<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported):
June 30, 1998
HOUSEHOLD FINANCE CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
1-75 36-1239445
(Commission File Number) (IRS 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
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On June 30, 1998, subject to the terms and conditions of the Agreement and
Plan of Merger (the "Merger Agreement") dated as of April 7, 1998 between
Household International, Inc. ("Household"), the parent of the Registrant,
Household Acquisition Corporation II, a wholly-owned subsidiary of the parent,
and Beneficial Corporation ("Beneficial"), Household Acquisition Corporation II
was merged with and into Beneficial, with Beneficial being the surviving
corporation (the "Merger"). In accordance with the Merger Agreement, each share
of the common stock, par value $1.00 per share, of Beneficial ("Beneficial
Common Stock") outstanding immediately prior to the effective time of the Merger
was converted into the right to receive 3.0666 shares of the common stock, $1.00
par value, of Household ("Household Common Stock"). The Merger was accounted
for as a "pooling of interests" under generally accepted accounting principles.
Following the Merger, substantially all of the consolidated net assets of
Beneficial were contributed to the Registrant.
Certain information regarding the Merger, Household and Beneficial,
including, but not limited to, the date and manner of the Merger, a description
of the assets involved, the nature and amount of consideration paid by Household
therefor, the method used for determining the amount of such consideration ,the
nature of any material relationships between Household and Beneficial or any
officer or director of Household or any associate of such officer or director,
the nature of Beneficial's business and Household's intended use of the assets
acquired in the Merger is set forth in the Joint Proxy Statement-Prospectus
dated June 2, 1998 included in Household's Registration Statement on Form S-4
(Registration No. 333-55707). Such Joint Proxy Statement-Prospectus is
incorporated herein by reference as Exhibit 99.5.
<PAGE> 3
ITEM 5. OTHER EVENTS.
As reported above under Item 2, on June 30, 1998, Household completed its
merger with Beneficial, and substantially all of Beneficial's net assets were
contributed to the Registrant. The Merger was accounted for as a "pooling
of interests" under generally accepted accounting principles.
The following supplemental consolidated financial statements of Household
Finance Corporation restating Household Finance Corporation's historical
consolidated financial statements as of and for the three years ended December
31, 1997 to reflect the Merger are incorporated herein by reference to Exhibit
99.1 filed herewith:
1. Management's Discussion and Analysis.
2. Consolidated Balance Sheets as of December 31, 1997 and 1996.
3. Consolidated Statements of Income for the three years ended December
31, 1997.
4. Consolidated Statements of Changes in Stockholders' Equity for the
three years ended December 31, 1997.
5. Consolidated Statements of Cash Flows for the three years ended
December 31, 1997.
6. Notes to the Consolidated Financial Statements.
The report of Arthur Andersen LLP, independent accountants, on the
supplemental consolidated financial statements of Household Finance Corporation
as of December 31, 1997 and 1996 and for the three years ended December 31,
1997 is filed herewith as part of Exhibit 99.1 and the related consent is
filed herewith as Exhibit 23.1. Both the opinion and the consent are
incorporated herein by reference.
The following unaudited supplemental interim condensed consolidated
financial statements of Household Finance Corporation restating Household
Finance Corporation's historical unaudited condensed consolidated financial
statements as of March 31, 1998 and for the three months ended March 31, 1998
and 1997 to reflect the Merger are incorporated herein by reference to Exhibit
99.2 filed herewith:
1. Condensed Consolidated Balance Sheets as of March 31, 1998 (Unaudited)
and December 31, 1997.
2. Condensed Consolidated Statements of Income for the three months ended
March 31, 1998 and 1997 (Unaudited).
3. Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 (Unaudited).
4. Notes to the Condensed Consolidated Financial Statements (Unaudited).
<PAGE> 4
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
The historical financial statements of Beneficial as filed in its
Annual Report on Form 10-K for the fiscal year ended December 31,
1997, as amended by Amendment No. 1 on Form 10-K/A and in its
Form 10-Q for the quarter ended March 31, 1998 are incorporated
herein by reference to Exhibit 99.3 filed herewith.
(b) Pro Forma Financial Information.
The pro forma financial information required by Item 7(b) of Form
8-K giving effect to the acquisition of Beneficial is
incorporated herein by reference to Exhibit 99.4 filed herewith.
(c) Exhibits.
Exhibit 2.1 Agreement and Plan of Merger dated as of April 7,
1998 between Household International, Inc.
Household Acquisition Corporation II and Beneficial
Corporation (incorporated herein by reference from
Exhibit 2.1 to the Household International, Inc.
Current Report on Form 8-K dated April 20, 1998
(File No. 1-8198)).
Exhibit 23.1 Consent of Arthur Andersen LLP
Exhibit 23.2 Consent of Deloitte & Touche LLP
Exhibit 27 Restated Financial Data Schedule.
Exhibit 27.1 Restated Financial Data Schedule.
Exhibit 99.1 Supplemental Consolidated Financial Statements of
Household Finance Corporation as of December 31,
1997 and 1996 and for the three years ended
December 31, 1997.
Exhibit 99.2 Unaudited Supplemental Interim Condensed Consoli-
dated Financial Statements of Household Finance
Corporation as of March 31, 1998 and for the three
months ended March 31, 1998 and 1997.
Exhibit 99.3 Financial Statements of Beneficial as filed in its
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, as amended by Amendment No. 1 on
Form 10-K/A and its Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
Exhibit 99.4 Unaudited pro forma condensed combined financial
information of Household Finance Corporation as of
March 31, 1998; for the three months ended March 31,
1998 and 1997; and for the years ended December 31,
1997, 1996 and 1995 and related notes thereto.
Exhibit 99.5 Joint Proxy Statement-Prospectus of Household
International, Inc. contained within the
Registration Statement of Household International,
Inc. on Form S-4 (File No. 333-55707) is
incorporated herein by reference.
<PAGE> 5
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Household Finance Corporation
-----------------------------
Registrant
Dated: June 30, 1998
-------------
By: /s/JOHN W. BLENKE
--------------------------
John W. Blenke
Assistant Secretary
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated June 30, 1998, included in this Current Report on Form 8-K of
Household Finance Corporation for the year ended December 31, 1997, into the
Company's previously filed Registration Statements No. 33-64175, 333-47945 and
333-14459 on Form S-3.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
June 30, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-64175, 333-47945 and 333-14459 of Household Finance Corporation on Form S-3
of our report dated January 28, 1998, appearing in this Current Report on Form
8-K of Household Finance Corporation and the reference to us under the heading
"Experts" in the prospectus.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
June 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997<F1> DEC-31-1996<F1> DEC-31-1995<F1>
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 545,300 508,100 427,800
<SECURITIES> 2,336,800 2,281,000 4,724,400
<RECEIVABLES> 32,383,300 30,467,300 25,715,800
<ALLOWANCES> 2,125,300 1,745,900 1,280,100
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0<F2> 0<F2> 0<F2>
<PP&E> 1,112,000 1,121,300 1,090,900
<DEPRECIATION> 647,200 647,700 621,600
<TOTAL-ASSETS> 39,673,000 36,522,100 33,478,100
<CURRENT-LIABILITIES> 0<F2> 0<F2> 0<F2>
<BONDS> 20,909,200 19,279,400 16,050,000
0 0 0
0 100,000 100,000
<COMMON> 1 1 1
<OTHER-SE> 5,803,700 4,287,600 3,640,100
<TOTAL-LIABILITY-AND-EQUITY> 39,673,000 36,522,100 33,478,100
<SALES> 0 0 0
<TOTAL-REVENUES> 6,867,200 6,017,100 5,512,200
<CGS> 0 0 0
<TOTAL-COSTS> 2,568,300 2,363,500 2,372,600
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 1,286,400 921,600 791,200
<INTEREST-EXPENSE> 1,853,500 1,723,900 1,640,800
<INCOME-PRETAX> 1,159,000 1,008,100 707,600
<INCOME-TAX> 391,900 358,100 295,300
<INCOME-CONTINUING> 767,100 650,000 412,300
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 767,100 650,000 412,300
<EPS-PRIMARY> 0 0 0
<EPS-DILUTED> 0 0 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>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998<F1> DEC-31-1997<F1>
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 593,900 522,500
<SECURITIES> 2,307,400 1,934,500
<RECEIVABLES> 34,087,700 29,839,200
<ALLOWANCES> 2,194,600 1,827,300
<INVENTORY> 0 0
<CURRENT-ASSETS> 0<F2> 0<F2>
<PP&E> 1,042,100 1,056,100
<DEPRECIATION> 604,700 591,600
<TOTAL-ASSETS> 41,892,700 36,266,500
<CURRENT-LIABILITIES> 0<F2> 0<F2>
<BONDS> 22,118,700 19,487,500
0 0
0 100,000
<COMMON> 1 1
<OTHER-SE> 6,346,000 4,329,900
<TOTAL-LIABILITY-AND-EQUITY> 41,892,700 36,266,500
<SALES> 0 0
<TOTAL-REVENUES> 2,002,500 1,699,200
<CGS> 0 0
<TOTAL-COSTS> 633,200 623,700
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 348,600 326,600
<INTEREST-EXPENSE> 500,200 447,900
<INCOME-PRETAX> 520,500 301,000
<INCOME-TAX> 196,000 111,200
<INCOME-CONTINUING> 324,500 189,800
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 324,500 189,800
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 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>
<PAGE> 1
EXHIBIT 99.1
HOUSEHOLD FINANCE CORPORATION
INDEX TO SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Introduction .......................................................... 2
Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 3
Supplemental Glossary of Terms ........................................ 19
Supplemental Selected Quarterly Financial Data ........................ 21
Report of Independent Public Accountants .............................. 22
Supplemental Consolidated Financial Statements ........................ 23
Notes to Supplemental Consolidated Financial Statements ............... 27
</TABLE>
1
<PAGE> 2
INTRODUCTION
Effective June 30, 1998, Household International, Inc. ("Household") completed
its merger with Beneficial Corporation ("Beneficial") bringing together two of
the oldest brands in the consumer finance industry which we believe will create
a preeminent branch based consumer finance company. Upon completion of the
merger, substantially all the net assets of Beneficial were contributed by
Household to Household Finance Corporation. At March 31, 1998, the combined
company had assets of $41.9 billion.
The merger has been accounted for as a pooling of interests and, accordingly,
the amounts for all periods reported in this supplemental filing are reported
on a combined basis including both Household Finance Corporation and Beneficial.
2
<PAGE> 3
- -------------------------------------------------------------------------------
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Household Finance Corporation and Subsidiaries
All dollar amounts in millions.
Year ended December 31, unless otherwise indicated. 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $ 767.1 $ 650.0 $ 412.3
- -------------------------------------------------------------------------------
KEY PERFORMANCE RATIOS
Return on average owned assets 2.00% 1.87% 1.14%
Return on average common shareholder's equity 15.0 16.3 11.5
Managed net interest margin 8.17 8.11 7.96
Managed consumer net chargeoff ratio 3.76 2.83 2.53
- -------------------------------------------------------------------------------
AT DECEMBER 31
Total assets:
Owned $39,673.0 $36,522.1 $33,478.1
Managed (1) 57,716.0 51,356.3 43,803.1
Managed receivables (1) 50,426.3 45,301.5 36,040.9
Debt to equity ratio 5.3:1 6.7:1 6.6:1
- -------------------------------------------------------------------------------
</TABLE>
(1) Managed data includes receivables on our balance sheet and those that we
service for investors as part of our asset securitization program.
Household Finance Corporation ("HFC") is a wholly-owned subsidiary of Household
International, Inc. ("Household International" or the "parent company"). We are
a leading provider of consumer lending products to middle-market customers
primarily in the United States, Canada and the United Kingdom, with $50.4
billion of managed receivables at December 31, 1997. Our lending products
include: home equity loans, auto finance loans, MasterCard* and Visa* and
private label credit cards, tax refund anticipation loans and other unsecured
loans. We offer credit and specialty insurance in the United States, Canada and
the United Kingdom. We also have commercial loans and leases, periodic payment
annuities, and corporate owned life insurance products, which we no longer
offer.
On June 30, 1998, Household International merged with Beneficial Corporation
("Beneficial"), a consumer finance holding company headquartered in Wilmington,
Delaware. Pursuant to the merger, each outstanding share of Beneficial common
stock has been converted into 3.0666 shares of Household International's common
stock, resulting in the issuance of approximately 167.3 million shares of common
stock. Each share of Beneficial $5.50 Convertible Preferred Stock (the
"Beneficial Convertible Stock") has been converted into the number of shares of
Household International common stock the holder would have been entitled to
receive in the merger had such Beneficial Convertible Preferred Stock been
converted into shares of Beneficial common stock immediately prior to the
merger. Additionally, each other share of Beneficial preferred stock outstanding
has been 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 has been 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 supplemental consolidated financial statements include the
results of operations, financial position and changes in cash flows of
Beneficial for all periods.
* MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
3
<PAGE> 4
In connection with the merger, Household International and HFC will incur
pre-tax merger and integration related costs of approximately $1 billion ($751
million after-tax) during the quarter ended June 30, 1998. These costs include
approximately $284 million in lease exit costs, $161 million in fixed asset
write-offs related to closed facilities, $240 million in severance and change
in control payments, $140 million in asset writedowns to reflect modified
business plans, $66 million in investment banking fees, $34 million in legal
and other expenses, and $75 million in prepayment premiums related to debt.
The estimated merger and integration related costs include approximately $286
million in non-cash charges. Cash payments of approximately $714 million will
be funded through HFC's existing operations and commercial paper and other
borrowings. In addition, HFC expects to receive 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 net income in 1997 was $767.1 million, an increase of 18 percent over
1996. Net income in 1996 was $650.0 million, 58 percent higher than 1995
earnings of $412.3 million. Results in 1997 were impacted by an after-tax
provision of $27.8 million for the disposition of Beneficial's German
operations, an $8.2 million after-tax addition to Benefical's litigation
reserves and a $10.6 million after-tax charge to write down Beneficial's
real estate holdings in Tampa, Florida and Houston, Texas that are being
sold and other reorganization and restructuring efforts. In addition, the
tax anticipation refund loan business ("RAL") profits decreased in 1997
compared with 1996 which benefited from strong collections of previously
written off loans. Results in 1996 were impacted from the turnaround of
the RAL business whose results were severely impacted in 1995 due to the
Internal Revenue Service releasing certain portions of refunds directly to
taxpayers.
Our return on average common shareholder's equity ("ROE") was 15.0 percent
in 1997, compared to 16.3 percent in 1996, and up from 11.5 percent in
1995. The decrease in 1997 was due to the capital contribution from
Household International in June 1997 to fund the purchase of Transamerica
Financial Services Holding Company, as discussed below, which decreased our
leverage, resulting in more of our assets being funded by equity as
compared to the prior year. Our return on average owned assets ("ROA") was
2.00 percent, up from 1.87 percent in 1996 and 1.14 percent in 1995. Our
net income and ROA increased over the past three years due to growth in our
consumer receivables and because we have focused on our higher return
businesses.
- - In June, Household International and a wholly-owned subsidiary of HFC
purchased Transamerica Financial Services Holding Company ("TFS"), the
branch-based consumer finance subsidiary of Transamerica Corporation, for
$1.1 billion. We also repaid $2.7 billion of debt that TFS owed to
affiliates of Transamerica Corporation. We added about $3.1 billion of
real estate secured receivables as a result of the acquisition. The
acquisition strengthened our consumer finance operations by adding new
markets, new customer accounts, seasoned employees and receivables secured
by collateral. This type of security helps to reduce the amount of loss we
might incur if borrowers do not pay off their loans. The integration of
TFS is complete. We closed all redundant branches and consolidated back
office operations.
In June 1997, we received a capital contribution from Household
International of $976.5 million which was used to repay short-term
borrowings related to the TFS acquisition.
4
<PAGE> 5
In October 1997, Household International and its wholly-owned subsidiary
purchased all of the outstanding capital stock of ACC Consumer Finance
Corporation ("ACC"), an auto finance company, for about 4.2 million shares
of its common stock and cash. ACC makes loans to non-prime borrowers
secured by automobiles, primarily used vehicles sold through franchised
dealers. Upon completing this transaction, Household International
contributed its investment in ACC to HFC. The acquisition of ACC increased
our market share in the non-prime auto finance market and added key
managers to grow this business.
In late December 1997, Beneficial acquired Endeavour Personal Finance Ltd.,
including receivables of approximately $250 million, expanding our
presence in the United Kingdom.
We accounted for each of these acquisitions as purchases. Thus, we have
included the results of operations of TFS, ACC and Endeavour in our
statement of income for 1997 from the closing dates of the transactions.
These acquisitions were not material to our financial statements.
In 1997, Beneficial announced its intent to sell its German operations and
recorded an after-tax loss of approximately $27.8 million after
consideration of a $31.0 million tax benefit primarily generated by the
expected utilization of capital losses. The sale of Beneficial's German
operations was completed in April 1998. No additional losses were realized
as a result of the sale. During the first quarter of 1998, the sale of
Beneficial's Canadian operations was completed. An after-tax gain of
approximately $118.5 million was recorded. As of December 31, 1997, the net
assets of these sold operations were $121.5 million for Canada and $15.7
million for Germany. In 1997, the sold Canadian operations reported pre-tax
earnings of $21.2 million, while the German operating pre-tax loss was $6.7
million.
- - In 1996 and 1995, we also exited several businesses that were providing
insufficient returns on our investment.
On March 31, 1996, Beneficial sold a $957 million annuity portfolio
through a co-insurance agreement. Approximately $900 million of investment
securities were sold as part of this disposition.
In October 1995, we sold certain of the individual life and annuity
product lines of our individual life insurance business. However, we
retained our credit life insurance business, which complements our consumer
lending and provides us additional revenue. We sold $6.1 billion of assets,
which were virtually all investment securities. We retained two product
lines of the individual life insurance business, but are no longer pursuing
new business in this area.
In the second quarter of 1995, we sold our purchased mortgage servicing
rights to a third party. The sale did not have a material impact on our
operating results.
5
<PAGE> 6
- - The following summarizes operating results for our key businesses for
1997 compared to 1996 and 1995:
Our consumer finance business reported higher earnings due mainly to
higher levels of average managed receivables, particularly in
unsecured loans. These loans typically carry higher rates than secured
products because they carry more risk. More receivables, coupled with
higher interest rates charged on loans, resulted in higher net interest
margin. The increase in margin was partially offset by higher credit losses
because more of our borrowers declared personal bankruptcy. Personal
bankruptcy filings in the U.S. were at an all-time high in 1997.
Our MasterCard and Visa credit card business achieved higher earnings due
to higher net interest margin and fee income, and improved efficiency.
These factors were offset to some degree by higher credit losses resulting
primarily from increased personal bankruptcy filings. In late 1996 we
started a program designed to increase the return on our MasterCard and
Visa portfolio. We sold certain non-strategic portfolios, increased fees,
and systematically eliminated unprofitable accounts. This business
continued to benefit from our co-branding and affinity relationship
strategies. This includes our alliance with General Motors Corporation
("GM") to issue the GM Card, a co-branded credit card. The GM Card
continues to represent a substantial portion of our credit card portfolio.
The MasterCard and Visa business also includes the AFL-CIO's Union
Privilege affinity relationship which we acquired in June 1996. Union
Privilege was created by the AFL-CIO to market benefits to union members.
Our private label credit card business reported higher income resulting
from a wider net interest margin and higher late fees, partially offset by
higher credit losses due to the end of certain special promotions and
increased personal bankruptcies. Results in 1997 also benefited from the
renegotiation of contracts with several merchant partners. Additionally,
in 1997, we began to implement various initiatives to control the mix and
increase the profitability of promotional activity. Results in 1996 were
impacted by Beneficial's $65 million up-front loan loss provision on strong
receivables growth and $10 million in start-up costs relating to two of its
merchants.
Our RAL program reported lower profits in 1997 as compared with 1996,
which benefited from very strong collections on loans previously
written off during the 1995 season. Additionally, 1997 earnings were
reduced by the July 1996 agreement with H&R Block Tax Services Inc. that
gave them a share in both the revenue and credit risk of certain RALs. RAL
program fundamentals, however, remained strong as the number of loans made
in 1997 increased by 12% to 2.96 million from 2.65 million in 1996, while
gross revenues grew 31%. The RAL business incurred a pre-tax loss in 1995,
which was severely impacted by the Internal Revenue Service sending certain
refunds directly to taxpayers.
Our United Kingdom operation's net income increased because of revenue
growth from a larger receivable base. Owned receivables increased to
$1.9 billion at year-end 1997, up 45 percent from the end of 1996. The
acquisition of Endeavour Personal Finance Ltd. during the year contributed
to this increase in receivables.
Profits from our Canadian operation were down from 1996 as higher net
interest margin was offset by higher credit losses and higher operating
expenses from Beneficial's Canadian operations which were sold during the
first quarter of 1998.
6
<PAGE> 7
Harbour Island, Inc., our real estate subsidiary in Tampa, Florida,
recorded pre-tax losses in each of the prior three years, representing
interest cost to carry and non cash depreciation charges. The 1997 results
reflected the sale of the Athletic Club and residential land, and a
writedown from the anticipated loss on the sale of a People Mover System
and its infrastructure.
Our commercial operations benefited from gains on the disposition of
assets while continuing to minimize credit losses.
- - Our managed net interest margin expanded to 8.17 percent in 1997 from 8.11
percent in 1996 and 7.96 percent in 1995. Our margins have increased over
the past three years because we have continued to raise the interest rates
we charge on most of our products. In addition, HFC's product mix has
shifted towards unsecured receivables, which have higher rates than secured
products because they carry more risk. The overall rate of increase has
been tempered by the impact of Beneficial's product mix which carries a
higher percentage of real estate secured receivables which carry a lower
yield compared to unsecured products.
- -------------------------------------------------------------------------------
BALANCE SHEET REVIEW
- - Managed assets (total assets on our balance sheet plus receivables serviced
with limited recourse) increased to $57.7 billion at December 31, 1997 from
$51.4 billion at year-end 1996. The increase was due to receivable growth
in our consumer finance business. Owned assets totaled $39.7 billion at
December 31, 1997, up from $36.5 billion at year-end 1996. Owned assets may
vary from period to period depending on the timing and size of asset
securitization transactions. We securitized $6.1 billion of receivables in
1997 and $8.1 billion of receivables during 1996. We refer to the
securitized receivables that are serviced for investors and not on our
balance sheet as our off-balance sheet portfolio.
- - Our consumer receivables grew during 1997, as shown in the following table:
<TABLE>
<CAPTION>
All dollar amounts are stated INCREASE (DECREASE) Increase (Decrease)
in millions. DECEMBER 31, 1997 IN 1997 / 1996 in 1996 / 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANAGED RECEIVABLES:
Home equity $18,844.7 25% 4%
Auto finance(1) 872.4 - -
MasterCard/Visa 11,828.1 (3) 78
Private label 9,064.2 1 32
Other unsecured 8,879.1 9 23
- -----------------------------------------------------------------------------------------------------
TOTAL CONSUMER 49,488.5 12 28
- -----------------------------------------------------------------------------------------------------
Commercial 937.8 (5) (25)
- -----------------------------------------------------------------------------------------------------
Total $50,426.3 11% 26%
=====================================================================================================
</TABLE>
(1) Prior to 1997, auto finance receivables were not significant and were
included in other unsecured receivables.
Growth in home equity and auto finance receivables benefited from
acquisitions during 1997. MasterCard and Visa receivables were down
somewhat from 1996 due to the sale and planned runoff of non-strategic and
less profitable receivables. Private label credit card receivables were up
slightly from last year. Other unsecured receivables were up from 1996 as
we experienced steady growth in our consumer finance business.
7
<PAGE> 8
- - The managed consumer two-months-and-over contractual delinquency ratio
increased to 4.77 percent at December 31, 1997 from 3.96 percent at
December 31, 1996. The 1997 managed consumer net chargeoff ratio was 3.76
percent compared to 2.83 percent in 1996 and 2.53 percent in 1995.
- - We increased managed credit loss reserves 24 percent in 1997, to $2.1
billion compared to $1.7 billion at December 31, 1996. This compares to an
increase of 11 percent in total managed receivables in 1997. The increase
in managed reserves was due to continuing uncertainty about consumer
payment patterns, the maturing of our unsecured loan portfolios and the
increase in our off-balance sheet portfolio. Credit loss reserves as a
percent of managed receivables increased to 4.21 percent at year-end 1997
from 3.85 percent a year ago.
- - Our debt to equity ratio was 5.3 to 1 compared to 6.7 to 1 at December 31,
1996. The decrease in the ratio was primarily due to the capital
contribution from Household International in June to fund the TFS
acquisition.
- -------------------------------------------------------------------------------
STATEMENT OF INCOME REVIEW
NET INTEREST MARGIN Net interest margin was $2,440.2 million for 1997, up
from $2,279.9 million in 1996 and $2,044.5 million in 1995. As a percent of
average owned interest-earning assets, net interest margin was 7.66 percent
in 1997, 7.90 percent in 1996 and 8.18 percent in 1995. The decrease in the
net interest margin percentage in 1997 was the result of the change in
product mix in the owned portfolio due to asset securitizations, as
discussed below. The dollar increase over 1996 and 1995 was due to an
increase in average owned home equity loans and growth in 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, which
assumes receivables securitized were held in our portfolio, increased to
$3.9 billion for 1997 from $3.3 billion in 1996. Net interest margin on a
managed basis as a percent of average managed interest-earning assets
increased to 8.17 percent from 8.11 percent in 1996 and 7.96 percent in
1995.
PROVISION FOR CREDIT LOSSES The provision for credit losses includes
current period credit losses. It also includes an amount which, in our
judgment, is sufficient to maintain reserves for credit losses at a level
that reflects known and inherent risks in the portfolio. The managed basis
provision for credit losses also includes the over-the-life reserve
requirement established on the off-balance sheet portfolio when receivables
are securitized.
8
<PAGE> 9
The provision for credit losses on an owned basis totaled $1,286.4 million
in 1997, compared to $921.6 million in 1996 and $791.2 million in 1995. As
a percent of average owned receivables, the provision was 4.09 percent
compared to 3.28 percent in 1996 and 3.24 percent in 1995. The increase in
1997 was due to higher chargeoffs on our unsecured portfolios. Over the
past three years, we recorded provisions for credit losses in excess of
chargeoffs because of continued uncertainty regarding consumer payment
patterns, high levels of personal bankruptcies and the maturing of our
unsecured products. In 1996, Beneficial recorded a $65 million up-front
loan loss provision for the strong private label receivables growth
experienced during the year. The maturing or seasoning of a product is the
effect of a growing portfolio reaching expected levels of chargeoffs as
loans age. Owned provision in excess of owned chargeoffs was $194.5 million
in 1997, $151.0 million in 1996 and $108.5 million in 1995.
OTHER REVENUES Securitization income was $1,232.0 million in 1997, $912.4
million in 1996 and $548.2 million in 1995. Securitization income 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 over the three year period because of growth in average
securitized receivables.
Insurance revenues of $352.9 million in 1997 were up from $336.6 million
in 1996 but down from $404.4 million in 1995. The increase in 1997 was
primarily due to increased insurance sales on a larger portfolio. The
decrease in 1996 from 1995 was due to the sale of Beneficial's annuity
product line in the first quarter of 1996 and HFC's individual life and
annuity product lines in the fourth quarter of 1995.
Investment income includes interest income on investment securities in the
retained insurance business as well as realized gains and losses from the
sale of investment securities. Investment income was $152.6 million in 1997
compared to $212.7 million in 1996 and $508.4 million in 1995. The decrease
in 1997 from 1996 was due to lower average investment balances and lower
yields on the securities in the portfolio. The large decline in 1996 from
1995 was because of the sale of our insurance businesses.
Fee income on an owned basis includes revenues from fee-based products
such as credit cards. Fee income was $525.5 million in 1997, up from
$294.6 million in 1996 and $226.2 million in 1995. The increase in fee
income in 1997 reflected higher credit card fees as a result of increased
average owned credit card receivables compared to the prior years and
higher interchange income.
Other income was $310.5 million in 1997, $257.0 million in 1996 and $139.7
million in 1995. Other income includes earnings from our RAL program, gains
and losses from the disposition of assets and businesses and, in 1995,
income from servicing receivable portfolios without recourse. Other income
was up in 1997 reflecting gains on sales of certain non-strategic assets
which included the sale of certain non co-branded MasterCard and Visa
receivables somewhat offset by a decrease in RAL income as compared to the
prior year. RAL income in 1996 benefited from very strong collections on
loans previously written off during the 1995 season. Other income in 1996
also included the gain related to the sale of our annuity portfolio in the
first quarter.
9
<PAGE> 10
EXPENSES Salaries and fringe benefits and other operating expenses were
$2,188.3 million in 1997, up from $1,955.6 million in 1996 and $1,769.3
million in 1995. The increases were due to a higher number of sales people
in our consumer finance branch network and a higher number of collectors.
Additionally, we had higher expenses associated with growth in our managed
receivable portfolio. Average managed receivables grew 18 percent in 1997
compared to 1996 and 43 percent compared to 1995. Also contributing to the
increase in 1997 were higher expenses related to the TFS and ACC
acquisitions. The overall combined normalized managed efficiency ratio
was 41.3% in 1997. Excluding the impact of Beneficial, our normalized
managed efficiency ratio was 34.1% in 1997.
During 1997, we recorded non-operating pretax charges of $90 million.
These charges included a $59 million provision for the planned disposition
of Beneficial's German operations, a $13 million addition to Beneficial's
litigation reserves, a $14 million writedown of Beneficial's real estate
holdings in both Tampa, Florida, and Houston, Texas, that are being sold,
and a $4 million charge for various Benefical reorganization and
restructuring efforts. During 1996, we recorded non-operating charges of
$19 million related to closing office space, settling litigation and other
matters. In 1995, we recorded non-operating charges of $25 million. These
charges included a $15 million provision for Beneficial's additional
potential losses relating to a significant liquidating loan portfolio in
Germany and a $10 million restructuring charge related to Beneficial's
annuity business.
Amortization of acquired intangibles and goodwill was $143.4 million in
1997, $121.1 million in 1996 and $70.6 million in 1995. The increase
reflects our acquisitions of TFS in mid-1997 and ACC in late 1997, and the
Union Privilege portfolio in mid-1996.
Policyholders' benefits were $236.6 million in 1997, $286.8 million in
1996 and $532.7 million in 1995. Expense was lower in 1997 compared to 1996
because we have fewer policies in our retained life insurance business. The
decrease in 1996 from 1995 was due to the sale of our annuity product lines
in 1996 and late 1995.
