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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-75
HOUSEHOLD FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-1239445
(State of incorporation) (I.R.S. Employer Identification No.)
2700 SANDERS ROAD 60070
PROSPECT HEIGHTS, ILLINOIS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 564-5000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
9% SENIOR SUBORDINATED NOTES, DUE SEPTEMBER 28, 2001 NEW YORK STOCK EXCHANGE
9 5/8% SENIOR SUBORDINATED NOTES, DUE JULY 15, 2000 NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES / X / NO / /
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. / X /
AS OF MARCH 18, 1998, THERE WERE 1,000 SHARES OF REGISTRANT'S COMMON STOCK
OUTSTANDING, ALL OF WHICH ARE OWNED BY HOUSEHOLD INTERNATIONAL, INC.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE
REDUCED DISCLOSURE FORMAT.
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TABLE OF CONTENTS
<TABLE>
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PART/ITEM NO. PAGE
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PART I.
Item 1. Business.................................................... 1
Cautionary Statement on Forward-Looking Statements.......... 1
Item 2. Properties.................................................. 1
Item 3. Legal Proceedings........................................... 1
Item 4. Submission of Matters to a Vote of Security Holders......... 2
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 2
Item 6. Selected Financial Data..................................... 2
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 2
Financial Highlights........................................ 2
Operations Summary.......................................... 3
Balance Sheet Review........................................ 4
Statement of Income Review.................................. 5
Credit Quality.............................................. 7
Credit Loss Reserves........................................ 9
Liquidity and Capital Resources............................. 9
Glossary of Terms........................................... 13
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 15
Item 8. Financial Statements and Supplementary Data................. 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 15
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 15
Item 11. Executive Compensation...................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 15
Item 13. Certain Relationships and Related Transactions.............. 15
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 16
Financial Statements........................................ 16
Reports on Form 8-K......................................... 16
Exhibits.................................................... 16
Schedules................................................... 16
Signatures.................................................................... 17
Report of Independent Public Accountants...................................... F-1
Consolidated Statements of Income............................................. F-2
Consolidated Balance Sheets................................................... F-3
Consolidated Statements of Cash Flows......................................... F-4
Consolidated Statements of Changes in Preferred Stock and Common Shareholder's
Equity...................................................................... F-5
Notes to Consolidated Financial Statements.................................... F-6
Selected Quarterly Financial Data (Unaudited)................................. F-28
Schedule II................................................................... F-29
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PART I.
ITEM 1. BUSINESS.
Household Finance Corporation ("HFC") is a wholly-owned subsidiary of
Household International, Inc. ("Household International"). HFC and its
subsidiaries may also be referred to in this Form 10-K as "we", "us" or "our."
We primarily offer home equity loans, auto finance loans, and unsecured loans,
including MasterCard*, VISA*, and private label credit cards to consumers in the
United States. Loans are marketed through branch lending offices, direct mail
and telemarketing as well as through dealer networks and retail stores in
connection with our private label business. We also purchase loans of a similar
nature from other lenders. Our loans may bear interest at either a fixed or
floating rate and may be offered at fixed dollar amounts or on a revolving
basis, such as a line of credit, that allows the customer to borrow up to a
fixed credit limit. Our subsidiaries generally service these loans, including
loans made by the credit card operations of Household International.
Where applicable laws permit, credit life, credit accident, health and
disability insurance is offered to our customers in connection with our
products. Such insurance is generally written directly by, or reinsured with one
of our affiliates.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Certain matters discussed throughout this Form 10-K or in the information
incorporated herein by reference may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
as such may involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Forward-looking statements are based
on our current views and assumptions, and involve risks and uncertainties that
could cause these results to be materially different. For example, operating
results may be affected by external factors such as: changes in laws and
regulations, including changes in accounting standards; changes in overall
economic conditions, including the interest rate environment in which we operate
and currency fluctuations; consumer perception of the availability of credit,
including the ramifications of filing for personal bankruptcy; the effectiveness
of programs to predict delinquency or loss or improve collections and consumer
acceptance and demand for our loan products.
ITEM 2. PROPERTIES.
Substantially all of our branch offices and headquarters space is leased,
except for a credit card processing facility located in Las Vegas, Nevada. We
believe that such properties are in good condition and are adequate to meet our
current and reasonably anticipated needs.
ITEM 3. LEGAL PROCEEDINGS.
