<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-75
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HOUSEHOLD FINANCE CORPORATION
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1239445
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
2700 Sanders Road, Prospect Heights, Illinois 60070
- -------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 564-5000
--------------
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
At July 31, 1998, there were 1,000 shares of registrant's
common stock outstanding.
The registrant meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q and is therefore
filing this Form 10-Q with the reduced disclosure format.
<PAGE>
<PAGE> 2
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
Table of Contents
PART I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
(Unaudited) - Three Months and Six Months
Ended June 30, 1998 and 1997 2
Condensed Consolidated Balance Sheets -
June 30, 1998 (Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended
June 30, 1998 and 1997 4
Financial Highlights 5
Notes to Interim Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
<PAGE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -----------------------------------------------------------
All amounts, except per share data, are stated in millions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income $1,165.9 $1,019.7 $2,281.6 $2,043.1
Other interest income 6.6 14.6 15.3 22.5
Interest expense 508.5 452.3 1,008.7 900.2
-------- -------- -------- --------
Net interest margin 664.0 582.0 1,288.2 1,165.4
Provision for credit losses on owned
receivables 318.5 293.6 655.1 612.2
-------- -------- -------- --------
Net interest margin after provision for
credit losses 345.5 288.4 633.1 553.2
-------- -------- -------- --------
Securitization income 268.4 314.8 591.7 579.1
Insurance revenues 90.6 86.8 182.0 174.6
Investment income 35.6 36.5 72.8 73.8
Fee income 120.0 106.6 245.8 202.8
Other income 49.5 56.7 136.0 222.9
Gain on sale of Beneficial Canada - - 189.4 -
-------- -------- -------- --------
Total other revenues 564.1 601.4 1,417.7 1,253.2
-------- -------- -------- --------
Salaries and fringe benefits 221.2 223.6 455.7 436.3
Occupancy and equipment expense 72.3 69.1 147.5 143.8
Other marketing expenses 49.3 56.2 114.2 123.7
Other servicing and administrative expenses 133.4 134.6 280.8 297.3
Amortization of acquired intangibles
and goodwill 44.7 33.3 85.9 66.4
Policyholders' benefits 48.3 57.9 105.8 122.8
Merger and integration related costs 1,000.0 - 1,000.0 -
-------- -------- -------- --------
Total costs and expenses 1,569.2 574.7 2,189.9 1,190.3
-------- -------- -------- --------
Income (loss) before income taxes (659.6) 315.1 (139.1) 616.1
Income taxes (benefit) (131.4) 111.1 64.6 222.3
-------- -------- -------- --------
Net income (loss) $ (528.2) $ 204.0 $ (203.7) $ 393.8
======== ======== ======== ========
</TABLE>
See notes to interim condensed consolidated financial statements.<PAGE>
<PAGE> 4
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------
In millions, except share data.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
June 30, December 31,
1998 1997
- -----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Cash $ 521.5 $ 545.3
Investment securities 2,759.8 2,336.8
Receivables, net 33,866.3 32,152.5
Advances to parent company and affiliates 498.5 10.5
Acquired intangibles and goodwill, net 1,892.6 1,777.9
Properties and equipment, net 371.4 464.8
Real estate owned 201.8 187.8
Other assets 2,275.7 1,973.3
--------- ---------
Total assets $42,387.6 $39,448.9
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Debt:
Deposits - $ 555.3
Commercial paper, bank and other borrowings $10,290.5 9,547.1
Senior and senior subordinated debt (with
original maturities over one year) 23,352.2 20,909.2
--------- ---------
Total debt 33,642.7 31,011.6
Insurance policy and claim reserves 1,123.0 1,182.3
Other liabilities 1,855.8 1,451.3
--------- ---------
Total liabilities 36,621.5 33,645.2
--------- ---------
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares
shares authorized, issued and outstanding
at June 30, 1998 and December 31, 1997,
and additional paid-in capital 2,910.2 2,555.1
Retained earnings 2,866.1 3,296.9
Foreign currency translation adjustments (37.5) (56.5)
Unrealized gain on investments, net 27.3 8.2
--------- ---------
Total common shareholder's equity 5,766.1 5,803.7
--------- ---------
Total liabilities and shareholder's equity $42,387.6 $39,448.9
========= =========
</TABLE>
See notes to interim condensed consolidated financial statements.<PAGE>
<PAGE> 5
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
In millions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Six months ended June 30 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income (loss) $ (203.7) $ 393.8
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 655.1 612.2
Merger and integration related costs 1,000.0 -
Insurance policy and claim reserves (53.8) 28.9
Depreciation and amortization 147.4 131.6
Net realized (gains) losses from sales of assets (190.4) (54.9)
Other, net (598.4) (106.5)
--------- ---------
Cash provided by operations 756.2 1,005.1
--------- ---------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (689.3) (698.8)
Matured 209.1 148.3
Sold 443.0 470.6
Short-term investment securities, net change (381.6) 88.5
Receivables:
Originations, net (7,489.0) (6,778.8)
Purchases and related premiums (2,272.5) (387.4)
Sold 7,154.5 7,834.6
Purchase capital stock of Transamerica Financial
Services Holding Company - (1,059.6)
Properties and equipment purchased (44.5) (24.9)
Properties and equipment sold 20.8 1.5
Advances to parent company and affiliates, net (573.8) (351.8)
--------- ---------
Cash increase (decrease) from investments in operations (3,623.3) (757.8)
--------- ---------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt and deposits, net change 480.1 7.8
Senior and senior subordinated debt issued 5,601.7 4,819.5
Senior and senior subordinated debt retired (2,576.3) (3,049.3)
Prepayment of debt (607.4) -
Repayment of Transamerica Financial Services Holding
Company debt - (2,679.7)
Policyholders' benefits paid (51.4) (72.5)
Cash received from policyholders 22.0 58.9
Dividends paid to parent company (150.0) (75.0)
Dividends paid - pooled affiliate (75.4) (121.4)
Dividends on preferred stock - (3.7)
Capital contributions from parent company 200.0 976.5
--------- ---------
Cash increase (decrease) from financing and
capital transactions 2,843.3 (138.9)
--------- ---------
Increase (decrease) in cash (23.8) 108.4
Cash at January 1 545.3 508.1
--------- ---------
Cash at June 30 $ 521.5 $ 616.5
========= =========
Supplemental cash flow information:
Interest paid $ 897.4 $ 879.6
--------- ---------
Income taxes paid 148.7 259.3
--------- ---------
</TABLE>
See notes to interim condensed consolidated financial statements.<PAGE>
<PAGE> 6
Household Finance Corporation and Subsidiaries
FINANCIAL HIGHLIGHTS
- --------------------
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income excluding merger
costs and Beneficial
Canada gain
HFC $ 175.3 $ 115.7 $ 312.3 $ 204.8
Beneficial 47.5 88.3 116.5 189.0
-------- -------- -------- --------
Total net income excluding
merger costs and
Beneficial Canada gain 222.8 204.0 428.8 393.8
Merger and integration
related costs (751.0) - (751.0) -
Beneficial Canada gain - - 118.5 -
-------- -------- -------- --------
Net income (loss) (528.2) 204.0 (203.7) 393.8
======== ======== ======== ========
Net interest margin and other
revenues <F1> 1,179.8 1,125.5 2,600.1 2,295.8
-------- -------- -------- --------
Return on average common
shareholder's equity <F2> 16.1% 18.4% 14.7% 18.2%
-------- -------- -------- --------
Return on average owned assets <F2> 2.66 2.21 2.45 2.14
-------- -------- -------- --------
</TABLE>
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
June 30, December 31,
1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Total assets:
Owned $42,387.6 $39,448.9
Managed 57,569.4 57,491.9
--------- ---------
Receivables:
Owned $34,253.5 $32,383.3
Serviced with limited recourse 15,181.8 18,043.0
--------- ---------
Managed $49,435.3 $50,426.3
========= =========
Debt to total shareholder's equity 5.8:1 5.3:1
--------- ---------
<FN>
<F1> Policyholders' benefits have been netted against other revenues.