Income taxes. The 1997 effective tax rate was 33.8 percent compared to
35.5 percent in 1996 and 41.7 percent in 1995. The effective rate in
1997 recognized tax benefits related to the anticipated sale of
Beneficial's German operations. The 1995 effective rate was affected by
additional taxes on the sale of certain of our insurance operations.
In 1992, the Internal Revenue Service ("IRS") completed its examination of
Beneficial's federal income tax returns for 1984 through 1987. The IRS
proposed $142 million in adjustments that relate principally to activities
of a former subsidiary, American Centennial Insurance Company ("ACIC"),
prior to its sale in 1987.
In order to limit the further accrual of interest on the proposed
adjustments, Beneficial paid $105.5 million of tax and interest during
1992.
The issues were not resolved during the administrative appeals process,
and the IRS issued a statutory Notice of Deficiency asserting the
unresolved adjustments and increased the disallowance to $195 million in
1996.
Beneficial has initiated litigation in the United States Tax Court to
oppose the disallowance. While the conclusion of this matter in its
entirety cannot be predicted with certainty, we do not anticipate the
ultimate resolution to differ materially from amounts accrued.
10
<PAGE> 11
- -------------------------------------------------------------------------------
CREDIT QUALITY
Our delinquency and net chargeoff ratios reflect, among other factors, the
quality of receivables, the average age of our loans, the success of our
collection efforts and general economic conditions. Specifically, the high
levels of personal bankruptcies experienced by our industry over the last
two years has had a direct effect on the asset quality of our overall
portfolio.
During 1997 our delinquency and net chargeoff levels were impacted by
higher consumer bankruptcies in our unsecured portfolios and the
continued maturing of our receivables. We continued to tighten and refine
our credit standards throughout the year and increased the number of
collectors.
Until June 1997, when we acquired virtually all secured loans from TFS,
the percentage of unsecured loans in our portfolio had been increasing.
Unsecured loans were 60 percent of our managed consumer receivables at
year-end 1997 compared to 66 percent in 1996 and 58 percent in 1995.
Generally, unsecured loans have higher delinquency and chargeoff rates
than secured loans. The high proportion of unsecured receivables increases
the delinquency and chargeoff statistics of the entire portfolio. We
compensate for this by charging higher interest rates and fees on these
loans, which benefits our revenue.
We track delinquency and chargeoff levels on a managed basis. We include
the off-balance sheet portfolio since we apply the same credit and
portfolio management procedures as on our owned portfolio. This results in
a similar credit loss exposure for us. Our focus is to continue using
risk-based pricing and effective collection efforts for each loan. We have
a process that gives us a reasonable basis for predicting the asset
quality of new accounts. This process is based on our experience with
numerous marketing, credit and risk management tests. We also believe that
our frequent and early contact with delinquent customers is helpful in
managing net credit losses. Despite these efforts to manage the current
credit environment, bankruptcies remain an industry-wide issue and are
unpredictable.
Our chargeoff policy for consumer receivables varies by product.
Receivables for HFC are written off, or for secured products written down
to net realizable value, at the following stages of contractual
delinquency: auto finance - 5 months; first mortgage, home equity and
MasterCard and Visa - 6 months; private label - 9 months; and other
unsecured - 9 months and no payment received in 6 months. Beneficial, in
general, charges off unsecured receivables after no payment has been made
for six months and secured receivables are written down to net realizable
value at the time of foreclosure. Commercial receivables are written off
when it becomes apparent that an account is uncollectible.
The state of California accounts for 21 percent of our managed domestic
consumer portfolio. It is the only state with more than 10 percent of this
portfolio. Because of our centralized underwriting, collections and
processing functions, we can quickly change our credit standards and
intensify collection efforts in specific locations. We will be able to
extend this capability as the centralization of underwriting, collections
and processing functions contained within the Beneficial branch network is
completed.
Our foreign consumer operations located in the United Kingdom and Canada
accounted for 4 and 2 percent, respectively, of managed consumer
receivables at December 31, 1997. German receivables accounted for less
than one percent of managed consumer receivables at year-end 1997.
11
<PAGE> 12
- -------------------------------------------------------------------------------
MANAGED CONSUMER TWO-MONTH-AND-OVER CONTRACTUAL DELINQUENCY RATIOS
<TABLE>
<CAPTION>
1997 QUARTER END 1996 Quarter End
--------------------------- ---------------------------
4 3 2 1 4 3 2 1
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Home equity 3.59% 3.03% 2.82% 3.05% 2.82% 3.14% 2.94% 2.87%
Auto finance(1) 1.97 - - - - - - -
MasterCard/Visa 3.28 3.42 3.39 3.34 2.91 2.73 2.01 2.52
Private label 6.01 5.85 5.25 4.82 4.69 4.73 4.35 4.05
Other unsecured 8.25 7.89 7.36 7.32 6.83 6.92 6.54 6.40
- -------------------------------------------------------------------------------
Total 4.77% 4.57% 4.24% 4.29% 3.96% 4.04% 3.60% 3.71%
===============================================================================
</TABLE>
(1) Prior to the fourth quarter of 1997, delinquency statistics for auto
finance receivables were not significant. For prior periods, delinquency
data for these receivables were included in other unsecured receivables.
Our managed consumer delinquency ratio at year end was 20 basis points
higher than the third quarter level. This increase was lower than the
third quarter increase of 33 basis points. The increases in these two
quarters were due to the expiration of certain special no-interest and
no-payment promotions in our private label portfolio, and seasoning of the
other unsecured portfolio. Home equity delinquency was up due to the
maturing of acquired receivables. MasterCard and Visa delinquency was down
in the quarter.
The increase in the managed delinquency ratio from a year ago was mainly
due to the seasoning of all portfolios and the expiration of certain
special no-interest and no-payment promotions in our private label
portfolio.
The owned consumer delinquency ratio was 4.77 percent at December 31, 1997
and 4.00 percent at December 31, 1996.
- -------------------------------------------------------------------------------
MANAGED CONSUMER NET CHARGEOFF RATIOS
<TABLE>
<CAPTION>
1997 QUARTER ANNUALIZED Full Year 1996 Quarter Annualized
FULL YEAR ---------------------------- ---------- ----------------------------- Full Year
1997 4 3 2 1 1996 4 3 2 1 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Home equity .58% .59% .47% .60% .69% .55% .73% .54% .47% .47% .59%
Auto finance(1) 4.68 5.33 - - - - - - - - -
MasterCard/Visa 5.35 5.45 6.24 5.13 4.59 3.97 3.82 3.80 4.14 4.30 4.32
Private label 5.22 5.92 5.40 4.94 4.67 3.68 4.18 3.94 3.93 4.42 4.20
Other unsecured 6.37 6.76 6.48 6.04 6.02 5.07 5.45 5.46 4.41 4.88 4.03
- ---------------------------------------------------------------------------------------------------------------
Total 3.76% 3.91% 3.89% 3.68% 3.54% 2.83% 3.11% 2.95% 2.71% 2.84% 2.53%
===============================================================================================================
</TABLE>
(1) Includes ACC net chargeoffs subsequent to our acquisition in October
1997. Prior to the fourth quarter of 1997, chargeoff statistics for auto
finance receivables were not significant and were included in other
unsecured receivables.
The annualized fourth quarter chargeoff ratio was up slightly from the
third quarter. In the private label portfolio, increased chargeoffs
reflected the maturing of promotional balances and higher personal
bankruptcies. In our other unsecured portfolio, higher chargeoffs resulted
from continued seasoning and high levels of personal bankruptcies. For the
MasterCard and Visa portfolio, actual dollars of chargeoffs were down over
$20 million in the quarter, reflecting reductions in both bankruptcies and
credit chargeoffs. This resulted in a 79 basis point decline in the
MasterCard and Visa chargeoff ratio to 5.45 percent.
12
<PAGE> 13
The managed consumer net chargeoff ratio for full year 1997 was 3.76
percent, up from 2.83 percent in 1996 and 2.53 percent in 1995. The
increase was due to higher bankruptcy chargeoffs in our MasterCard and Visa
portfolio, the expiration of certain private label promotional programs and
seasoning of other unsecured receivables. The owned consumer net chargeoff
ratio was 3.57 percent in 1997, 2.86 percent in 1996 and 2.96 percent in
1995.
- -------------------------------------------------------------------------------
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual owned receivables $ 726.0 $ 511.6 $ 654.5
Accruing owned consumer receivables 90 or
more days delinquent 433.6 382.5 145.9
Renegotiated commercial loans 12.4 12.9 21.2
- -------------------------------------------------------------------------------
Total nonperforming owned receivables 1,172.0 907.0 821.6
Real estate owned 187.8 212.3 206.8
- -------------------------------------------------------------------------------
Total nonperforming owned assets $1,359.8 $1,119.3 $1,028.4
===============================================================================
Nonaccrual managed receivables $1,121.3 $ 787.5 $ 831.3
Accruing managed consumer receivables 90 or
more days delinquent 639.1 502.2 202.8
Renegotiated commercial loans 12.4 12.9 21.2
- -------------------------------------------------------------------------------
Total nonperforming managed receivables 1,772.8 1,302.6 1,055.3
Real estate owned 187.8 212.3 206.8
- -------------------------------------------------------------------------------
Total nonperforming managed assets $1,960.6 $1,514.9 $1,262.1
===============================================================================
Managed credit loss reserves as a percent
of nonperforming managed receivables 119.9% 134.0% 121.3%
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
CREDIT LOSS RESERVES
We maintain credit loss reserves to cover probable losses of principal and
interest in both our owned and off-balance sheet portfolios. We estimate
losses for consumer receivables based on delinquency status and past loss
experience. For securitized receivables, we also record a provision for
estimated probable losses that we will incur over the life of the
transaction. For commercial loans, we calculate probable losses by using
expected amounts and timing of future cash flows to be received on loans.
In addition, we provide for general loss reserves on consumer and
commercial receivables to reflect our assessment of portfolio risk factors.
Loss reserve estimates are reviewed periodically and adjustments are
reported in earnings when they become known. These estimates are influenced
by factors outside of our control, such as economic conditions and consumer
payment patterns. As a result, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change.
Owned credit loss reserves increased 21 percent to $1,417.5 million from
$1,169.7 million at December 31, 1996. The ratio of credit loss reserves to
total owned receivables was 4.38 percent, up from 3.84 percent at December
31, 1996.
Total managed credit loss reserves increased 22 percent to $2,125.3
million from $1,745.9 million at December 31, 1996. The ratio of credit
loss reserves to total managed receivables was 4.21 percent, up from 3.85
percent at December 31, 1996. We increased credit loss reserves because of
seasoning of unsecured products and increased personal bankruptcies.
Additionally, in 1996, Beneficial recorded a $65 million up-front loan loss
provision for the strong private label receivables growth experienced
during the year.
13
<PAGE> 14
- -------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Generally, we are funded independently from our parent. Cash flows,
liquidity and capital are monitored at both HFC and Household
International levels. In managing capital, HFC and Beneficial develop
targets for equity to managed assets based on discussions with rating
agencies, reviews of regulatory requirements and competitor capital
positions, credit loss reserve strength, risks inherent in the projected
operating environment and acquisition objectives. We also specifically
consider the level of intangibles arising from acquisitions. These targets
include capital levels against both on-balance sheet assets and our
off-balance sheet portfolio. HFC paid cash dividends to Household
International of $250 million in 1997 and $155 million in 1995. HFC did
not pay any cash dividends to Household International in 1996. Beneficial
paid cash dividends of $200.7 million (including $80.0 million of treasury
share purchases) in 1997, $110.5 million in 1996 and $99.7 million in
1995.
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.
HFC, along with its wholly-owned subsidiary, Beneficial Corporation, funds
its operations by issuing commercial paper, medium- and long-term debt to
mainly wholesale investors, securitizing consumer receivables and receiving
capital contributions from our parent. Outstanding commercial paper
totaled $8.3 billion at December 31, 1997 and $8.5 billion at December 31,
1996. HFC markets its commercial paper through an in-house sales force. We
actively manage the level of commercial paper outstanding to ensure
availability to core investors and proper utilization of any excess
capacity within internally established targets.
We also market domestic medium-term notes through investment banks and our
in-house sales force, issuing a total of $5.1 billion in 1997. To obtain a
broader investment base, HFC and a subsidiary, Household Bank (Nevada)
N.A., periodically issue medium-term notes in European and Asian markets.
These markets provide us with a broader investor base as compared with
domestic markets. During 1997, $1.9 billion in medium-term notes were
issued in European and Asian markets compared to $.9 billion in European
markets in 1996. These notes were issued in various European and Asian
currencies and currency swaps were used to convert the notes to U.S.
dollars in order to eliminate future foreign exchange risk. During 1997, we
also issued $300 million of long-term debt with an original maturity of 10
years. In August 1997, we redeemed, at par of $100 million, all outstanding
shares of our 7.25% term cumulative preferred Series 1992-A, for $100 per
depositary share plus accrued and unpaid dividends.
We had committed back-up lines of credit totaling $10.5 billion at December
31, 1997, of which $400 million were available to our parent company.
These back-up lines include Beneficial's $3 billion syndicated revolving
credit agreement which supports its commercial paper issuances. None
of these back-up lines were used by us or our parent at December 31, 1997.
In addition, none of these lines contained a material adverse change
clause which could restrict availability. These back-up lines expire on
various dates from 1998 through 2002. The only financial covenants
contained in the terms of our credit agreements are the maintenance of
minimum shareholder's equity of $1.5 billion as well as a $1 billion net
worth test for Beneficial.
14
<PAGE> 15
We paid $1.1 billion for the stock of TFS and repaid about $2.7 billion of
TFS debt owed to affiliates of Transamerica Corporation. We funded this
acquisition through the issuance of commercial paper, bank and other
borrowings. In addition, we received a capital contribution of
approximately $1.0 billion from the parent company to repay debt.
HFC's wholly-owned subsidiary, Beneficial Corporation, has foreign
operating subsidiaries located in the United Kingdom, Canada and Germany.
These operating subsidiaries are directly owned by Beneficial Corporation,
a wholly-owned subsidiary of HFC and represent Beneficial's operations in
these countries prior to its merger with Household International, HFC's
parent, and subsequent contribution to HFC. Consolidated shareholder's
equity reflects the increase or decrease from translating our foreign
subsidiaries' assets, liabilities and operating results from their local
currency into U.S. dollars. We have entered into foreign exchange
contracts to hedge our investment in foreign subsidiaries to protect
ourselves from fluctuations in foreign currencies that are beyond our
control. The potential loss in net income associated with a 10% adverse
change in the British pound/US dollar or Canadian dollar/US dollar
exchange rates is not material.
Each foreign subsidiary conducts its operations using its local currency,
raising funds chiefly on its own, with the guarantee of Beneficial
Corporation attached to maximize market depth and minimize cost. The
Canadian and United Kingdom subsidiaries both issue commercial paper
through dealers. Canadian commercial paper outstandings totaled $346
million at year-end 1997 and $230 million at year-end 1996. United Kingdom
commercial paper outstandings totaled $181 million at year-end 1997 and
$267 million at year-end 1996. During 1997, the Canadian and United
Kingdom subsidiaries issued $110 million and $315 million, respectively,
in medium-term notes and other public debt offerings. The German
subsidiary obtains funding primarily through deposits.
As previously discussed, Beneficial sold its Canadian and German
operations during the first and second quarters of 1998.
ASSET SECURITIZATIONS
---------------------
Securitizations of consumer receivables have been, and will continue to be,
an important source of funds for HFC. The market for securities backed by
receivables is a reliable and cost-effective source of funds, which we plan
to use in the future. During 1997 we securitized about $6.1 billion of
home equity, MasterCard and Visa, private label and other unsecured
receivables. As of December 31, 1997, we have not securitized new auto
loan originations subsequent to the acquisition of ACC. The 1997 total
securitization volume compares to $8.1 billion in sales in 1996 and $5.2
billion in 1995. At December 31, 1997, we had $18.0 billion of receivables
sold under securitization transactions. At December 31, 1997, the expected
weighted average remaining life of these transactions was 2.3 years.
The following table summarizes the expected amortization of our
securitizations by type:
<TABLE>
<CAPTION>
In millions.
At December 31, 1997 1998 1999 2000 2001 2002 Thereafter
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Home equity $1,985.8 $1,374.7 $ 823.9 $ 577.8 $458.8 $ 817.6
Auto finance(1) 144.8 124.6 79.2 36.7 10.6 -
MasterCard/Visa 500.0 4,100.0 1,575.7 600.0 - -
Private label 213.5 161.5 - 650.0 - -
Other unsecured 863.2 628.9 502.3 466.7 460.3 886.4
- -------------------------------------------------------------------------------
Total $3,707.3 $6,389.7 $2,981.1 $2,331.2 $929.7 $1,704.0
===============================================================================
</TABLE>
(1) Auto finance receivables were previously securitized by ACC before its
acquisition in October 1997.
For MasterCard and Visa and private label securitizations, the issued
securities may pay off sooner than originally scheduled if certain events
occur. One example of such an event is if the annualized portfolio yield
(defined as the sum of finance income and applicable fees, less net
chargeoffs) for a certain period drops below a base rate (generally equal
to the sum of the rate paid to the investors and the servicing fee). For
home equity and other unsecured securitizations, early pay off of the
securities begins if the annualized portfolio yield falls below various
limits, or if certain other events occur. We do not presently believe that
any of these events will take place. If any such event occurred, our
funding requirements would increase. These additional requirements could be
met through securitizations, issuance of various types of debt or
borrowings under existing back-up lines of credit. We believe we would
continue to have adequate sources of funds if an early payoff event
occurred.
We and our affiliate, Household Bank, f.s.b., have facilities with
commercial banks under which we may collectively securitize up to $6.6
billion of receivables. These facilities are renewable on an annual basis.
At December 31, 1997, these facilities were fully utilized, of which we had
securitized $5.6 billion. The amount available under these facilities will
vary based on the timing and volume of public securitization transactions.
15
<PAGE> 16
At December 31, 1997, our long-term debt, the long-term debt of Beneficial
and preferred stock of our parent company have been assigned an
investment grade rating by four rating agencies. Furthermore, these
agencies included our commercial paper in their highest rating category.
Three of these agencies also include our parent company's commercial paper
in their highest rating category. With our back-up lines of credit and
securitization programs, we believe we have sufficient funding capacity to
refinance maturing debts and fund business growth.
CAPITAL EXPENDITURES During 1997 we made $114 million in capital
expenditures compared to the prior-year level of $131 million.
YEAR 2000 The conversion of certain computer systems to permit continued
use in the Year 2000 and beyond began in prior years. The Year 2000
issue exists because many computer systems and applications currently use
two-digit date fields to designate a year. As the century date change
occurs, date-sensitive systems may recognize the Year 2000 as 1900, or not
at all. The inability to recognize or properly treat the Year 2000 may
cause systems to process critical financial and operational information
incorrectly. We have identified our Year 2000 issues and are scheduled to
complete conversion and substantially complete testing of our significant
systems by the end of 1998. The costs for Year 2000 compliance have not
been, and are not expected to be, material to our operations. While we are
reviewing our third-party vendors' Year 2000 compliance, we cannot assure
that the systems of our vendors, upon which we rely, will be converted in a
timely manner, or that their failure to convert would not have an adverse
effect on our systems.
- -------------------------------------------------------------------------------
RISK MANAGEMENT
We have a comprehensive program to address potential financial risks.
These risks include interest rate, counterparty and currency risk.
The Finance Committee of Household International's Board of Directors sets
acceptable limits for each of these risks annually and reviews the limits
semi-annually.
Interest rate risk is defined as the impact of changes of market interest
rates on our earnings. HFC utilizes simulation models to measure the impact
on net interest margin of changes in interest rates. The key assumptions
used in this model include the rate at which we expect our loans to pay
off, loan volumes and pricing, cash flows from derivative financial
instruments and changes in market conditions. The assumptions we make are
based on our best estimates of actual conditions. The model cannot
precisely predict the actual impact of changes in interest rates on net
income because these assumptions are highly uncertain. At December 31,
1997, the combined company's interest rate risk levels were substantially
below those allowed by HFC's policy.
We generally fund our assets with liabilities that have similar interest
rate features. This reduces structural interest rate risk. Over time,
customer demand for our receivable products shifts between fixed rate and
floating rate products, based on market conditions and preferences. These
shifts result in different funding strategies and produce different
interest rate risk exposures. To manage these exposures, as well as our
liquidity position, we may use derivatives to synthetically alter the terms
of our assets or liabilities, or off-balance sheet transactions. We do
not use any exotic or leveraged derivatives.
16
<PAGE> 17
At December 31, 1997, we managed about $26 billion of domestic receivables
that have variable interest rates, including credit card, home equity and
other unsecured products. These receivables have been funded with $8.3
billion of short-term debt, with the remainder funded by long-term
liabilities. This position exposes us to interest rate risk. We primarily
use interest rate swaps to alter our exposure to interest rate risk while
still controlling liquidity risk. Interest rate swaps also are used
sometimes to synthetically alter our exposure to basis risk. This type of
risk exists because the pricing of some of our assets is tied to the prime
rate, while the funding for these assets is tied to LIBOR. The prime rate
and LIBOR react differently to changes in market interest rates; that is,
the prime rate does not change as quickly as LIBOR. We assign all of our
synthetic alteration and hedge transactions to specific groups of assets,
liabilities or off-balance sheet items.
The economic risk related to our interest rate swap portfolio is minimal.
The face amount of a swap transaction is referred to as the notional
amount. The notional amount is used to determine the interest payment to be
paid by each counterparty, but does not result in an exchange of principal
payments. For example, let's assume we have entered into a swap with the
counterparty whom we will call Bank A. Bank A agrees to pay us a fixed
interest rate while we agree to pay a variable rate. If variable rates for
the accrual period are below the fixed rate in the swap, Bank A owes us the
difference between the fixed rate and variable rate multiplied by the
notional amount.
The primary exposure on our interest rate swap portfolio is the risk that
the counterparty (Bank A in this example) does not pay us the money
they owe us. We protect ourselves against counterparty risk in several
ways. Counterparty limits have been set and are closely monitored as part
of the overall risk management process. These limits ensure that we do not
have significant exposure to any individual counterparty. Based on peak
exposure at December 31, 1997, virtually all of our derivative
counterparties are rated A+ or better. We have never suffered a loss due to
counterparty failure. Certain swap agreements that we have entered into
require that payments be made to, or received from, the counterparty when
the fair value of the agreement reaches a certain level.
We also utilize interest rate futures, and purchased put and call options
in our hedging strategy to reduce interest rate risk. We use these
instruments to hedge the changes in interest rates on our variable rate
assets and liabilities. For example, short-term borrowings expose us to
interest rate risk because the interest rate we must pay to others may
change faster than the rate we received from borrowers on the asset our
borrowings are funding. We use futures and options to fix our interest cost
on these borrowings at a desired rate. We hold these contracts until the
interest rate on the variable rate asset or liability change. We then
terminate, or close out the contracts. These terminations are necessary
because the date the interest rate changes is usually not the same as the
expiration date of the futures contract or option.
At December 31, 1997, we estimate that our earnings would decline by about
$40 million following a gradual 200 basis point increase in interest rates
over a twelve month period and would increase by about $48 million
following a gradual 200 basis point decrease in interest rates. These
estimates assume we would not take any corrective action to lessen the
impact and, therefore, exceed what most likely would occur if rates were to
change.
17
<PAGE> 18
We enter into currency swaps in order to minimize currency risk. These
swaps convert both principal and interest payments on debt issued from
one currency to another. For example, we may issue debt based on the French
franc and then execute a currency swap to convert the obligation to U. S.
dollars.
See Note 9, "Derivative Financial Instruments and Other Financial
Instruments With Off-Balance Sheet Risk," for additional information
related to interest rate risk management.
In the accompanying supplemental consolidated financial statements, Note
11, "Fair Value of Financial Instruments," provides information regarding
the fair value of certain financial instruments.
18
<PAGE> 19
HOUSEHOLD FINANCE CORPORATION
SUPPLEMENTAL GLOSSARY OF TERMS
ACQUIRED INTANGIBLES AND GOODWILL - Intangible assets reflected on our
consolidated balance sheet resulting from the market value premium attributable
to our credit card accounts in excess of the aggregate outstanding managed
credit card loans acquired. Goodwill represents the purchase price over the
fair value of identifiable assets acquired less liabilities assumed from
business combinations.
AFFINITY CREDIT CARD - A MasterCard or Visa account that is jointly sponsored
by an organization that has a membership with a common interest (e.g., the
AFL-CIO Union Privilege Credit Card Program).
ASSET SECURITIZATION - The process where interests in a pool of financial
assets, such as credit card or home equity receivables, are sold to investors.
Typically, the receivables are sold to a trust that issues interests that are
sold to investors.
AUTO FINANCE LOANS - Closed-end loans secured by a first lien on a vehicle.
CO-BRANDED CREDIT CARD - A MasterCard or Visa account that is jointly sponsored
by the issuer of the card and another corporation. The account holder typically
receives some form of added benefit for using the card (e.g., the GM Card).
CONSUMER NET CHARGEOFF RATIO - Net chargeoffs of receivables divided by average
receivables outstanding.
CONTRACTUAL DELINQUENCY - A method of determining delinquent accounts based on
the contractual terms of the original loan agreement.
CREDIT LIFE INSURANCE - Insurance products that either pay off or continue
repaying a debt in the event of death, or temporary or permanent disability of
the borrower.
FEE INCOME - Income associated with interchange on credit cards and annual,
late and other fees and from the origination or acquisition of loans.
FOREIGN EXCHANGE CONTRACT - A contract used to minimize our exposure to changes
in foreign currency exchange rates.
FUTURES CONTRACT - An exchange-traded contract to buy or sell a stated amount
of a financial instrument or index at a specified future date and price.
HOME EQUITY LOAN - Closed-end loans and revolving lines of credit secured by
first or second mortgages on residential real estate.
INTERCHANGE FEES - Fees received for processing a credit card transaction
through the MasterCard or Visa network.
INTEREST RATE SWAP - Contract between two parties to exchange interest payments
on a stated principal amount (notional principal) for a specified period.
Typically, one party makes fixed rate payments while the other party makes
payments using a variable rate.
LIBOR - London Interbank Offered Rate. A widely-quoted market rate which is
frequently the index used to determine that rate at which we borrow funds.
19
<PAGE> 20
HOUSEHOLD FINANCE CORPORATION
SUPPLEMENTAL GLOSSARY OF TERMS - CONTINUED
LIQUIDITY - A measure of how quickly we can convert assets to cash or raise
additional cash by issuing debt.
MANAGED BASIS - Method of reporting whereby net interest margin, other revenues
and credit losses on securitized receivables are reported as if those
receivables were still held on our balance sheet.
MANAGED NET INTEREST MARGIN - Interest income from managed receivables and
noninsurance investment securities reduced by interest expense.
MANAGED RECEIVABLES - The sum of receivables on our balance sheet and those
that we service for investors as part of our asset securitization program.
MASTERCARD/VISA RECEIVABLES - Receivables generated through customer usage of
MasterCard and Visa credit cards.
NONACCRUAL LOANS - Loans on which we no longer accrue interest because ultimate
collection is unlikely.
OPTIONS - A contract giving the owner the right, but not the obligation, to buy
or sell a specified item at a fixed price for a specified period.
OTHER UNSECURED RECEIVABLES - Unsecured lines of credit or closed-end loans
made to individuals.
OVER-THE-LIFE RESERVES - Credit loss reserves established for securitized
receivables to cover the estimated probable losses that we expect to incur over
the life of the transaction.
PRIVATE LABEL CREDIT CARD - A line of credit made available to customers of
retail merchants evidenced by a credit card bearing the merchant's name.
PROMOTIONAL ACCOUNT - A private label credit card account that allows for
limited or deferred interest and/or principal payments for a certain period.
RAL PROGRAM - A cooperative program with H&R Block Tax Services, Inc. and
certain of its franchises, along with other independent tax preparers, to
provide loans to customers who are entitled to tax refunds and who
electronically file their returns with the Internal Revenue Service.
RECEIVABLES OWNED - Those receivables held on our balance sheet.
RECEIVABLES SERVICED WITH LIMITED RECOURSE - Those receivables that we have
securitized and for which we have some level of potential loss if defaults
occur.
RETURN ON ASSETS - Net income divided by average assets.
RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY - Net income less dividends on
preferred stock divided by average common shareholder's equity.
SYNTHETIC ALTERATION - Process by which derivative financial instruments are
used to alter the risk characteristics of an asset, liability or off-balance
sheet item.
20
<PAGE> 21
SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Household Finance Corporation and Subsidiaries 1997--THREE MONTHS ENDED 1996--Three Months Ended
All dollar amounts except per share -------------------------------------- ----------------------------------
data are stated in millions. DEC. SEPT. JUNE MARCH Dec. Sept. June March
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance income $1,091.2 $1,098.6 $1,031.8 $1,037.0 $1,066.9 $1,016.3 $933.6 $938.4
Other interest income 5.3 7.3 14.6 7.9 8.7 8.5 22.1 9.3
Interest expense 471.1 482.2 452.3 447.9 456.4 441.9 422.0 403.6
- --------------------------------------------------------------------------------------------------------------------------------
Net interest margin 625.4 623.7 594.1 597.0 619.2 582.9 533.7 544.1
Provision for credit losses on
owned receivables 336.6 321.6 301.6 326.6 292.9 208.4 209.7 210.6
- --------------------------------------------------------------------------------------------------------------------------------
Net interest margin after provision
for credit losses 288.8 302.1 292.5 270.4 326.3 374.5 324.0 333.5
- --------------------------------------------------------------------------------------------------------------------------------
Securitization income 302.6 350.3 314.8 264.3 229.6 245.9 257.3 179.6
Insurance revenues 92.3 86.0 86.8 87.8 89.7 83.3 79.7 83.9
Investment income 37.5 41.3 36.5 37.3 34.1 44.1 45.2 89.3
Fee income 180.0 137.7 109.1 98.7 83.9 79.8 68.2 62.7
Other income 22.1 65.5 56.7 166.2 25.3 46.7 64.1 120.9
- --------------------------------------------------------------------------------------------------------------------------------
Total other revenues 634.5 680.8 603.9 654.3 462.6 499.8 514.5 536.4
- --------------------------------------------------------------------------------------------------------------------------------
Salaries and fringe benefits 241.9 236.2 223.6 212.7 221.1 202.3 190.1 191.9
Other operating expenses 409.6 284.8 266.5 313.0 281.9 297.3 300.4 270.6
Amortization of acquired intangibles
and goodwill 38.4 38.6 33.3 33.1 33.0 32.1 34.0 22.0
Policyholders' benefits 56.9 56.9 57.9 64.9 59.7 69.9 66.9 90.3
- --------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 746.8 616.5 581.3 623.7 595.7 601.6 591.4 574.8
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 176.5 366.4 315.1 301.0 193.2 272.7 247.1 295.1
Income taxes 36.9 132.7 111.1 111.2 59.5 99.4 90.5 108.7
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 139.6 $ 233.7 $ 204.0 $ 189.8 $ 133.7 $ 173.3 $156.6 $186.4
================================================================================================================================
</TABLE>
21
<PAGE> 22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Household Finance Corporation:
We have audited the accompanying supplemental consolidated balance sheets of
Household Finance Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related supplemental consolidated
statements of income, consolidated statements of changes in preferred stock
and common shareholder's equity and cash flows for each of the three years in
the period ended December 31, 1997. The supplemental consolidated statements
give retroactive effect to the merger of Household International, Inc. (parent
company of Household Finance Corporation) and Beneficial Corporation on June
30, 1998, which has been accounted for as a pooling of interests as described
in Note 2. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the supplemental consolidated 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,
1997 and 1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, after
giving retroactive effect to the merger of Household International, Inc., and
Beneficial Corporation as described in Note 2, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
June 30, 1998
22
<PAGE> 23
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Household Finance Corporation and Subsidiaries
In millions.