We have developed and implemented compliance functions to monitor our
operations to ensure that we comply with all applicable laws. However, we are
parties to various legal proceedings resulting from ordinary business
activities. Certain of these actions are or purport to be class actions seeking
damages in very large amounts. Due to the uncertainties in litigation and other
factors, we cannot assure you that we will ultimately prevail in each instance.
We believe that we have meritorious defenses to these actions and any adverse
decision should not materially affect our consolidated financial condition.
During the past several years, the press has widely reported certain
industry related concerns which may impact us. Some of these involve the amount
of litigation instituted against finance and insurance companies operating in
the state of Alabama and the large punitive awards obtained from juries in that
state. Like other companies in this industry, we and some of our subsidiaries
are involved in a number of lawsuits pending
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* MasterCard is a registered trademark of MasterCard International, Incorporated
and VISA is a registered trademark of VISA USA, Inc.
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against us in Alabama, many of which relate to the financing of satellite
television broadcast receivers. We discontinued financing such receivers in
1995. The Alabama cases generally allege inadequate disclosure or
misrepresentation of financing terms. In many suits, other parties are also
named as defendants. Unspecified compensatory and punitive damages are sought.
Several of these suits purport to be class actions. The judicial climate in
Alabama is such that the outcome of all of these cases is unpredictable.
Although we believe we have substantive legal defenses to these claims and are
prepared to defend each case vigorously, a number of such cases have been
settled or otherwise resolved for amounts that in the aggregate are not material
to our operations. Appropriate insurance carriers have been notified of each
claim, and a number of reservations of rights letters have been received.
Certain of these claims have been partially covered by insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All 1,000 shares of HFC's outstanding common stock are owned by Household
International. Consequently, there is no public market in HFC's common stock. In
August 1997, we redeemed, at par of $100 million, all outstanding shares of
HFC's 7.25 percent term cumulative preferred Series 1992-A, for $100 per
depositary share plus accrued and unpaid dividends.
HFC paid cash dividends to Household International of $250 million in 1997
and $155 million in 1995. HFC did not pay any cash dividends to Household
International in 1996. In addition, HFC paid cash dividends on its preferred
stock of $4.6 million in 1997 and $7.2 million for each of the full years in
1996 and 1995.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL HIGHLIGHTS
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
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(ALL DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
NET INCOME.................................................. $ 513.4 $ 369.0 $ 261.8
========= ========= =========
KEY PERFORMANCE RATIOS
Return on average owned assets.............................. 2.31% 1.89% 1.22%
Return on average common shareholder's equity............... 15.5 15.8 12.6
Managed net interest margin, normalized..................... 7.85 7.64 7.20
Managed consumer net chargeoff ratio........................ 4.51 3.31 3.25
--------- --------- ---------
AT DECEMBER 31
Total assets:
Owned..................................................... $22,934.7 $20,587.4 $17,793.4
Managed(1)................................................ 38,065.0 33,096.8 27,005.5
Managed receivables(1)...................................... 32,642.6 28,596.2 21,647.6
Debt to equity ratio........................................ 4.2:1 5.9:1 5.5:1
--------- --------- ---------
</TABLE>
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(1) Managed data includes receivables on our balance sheet and those that we
service for investors as part of our asset securitization program.
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OPERATIONS SUMMARY
- Our net income in 1997 was $513.4 million, an increase of 39 percent over
1996. Net income in 1996 was $369.0 million, 41 percent higher than 1995
earnings of $261.8 million. Our return on average common shareholder's
equity ("ROE") was 15.5 percent in 1997, compared to 15.8 percent in
1996, and up from 12.6 percent in 1995. The slight decrease in 1997 was
due to the capital contribution from Household International in June 1997
to fund the purchase of Transamerica Financial Services Holding Company,
as discussed below. Our return on average owned assets ("ROA") was 2.31
percent, up from 1.89 percent in 1996 and 1.22 percent in 1995. Our net
income and ROA increased over the past three years due to growth in our
consumer receivables and because we have focused on our higher return
businesses.
- In June, Household International and a wholly-owned subsidiary of HFC
purchased Transamerica Financial Services Holding Company ("TFS"), the
branch-based consumer finance subsidiary of Transamerica Corporation, for
$1.1 billion. We also repaid $2.7 billion of debt that TFS owed to
affiliates of Transamerica Corporation. We added about $3.1 billion of
real estate secured receivables as a result of the acquisition. The
acquisition strengthened our consumer finance operations by adding new
markets, new customer accounts, seasoned employees and receivables
secured by collateral. This type of security helps to reduce the amount
of loss we might incur if borrowers do not pay off their loans. The
integration of TFS is complete. We closed all redundant branches and
consolidated back office operations.
