases generally
require the company to pay certain operating expenses. The majority of the
company's leases are noncancelable operating leases. Net rental expense under
operating leases was $37.5, $36.4 and $19.2 million for 1996, 1995 and 1994,
respectively.
Future net minimum lease commitments under noncancelable operating lease
arrangements were:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996
---------------
(IN MILLIONS)
<S> <C>
1997........................................................ $ 37.8
1998........................................................ 30.4
1999........................................................ 21.2
2000........................................................ 14.0
2001........................................................ 8.2
Thereafter.................................................. 73.0
------
Net minimum lease commitments............................... $184.6
======
</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 made for the
company's participation in RIP. The fair value of plan assets in RIP exceeded
Household International's projected benefit obligation by $284.2 and $239.1
million at December 31, 1996 and 1995, respectively. The 1996 and 1995 projected
benefit obligations for RIP were determined using an assumed weighted average
discount rate of 7.50 and 7.25 percent, respectively; an assumed compensation
increase of 4.00 and 3.75 percent, respectively; and an assumed weighted average
long-term rate of return on plan assets of 10.00 percent. At December 31, 1996
and 1995, the company's estimated share of prepaid pension cost was
F-20
<PAGE> 35
$130.0 and $121.3 million, respectively. Plan benefits are based primarily on
years of service. The company's share of total pension income due to the
overfunded status of RIP was $8.6, $8.2 and $8.0 million for 1996, 1995 and 1994
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 1996, 1995 and 1994
the company's costs totaled $7.1, $6.4 and $9.6 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.
Household International recognizes the expected postretirement costs on an
accrual basis, similar to pension accounting. The expected cost of
postretirement benefits is required to be recognized over the employees' years
of service with the company instead of the period in which the benefits are
paid. 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 $104.9 and $102.1 million at December 31, 1996 and 1995,
respectively. The company's estimated share of Household International's accrued
postretirement benefit obligation was $51.6 and $37.8 million at December 31,
1996 and 1995, respectively. In addition, the company's estimated share of
postretirement benefit expense recognized in 1996 and 1995 was $11.7 and $14.0
million, respectively.
Household International's accumulated postretirement benefit obligation at
December 31, 1996 and 1995 was determined using an assumed weighted average
discount rate of 7.50 and 7.25 percent, respectively, and an assumed annual
compensation increase of 4.0 and 3.75 percent, respectively. An 11.0 and 12.0
percent annual rate of increase in the gross cost of covered health care
benefits is assumed for 1997 and 1996. This rate of increase is assumed to
decline by 1 percent in each year after 1997.
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
percent would have increased the company's share of the 1996 and 1995 net
periodic postretirement benefit cost by $.7 and $.6 million, respectively, and
its share of the accumulated postretirement benefit obligation at December 31,
1996 and 1995 by $6.5 and $6.4 million, respectively. A 1 percentage point
increase would have increased Household International's accumulated
postretirement benefit obligation at December 31, 1996 and 1995 by $7.5 and $7.3
million, respectively.
Employees of the company may participate in Household International's
Employee Stock Purchase Plan (the "ESPP"). The ESPP provides a means for
employees to purchase shares of the parent company's common stock at 85 percent
of the lesser of its market price at the beginning or end of a one year
subscription period.
Key officers and employees of the company participate in Household
International's executive compensation plans which provide for the issuance of
nonqualified stock options and restricted stock rights ("RSRs"). Stock options
permit the holder to purchase, under certain limitations, the parent company's
common stock at a price not less than 100 percent of the market value of the
stock on the date the option is granted. Stock options vest equally over four
years and expire 10 years from the date of grant. RSRs entitle an employee to
receive a stated number of shares of the parent company's common stock if the
employee satisfies the conditions set by Household International's Compensation
Committee for the award.
Household International accounts for options and shares issued under the
ESPP in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," pursuant to which no compensation cost has been
recognized.