Year ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance income $4,258.6 $3,955.2 $3,638.2
Other interest income 35.1 48.6 47.1
Interest expense 1,853.5 1,723.9 1,640.8
- -------------------------------------------------------------------------------
Net interest margin 2,440.2 2,279.9 2,044.5
Provision for credit losses on
owned receivables 1,286.4 921.6 791.2
- -------------------------------------------------------------------------------
Net interest margin after provision
for credit losses 1,153.8 1,358.3 1,253.3
- -------------------------------------------------------------------------------
Securitization income 1,232.0 912.4 548.2
Insurance revenues 352.9 336.6 404.4
Investment income 152.6 212.7 508.4
Fee income 525.5 294.6 226.2
Other income 310.5 257.0 139.7
- -------------------------------------------------------------------------------
Total other revenues 2,573.5 2,013.3 1,826.9
- -------------------------------------------------------------------------------
Salaries and fringe benefits 914.4 805.4 683.5
Other operating expenses 1,273.9 1,150.2 1,085.8
Amortization of acquired intangibles and goodwill 143.4 121.1 70.6
Policyholders' benefits 236.6 286.8 532.7
- -------------------------------------------------------------------------------
Total costs and expenses 2,568.3 2,363.5 2,372.6
- -------------------------------------------------------------------------------
Income before income taxes 1,159.0 1,008.1 707.6
Income taxes 391.9 358.1 295.3
- -------------------------------------------------------------------------------
Net income $ 767.1 $ 650.0 $ 412.3
===============================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
23
<PAGE> 24
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Household Finance Corporation and Subsidiaries
In millions, except share data.
At December 31 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 545.3 $ 508.1
Investment securities 2,336.8 2,281.0
Receivables, net 32,376.6 30,532.2
Advances to parent company and affiliates 10.5 -
Acquired intangibles and goodwill, net 1,777.9 952.8
Properties and equipment, net 464.8 473.6
Real estate owned 187.8 212.3
Other assets 1,973.3 1,562.1
- -------------------------------------------------------------------------------
Total assets $39,673.0 $36,522.1
===============================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt:
Deposits $ 555.3 $ 635.0
Commercial paper, bank and other borrowings 9,547.1 9,392.8
Senior and senior subordinated debt (with
original maturities over one year) 20,909.2 19,279.4
- -------------------------------------------------------------------------------
Total debt 31,011.6 29,307.2
Insurance policy and claim reserves 1,406.4 1,380.4
Borrowings from parent company and affiliates - 7.6
Other liabilities 1,451.3 1,439.3
- -------------------------------------------------------------------------------
Total liabilities 33,869.3 32,134.5
Preferred stock - 100.0
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding at
December 31, 1997 and 1996, and additional
paid-in capital 2,555.1 1,366.9
Retained earnings 3,296.9 2,985.1
Foreign currency translation adjustments (56.5) (54.3)
Unrealized gain (loss) on investments, net 8.2 (10.1)
- -------------------------------------------------------------------------------
Total common shareholder's equity 5,803.7 4,287.6
- -------------------------------------------------------------------------------
Total liabilities and shareholder's equity $39,673.0 $36,522.1
===============================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
24
<PAGE> 25
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Household Finance Corporation and Subsidiaries
In millions.
Year ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income $ 767.1 $ 650.0 $ 412.3
Adjustments to reconcile net income to
net cash provided by operations:
Provision for credit losses on
owned receivables 1,286.4 921.6 791.2
Provision for loss on German disposal 58.8 - 15.0
Insurance policy and claim reserves 102.5 (866.3) 589.0
Depreciation and amortization 272.8 245.6 225.6
Net realized gains from sales of assets (78.3) (11.3) (36.4)
Deferred income tax provision 17.8 (32.5) (8.2)
Other, net (504.4) 120.3 176.8
- -------------------------------------------------------------------------------
Cash provided by operations 1,922.7 1,027.4 2,165.3
- -------------------------------------------------------------------------------
INVESTMENTS IN OPERATIONS
Investment securities available-for-sale:
Purchased (1,863.7) (2,100.7) (3,490.7)
Matured 264.3 696.6 271.4
Sold 1,694.9 2,932.1 2,525.9
Investment securities held-to-maturity:
Purchased - - (420.0)
Matured - - 263.8
Sold - - 31.9
Short-term investment securities, net change (32.3) (63.1) 273.6
Receivables:
Originations, net (15,418.9) (15,479.3) (11,098.1)
Purchased (1,668.8) (4,811.4) (1,669.4)
Sold 17,210.4 14,490.0 9,146.3
Purchase of Transamerica Financial
Services Holding Company capital stock (1,059.6) - -
Disposition of product lines of life
insurance business - - 575.0
(Acquisition) disposition of portfolios, net - (640.7) (135.0)
Properties and equipment purchased (114.0) (131.4) (82.7)
Properties and equipment sold 2.7 5.6 3.4
Advances to parent company and
affiliates, net (18.1) 127.2 362.7
- -------------------------------------------------------------------------------
Cash decrease from investments in operations (1,003.1) (4,975.1) (3,441.9)
- -------------------------------------------------------------------------------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change (186.1) 1,167.4 880.6
Senior and senior subordinated debt issued 7,401.0 8,071.4 5,595.8
Senior and senior subordinated debt retired (5,775.0) (4,881.1) (4,709.2)
Repayment of Transamerica Financial
Services Holding Company debt (2,679.7) - -
Policyholders' benefits paid (120.9) (510.4) (741.7)
Cash received from policyholders 57.1 98.2 652.6
Dividends on preferred stock (4.6) (7.2) (7.2)
Redemption of preferred stock (100.0) - -
Dividends paid to parent company (250.0) - (155.0)
Dividends paid - pooled affiliate (200.7) (110.5) (99.7)
Capital contributions from parent company 976.5 200.2 1.4
- -------------------------------------------------------------------------------
Cash increase (decrease) from financing
and capital transactions (882.4) 4,028.0 1,417.6
- -------------------------------------------------------------------------------
Increase in cash 37.2 80.3 141.0
Cash at January 1 508.1 427.8 286.8
- -------------------------------------------------------------------------------
Cash at December 31 $ 545.3 $ 508.1 $ 427.8
===============================================================================
Supplemental Cash Flow Information:
Interest paid $ 1,827.3 $ 1,947.2 $ 1,563.8
Income taxes paid 315.6 541.3 44.5
- -------------------------------------------------------------------------------
Supplemental Non-Cash Investing and
Financing Activities:
Contribution of acquired company
from parent $ 187.0 - -
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
25
<PAGE> 26
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK AND COMMON
SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Shareholder's Equity
-------------------------------------------------
Common
Stock and Total
Additional Common
Household Finance Corporation and Subsidiaries Preferred Paid-in Retained Shareholder's
All dollar amounts are stated in millions. Stock Capital Earnings Other (1) Equity
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ 100.0 $1,105.1 $2,302.4 $(148.1) $3,259.4
Net income 412.3 412.3
Dividends to parent company (155.0) (155.0)
Dividends - pooled affiliate(2) (.1) (99.7) (99.8)
Dividends on preferred stock (7.2) (7.2)
Contribution of capital from parent company 1.4 1.4
Contribution of capital - pooled affiliate(2) 24.2 24.2
Foreign currency translation adjustments .5 .5
Unrealized gain on investments, net 204.3 204.3
- ---------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 100.0 1,130.6 2,452.8 56.7 3,640.1
Net income 650.0 650.0
Dividends - pooled affiliate(2) (110.5) (110.5)
Dividends on preferred stock (7.2) (7.2)
Contribution of capital from parent company 200.2 200.2
Contribution of capital - pooled affiliate(2) 36.1 36.1
Foreign currency translation adjustments 1.1 1.1
Unrealized loss on investments, net (122.2) (122.2)
- ---------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 100.0 1,366.9 2,985.1 (64.4) 4,287.6
Net income 767.1 767.1
Dividends to parent company (250.0) (250.0)
Dividends - pooled affiliate(2) (200.7) (200.7)
Dividends on preferred stock (4.6) (4.6)
Redemption of preferred stock (100.0)
Contribution of capital from parent company 1,163.5 1,163.5
Contribution of capital - pooled affiliate(2) 24.7 24.7
Foreign currency translation adjustments (2.2) (2.2)
Unrealized gain on investments, net 18.3 18.3
- ---------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ - $2,555.1 $3,296.9 $ (48.3) $5,803.7
===============================================================================================================
</TABLE>
(1) At December 31, 1997, 1996, 1995 and 1994 items in the other column
include cumulative adjustments for unrealized gains (losses) on
available-for-sale investments of $8.2, $(10.1), $112.1 and $(92.2)
million, respectively. The gross unrealized gain (loss) on
available-for-sale investments at December 31, 1997, 1996 and 1995 of
$12.6, $(15.7) and $169.4 million, respectively, is recorded net of income
taxes (benefit) of $4.4, $(5.6) and $57.3 million, respectively.
(2) Relates to previous equity transactions of Beneficial Corporation.
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
26
<PAGE> 27
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Household Finance Corporation and Subsidiaries
- -------------------------------------------------------------------------------
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 lending
products to middle-market customers primarily in the United States, Canada and
the United Kingdom, with $50.4 billion of managed receivables at December 31,
1997. The company's lending products include: home equity loans, auto finance
loans, MasterCard* and Visa* and private label credit cards, tax refund
anticipation loans and other unsecured loans. The company also offers credit and
specialty insurance in the United States, Canada and the United Kingdom. The
company also has commercial loans and leases, periodic payment annuities, and
corporate owned life insurance products, which it no longer offers.
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial statements include the
accounts of Household 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, 1997 and 1996.
Available-for-sale investments are intended to be invested for an indefinite
period but may be sold in response to events reasonably expected in the
foreseeable future. These investments are carried at fair value. Unrealized
holding gains and losses on available-for-sale investments are recorded as
adjustments to common 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.
* MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
27
<PAGE> 28
Cost of investment securities sold is determined using the specific
identification method. Interest income earned on the noninsurance investment
portfolio is classified in the statements of income in net interest margin.
Realized gains and losses from the investment portfolio and investment income
from the insurance portfolio are recorded in investment income. Accrued
investment income is classified with investment securities.
RECEIVABLES Receivables are carried at amortized cost. The company
periodically sells receivables from its home equity, auto finance, MasterCard
and Visa, private label and other unsecured portfolios. Because these
receivables were originated with variable rates of interest or rates comparable
to those currently offered by the company, carrying value approximates fair
value.
Finance income is recognized using the effective yield method. Origination fees
are deferred and amortized to finance income over the estimated life of the
related receivables, except to the extent they offset directly related lending
costs. Annual fees are netted with direct lending costs associated with the
issuance of MasterCard and Visa receivables and are deferred and amortized on a
straight-line basis over one year. Net deferred lending costs related to these
receivables totaled $8.6 and $1.2 million at December 31, 1997 and 1996,
respectively. Premiums and discounts on purchased receivables are recognized as
adjustments of the yield of the related receivables.
Insurance reserves applicable to credit risks on consumer receivables are
treated as a reduction of receivables in the balance sheets, since payments on
such policies generally are used to reduce outstanding receivables.
PROVISION AND CREDIT LOSS RESERVES Provision for credit losses on owned
receivables is made in an amount sufficient to maintain credit loss reserves at
a level considered adequate to cover probable losses of principal and interest
in the existing owned portfolio. Probable losses are estimated for consumer
receivables based on contractual delinquency status and historical loss
experience. For commercial loans, probable losses are calculated using
estimates of amounts and timing of future cash flows expected to be received on
loans. In addition, general loss reserves on consumer and commercial
receivables are maintained to reflect management's judgment of portfolio risk
factors. Loss reserve estimates are reviewed periodically and adjustments are
reported in earnings when they become known. As these estimates are influenced
by factors outside the company's control, such as consumer payment patterns and
economic conditions, there is uncertainty inherent in these estimates, making
it reasonably possible that they could change.
The company's chargeoff policy for consumer receivables varies by product.
Receivables for HFC are written off, or for secured products written down to net
realizable value, at the following stages of contractual delinquency: auto
finance - 5 months; home equity and MasterCard and Visa - 6 months; private
label - 9 months; and other unsecured - 9 months and no payment received in 6
months. Beneficial, in general, charges off unsecured receivables after no
payment has been made for six months and secured receivables are written down to
net realizable value at the time of foreclosure. Commercial receivables are
written off when it becomes apparent that an account is uncollectible.
28
<PAGE> 29
NONACCRUAL LOANS Nonaccrual loans are loans on which accrual of interest has
been suspended. Interest income is suspended on all loans when principal or
interest payments are more than three months contractually past due, except for
MasterCard and Visa and private label credit cards and auto finance
receivables. On credit card receivables, interest continues to accrue until the
receivable is charged off. On auto finance receivables, accrual of interest
income is discontinued when payments are more than two months contractually
past due. There were no commercial loans at December 31, 1997 which were 90
days or more past due which remained on accrual status. Accrual of income on
nonaccrual consumer receivables is not resumed until such receivables become
less than three months contractually past due (two months for auto finance
receivables). Accrual of income on nonaccrual commercial loans is not resumed
until such loans become contractually current. Cash payments received on
nonaccrual commercial loans are either applied against principal or reported as
interest income, according to management's judgment as to the collectibility of
principal.
RECEIVABLES SOLD AND SERVICED WITH LIMITED RECOURSE AND SECURITIZATION INCOME
Certain home equity, auto finance, MasterCard and Visa, private label and other
unsecured receivables have been securitized and sold to investors with limited
recourse. The servicing rights to these receivables have been retained by the
company. Upon sale, the receivables are removed from the balance sheet, and a
gain on sale is recognized for the difference between the carrying value of the
receivables and the adjusted sales proceeds. The adjusted sales proceeds are
based on a present value estimate of future cash flows to be received over the
lives of the receivables. Future cash flows are based on estimates of
prepayments, the impact of interest rate movements on yields of receivables
sold and securities issued, delinquency of receivables sold, servicing fees,
operating expenses and other factors. The resulting gain is adjusted by
establishing a reserve for estimated probable losses under the recourse
provisions. Gains on sale, recourse provisions and servicing cash flows on
receivables sold are reported in the accompanying consolidated statements of
income as securitization income. Unamortized securitization assets are reviewed
for impairment whenever events indicate that the carrying value may not be
recovered.
Effective January 1, 1997, the company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FAS No. 125"), which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on a derecognition
approach that focuses on control of the assets and extinguishment of the
liabilities. The statement was effective for securitization transactions
occurring subsequent to December 31, 1996. The adoption of FAS No. 125 did not
have a material impact on the company's consolidated financial statements.
PROPERTIES AND EQUIPMENT Properties and equipment, which include leasehold
improvements, are recorded at cost, net of accumulated depreciation and
amortization of $647.2 and $647.7 million at December 31, 1997 and 1996,
respectively. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets for financial reporting purposes.
Leasehold improvements are amortized over the lesser of the economic useful
life of the improvement or the term of the lease.
REPOSSESSED COLLATERAL Real estate owned is valued at the lower of cost or
fair value less estimated costs to sell. These values are periodically reviewed
and reduced, if appropriate. Costs of holding real estate, and related gains
and losses on disposition, are credited or charged to operations as incurred.
29
<PAGE> 30
Vehicles acquired for nonpayment of indebtedness are recorded at the lower of
the estimated fair market value or the outstanding receivable balance. Such
assets are generally sold within 60 days of repossession and any difference
between the sales price, net of expenses, and the carrying value is credited or
charged to operations as incurred.
INSURANCE Insurance revenues on revolving credit insurance policies are
recognized when billed. Insurance revenues on the remaining insurance contracts
are recorded as unearned premiums and recognized into income based on the
nature and term of the underlying contracts. Liabilities for credit insurance
policies are based upon estimated settlement amounts for both reported and
incurred but not yet reported losses. Liabilities for future benefits on
annuity contracts and specialty and corporate owned life insurance products are
based on actuarial assumptions as to investment yields, mortality and
withdrawals.
ACQUIRED INTANGIBLES AND GOODWILL Acquired intangibles consist of acquired
credit card relationships which are amortized on a straight-line basis over
their estimated remaining lives, not to exceed 10 years.
Goodwill represents the purchase price over the fair value of identifiable
assets acquired less liabilities assumed from business combinations and is
amortized over 25 years on a straight-line basis. Goodwill is reviewed for
impairment whenever events indicate that the carrying amount may not be
recoverable.
INTEREST RATE CONTRACTS The nature and composition of the company's assets and
liabilities and off-balance sheet items expose the company to interest rate
risk. The company enters into a variety of interest rate contracts for managing
its interest rate exposure. Interest rate swaps are the principal vehicle used
to manage interest rate risk; however, interest rate futures, options, caps and
floors, and forward contracts also are utilized. The company also has entered
into currency swaps to convert both principal and interest payments on debt
issued from one currency to the appropriate functional currency.
Interest rate swaps are designated, and effective, as synthetic alterations of
specific assets or liabilities (or specific groups of assets or liabilities)
and off-balance sheet items. The interest rate differential to be paid or
received on these contracts is accrued and included in net interest margin in
the statements of income. Interest rate futures, forwards, options, and caps
and floors used in hedging the company's exposure to interest rate fluctuations
are designated, and effective, as hedges of balance sheet items.
Correlation between all interest rate contracts and the underlying asset,
liability or off-balance sheet item is direct because the company uses interest
rate contracts which mirror the underlying item being hedged/synthetically
altered. If correlation between the hedged/synthetically altered item and
related interest rate contract would cease to exist, the interest rate contract
would be recorded at fair value and the associated unrealized gain or loss
would be included in net interest margin, with any future realized and
unrealized gains or losses recorded in other income.
30
<PAGE> 31
Interest rate contracts are recorded at amortized cost. If interest rate
contracts are terminated early, the realized gains and losses are deferred and
amortized over the life of the hedged/synthetically altered item as adjustments
to net interest margin. These deferred gains and losses are recorded on the
accompanying consolidated balance sheets as adjustments to the carrying value
of the hedged items. In circumstances where the underlying assets or
liabilities are sold, any remaining carrying value adjustments or cumulative
change in value on any open positions are recognized immediately as a component
of the gain or loss upon disposition. Any remaining interest rate contracts
previously designated to the sold hedged/synthetically altered item are
recorded at fair value with realized and unrealized gains and losses included
in other income.
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. Beneficial Corporation will be included
in Household International's consolidated federal and state income tax returns
for periods subsequent to the merger. 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.
- -------------------------------------------------------------------------------
2. HOUSEHOLD INTERNATIONAL MERGER WITH BENEFICIAL CORPORATION
On June 30, 1998, Household International ("Household") merged with Beneficial
Corporation ("Beneficial"), a consumer finance holding company headquartered in
Wilmington, Delaware. Pursuant to the merger, each outstanding share of
Beneficial common stock has been converted into 3.0666 shares of Household's
common stock, resulting in the net issuance of approximately 167.3 million
shares of common stock. Each share of Beneficial $5.50 Convertible Preferred
Stock has been converted into the number of shares of Household common stock the
holder thereof would have been entitled to receive in the merger had such
holder converted such 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 with terms substantially similar
to those of existing Beneficial preferred stock. The merger has been accounted
for as a pooling of interests. Upon completion of the merger, substantially all
the net assets of Beneficial were contributed by Household to the company.
Therefore, these supplemental consolidated financial statements include the
results of operations, financial position, and changes in cash flows of
Beneficial for all periods. On March 31, 1998 Beneficial's total assets were
$16.3 billion and common shareholders' equity was $1.9 billion.
In connection with the merger, Household and the company will incur pre-tax
merger and integration related costs of approximately $1 billion ($751 million
after-tax) during the quarter ended June 30, 1998. These costs include
approximately $284 million in lease exit costs, $161 million in fixed asset
write-offs related to closed facilities, $240 million in severance and change
in control payments, $140 million in asset writedowns to reflect modified
business plans, $66 million in investment banking fees, $34 million in legal
and other expenses, and $75 million in prepayment premiums related to debt.
31
<PAGE> 32
The separate results of operations for HFC and Beneficial were as follows:
<TABLE>
<CAPTION>
In millions
Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest margin and other revenues (1)
HFC $2,747.5 $2,130.1 $1,837.1
Beneficial 2,029.6 1,876.3 1,501.6
- -------------------------------------------------------------------------------
Total $4,777.1 $4,006.4 $3,338.7
===============================================================================
Net Income
HFC $ 513.4 $ 369.0 $ 261.8
Beneficial 253.7 281.0 150.5
- -------------------------------------------------------------------------------
Total $ 767.1 $ 650.0 $ 412.3
===============================================================================
</TABLE>
(1) Policyholder's benefits have been netted against other revenues.
- -------------------------------------------------------------------------------
3. OTHER BUSINESS COMBINATIONS AND DIVESTITURES
During the fourth quarter of 1997, Beneficial announced its intent to sell its
German consumer banking operations and its Canadian consumer finance
operations. An after tax loss of $27.8 million was recorded after consideration
of a $31.0 million tax benefit, primarily generated by the expected utilization
of capital losses at December 31, 1997 to cover the expected loss associated
with disposing of the German operations. On April 28, 1998, sale of the German
operations was completed. No additional losses were realized as a result of the
sale.
On March 2, 1998, the sale of Beneficial's Canadian operations was completed.
An after tax gain of $118.5 million was recorded upon consummation of the
transaction.
On June 23, 1997, Household International and a wholly-owned subsidiary of HFC
acquired the capital stock of Transamerica Financial Services Holding Company
("TFS"), the branch-based consumer finance subsidiary of Transamerica
Corporation ("TA"). The company paid $1.1 billion for the stock of TFS and
repaid approximately $2.7 billion of TFS debt owed to affiliates of TA. The
acquisition added approximately $3.1 billion of real estate secured
receivables. The acquisition of TFS was accounted for as a purchase, and
accordingly, earnings from TFS' operations have been included in the company's
results of operations from June 24, 1997. The acquisition of TFS was not
material to the company's consolidated financial statements.
In June 1997, the company received a capital contribution from Household
International of $976.5 million which was used to repay certain short-term
borrowings in connection with the acquisition of TFS.
On October 21, 1997, Household International and its wholly-owned subsidiary
acquired the capital stock of ACC Consumer Finance Corporation ("ACC"), a
non-prime auto finance company, for approximately 4.2 million shares of its
common stock and cash. Upon the consummation of this transaction, Household
International contributed the investment in ACC to HFC. The acquisition of ACC
was accounted for as a purchase, and accordingly, earnings from ACC's
operations have been included in the company's results of operations from
October 22, 1997. The acquisition of ACC was not material to the company's
consolidated financial statements.
32
<PAGE> 33
In December 1997, Beneficial acquired Endeavour Personal Finance Ltd,
("Endeavour") a consumer lending business in the United Kingdom with
approximately $250 million in receivables for cash. The acquisition of Endeavour
was accounted for as a purchase, and accordingly earnings from Endeavour's
operations have been included in the company's results of operations from the
acquisition date. The acquisition of Endeavour was not material to the company's
consolidated financial statements.
- -------------------------------------------------------------------------------
4. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities $ 132.5 $ 213.7
Corporate debt securities 1,594.0 1,382.9
U.S. government and federal agency debt securities 370.0 391.1
Other 206.9 258.4
- -------------------------------------------------------------------------------
Subtotal 2,303.4 2,246.1
- -------------------------------------------------------------------------------
Accrued investment income 33.4 34.9
- -------------------------------------------------------------------------------
Total investment securities $2,336.8 $2,281.0
===============================================================================
</TABLE>
Proceeds from the sale of available-for-sale investments totaled approximately
$1.7, $3.4 and $2.5 billion in 1997, 1996 and 1995, respectively. Gross gains of
$27.3, $48.9 and $10.8 million in 1997, 1996 and 1995, respectively, and gross
losses of $3.3 and $5.3 million in 1997 and 1996, respectively, were realized on
those sales.
The gross unrealized gains (losses) of investment securities were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------- -------------------------------------------------
GROSS GROSS Gross Gross
In millions. AMORTIZED UNREALIZED UNREALIZED FAIR Amortized Unrealized Unrealized Fair
At December 31 COST GAINS LOSSES VALUE Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
INVESTMENTS
Marketable equity
securities $ 129.0 $ 3.7 $ (.2) $ 132.5 $ 213.3 $ 1.9 $ (1.5) $ 213.7
Corporate debt securities 1,575.4 36.8 (18.2) 1,594.0 1,392.0 22.2 (31.3) 1,382.9
U.S. government and federal
agency debt securities 380.2 2.9 (13.1) 370.0 398.6 2.8 (10.3) 391.1
Other 206.2 .8 (.1) 206.9 257.9 .6 (.1) 258.4
- -------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale
investments $2,290.8 $ 44.2 $(31.6) $2,303.4 $2,261.8 $ 27.5 $ (43.2) $2,246.1
===============================================================================================================================
</TABLE>
See Note 11, "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.
Contractual maturities of and yields on investments in debt securities were as
follows:
<TABLE>
<CAPTION>
All dollar amounts are U.S. Government and Federal
stated in millions. Corporate Debt Securities Agency Debt Securities
------------------------------- -------------------------------
Amortized Fair Amortized Fair
At December 31, 1997 Cost Value Yield* Cost Value Yield*
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due within 1 year $ 175.6 $ 175.3 6.21% $30.3 $30.3 5.49%
After 1 but within 5 years 184.0 186.2 6.87 69.8 71.0 6.70
After 5 but within 10 years 433.1 439.5 6.82 145.8 146.0 6.64
After 10 years 782.7 793.0 7.64 134.3 122.7 6.49
- -------------------------------------------------------------------------------------------------
Total $1,575.4 $1,594.0 7.17% $380.2 $370.0 6.49%
=================================================================================================
</TABLE>
* Computed by dividing annualized interest by the amortized cost of the
respective investment securities.
33
<PAGE> 34
- --------------------------------------------------------------------------------
5. RECEIVABLES
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Home equity $12,806.1 $ 8,401.2
Auto finance(1) 476.5 -
MasterCard/Visa 5,052.4 7,099.7
Private label 8,039.2 8,472.5
Other unsecured 5,071.3 5,501.8
Commercial 937.8 992.1
- --------------------------------------------------------------------------------
Total owned receivables 32,383.3 30,467.3
Accrued finance charges 400.1 371.5
Credit loss reserve for owned receivables (1,417.5) (1,169.7)
Unearned credit insurance premiums and claims reserves (120.1) (82.6)
Amounts due and deferred from receivables sales 1,838.6 1,521.9
Reserve for receivables serviced with limited recourse (707.8) (576.2)
- --------------------------------------------------------------------------------
Total owned receivables, net 32,376.6 30,532.2
Receivables serviced with limited recourse 18,043.0 14,834.2
- --------------------------------------------------------------------------------
Total managed receivables, net $50,419.6 $45,366.4
================================================================================
</TABLE>
(1) Prior to the fourth quarter of 1997, auto finance receivables were not
significant and were included in other unsecured receivables.
At December 31, 1997 net receivables relating to Beneficial's disposed Canadian
and German operations were $775.1 and $271.6 million, respectively.
Foreign receivables included in owned receivables were as follows:
<TABLE>
<CAPTION>
UNITED KINGDOM CANADA GERMANY
In millions. ----------------- -------------- -------------
At December 31 1997 1996 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Home equity $626.5 $313.9 $311.1 $300.3 $20.9 $145.2
MasterCard/Visa 699.2 520.0 - - .5 -
Private label 197.3 165.8 250.7 201.9 134.3 112.2
Other unsecured 403.7 332.5 230.4 203.8 53.3 131.7
Commercial - - - - 74.4 -
- --------------------------------------------------------------------------------
Total $1,926.7 $1,332.2 $792.2 $706.0 $283.4 $389.1
================================================================================
</TABLE>
Foreign managed receivables represented 6 and 5 percent of total managed
receivables at December 31, 1997 and 1996, respectively.
The company has securitized certain receivables which it services with limited
recourse. Securitizations of receivables, including replenishments of
certificate holder interests, were as follows:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Home equity $1,920.4 $3,675.2 $2,239.0
MasterCard/Visa 10,036.1 7,875.1 4,755.8
Private label 2,270.2 697.4 644.0
Other unsecured 2,428.5 2,255.1 1,074.8
- --------------------------------------------------------------------------------
Total $16,655.2 $14,502.8 $8,713.6
================================================================================
</TABLE>
The outstanding balance of receivables serviced with limited recourse consisted
of the following:
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 6,038.6 $ 6,662.3
Auto finance(1) 395.9 -
MasterCard/Visa 6,775.7 5,043.5
Private label 1,025.0 517.0
Other unsecured 3,807.8 2,611.4
- --------------------------------------------------------------------------------
Total $18,043.0 $14,834.2
================================================================================
</TABLE>
(1) Auto finance receivables were previously securitized by ACC before its
acquisition in October 1997.
34
<PAGE> 35
At December 31, 1997, the expected weighted average remaining life of these
securitization transactions was 2.3 years.
The combination of receivables owned and receivables serviced with limited
recourse, which the company considers its managed portfolio, is shown below:
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Home equity $18,844.7 $15,063.5
Auto finance(1) 872.4 -
MasterCard/Visa 11,828.1 12,143.2
Private label 9,064.2 8,989.5
Other unsecured 8,879.1 8,113.2
Commercial 937.8 992.1
- ---------------------------------------------------------------------------------------------
Managed receivables $50,426.3 $45,301.5
=============================================================================================
</TABLE>
(1) Prior to the fourth quarter of 1997, auto finance receivables were not
significant and were included in other unsecured receivables.