In June 1997, we received a capital contribution from Household
International of $976.5 million which was used to repay short-term
borrowings related to the TFS acquisition.
In October 1997, Household International and its wholly-owned subsidiary
purchased all of the outstanding capital stock of ACC Consumer Finance
Corporation ("ACC"), an auto finance company, for about 1.4 million shares
of its common stock and cash. ACC makes loans to non-prime borrowers
secured by automobiles, primarily used vehicles sold through franchised
dealers. Upon completing this transaction, Household International
contributed its investment in ACC to HFC. The acquisition of ACC increased
our market share in the non-prime auto finance market and added key
managers to grow this business.
We accounted for both of these acquisitions as purchases. Thus, we have
included the results of operations of TFS and ACC in our statement of
income for 1997 from the closing dates of the transactions. These
acquisitions were not material to our financial statements.
- The following summarizes operating results for our key businesses for
1997:
Our consumer finance business reported higher earnings due mainly to
higher levels of average managed receivables, particularly in unsecured
loans. These loans typically carry higher rates than secured products
because they carry more risk. More receivables, coupled with higher
interest rates charged on loans, resulted in higher net interest margin.
The increase in margin was partially offset by higher credit losses
because more of our borrowers declared personal bankruptcy. Personal
bankruptcy filings in the U.S. were at an all-time high in 1997.
Our MasterCard and Visa credit card business achieved higher earnings due
to higher net interest margin and fee income, and improved efficiency.
These factors were offset to some degree by higher credit losses resulting
primarily from increased personal bankruptcy filings. In late 1996 we
started a program designed to increase the return on our MasterCard and
Visa portfolio. We sold certain non-strategic portfolios, increased fees,
and systematically eliminated unprofitable accounts. This business
continued to benefit from our co-branding and affinity relationship
strategies. This includes our alliance with General Motors Corporation
("GM") to issue the GM Card, a co-branded credit card. The GM Card
continues to represent a substantial portion of our credit card portfolio.
The MasterCard and Visa business also includes the AFL-CIO's Union
Privilege affinity relationship which we acquired in June 1996. Union
Privilege was created by the AFL-CIO to market benefits to union members.
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Our private label credit card business reported lower income as a result
of higher credit losses in 1997 due to the end of certain special
promotions and increased personal bankruptcies. The higher credit losses
were partially offset by higher net interest margin. During 1997, we began
to implement various initiatives to control the mix and increase the
profitability of promotional activity.
Our commercial operations benefited from gains on the disposition of
assets while continuing to minimize credit losses.
- In October 1995, we sold the individual life and annuity product lines of
our individual life insurance business. However, we retained our credit
life insurance business, which complements our consumer lending and
provides us additional revenue. We sold $6.1 billion of assets, which
were virtually all investment securities. We retained two product lines
of the individual life insurance business, but are no longer pursuing new
business in this area.
In the second quarter of 1995, we sold our purchased mortgage servicing
rights to a third party. The sale did not have a material impact on our
operating results.
- Our managed net interest margin expanded to 7.85 percent in 1997 from
7.64 percent in 1996 and 7.20 percent in 1995. Our margins have increased
over the past three years because we have continued to raise the interest
rates we charge on most of our products. In addition, our product mix has
shifted towards unsecured receivables, which have higher rates than
secured products because they carry more risk.
BALANCE SHEET REVIEW
- Managed assets (total assets on our balance sheet plus receivables
serviced with limited recourse) increased to $38.1 billion at December
31, 1997 from $33.1 billion at year-end 1996. The increase was due to
receivable growth in our consumer receivables. Owned assets totaled $22.9
billion at December 31, 1997, up from $20.6 billion at year-end 1996.
Owned assets may vary from period to period depending on the timing and
size of asset securitization transactions. We securitized $4.5 billion of
receivables in 1997 and $6.2 billion of receivables during 1996. We refer
to the securitized receivables that are serviced for investors and not on
our balance sheet as our off-balance sheet portfolio.
- Our consumer receivables grew during 1997, as shown in the following
table:
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
DECEMBER 31, 1997 IN 1997 / 1996 IN 1996 / 1995
----------------- -------------- --------------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C>
Managed receivables:
Home equity.......................... $10,079.0 47% 2%
Auto finance(1)...................... 872.4 -- --
MasterCard/Visa...................... 10,880.7 (4) 81
Private label........................ 4,390.2 2 23
Other unsecured...................... 5,665.3 9 33
--------- --- ---
Total consumer..................... 31,887.6 15 36
--------- --- ---
Commercial........................... 755.0 (15) (27)
--------- --- ---
Total.............................. $32,642.6 14% 32%
========= === ===
</TABLE>
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(1) Prior to 1997, auto finance receivables were not significant and were
included in other unsecured receivables.