F-21
<PAGE> 36
11. INCOME TAXES
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Provision for income taxes related to operations............ $180.6 $175.4 $103.6
Income taxes related to adjustments included in common
shareholder's equity:
Unrealized gain (loss) on investments, net................ (54.6) 92.6 (64.4)
Foreign currency translation adjustments.................. -- -- (4.4)
------ ------ ------
Total.................................................. $126.0 $268.0 $ 34.8
====== ====== ======
</TABLE>
Provisions for income taxes related to operations were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
CURRENT
United States............................................. $244.8 $147.6 $ 97.9
Foreign................................................... 1.4 1.0 1.3
------ ------ ------
Total current.......................................... 246.2 148.6 99.2
------ ------ ------
DEFERRED
United States............................................. (65.6) 26.8 2.8
Foreign................................................... -- -- 1.6
------ ------ ------
Total deferred......................................... (65.6) 26.8 4.4
------ ------ ------
Total income taxes..................................... $180.6 $175.4 $103.6
====== ====== ======
</TABLE>
The significant components of deferred income tax provisions attributable
to income from operations were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1995 1994
------ ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Deferred income tax provision (exclusive of the effects of
other components listed below)............................ $(60.3) $26.8 $(2.4)
Investment tax credits...................................... -- -- .4
Operating loss carryforwards................................ (5.3) -- 6.4
------ ----- -----
Deferred income tax provision.......................... $(65.6) $26.8 $ 4.4
====== ===== =====
</TABLE>
Income before income taxes from foreign operations was $3.9, $2.7 and $7.8
million in 1996, 1995 and 1994, respectively.
F-22
<PAGE> 37
Effective tax rates are analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit............. 2.2 2.5 1.4
Amortization of intangible assets......................... 1.7 1.4 2.0
Leveraged lease tax benefits.............................. (2.6) (3.3) (4.3)
Recapture of life insurance policy holders' surplus
account balance........................................ -- 6.7 --
Net operating loss........................................ (2.3) -- --
Sale of foreign subsidiary................................ -- -- (2.5)
Other..................................................... (1.1) (2.2) (2.8)
---- ---- ----
Effective tax rate..................................... 32.9% 40.1% 28.8%
==== ==== ====
</TABLE>
At December 31, 1996 the company had net operating loss carryforwards for
tax purposes of $16.3 million, of which $.1 million expire in 2002; $14.4
million expire in 2007; and $1.8 million expire in 2008.
Temporary differences which gave rise to a significant portion of deferred
tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
DEFERRED TAX LIABILITIES
Leveraged lease transactions, net......................... $383.3 $405.6
Receivables sold.......................................... 235.1 158.8
Pension plan assets....................................... 51.9 48.7
Market value adjustments.................................. -- 59.6
Other..................................................... 121.4 94.8
------ ------
Total deferred tax liabilities......................... 791.7 767.5
------ ------
DEFERRED TAX ASSETS
Credit loss reserves...................................... 473.0 306.7
Other..................................................... 177.0 133.1
------ ------
Total deferred tax assets.............................. 650.0 439.8
------ ------
Net deferred tax liability at end of year.............. $141.7 $327.7
====== ======
</TABLE>
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 (from) parent company and affiliates consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Parent company and other subsidiaries....................... $ 73.9 $ 35.5
Household Bank, f.s.b....................................... (79.8) 81.3
Household Global Funding, Inc............................... (1.7) 2.8
------ ------
Advances to (from) parent company and affiliates....... $ (7.6) $119.6
====== ======
</TABLE>
F-23
<PAGE> 38
These advances bear interest at various market interest rates. Net interest
income on advances to (from) parent company and affiliates was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1996 1995 1994
----- ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Parent company and other subsidiaries....................... $13.3 $ 26.6 $30.6
Household Bank, f.s.b....................................... (3.6) (10.9) (2.3)
----- ------ -----
Net interest income on advances to (from) parent
company and affiliates............................... $ 9.7 $ 15.7 $28.3
===== ====== =====
</TABLE>
Household Bank, f.s.b. ("the Bank") has agreements with certain
wholly-owned bank subsidiaries of the company to provide loans of up to $350
million to fund their credit card operations. The outstanding balance at
December 31, 1996 was $15 million and was included in commercial paper, bank and
other borrowings for financial statement purposes. Borrowings in 1995 were
repaid during that year. Interest expense on these borrowings totaled $3.9,
$13.9 and $2.5 million during 1996, 1995 and 1994, respectively. Average
borrowings totaled $63.8, $204.4 and $26.4 million in 1996, 1995 and 1994,
respectively.
The company's wholly-owned bank subsidiary has been designated by Household
International to issue the GM Card. Fees for this designation totaled $27.2,
$19.1 and $3.1 million in 1996, 1995 and 1994, respectively, and are recorded in
other operating expenses on the consolidated statements of income.