At December 31, 1997 and 1996, the amounts due and deferred from receivables
sales of $1,838.6 and $1,521.9 million, respectively, included unamortized
securitization assets and funds established pursuant to the recourse provisions
for certain sales totaling $1,583.1 and $1,166.0 million, respectively. The
amounts due and deferred also included customer payments not yet remitted by the
securitization trustee to the company of $209.6 and $140.5 million at December
31, 1997 and 1996, respectively. The company made guarantees relating to certain
securitizations of $90.2 million plus unpaid interest at December 31, 1996. The
company made no such guarantees at December 31, 1997. The company has
subordinated interests in certain transactions, which were recorded as
receivables, of $888.7 and $388.5 million at December 31, 1997 and 1996,
respectively. The company has agreements with a "AAA"-rated third party who will
indemnify the company for up to $21.2 million in losses related to certain
securitization transactions. The company maintains credit loss reserves pursuant
to the recourse provisions for receivables serviced with limited recourse which
are based on estimated probable losses under such provisions. These reserves
totaled $707.8 and $576.2 million at December 31, 1997 and 1996, respectively,
and represent the company's best estimate of probable losses on receivables
serviced with limited recourse.
The providers of the credit enhancements have no recourse to the company. The
company maintains facilities with third parties which provide for the
securitization of receivables on a revolving basis totaling $6.6 billion through
the issuance of commercial paper. At December 31, 1997, these facilities were
fully utilized, of which HFC had securitized $5.6 billion. The amount available
under these facilities will vary based on the timing and volume of public
securitization transactions.
Contractual maturities of owned receivables were as follows:
<TABLE>
<CAPTION>
In millions There-
At December 31, 1997 1998 1999 2000 2001 2002 after Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Home equity $2,959.5 $2,100.0 $1,700.0 $1,481.9 $1,282.9 $3,281.8 $12,806.1
Auto finance 78.0 92.1 104.1 107.5 82.2 12.6 476.5
MasterCard/Visa 758.3 437.4 365.1 331.3 306.7 2,853.6 5,052.4
Private label 2,630.6 780.1 605.8 474.0 441.2 3,107.5 8,039.2
Other unsecured 2,052.6 1,430.9 792.2 284.3 230.5 280.8 5,071.3
Commercial 202.4 101.4 55.4 68.1 44.7 465.8 937.8
============================================================================================
Total $8,681.4 $4,941.9 $3,622.6 $2,747.1 $2,388.2 $10,002.1 $32,383.3
============================================================================================
</TABLE>
35
<PAGE> 36
A substantial portion of consumer receivables, based on the company's
experience, will be renewed or repaid prior to contractual maturity. The above
maturity schedule should not be regarded as a forecast of future cash
collections. The ratio of annual cash collections of principal to average
principal balances, excluding MasterCard and Visa receivables, approximated 63
and 54 percent in 1997 and 1996, respectively.
The following table summarizes contractual maturities of owned receivables due
after one year by repricing characteristic:
<TABLE>
<CAPTION>
Over 1
In millions. But Within Over
At December 31, 1997 5 years 5 years
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Receivables at predetermined interest rates $ 8,540.1 $4,872.5
Receivables at floating or adjustable rates 6,956.4 3,868.4
- ----------------------------------------------------------------------------------------------
Total $15,496.5 $8,740.9
==============================================================================================
</TABLE>
Nonaccrual owned consumer receivables totaled $701.9 and $471.8 million at
December 31, 1997 and 1996, respectively, including $79.4 and $70.8 million,
respectively, relating to foreign operations. Interest income that would have
been recorded in 1997 and 1996 if such nonaccrual receivables had been current
and in accordance with contractual terms was approximately $105.9 and $73.4
million, respectively, including $13.6 and $12.2 million, respectively,
relating to foreign operations. Interest income that was included in net income
for 1997 and 1996, prior to these loans being placed on nonaccrual status, was
approximately $59.3 and $39.8 million, respectively, including $6.4 and $5.6
million, respectively, relating to foreign operations.
The following table sets forth the activity in the company's credit loss
reserves for the periods indicated:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Credit loss reserves for owned receivables at January 1 $1,169.7 $937.9 $745.3
Provision for credit losses-owned receivables 1,286.4 921.6 791.2
Owned receivables charged off (1,233.4) (891.7) (802.5)
Recoveries on owned receivables 141.5 121.1 119.8
Portfolio acquisitions, net 53.3 80.8 84.1
- -----------------------------------------------------------------------------------------
Total credit loss reserves for owned receivables
at December 31 1,417.5 1,169.7 937.9
- -----------------------------------------------------------------------------------------
Credit loss reserves for receivables serviced with limited
recourse at January 1 576.2 342.2 186.8
Provision for credit losses-receivables serviced
with limited recourse 738.9 575.8 326.1
Receivables charged off (695.4) (357.1) (182.0)
Recoveries 43.7 17.1 8.5
Other, net 44.4 (1.8) 2.8
- -----------------------------------------------------------------------------------------
Total credit loss reserves for receivables serviced
with limited recourse at December 31 707.8 576.2 342.2
- -----------------------------------------------------------------------------------------
Total credit loss reserves for managed receivables
at December 31 $2,125.3 $1,745.9 $1,280.1
=========================================================================================
</TABLE>
36
<PAGE> 37
- --------------------------------------------------------------------------------
6. DEPOSITS
<TABLE>
<CAPTION>
1997 1996
------------------- -----------------
WEIGHTED Weighted
All dollar amounts are stated in millions. AVERAGE Average
At December 31 AMOUNT RATE Amount Rate
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOMESTIC
Time certificates $ 98.9 5.1% $125.1 5.2%
Savings accounts 45.7 3.1 47.7 3.4
Demand accounts 59.8 - 57.8 -
- --------------------------------------------------------------------------------------
Total domestic deposits 204.4 3.3 230.6 3.6
- --------------------------------------------------------------------------------------
FOREIGN
Time certificates 306.2 5.4 349.8 5.5
Savings accounts 27.7 2.9 39.2 3.1
Demand accounts 17.0 2.9 15.4 2.6
- --------------------------------------------------------------------------------------
Total foreign deposits 350.9 5.1 404.4 5.1
- --------------------------------------------------------------------------------------
Total deposits $555.3 4.4% $635.0 4.6%
======================================================================================
</TABLE>
Average deposits and related weighted average interest rates for 1997, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ -----------------
All dollar amounts are WEIGHTED Weighted Weighted
stated in millions. AVERAGE AVERAGE Average Average Average Average
At December 31 DEPOSITS RATE Deposits Rate Deposits Rate
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC
Time certificates $ 70.9 5.2% $ 89.0 5.6% $92.0 5.7%
Savings and demand accounts 147.3 1.0 150.9 1.0 137.8 1.1
- ---------------------------------------------------------------------------------------
Total domestic deposits 218.2 2.3 239.9 2.7 229.8 2.9
- ---------------------------------------------------------------------------------------
FOREIGN
Time certificates 331.7 5.3 337.5 5.9 340.5 6.5
Savings and demand accounts 45.3 3.5 52.7 3.5 45.0 3.9
- ---------------------------------------------------------------------------------------
Total foreign deposits 377.0 5.1 390.2 5.6 385.5 6.2
- ---------------------------------------------------------------------------------------
Total deposits $595.2 4.1% $630.1 4.5% $615.3 5.0%
=======================================================================================
</TABLE>
Interest expense on deposits was $26.8, $29.9 and $30.6 million for 1997, 1996
and 1995, respectively. Interest expense on domestic deposits was $7.8, $9.5 and
$9.4 million for 1997, 1996 and 1995, respectively.
Maturities of time certificates in amounts of $100,000 or more were:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31, 1997 Domestic Foreign Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
3 months or less $10.1 $36.5 $46.6
Over 3 months through 6 months 4.3 2.0 6.3
Over 6 months through 12 months 4.8 5.6 10.4
Over 12 months 8.6 - 8.6
- ---------------------------------------------------------------------------------------
Total $27.8 $44.1 $71.9
=======================================================================================
</TABLE>
Contractual maturities of time certificates within each interest rate range
were as follows:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions. There-
At December 31, 1997 1998 1999 2000 2001 2002 after Total
- ---------------------------------------------------------------------------------------
INTEREST RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
< 4.00% $107.9 - - - - - $107.9
4.00% - 5.99% 98.7 $17.0 $ 7.7 $5.4 $5.3 $ .6 134.7
6.00% - 7.99% 45.6 22.8 88.0 - 2.3 2.9 161.6
8.00% - 9.99% - .9 - - - - .9
- ---------------------------------------------------------------------------------------
Total $252.2 $40.7 $95.7 $5.4 $7.6 $3.5 $405.1
=======================================================================================
</TABLE>
37
<PAGE> 38
- --------------------------------------------------------------------------------
7. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS
<TABLE>
<CAPTION>
Bank and
All dollar amounts are stated in millions. Commercial Other
At December 31 Paper Borrowings Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Balance $8,349.0 $1,198.1 $9,547.1
Highest aggregate month-end balance 10,378.1
Average borrowings 8,480.8 748.1 9,228.9
Weighted average interest rate:
At year end 5.8% 7.1% 6.0%
Paid during year 5.7 6.2 5.7
- --------------------------------------------------------------------------------
1996
Balance $8,520.6 $872.2 $9,392.8
Highest aggregate month-end balance 10,378.0
Average borrowings 8,273.5 542.5 8,816.0
Weighted average interest rate:
At year end 5.5% 6.5% 5.6%
Paid during year 5.4 6.2 5.5
- --------------------------------------------------------------------------------
1995
Balance $7,548.6 $629.5 $8,178.1
Highest aggregate month-end balance 8,178.1
Average borrowings 7,155.1 581.9 7,737.0
Weighted average interest rate:
At year end 5.8% 6.6% 5.9%
Paid during year 6.0 6.9 6.1
- --------------------------------------------------------------------------------
</TABLE>
Interest expense for commercial paper, bank and other borrowings totaled
$514.1, $479.5 and $467.7 million for 1997, 1996 and 1995, respectively.
The company maintains various bank credit agreements primarily to support
commercial paper borrowings. At December 31, 1997 and 1996, the company had
committed back-up lines of $10.5 and $9.4 billion, respectively, $400 million
of which were available to the parent company. Of these amounts, $10.1 and $9.0
billion, respectively were unused. These lines included a $3 billion syndicated
revolving credit agreement. Formal credit lines are reviewed annually, and
expire at various dates from 1998 to 2004. Borrowings under these lines
generally are available at a surcharge over LIBOR. Annual commitment fee
requirements to support availability of these lines at December 31, 1997
totaled $9.0 million.
- --------------------------------------------------------------------------------
8. SENIOR AND SENIOR SUBORDINATED DEBT (WITH ORIGINAL MATURITIES OVER ONE
YEAR)
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
SENIOR DEBT
3.50% to 6.49%; due 1998 to 2009 $ 1,923.0 $ 2,359.8
6.50% to 6.99%; due 1998 to 2013 3,306.4 2,295.0
7.00% to 7.49%; due 1998 to 2023 1,664.3 1,340.8
7.50% to 7.99%; due 1998 to 2012 1,361.6 1,668.0
8.00% to 8.99%; due 1998 to 2005 1,736.1 1,770.3
9.00% and greater; due 1998 to 2013 1,061.0 1,460.9
Variable interest rate debt; 5.25% to 8.50%;
due 1998 to 2015 9,438.4 7,989.7
SENIOR SUBORDINATED DEBT
9.00% to 9.63%; due 2000 to 2001 400.0 400.0
10.25%; due 2003 20.0 -
Unamortized discount (1.6) (5.1)
- --------------------------------------------------------------------------------
Total senior and senior subordinated debt $20,909.2 $19,279.4
================================================================================
</TABLE>
38
<PAGE> 39
Weighted average coupon interest rates were 6.7 percent at December 31, 1997
and 1996. Interest expense for senior and senior subordinated debt was
$1,312.5, $1,209.6 and $1,125.5 million for 1997, 1996 and 1995, respectively.
The only financial covenants contained in the terms of the company's debt
agreements are the maintenance of minimum shareholder's equity of $1.5 billion,
and a $1 billion net worth test for an HFC subsidiary.
Maturities of senior and senior subordinated debt were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1997
- -----------------------------------
<S> <C>
1998 $4,175.1
1999 4,342.1
2000 2,695.9
2001 2,513.2
2002 2,133.0
Thereafter 5,049.9
- -----------------------------------
Total $20,909.2
===================================
</TABLE>
- --------------------------------------------------------------------------------
9. DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
In the normal course of business and in connection with its asset/liability
management program, the company enters into various transactions involving
derivative and other off-balance sheet financial instruments. These instruments
primarily are used to manage the company's exposure to fluctuations in interest
rates and foreign exchange rates. The company does not serve as a financial
intermediary to make markets in any derivative financial instruments. For
further information on the company's strategies for managing interest rate and
foreign exchange rate risk, see Risk Management on page 16.
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 1997, 1996 and
1995:
39
<PAGE> 40
<TABLE>
<CAPTION>
Exchange Traded
-----------------------------------------------------------
Interest Rate
Futures Contracts Options
--------------------------- -----------------------------
In millions. Purchased Sold Purchased Written
- -----------------------------------------------------------------------------------------------------------
HEDGING/SYNTHETIC ALTERATION INSTRUMENTS
<S> <C> <C> <C> <C>
1995
Notional amount, 1994 -- $ (93.0) -- --
New contracts $ 2,003.0 (1,850.0) $ 300.0 $ (300.0)
Matured or expired contracts -- 290.0 -- --
Terminated contracts -- -- -- --
In-substance maturities (1) (1,653.0) 1,653.0 (300.0) 300.0
- -----------------------------------------------------------------------------------------------------------
NOTIONAL AMOUNT, 1995 $ 350.0 -- -- --
===========================================================================================================
Fair value, 1995 (2) $ .1 -- -- --
- -----------------------------------------------------------------------------------------------------------
1996
Notional amount, 1995 $ 350.0 -- -- --
New contracts 6,611.9 $(4,202.9) $ 440.0 $ (440.0)
Matured or expired contracts (1,471.0) 50.0 -- --
Terminated contracts -- -- -- --
In-substance maturities (1) (4,152.9) 4,152.9 (440.0) 440.0
- -----------------------------------------------------------------------------------------------------------
NOTIONAL AMOUNT, 1996 $ 1,338.0 -- -- --
===========================================================================================================
Fair value, 1996 (2) -- -- -- --
- -----------------------------------------------------------------------------------------------------------
1997
Notional amount, 1996 $ 1,338.0 -- -- --
New contracts 8,584.0 $(7,350.0) -- --
Matured or expired contracts (2,020.0) 120.0 -- --
Terminated contracts -- -- -- --
In-substance maturities (1) (7,030.0) 7,030.0 -- --
- -----------------------------------------------------------------------------------------------------------
NOTIONAL AMOUNT, 1997 $ 872.0 $ (200.0) -- --
===========================================================================================================
Fair value, 1997 (2) -- -- -- --
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Non-Exchange Traded
-------------------------------------------------------------------------------------------
Foreign Exchange Interest Rate
Rate Contracts Forward Contracts Other Risk
Interest Currency ------------------- ----------------- Management
In millions. Rate Swaps Swaps Purchased Sold Purchased Instruments
- ------------------------------------------------------------------------------------------------------------------------------------
HEDGING/SYNTHETIC ALTERATION INSTRUMENTS
<S> <C> <C> <C> <C> <C> <C>
1995
Notional amount, 1994 $15,847.4 $ 457.3 $ 457.9 $ (617.7) $ 180.0 $ 100.0
New contracts 2,678.0 -- 1,952.1 (2,275.2) 27.0 --
Matured or expired contracts (5,845.6) (52.0) (1,245.3) 1,510.8 -- --
Terminated contracts (4,275.3) -- -- -- (180.0) --
In-substance maturities (1) -- -- (773.2) 913.3 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
NOTIONAL AMOUNT, 1995 $ 8,404.5 $ 405.3 391.5 (468.8) 27.0 $ 100.0
====================================================================================================================================
Fair value, 1995 (2) $ 113.0 $ 80.2 4.0 (2.9) -- $ .8
- ------------------------------------------------------------------------------------------------------------------------------------
1996
Notional amount, 1995 $ 8,404.5 $ 405.3 $ 391.5 $ (468.8) $ 27.0 $ 100.0
New contracts 4,418.5 900.3 649.7 (1,092.0) -- 1,250.0
Matured or expired contracts (2,715.5) (117.0) (875.2) 1,298.2 (27.0) --
Terminated contracts (1,215.0) -- -- -- -- --
In-substance maturities (1) -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
NOTIONAL AMOUNT, 1996 $ 8,892.5 $ 1,188.6 166.0 $ (262.6) -- $ 1,350.0
====================================================================================================================================
Fair value, 1996 (2) $ 33.7 $ (45.4) -- $ (19.7) -- $ 7.0
- ------------------------------------------------------------------------------------------------------------------------------------
1997
Notional amount, 1996 $ 8,892.5 $ 1,188.6 $ 166.0 $ (262.6) -- $ 1,350.0
New contracts 3,448.3 1,036.6 884.6 (944.0) -- --
Matured or expired contracts (2,777.9) (57.6) (642.9) 732.0 -- --
Terminated contracts (762.0) (102.4) -- -- -- --
In-substance maturities (1) -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
NOTIONAL AMOUNT, 1997 $ 8,800.9 $ 2,065.2 $ 407.7 $ (474.6) -- $ 1,350.0
====================================================================================================================================
Fair value, 1997 (2) $ 138.1 $ (69.5) $ 4.4 $ (12.5) -- $ .5
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represent contracts terminated as the market execution technique of
closing the transaction either (a) just prior to maturity to avoid
delivery of the underlying instrument, or (b) at the maturity of the
underlying items being hedged.
(2) (Bracketed) unbracketed amounts represent amounts to be (paid) received
by the company had these positions been closed out at the respective
balance sheet date. Bracketed amounts do not necessarily represent risk of
loss for hedging instruments, as the fair value of the hedging instrument
and the items being hedged must be evaluated together. See Note 9, "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.
The company operates in three functional currencies, the US dollar, the
British pound and the Canadian dollar. Of the above instruments the US dollar
is the functional currency for exchange traded interest rate futures and
options. The remaining instruments are restated in US dollars by country as
follows:
<TABLE>
<CAPTION>
Foreign Exchange Interest Rate
Forward Contracts Forward Contracts Other Risk
Interest Currency -------------------- ----------------- Management
In millions. Rate Swaps Swaps Purchased Sold Purchased Sold Instruments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995
United States $ 7,992.7 $ 297.3 $ 391.5 $ (468.8) -- -- $ 100.0
Canada 14.7 -- -- -- -- -- --
United Kingdom 397.1 108.0 -- -- $ 27.0 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
$ 8,404.5 $ 405.3 $ 391.5 $ (468.8) $ 27.0 -- $ 100.0
====================================================================================================================================
1996
United States $ 8,335.4 $ 1,080.6 $ 166.0 $ (262.6) -- -- $ 1,350.0
Canada -- -- -- -- -- -- --
United Kingdom 557.1 108.0 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
$ 8,892.5 $ 1,188.6 $ 166.0 $ (262.6) -- -- $ 1,350.0
====================================================================================================================================
1997
United States $ 8,115.4 $ 1,861.0 $ 407.7 $ (474.6) -- -- $ 1,350.0
Canada -- -- -- -- -- -- --
United Kingdom 685.5 204.2 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
$ 8,800.9 $ 2,065.2 $ 407.7 $ (474.6) -- -- $ 1,350.0
====================================================================================================================================
</TABLE>
40
<PAGE> 41
Interest rate swaps are contractual agreements between two counterparties for
the exchange of periodic interest payments generally based on a notional
principal amount and agreed-upon fixed or floating rates. The company primarily
enters into interest rate swap transactions to synthetically alter balance
sheet items. These transactions are specifically designated to a particular
asset/liability, off-balance sheet item or anticipated transaction of a similar
characteristic. Specific assets or liabilities may consist of groups of
individually small dollar homogeneous assets or liabilities of similar economic
characteristics. Credit and market risk exists with respect to these
instruments. The following table reflects the items so altered at December 31,
1997:
<TABLE>
<CAPTION>
In millions.
- -------------------------------------------------------------------------------
<S> <C>
Investment securities $ 70.7
Receivables:
Home equity 775.0
MasterCard/Visa 550.0
Other unsecured 19.3
- -------------------------------------------------------------------------------
Total owned receivables 1,344.3
Commercial paper, bank and
other borrowings 2,312.5
Senior and senior subordinated debt 5,040.0
Receivables serviced with limited recourse 33.4
Total items synthetically altered with interest rate swaps $8,800.9
===============================================================================
</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. Interest rate swaps also
are used to synthetically alter interest rate characteristics on certain
receivables that are sold and serviced with limited recourse. These off-balance
sheet items expose the company to the same interest rate risk as on-balance
sheet items. Interest rate swaps are used to synthetically alter the interest
rate provisions of the securitization transaction whereby the underlying
receivables pay a fixed (floating) rate and the pass-through rate to the
investor is floating (fixed). The company also has entered into currency swaps
to convert both principal and interest payments on debt issued from one
currency to the appropriate functional currency.
41
<PAGE> 42
The following table summarizes the maturities and related weighted average
receive/pay rates of interest rate swaps outstanding at December 31, 1997:
<TABLE>
<CAPTION>
All dollar amounts are
stated in millions. 1998 1999 2000 2001 2002 2003 Thereafter Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay a fixed rate/receive a
floating rate:
Notional value $ 704.4 $ 699.4 $ 343.0 173.4 181.7 - - $2,101.9
Weighted average receive
rate 6.15% 6.11% 6.66% 7.55 7.54 - - 6.46%
Weighted average pay
rate 6.42 6.83 6.98 7.35 7.07 - - 6.78
Pay a floating rate/receive
a fixed rate:
Notional value $ 526.4 $ 229.9 $ 150.0 $ 622.5 $ 177.4 $ 300.0 $ 1,887.8 $3,894.0
Weighted average receive
rate 7.09% 6.65% 6.59% 6.55% 6.58% 6.74% 6.93% 6.83%
Weighted average pay
rate 5.93 6.22 5.83 5.98 5.99 5.97 5.93 5.96
Pay a floating rate/receive
a different floating rate:
Notional value $ 955.0 $1,548.0 $ 237.0 55.0 $ 10.0 - - $2,805.0
Weighted average receive
rate 5.70% 6.02% 5.85% 6.05 6.50% - - 5.90%
Weighted average pay
rate 5.87 5.97 5.91 6.02 5.81 - - 5.93
- -------------------------------------------------------------------------------------------------------------------------
Total notional value $2,185.8 $2,477.3 $ 730.0 $ 850.9 $ 369.1 $ 300.0 $ 1,887.8 $8,800.9
=========================================================================================================================
Total weighted average
rates on swaps:
Receive rate 6.18% 6.11% 6.38% 6.73% 7.05% 6.74% 6.93% 6.45%
- -------------------------------------------------------------------------------------------------------------------------
Pay rate 6.06 6.23 6.40 6.26 6.52 5.97 5.93 6.14
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The floating rates paid or received by the company are based on spot rates from
independent market sources for the index contained in each interest rate swap
contract, which generally are based on either 1-, 3- or 6-month LIBOR. These
current floating rates are different than the floating rates in effect when the
contracts were initiated. Changes in spot rates impact the variable rate
information disclosed above. However, these changes in spot rates also impact
the interest rate on the underlying assets or liabilities. Hedging/synthetic
alteration instruments are used by the company to manage the volatility of net
interest margin resulting from changes in interest rates on the underlying
hedged/synthetically altered items. Owned net interest margin would have
declined by 13 and 19 basis points in 1997 and 1996, 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.
42
<PAGE> 43
Purchased options grant the purchaser the right, but not the obligation, to
either purchase or sell a financial instrument at a specified price within a
specified period. The seller of the option has written a contract which creates
an obligation to either sell or purchase the financial instrument at the
agreed-upon price if, and when, the purchaser exercises the option.
Other risk management instruments consist of caps and floors. Caps and floors
written expose the company to market risk but not to credit risk. Market risk
associated with caps and floors purchased is limited to the premium paid which
is recorded on the balance sheets in other assets.
Deferred gains of $37.8 and $43.6 million and deferred losses of $2.4 and $8.5
million from hedging/synthetic alteration instruments were recorded on the
balance sheets at December 31, 1997 and 1996, respectively. The weighted
average amortization period associated with the deferred gains was 5.4 and 6.8
years at December 31, 1997 and 1996, respectively. The weighted average
amortization period for the deferred losses was 1.6 and 1.5 years at December
31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, the accrued interest, unamortized premium and
other assets recorded for agreements which would be written off should all
related counterparties fail to meet the terms of their contracts was $54.7 and
$48.1 million, respectively.
CONCENTRATIONS OF CREDIT RISK A concentration of credit risk is defined as a
significant credit exposure with an individual or group engaged in similar
activities or affected similarly by economic conditions.
Because the company primarily lends to consumers, it does not have receivables
from any industry group that equal or exceed 10 percent of total managed
receivables at December 31, 1997 and 1996. The company lends nationwide, with
the following geographic areas comprising more than 10 percent of total managed
domestic receivables at December 31, 1997: California -21 percent; Midwest (IL,
IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI) -23 percent; Middle Atlantic (DE,
DC, MD, NJ, PA, VA, WV) -14 percent; Northeast (CT, ME, MA, NH, NY, RI, VT)
- -13 percent; and Southeast (AL, FL, GA, KY, MS, NC, SC, TN) -15 percent.
- -------------------------------------------------------------------------------
10. PREFERRED STOCK
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
7.25% term cumulative preferred, Series 1992-A,
1,000,000 depositary shares - $100.0
- -------------------------------------------------------------------------------
</TABLE>
On August 15, 1997, the company redeemed, at par, all outstanding shares of its
7.25 percent term cumulative preferred Series 1992-A, for $100 per depositary
share plus accrued and unpaid dividends.
43
<PAGE> 44
- --------------------------------------------------------------------------------
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The company has estimated the fair value of its financial instruments in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments" ("FAS No. 107"). Fair
value estimates, methods and assumptions set forth below for the company's
financial instruments are made solely to comply with the requirements of FAS
No. 107 and should be read in conjunction with the financial statements and
notes in this Annual Report.
For a significant portion of the company's financial instruments, fair values
for items lacking a quoted market price were estimated by discounting estimated
future cash flows at estimated current market discount rates. Assumptions used
to estimate future cash flows are consistent with management's assessments
regarding ultimate collectibility of assets and related interest and with
estimates of product lives and repricing characteristics used in the company's
asset/liability management process. All assumptions are based on historical
experience adjusted for future expectations. Assumptions used to determine fair
values for financial instruments for which no active market exists are
inherently judgmental, and changes in these assumptions could significantly
affect fair value calculations.
As required under generally accepted accounting principles, a number of other
assets recorded on the balance sheets (such as acquired credit card
relationships) and other intangible assets not recorded on the balance sheets
(such as the value of consumer lending relationships for originated receivables
and the franchise values of the company's business units) are not considered
financial instruments and, accordingly, are not valued for purposes of this
disclosure. The company believes there is substantial value associated with
these assets based on current market conditions and historical experience.
Accordingly, the estimated fair value of financial instruments, as disclosed,
does not fully represent the entire value, nor the changes in the entire value,
of the company.
44
<PAGE> 45
The following is a summary of the carrying value and estimated fair value of
the company's financial instruments:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- --------------------------------
ESTIMATED Estimated
In millions. CARRYING FAIR Carrying Fair
At December 31 VALUE VALUE DIFFERENCE Value Value Difference
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash $545 $545 - $508 $508 -
Investment securities 2,337 2,337 - 2,281 2,281
Receivables 32,377 33,662 $1,285 30,532 31,973 $1,441
Advances to parent company
and affiliates 11 11 - - - -
- ------------------------------------------------------------------------------------------------
Subtotal 35,270 36,555 1,285 33,321 34,762 1,441
- ------------------------------------------------------------------------------------------------
Deposits (555) (555) - (635) (635) -
Commercial paper, bank and
other borrowings (9,547) (9,547) - (9,393) (9,393) -
Senior and senior subordinated
debt (20,909) (21,235) (326) (19,279) (19,587) (308)
Insurance reserves (2,194) (2,423) (229) (2,289) (2,505) (216)
Borrowings from parent company
and affiliates - - - (8) (8) -
- ------------------------------------------------------------------------------------------------
Subtotal (33,205) (33,760) (555) (31,604) (32,128) (524)
- ------------------------------------------------------------------------------------------------
Interest rate and foreign
exchange contracts 37 62 25 34 (24) (58)
Commitments to extend credit
and guarantees - 50 50 - 40 40
- ------------------------------------------------------------------------------------------------
Subtotal 37 112 75 34 16 (18)
- ------------------------------------------------------------------------------------------------
Total $2,102 $2,907 $805 $1,751 $2,650 $899
================================================================================================
</TABLE>
The following methods and assumptions were used to estimate the fair value of
the company's financial instruments:
Cash: The carrying value approximates fair value for this instrument due to
its liquid nature.
Investment securities: Investment securities are classified as
available-for-sale and are carried at fair value on the balance sheets.
Receivables: The fair value of adjustable rate consumer receivables was
determined to approximate existing carrying value because interest rates on
these receivables adjust with changing market interest rates. The fair value of
fixed rate consumer receivables was estimated by discounting future expected
cash flows at interest rates approximating those offered by the company on such
products at the respective valuation dates. This approach to estimating fair
value for fixed rate receivables results in a disclosed fair value that is less
than amounts the company believes could be currently realizable on a sale of
these receivables. These receivables are relatively insensitive to changes in
overall market interest rates and, therefore, have additional value compared to
alternative uses of funds. The fair value of commercial receivables was
determined by discounting estimated future cash flows at estimated market
interest rates.
The fair value of consumer receivables also included an estimate, on a present
value basis, of cash flows associated with securitizations of certain home
equity, auto finance, MasterCard and Visa, private label and other unsecured
receivables.
Advances to parent company and affiliates: The carrying value approximates
fair value for this instrument due to its short-term nature.
45
<PAGE> 46
Commercial paper, bank and other borrowings: The fair value of these
instruments was determined to approximate existing carrying value because
interest rates on these instruments adjust with changes in market interest
rates due to their short-term maturity or repricing characteristics.
Senior and senior subordinated debt: The estimated fair value of these
instruments was computed by discounting future expected cash flows at interest
rates offered for similar types of debt instruments.
