<PAGE> 1
FORM 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: June 2, 1998
------------
HOUSEHOLD FINANCE CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-75 36-1239445
- -------------------------------------------------------------------------------
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification
incorporation Number)
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 5. Other Events
Household International, Inc. ("Household"), the parent of the
Registrant, announced on April 7, 1998 that it had reached a merger
agreement with Beneficial Corporation ("Beneficial") under which each
share of Beneficial common stock will be exchanged for 3.0666 shares of
Household common stock (as adjusted for a 3-for-1 stock split effected
in the form of a dividend paid on June 1, 1998). The agreement
contemplates the merger of Household Acquisition Corporation II, a
wholly owned subsidiary of Household, with and into Beneficial, with
Beneficial being the surviving corporation (the "Merger"). Following
the Merger, it is expected that the common stock of Beneficial and
substantially all the consolidated assets of Beneficial will be
contributed to the Registrant.
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
The 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
of Form 10-K/A and in its Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 are contained in this Item 7(a).
(i) FISCAL YEAR ENDED DECEMBER 31, 1997
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> 3
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> 4
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> 5
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> 6
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> 7
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> 8
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> 9
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> 10
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> 11
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> 12
<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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
<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 $659.6
Income before Income Taxes.. 184.7 139.6 109.5 24.7
Net Income.................. 107.4 82.4 67.9 23.3
Diluted Earnings per Common
Share...................... 1.96 1.48 1.22 .39
Dividends per Common Share.. .47 .47 .52 .52
</TABLE>
<PAGE> 26
(ii) QUARTER ENDED MARCH 31, 1998
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ---------
<S> <C> <C>
ASSETS
Cash and Equivalents . . . . . . . . . . . .$ 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> 27
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(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> 28
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(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> 29
BENEFICIAL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(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> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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> 36
(b) Pro forma information.
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, it is expected that the common stock of Beneficial and substantially
all the consolidated assets of Beneficial will be contributed to HFC. 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> 37
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 1,673.5 903.4 2,576.9
Receivables, net 19,804.3 13,996.5 33,800.8
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 1,134.8 (159.0)(b) 2,463.1
---------- ----------- ----------- ----------
Total assets $ 25,596.7 $ 16,618.0 ($286.0) $ 41,928.7
========== =========== =========== ==========
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 937.4 569.2 1,506.6
Other liabilities 938.9 892.8 $ 465.0(b) 2,296.7
---------- ----------- ----------- ----------
Total liabilities 21,298.7 14,570.0 465.0 36,333.7
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 $ 16,618.0 ($286.0) $ 41,928.7
========== =========== =========== ==========
</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> 38
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 $ 562.8 $ 1,141.9
Interest expense 276.6 223.6 500.2
-------- ---------- ----------
Net interest margin 302.5 339.2 641.7
Provision for credit losses on owned
receivables 208.8 139.8 348.6
-------- ---------- ----------
Net interest margin after provision for
credit losses 93.7 199.4 293.1
-------- ---------- ----------
Total other revenues 446.7 413.9 860.6
-------- ---------- ----------
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> 39
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 $ 535.4 $ 1,042.0
Interest expense 233.2 214.7 447.9
-------- ---------- ----------
Net interest margin 273.4 320.7 594.1
Provision for credit losses on owned
receivables 233.5 93.1 326.6
-------- ---------- ----------
Net interest margin after provision for
credit losses 39.9 227.6 267.5
-------- ---------- ----------
Total other revenues 420.0 237.2 657.2
-------- ---------- ----------
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> 40
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 $ 2,127.3 $ 4,280.7
Interest expense 998.5 855.0 1,853.5
-------- ---------- ----------
Net interest margin 1,154.9 1,272.3 2,427.2
Provision for credit losses on owned
receivables 801.1 485.3 1,286.4
-------- ---------- ----------
Net interest margin after provision for
credit losses 353.8 787.0 1,140.8
-------- ---------- ----------
Total other revenues 1,758.1 828.4 2,586.5
-------- ---------- ----------
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> 41
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 $ 2,027.3 $ 3,991.1
Interest expense 911.1 812.8 1,723.9
-------- ---------- ----------
Net interest margin 1,052.7 1,214.5 2,267.2
Provision for credit losses on owned
receivables 522.8 398.8 921.6
-------- ---------- ----------
Net interest margin after provision for
credit losses 529.9 815.7 1,345.6
-------- ---------- ----------
Total other revenues 1,281.4 744.6 2,026.0
-------- ---------- ----------
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> 42
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 $ 1,913.6 $ 3,672.1
Interest expense 824.6 816.2 1,640.8
-------- ---------- ----------
Net interest margin 933.9 1,097.4 2,031.3
Provision for credit losses on owned
receivables 511.0 280.2 791.2
-------- ---------- ----------
Net interest margin after provision for
credit losses 422.9 817.2 1,240.1
-------- ---------- ----------
Total other revenues 1,355.5 484.6 1,840.1
-------- ---------- ----------
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> 43
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
Note 1. Basis of Presentation
Household will issue shares of its capital stock in exchange for all of the
outstanding capital stock of Beneficial. It is intended that the Merger will be
accounted for as a "pooling of interests" by Household. Following the Merger,
it is expected that the common stock of Beneficial and substantially all the
consolidated assets of Beneficial will be contributed to HFC. Accordingly,
HFC's consolidated financial statements will 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.
The pro forma adjustments represent management's best estimate based on
available information at this time. Actual adjustments may differ from those
reflected in the unaudited pro forma condensed combined financial information.
HFC and Beneficial are still in the process of reviewing their respective
accounting policies relative to those followed by the other entity. As a result
of this review, it might be necessary to restate certain amounts in HFC's or
Beneficial's financial statements to conform to those accounting policies that
are most appropriate. At this time, it is not expected that conformance of such
accounting policies will have a material impact on the pro forma condensed
combined financial statements.
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.
HFC expects to incur pre-tax Merger and integration related costs of
approximately $1 billion ($751 million after-tax). 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> 44
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.
(c) Exhibits.
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger among Household
International, Inc., Household Acquisition Corporation
II and Beneficial Corporation dated as of April 7,
1988 (incorporated by reference to Exhibit 2.1 to
Household International, Inc.'s Form 8-K dated April
20, 1998 (File No. 1-8198)).
23.1 Consent of Deloitte & Touche LLP.
<PAGE> 45
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
By: /s/ John W. Blenke
-------------------------
John W. Blenke
Assistant Secretary
Dated: June 2, 1998
------------
<PAGE> 1
EXHIBIT 23.1
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 the Current Report on Form
8-K of Household Finance Corporation filed on June 2, 1998 and the reference to
us under the heading "Experts" in the prospectus.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
June 2, 1998