<F2> Annualized. Excludes merger and integration related
costs and the Beneficial Canada gain.
</FN>
</TABLE>
See notes to interim condensed consolidated financial statements.<PAGE>
<PAGE> 7
Household Finance Corporation and Subsidiaries
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
- --------------------------
The accompanying unaudited condensed consolidated financial
statements of Household Finance Corporation ("HFC") and its
subsidiaries have been prepared in accordance with
generally accepted accounting principles for interim
financial information. Additionally, these financial
statements have been prepared in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting
principles for complete financial statements. Certain prior
period amounts have been reclassified to conform with the
current period's presentation. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six
months ended June 30, 1998 should not be considered
indicative of the results for any future quarters or the
year ending December 31, 1998. HFC and its subsidiaries may
also be referred to in this Form 10-Q as "we," "us" or
"our." These financial statements should be read in
conjunction with the supplemental consolidated financial
statements for the year ended December 31, 1997 contained
in HFC's Current Report on Form 8-K dated June 30, 1998.
2. HOUSEHOLD INTERNATIONAL MERGER WITH BENEFICIAL CORPORATION
- ---------------------------------------------------------------
On June 30, 1998, Household International, Inc., our parent
company, completed its merger with Beneficial Corporation
("Beneficial"), a consumer finance holding company
headquartered in Wilmington, Delaware. Beneficial's total
assets were $16.1 billion and common shareholders' equity
was $2.0 billion on the date of the merger, excluding the
impact of the merger and integration related costs. Each
outstanding share of Beneficial common stock was converted
into 3.0666 shares of Household International's common
stock, resulting in the issuance of approximately 168.4
million common shares to the former Beneficial
shareholders. Each share of Beneficial $5.50 Convertible
Preferred Stock was converted into the number of shares of
Household International common stock the holder would have
been entitled to receive in the merger had the holder
converted his or her shares of Beneficial $5.50 Convertible
Preferred Stock into shares of Beneficial common stock
immediately prior to the merger. Additionally, each other
share of preferred stock of Beneficial outstanding
immediately prior to the merger has been converted into one
share of a newly created series of preferred stock of
Household International with terms substantially similar to
those of existing Beneficial preferred stock. The merger
was accounted for as a pooling of interests. Upon
completion of the merger, substantially all the net assets
of Beneficial were contributed by Household International
to HFC. Therefore, these interim condensed consolidated
financial statements include the results of operations,
financial position, and changes in cash flows of Beneficial
for all periods presented.
<PAGE>
<PAGE> 8
The separate results of operations for HFC and Beneficial
were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
In millions. 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest margin and other
revenues <F1>
HFC $ 716.8 $ 627.4 $1,412.4 $1,270.7
Beneficial 463.0 498.1 1,187.7 1,025.1
-------- -------- -------- --------
Total $1,179.8 $1,125.5 $2,600.1 $2,295.8
======== ======== ======== ========
Net income (loss)
HFC $ 175.3 $ 115.7 $ 312.3 $ 204.8
Beneficial 47.5 88.3 116.5 189.0
Merger and integration
related costs (751.0) - (751.0) -
Beneficial Canada gain - - 118.5 -
-------- -------- -------- --------
Total $ (528.2) $ 204.0 $ (203.7) $ 393.8
======== ======== ======== ========
<FN>
<F1> Policyholders' benefits have been netted against other revenues.
</FN>
</TABLE>
In connection with the merger, Household International and
HFC incurred pre-tax merger and integration related costs
of approximately $1 billion ($751 million after-tax) in the
quarter. These costs included approximately $305 million in
lease exit costs, $50 million in fixed asset write-offs
related to closed facilities, $255 million in severance and
change in control payments, $230 million in asset
writedowns to reflect modified business plans, $75 million
in investment banking fees, $25 million in legal and other
expenses, and $60 million in prepayment premiums related to
debt.
The following table summarizes the activity in the merger and
restructuring reserve for the three months ended June 30, 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------
Three Months Ended
In millions. June 30, 1998
- ---------------------------------------------------
<S> <C>
Balance at beginning of period -
Establishment of reserve $1,000.0
Cash payments (113.7)
Non-cash items (249.5)
--------
Balance on June 30, 1998 $ 636.8
========
</TABLE>
3. BUSINESS DIVESTITURES
- --------------------------
On April 28, 1998, the sale of Beneficial's German operations was completed.
An after-tax loss of $27.8 million was recorded in the fourth quarter of
1997. This loss was recorded after consideration of a $31.0 million tax
benefit, primarily generated by the expected utilization of capital losses
to cover the expected loss associated with disposing of the German
operations. No additional losses were realized in 1998 as a result of
the sale.
On March 2, 1998, the sale of Beneficial's Canadian operations was
completed. An after-tax gain of $118.5 million was recorded upon
consummation of the transaction.