Growth in home equity and auto finance receivables benefited from
acquisitions during 1997. MasterCard and Visa receivables were down from
1996 due to the sale and planned runoff of non-strategic and less
profitable receivables. Private label credit card receivables were up
slightly from last
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year. Other unsecured receivables were up from 1996 as we experienced
steady growth in our consumer finance business.
- The managed consumer two-months-and-over contractual delinquency ratio
increased to 5.09 percent at December 31, 1997 from 4.33 percent at
December 31, 1996. The 1997 managed consumer net chargeoff ratio was 4.51
percent compared to 3.31 percent in 1996 and 3.25 percent in 1995.
- We increased managed credit loss reserves 25 percent in 1997, to $1.5
billion compared to $1.2 billion at December 31, 1996. This compares to
an increase of 14 percent in total managed receivables in 1997. The
increase in managed reserves was due to continuing uncertainty about
consumer payment patterns, the maturing of our unsecured loan portfolios
and the increase in our off-balance sheet portfolio. Credit loss reserves
as a percent of managed receivables increased to 4.74 percent at year-end
1997 from 4.31 percent a year ago.
- Our debt to equity ratio was 4.2 to 1 compared to 5.9 to 1 at December
31, 1996. The decrease in the ratio is primarily due to the capital
contribution from Household International in June to fund the TFS
acquisition.
STATEMENT OF INCOME REVIEW
NET INTEREST MARGIN
Net interest margin was $1,154.9 million for 1997, up from $1,052.7 million
in 1996 and $933.9 million in 1995. As a percent of average owned
interest-earning assets, net interest margin was 6.65 percent in 1997, 6.89
percent in 1996 and 7.41 percent in 1995. The decrease in the net interest
margin percentage in 1997 was the result of the change in product mix in the
owned portfolio due to asset securitizations, as discussed below. The dollar
increase over 1996 and 1995 was due to an increase in average owned home equity
loans and growth in private label receivables.
Due to the securitization of assets over the past several years, the
comparability of net interest margin between years may be affected by the level
and type of assets securitized. As receivables are securitized rather than held
in our portfolio, net interest income is reclassified to securitization income.
Net interest margin on a managed basis, assuming receivables securitized were
held in our portfolio, increased to $2.4 billion for 1997 from $1.9 billion in
1996. Net interest margin on a managed basis as a percent of average managed
interest-earning assets increased to 7.85 percent from 7.64 percent in 1996 and
7.20 percent in 1995. The managed net interest margin percentages for 1997 and
1996 exclude the impact of temporary investments related to acquisitions during
those years. Including the impact of these temporary investments, the managed
net interest margin percentage was 7.81 percent in 1997 and 7.54 percent in
1996.
PROVISION FOR CREDIT LOSSES
The provision for credit losses includes current period credit losses. It
also includes an amount which, in our judgment, is sufficient to maintain
reserves for credit losses at a level that reflects known and inherent risks in
the portfolio. The managed basis provision for credit losses also includes the
over-the-life reserve requirement established on the off-balance sheet portfolio
when receivables are securitized.
The provision for credit losses on an owned basis totaled $801.1 million in
1997, up from $522.8 million in 1996 and $511.0 million in 1995. As a percent of
average owned receivables, the provision was 4.72 percent compared to 3.58
percent in 1996 and 4.22 percent in 1995. The increase in 1997 was due to higher
chargeoffs on our unsecured portfolios. Over the past three years, we recorded
provisions for credit losses in excess of chargeoffs because of continued
uncertainty regarding consumer payment patterns, high levels of personal
bankruptcies and the maturing of our unsecured products. The maturing or
seasoning of a product is the effect of a growing portfolio reaching expected
levels of chargeoffs as loans age. Owned provision in excess of owned chargeoffs
was $121.4 million in 1997, $69.1 million in 1996 and $37.7 million in 1995.
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OTHER REVENUES
Securitization income was $994.2 million in 1997, $720.1 million in 1996
and $424.6 million in 1995. Securitization income consists of income associated
with the securitization and sale of receivables with limited recourse, including
net interest margin, fee and other income, and provision for credit losses
related to those receivables. Securitization income increased over the three
year period because of growth in average securitized receivables.