The company had an agreement with the Bank to originate loans using the
Bank's lending criteria. These loans were originated through direct mail
programs and the company's retail consumer finance branches and were sold to the
Bank at fair value. The company received premiums, totaling $2.8 and $6.2
million in 1996 and 1995, respectively, for originating loans under this
program. During 1996 this agreement was terminated and HFC purchased the
outstanding loans from the Bank.
Household International has 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 required levels. The agreement also requires that any capital
deficiency be cured by Household International and/or the company within thirty
days. There were no cash capital contributions made by Household International
to the Bank in 1996 and 1995.
In July 1995 the company acquired from Household International an
affiliated entity that provides certain support services, such as item
processing, collections and billings, accounts payable and payroll processing,
primarily for Household International's domestic credit card portfolio. The
company acquired this servicing subsidiary, including approximately $125 million
of property and equipment, at net book value. HFC and this servicing subsidiary
have negotiated a market rate agreement with the Bank for services such as
underwriting, data processing, item processing, check clearing, bank operations,
accounts payable, and payroll processing. Fees for these services totaled $50.9,
$89.0 and $156.4 million during 1996, 1995 and 1994, respectively.
The company was allocated costs incurred on its behalf by Household
International for administrative expenses, including insurance, credit
administration, legal and other fees. These administrative expenses were
recorded in other operating expenses and totaled approximately $55, $56 and $39
million in 1996, 1995 and 1994, respectively.
13. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business there are various legal proceedings
pending against the company. Management believes the aggregate liabilities, if
any, resulting from such actions would not have a material adverse effect on the
consolidated financial position of the company. However, as the ultimate
resolution of these proceedings is influenced by factors that are outside of the
company's control, it is reasonably possible
F-24
<PAGE> 39
the company's estimated liability under these proceedings may change. See Note 9
for discussion of lease commitments.
14. SALE OF PRODUCT LINES
In October 1995 the company sold the individual life and annuity product
lines of the Individual Life Insurance segment for $525 million in cash and $50
million of preferred stock of the purchaser. Assets sold related to these
product lines totaled approximately $6.1 billion and consisted primarily of
investment securities. For the first nine months of 1995, these sold product
lines generated approximately $400 million of revenues and earned approximately
$35 million of net income.
F-25
<PAGE> 40
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1996--THREE MONTHS ENDED 1995--THREE MONTHS ENDED
--------------------------------- ---------------------------------
DEC. SEPT. JUNE MAR. DEC. SEPT. JUNE MAR.
------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance income................................ $556.0 $509.4 $442.9 $419.6 $444.5 $457.9 $422.2 $400.0
Interest income from noninsurance investment
securities.................................. 5.6 5.6 18.7 6.0 5.2 9.2 10.0 9.5
Interest expense.............................. 252.9 239.8 223.8 194.6 213.9 214.7 203.6 192.4
------ ------ ------ ------ ------ ------ ------ ------
Net interest margin........................... 308.7 275.2 237.8 231.0 235.8 252.4 228.6 217.1
Provision for credit losses on owned
receivables................................. 149.8 114.7 129.4 128.9 124.5 135.3 133.5 117.7
------ ------ ------ ------ ------ ------ ------ ------
Net interest margin after provision for credit
losses...................................... 158.9 160.5 108.4 102.1 111.3 117.1 95.1 99.4
------ ------ ------ ------ ------ ------ ------ ------
Securitization income......................... 191.1 178.4 196.0 154.6 126.0 100.9 103.1 94.6
Insurance revenues............................ 43.8 42.0 38.3 43.8 40.8 69.5 69.5 71.9
Investment income............................. 22.9 32.6 34.5 55.2 39.8 143.0 135.6 135.4
Fee income.................................... 52.5 50.0 39.7 36.2 40.9 32.9 27.9 23.5
Other income.................................. 6.7 27.8 17.7 17.6 60.3 12.8 (.1) 27.2
------ ------ ------ ------ ------ ------ ------ ------
Total other revenues.......................... 317.0 330.8 326.2 307.4 307.8 359.1 336.0 352.6
------ ------ ------ ------ ------ ------ ------ ------
Salaries and fringe benefits.................. 104.9 95.7 87.0 87.4 87.0 89.2 54.6 58.5
Other operating expenses...................... 163.5 182.1 193.0 144.1 128.6 142.3 163.6 165.1