<PAGE>
<PAGE> 9
4. INVESTMENT SECURITIES
- --------------------------
Investment securities consisted of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
In millions. June 30, 1998 December 31, 1997
- ----------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
INVESTMENTS
Marketable equity securities $ 69.0 $ 72.5 $ 129.0 $ 132.5
Corporate debt securities 1,607.0 1,642.3 1,575.4 1,594.0
U.S. government and federal
agency debt securities 337.0 339.7 380.2 370.0
Other 670.1 671.0 206.2 206.9
-------- -------- -------- --------
Subtotal 2,683.1 2,725.5 2,290.8 2,303.4
Accrued investment income 34.3 34.3 33.4 33.4
-------- -------- -------- --------
Total investment securities $2,717.4 $2,759.8 $2,324.2 $2,336.8
======== ======== ======== ========
</TABLE>
5. RECEIVABLES
- ----------------
Receivables consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
June 30, December 31,
In millions. 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Home equity $15,381.9 $12,806.1
Auto finance 537.2 476.5
MasterCard/Visa 4,950.2 5,052.4
Private label 7,151.5 8,039.2
Other unsecured 5,557.8 5,071.3
Commercial 674.9 937.8
--------- ---------
Total owned receivables 34,253.5 32,383.3
Accrued finance charges 424.9 400.1
Credit loss reserve for owned receivables (1,524.9) (1,417.5)
Unearned credit insurance premiums and
claims reserves (371.3) (344.2)
Amounts due and deferred from
receivables sales 1,767.6 1,838.6
Reserve for receivables serviced with
limited recourse (683.5) (707.8)
--------- ---------
Total owned receivables, net 33,866.3 32,152.5
Receivables serviced with limited recourse 15,181.8 18,043.0
--------- ---------
Total managed receivables, net $49,048.1 $50,195.5
========= =========
</TABLE>
<PAGE>
<PAGE> 10
The outstanding balance of receivables serviced with
limited recourse consisted of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
June 30, December 31,
In millions. 1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Home equity $ 4,403.7 $ 6,038.6
Auto finance 700.7 395.9
MasterCard/Visa 5,598.8 6,775.7
Private label 927.9 1,025.0
Other unsecured 3,550.7 3,807.8
--------- ---------
Total $15,181.8 $18,043.0
========= =========
</TABLE>
The combination of receivables owned and receivables
serviced with limited recourse, which we consider our
managed portfolio, is shown below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
June 30, December 31,
In millions. 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Home equity $19,785.6 $18,844.7
Auto finance 1,237.9 872.4
MasterCard/Visa 10,549.0 11,828.1
Private label 8,079.4 9,064.2
Other unsecured 9,108.5 8,879.1
Commercial 674.9 937.8
--------- ---------
Total $49,435.3 $50,426.3
========= =========
</TABLE>
The amounts due and deferred from receivables sales were
$1,767.6 million at June 30, 1998 and $1,838.6 million at
December 31, 1997. The amounts due and deferred included
unamortized securitization assets and funds set up under
the recourse requirements for certain sales totaling
$1,820.1 million at June 30, 1998 and $1,846.3 million at
December 31, 1997. It also included net customer payments
owed by us to the securitization trustee of $72.7 million
at June 30, 1998 and $53.6 million at December 31, 1997. In
addition, we have subordinated interests in certain
transactions, which were recorded as receivables, of $884.5
million at June 30, 1998 and $888.7 million at December 31,
1997. We have agreements with a "AAA"-rated third party who
will insure us for up to $21.2 million in losses relating
to certain securitization transactions. We maintain credit
loss reserves under the recourse requirements for
receivables serviced with limited recourse which are based
on estimated probable losses under those requirements. The
reserves totaled $683.5 million at June 30, 1998 and $707.8
million at December 31, 1997 and represents our best
estimate of probable losses on receivables serviced with
limited recourse.
<PAGE>
<PAGE> 11
6. CREDIT LOSS RESERVES
- -------------------------
An analysis of credit loss reserves for the three and six
months ended June 30 was as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
In millions. 1998 1997 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit loss reserves for owned
receivables at beginning
of period $1,510.0 $1,218.6 $1,417.5 $1,169.7
Provision for credit losses 318.5 293.6 655.1 612.2
Chargeoffs (354.0) (282.5) (693.1) (569.3)
Recoveries 29.1 39.4 59.6 69.0
Portfolio acquisitions, net 21.3 61.7 85.8 49.2
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
OWNED RECEIVABLES AT JUNE 30 1,524.9 1,330.8 1,524.9 1,330.8
-------- -------- -------- --------
Credit loss reserves for
receivables serviced with
limited recourse at beginning
of period 684.6 608.7 707.8 576.2
Provision for credit losses 177.2 123.8 356.8 280.4
Chargeoffs (204.6) (166.0) (420.8) (298.6)
Recoveries 17.3 7.9 30.8 14.1
Other, net 9.0 .1 8.9 2.4
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
RECEIVABLES SERVICED WITH
LIMITED RECOURSE AT JUNE 30 683.5 574.5 683.5 574.5
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
MANAGED RECEIVABLES AT JUNE 30 $2,208.4 $1,905.3 $2,208.4 $1,905.3
======== ======== ======== ========
</TABLE>
7. INCOME TAXES
- -----------------
The effective tax rate for the first six months of 1998 was
36.4 percent excluding merger and integration related
costs. The inclusion of this item resulted in a $249
million net tax benefit for the first six months of 1998.
The effective tax rate was 36.1 percent in the year-ago
period. The effective tax rate differs from the statutory
federal income tax rate in these years primarily because of
the effects of (a) state and local income taxes, (b) in
1997, capital losses from the sale of German operations,
(c) leveraged lease tax benefits, (d) amortization and
write-offs of intangible assets, (e) reduction of
noncurrent tax requirements and (f) in 1998, nondeductible
merger costs.
8. TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
- ----------------------------------------------------
We periodically advance funds to Household International
and affiliates or receive amounts in excess of our parent
company's current requirements. Advances to parent company
and affiliates were $498.5 million at June 30, 1998
compared to $10.5 million at December 31, 1997. Advances
from parent company and affiliates, which are included in
commercial paper, bank and other borrowings, were $250.0
million at December 31, 1997. There were no advances from
parent company and affiliates at June 30, 1998. Net
interest income on affiliated balances was $7.3 million for
the second quarter of 1998 and $4.6 million for the prior
year quarter. In the first six months of 1998 net interest
income on affiliated balances was $9.2 million compared to
$10.7 million for the same period last year.
<PAGE>
<PAGE> 12
9. COMPREHENSIVE INCOME (LOSS)
- ------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS No. 130"), effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for the reporting
and presentation of comprehensive income. Comprehensive income, in addition
to traditional net income, includes the mark-to-market adjustments on
available-for-sale securities, cumulative translation adjustments and other
items which represent a change in equity from "nonowner" sources. FAS
No. 130 does not change existing requirements for certain items to be
reported as a separate component of shareholder's equity. In accordance
with the interim reporting guidelines of FAS No. 130, comprehensive income
(loss) was $(515.4) million for the quarter ended June 30, 1998, $224.7
million for the quarter ended June 30, 1997, $(165.6) million for the six
months ended June 30, 1998 and $383.0 million for the six months ended
June 30, 1997. Excluding the impact of the merger and integration related
costs as well as the gain on sale of Beneficial Canada, comprehensive
income was $235.6 million for the quarter ended June 30, 1998 and $466.9
million for the six months ended June 30, 1998.