Insurance revenues of $175.1 million in 1997 were up from $167.9 million in
1996 but down from $251.7 million in 1995. The increase in 1997 was due to
increased insurance sales on a larger portfolio. The decrease in 1996 from 1995
was due to the sale of the individual life and annuity product lines in the
fourth quarter of 1995. Revenues of the retained insurance business were $158.7
million in 1995 on a pro forma basis.
Investment income includes interest income on investment securities in the
retained insurance business as well as realized gains and losses from the sale
of investment securities. Investment income was $109.0 million in 1997 compared
to $145.2 million in 1996 and $453.8 million in 1995. The decrease in 1997 from
1996 was due to lower average investment balances and lower yields on the
securities in the portfolio. The large decline in 1996 from 1995 was because of
the sale of our insurance business. On a pro forma basis, investment income from
our retained insurance businesses was $154.3 million in 1995. The decline in
1996 compared to pro forma 1995 was due to lower average investment balances and
lower yields.
Fee income on an owned basis includes revenues from fee-based products such
as credit cards. Fee income was $335.7 million in 1997, up from $178.4 million
in 1996 and $125.2 million in 1995. The increase in fee income in 1997 reflected
higher credit card fees as a result of increased average owned credit card
receivables compared to the prior years.
Other income was $144.1 million in 1997, $69.8 million in 1996 and $100.2
million in 1995 and includes gains and losses from the disposition of assets and
businesses and, in 1995, income from servicing receivable portfolios without
recourse. Other income in 1997 reflected the sale of certain non-strategic
assets which included the sale of certain non co-branded MasterCard and Visa
receivables.
EXPENSES
Salaries and fringe benefits and other operating expenses were $1,017.3
million in 1997, up from $936.6 million in 1996 and $818.3 million in 1995. The
increases were due to a higher number of sales people in our consumer finance
branch network and a higher number of collectors. Additionally, we had higher
expenses associated with growth in our managed receivable portfolio. Average
managed receivables grew 21 percent in 1997 compared to 1996 and 55 percent
compared to 1995. Also contributing to the increase in 1997 were higher expenses
related to the TFS and ACC acquisitions. Expenses in 1996 included non-recurring
charges of $19 million related to closing office space, settling litigation and
other matters.
Amortization of acquired intangibles and goodwill was $143.4 million in
1997, $121.1 million in 1996 and $70.6 million in 1995. The increase reflects
our acquisitions of TFS in mid-1997 and ACC in late 1997, and the Union
Privilege portfolio in mid-1996.
Policyholders' benefits were $165.5 million in 1997, $204.0 million in 1996
and $452.3 million in 1995. Expense was lower in 1997 compared to 1996 because
we have fewer policies in our retained life insurance business. The decrease in
1996 from 1995 was due to the sale of our insurance business in late 1995. On a
pro forma basis, policyholders' benefits of our retained insurance business were
$189.2 million in 1995. The increase in 1996 over pro forma 1995 was due to
receivables growth.
Income taxes. The 1997 effective tax rate was 34.7 percent compared to 32.9
percent in 1996 and 40.1 percent in 1995. The 1995 tax rate was affected by
additional taxes on the sale of our insurance business. Excluding this impact,
the effective tax rate for 1995 would have been 33.1 percent.
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CREDIT QUALITY
Our delinquency and net chargeoff ratios reflect, among other factors, the
quality of receivables, the average age of our loans, the success of our
collection efforts and general economic conditions. Specifically, the high
levels of personal bankruptcies experienced by our industry over the last two
years has had a direct effect on the asset quality of our overall portfolio.
During 1997 our delinquency and net chargeoff levels were impacted by
higher consumer bankruptcies in our unsecured portfolios and the continued
maturing of our receivables. We continued to tighten and refine our credit
standards throughout the year and increased the number of collectors. During the
fourth quarter of 1997, we recognized the first drop in our quarterly chargeoff
ratio since the second quarter of 1996, due to a decrease in our MasterCard and
Visa portfolio.
Until June 1997, when we acquired virtually all secured loans from TFS, the
percentage of unsecured loans in our portfolio had been increasing. Unsecured
loans were 66 percent of our managed consumer receivables at year end 1997
compared to 75 percent in 1996 and 67 percent in 1995. Generally, unsecured
loans have higher delinquency and chargeoff rates than secured loans. The high
proportion of unsecured receivables increases the delinquency and chargeoff
statistics of the entire portfolio. We compensate for this by charging higher
interest rates and fees on these loans, which benefits our revenue.