Insurance reserves: The fair value of insurance reserves for periodic payment
annuities was estimated by discounting future expected cash flows at estimated
market interest rates at December 31, 1997 and 1996. The fair value of other
insurance reserves is not required to be determined in accordance with FAS No.
107.
Borrowings from parent company and affiliates: The fair value of this
instrument was determined to approximate existing carrying value due to its
short-term nature.
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 7, "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.
- --------------------------------------------------------------------------------
12. LEASES
The company leases certain offices, buildings and equipment for periods of up
to 47 years with various renewal options. The office space leases generally
require the company to pay certain operating expenses. The majority of the
company's leases are noncancelable operating leases. Net rental expense under
operating leases was $124.4, $109.4 and $104.3 million for 1997, 1996 and 1995,
respectively.
Future net minimum lease commitments under noncancelable operating lease
arrangements were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1997
- --------------------------------------------------------------------------------
<S> <C>
1998 $ 115.9
1999 95.4
2000 75.6
2001 59.8
2002 51.3
Thereafter 332.6
- --------------------------------------------------------------------------------
Net minimum lease commitments $ 730.6
================================================================================
</TABLE>
46
<PAGE> 47
- --------------------------------------------------------------------------------
13. EMPLOYEE BENEFIT PLANS
Household International is now in the process of reviewing its pension and
postretirement benefit plans with a view to providing uniform benefits.
Completion and approval is expected sometime in 1999.
The company and certain U.S. subsidiaries participate in Household
International's Retirement Income Plan ("RIP"). In addition, HFC's wholly owned
subsidiary, Beneficial, currently has its own defined benefit pension plan
("Beneficial Plan"). The plans cover substantially all U.S. full-time employees.
No separate actuarial valuation has been made for the company's participation
in RIP. At December 31, 1997, Household International's plan assets included an
investment in 1,258,807 shares of its common stock with a fair value of $160.7
million. Dividends declared by Household International on theses shares in 1997
totaled approximately $2 million. The fair value of plan assets in RIP exceeded
Household International's projected benefit obligation by $313.9 and $284.2
million at December 31, 1997 and 1996, respectively. The 1997 and 1996
projected benefit obligations for RIP were determined using an assumed weighted
average discount rate of 7.50 percent and an assumed compensation increase of
4.00 percent. The assumed weighted average long-term rate of return on plan
assets was 10.00 percent in 1997, 1996 and 1995. At December 31, 1997 and 1996,
the company's estimated share of prepaid pension cost was $137.2 and $130.0
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 $9.0, $8.6 and $8.2 million for 1997, 1996 and 1995, respectively.
A separate actuarial valuation has been made for the Beneficial plan. The
benefits under the Beneficial plan are based primarily on years of service. The
Beneficial Plan's funded status and amounts recognized in the Company's balance
sheet are as follows:
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 51.5 $ 45.4
Nonvested benefits 12.5 15.0
- --------------------------------------------------------------------------------
Accumulated benefit obligation 64.0 60.4
Effects of future salary increases 48.8 43.5
- --------------------------------------------------------------------------------
Projected benefit obligation 112.8 103.9
Less plan assets at fair value 78.9 65.0
- --------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets 33.9 38.9
Less unrecognized net loss 17.1 20.5
- --------------------------------------------------------------------------------
Accrued pension cost included in accounts payable
and accrued liabilities $ 16.8 $ 18.4
================================================================================
</TABLE>
The 1997 and 1996 projected benefit obligations were determined using an assumed
discount rate of 7.0% (compared with 7.5% in 1996), an assumed long-term rate of
return on assets of 9.0%, and an assumed long-term rate of increase in future
compensation levels of 4.5%.
47
<PAGE> 48
The following table details the components of net pension expense for the
Beneficial Plan:
<TABLE>
<CAPTION>
In millions
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 5.5 $ 5.4 $ 4.4
Interest cost on projected benefit obligation 7.3 7.6 7.6
Actual return on plan assets (13.3) (7.1) (12.3)
Net amortization and deferral 7.9 1.6 7.1
- --------------------------------------------------------------------------------
Net periodic pension cost $ 7.4 $ 7.5 $ 6.8
================================================================================
</TABLE>
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 1997, 1996 and 1995 the
company's costs totaled $13.9, $7.1 and $6.4 million, respectively.
The company also participates in the existing Beneficial defined contribution
plan, which provides for annual employer contributions up to 2.5% of each
eligible employee's compensation. For 1997, 1996 and 1995 total expenses for
this plan was $5.4, $4.8 and $4.6 million, respectively.
The company also participates in Household International's and Beneficial'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. The Plans have 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 over a
period of 20 years. The transition obligation represents the unfunded and
unrecognized accumulated postretirement benefit obligation.
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 $111.7 and $104.9 million at December 31, 1997 and 1996,
respectively. The company's estimated share of Household International's
accrued postretirement benefit obligation was $51.3 and $42.5 million at
December 31, 1997 and 1996, respectively. In addition, the company's estimated
share of postretirement benefit expense recognized in 1997, 1996 and 1995 was
$12.1, $11.7 and $14.0 million, respectively.
Household International's accumulated postretirement benefit obligation at
December 31, 1997 and 1996 was determined using an assumed weighted average
discount rate of 7.50 percent and an assumed annual compensation increase of
4.0 percent. A 10.0 and 11.0 percent annual rate of increase in the gross cost
of covered health care benefits was assumed for 1998 and 1997, respectively.
This rate of increase is assumed to decline by 1 percent in each year after
1998.
48
<PAGE> 49
Separate actuarial valuations have been made for the Beneficial plans for post
retirement, medical, dental and life benefits. The company recognizes the
expected postretirement costs on an accrual basis, similar to pension
accounting, over the employees' years of service with the company. Under the
plans, the transition obligation was recognized up front at the time Statement
of Financial Accounting Standards No. 106 was adopted.
The net postretirement benefit cost of the Beneficial Plans included the
following:
<TABLE>
<CAPTION>
In millions.
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Postretirement benefit costs:
Service cost-benefits attributable to
service during the year $2.0 $2.0 $1.5
Interest cost on accumulated
benefit obligation 4.2 4.1 4.2
Amortization of deferred gain (.8) (.3) (.8)
- --------------------------------------------------------------------------------
Total $5.4 $5.8 $4.9
================================================================================
</TABLE>
The actuarial and recorded liabilities for the Beneficial postretirement benefit
plans were as follows:
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 45.1 $ 38.8
Fully eligible active participants 12.4 10.3
Other active plan participants 14.7 12.0
- --------------------------------------------------------------------------------
Total $ 72.2 $ 61.1
================================================================================
</TABLE>
For measurement purposes, a 10.2% pre-65 trend rate was used for 1997 and 1996,
with an ultimate rate of 5.0% in 2013. An 11% pre-65 trend rate was used in
1995, with an ultimate rate of 5% in 2012. In addition, a 9.7% post-64 trend
rate was used for 1997 and 1996, with an ultimate rate of 5.0% in 2018. A 10%
post-64 trend rate was used for 1995, with an ultimate rate of 5.0% in 2017.
The discount rate was 7.0% at December 31, 1997, 7.50% at December 31, 1996 and
7.25% at December 31, 1995.
The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rate by
1 percent would have increased the company's 1997 and 1996 net periodic
postretirement benefit cost including its share under the Household
International plans by $1.1 and $1.5 million, respectively, and the accumulated
postretirement benefit obligation at December 31, 1997 and 1996 by $9.8 and
$12.2 million, respectively. A 1 percentage point increase would have increased
Household International's accumulated postretirement benefit obligation at
December 31, 1997 and 1996 by $6.1 and $7.5 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. Beneficial previously maintained an Employee Stock Purchase Plan
("BESPP") whereby participants could elect to purchase stock subject to certain
limitations, which were eligible to be matched by Beneficial up to certain
levels. The matching contributions vested over a 3 year period. This plan has
been terminated effective with the merger of Household and Beneficial.
49
<PAGE> 50
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. Under the BESPP, compensation costs on matching contributions have
been recognized.
- -------------------------------------------------------------------------------
14. INCOME TAXES
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes related to
operations $391.9 $358.1 $295.3
Income taxes related to adjustments
included in common shareholder's equity:
Unrealized gain (loss) on
investments, net 10.0 (62.9) 106.7
Foreign currency translation adjustments 8.1 (5.2) (3.9)
- -------------------------------------------------------------------------------
Total $410.0 $290.0 $398.1
===============================================================================
</TABLE>
Provisions for income taxes related to operations were:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT
United States $354.9 $438.8 $284.1
Foreign 19.2 17.4 19.4
- -------------------------------------------------------------------------------
Total current 374.1 456.2 303.5
- -------------------------------------------------------------------------------
DEFERRED
United States 18.0 (98.4) (7.4)
Foreign (.2) .3 (.8)
- -------------------------------------------------------------------------------
Total deferred 17.8 (98.1) (8.2)
- -------------------------------------------------------------------------------
Total income taxes $391.9 $358.1 $295.3
===============================================================================
</TABLE>
The significant components of deferred income tax provisions attributable to
income from operations were:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred income tax provision $ 17.1 $(84.7) $ 4.3
Adjustment of valuation allowance (4.7) (8.1) (12.5)
Operating loss carryforwards 5.4 (5.3) -
- -------------------------------------------------------------------------------
Deferred income tax provision $ 17.8 $(98.1) $ (8.2)
===============================================================================
</TABLE>
Income before income taxes from foreign operations was $(15.4), $58.5 and $30.6
million in 1997, 1996 and 1995, respectively.
50
<PAGE> 51
Effective tax rates are analyzed as follows:
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit 2.8 2.3 2.7
Capital losses - Germany (2.5) - -
Leveraged lease tax benefits (2.4) (1.4) (2.0)
Recapture of life insurance policyholders'
surplus account balance - - 4.1
Other .9 (.4) 1.9
- -------------------------------------------------------------------------------
Effective tax rate 33.8% 35.5% 41.7%
===============================================================================
</TABLE>
Provision for U.S. income taxes had not been made at December 31, 1997 and 1996
on $19.0 and $35.1 million, respectively, of undistributed earnings of foreign
subsidiaries. If this amount was distributed, the additional income tax payable
would be approximately $1.0 and $1.7 million, respectively. In addition,
provision for U.S. income taxes had not been made at December 31, 1997 and 1996
on $77.8 million of undistributed earnings of life insurance subsidiaries
accumulated as policyholders' surplus under tax laws in effect prior to 1984.
If this amount was distributed, the additional income tax payable would be
approximately $27.2 million.
Temporary differences which gave rise to a significant portion of deferred tax
assets and liabilities were as follows:
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Receivables sold $ 408.3 $ 240.0
Leveraged lease transactions, net 312.7 383.3
Pension plan assets 54.7 51.9
Other 259.2 175.0
- -------------------------------------------------------------------------------
Total deferred tax liabilities 1,034.9 850.2
===============================================================================
DEFERRED TAX ASSETS
Credit loss reserves 799.6 636.9
Other 320.0 311.9
- -------------------------------------------------------------------------------
Total deferred tax assets 1,119.6 948.8
- -------------------------------------------------------------------------------
VALUATION ALLOWANCE (3.3) (8.0)
- -------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS NET OF VALUATION ALLOWANCE 1,116.3 940.8
NET DEFERRED TAX ASSETS AT END OF YEAR $ 81.4 $ 90.6
===============================================================================
</TABLE>
- -------------------------------------------------------------------------------
15. 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>
In millions.
At December 31 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Parent company and other subsidiaries $ 76.2 $ 73.9
Household Bank, f.s.b. (70.5) (79.8)
Household Global Funding, Inc. 4.8 (1.7)
- -------------------------------------------------------------------------------
Advances to (from) parent company and affiliates $ 10.5 $ (7.6)
===============================================================================
</TABLE>
51
<PAGE> 52
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>
In millions.
Year ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Parent company and other subsidiaries $20.8 $13.3 $26.6
Household Bank, f.s.b. .1 (3.6) (10.9)
- -------------------------------------------------------------------------------
Net interest income on advances to (from) parent company
and affiliates $20.9 $ 9.7 $15.7
===============================================================================
</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 $450 million to fund
their credit card operations. The outstanding balance at December 31, 1997 and
1996 was $250 and $15 million, respectively, and was included in commercial
paper, bank and other borrowings for financial statement purposes. Interest
expense on these borrowings totaled $5.8, $3.9 and $13.9 million during 1997,
1996 and 1995, respectively.
Under the GM Card program, Household International designates the issuer of the
GM Card under a written contractual arrangement. From June 1994 to May 1997,
Household International designated the company's wholly-owned bank subsidiary
as the issuer of the new GM Card accounts for customers who previously did not
have an account with the previous designated issuer. In effect, Household
International licensed to the bank subsidiary, the GM Card account
relationships and GM's obligation to administer its rebate program in an
arrangement similar to an operating lease. Under this arrangement, the bank
subsidiary pays a licensing fee to Household International for each open
account for the privilege of maintaining the account relationship. Fees paid to
Household International under this arrangement were $27.6, $27.2 and $19.1
million in 1997, 1996 and 1995, respectively, and are recorded in other
operating expenses on the consolidated statements of income.
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 1997 and 1996.
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 $47.8, $50.9 and $89.0 million during 1997, 1996 and 1995,
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 $58, $55 and $56
million in 1997, 1996 and 1995, respectively.
52
<PAGE> 53
- -------------------------------------------------------------------------------
16. COMMITMENTS AND CONTINGENT LIABILITIES
In 1992, the Internal Revenue Service ("IRS") completed its examination of
Beneficial's federal income tax returns for 1984 through 1987. The IRS proposed
$142.0 million in adjustments that relate principally to activities of a former
subsidiary, American Centennial Insurance Company ("ACIC"), prior to its sale
in 1987.
In order to limit the further accrual of interest on the proposed adjustments,
Beneficial paid $105.5 million of tax and interest during the third quarter of
1992.
The issues were not resolved during the administrative appeals process, and the
IRS issued a statutory Notice of Deficiency asserting the unresolved
adjustments and increased the disallowance to $195.0 million in the third
quarter of 1996.
Beneficial has initiated litigation in the United States Tax Court to oppose
the disallowance. While the conclusion of this matter in its entirety cannot be
predicted with certainty, management does not anticipate the ultimate
resolution to differ materially from amounts accrued.
The company and subsidiaries are involved in various other legal proceedings in
the normal course of business. Management believes the aggregate liabilities,
if any, resulting from such actions would not have a material adverse effect on
the consolidated financial position of the company. However, as the ultimate
resolution of these proceedings is influenced by factors that are outside of
the company's control, it is reasonably possible the company's estimated
liability under these proceedings may change. See Note 12 for discussion of
lease commitments.
- -------------------------------------------------------------------------------
17. GEOGRAPHIC DATA
The following is a summary of assets, revenues and operating profit of the
company by country:
<TABLE>
<CAPTION>
Identifiable Assets Revenues Operating Profit
----------------------------- ---------------------------- --------------------------
In millions. 1997 1996 1995 1997 1996 1995 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $37,064.0 $34,840.7 $31,258.9 $6,405.0 $5,607.5 $5,123.2 $1,175.6 $ 973.5 $688.9
United Kingdom 2,137.1 1,432.0 1,077.5 259.5 205.7 194.2 23.1 16.5 25.7
Canada 789.8 706.4 676.1 137.7 130.8 122.7 21.2 23.6 20.3
Germany 401.0 413.7 455.1 31.2 55.2 67.4 (65.5) (2.0) (26.2)
Ireland 69.0 37.6 10.5 33.8 17.9 4.7 4.6 (3.5) (1.1)
- ----------------------------------------------------------------------------------------------------------
Total $40,460.9 $37,430.4 $33,478.1 $6,867.2 $6,017.1 $5,512.2 $1,159.0 $1,008.1 $707.6
==========================================================================================================
</TABLE>
53
<PAGE> 1
EXHIBIT 99.2
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
Index to Supplemental Quarterly Financial Information
<TABLE>
<CAPTION>
Page
----
<S> <C>
Supplemental Interim Condensed Consolidated Financial Statements
Supplemental Condensed Consolidated Statements of Income
(Unaudited) - Three Months
Ended March 31, 1998 and 1997 ........................................ 2
Supplemental Condensed Consolidated Balance Sheets -
March 31, 1998 (Unaudited) and December 31, 1997 ..................... 3
Supplemental Condensed Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended
March 31, 1998 and 1997 .............................................. 4
Supplemental Financial Highlights .................................... 5
Notes to Supplemental Interim Condensed Consolidated Financial
Statements (Unaudited) ............................................... 6
</TABLE>
1
<PAGE> 2
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
SUPPLEMENTAL FINANCIAL STATEMENTS
Household Finance Corporation and Subsidiaries
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
In millions.
- ---------------------------------------------------------------------------------------
Three months ended March 31 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Finance income $1,136.2 $1,037.0
Other interest income 8.7 7.9
Interest expense 500.2 447.9
------- -------
Net interest margin 644.7 597.0
Provision for credit losses on owned receivables 348.6 326.6
------- -------
Net interest margin after provision for credit losses 296.1 270.4
------- -------
Securitization income 323.3 264.3
Insurance revenues 91.4 87.8
Investment income 37.2 37.3
Fee income 129.8 98.7
Gain on Canadian disposal 189.4 -
Other income 86.5 166.2
------- -------
Total other revenues 857.6 654.3
------- -------
Salaries and fringe benefits 234.5 212.7
Other operating expenses 300.0 313.0
Amortization of acquired intangibles and goodwill 41.2 33.1
Policyholders' benefits 57.5 64.9
------- -------
Total costs and expenses 633.2 623.7
------- -------
Income before income taxes 520.5 301.0
Income taxes 196.0 111.2
------- -------
Net income $ 324.5 $ 189.8
======= =======
</TABLE>
See notes to supplemental interim condensed consolidated financial statements.
2
<PAGE> 3
Household Finance Corporation and Subsidiaries
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------
<TABLE>
<CAPTION>
In millions, except share data.
- ---------------------------------------------------------------------------------------
March 31, December 31,
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Unaudited)
- ------
Cash $ 593.9 $ 545.3
Investment securities 2,307.4 2,336.8
Receivables, net 34,047.9 32,376.6
Advances to parent company and affiliates 67.5 10.5
Acquired intangibles and goodwill, net 1,928.0 1,777.9
Properties and equipment, net 437.4 464.8
Real estate owned 188.1 187.8
Other assets 2,322.5 1,973.3
-------- --------
Total assets $41,892.7 $39,673.0
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Debt:
Deposits $ 509.7 $ 555.3
Commercial paper, bank and other borrowings 9,902.0 9,547.1
Senior and senior subordinated debt (with
original maturities over one year) 22,118.7 20,909.2
-------- --------
Total debt 32,530.4 31,011.6
Insurance policy and claim reserves 1,295.2 1,406.4
Other liabilities 1,721.1 1,451.3
-------- --------
Total liabilities 35,546.7 33,869.3
-------- --------
Common shareholder's equity:
Common stock, $1.00 par value, 1,000
shares authorized, issued and outstanding
at March 31, 1998 and December 31, 1997,
and additional paid-in capital 2,775.2 2,475.1
Retained earnings 3,593.8 3,376.9
Foreign currency translation adjustments (35.6) (56.5)
Unrealized gain on investments, net 12.6 8.2
-------- --------
Total common shareholder's equity 6,346.0 5,803.7
-------- --------
Total liabilities and shareholder's equity $41,892.7 $39,673.0
======== ========
</TABLE>
See notes to supplemental interim condensed consolidated financial statements.
3
<PAGE> 4
Household Finance Corporation and Subsidiaries
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
In millions.
- --------------------------------------------------------------------------------
Three months ended March 31 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income $ 324.5 $ 189.8
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 348.6 326.6
Insurance policy and claim reserves (100.6) 21.9
Depreciation and amortization 71.6 66.2
Net realized gains from sales of assets - (50.6)
Other, net 47.2 193.4
--------- ---------
Cash provided by operations 691.3 747.3
--------- ---------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (364.9) (487.2)
Matured 66.4 70.1
Sold 209.6 278.7
Short-term investment securities, net change 128.6 159.1
Receivables:
Originations, net (3,930.0) (2,955.0)
Purchases and related premiums (2,225.1) (354.7)
Sold 3,957.8 3,564.6
Properties and equipment purchased (9.2) (10.3)
Properties and equipment sold 20.1 .9
Advances to parent company and affiliates, net (57.0) (349.3)
--------- ---------
Cash increase (decrease) from investments in
operations (2,203.7) (83.1)
--------- ---------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change 300.0 (778.5)
Senior and senior subordinated debt issued 3,140.5 1,854.1
Senior and senior subordinated debt retired (1,956.1) (1,623.7)
Policyholders' benefits paid (26.8) (37.7)
Cash received from policyholders 22.0 57.7
Dividends on preferred stock - (1.8)
Dividends paid to parent company (75.0) (75.0)
Dividends paid - pooled affiliate (43.6) (44.9)
Capital contribution from parent company 200.0 -
--------- ---------
Cash increase (decrease) from financing and
capital transactions 1,561.0 (649.8)
--------- ---------
Increase in cash 48.6 14.4
Cash at January 1 545.3 508.1
--------- ---------
Cash at March 31 $ 593.9 $ 522.5
========= =========
Supplemental Cash Flow Information:
Interest paid $ 422.9 $ 339.6
--------- ---------
Income taxes received (56.4) (22.2)
--------- ---------
</TABLE>
See notes to supplemental interim condensed consolidated financial statements.
4
<PAGE> 5
Household Finance Corporation and Subsidiaries
SUPPLEMENTAL FINANCIAL HIGHLIGHTS
- ---------------------------------
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
- ------------------------------------------------------------------------------
Three months ended March 31 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 324.5 $ 189.8
-------- --------
Net interest margin and other revenues (1) 1,444.8 1,186.4
-------- --------
Return on average common shareholder's
equity (2) 21.9% 17.7%
-------- --------
Return on average owned assets (2) 3.16 2.05
-------- --------
</TABLE>
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
- ------------------------------------------------------------------------------
March 31, December 31,
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Total assets:
Owned $ 41,892.7 $ 39,673.0
Managed 59,191.6 57,716.0
--------- ---------
Receivables:
Owned $ 34,087.7 $ 32,383.3
Serviced with limited recourse 17,298.9 18,043.0
--------- ---------
Managed $ 51,386.6 $ 50,426.3
========= =========
Debt to total shareholder's equity 5.1:1 5.3:1
--------- ---------
</TABLE>
(1) Policyholders' benefits have been netted against other revenues.
(2) Annualized.
See notes to interim condensed consolidated financial statements.
5
<PAGE> 6
Household Finance Corporation and Subsidiaries
NOTES TO SUPPLEMENTAL 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.
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 months ended March 31, 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 these supplemental interim condensed consolidated financial statements 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. See Exhibit 99.1 of this Form 8-K.
2. INVESTMENT SECURITIES
- -------------------------
Investment securities consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
In millions. March 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities $ 128.4 $ 130.5 $ 129.0 $ 132.5
Corporate debt securities 1,541.0 1,556.8 1,575.4 1,594.0
U.S. government and federal
agency debt securities 364.2 364.6 382.7 370.0
Other 218.0 219.2 203.7 206.9
-------- -------- -------- --------
Subtotal 2,251.6 2,271.1 2,290.8 2,303.4
Accrued investment income 36.3 36.3 33.4 33.4
-------- -------- -------- --------
Total investment securities $2,287.9 $2,307.4 $2,324.2 $2,336.8
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
3. RECEIVABLES
- ---------------
Receivables consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
March 31, December 31,
In millions. 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Home equity $13,763.3 $12,806.1
Auto finance 654.4 476.5
MasterCard/Visa 5,821.3 5,052.4
Private label 6,608.3 8,039.2
Other unsecured 6,388.7 5,071.3
Commercial 851.7 937.8
--------- ---------
Total owned receivables 34,087.7 32,383.3
Accrued finance charges 408.5 400.1
Credit loss reserve for
owned receivables (1,510.0) (1,417.5)
Unearned credit insurance premiums
and claims reserves (125.9) (120.1)
Amounts due and deferred from
receivables sales 1,872.2 1,838.6
Reserve for receivables serviced with
limited recourse (684.6) (707.8)
--------- ---------
Total owned receivables, net 34,047.9 32,376.6
Receivables serviced with limited recourse 17,298.9 18,043.0
--------- ---------
Total managed receivables, net $51,346.8 $50,419.6
========= =========
</TABLE>
At December 31, 1997, net receivables relating to Beneficial's disposed
Canadian and German operations were $775.1 and $271.1 million, respectively.
The outstanding balance of receivables serviced with limited recourse consisted
of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
March 31, December 31,
In millions. 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 5,455.2 $ 6,038.6
Auto finance 348.0 395.9
MasterCard/Visa 6,633.0 6,775.7
Private label 986.1 1,025.0
Other unsecured 3,876.6 3,807.8
--------- ---------
Total $17,298.9 $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>
- ------------------------------------------------------------------------------
March 31, December 31,
In millions. 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Home equity $19,218.5 $18,844.7
Auto finance 1,002.4 872.4
MasterCard/Visa 12,454.3 11,828.1
Private label 7,594.4 9,064.2
Other unsecured 10,265.3 8,879.1
Commercial 851.7 937.8
--------- ---------
Total $51,386.6 $50,426.3
========= =========
</TABLE>
7
<PAGE> 8
The amounts due and deferred from receivables sales were $1,872.2 million at
March 31, 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 $1,608.3 million at March 31,
1998 and $1,583.1 million at December 31, 1997. It also included customer
payments not yet sent to us by the securitization trustee of $183.9 million at
March 31, 1998 and $209.6 million at December 31, 1997. In addition, we have
subordinated interests in certain transactions, which were recorded as
receivables, of $898.5 million at March 31, 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 $684.6 million at
March 31, 1998 and $707.8 million at December 31, 1997 and represents our best
estimate of probable losses on receivables serviced with limited recourse.
4. CREDIT LOSS RESERVES
- ------------------------
An analysis of credit loss reserves for the three months ended March 31 was as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
In millions. 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Credit loss reserves for owned receivables
at January 1 $1,417.5 $1,169.7
Provision for credit losses 348.6 326.6
Chargeoffs (351.1) (294.8)
Recoveries 30.5 29.6
Portfolio acquisitions, net 64.5 (12.5)
-------- --------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES
AT MARCH 31 1,510.0 1,218.6
-------- --------
Credit loss reserves for receivables serviced with
limited recourse at January 1 707.8 576.2
Provision for credit losses 179.6 156.6
Chargeoffs (216.2) (132.6)
Recoveries 13.5 6.2
Other, net (.1) 2.3
-------- --------
TOTAL CREDIT LOSS RESERVES FOR RECEIVABLES SERVICED
WITH LIMITED RECOURSE AT MARCH 31 684.6 608.7
-------- --------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES
AT MARCH 31 $2,194.6 $1,827.3
======== ========
</TABLE>
5. INCOME TAXES
- ----------------
The effective tax rate was 37.7 percent for the three months ended March 31,
1998 and 36.9 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) leveraged lease tax benefits, (b) dividends received
deduction applicable to term preferred stock, (c) capital losses from the sale
of German operations and (d) state and local income taxes.
8
<PAGE> 9
6. 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 $67.5 million at March 31, 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 $450.0 million at March 31, 1998 and $250.0 million at December 31, 1997.
Net interest income on affiliated balances was $1.8 million for the three months
ended March 31, 1998 and $6.1 million for the three months ended March 31, 1997.
7. COMPREHENSIVE INCOME
- --------------------------
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 was $349.8 million for the quarter ended March 31,
1998 and $158.3 million for the quarter ended March 31, 1997.
9
<PAGE> 1
EXHIBIT 99.3
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF BENEFICIAL CORPORATION:
We have audited the accompanying consolidated balance sheets of
Beneficial Corporation and Subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income and retained earnings and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, such consolidated financial statements present fairly,
in all material respects, the financial position of Beneficial Corporation and
Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
January 28, 1998
<PAGE> 2
BENEFICIAL CORPORATION AND SUBSIDIARIES
BALANCE SHEET
<TABLE>
<CAPTION>
Years Ended December 31
1997 1996
----------- -----------
(in millions)
<S> <C> <C>
ASSETS
Cash Equivalents............................. $ 253.9 $ 279.6
Finance Receivables (Note 5)................. 15,030.2 14,536.2
Allowance for Credit Losses (Note 6)...... (559.9) (498.2)
---------- ----------
Net Finance Receivables...................... 14,470.3 14,038.0
Investment Securities (Note 7)............... 866.2 686.1
Property and Equipment....................... 229.3 204.9
Other Assets (Note 8)........................ 1,825.4 1,722.6
---------- ----------
TOTAL ASSETS.............................. $ 17,645.1 $ 16,931.2
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-Term Debt (Note 10).................... $ 4,585.1 $ 4,169.3
Deposits Payable............................. 555.3 635.0
Long-Term Debt (Note 11)..................... 8,887.2 8,631.1
---------- ----------
Total Interest-Bearing Debt............... 14,027.6 13,435.4
Accounts Payable and Accrued
Liabilities (Note 9)...................... 708.0 534.0
Insurance Policy and Claim Reserves.......... 1,137.2 1,267.0
---------- ----------
Total Liabilities......................... $ 15,872.8 $ 15,236.4
========== ==========
Shareholders' Equity:
Preferred Stock (Note 12)................... 114.8 114.8
Common Stock (160.0 shares authorized; 53.3
and 54.0 shares outstanding) (Note 12)... 53.3 54.0
Additional Capital (Note 13)................ 250.7 305.3
Net Unrealized Gain on Investment Securities
(Note 7)................................. 5.2 2.6
Accumulated Foreign Currency Translation
Adjustments.............................. (48.2) (45.4)
Retained Earnings........................... 1,396.5 1,263.5
---------- ----------
Total Shareholders' Equity.............. 1,772.3 1,694.8
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY. $ 17,645.1 $ 16,931.2
========== ==========
</TABLE>
See Notes to Financial Statements.