10. COMMITMENTS AND CONTINGENT LIABILITIES
- -------------------------------------------
In 1992, the Internal Revenue Service ("IRS") completed its
examination of Beneficial's federal income tax returns for
1984 through 1987. The IRS proposed $142.0 million in
adjustments that relate principally to activities of a
former subsidiary, American Centennial Insurance Company,
prior to its sale in 1987.
In order to limit the further accrual of interest on the
proposed adjustments, Beneficial paid $105.5 million of tax
and interest during the third quarter of 1992.
The issues were not resolved during the administrative
appeals process, and the IRS issued a statutory Notice of
Deficiency asserting the unresolved adjustments and
increased the disallowance to $195.0 million in the third
quarter of 1996.
Beneficial has initiated litigation in the United States
Tax Court to oppose the disallowance. While the conclusion
of this matter in its entirety cannot be predicted with
certainty, management does not anticipate the ultimate
resolution to differ materially from amounts accrued.
11. ACCOUNTING PRONOUNCEMENTS
- ------------------------------
In March 1998, Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), was issued. This statement,
effective for financial statements issued for fiscal years
beginning after December 15, 1998, provides guidance on
accounting for the costs of computer software developed or
obtained for internal use. We do not expect the adoption of
SOP 98-1 to have a material impact on our consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging
Activities ("FAS No. 133"). FAS No. 133 establishes
accounting and reporting standards requiring that every
derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at
its fair value. FAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. FAS No.
133 is effective for fiscal years beginning after June 15,
1999, and can be implemented as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1998 and thereafter). FAS No. 133 cannot
be applied retroactively. We expect to adopt FAS No. 133 on
January 1, 2000 and have not yet quantified the impacts of
adopting this statement on our financial statements.
<PAGE>
<PAGE> 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains certain estimates and projections
regarding HFC and Household International, Inc., our
parent company, and its merger with Beneficial Corporation
("Beneficial"), that may be forward-looking in nature, as
defined by the Private Securities Litigation Reform Act of
1995. A variety of factors may cause actual results to
differ materially from the results discussed in these
forward-looking statements. Factors that might cause such a
difference are discussed herein and in Household
International's Form 10-Q for the quarter ended June 30,
1998, and in Household International's and Beneficial
Corporation's Annual Reports on Forms 10-K, for the year
ended December 31, 1997, all filed with the Securities and
Exchange Commission.
On June 30, 1998, Household International merged with
Beneficial, a consumer finance holding company
headquartered in Wilmington, Delaware. Each outstanding
share of Beneficial common stock was converted into 3.0666
shares of Household International's common stock, resulting
in the issuance of approximately 168.4 million shares of
common stock. Each share of Beneficial $5.50 Convertible
Preferred Stock (the "Beneficial Convertible Stock") was
converted into the number of shares of Household
International common stock the holder would have been
entitled to receive in the merger had the Beneficial
Convertible Stock been converted into shares of Beneficial
common stock immediately prior to the merger. Additionally,
each other share of Beneficial preferred stock outstanding
was converted into one share of a newly-created series of
Household International preferred stock with terms
substantially similar to those of existing Beneficial
preferred stock. The merger was accounted for as a pooling
of interests. Upon completion of the merger, substantially
all the net assets of Beneficial were contributed by
Household International to HFC. Therefore, the information
included in this report presents the combined results of
HFC and Beneficial as if the two companies had operated as
a combined entity for all periods presented.
In connection with the merger, Household International and
HFC incurred pre-tax merger and integration related costs
of approximately $1 billion ($751 million after-tax) in the
second quarter. These costs included approximately $305
million in lease exit costs, $50 million in fixed asset
write-offs related to closed facilities, $255 million in
severance and change in control payments, $230 million in
asset writedowns to reflect modified business plans, $75
million in investment banking fees, $25 million in legal
and other expenses, and $60 million in prepayment premiums
related to debt.
The merger and integration related costs included
approximately $291 million in non-cash charges. Cash
payments of approximately $709 million will be funded
through our existing operations and by issuing additional
commercial paper and other borrowings. In addition, we
received tax benefits of approximately $249 million.
Substantially all of the cash payments are expected to be
made by the end of 1998.
OPERATIONS SUMMARY
- ------------------
Our operating income (net income excluding merger and
integration related costs and the gain on sale of
Beneficial's Canadian operations) for the second quarter of
1998 was $222.8 million, up from $204.0 million in 1997.
Operating income for the first six months of 1998 was
$428.8 million, up from $393.8 million a year ago.
Including merger and integration related costs and, for the
first six months of 1998, the gain on sale of Beneficial's
Canadian operations, we recognized a net loss of $(528.2)
million for the second quarter and $(203.7) million for the
first six months of 1998.<PAGE>
<PAGE> 14
On a stand-alone basis and excluding merger costs, HFC's
net income for the second quarter of 1998 was $175.3
million, up from $115.7 million in 1997, while Beneficial's
net income for the second quarter was $47.5 million,
compared to $88.3 million last year. The decline in
Beneficial's net income was due to increased credit losses,
partially offset by an improved net interest margin.
Beneficial's results for the quarter were consistent with
our expectations.
Excluding merger and integration related costs and the gain
on sale of Beneficial's Canadian operations, our annualized
return on average common shareholder's equity was 16.1
percent for the second quarter and 14.7 percent for the
first six months of 1998. This compares to an annualized
return on average common shareholder's equity of 18.4
percent for the second quarter and 18.2 percent for the
first six months of 1997.
- - On April 28, 1998, the sale of Beneficial's German
operations was completed. An after-tax loss of $27.8
million was recorded in the fourth quarter of 1997. This
loss was recorded after consideration of a $31.0 million
tax benefit, primarily generated by the expected
utilization of capital losses to cover the expected loss
associated with disposing of the German operations. No
additional losses were realized in 1998 as a result of the
sale.
- - On March 2, 1998, the sale of Beneficial's Canadian
operations was completed. An after-tax gain of $118.5
million was recorded upon consummation of the transaction.
- - The following summarizes our operating results for our
key businesses for the second quarter and first six
months of 1998 compared to the corresponding prior year
periods:
Results for our consumer finance business improved from
the prior year periods reflecting higher net interest
margin and fee income due mainly to higher levels of
average managed receivables. These improvements were
partially offset by higher credit losses resulting
primarily from increased personal bankruptcy filings.
Our MasterCard* and Visa* credit card business reported
lower net interest margin and, for the first six months,
higher credit losses, partially offset by higher fee
income. This business includes our co-branding and
affinity relationship strategies, in particular our
alliance with General Motors Corporation ("GM") to issue
the GM Card, a co-branded credit card, and the AFL-CIO's
Union Privilege affinity relationship.
Our private label credit card business reported higher
credit losses, partially offset by higher net interest
margin and fee income, and improved efficiency. Higher
credit losses reflected higher personal bankruptcies as
well as the maturing of promotional balances in the first
quarter of 1998.