We track delinquency and chargeoff levels on a managed basis. We include
the off-balance sheet portfolio since we apply the same credit and portfolio
management procedures as on our owned portfolio. This results in a similar
credit loss exposure for us. Our focus is to continue using risk-based pricing
and effective collection efforts for each loan. We have a process that gives us
a reasonable basis for predicting the asset quality of new accounts. This
process is based on our experience with numerous marketing, credit and risk
management tests. We also believe that our frequent and early contact with
delinquent customers is helpful in managing net credit losses. Despite these
efforts to manage the current credit environment, bankruptcies remain an
industry-wide issue and are unpredictable.
Our chargeoff policy for consumer receivables varies by product.
Receivables are written off, or for secured products written down to net
realizable value, at the following stages of contractual delinquency: auto
finance--5 months; home equity and MasterCard and Visa--6 months; private
label--9 months; and other unsecured--9 months and no payment received in 6
months. Commercial receivables are written off when it becomes apparent that an
account is uncollectible.
The state of California accounts for 20 percent of our managed domestic
consumer portfolio. It is the only state with more than 10 percent of this
portfolio. Because of our centralized underwriting, collections and processing
functions, we can quickly change our credit standards and intensify collection
efforts in specific locations.
MANAGED CONSUMER TWO-MONTH-AND-OVER
CONTRACTUAL DELINQUENCY RATIOS
<TABLE>
<CAPTION>
1997 QUARTER END 1996 QUARTER END
---------------------------- ----------------------------
4 3 2 1 4 3 2 1
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Home equity..................... 4.03% 3.20% 2.94% 3.53% 3.62% 3.59% 3.47% 3.36%
Auto finance(1)................. 1.97 -- -- -- -- -- -- --
MasterCard/Visa................. 3.22 3.39 3.36 3.32 2.90 2.64 1.99 2.61
Private label................... 7.45 7.06 6.31 5.81 5.95 5.68 5.25 4.93
Other unsecured................. 9.22 8.52 7.85 7.68 7.04 6.79 6.59 6.50
---- ---- ---- ---- ---- ---- ---- ----
Total................. 5.09% 4.84% 4.46% 4.62% 4.33% 4.14% 3.70% 4.01%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
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(1) Prior to the fourth quarter of 1997, delinquency statistics for auto finance
receivables were not significant. For prior periods, delinquency data for
these receivables were included in other unsecured receivables.
7
<PAGE> 10
Our managed consumer delinquency ratio at year end was 25 basis points
higher than the third quarter level. This increase was lower than the third
quarter increase of 38 basis points. The increases in these two quarters were
due to the expiration of certain special no-interest and no-payment promotions
in our private label portfolio, and seasoning of the other unsecured portfolio.
Home equity delinquency was up due to the maturing of acquired receivables.
MasterCard and Visa delinquency was down in the quarter.
The increase in the managed delinquency ratio from a year ago was mainly
due to the seasoning of all portfolios and the expiration of certain special
no-interest and no-payment promotions in our private label portfolio.
The owned consumer delinquency ratio was 5.03 percent at December 31, 1997
and 4.39 percent at December 31, 1996.
MANAGED CONSUMER NET CHARGEOFF RATIOS
<TABLE>
<CAPTION>
1997 QUARTER ANNUALIZED 1996 QUARTER ANNUALIZED
FULL YEAR ------------------------- FULL YEAR ------------------------- FULL YEAR
1997 4 3 2 1 1996 4 3 2 1 1995
--------- ---- ---- ---- ---- --------- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Home equity............. .93% .75% .69% 1.09% 1.35% .99% 1.22% .96% .91% .85% .99%
Auto finance(1)......... 4.68 5.33 -- -- -- -- -- -- -- -- --
MasterCard/Visa......... 5.60 5.74 6.57 5.38 4.76 4.17 3.90 3.99 4.40 4.67 4.66
Private label........... 5.50 6.03 5.52 5.13 5.36 3.30 3.78 3.78 4.08 5.05 5.28
Other unsecured......... 7.15 7.78 7.36 6.78 6.34 5.10 5.53 5.57 4.31 4.85 3.89
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total......... 4.51% 4.55% 4.65% 4.51% 4.31% 3.31% 3.51% 3.45% 3.29% 3.50% 3.25%
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) Includes ACC net chargeoffs subsequent to our acquisition in October 1997.