<PAGE> 3
BENEFICIAL CORPORATION AND SUBSIDIARIES
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Years Ended December 31
1997 1996 1995
(in millions, except per share amounts)
<S> <C> <C> <C>
REVENUE
Finance Charges and Fees.......... $2,317.1 $2,143.5 $2,014.6
Interest Expense.................. 855.0 812.8 816.2
-------- -------- --------
Lending Spread................. 1,462.1 1,330.7 1,198.4
Insurance Premiums................ 177.8 168.7 152.7
Other (Note 18)................... 460.8 459.7 230.9
-------- -------- --------
Total.......................... 2,100.7 1,959.1 1,582.0
-------- -------- --------
OPERATING EXPENSES
Salaries and Employee Benefits.... 434.9 412.6 384.6
Insurance Benefits................ 71.1 82.8 80.4
Provision for Credit Losses....... 485.3 398.8 280.2
Provision for Loss on German Disposal
(Note 3).................... 58.8 -- --
Provision for Credit Losses on German
Liquidating Loan Portfolio (Note 3). -- -- 15.0
Provision for Restructuring (Note 4)... -- -- 9.8
Other (Note 19)........................ 677.3 606.4 541.6
-------- -------- --------
Total............................... 1,727.4 1,500.6 1,311.6
-------- -------- --------
Income Before Income Taxes............. 373.3 458.5 270.4
Provision for Income Taxes (Note 17)... 119.6 177.5 119.9
-------- -------- --------
NET INCOME............................. 253.7 281.0 150.5
Retained Earnings, Beginning of Period. 1,263.5 1,093.0 1,042.2
Dividends Paid (Note 21)............... 120.7 110.5 99.7
-------- -------- --------
RETAINED EARNINGS, END OF PERIOD....... $1,396.5 $1,263.5 $1,093.0
======== ======== ========
BASIC EARNINGS PER COMMON
SHARE (Note 23)...................... $ 4.68 $ 5.19 $ 2.77
======== ======== ========
DILUTED EARNINGS PER COMMON SHARE
(Note 23)........................... $ 4.54 $ 5.05 $ 2.71
======== ======== ========
DIVIDENDS PER COMMON SHARE............. $ 2.18 $ 1.98 $ 1.80
======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING
(Note 23)........................... 54.7 54.6 53.7
======== ======== ========
</TABLE>
See Notes to Financial Statements.
<PAGE> 4
BENEFICIAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
1997 1996 1995
(in millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.............................. $ 253.7 $ 281.0 $ 150.5
Reconciliation of Net Income to Net
Cash Provided by
Operating Activities:
Provision for Credit Losses........ 485.3 398.8 280.2
Provision for Loss on German
Disposal....................... 58.8 -- --
Gain on Securitized Receivables.... (73.5) (55.3) (15.4)
Provision for Credit Losses
on German Liquidating
Loan Portfolio.................. -- -- 15.0
Provision for Restructuring........ -- -- 9.8
Provision for Deferred Income
Taxes........................... (71.5) (32.5) (35.0)
Depreciation and Amortization...... 46.8 49.6 48.8
Insurance Policy and Claim
Reserves........................ (129.8) 1.5 180.8
Accounts Payable and Accrued
Liabilities..................... 108.2 24.1 50.2
---------- ---------- ----------
Net Cash Provided by Operating
Activities................. 678.0 667.2 684.9
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Receivables Originated or Acquired.... (13,898.9) (12,341.8) (9,860.3)
Receivables Collected................. 11,505.2 8,954.0 7,443.3
Receivables Securitized............... 1,607.8 1,919.3 1,103.8
Available-For-Sale Investments
Purchased........................ (463.3) (492.8) (313.9)
Held-To-Maturity Investments Purchased (7.4) (13.0) (78.2)
Available-For-Sale Investments Sold... 347.8 1,058.5 97.5
Available-For-Sale Investments Matured 61.6 372.9 154.5
Held-To-Maturity Investments Matured.. 16.2 5.3 21.1
Property and Equipment Purchased...... (62.6) (62.6) (37.2)
Deposit from Reinsurers............... 120.4 (908.3) --
Interest in Residual Certificates..... (127.4) (10.8) (34.1)
Other................................. (43.6) 72.5 34.1
---------- ---------- ----------
Net Cash Used in Investing
Activities.............. (944.2) (1,446.8) (1,469.4)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-Term Debt, Net Change.......... 190.8 88.9 556.4
Deposits Payable, Net Change......... (28.7) 9.2 (29.4)
Long-Term Debt Issued................ 2,829.5 2,782.3 3,102.1
Long-Term Debt Repaid................ (2,550.4) (1,983.8) (2,661.3)
Dividends Paid....................... (120.7) (110.5) (99.7)
Common Stock Repurchased............. (80.0) -- --
---------- ---------- ----------
Net Cash Provided by Financing
Activities.............. 240.5 786.1 868.1
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND
EQUIVALENTS.......................... (25.7) 6.5 83.6
Cash and Equivalents at Beginning of
Period............................... 279.6 273.1 189.5
---------- ---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD... $ 253.9 $ 279.6 $ 273.1
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid........................ $ 847.8 $ 816.2 $ 823.4
Income Taxes Paid.................... 181.5 222.9 154.8
</TABLE>
See Notes to Financial Statements.
<PAGE> 5
BENEFICIAL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(in millions, except per share amounts)
1. NATURE OF OPERATIONS
Beneficial Corporation (Company) is a holding company, subsidiaries of
which provide financial services through their various consumer finance,
banking and insurance operations located throughout the United States,
Canada, Germany, Ireland and the United Kingdom. The Beneficial consumer
finance loan office network includes more than 1,200 offices, offering
both real estate secured loans and unsecured loans, as well as
credit-related insurance products. Additionally, other subsidiaries offer
credit card products (largely private-label), tax refund anticipation
loans and selected non-credit-related insurance products. Approximately
40% of loans owned outstanding are secured by real estate. The majority of
net income is derived from the consumer finance operations and credit
insurance products related to the consumer finance business. Operations in
any one country outside the United States are not significant in relation
to the Company's overall operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES
a) Basis of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries, after elimination of all
significant intercompany accounts and transactions, and have been prepared
in accordance with generally accepted accounting principles. Certain
prior-period amounts have been reclassified to conform with the 1997
presentation.
b) Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
c) Finance Operations. The financial statements are prepared on the
accrual basis. Finance charges are recognized as income using the interest
method or methods that produce similar results. The net amount of loan
origination fees and direct loan origination costs are deferred and
amortized into interest income over the estimated lives of the related
loans. Direct origination costs for credit cards are deferred and
amortized over 12 months. Income accrual is generally suspended after 30
days on delinquent loans.
Premiums paid on receivables purchased are amortized using straight-line
and accelerated methods generally over the estimated life of the loans.
Provisions for credit losses are charged to income in amounts sufficient
to maintain the allowance for credit losses at a level considered adequate
to cover the losses of principal and interest in the finance receivables
portfolio.
Delinquent real estate secured receivables are reviewed individually by
management, and accounts known to be uncollectible are charged off. In
general, other receivables are automatically charged off after no payment
has been made for six months. For all types of loans, collection efforts
are generally continued.
<PAGE> 6
Real estate properties acquired through foreclosure are carried at the
lower of cost or estimated fair market value, minus estimated costs to
sell, determined on an individual asset basis. Valuations are periodically
performed by management, and an allowance for possible losses is
established if the book value exceeds the estimated fair market value
minus estimated costs to sell. Residual gains or losses on disposition are
recorded in expense as incurred.
Certain real estate secured loans are accounted for as foreclosed property
(in-substance foreclosure) even though the actual foreclosure has not
occurred. Such loans continue to be reported in finance receivables. These
loans are carried at the lower of cost or estimated fair market value when
the borrower has little or no equity in the collateral at its current
estimated fair market value and it appears unlikely that the borrower will
repay the loan other than through liquidation of the property.
d) Receivables Sold with Servicing Retained. Periodically, subsidiaries of
the Company sell home equity loans to trusts created as real estate
mortgage investment conduits and retain the servicing. At the date of such
securitizations, the Company allocates the total cost of the home equity
loans to mortgage servicing rights and the loans based on their relative
fair values. Fair values are determined based on present valuing the
expected future cash flows using a discount rate commensurate with the
risks involved, adjusted for prepayments and bad debts.
On January 1, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." For
each servicing contract in existence before January 1, 1997, previously
recognized excess servicing assets that do not exceed contractually
specified servicing fees were combined and recognized as a servicing
asset.
Previously recognized servicing assets that exceed contractually specified
servicing fees were reclassified as interest-only strips and are carried
at fair value. Both the servicing assets and the interest-only strips are
included in other assets on the balance sheet. The servicing assets are
amortized in proportion to, and over the period of, estimated net future
servicing fee income. The servicing assets are periodically reviewed for
valuation impairment. This review is performed on a disaggregated basis
for the predominate risk characteristics of the underlying loans which are
loan type, term, interest rate, prepayment rate and loss rate. The fair
value of the servicing assets and interest-only strips are determined by
present valuing the estimated net future cash flows. The weighted-average
assumptions used in the fair value calculations include: discount rate -
15%, prepayment rate - 34%, loss rate - 1.3%, and servicing fees - 1.0%.
e) Insurance Operations. The Company's insurance subsidiaries are engaged
in writing credit life, credit accident and health insurance, credit
property, credit involuntary unemployment insurance and ordinary life
insurance. Premiums on credit life insurance are taken into income using
the sum-of-the-months or actuarial methods, except in the case of
level-term contracts, which are taken into income using the straight-line
method over the lives of the policies. Premiums on credit accident and
health insurance are generally taken into income using an average of the
sum-of-the-digits and the straight-line methods. Premiums for credit
property and credit involuntary unemployment insurance are generally taken
into income using the sum-of-the-months method or on a pro rata basis.
Premiums for ordinary life insurance are included in income when due.
Premiums collected on annuity contracts are included as a liability in
insurance policy and claim reserves. Policy reserves for credit life,
credit accident and health insurance, credit property, and credit
involuntary unemployment insurance are equal to related unearned premiums.
Additionally, claim reserves for credit life, credit accident and health
insurance, credit property, and credit involuntary unemployment insurance
are adjusted to reflect claim experience. Liabilities for future life
insurance policy benefits associated with ordinary life contracts are
accrued when premium revenue is recognized and are computed on the basis
of assumptions as to investment yields, mortality, morbidity and
withdrawals.
<PAGE> 7
f) Valuation of Investment Securities. Investments are owned principally
by the insurance subsidiaries and consist primarily of debt securities.
Investments in debt securities that the subsidiaries have both the ability
and the intention of holding until maturity are classified as
held-to-maturity securities and reported at amortized cost (remaining
principal net of unamortized premiums or discounts). Investments that may
be sold prior to maturity to support the subsidiaries' investment
strategy, such as in response to changes in interest rates or tax
deductibility of interest, are considered as available-for-sale securities
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of shareholders' equity.
Gains and losses from trading securities are included in income from
operations. The cost of investments sold is determined on the specific
cost identification basis.
g) Translation of Foreign Currencies. Operations outside the United States
are conducted through subsidiaries located in Canada, Germany, Ireland and
the United Kingdom. Assets and liabilities of these subsidiaries are
translated at the rates of exchange at the balance sheet dates, while
income and expense items are translated at the average exchange rates for
each period covered by the statement of income and retained earnings. The
resulting translation adjustments are included in accumulated foreign
currency translation adjustments, a separate component of shareholders'
equity.
h) Derivative Financial Instruments. To hedge its investment in foreign
subsidiaries and to moderate its exposure to interest-rate fluctuations,
the Company enters into various transactions involving off-balance-sheet
financial instruments. These transactions include options, currency swaps
and forwards for foreign currency risk management and interest-rate swaps
and forward-rate agreements for interest rate exposure management.
Gains or losses on foreign currency instruments designated as hedges of
the Company's net investments in foreign subsidiaries are included with
translation adjustments in shareholders' equity. Gains or losses on these
instruments in excess of the amount needed to offset net investment losses
or gains are included in income. The net amount of interest income and
interest expense on agreements used to hedge interest-rate exposure is
recognized in interest expense over the lives of the instruments. The
indices on derivatives used to hedge interest-rate exposure match an index
corresponding to either a specific long-term debt instrument or to a pool
of short-term debt. The Company does not terminate these derivatives prior
to maturity. In the unlikely event of termination, gain or loss would be
reflected in the income statement, or deferred and recognized over the
remaining life of the hedged instrument.
The Company does not serve as a financial intermediary to make markets in
any off-balance-sheet financial instruments nor does it hold or issue
derivative financial instruments for trading purposes.
i) Amortization of Intangible Assets. Excess cost applicable to
acquisitions is generally amortized on a straight-line basis over 20
years.
j) Earnings per Common Share. Basic earnings per common share are computed
by deducting dividend requirements on preferred stock of the Company from
net income and dividing the remainder by weighted-average common shares
outstanding. Diluted earnings per common share are computed by deducting
dividend requirements on non-convertible preferred stocks of the Company
from net income and dividing the remainder by weighted-average common
shares outstanding adjusted for all dilutive potential common shares that
were outstanding during the period.
k) Cash Equivalents. The Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
<PAGE> 8
l) Computer Software Costs. The Company capitalizes costs of purchased
software or software developed internally when the project is in the
application development stage. Costs of developed software that is
considered to be in the preliminary project stage or the
post-implementation stage are expensed as incurred. Costs incurred in
conjunction with Year 2000 remediation are expensed as incurred.
3. DIVESTITURE OF CANADA AND GERMANY
As part of a number of strategic initiatives to enhance growth and build
shareholder value, the Company recently announced its intent to sell its
Canadian consumer finance subsidiary and its German consumer banking
subsidiary. On February 10, 1998, the Company entered into a definitive
agreement for the sale of its Canadian operations and on March 2nd closed
the transaction. The sale generated a net aftertax gain in excess of $100.
The Company anticipates the sale of its German subsidiary to occur in the
near term. The sale is expected to result in a loss of $27.8 after
consideration of a $31.0 tax benefit, primarily generated by the expected
utilization of capital losses, and has been accrued at December 31, 1997.
As of December 31, 1997, the net assets subject to sale totaled $137.2 and
were comprised of the following:
<TABLE>
<CAPTION>
Canada Germany Total
<S> <C> <C> <C>
Net Finance Receivables..... $775.1 $ 271.6 $ 1,046.7
Other Assets................ 14.7 129.5 144.2
------ ------- ---------
Total Assets............. 789.8 401.1 1,190.9
------ ------- ---------
Short-Term Debt............ 344.2 -- 344.2
Long-Term Debt............. 308.8 32.5 341.3
Deposits................... -- 277.6 277.6
Other Liabilities.......... 15.3 75.3 90.6
------ ------- ---------
Total Liabilities.......... 668.3 385.4 1,053.7
------ ------- ---------
Net Assets................... $121.5 $ 15.7 $ 137.2
====== ======= =========
</TABLE>
In 1997, the Canadian operations reported pretax earnings of $21.2 while
the German operating pretax loss was $6.7.
The Company had previously announced its intent, in December of 1994, to
sell its German subsidiary. However, in December of 1995, the Company
announced the decision to retain the operation because no acceptable
offers were received. Since negotiations and other efforts did not
progress as anticipated in the original loss estimates, the Company
recorded a $15.0, or $0.28 per share, charge in 1995 for additional
potential losses relating to a significant liquidating loan portfolio.
4. PROVISION FOR RESTRUCTURING
In the fourth quarter of 1995, the Company implemented an
expense-reduction program, principally within its headquarters operations.
The resulting restructuring charge reduced net income by $5.9, or $0.11
per share, and was largely related to early retirement and severance
expenses corresponding to workforce reductions of 225.
<PAGE> 9
5. FINANCE RECEIVABLES
Finance receivables at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Receivables Owned:
Real Estate Secured............... $ 5,905.3 $ 5,931.7
Personal Unsecured................ 3,262.4 2,982.9
Credit Cards...................... 4,685.4 4,595.8
Sales Finance Contracts........... 994.3 926.3
Commercial........................ 182.8 99.5
--------- ---------
Total Owned..................... 15,030.2 14,536.2
Receivables Sold with Servicing Retained
(all real estate secured)...... 2,912.7 2,324.8
--------- ---------
Total Managed........................ $17,942.9 $16,861.0
========= =========
</TABLE>
Includes receivables of $1,084.2 and $1,103.0 in 1997 and 1996,
respectively, relating to the Company's German and Canadian subsidiaries.
Average receivables during the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Average Receivables Owned............ $14,459.6 $13,520.8
Average Receivables Sold With
Servicing Retained............... 2,600.4 1,798.1
--------- ---------
Average Managed...................... $17,060.0 $15,318.9
========= =========
</TABLE>
From time to time, subsidiaries of the Company have sold home equity loans
through securitizations and have retained collection and administrative
responsibilities as servicer for the trust holding the home equity loans.
Scheduled contractual maturities of finance receivables owned to be
received after December 31, 1997, are as follows:
<TABLE>
<CAPTION>
1998 1999 2000 2001 Beyond
---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
Real Estate Secured...... 18% 12% 12% 13% 45%
Personal Unsecured....... 43 32 17 4 4
Credit Cards............. 43 7 7 6 37
Sales Finance Contracts.. 72 20 6 1 1
Commercial............... 25 20 13 8 34
Overall.................. 35% 16% 11% 8% 30%
</TABLE>
While the statutes of several states place no maximum limit on the
contractual term of closed-end loans secured by real estate, the consumer
finance subsidiaries generally limit loans of this type to periods ranging
from 60 to 180 months. Terms of closed-end unsecured loans and sales
finance contracts generally do not exceed 60 months. It is the Company's
experience that a substantial portion of all consumer receivables is
renewed or repaid prior to contractual maturity dates. Accordingly, the
previous tabulation should not be viewed as a forecast of future cash
collections. During the years ended December 31, 1997 and 1996, cash
collections totaled $11,505.2 and $8,954.0, respectively. The monthly
collections of cash principal as a percentage of average receivables were
6.66% in 1997 and 5.51% in 1996.
<PAGE> 10
6. ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance at Beginning of Year.................. $ 498.2 $ 406.1
Accounts Charged Off.......................... (468.2) (363.3)
Recoveries on Accounts Previously Charged Off. 56.0 46.4
Provision for Credit Losses................... 485.3 398.8
Other......................................... (11.4) 10.2
------- -------
Balance at End of Year......................... $ 559.9 $ 498.2
======= =======
</TABLE>
Year-end balances include $37.5 and $57.3 in 1997 and 1996,
respectively, relating to the Company's German and Canadian subsidiaries.
7. INVESTMENT SECURITIES
In the fourth quarter of 1995, the Company decided to exit its annuity
business. The actual disposition of the annuity business and the capital
gain from the sale of corresponding investments increased net income by
$8.4, or $0.16 per share, in March 1996. As of December 31, 1997,
shareholders' equity included a net unrealized gain of $5.2, consisting of
an $8.0 net gain on the Available-For-Sale portfolio, offset by $2.8 of
applicable income taxes.
Investments at December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross Est.
Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
---- --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Available-For-Sale
Debt Securities:
Corporate............... $294.7 $6.5 $1.1 $300.1
Mortgage-backed......... 29.8 .9 -- 30.7
Municipal............... 5.2 .1 -- 5.3
U.S. Government......... 115.8 1.0 -- 116.8
Foreign Government...... 59.8 .7 -- 60.5
Other................... 5.6 .1 -- 5.5
------ ----- ----- -----
510.9 9.2 1.2 518.9
Equity Securities.......... .6 -- -- .6
------ ----- ----- -----
Total................... $511.5 $9.2 $1.2 $519.5
====== ==== ==== ======
Held-To-Maturity
Debt Securities:
Corporate............... $48.8 $ .4 $ .1 $49.1
Mortgage-backed......... 2.2 -- -- 2.2
Municipal............... 10.8 .3 -- 11.1
U.S. Government......... 10.4 -- .1 10.3
Foreign Government...... 1.1 -- .1 1.0
Other................... 10.2 -- -- 10.2
----- ---- --- ----
Total............. $83.5 $ .7 $ .3 $83.9
===== ==== ==== =====
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
Gross Gross Est.
Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
---- --------- ----------- ---------- ------
<S> <C> <C> <C> <C>
Available-For-Sale
Debt Securities
Corporate......... $273.6 $5.3 $3.4 $275.5
Mortgage-backed... 35.1 1.2 .2 36.1
Municipal......... 7.3 .1 .1 7.3
U.S. Government... 93.9 .6 .2 94.3
Foreign Government. 42.4 .5 -- 42.9
---- ---- ---- ----
452.3 7.7 3.9 456.1
Equity Securities.... .6 -- -- .6
---- ---- ---- ----
Total............. $452.9 $7.7 $3.9 $456.7
====== ==== ==== ======
Held-To-Maturity
Debt Securities:
Corporate.......... $48.9 $ .1 $ .7 $48.3
Mortgage-backed.... 2.6 -- .1 2.5
Municipal.......... 8.5 .2 -- 8.7
U.S. Government.... 14.4 -- .2 14.2
Foreign Government. 1.1 -- -- 1.1
Other.............. 18.1 -- -- 18.1
---- --- --- ----
Total........ $93.6 $ .3 $1.0 $92.9
===== ==== ==== =====
</TABLE>
Included in investments is $263.2 and $135.8, in 1997 and 1996,
respectively, classified as trading securities. These amounts represent
residual interests in securitized receivables resulting from the early
payment of principal to certificate holders.
The contractual maturities of debt securities at December 31, 1997, are
shown in the table that follows. Actual maturities may differ from
contractual maturities because some borrowers may have the right to prepay
obligations, with or without prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
1997
<S> <C> <C>
Available-For-Sale
Due within one year............... $ 29.1 $ 29.1
Due one through five years........ 156.1 158.4
Due five through ten years........ 317.4 322.9
Due after ten years............... 8.3 8.5
------ ------
Total.......................... $510.9 $518.9
------ ------
Held-To-Maturity
Due within one year.............. $ 7.3 $ 7.3
Due one through five years....... 47.3 47.5
Due five through ten years....... 17.1 17.3
Due after ten years.............. 11.8 11.8
------- -------
Total......................... $ 83.5 $ 83.9
======= =======
</TABLE>
Proceeds from sales of Available-For-Sale securities totaled $347.8 in
1997, compared with $1,508.5 in 1996. Gross gains of $6.8 in 1997 and
$27.5 in 1996, and gross losses of $0.4 in 1997 and $1.6 in 1996, were
realized on those sales.
<PAGE> 12
8. OTHER ASSETS
<TABLE>
<CAPTION>
At December 31 1997 1996
-------------- ---- ----
<S> <C> <C>
Annuity Deposits...................... $ 787.9 $ 908.3
Deferred Income Tax Benefits.......... 302.7 232.3
Excess Cost of Net Assets Acquired.... 43.7 14.6
Interest-Only Residual................ 72.8 46.9
Investments in and Advances to Discontinued
Operations.......................... 6.5 15.0
Miscellaneous Accounts and Notes
Receivable.......................... 75.7 70.1
Prepaid Expenses...................... 178.9 130.7
Property Acquired by Foreclosure...... 85.5 100.2
Recoverable Income Taxes.............. 43.4 44.6
Servicing Asset....................... 11.4 8.0
Unamortized Insurance Policy
Acquisition Costs.................... 33.2 36.0
Other................................. 183.7 115.9
-------- --------
Total.............................. $1,825.4 $1,722.6
======== ========
</TABLE>
The activity in the servicing asset is summarized as follows: balance
January 1, 1997 - $8.0, recognized during the period - $6.9,
amortization - $3.5, balance at December 31, 1997 - $11.4.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
At December 31........................ 1997 1996
-------------- ---- ----
<S> <C> <C>
Accounts Payable...................... $347.3 $191.5
Accrued and Deferred Compensation..... 76.4 72.1
Accrued Interest...................... 81.0 69.5
Accrued Postretirement Benefits....... 72.2 61.1
Accrued Pension Cost.................. 16.8 18.4
Income Taxes Payable.................. 46.1 42.0
Insurance Premiums Payable............ 27.7 32.2
Other................................. 40.5 47.2
------ ------
Total.............................. $708.0 $534.0
====== ======
</TABLE>
10. SHORT-TERM DEBT
Short-term debt, includes $1,277.4. and $916.9 relating to foreign
subsidiaries at year-end 1997 and 1996, respectively, of which $344.2 and
$228.4 at year-end 1997 and 1996, respectively, relate to the German and
Canadian subsidiaries. Short-term debt consisted of the following:
<TABLE>
<CAPTION>
At December 31........................ 1997 1996
-------------- ---- ----
<S> <C> <C>
Commercial Paper...................... $3,770.5 $3,695.4
Bank Borrowings....................... 814.6 473.9
-------- --------
Total.............................. $4,585.1 $4,169.3
======== ========
</TABLE>
<PAGE> 13
Selected details of short-term borrowings are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Highest Aggregate at Any Month-End. $4,585.1 $4,571.3 $4,023.9
Daily Average Amount............... 3,977.1 3,846.2 3,366.3
Weighted Average Interest Rates:
At Year-End:
Commercial Paper............. 5.74% 5.38% 5.85%
Bank Borrowings.............. 7.48 6.17 6.71
Overall................... 6.09 5.49 5.98
Paid During Year*:
Commercial Paper............. 5.52 5.52 6.24
Bank Borrowings.............. 6.89 6.46 7.19
Overall................... 5.68% 5.63% 6.37%
</TABLE>
*Weighted average interest rates paid during the year have been determined
by relating short-term interest costs (including the costs of maintaining
lines of credit) for each year to the daily average dollar amounts
outstanding.
The Company maintains committed revolving credit agreements in support of
its outstanding commercial paper. At December 31, 1997, the Company had
lines of credit of $4,307.5, of which $3,850.7 was unused. The most
significant of these credit agreements has a net-worth test of $1,000.
Annual commitment fee requirements to support availability of credit
agreements at the end of 1997, 1996 and 1995 totaled $3.9, $4.1 and $5.8,
respectively.
The impact of interest rate hedging activities on the Company's weighted
average short-term borrowing rates and on the reported short-term interest
expense were increases as follows: .08% and $3.1 in 1997; .13% and $5.1 in
1996; and .05% and $1.7 in 1995.
11. LONG-TERM DEBT
<TABLE>
<CAPTION>
At December 31 1997 1996
-------------- ---- ----
<S> <C> <C>
United States.............. $7,814.8 $7,832.2
Canada..................... 308.8 338.6
Germany.................... 32.5 31.6
United Kingdom............. 731.1 428.7
-------- --------
Total................... $8,887.2 $8,631.1
======== ========
</TABLE>
Long-term debt, including weighted average interest rates by year of
maturity on debt outstanding at December 31, 1997, is shown below in the
earliest year it could become payable:
<TABLE>
<CAPTION>
Average Rates
Maturity 1997 1997 1996
-------- ------------- ---- ----
<S> <C> <C> <C> <C>
1997................. $2,610.1
1998................. 7.13% $2,246.1 1,982.0
1999................. 6.73 1,990.7 1,669.7
2000................. 6.71 1,254.1 554.9
2001.................. 7.05 946.3 632.4
2002.................. 6.82 1,293.4 558.3
2003-2007............. 6.77 959.3 426.4
2008-2023............. 7.85 197.3 197.3
--------- ---------
Total.............. 6.90% $8,887.2 $8,631.1
======== ========
</TABLE>
<PAGE> 14
The weighted average annual interest rates on debt outstanding at year-end
were 6.90%, 6.84% and 7.24% for 1997, 1996 and 1995, respectively.
Weighted average interest rates (including issuance costs) paid during the
year on average long-term debt outstanding were 6.92%, 7.07% and 7.56% for
years ended December 31, 1997, 1996 and 1995, respectively.
Long-term debt outstanding at December 31, 1997 and 1996, includes
$4,174.6 and $3,815.7, respectively, of variable-rate debt that reprices
based on various indices. Such variable-rate debt generally has an
original maturity of one to two years.
The impact of interest rate hedging activities on the Company's weighted
average long-term borrowing rates and on the reported long-term interest
expense were increases as follows: .02% and $2.0 in 1997; .06% and $4.8 in
1996; and .05% and $3.7 in 1995.
12. CAPITAL STOCK
Shares of capital stock outstanding were as follows:
<TABLE>
<CAPTION>
At December 31....................... 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C>
5% Cumulative Preferred - $50 par value.
Authorized, 585,730.............. 407,718(a 407,718(a 407,718(a
$5.50 Dividend Cumulative
Convertible Preferred - no par
value - $20 stated value (each
share convertible into nine
shares of Common; maximum
liquidation value, $1,653,800,
$1,845,700, and $2,031,000).
Authorized, 1,164,077
Outstanding Shares Beginning of
Year................... 18,457 20,310 22,362
Conversion into Common..... (1,919) (1,853) (2,052)
-------- -------- --------
Outstanding Shares End of Year 16,538 18,457 20,310
-------- -------- --------
$4.50 Dividend Cumulative Preferred
- $100 par value.
Authorized, 103,976............. 103,976 103,976 103,976
-------- -------- -------
$4.30 Dividend Cumulative Preferred
- no par value -
$100 stated value.
Authorized, 1,069,204........... 836,585 836,585 836,585
-------- ------- -------
Common - $1 par value. Authorized
160,000,000
Outstanding Shares Beginning
of Year.................... 54,041,214 53,197,422 52,509,728
Conversion of $5.50 Preferred
into Common............... 17,271 16,677 18,468
Exercise of Stock Options.. 453,363 827,115 669,903
Tendered Shares............ (29,510) -- --
Repurchased Shares......... (1,205,000) -- --
Direct Investment Plan..... 13,271 -- --
Transfer into Treasury from
Treasury
Shares Held as an Asset.. -- -- (677)
Outstanding Shares End
of Year................. 53,290,609(b 54,041,214(b 53,197,422(b
---------- ---------- ----------
After deducting treasury shares:
a) 5% Cumulative
Preferred........ 178,012 178,012 178,012
b) Common............. 3,581,451 2,800,304 3,627,419
</TABLE>
<PAGE> 15
In addition, the Company is authorized to issue 500,000 shares of
preferred stock (no par value) and 2,500,000 shares of preferred stock
($1.00 par value). Included within such shares are 570,000 shares of
Series A Participating Preferred Stock ($1.00 par value) that the Company
is authorized to issue in connection with Preferred Stock Purchase Rights
(see Note 14). None of these authorized preferred shares are issued or
outstanding.
At December 31, 1997, a total of 148,842 shares of common stock was
reserved for conversion of $5.50 Dividend Cumulative Convertible Preferred
Stock. During the year, 17,271 shares of common stock were issued upon
conversion of the $5.50 Dividend Cumulative Convertible Preferred Stock,
and 453,363 common stock treasury shares were reissued in connection with
the exercise of stock options.
13. ADDITIONAL CAPITAL
Additional capital decreased by $54.6 in 1997 and increased by $35.3 in
1996. The decrease in 1997 resulted from common stock repurchases of $78.8
offset by issuances in connection with various employee stock plans,
primarily the non-qualified stock option plan described in Note 20. The
increase in 1996 resulted from stock issuances in connection with various
employee stock plans.