Beneficial's tax refund anticipation loan ("RAL")
business profits declined from the prior year periods,
reflecting certain limited measures taken by the Internal
Revenue Service to delay payment on the returns of
selected taxpayers claiming an earned income tax credit.
* MasterCard is a registered trademark of MasterCard
International, Incorporated and Visa is a registered
trademark of VISA USA, Inc.
<PAGE>
<PAGE> 15
BALANCE SHEET REVIEW
- --------------------
- - Managed consumer receivables (receivables on our
balance sheet plus receivables serviced with limited
recourse) grew 3 percent over the prior year. Excluding
Beneficial's German and Canadian receivables which were
sold in the first half of 1997, managed consumer
receivables grew 5 percent year-over-year. Growth in auto
finance receivables reflect the acquisition of ACC Consumer
Finance Corporation ("ACC") in October 1997. New loan
originations in our retail branch network were up, however,
the higher level of refinancings continued to impact home
equity loan growth. MasterCard and Visa receivables were
down from a year ago as the purchase of a $925 million
portfolio in the first quarter of 1998 was offset by
attrition as well as by the non-strategic portfolio sales
which occurred in the second half of 1997. Other unsecured
receivables were up compared to the prior year reflecting
the purchase of an $850 million portfolio in the first
quarter. In addition, other unsecured growth was affected
by our slowed origination of new unsecured business in
recent quarters because of the uncertain credit
environment.
On a stand-alone basis, HFC's managed consumer
receivables grew 5 percent and Beneficial's receivables,
excluding the German and Canadian receivables sold,
increased 6 percent year-over-year.
- - Compared to the first quarter, managed consumer
receivables were down 4 percent. New loan originations in
the HFC retail branch network were up over 20 percent in
the quarter. However, the higher level of refinancings
continued to impact home equity loan growth. Our other
unsecured portfolio declined slightly in the quarter as run-
off outpaced new volume. As discussed above, the decline in
other unsecured is attributable to our slowing growth
somewhat due to credit quality concerns. MasterCard/Visa
receivables were down from the first quarter. Starting in
the first quarter, we actively repriced our MasterCard/Visa
portfolios and cut credit lines to minimize future loss
experience. These actions, however, led to greater
attrition than anticipated. Private label receivables were
down in the quarter from attrition at two major merchants
due to less promotional activity by Beneficial.
- - Consumer receivables on our balance sheet were $33.6
billion at June 30, 1998, up from $33.2 billion at March
31, 1998 and $31.2 billion at June 30, 1997. Changes in
these owned receivables from period to period may vary
depending on the timing and significance of securitization
transactions.
- - Our managed credit loss reserves were $2,208.4 million
at June 30, 1998, up from $2,194.6 million at March 31,
1998 and $1,905.3 million at June 30, 1997. Credit loss
reserves as a percent of managed receivables were 4.47
percent, up from 4.27 percent at March 31, 1998 and 3.94
percent at June 30, 1997. Reserves as a percent of
nonperforming managed receivables were 117.8 percent,
compared to 119.3 percent at March 31, 1998 and 126.4
percent at June 30, 1997. Consumer two-months-and-over
contractual delinquency ("delinquency") as a percent of
managed consumer receivables was 5.01 percent at June 30,
1998, compared to 4.79 percent at March 31, 1998 and 4.24
percent at June 30, 1997. The annualized total consumer
managed chargeoff ratio in the second quarter of 1998 was
4.10 percent, compared to 4.04 percent in the prior quarter
and 3.61 percent in the year-ago quarter.
- - Our debt to total shareholder's equity ratio was 5.8 to 1
compared to 5.3 to 1 at December 31, 1997. The increase was due
to higher debt levels primarily attributable to higher average
owned receivables at June 30, 1998.
<PAGE>
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our major use of cash is the origination or purchase of
receivables or purchases of investment securities. Our main
sources of cash are the collection of receivable balances,
maturities or sales of investment securities, proceeds from
the issuance of debt and securitization of consumer
receivables, and cash provided by operations.
The following describes major changes in our funding base
from December 31, 1997 to June 30, 1998:
- - We paid $75 million of dividends to our parent company
during the second quarter of 1998. A total of $150 million
of dividends were paid to our parent company during the
first six months of 1998.
- - Deposits decreased due to the sale of Beneficial's
German operations, as previously discussed.
- - Commercial paper, bank and other borrowings increased
8 percent to $10.3 billion from $9.5 billion. Senior and
senior subordinated debt (with original maturities over one
year) increased 12 percent to $23.4 billion from $20.9
billion. The increase in debt levels from year end is
primarily attributable to the increase in owned
receivables.
- - In connection with the Beneficial merger, we have
repurchased or have commitments to repurchase approximately
$.7 billion of senior and senior subordinated debt and bank
and other borrowings. We funded the debt repurchase with
senior debt and other borrowings.
Cash payments of approximately $709 million for merger
and integration related costs will be funded through our
existing operations, senior debt and other borrowings.
- - In March 1998, we received a capital contribution from
our parent company of $200 million in connection with the
acquisition of a credit card portfolio during the quarter.
- - Our securitized portfolio of home equity, auto
finance, MasterCard and Visa, private label and other
unsecured receivables totaled $15.2 billion at June 30,
1998, compared to $18.0 billion at December 31, 1997.
During the three months ended June 30, 1998, we
securitized, excluding replenishments of certificate holder
interests, $1.2 billion of auto finance and MasterCard/Visa
receivables. During the six months ended June 30, 1998, we
securitized, excluding replenishments of certificate holder
interests, $1.5 billion of auto finance, MasterCard/Visa
and other unsecured receivables.
The composition of these securitizations by type is as follows
(in billions):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
1998 1998
- -------------------------------------------------------------------
<S> <C> <C>
Auto finance $ .4 $ .4
Visa/MasterCard .8 .8
Other unsecured - .3
-------- --------
Total $ 1.2 $ 1.5
======== ========
</TABLE>
The market for securities backed by receivables is a
reliable, efficient and cost-effective source of funds,
which we plan to continue to utilize in the future.
<PAGE>
<PAGE> 17
INCOME STATEMENT REVIEW
- -----------------------
Net interest margin
- -------------------
Net interest margin was $664.0 million for the second
quarter of 1998, up from $582.0 million for the prior year
quarter. Net interest margin for the first six months of
1998 was $1,288.2 million, up from $1,165.4 million in the
prior year period. Net interest margin as a percent of
average owned interest-earning assets, annualized, was 7.50
percent in the second quarter of 1998 compared to 7.48
percent in the year-ago quarter. The net interest margin
percentage in the year-ago quarter was adversely affected
by temporary investments that were used to pre-fund the
acquisition of Transamerica Financial Services Holding
Company ("TFS"). Excluding the impact of these temporary
investments, net interest margin as a percent of average
owned interest-earning assets, annualized, was 7.63 percent
in the second quarter of 1997. The decrease in the net
interest margin percentage in 1998 was the result of the
change in product mix in the owned portfolio due to asset
securitizations, as discussed below. The dollar increase
was primarily due to an increase in average owned home
equity loans as a result of the acquisition of TFS in 1997,
but was partially offset by a decrease in average owned
MasterCard/Visa and private label receivables.