Prior to the fourth quarter of 1997, chargeoff statistics for auto finance
receivables were not significant and were included in other unsecured
receivables.
The annualized fourth quarter chargeoff ratio was 4.55 percent, down 10
basis points from the third quarter. Total dollars of chargeoff were down in the
quarter. The improvement was driven by an 83 basis point decline in the
MasterCard and Visa chargeoff ratio to 5.74 percent. For the MasterCard and Visa
portfolio, actual dollars of chargeoffs were down over $22 million in the
quarter, reflecting reductions in both bankruptcies and credit chargeoffs. In
the private label portfolio, increased chargeoffs reflected the maturing of
promotional balances and higher personal bankruptcies. In our other unsecured
portfolio, higher chargeoffs resulted from continued seasoning and high levels
of personal bankruptcies.
The managed consumer net chargeoff ratio for full year 1997 was 4.51
percent, up from 3.31 percent in 1996 and 3.25 percent in 1995. About 35 percent
of the increase in 1997 was due to higher bankruptcy chargeoffs in our
MasterCard and Visa portfolio. The remaining increase was due to the expiration
of certain private label promotional programs and seasoning of other unsecured
receivables. The owned consumer net chargeoff ratio was 4.18 percent in 1997,
3.35 percent in 1996 and 4.37 percent in 1995.
8
<PAGE> 11
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1997 1996 1995
---- ---- ----
(ALL DOLLAR AMOUNTS ARE
STATED IN MILLIONS)
<S> <C> <C> <C>
Nonaccrual managed receivables.............................. $ 729.9 $ 519.9 $547.9
Accruing managed consumer receivables 90 or more days
delinquent................................................ 503.3 405.7 149.7
Renegotiated commercial loans............................... 12.4 12.9 21.2
-------- -------- ------
Total nonperforming managed receivables................... 1,245.6 938.5 718.8
Real estate owned........................................... 102.3 112.1 105.6
-------- -------- ------
Total nonperforming managed assets........................ $1,347.9 $1,050.6 $824.4
======== ======== ======
Managed credit loss reserves as a percent of nonperforming
managed receivables....................................... 124.2% 131.4% 120.5%
</TABLE>
CREDIT LOSS RESERVES
We maintain credit loss reserves to cover probable losses of principal and
interest in both our owned and off-balance sheet portfolios. We estimate losses
for consumer receivables based on delinquency status and past loss experience.
For securitized receivables, we also record a provision for estimated probable
losses that we will incur over the life of the transaction. For commercial
loans, we calculate probable losses by using expected amounts and timing of
future cash flows to be received on loans. In addition, we provide for general
loss reserves on consumer and commercial receivables to reflect our assessment
of portfolio risk factors. Loss reserve estimates are reviewed periodically and
adjustments are reported in earnings when they become known. These estimates are
influenced by factors outside of our control, such as economic conditions and
consumer payment patterns. As a result, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change.
Owned credit loss reserves increased 28 percent to $857.6 million from
$671.5 million at December 31, 1996. The ratio of credit loss reserves to total
owned receivables was 4.90 percent, up from 4.17 percent at December 31, 1996.
Total managed credit loss reserves increased 25 percent to $1,546.8 million
from $1,233.1 million at December 31, 1996. The ratio of credit loss reserves to
total managed receivables was 4.74 percent, up from 4.31 percent at December 31,
1996. We increased credit loss reserves because of seasoning of unsecured
products and increased personal bankruptcies.
LIQUIDITY AND CAPITAL RESOURCES
Generally, we are funded independently. Cash flows, liquidity and capital
are monitored at both HFC and Household International levels. In managing
capital, we develop targets for equity to managed assets based on discussions
with rating agencies, reviews of regulatory requirements and competitor capital
positions, credit loss reserve strength, risks inherent in the projected
operating environment and acquisition objectives. We also specifically consider
the level of intangibles arising from acquisitions. These targets include
capital levels against both on-balance sheet assets and our off-balance sheet
portfolio. HFC paid cash dividends to Household International of $250 million in
1997 and $155 million in 1995. HFC did not pay any cash dividends to Household
International in 1996. HFC paid cash dividends on its preferred stock of $4.6
million in 1997 and $7.2 million for each of the full years in 1996 and 1995.
Our major use of cash is the origination or purchase of receivables or
purchases of investment securities. Our main sources of cash are the collection
of receivable balances; maturities or sales of investment securities; proceeds
from the issuance of debt and securitization of consumer receivables; and cash
provided by operations.