14. PREFERRED STOCK PURCHASE RIGHTS
On August 22, 1996, the Board of Directors of the Company adopted a
Renewed Rights Agreement which became effective November 23, 1997. One new
Preferred Stock Purchase Right (Right) was issued for each share of common
stock, par value $1.00 per share, of the Company outstanding on November
23, 1997, and a Right will be issued for each share of common stock issued
thereafter. Under certain circumstances, each Right entitles the
registered holder to purchase from the Company one one-hundredth of a
share of the Company's Series A Participating Preferred Stock at a price
of $235, subject to adjustment. Until the Rights become exercisable,
expire or are redeemed, they will automatically trade with the common
stock but will at no time have voting power.
The Rights will be exercisable under circumstances generally involving
certain acquisitions of, or tender offers for, the common stock, or if a
10% stockholder is declared an "Adverse Person" by the Board of Directors.
If, at any time after the Rights become exercisable, but before they
expire or are redeemed, the Company is acquired in a merger or other
business combination or sells 50% or more of its assets or earning power,
the holder of a Right will be entitled to buy, at the exercise price, a
number of shares of Common Stock of the acquiring or surviving company
having a market value of twice the exercise price of each Right.
Generally, the Rights may be redeemed by the Company for $.01 per Right at
any time prior to the expiration of the Rights on August 22, 2006, and the
Company may alter the exercise price of the Rights and extend the duration
of the Renewed Rights Agreement beyond its 10-year term.
The Renewed Rights Agreement, which became effective on November 23, 1997,
replaced the original Rights Agreement adopted in 1987. The original
Rights Agreement was substantially identical to the Renewed Rights
Agreement, except that (i) the exercise price per Preferred Stock Purchase
Right was $87.50 per share, subject to adjustment; (ii) the redemption
price was $.025 per Right; (iii) each Right entitled the registered holder
to purchase from the Company one two-hundredth of a share of the Company's
Series A Participating Preferred Stock; and (iv) the amendment provision
did not permit the Company to alter the exercise price of the Rights or to
extend the original Rights agreement beyond its 10-year term.
<PAGE> 16
15. EMPLOYEE RETIREMENT PLANS
The Company has a non-contributory defined benefit pension plan (Plan)
covering substantially all employees of the Company and its subsidiaries
in the United States. The benefits provided are based on the employee's
age, years of service and average compensation during the highest three
consecutive years of earnings. The Company has made annual contributions
at least equal to the amounts accrued for retirement expense. Plan assets
are invested primarily in equity securities and corporate bonds.
The Company also has a supplemental retirement plan to restore those
benefits which have been earned under the Plan but which are not payable
to participants because of the limits imposed by the Internal Revenue Code
on qualified plan benefit distributions.
Employees of subsidiaries outside the United States generally receive
retirement benefits from Company-sponsored plans or from statutory plans
administered by governmental agencies in other countries.
In addition, the Company funds two 401(k) savings plans, which
collectively cover substantially all employees of the Company and its
subsidiaries in the United States, under which basic contributions are
made annually up to 2.5% of each eligible employee's annual compensation
up to $0.15. Related costs charged to income for the years ended December
31, 1997, 1996 and 1995, were $5.4, $4.8 and $4.6, respectively.
The Plan's funded status and amounts recognized in the Company's balance
sheet are as follows:
<TABLE>
<CAPTION>
At December 31 1997 1996
-------------- ---- ----
<S> <C> <C>
Actuarial Present Value of Benefit Obligation:
Vested Benefits............................ $ 51.5 $ 45.4
Non-Vested Benefits........................ 12.5 15.0
------- -------
Accumulated Benefit Obligation................ 64.0 60.4
Effect of Future Salary Increases............. 48.8 43.5
------- -------
Projected Benefit Obligation.................. 112.8 103.9
Less Plan Assets at Fair Value................ 78.9 65.0
------- -------
Projected Benefit Obligation in Excess of Plan
Assets..................... 33.9 38.9
Less Unrecognized Net Loss.................... 17.1 20.5
------- -------
Accrued Pension Cost Included in Accounts Payable
and Accrued Liabilities...................... $ 16.8 $ 18.4
====== ======
</TABLE>
For 1997, the projected benefit obligation was determined using an assumed
discount rate of 7.00% (compared with 7.50% in 1996), an assumed long-term
rate of return on assets of 9.00%, and an assumed long-term rate of
increase in future compensation levels of 4.50%.
The following table details the components of net pension expense for the
Plan:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service Cost - Benefits Earned During Period...$ 5.5 $ 5.4 $ 4.4
Interest Cost on Projected Benefit Obligation.. 7.3 7.6 7.6
Actual Return on Plan Assets...................(13.3) (7.1) (12.3)
Net Amortization and Deferral.................. 7.9 1.6 7.1
----- ----- -----
Net Periodic Pension Cost..................... $ 7.4 $ 7.5 $ 6.8
===== ===== =====
</TABLE>
Pension expense related to the Company's supplemental pension plan was
$1.3, $1.3 and $1.2 in 1997, 1996 and 1995, respectively. Pension expense
for the Company's subsidiaries outside the United States was $2.8, $2.7
and $2.6 for 1997, 1996 and 1995, respectively.
<PAGE> 17
16. POSTRETIREMENT BENEFITS
The Company provides postretirement health and dental care benefits to
eligible employees in the United States, along with their spouses and
eligible dependents. Employees become eligible for these benefits if they
meet minimum age and service requirements and if they agree to contribute
a portion of the cost. The associated plans are unfunded, and approved
claims are paid from Company funds. Under the terms of the plans, the
Company reserves the right to modify or terminate the plans. Most
employees outside the United States are covered by government health care
programs. The cost of such programs is not significant to the Company.
The cost to the Company of postretirement benefits consisted of the
following components:
<TABLE>
<CAPTION>
At December 31 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C>
Postretirement Benefit Cost:
Service Cost - benefits
attributable to service
during the year.............. $2.0 $2.0 $1.5
Interest Cost on Accumulated
Benefit Obligation............ 4.2 4.1 4.2
Amortization of Deferred Gain.. (0.8) (0.3) (0.8)
---- ---- ----
Total....................... $5.4 $5.8 $4.9
==== ==== ====
</TABLE>
The actuarial and recorded liabilities for these benefits were as follows:
<TABLE>
<CAPTION>
At December 31 1997 1996
-------------- ---- ----
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees.................................... $45.1 $38.8
Fully Eligible Active Plan Participants..... 12.4 10.3
Other Active Plan Participants.............. 14.7 12.0
----- -----
Total.................................... $72.2 $61.1
===== =====
</TABLE>
For measurement purposes, a 10.2% pre-65 trend rate was used for 1997 and
1996, with an ultimate rate of 5.0% in 2013. In addition, a 9.7% post-64
trend rate was used for 1997 and 1996, with an ultimate rate of 5.0% in
2018. For dental costs, a trend rate of 6.0% was used for 1997 and 1996,
with an ultimate rate of 4.0% in 2001. The discount rate was 7.00% at
December 31, 1997, and 7.50% at December 31, 1996. A one-percentage-point
increase in the health care trend rate would have increased the
accumulated postretirement benefit obligation by $3.9 at year-end 1997 and
would have added $.6 to the benefit cost for the year.
17. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal:
Current:
U.S..................... $153.5 $177.0 $124.1
Foreign................. 17.4 16.0 18.4
------ ------ ------
Total................ 170.9 193.0 142.5
------ ------ ------
Deferred:
U.S..................... (71.3) (32.8) (34.2)
Foreign................. (0.2) 0.3 (0.8)
------ ------ ------
Total................ (71.5) (32.5) (35.0)
State and Local............... 20.2 17.0 12.4
------ ------ ------
Total Provision for
Income Taxes......... $119.6 $177.5 $119.9
====== ====== ======
</TABLE>
<PAGE> 18
Temporary differences that gave rise to deferred tax assets and
liabilities were as follows:
<TABLE>
<CAPTION>
At December 31 1997 1996
-------------- ---- ----
<S> <C> <C>
Deferred Tax Assets:
Allowance for Credit Losses............ $187.2 $163.9
Capital Losses - Germany............... 33.0 --
Retiree Benefit Plans.................. 31.5 29.8
Accrued and Deferred Compensation...... 19.4 19.2
Deferred Commission Income............. 12.8 10.4
Insurance Reserves..................... 10.1 3.3
Foreign Tax Credits*................... 1.3 8.0
All Other............................... 73.0 64.2
------ ------
Subtotal............................. 368.3 298.8
====== ======
Deferred Tax Liabilities:
Real Estate Partnership Losses.......... 27.4 23.7
Deferred Acquisition Costs.............. 17.8 15.7
All Other............................... 17.1 19.1
------ ------
Subtotal............................. 62.3 58.5
------ ------
Valuation Allowance*....................... (3.3) (8.0)
------ ------
Net Deferred Taxes.................... $302.7 $232.3
====== ======
</TABLE>
*Foreign Tax Credits are fully offset by valuation allowances because
utilization is uncertain. The tax credits expire over the next five years.
A reconciliation of the differences between income taxes computed at the
statutory U.S. income tax rate and the consolidated tax provisions is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. Tax Rate................... 35.0% 35.0% 35.0%
Increase (Decrease):
Differential Due to Operations Outside
U.S............................... (.8) (1.4) 4.0*
State and Local Income Taxes........... 3.5 2.4 3.0
Capital Losses - Germany............... (7.7) -- --
Other.................................. 2.0 2.7 2.3
---- ---- ----
Effective Tax Rate..................... 32.0% 38.7% 44.3%
==== ==== ====
</TABLE>
*Includes 3.2% in 1995 resulting from the non-deductibility of credit
losses at the German banking subsidiary.
The foreign tax credit utilization resulted from the Company's election to
modify the limitation calculation. U.S. income taxes were not provided at
December 31, 1997, on $19.0 of undistributed earnings of foreign
subsidiaries, which are expected to be permanently invested in foreign
countries, and on $77.8 of undistributed earnings of life insurance
subsidiaries accumulated as policyholders' surplus under tax laws in
effect prior to 1984. Should these amounts be distributed, the additional
income taxes payable would be approximately $1.0 and $27.2, respectively.
18. OTHER REVENUE
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Investment Income................$ 56.6 $ 80.2 $ 67.8
Net Tax Service (RAL) Revenue.... 105.7 140.9 (14.9)
Securitization Revenue........... 237.8 192.3 123.6
Other............................ 60.7 46.3 54.4
---- ---- ----
Total.......................... $460.8 $459.7 $230.9
====== ====== ======
</TABLE>
19. OTHER EXPENSES
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Collection Expense................. $ 27.4 $ 20.4 $ 16.4
Data Processing Costs.............. 57.8 42.1 35.6
Depreciation....................... 38.8 40.8 40.0
Insurance Commissions.............. 19.9 18.5 21.7
Licenses and Taxes................. 20.9 17.6 17.0
Losses on Real Estate Foreclosures. 26.1 38.1 45.9
Marketing.......................... 111.9 77.1 58.2
Occupancy.......................... 80.7 78.1 75.8
Origination Costs.................. 18.0 29.1 26.7
Postage............................ 35.8 32.3 26.6
Premium Amortization............... 33.4 35.2 25.3
Printing........................... 23.3 27.6 22.6
Professional Services.............. 46.0 29.9 26.6
Telecommunications................. 32.8 32.6 30.6
Travel............................. 23.0 21.4 20.3
Other.............................. 81.5 65.6 52.3
------ ------ ------
Total........................... $677.3 $606.4 $541.6
====== ====== ======
</TABLE>
20. STOCK OPTIONS
The Company has a non-qualified stock option plan (Non-Qualified Plan),
adopted in 1990, which provides for grants of options to officers,
directors and key employees of the Company and its participating
subsidiaries. Under the Non-Qualified Plan, the option price shall not be
less than 100% of fair market value on the date the option is granted.
Options generally become exercisable in cumulative annual increments of
25% each year, commencing one year after date of grant and expiring after
10 years. The aggregate number of options for any calendar year may not
exceed 1.75% of the total issued and outstanding common stock of the
Company as measured on the first day of any such calendar year. If during
any such calendar year the total number of authorized options is not
granted, the remainder will be available for granting during any
succeeding year during the term of the Non-Qualified Plan. Shares of
common stock to be issued upon exercise of options may be treasury shares
reacquired by the Company or authorized and unissued common shares or a
combination of both.
The Company adopted an equity participation plan (Plan) in 1997, that
provides for grants of options to each eligible employee. It is the intent
of the Plan that there be no overlap in eligibility between the Plan and
the Non-Qualified Plan. Under the Plan, the option price shall be 120% of
the fair market value on the date the option is granted. Options are fully
exercisable when granted and expire after 10 years.
<PAGE> 19
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the Non-Qualified Plan or the Plan. Had
compensation cost for the Non-Qualified Plan or the Plan been determined
based on the fair value at the grant date of awards in 1997, 1996 and 1995
consistent with the provisions of SFAS No. 123, the Company's net earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Income - Reported.................. $253.7 $281.0 $150.5
Net Income - Pro Forma................. 248.9 278.8 150.3
Basic Earnings per share:
Reported............................ 4.68 5.19 2.77
Pro Forma........................... 4.59 5.15 2.77
Diluted Earnings per share:
Reported............................ 4.54 5.05 2.71
Pro Forma........................... 4.45 5.01 2.71
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1997, 1996 and 1995, respectively:
dividend yield of 3.07%,3.54% and 4.00%; risk-free interest rate of 5.82%,
5.95% and 5.77%; expected volatility of 26.3% and expected lives of 5.5
for all years. The pro forma effect on net income for 1997, 1996 and 1995
is not representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma compensation
expense related to grants made prior to 1995. The weighted average fair
value at the date of grant for options granted during 1997, 1996 and
1995 was $16.06, $16.21 and $13.10 per option, respectively.
The following table summarizes the activity relating to the Plan:
<TABLE>
<CAPTION>
Weighted-Average
Number Exercise Price
Shares Under Option
<S> <C> <C>
Options Outstanding December 31, 1994.. 3,634,566 $33.05
Options Exercised................... (669,903) 28.82
Options Canceled.................... (132,425) 35.26
Options Granted..................... 955,130 49.19
---------- -------
Options Outstanding December 31, 1995.. 3,787,368 37.79
========= =======
Options Exercised................... (827,115) 32.79
Options Canceled.................... (68,056) 40.38
Options Granted..................... 1,042,350 64.32
--------- -------
Options Outstanding December 31, 1996.. 3,934,547 45.82
========= =======
Options Exercised................... (453,363) 38.52
Options Canceled.................... (485,088) 72.10
Options Granted..................... 3,031,800 82.53
--------- ------
Options Outstanding December 31, 1997.. 6,027,896 $62.72
========= ======
Options Exercisable December 31, 1997.. 3,605,679 $60.92
========= ======
</TABLE>
<PAGE> 20
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$21.75 - $22.44 42,477 3 years $22.04 42,477 $22.04
29.16 - 31.13 519,727 4.6 years 29.95 519,727 29.95
37.44 - 38.78 1,053,375 6.5 years 37.70 862,737 37.76
49.19 - 49.25 752,414 8 years 49.19 331,814 49.19
61.81 - 64.44 965,313 9 years 64.32 254,834 63.98
75.44 - 79.44 1,100,500 10 years 77.04 - -
81.00 - 90.53 1,594,090 9.6 years 86.54 1,594,090 86.54
--------------- --------- --------- ----- --------- -----
$21.75 - $90.53 6,027,896 8.4 years $62.72 3,605,679 $60.92
=============== ========= ========= ====== ========= ======
</TABLE>
21. DIVIDENDS PAID
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Preferred Stock:
5%............................. $ 1.0 $ 1.0 $ 1.0
$5.50 Convertible.............. .1 .1 .1
$4.50.......................... .5 .5 .5
$4.30.......................... 3.6 3.6 3.6
--- --- ---
5.2 5.2 5.2
Common Stock...................... 115.5 105.3 94.5
----- ----- ----
Total Dividends.............. $120.7 $110.5 $99.7
====== ====== =====
</TABLE>
22. GEOGRAPHIC INFORMATION
Data by geographic area for the years ended December 31 are shown in the
following table:
<TABLE>
<CAPTION>
Inter-
United Company
States Foreign Eliminations Total
<S> <C> <C> <C> <C>
1997
Revenue.......................$ 2,507.8 $ 462.2 $(14.3) $ 2,955.7
Income before Income Taxes.... 389.9 (16.6) -- 373.3
Net Assets.................... 1,380.5 391.8 -- 1,772.3
Total Assets.................. 14,339.9 3,396.9 (91.7) 17,645.1
1996
Revenue....................... 2,371.2 409.6 (8.9) 2,771.9
Income before Income Taxes.... 423.9 34.6 -- 458.5
Net Assets.................... 1,398.6 296.2 -- 1,694.8
Total Assets.................. 14,410.0 2,589.7 (68.5) 16,931.2
1995
Revenue....................... 2,018.5 389.0 (9.3) 2,398.2
Income before Income Taxes.... 251.7 18.7 -- 270.4
Net Assets.................... 1,250.0 253.0 -- 1,503.0
Total Assets.................. 13,572.3 2,219.2 (54.2) 15,737.3
</TABLE>
23. EARNINGS PER SHARE
<TABLE>
<CAPTION>
Per Share
Income Shares Amount
1997
<S> <C> <C> <C>
Net Income........................... $253.7
Less: Preferred stock dividends.. (5.2)
--------
Basic Earnings per Share:
Income available to common
stockholders.................... 248.5 53.0 $4.68
----- ---- -----
Convertible preferred stock....... 0.1 0.2
Options........................... -- 1.2
Employee stock purchase plan...... -- 0.3
Diluted Earnings per Share:
Income available to common
stockholders and assumed
conversions.................. $248.6 54.7 $4.54
====== ==== =====
1996
Net Income........................... $281.0
Less: Preferred stock dividends.. (5.2)
--------
Basic Earnings per Share:
Income available to common
stockholders.................... 275.8 53.1 $5.19
----- ---- -----
Convertible preferred stock....... 0.1 0.2
Options........................... -- 1.0
Employee stock purchase plan...... -- 0.3
Diluted Earnings per Share:
Income available to common
stockholders and assumed
conversions.................. $275.9 54.6 $5.05
====== ==== =====
1995
Net Income........................... $150.5
Less: Preferred stock dividends.. (5.2)
---------
Basic Earnings per Share:
Income available to common
stockholders.................... 145.3 52.5 $2.77
----- ---- -----
Convertible preferred stock....... 0.1 0.2
Options........................... -- 0.7
Employee stock purchase plan...... -- 0.3
Diluted Earnings per Share:
Income available to common
stockholders and assumed
conversions.................. $145.4 53.7 $2.71
====== ==== =====
</TABLE>
24. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign exchange forward agreements, options
and currency swaps to hedge its net investment in foreign subsidiaries.
The forward agreements do not subject the Company to risk caused
by exchange-rate movements because gains and losses on these
agreements offset losses and gains on the assets and liabilities being
hedged. The forward agreements generally have maturities that do not
exceed six months.
<PAGE> 21
Outstanding forward agreements as of December 31, 1997, consisted of a
sale of (pound)46.0 in exchange for US$71.6 and a net forward purchase of
DM17.0 in exchange for US$9.6. This compares to forward sales of
(pound)46.0 and DM38.0 in exchange for US$71.6 and US$24.7, respectively,
at December 31, 1996.
The Company sells at-the-money (spot) call options and buys
out-of-the-money (spot) put options on British pounds. The strike rate of
each call option is set at the then-current exchange rate, and the strike
rate of each put option purchased is set at a rate whereby the premium
received on the related call option exactly offsets the premium paid for
such put option, resulting in no out-of-the-pocket cost. With the
exception of the strike rates, all terms of the call and put are
identical. The notional amount of each option is an amount that will
generally produce offsetting gains or losses (on an aftertax basis) to the
gains or losses produced by the underlying net investment. Further, the
combination of these instruments (a so-called "no cost collar") is
effectively a partial hedge, as hedging gains or losses occur only when
the spot rates fluctuate outside the range of the respective strike rates.
These option transactions generally have a maturity of three to six
months.
At December 31, 1997, the Company had purchased options to deliver British
pounds in exchange for US$386.3, as compared with December 31, 1996, when
the Company owned the right to deliver British pounds for US$166.0.
Concurrently, the Company had sold options to buy British pounds for
US$391.2 at December 31, 1997, as compared with sales of call options on
British pounds for US$166.3 at year-end 1996.
Through the use of currency swaps, the Company exchanges principal
denominated in U.S. dollars for principal denominated in a foreign
currency at the then-current exchange rate and agrees to make the opposite
exchanges on the swaps' termination date. Semi-annual interest payments
are made on the notional amounts over the life of the agreements.
Currency swaps outstanding at year-end obligate the Company to pay DM47.0
in exchange for US$31.1 in September 1998, to pay C$165.0 in exchange for
US$120.4 in July 1999 and to pay C$100.0 in exchange for US$74.5 in
November 2000. There has been no change in currency swaps outstanding
since December 31, 1996.
The Company recorded unrealized pretax gains of $6.0 at December 31, 1997,
and unrealized pretax losses of $18.5 at December 31, 1996, on open
hedges. These gains and losses represent a mark to spot on all open hedges
and are recognized in a separate component of equity.
There were no gains or losses recognized in net income attributable to the
above hedging programs during the three years ended December 31, 1997.
Gains and losses in excess of the amount needed to offset gains or losses
on investments in foreign subsidiaries due to currency fluctuations are
not expected given the above hedging strategy.
The Company and its subsidiaries utilize interest rate swaps to manage
interest rate risk. The agreements effectively changed interest rates on
certain medium-term notes and other indebtedness issued by the Company and
its subsidiaries to variable commercial paper or LIBOR indices or fixed
rate, with interest received exactly offsetting interest paid on such
medium-term notes or other indebtedness. The risks inherent in interest
rate swaps are the potential inability of a counterparty to meet the terms
of each contract. These agreements to exchange fixed and floating, or
floating versus floating, interest rate payments are with major
international financial institutions that are expected to fully perform
under the terms of the agreements, thereby mitigating credit risk from the
transactions.
<PAGE> 22
The amounts to be paid or received under the agreements are accrued in
interest expense consistent with the terms of the agreements. At December
31, 1997, accrued interest payable related to these interest rate swaps
totaled $12.0, which is offset by $12.8 of accrued interest receivable.
The impacts of the interest rate hedging activities on the Company's
weighted average borrowing rates and on the reported interest expense were
increases as follows: .04% and $5.1 in 1997; .08% and $9.9 in 1996; and
.05% and $5.4 in 1995.
The following table summarizes the interest-rate swaps outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Weighted Average Weighted
Notional Interest Rates Average
Amount Pay Receive Maturity*
<S> <C> <C> <C> <C>
Pay fixed-rate - receive
floating-rate $ 732.5 7.40% 7.37% 2.6
Pay floating-rate - receive
fixed-rate
Denominated in:
US$ 153.0 6.13 6.51 8.4
British pounds 141.0 7.89 7.94 1.5
Pay floating-rate - receive
floating-rate 853.2 6.09 5.75 1.4
-------- ---- ---- ---
Total $1,879.7 6.74% 6.61% 2.5
======== ==== ==== ===
</TABLE>
*Remaining term in years.
25. CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to finance receivables are
limited because the Company's subsidiaries primarily lend to consumers
across many different geographic areas. The highest percentage of owned
receivables in any geographic area is in California (16%), with no other
state or country having more than 13%. About 65% of receivables in
California are real estate secured, compared with 39% for the Company in
total. Second mortgage loans are generally limited to 75% of the appraised
value of the home as determined by certified, independent appraisers. In
the case of first mortgages, the lending cap is 80%. In addition, a
rigorous discipline of credit approval is enforced regarding borrower
debt-to-income ratios and overall consumer credit quality.
In meeting the financing needs of its customers, subsidiaries of the
Company issue commitments to extend additional credit to customers under
revolving real estate (including loans securitized), credit cards and
sales finance contracts as long as there is no violation of any conditions
established in the contract. The commitments generally have fixed
expiration dates or other termination clauses and generally require
payment of a fee. The Company uses the same credit procedures when
entering into such commitments as it does for traditional lending
products. At December 31, 1997, committed lines totaled $20,627.2,
compared with $18,598.1 at year-end 1996, of which 56% at the end of 1997
was available for further loans. A large majority of these commitments
expire without being exercised. As a result, total contractual commitments
do not represent future credit exposure or liquidity requirements.
<PAGE> 23
26. LEASES
The consumer finance system operates from premises under leases generally
having an original term of five years with a renewal option for a like
term. The Company leases its headquarters in Wilmington, Delaware, under a
lease expiring in 2010. Also, a subsidiary leases an office complex in
Peapack, New Jersey, with a primary term expiring in 2010 and renewal
options totaling 47 years. Data processing equipment lease terms range
from one to four years and are generally renewable. The minimum rental
commitments under noncancelable operating leases at December 31, 1997,
were as follows:
<TABLE>
<CAPTION>
<S> <C>
1998......................................................... $ 72.8
1999......................................................... 64.2
2000......................................................... 53.9
2001......................................................... 45.8
2002......................................................... 41.3
2003-2007.................................................... 177.7
2008-2021.................................................... 88.2
------
Total..................................................... $543.9
======
</TABLE>
27. FAIR VALUE OF FINANCIAL INSTRUMENTS
The information provided below is required by SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments." These amounts represent
estimates of fair value of financial instruments at a point in time.
Significant estimates using available market information and appropriate
valuation methodologies were used for the purposes of this disclosure. The
estimates are not necessarily indicative of the amounts the Company could
realize in a current market exchange, and the use of different market
assumptions or methodologies could have a material effect on the estimated
fair value amounts.
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Estimated Carrying Estimated
At December 31 Value Fair Value Value Fair Value
-------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Assets
------
Cash and Equivalents.. $ 253.9 $ 253.9 $ 279.6 $ 279.6
Investment Securities. 866.2 866.6 686.1 685.4
Finance Receivables,
Net............ 14,470.3 15,646.2 14,038.0 15,090.9
Servicing Asset....... 11.4 11.4 8.0 8.0
Interest-Only Residual. 72.8 72.8 46.9 46.9
Liabilities
-----------
Short-Term Debt........ 4,585.1 4,585.1 4,169.3 4,169.3
Deposits............... 555.3 555.3 635.0 635.0
Long-Term Debt......... 8,887.2 9,033.2 8,631.1 8,812.6
Accounts Payable....... 708.0 708.0 534.0 534.0
December 31
1997 1996
Net Unrealized Gain (Loss) on Derivative
Financial Instruments.............. $10.1 $(33.9)
</TABLE>
The fair value of investment securities is based on quoted market prices.
The fair market value of real estate secured and personal unsecured loans
was estimated by discounting the future cash flows over the estimated
remaining term, based on past cash collection experience. For credit cards
and sales finance products, the carrying amount is a reasonable estimate
of fair value. The discount factor was determined by taking into
consideration current funding costs, chargeoff experience and premiums
paid on acquisitions of receivables with similar characteristics.
Demand deposits are shown at their face values. For short-term and
long-term debt, the fair values are estimated, using the interest rates
currently offered for debt with similar terms and remaining maturities.
The estimated fair value of accounts payable approximates their carrying
value. The fair value of interest-rate swap agreements, forward exchange
contracts and foreign exchange options is the estimated amount the Company
would receive or pay to terminate the agreements at the balance sheet
date, taking into account current interest rates, foreign exchange rates
and the creditworthiness of the counterparties.
The fair value estimates presented were based on information available to
the Company at December 31, 1997 and 1996. While management is not aware
of any significant factors that would affect the year-end 1997 estimate
since that date, current estimates of fair value could differ
significantly from the amounts disclosed.
28. CONTINGENT LIABILITIES
In July 1992, the Internal Revenue Service (IRS) completed its examination
of the Company's federal income tax returns for 1984 through 1987. The IRS
proposed $142.0 in adjustments relating to 1986 and 1987 additions to the
loss reserves of the Company's former subsidiary, American Centennial
Insurance Company (ACIC), prior to the Company's sale of its entire
interest in ACIC in May 1987.
In order to limit the further accrual of interest on the proposed
adjustments, the Company paid $105.5 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 in the
third quarter of 1996.
The Company has initiated litigation in the United States Tax Court to
oppose the disallowance. While the conclusion of this matter cannot be
predicted with certainty, management does not anticipate the ultimate
resolution to differ materially from amounts accrued. Complete resolution
is not expected to occur within one year.
The Company and subsidiaries are involved in various other claims and
lawsuits incidental to the business. In the opinion of management, these
claims and suits in the aggregate will not have a material adverse effect
on the Company's consolidated financial statements.
<PAGE> 24
<TABLE>
<CAPTION>
BENEFICIAL CORPORATION AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in millions, except per share amounts)
Quarter Ended 3/31 6/30 9/30 12/31
- --------------- ---- ---- ---- -----
<S> <C> <C> <C> <C>
1997
Gross Revenue................ $772.6 $734.0 $744.3 $704.8
Income (Loss) before Income
Taxes...................... 162.4 133.4 120.6 (43.1)
Net Income (Loss)........... 100.7 88.3 77.5 (12.8)
Diluted Earnings (Loss) per
Common Share............... 1.80 1.59 1.40 (.25)
Dividends per Common Share.. .52 .52 .57 .57
1996
Gross Revenue............... $751.1 $682.4 $678.8 $659.6
Income before Income Taxes.. 184.7 139.6 109.5 24.7
Net Income.................. 107.4 82.4 67.9 23.3
Diluted Earnings per Common
Share...................... 1.96 1.48 1.22 .39
Dividends per Common Share.. .47 .47 .52 .52
</TABLE>
<PAGE> 25
(ii) QUARTER ENDED MARCH 31, 1998
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and Equivalents . . . . . . . . . . . .$ 224.6 $ 253.9
Finance Receivables (Note 3). . . . . . . . . . 14,550.8 15,030.2
Allowance for Credit Losses (Note 4) . . . . . . (554.3) (559.9)
--------- ---------
Net Finance Receivables. . . . . . . . . . 13,996.5 14,470.3
Investment Securities (Note 5) . . . . . . . . . 903.4 866.2
Property and Equipment. . . . . . . . . . . . 233.0 229.3
Other Assets . . . . . . . . . . . . . . . 1,260.5 1,825.4
-------- ---------
TOTAL ASSETS . . . . . . . . . . . . .$16,618.0 $17,645.1
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-Term Debt (Note 7) . . . . . . . . . . .$ 3,935.6 $ 4,585.1
Deposits Payable. . . . . . . . . . . . . . 509.7 555.3
Long-Term Debt (Note 8) . . . . . . . . . . . 8,662.7 8,887.2
-------- ---------
Total Interest-Bearing Debt . . . . . . . . . 13,108.0 14,027.6
Accounts Payable and Accrued Liabilities. . . . . . 892.8 708.0
Insurance Policy and Claim Reserves . . . . . . . 569.2 1,137.2
-------- ---------
Total Liabilities. . . . . . . . . . . . . 14,570.0 15,872.8
-------- ---------
Shareholders' Equity:
Preferred Stock . . . . . . . . . . . . . 114.8 114.8
Common Stock . . . . . . . . . . . . . . 54.4 53.3
Additional Capital . . . . . . . . . . . . 349.7 250.7
Accumulated Other Comprehensive Income (Note 11) . . (22.3) (43.0)
Retained Earnings. . . . . . . . . . . . . 1,551.4 1,396.5
-------- --------
Total Shareholders' Equity . . . . . . . . . 2,048.0 1,772.3
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . .$16,618.0 $17,645.1
========= =========
</TABLE>
See Notes to Financial Statements.