Due to the securitization of assets over the past several
years, the comparability of net interest margin between
years may be affected by the level and type of assets
securitized. As receivables are securitized rather than
held in our portfolio, net interest income is reclassified
to securitization income. Net interest margin on a managed
basis, assuming receivables securitized were held in our
portfolio, was $1,017.2 million for the second quarter of
1998, up 11 percent compared to $918.4 million in the year-
ago period. Net interest margin on a managed basis for the
first six months of 1998 was $2,061.9 million, up 13
percent compared to $1,827.0 million in the prior year
period. Net interest margin on a managed basis as a percent
of average managed interest-earning assets, annualized, was
7.97 percent compared to 7.93 percent in the year-ago
quarter. The net interest margin percentage on a managed
basis in the second quarter of 1997 was also adversely
affected by the previously-mentioned portfolio of temporary
investments. Excluding the impact of these temporary
investments, net interest margin as a percent of average
managed interest-earning assets, annualized, was 8.01
percent in the second quarter of 1997. The decrease in the
net interest margin percentage compared to the prior year
quarter was attributable to a change in our product mix.
Our receivables portfolio in the second quarter of 1998 was
comprised of a larger portion of home equity loans as
compared to the prior year. Home equity loans typically
carry lower interest rates than our unsecured loan products
which carry more risk.
Provision for credit losses
- ---------------------------
The provision for credit losses for receivables on an owned
basis for the second quarter of 1998 totaled $318.5
million, up 8 percent from $293.6 million in the prior year
quarter. The provision for the first six months of 1998 was
$655.1 million, up 7 percent from $612.2 million in the
year-ago period. Net chargeoffs in excess of owned
provision was $6 million for the three months ended June
30, 1998 compared to owned provision in excess of owned
chargeoffs of $51 million for the three months ended June
30, 1997. Owned provision in excess of owned chargeoffs for
the six months ended June 30, 1998 was $22 million,
compared to $112 million for the six months ended June 30,
1997. The provision for credit losses on an owned basis may
vary from quarter to quarter, depending on the amount of
securitizations in a particular period.
<PAGE>
<PAGE> 18
Other revenues
- --------------
Securitization income was $268.4 million for the second
quarter of 1998, compared to $314.8 million for the same
period in 1997. Securitization income for the first six
months of 1998 was $591.7 million, up from $579.1 million
in the year-ago period. Securitization income consists of
income associated with the securitization and sale of
receivables with limited recourse, including net interest
income, fee and other income and provision for credit
losses related to those receivables. The decrease in
securitization income compared to the second quarter of
1997 was primarily due to Beneficial's securitization gains
on home equity loans in the prior year quarter.
Securitization income for the first six months of 1998
increased compared to a year ago due to an increase in
average securitized receivables.
Fee income on an owned basis includes revenues from fee-
based products such as credit cards. Fee income was $120.0
million in the second quarter of 1998, up from $106.6
million in the comparable period of the prior year. Fee
income for the first six months of 1998 was $245.8 million,
up from $202.8 million for the same period in 1997. The
increase in fee income reflected higher credit card fees as
compared to the prior year periods.
Other income was $49.5 million in the second quarter of
1998, down from $56.7 million in the second quarter of
1997. Other income for the first six months of 1998 was
$136.0 million, compared to $222.9 million in the year-ago
period. The decrease in other income in 1998 is due to
lower RAL income. Additionally, the 1997 year-to-date
amount included approximately $50 million of non-recurring
gains on the sales of certain non-strategic assets and a
gain from the sale of a Beneficial life insurance portfolio
in June 1997.
Total other revenue for the first six months of 1998
included a pretax gain of $189.4 million from the sale of
Beneficial's Canadian operations, as previously discussed.
Expenses
- --------
Operating expenses for the second quarter of 1998,
excluding the one-time merger and integration related costs
of approximately $1.0 billion, were $520.9 million,
compared to $516.8 million in the comparable prior year
quarter. Operating expenses for the first six months of
1998, excluding the one-time merger related costs, were
$1,084.1 million, compared to $1,067.5 million in the year-
ago period.
Salaries and fringe benefits for the second quarter were
$221.2 million compared to $223.6 million in the second
quarter of 1997. Salaries and fringe benefits for the first
six months of 1998 were $455.7 million compared to $436.3
million for the first half of 1997. The expense was flat in
the second quarter as the increase in the average number of
employees in our domestic consumer finance and auto finance
businesses in connection with HFC's acquisitions of TFS in
June 1997 and ACC in October 1997 were offset by the sale
of Beneficial's Canadian operations in March 1998 and
German operations in April 1998. The higher expense for the
first six months was primarily due to the increase in the
average number of employees in connection with the
acquisitions of TFS and ACC.
Other marketing expenses for the second quarter were $49.3
million, compared to $56.2 million in 1997. Other marketing
expense for the first six months of 1998 totaled $114.2
million, compared to $123.7 million in the year-ago period.
Other marketing expense was down from the prior year due to
increased spending on private label programs in 1997 for
several Beneficial private label merchants.
<PAGE>
<PAGE> 19
Other servicing and administrative expenses were $133.4
million in the second quarter of 1998, relatively unchanged
from $134.6 million in the prior year. Other servicing and
administrative expenses for the first six months of 1998
were $280.8 million, down from $297.3 million for the same
period in 1997. The decrease in expense for the first six
months of 1998 was primarily due to lower real estate owned
costs.
Amortization of acquired intangibles and goodwill was $44.7
million in the second quarter of 1998, up from $33.3
million in the prior year quarter. Amortization expense
for the first six months of 1998 was $85.9 million, up from
$66.4 million in the prior year period. The increase
reflects our acquisitions of TFS and ACC in 1997.
CREDIT LOSS RESERVES
- --------------------
Our consumer credit management policies focus on product
type and specific portfolio risk factors. The consumer
credit portfolio is diversified by product and geographic
location. See Note 5, "Receivables" in the accompanying
financial statements for receivables by product type.
Total managed credit loss reserves, which include reserves
established on the off-balance sheet portfolio when
receivables are securitized, were as follows (in millions):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
1998 1998 1997 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned $1,524.9 $1,510.0 $1,417.5 $1,330.8
Serviced with limited recourse 683.5 684.6 707.8 574.5
-------- -------- -------- --------
Total $2,208.4 $2,194.6 $2,125.3 $1,905.3
======== ======== ======== ========
</TABLE>
Managed credit loss reserves as a percent of nonperforming managed
receivables were 117.8 percent, compared to 119.3 percent at March 31,
1998 and 126.4 percent at June 30, 1997.