Policyholders' benefits....................... 39.0 50.3 47.1 67.6 53.3 128.0 137.0 134.0
------ ------ ------ ------ ------ ------ ------ ------
Total costs and expenses...................... 307.4 328.1 327.1 299.1 268.9 359.5 355.2 357.6
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes.................... 168.5 163.2 107.5 110.4 150.2 116.7 75.9 94.4
Income taxes.................................. 58.1 57.8 33.3 31.4 79.1 41.6 24.0 30.7
------ ------ ------ ------ ------ ------ ------ ------
Net income.................................... $110.4 $105.4 $ 74.2 $ 79.0 $ 71.1 $ 75.1 $ 51.9 $ 63.7
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
F-26
<PAGE> 41
SCHEDULE II
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1996 1995 1994
------ ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
Unearned credit insurance premiums and claims reserves:
Unearned credit insurance premiums:
Balance at January 1................................... $ 36.9 $ 5.3 $ 6.8
Earned premiums........................................ (16.6) (1.7) (103.6)
Net premiums written and reinsurance assumed........... 18.0 1.8 103.0
Other items............................................ .1 31.5 (.9)
------ ------ -------
Balance at December 31................................. 38.4 36.9 5.3
------ ------ -------
Claims reserves:
Balance at January 1................................... 41.5 40.6 43.0
Provision for claims................................... 62.2 51.7 49.3
Benefits paid.......................................... (60.0) (48.5) (47.0)
Other items............................................ .5 (2.3) (4.7)
------ ------ -------
Balance at December 31................................. 44.2 41.5 40.6
------ ------ -------
Total at December 31...................................... $ 82.6 $ 78.4 $ 45.9
====== ====== =======
</TABLE>
F-27
<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
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------ --------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net income.................................... $ 369.0 $ 261.8 $ 256.4 $220.4 $ 239.5
Income taxes.................................. 180.6 175.4 103.6 107.4 92.3
-------- -------- -------- ------ --------
Income before income taxes.................... 549.6 437.2 360.0 327.8 331.8
-------- -------- -------- ------ --------
Fixed charges:
Interest expense(1)......................... 915.1 859.7 656.6 532.9 665.8
Interest portion of rentals(2).............. 21.9 14.8 8.6 4.9 9.5
-------- -------- -------- ------ --------
Total fixed charges........................... 937.0 874.5 665.2 537.8 675.3
-------- -------- -------- ------ --------
Total earnings as defined..................... $1,486.6 $1,311.7 $1,025.2 $865.6 $1,007.1
======== ======== ======== ====== ========
Ratio of earnings to fixed charges............ 1.59 1.50 1.54 1.61 1.49
======== ======== ======== ====== ========
Preferred stock dividends(3).................. $ 10.9 $ 12.0 $ 10.1 $ 12.9 $ 14.2
======== ======== ======== ====== ========
Ratio of earnings to combined fixed charges
and preferred stock dividends............... 1.57 1.48 1.52 1.57 1.46
======== ======== ======== ====== ========
</TABLE>
- ---------------
(1) For financial statement purposes, these amounts are reduced for income
earned on temporary investment of excess funds, generally resulting from
over-subscriptions of commercial paper issuances.
(2) Represents one-third of rental which approximates the portion representing
interest.
(3) Preferred stock dividends are grossed up to their pre-tax equivalents based
on effective tax rates of 32.9, 40.1, 28.8, 32.8 and 27.8 percent for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
F-28
<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 January 23, 1997, included in this annual report on Form
10-K of Household Finance Corporation for the year ended December 31, 1996, into
the Company's previously filed Registration Statements No. 33-55043, No.
33-55561, No. 33-64175 and No. 333-14459 on Form S-3.
Arthur Andersen LLP
Chicago, Illinois
March 26, 1997
<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 AND EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 228,500
<SECURITIES> 1,720,000
<RECEIVABLES> 16,086,800
<ALLOWANCES> 1,233,100
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 612,900
<DEPRECIATION> 344,200
<TOTAL-ASSETS> 20,579,800
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 10,648,300
0
100,000
<COMMON> 1
<OTHER-SE> 2,592,800
<TOTAL-LIABILITY-AND-EQUITY> 20,579,800
<SALES> 0
<TOTAL-REVENUES> 3,245,200
<CGS> 0
<TOTAL-COSTS> 1,261,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 522,800
<INTEREST-EXPENSE> 911,100
<INCOME-PRETAX> 549,600
<INCOME-TAX> 180,600
<INCOME-CONTINUING> 369,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 369,000
<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>