<PAGE> 26
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
REVENUE
Finance Charges and Fees . . . . . . . . . $614.6 $579.4
Interest Expense. . . . . . . . . . . . 223.6 214.7
------ ------
Lending Spread. . . . . . . . . . . . 391.0 364.7
Insurance Premiums . . . . . . . . . . . 45.0 45.9
Other (Note 2) . . . . . . . . . . . . 317.1 147.3
------ ------
Total . . . . . . . . . . . . . . 753.1 557.9
------ ------
OPERATING EXPENSES
Salaries and Employee Benefits . . . . . . . 111.0 105.1
Insurance Benefits . . . . . . . . . . . 15.9 22.8
Provision for Credit Losses . . . . . . . . 139.8 93.1
Other . . . . . . . . . . . . . . . 173.1 174.5
------ ------
Total . . . . . . . . . . . . . 439.8 395.5
------ ------
Income Before Income Taxes . . . . . . . . . 313.3 162.4
Provision for Income Taxes . . . . . . . . . 125.8 61.7
------ ------
NET INCOME . . . . . . . . . . . . . . 187.5 100.7
Other Comprehensive Income (Note 11). . . . . . 20.7 (7.6)
COMPREHENSIVE INCOME . . . . . . . . . . . ------ ------
$208.2 $ 93.1
====== ======
BASIC EARNINGS PER COMMON SHARE (Note 10) . . . . $ 3.49 $ 1.85
====== ======
DILUTED EARNINGS PER COMMON SHARE (Note 10) . . . $ 3.34 $ 1.80
====== ======
DIVIDENDS PER COMMON SHARE . . . . . . . . . $ .57 $ .52
====== ======
</TABLE>
See Notes to Financial Statements.
<PAGE> 27
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . $ 187.5 $ 100.7
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Provision for Credit Losses . . . . . . . . 139.8 93.1
Provision for Deferred Income Taxes . . . . . (3.8) (10.8)
Depreciation and Amortization . . . . . . . 10.4 12.9
Insurance Policy & Claim Reserves . . . . . . (568.0) (.9)
Accounts Payable & Accrued Liabilities . . . . 184.8 161.5
-------- --------
Net Cash (Used in) Provided by Operating Activities (49.3) 356.5
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Receivables Originated or Acquired . . . . . . (3,517.9) (3,170.3)
Receivables Collected. . . . . . . . . . . 3,080.2 2,921.5
Canadian Receivables Sold . . . . . . . . . 804.0 --
Investment Securities Purchased . . . . . . . (92.4) (110.0)
Investment Securities Sold . . . . . . . . . 42.0 68.1
Investment Securities Matured . . . . . . . . 31.7 26.2
Deposit from Reinsurer . . . . . . . . . . 576.5 --
Other . . . . . . . . . . . . . . . . 81.6 (27.3)
-------- --------
Net Cash Provided by (Used in) Investing Activities 1,005.7 (291.8)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-Term Debt, Net Change. . . . . . . . . (665.2) (196.4)
Deposits Payable, Net Change . . . . . . . . (39.2) (30.6)
Long-Term Debt Issued. . . . . . . . . . . 703.0 1,081.8
Long-Term Debt Repaid. . . . . . . . . . . (940.7) (905.1)
Dividends Paid . . . . . . . . . . . . . (32.6) (29.8)
Common Stock Repurchased. . . . . . . . . . (11.0) (15.1)
------- --------
Net Cash Used in Financing Activities . . . . (985.7) (95.2)
------- --------
NET DECREASE IN CASH AND EQUIVALENTS . . . . . . (29.3) (30.5)
Cash and Equivalents at Beginning of Period. . . . 253.9 279.6
------- --------
CASH AND EQUIVALENTS AT END OF PERIOD. . . . . . $ 224.6 $ 249.1
======= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid . . . . . . . . . . . . . $ 165.1 $ 135.1
Income Taxes Paid . . . . . . . . . . . . (25.7) .4
</TABLE>
See Notes to Financial Statements.
<PAGE> 28
BENEFICIAL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies used in the preparation of the unaudited quarterly
financial statements are consistent with accounting policies described in the
notes to financial statements contained in the Beneficial Corporation (the
Company) Annual Report on Form 10-K for the fiscal year-ended December 31, 1997.
In the opinion of management, all adjustments, consisting of a normal recurring
nature, necessary for a fair presentation have been reflected. Certain prior
period amounts have been reclassified to conform with the 1998 presentation.
Interim results are not necessarily indicative of results for a full year.
2. SALE OF CANADIAN SUBSIDIARY
On March 2, 1998, the Company sold its Canadian subsidiary, Beneficial
Canada Holdings Inc., to Associates Capital Corporation of Canada, a subsidiary
of Associates First Capital Corporation, resulting in a net aftertax gain of
$118.5 million, which is included in other income.
3. FINANCE RECEIVABLES
Finance receivables consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
<S> <C> <C>
Receivables Owned:
Real Estate Secured. . . . . . $ 6,124.5 $ 5,905.3
Personal Unsecured . . . . . . 3,080.8 3,262.4
Credit Cards . . . . . . . . 4,200.6 4,685.4
Sales Finance Contracts . . . . 962.0 994.3
Commercial. . . . . . . . . 182.9 182.8
--------- ---------
Total Owned. . . . . . . . 14,550.8 15,030.2
Receivables Sold with Servicing Retained
(all real estate secured). . . 2,629.8 2,912.7
--------- ---------
Total Managed Receivables . . . . $17,180.6 $17,942.9
========= =========
</TABLE>
4. ALLOWANCE FOR CREDIT LOSSES
An analysis of the allowance for credit losses follows:
<TABLE>
<CAPTION>
1998
<S> <C>
Balance at January 1 . . . . . . . . . . . . . $ 559.9
Accounts Charged Off . . . . . . . . . . . . . (135.4)
Recoveries on Accounts Previously Charged Off . . . . . 13.6
Provision for Credit Losses . . . . . . . . . . . 139.8
Sale of Canada . . . . . . . . . . . . . . . (25.7)
Other . . . . . . . . . . . . . . . . . . 2.1
--------
Balance at March 31. . . . . . . . . . . . . . $ 554.3
========
</TABLE>
<PAGE> 29
5. INVESTMENT SECURITIES
Investment securities were as follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
Carrying Market Carrying Market
Value Value Value Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
Debt Securities:
Corporate $314.0 $314.0 $300.1 $300.1
Mortgage-backed 33.5 33.5 30.7 30.7
Municipal 5.1 5.1 5.3 5.3
U.S. Government 132.4 132.4 116.8 116.8
Foreign Government 54.2 54.2 60.5 60.5
Other 5.4 5.4 5.5 5.5
------ ------ ------ ------
544.6 544.6 518.9 518.9
Equity Securities .6 .6 .6 .6
------ ------ ------ ------
Total $545.2 $545.2 $519.5 $519.5
====== ====== ====== ======
HELD-TO-MATURITY
Debt Securities:
Corporate $ 44.8 $ 45.1 $ 48.8 $ 49.1
Mortgage-backed 1.8 1.8 2.2 2.2
Municipal 10.8 11.1 10.8 11.1
U.S. Government 8.4 8.3 10.4 10.3
Foreign Government 1.1 1.0 1.1 1.0
Other 10.2 10.2 10.2 10.2
------ ------ ------ ------
Total $ 77.1 $ 77.5 $ 83.5 $ 83.9
====== ====== ====== ======
</TABLE>
Included in total investment securities is $281.1 and $263.2 at
March 31, 1998 and December 31, 1997, respectively, classified as
trading securities.
There were no investments transferred from Held-To-Maturity to
Available-For-Sale, nor were there any sales of Held-To-Maturity
investments during the three-month period ended March 31, 1998.
6. SERVICING ASSET AND INTEREST-ONLY STRIPS
The activity in the servicing asset is summarized as follows:
<TABLE>
<CAPTION>
1998
<S> <C>
Balance at January 1 . . . . . . . . . . . . $11.4
Amortization . . . . . . . . . . . . . . . (1.1)
-----
Balance at March 31. . . . . . . . . . . . . $10.3
=====
</TABLE>
<PAGE> 30
Previously recognized servicing assets that exceed contractually
specified servicing fees were reclassified as interest-only strips and are
carried at fair value which amounted to $66.3 at March 31, 1998. Both the
servicing assets and the interest-only strips are included in other assets on
the balance sheet. The servicing assets and interest-only strips are amortized
in proportion to and over the period of estimated net future servicing fee
income. The servicing assets and interest-only strips are periodically reviewed
for valuation impairment. This review is performed on a disaggregated basis for
the predominate risk characteristics of the underlying loans which are loan
type, term, interest rate, prepayment rate and loss rate. The fair value of the
servicing assets and interest-only strips are determined by present valuing the
estimated net future cash flows. The weighted-average assumptions used in the
fair value calculations include: discount rate - 15%, prepayment rate - 34%,
loss rate - 1.4%, and servicing fees - 1.0%. As of March 31, 1998, fair value
approximates carrying value and therefore no valuation allowance is required.
7. SHORT-TERM DEBT
Short-term debt outstanding consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
<S> <C> <C>
Commercial Paper. . . . . . . . . . $3,471.7 $3,770.5
Bank Borrowings . . . . . . . . . . 463.9 814.6
-------- --------
Total . . . . . . . . . . . $3,935.6 $4,585.1
======== ========
</TABLE>
The weighted average interest rates (including the costs of maintaining
lines of credit) on short-term borrowings during the three months ended March 31
were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
U.S. Dollar Borrowings. . . . . . . . 5.70% 5.47%
Other Currency Borrowings. . . . . . . 7.22 5.63
Overall. . . . . . . . . . . . . 6.02% 5.49%
</TABLE>
The impact of interest rate hedging activities on the Company's
weighted average short-term borrowing rates and on the reported short-term
interest expense for the three months ended March 31 was a decrease of .04%
(annualized) and $0.5 in 1998 and an increase of .13% (annualized) and $1.4 in
1997.
8. LONG-TERM DEBT
Long-term debt is shown below in the earliest year it could become
payable:
<TABLE>
<CAPTION>
Weighted Average
Interest Rates at March 31, December 31,
Maturity March 31, 1998 1998 1997
-------- ----------------- ----------- ---------
<S> <C> <C> <C>
1998 6.75% $1,529.2 $2,246.1
1999 6.69 1,912.6 1,990.7
2000 6.68 1,174.2 1,254.1
2001 7.00 934.1 946.3
2002 6.77 1,259.3 1,293.4
2003-2007 6.78 1,634.0 959.3
2008-2023 7.49 219.3 197.3
-------- --------
Total 6.78% $8,662.7 $8,887.2
======== ========
</TABLE>
<PAGE> 31
The weighted average interest rates (including issuance costs) on the
Company's long-term debt during the three months ended March 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
U.S. Dollar Borrowings. . . . . . . . 6.82% 6.87%
Other Currency Borrowings. . . . . . . 7.56 6.89
Overall. . . . . . . . . . . . . 6.91% 6.87%
</TABLE>
Long-term debt outstanding at March 31, 1998, and December 31, 1997,
includes $4,198.3 and $4,174.6, respectively, of variable-rate debt that
reprices based on various indices. Such variable-rate debt generally has an
original maturity of one-to-three years.
The impact of interest rate hedging activities on the Company's
weighted average long-term borrowing rates and on the reported long-term
interest expense for the three months ended March 31 was an increase of .05%
(annualized) and $1.2 in 1998 and .01% (annualized) and $0.3 in 1997.
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign exchange forward agreements, options
and currency swaps to hedge its net investment in foreign subsidiaries. At March
31, 1998, the Company had purchased options to deliver British pounds in
exchange for US$475.6, as compared to December 31, 1997, when the Company owned
the right to deliver British pounds for US$386.3. Concurrently, the Company had
sold options to buy British pounds for US$483.0 at March 31, 1998, as compared
with sales of call options on British pounds for US$391.2 at year-end 1997.
The Company's outstanding forward agreements as of March 31, 1998,
consisted of forward sales of (pound)61.1 in exchange for US$101.0 and a forward
purchase of DM18.0 in exchange for US$9.8. This compared to a forward sale of
(pound)46.0 in exchange for US$71.6 and a net forward purchase of DM17.0 in
exchange for US$9.6 at December 31, 1997.
Currency swaps outstanding at year-end were terminated during the
period based on market prices at the time of termination.
The Company accrued pretax losses of $9.3 at March 31, 1998, and pretax
gains of $6.0 at December 31, 1997 on open hedges. These gains and losses
represent a mark to spot on all open hedges and are recognized in a separate
component of equity. There were no gains or losses recognized in net income
attributable to the above hedging programs.
The Company and its subsidiaries utilize interest-rate swaps to allow
it to match fund its variable- and fixed-rate receivables and to manage basis
risk. The amounts to be paid or received under the agreements are accrued in
interest expense consistent with the terms of the agreements. At March 31, 1998,
accrued interest payable related to these interest-rate swaps totaled $13.5,
which is largely offset by $12.3 of accrued interest receivable. The impact of
interest rate hedging activities on the Company's weighted average borrowing
rates and on the reported interest expense for the three months ended March 31,
was an increase of .02% (annualized) and $0.7 in 1998 and .05% (annualized) and
$1.6 in 1997.
<PAGE> 32
The following table summarizes the interest-rate swaps outstanding at
March 31, 1998:
<TABLE>
<CAPTION>
Weighted Average Weighted
Notional Interest Rates Average
Amount Pay Receive Maturity*
<S> <C> <C> <C> <C>
Pay fixed-rate - receive floating-rate $ 741.8 7.40% 7.40% 2.6
Pay floating-rate - receive fixed-rate
Denominated in:
US$ 153.0 5.83 6.51 8.2
British pounds 143.0 8.06 7.94 1.3
Pay floating-rate - receive
floating-rate 724.6 5.98 5.57 1.5
--------
Total $1,762.4 6.73% 6.61% 2.5
========
</TABLE>
*Remaining term in years.
10. EARNINGS PER COMMON SHARE
Computations of basic and diluted earnings per common share are as follows:
<TABLE>
<CAPTION>
Per Share
Income Shares Amount
<S> <C> <C> <C>
March 31, 1998
Net Income. . . . . . . . . . . . . . $187.5
Less: Preferred stock dividends . . . . . . (1.3)
Basic Earnings per Share:
Income available to common stockholders . . . 186.2 53.4 $3.49
------ ---- -----
Convertible preferred stock . . . . . . . -- 0.1
Options . . . . . . . . . . . . . . -- 1.9
Employee stock purchase plan . . . . . . . -- 0.3
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions . . . . . . . . . $186.2 55.7 $3.34
====== ==== =====
March 31, 1997
Net Income. . . . . . . . . . . . . . $100.7
Less: Preferred stock dividends . . . . . . (1.3)
Basic Earnings per Share:
Income available to common stockholders . . . 99.4 53.6 $1.85
------ ---- -----
Convertible preferred stock . . . . . . . -- 0.2
Options . . . . . . . . . . . . . . -- 1.2
Employee stock purchase plan . . . . . . . -- 0.3
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions . . . . . . . . . $ 99.4 55.3 $1.80
====== ==== =====
</TABLE>
<PAGE> 33
11. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 was adopted by the
Company effective January 1, 1998. As a result, the income statement includes an
amount for other comprehensive income, as well as total comprehensive income.
Other comprehensive income includes revenues, expenses, gain and losses that
have affected shareholders' equity but not net income, such as foreign currency
translation adjustments and unrealized gains and losses on the
available-for-sale investment portfolio. Other comprehensive income of $20.7
million for the three months ended March 31, 1998 resulted from $20.8 of
aftertax foreign currency translation adjustments, primarily as a result of a
$20.4 million reclassification adjustment for the sale of the Canadian
operations, and $.1 million related to unrealized losses on available-for-sale
investments, compared to a loss of $7.6 million for the three months ended March
31, 1997.
On the balance sheet, accumulated other comprehensive income totaled
($22.3) at March 31, 1998 compared to ($43.0) at December 31, 1997. These
amounts are net of accumulated foreign currency translation adjustments of
($27.4) and ($48.2) and net unrealized gain on investment securities of $5.1 and
$5.2 at March 31, 1998 and December 31, 1997, respectively.
12. RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Net Income. . . . . . . . . . . $187.5 $100.7
Add Provision for Income Taxes . . . . 125.8 61.7
------ ------
Earnings Before Income Taxes . . . 313.3 162.4
------ ------
Fixed Charges:
Interest and Debt Expense . . . . . 223.6 214.7
Interest Factor Portion of Rentals . . 7.9 6.2
------ ------
Total Fixed Charges . . . . . . 231.5 220.9
------ ------
Earnings Before Income Taxes and Fixed Charges $544.8 $383.3
====== ======
Ratio of Earnings to Fixed Charges . . . 2.35 1.74
====== ======
Preferred Dividend Requirements . . . . $ 2.2 $ 2.1
====== ======
Ratio of Earnings to Fixed Charges and Preferred
Dividend Requirements . . . . . . . 2.33 1.72
====== ======
</TABLE>
In computing the ratio of earnings to fixed charges, earnings consist
of net income to which has been added income taxes and fixed charges. Fixed
charges consist principally of interest on all indebtedness and that portion of
rentals considered to represent an appropriate interest factor. Preferred
dividend requirements are grossed up to their pretax equivalent.
<PAGE> 34
13. CONTINGENT LIABILITIES
In July 1992, the Internal Revenue Service (IRS) completed its
examination of the Company's federal income tax returns for 1984 through 1987.
The IRS proposed $142.0 in adjustments relating to 1986 and 1987 additions to
the loss reserves of the Company's former subsidiary, American Centennial
Insurance Company (ACIC), prior to the Company's sale of its entire interest in
ACIC in May 1987.
In order to limit the further accrual of interest on the proposed
adjustments, the Company paid $105.5 of tax and interest during the third
quarter 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 in the third quarter of
1996.
The Company has initiated litigation in the United States Tax Court to
oppose the disallowance. While the conclusion of this matter cannot be predicted
with certainty, management does not anticipate the ultimate resolution to differ
materially from amounts accrued.
The Company and subsidiaries are involved in various other claims and
lawsuits incidental to the business. In the opinion of management, these claims
and suits in the aggregate will not have a material adverse effect on the
Company's consolidated financial statements.
<PAGE> 1
EXHIBIT 99.4
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information and
explanatory notes are presented to show the impact on the historical financial
position and results of operations of Household Finance Corporation ("HFC") of
the Merger under the "pooling of interests" method of accounting. Following the
Merger, the common stock of Beneficial and substantially all the
consolidated net assets of Beneficial were contributed to HFC by its parent,
Household International, Inc. ("Household"). The unaudited pro forma condensed
combined financial information combines the historical financial information of
HFC and Beneficial at March 31, 1998, for the three months ended March 31, 1998
and 1997, and for each of the three years ended December 31, 1997.
The pro forma condensed combined financial information for the three months
ended March 31, 1998 and 1997 and for each of the three years ended December
31, 1997 is based on and derived from, and should be read in conjunction with,
(a) the historical consolidated financial statements and the related notes
thereto of HFC (as previously filed), and (b) the historical consolidated
financial statements and the related notes thereto of Beneficial, which are
included herein under Item 7(a).
<PAGE> 2
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
At March 31, 1998
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
HFC Beneficial Adjustments Pro Forma
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets
Cash $ 369.3 $ 224.6 $ 593.9
Investment securities 1,673.5 633.9 2,307.4
Receivables, net 19,804.3 14,243.6 34,047.9
Advances to parent company and
affiliates 67.5 67.5
Acquired intangibles and
goodwill, net 1,877.4 50.6 1,928.0
Properties and equipment, net 204.4 233.0 ($127.0)(b) 310.4
Real estate owned 113.0 75.1 188.1
Other assets 1,487.3 835.2 (159.0)(b) 2,163.5
---------- ----------- ----------- ----------
Total assets $ 25,596.7 $ 16,296.0 ($286.0) $ 41,606.7
========== =========== =========== ==========
Liabilities and Shareholder's Equity
Debt:
Deposits $ 509.7 $ 509.7
Commercial paper, bank and other
borrowings $ 5,966.4 3,935.6 9,902.0
Senior and senior subordinated
debt (with original maturities
over one year) 13,456.0 8,662.7 22,118.7
---------- ----------- ----------- ----------
Total debt 19,422.4 13,108.0 32,530.4
Insurance policy and claim reserves 937.4 357.8 1,295.2
Other liabilities 938.9 782.2 $ 465.0(b) 2,186.1
---------- ----------- ----------- ----------
Total liabilities 21,298.7 14,248.0 465.0 36,011.7
Preferred stock 114.8 (114.8)(a)
Common shareholder's equity:
Common stock 54.4 (54.4)(a)
Additional paid-in capital 2,256.3 349.7 169.2 (a) 2,775.2
Retained earnings 2,042.4 1,551.4 (751.0)(b) 2,842.8
Foreign currency translation
adjustments (8.2) (27.4) (35.6)
Unrealized gain on
investments, net 7.5 5.1 12.6
---------- ----------- ----------- ----------
Total common shareholder's equity 4,298.0 1,933.2 (636.2) 5,595.0
---------- ----------- ----------- ----------
Total liabilities and shareholder's
equity $ 25,596.7 $ 16,296.0 ($286.0) $ 41,606.7
========== =========== =========== ==========
</TABLE>
(a) The pro forma amount reflects the exchange of Beneficial common stock and
Beneficial convertible preferred stock for Household International common
stock and Beneficial preferred stock for Household International preferred
stock.
(b) Reflects the effect of the Merger and Integration Costs. See Note 2.
See Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
<PAGE> 3
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Three Months Ended March 31, 1998
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
HFC Beneficial Pro Forma
-------- ---------- ----------
<S> <C> <C> <C>
Finance and other interest income $ 579.1 $ 565.8 $ 1,144.9
Interest expense 276.6 223.6 500.2
-------- ---------- ----------
Net interest margin 302.5 342.2 644.7
Provision for credit losses on owned
receivables 208.8 139.8 348.6
-------- ---------- ----------
Net interest margin after provision for
credit losses 93.7 202.4 296.1
-------- ---------- ----------
Total other revenues 446.7 410.9 857.6
-------- ---------- ----------
Total costs and expenses 333.2 300.0 633.2
-------- ---------- ----------
Income before income taxes 207.2 313.3 520.5
Income taxes 70.2 125.8 196.0
-------- ---------- ----------
Net income $ 137.0 $ 187.5 $ 324.5
======== ========== ==========
</TABLE>
See Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
<PAGE> 4
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Three Months Ended March 31, 1997
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
HFC Beneficial Pro Forma
-------- ---------- ----------
<S> <C> <C> <C>
Finance and other interest income $ 506.6 $ 538.3 $ 1,044.9
Interest expense 233.2 214.7 447.9
-------- ---------- ----------
Net interest margin 273.4 323.6 597.0
Provision for credit losses on owned
receivables 233.5 93.1 326.6
-------- ---------- ----------
Net interest margin after provision for
credit losses 39.9 230.5 270.4
-------- ---------- ----------
Total other revenues 420.0 234.3 654.3
-------- ---------- ----------
Total costs and expenses 321.3 302.4 623.7
-------- ---------- ----------
Income before income taxes 138.6 162.4 301.0
Income taxes 49.5 61.7 111.2
-------- ---------- ----------
Net income $ 89.1 $ 100.7 $ 189.8
======== ========== ==========
</TABLE>
See Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
<PAGE> 5
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 1997
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
HFC Beneficial Pro Forma
-------- ---------- ----------
<S> <C> <C> <C>
Finance and other interest income $2,153.4 $ 2,140.3 $ 4,293.7
Interest expense 998.5 855.0 1,853.5
-------- ---------- ----------
Net interest margin 1,154.9 1,285.3 2,440.2
Provision for credit losses on owned
receivables 801.1 485.3 1,286.4
-------- ---------- ----------
Net interest margin after provision for
credit losses 353.8 800.0 1,153.8
-------- ---------- ----------
Total other revenues 1,758.1 815.4 2,573.5
-------- ---------- ----------
Total costs and expenses 1,326.2 1,183.3 2,509.5
-------- ---------- ----------
Provision for loss on German disposal - 58.8 58.8
-------- ---------- ----------
Income before income taxes 785.7 373.3 1,159.0
Income taxes 272.3 119.6 391.9
-------- ---------- ----------
Net income $ 513.4 $ 253.7 $ 767.1
======== ========== ==========
</TABLE>
See Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
<PAGE> 6
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 1996
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
HFC Beneficial Pro Forma
-------- ---------- ----------
<S> <C> <C> <C>
Finance and other interest income $1,963.8 $ 2,040.0 $ 4,003.8
Interest expense 911.1 812.8 1,723.9
-------- ---------- ----------
Net interest margin 1,052.7 1,227.2 2,279.9
Provision for credit losses on owned
receivables 522.8 398.8 921.6
-------- ---------- ----------
Net interest margin after provision for
credit losses 529.9 828.4 1,358.3
-------- ---------- ----------
Total other revenues 1,281.4 731.9 2,013.3
-------- ---------- ----------
Total costs and expenses 1,261.7 1,101.8 2,363.5
-------- ---------- ----------
Income before income taxes 549.6 458.5 1,008.1
Income taxes 180.6 177.5 358.1
-------- ---------- ----------
Net income $ 369.0 $ 281.0 $ 650.0
======== ========== ==========
</TABLE>
See Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
<PAGE> 7
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 1995
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
HFC Beneficial Pro Forma
-------- ---------- ----------
<S> <C> <C> <C>
Finance and other interest income $1,758.5 $ 1,926.8 $ 3,685.3
Interest expense 824.6 816.2 1,640.8
-------- ---------- ----------
Net interest margin 933.9 1,110.6 2,044.5
Provision for credit losses on owned
receivables 511.0 280.2 791.2
-------- ---------- ----------
Net interest margin after provision for
credit losses 422.9 830.4 1,253.3
-------- ---------- ----------
Total other revenues 1,355.5 471.4 1,826.9
-------- ---------- ----------
Total costs and expenses 1,341.2 1,006.6 2,347.8
-------- ---------- ----------
Provision for restructuring and other - 24.8 24.8
-------- ---------- ----------
Income before income taxes 437.2 270.4 707.6
Income taxes 175.4 119.9 295.3
-------- ---------- ----------
Net income $ 261.8 $ 150.5 $ 412.3
======== ========== ==========
</TABLE>
See Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
<PAGE> 8
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
Note 1. Basis of Presentation
On June 30, 1998, Household issued shares of its capital stock in exchange for
all of the outstanding capital stock of Beneficial. The Merger was accounted
for as a "pooling of interests" by Household. Upon completion of the Merger,
substantially all the consolidated net assets of Beneficial were contributed
to HFC. Accordingly, HFC's consolidated financial statements include the
combined operations for all prior periods.
The unaudited pro forma condensed combined financial information reflects the
Merger using the "pooling of interests" method of accounting and is based on the
historical consolidated financial statements of HFC and Beneficial. The
Unaudited Pro Forma Condensed Combined Balance Sheet assumes that the Merger
was consummated on March 31, 1998. The Unaudited Pro Forma Condensed Combined
Statements of Income give effect to the Merger as if it occurred on January 1,
1995.
Certain amounts in the historical financial statements of Beneficial have been
reclassified to conform with HFC's historical financial statement presentation.
The unaudited pro forma condensed combined financial information should be read
in conjunction with historical consolidated financial statements and the
related notes thereto of each of HFC (as previously filed) and Beneficial
which are included herein in Item 7(a).
Note 2. Merger and Integration Related Costs
In connection with the Merger, Household and HFC intend to merge corporate
functions, sell Beneficial's commercial bank business, sell or combine
overlapping branches, sell or merge Beneficial's mortgage operations into
HFC's, close Beneficial's United Kingdom ("UK") headquarters and merge
Beneficial's UK operations into Household's existing UK business.
Household and HFC will incur pre-tax Merger and integration related costs of
approximately $1 billion ($751 million after-tax) during the quarter ended June
30, 1998. These costs include approximately $284 million in lease exit costs,
$161 million in fixed asset write-offs related to closed facilities, $240
million in severance and change in control payments, $140 million in asset
writedowns to reflect modified business plans, $66 million in investment
banking fees, $34 million in legal and other expenses, and $75 million in
prepayment premiums related to debt.
The estimated Merger and integration related costs include approximately $286
million in non-cash charges. Cash payments of approximately $714 million will
be funded through HFC's existing operations and commercial paper and other
borrowings. In addition, HFC expects to receive tax benefits of approximately
$249 million. Substantially all of the cash payments are expected to be made by
the end of 1998.
<PAGE> 9
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION - (Continued)
These amounts, including the related tax effect, have been reflected in the
Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 1998 and
are not reflected in the Unaudited Pro Forma Condensed Combined Statements of
Income as they are not expected to have a continuing impact on the combined
company.
Note 3. Operating Costs Savings
The combined company expects to achieve substantial annual pre-tax cost savings
of approximately $450 million (approximately $300 million after-tax) through
the elimination of redundant staff functions and corporate overhead,
consolidation of product lines, data processing and back office functions, and
the elimination of certain duplicate or excess office facilities. Based on
Household management's current estimates, approximately 90% of the operating
cost savings are expected to be achieved on a run-rate basis by the end of 1999
(which estimates as to timing and amount have been modestly refined since the
public announcement of the Merger and at the time that the analyses were
performed by Household's and Beneficial's financial advisors in connection with
their respective fairness opinions). These savings should continue to benefit
the combined company in future years. No adjustment has been included in the
unaudited pro forma financial information for the anticipated operating cost
savings. There can be no assurance that the anticipated cost savings will be in
the expected amounts or at the times anticipated.