Total owned and managed credit loss reserves as a percent
of receivables were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
1998 1998 1997 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned 4.45% 4.43% 4.38% 4.13%
Managed 4.47 4.27 4.21 3.94
---- ---- ---- ----
</TABLE>
The level of reserves for consumer credit losses is based on delinquency and
chargeoff experience by product and judgmental factors. We also evaluate the
potential impact of existing and anticipated national and regional economic
conditions on the managed receivable portfolio when establishing credit loss
reserves. See Note 6, "Credit Loss Reserves" in the accompanying financial
statements for analyses of reserves.
CREDIT QUALITY
- --------------
Delinquency and chargeoff statistics reflect the impact of the portfolio
acquisitions during the quarter. Delinquency and chargeoff levels in the
consumer portfolio were higher compared to the prior and year-ago quarters.
We track delinquency and chargeoff levels on a managed basis. We include
the off-balance sheet portfolio since we apply the same credit and portfolio
management procedures as on our owned portfolio. This results in a similar
credit loss exposure for us.
<PAGE>
<PAGE> 20
Delinquency
- -----------
Two-Months-and-Over Contractual Delinquency (as a percent
of managed consumer receivables):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
6/30/98 3/31/98 12/31/97 9/30/97 6/30/97
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity 3.48% 3.59% 3.59% 3.03% 2.82%
Auto finance <F1> 1.67 1.84 1.97 - -
MasterCard/Visa 4.31 3.32 3.28 3.42 3.39
Private label 6.22 6.22 6.01 5.85 5.25
Other unsecured 8.55 8.22 8.25 7.89 7.36
---- ---- ---- ---- ----
Total 5.01% 4.79% 4.77% 4.57% 4.24%
==== ==== ==== ==== ====
<FN>
<F1> Prior to the fourth quarter of 1997, delinquency statistics for
auto finance receivables were not significant. For prior periods,
delinquency data for these receivables were included in other
unsecured receivables.
</FN>
</TABLE>
Delinquency as a percent of managed consumer receivables for the combined
company increased from the prior quarter and the prior year. On a stand-
alone basis, HFC's delinquency ratio increased 21 basis points, to 5.26
percent, and Beneficial's delinquency ratio increased 27 basis points to
4.53 percent. Dollars of delinquency at HFC declined slightly from the
prior quarter. This improvement was mainly in our home equity and private
label businesses and continues to be most evident in early-stage
delinquency. We attribute some of the Beneficial increase to transition
in the quarter.
The increase in the managed delinquency ratio for the combined company
from a year ago was due to seasoning of the home equity, MasterCard/Visa
and other unsecured portfolios and the maturing of certain special
promotional balances in our private label portfolio. The seasoning or
maturing of a product is the effect of a growing portfolio reaching
expected levels of chargeoffs as loans age.
Net Chargeoffs of Consumer Receivables
- --------------------------------------
Net Chargeoffs of Consumer Receivables (as a percent,
annualized, of average managed consumer receivables):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
1998 1998 1997 1997 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity .40% .58% .59% .47% .60%
Auto finance <F1> 5.18 5.95 5.33 - -
MasterCard/Visa 5.31 5.65 5.45 6.24 5.13
Private label <F2> 6.43 6.02 5.47 5.02 4.58
Other unsecured 8.13 6.91 6.76 6.48 6.04
---- ---- ---- ---- ----
Total 4.10% 4.04% 3.83% 3.81% 3.61%
==== ==== ==== ==== ====
<FN>
<F1> Prior to the fourth quarter of 1997, chargeoff statistics for
auto finance receivables were not significant and were included in
other unsecured receivables.
<F2> Following the merger, HFC adopted Beneficial's presentation of
chargeoffs related to private label receivables. As a result, at the
time a receivable is charged off, the principal balance is written off
against the allowance for credit losses, and accrued finance charges
and other fees are reversed against the respective items on the
statement of operations. Chargeoffs, net interest margin, provision
for credit losses and fee income have been restated for all periods.
</FN>
/TABLE
<PAGE>
<PAGE> 21
The second quarter chargeoff ratio for the combined company
was 4.10 percent compared to 4.04 percent in the first
quarter. On a stand-alone basis, HFC's chargeoff ratio
declined 9 basis points from the first quarter to 4.61
percent, with all products except other unsecured
contributing to the improvement. For Beneficial, chargeoffs
increased 31 basis points in the quarter to 3.09 percent,
led by increases in both unsecured consumer loans and
private label credit cards. We are currently taking steps
to address the chargeoff increases in the Beneficial
portfolio.
The increase in the chargeoff ratio for the combined
company compared to a year ago was primarily due to
increased bankruptcy filings in and continued seasoning of
the private label and other unsecured portfolios.
Nonperforming Assets
- --------------------
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
In millions. 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual owned receivables $ 759.2 $ 708.6 $ 726.0 $ 605.6 $ 587.5
Accruing owned consumer
receivables 90 or more days
delinquent 502.1 451.1 433.6 436.7 419.4
Renegotiated commercial loans 12.3 12.3 12.4 12.9 12.9
-------- -------- -------- -------- --------
Total nonperforming owned
receivables 1,273.6 1,172.0 1,172.0 1,055.2 1,019.8
Real estate owned 202.3 188.1 187.8 194.9 187.3
-------- -------- -------- -------- --------
Total nonperforming owned assets $1,475.9 $1,360.1 $1,359.8 $1,250.1 $1,207.1
======== ======== ======== ======== ========
Owned credit loss reserves as
a percent of nonperforming
owned receivables 119.7% 128.8% 120.9% 128.9% 130.5%
-------- -------- -------- -------- --------
Nonaccrual managed receivables $1,186.8 $1,165.2 $1,121.3 $ 980.4 $ 928.7
Accruing managed consumer
receivables 90 or more days
delinquent 675.5 662.4 639.1 593.8 566.3
Renegotiated commercial
loans 12.3 12.3 12.4 12.9 12.9
-------- -------- -------- -------- --------
Total nonperforming managed
receivables 1,874.6 1,839.9 1,772.8 1,587.1 1,507.9
Real estate owned 202.3 188.1 187.8 194.9 187.3
-------- -------- -------- -------- --------
Total nonperforming assets $2,076.9 $2,028.0 $1,960.6 $1,782.0 $1,695.2
======== ======== ======== ======== ========
Managed credit loss reserves as
a percent of nonperforming
managed receivables 117.8% 119.3% 119.9% 123.8% 126.4%
-------- -------- -------- -------- --------
/TABLE
<PAGE>
<PAGE> 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In 1992, the Internal Revenue Service ("IRS") completed its
examination of Beneficial's federal income tax returns for
1984 through 1987. The IRS proposed $142.0 million in
adjustments that relate principally to activities of a
former subsidiary, American Centennial Insurance Company,
prior to its sale in 1987.
In order to limit the further accrual of interest on the
proposed adjustments, Beneficial paid $105.5 million of tax
and interest during the third quarter of 1992.
The issues were not resolved during the administrative
appeals process, and the IRS issued a statutory Notice of
Deficiency asserting the unresolved adjustments and
increased the disallowance to $195.0 million in the third
quarter of 1996.
Beneficial has initiated litigation in the United States
Tax Court to oppose the disallowance. While the conclusion
of this matter in its entirety cannot be predicted with
certainty, management does not anticipate the ultimate
resolution to differ materially from amounts accrued.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 Statement of Computation of Ratio of
Earnings to Fixed Charges and to Combined
Fixed Charges and Preferred Stock Dividends.
27 Financial Data Schedule.
27.1 Restated Financial Data Schedule.
99.1 Debt Securities Ratings.
(b) Reports on Form 8-K
During the second quarter of 1998, the
Registrant filed a Current Report on Form 8-K dated
April 7, 1998 pertaining to Household
International's merger agreement with Beneficial
Corporation, a Current Report on Form 8-K dated June
2, 1998 with respect to the financial statements of
Beneficial Corporation for the fiscal year ended
December 31, 1997 and the first quarter ended March
31, 1998, a Current Report on Form 8-K dated June
11, 1998 in connection with the offerings of 6.40%
Notes due 2008 and Floating Rate Notes due 2005, and
a Current Report on Form 8-K dated June 30, 1998
with respect to supplemental consolidated financial
statements restating HFC's historical consolidated
financial statements as of and for the three years
ended December 31, 1997 and as of and for the three
months ended March 31, 1998 and 1997.
<PAGE>
<PAGE> 23
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
HOUSEHOLD FINANCE CORPORATION
-----------------------------
(Registrant)
Date: August 14, 1998 By: /s/ David A. Schoenholz
---------------- -----------------------------
David A. Schoenholz
Executive Vice President and
Chief Financial Officer,
Director and on behalf of
Household Finance Corporation
<PAGE>
<PAGE> 24
Exhibit Index
--------------
12 Statement of Computation of Ratio of
Earnings to Fixed Charges and to Combined
Fixed Charges and Preferred Stock Dividends.
27 Financial Data Schedule.
27.1 Restated Financial Data Schedule.
99.1 Debt Securities Ratings.
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>
- ----------------------------------------------------------------------
All dollar amounts are stated in millions.
Six months ended June 30 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $ (203.7) $ 393.8
Income taxes 64.6 222.3
-------- --------
Income (loss) before income taxes (139.1) 616.1
-------- --------
Fixed charges:
Interest expense <F1> 1,018.3 926.2
Interest portion of rentals <F2> 25.6 22.8
-------- --------
Total fixed charges 1,043.9 949.0
-------- --------
Total earnings as defined $ 904.8 $1,565.1
======== ========
Ratio of earnings to fixed charges <F4> .87 1.65
======== ========
Ratio of earnings to fixed charges, excluding
merger and integration related costs 1.82 -
======== ========
Preferred stock dividends <F3> - $ 5.6
======== ========
Ratio of earnings to combined fixed charges
and preferred stock dividends <F4> .87 1.64
======== ========
Ratio of earnings to combined fixed charges
and preferred stock dividends, excluding
merger and integration related costs 1.82 -
======== ========
<FN>
<F1> For financial statement purposes, interest expense includes income
earned on temporary investment of excess funds, generally resulting
from over-subscriptions of commercial paper.
<F2> Represents one-third of rentals, which approximates the portion
representing interest.
<F3> Preferred stock dividends are grossed up to their pretax equivalent
based upon an effective tax rate of 36.1 percent for the six
months ended June 30, 1997.
<F4> The 1998 ratios have been negatively impacted by the one-time merger
and integration related costs associated with our merger with
Beneficial Corporation. As a result, ratios excluding these costs
have also been presented for comparative purposes.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND ITS
SUBSIDIARIES IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION
AND FINANCIAL STATEMENTS PREVIOUSLY FILED WITH THE SECURITIES &
EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 521,500
<SECURITIES> 2,759,800
<RECEIVABLES> 34,253,500
<ALLOWANCES> (2,208,400)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,062,000
<DEPRECIATION> (690,600)
<TOTAL-ASSETS> 42,387,600
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 23,352,200
0
0
<COMMON> 1
<OTHER-SE> 5,766,100
<TOTAL-LIABILITY-AND-EQUITY> 42,387,600
<SALES> 0
<TOTAL-REVENUES> 3,714,600
<CGS> 0
<TOTAL-COSTS> 2,189,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 655,100
<INTEREST-EXPENSE> 1,008,700
<INCOME-PRETAX> (139,100)
<INCOME-TAX> 64,600
<INCOME-CONTINUING> (203,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (203,700)
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997<F1>
<PERIOD-END> JUN-30-1997
<CASH> 616,500
<SECURITIES> 2,322,900
<RECEIVABLES> 32,235,500
<ALLOWANCES> (1,905,300)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 1,076,400
<DEPRECIATION> (616,300)
<TOTAL-ASSETS> 39,210,900
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 21,033,300
0
0
<COMMON> 1
<OTHER-SE> 5,454,500
<TOTAL-LIABILITY-AND-EQUITY> 39,210,900
<SALES> 0
<TOTAL-REVENUES> 3,318,800
<CGS> 0
<TOTAL-COSTS> 1,190,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 612,200
<INTEREST-EXPENSE> 900,200
<INCOME-PRETAX> 616,100
<INCOME-TAX> 222,300
<INCOME-CONTINUING> 393,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 393,800
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>RESTATED
<F2>FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH
FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S
BALANCE SHEETS WERE NON-CLASSIFIED.
</FN>
</TABLE>
EXHIBIT 99.1
------------
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
DEBT SECURITIES RATINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Standard Moody's Fitch Duff & Phelps
& Poor's Investors Investors Credit Thomson
Corporation Service Services Rating Co. BankWatch
- ------------------------------------------------------------------------------------------------------------
At June 30, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Household Finance Corporation
Senior debt A A2 A+ A+ A+
Senior subordinated debt A- A3 A A A
Commercial paper A-1 P-1 F-1 Duff 1+ TBW-1
------ ------ ------ ------- ------
Beneficial Corporation
Senior debt A A2 A+ A NR
Commercial paper A-1 P-1 F-1 Duff 1 NR
------ ------ ------ ------- ------
Household Bank (Nevada), N.A.
Senior debt A A2 A+ A+ A+
- ------------------------------------------------------------------------------------------------------------
</TABLE>