9
<PAGE> 12
We fund our operations by issuing commercial paper, medium- and long-term
debt to mainly wholesale investors, securitizing consumer receivables and
receiving capital contributions from our parent. At December 31, 1997,
outstanding commercial paper totaled $4.6 billion compared to $4.8 billion at
December 31, 1996. We market our commercial paper through an in-house sales
force, directly reaching more than 275 investors. We actively manage the level
of commercial paper outstanding to ensure availability to core investors and
proper utilization of any excess capacity within internally established targets.
We also market domestic medium-term notes through investment banks and our
in-house sales force, issuing a total of $2.7 billion in 1997. To obtain a
broader investment base, HFC and a subsidiary, Household Bank (Nevada) N.A.,
periodically issue medium-term notes in European and Asian markets. These
markets provide us with a broader investor base as compared with domestic
markets. During 1997, $1.6 billion in medium-term notes were issued in European
and Asian markets compared to $.9 billion in European markets in 1996. These
notes were issued in various European and Asian currencies and currency swaps
were used to convert the notes to U.S. dollars in order to eliminate future
foreign exchange risk. During 1997, we also issued $200 million of long-term
debt with an original maturity of 10 years. In August 1997, we redeemed, at par
of $100 million, all outstanding shares of our 7.25% term cumulative preferred
Series 1992-A, for $100 per depositary share plus accrued and unpaid dividends.
We had committed back-up lines of credit totaling $6.2 billion at December
31, 1997, of which $400 million were available to our parent company. None of
these back-up lines were used by us or our parent at December 31, 1997. In
addition, none of these lines contained a material adverse change clause which
could restrict availability. These back-up lines expire on various dates from
1998 through 2002. The only financial covenant contained in the terms of our
credit agreements is the maintenance of minimum shareholder's equity of $1.5
billion.
We paid $1.1 billion for the stock of TFS and repaid about $2.7 billion of
TFS debt owed to affiliates of Transamerica Corporation. We funded this
acquisition through the issuance of commercial paper, bank and other borrowings.
In addition, we received a capital contribution of approximately $1.0 billion
from the parent company to repay debt.
ASSET SECURITIZATIONS
Securitizations of consumer receivables have been, and will continue to be,
an important source of funds for HFC. The market for securities backed by
receivables is a reliable and cost-effective source of funds, which we plan to
use in the future. During 1997 we securitized about $4.5 billion of MasterCard
and Visa, private label and other unsecured receivables. We have not securitized
new auto loan originations subsequent to the acquisition of ACC. This total
securitization volume compares to $6.2 billion in sales in 1996 and $4.1 billion
in 1995. At December 31, 1997, we had $15.1 billion of receivables sold under
securitization transactions. At December 31, 1997, the expected weighted average
remaining life of these transactions was 2.3 years.
The following table summarizes the expected amortization of our
securitizations by type:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER
-------- -------- -------- -------- ------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Home equity.......................... $ 981.7 $ 729.6 $ 397.3 $ 295.5 $271.9 $ 449.9
Auto finance(1)...................... 144.8 124.6 79.2 36.7 10.6 --
MasterCard/Visa...................... 500.0 4,100.0 1,575.7 600.0 -- --
Private label........................ 213.5 161.5 -- 650.0 -- --
Other unsecured...................... 863.2 628.9 502.3 466.7 460.3 886.4
-------- -------- -------- -------- ------ --------
Total...................... $2,703.2 $5,744.6 $2,554.5 $2,048.9 $742.8 $1,336.3
======== ======== ======== ======== ====== ========
</TABLE>
- ---------------
(1) Auto finance receivables were previously securitized by ACC before its
acquisition in October 1997.
10
<PAGE> 13
For MasterCard and Visa and private label securitizations, the issued
securities may pay off sooner than originally scheduled if certain events occur.
One example of such an event is if the annualized portfolio yield (defined as
the sum of finance income and applicable fees, less net chargeoffs) for a
certain period drops below a base rate (generally equal to the sum of the rate
paid to the investors and the servicing fee). For home equity and other
unsecured securitizations, early pay off of the securities begins if the
annualized portfolio yield falls below various limits, or if certain other
events occur. We do not presently believe that any of these events will take
place. If any such event occurred, our funding requirements would increase.
These additional requirements could be met through securitizations, issuance of
various types of debt or borrowings under existing back-up lines of credit. We
believe we would continue to have adequate sources of funds if an early payoff
event occurred.
We and our affiliate, Household Bank, f.s.b., have facilities with
commercial banks under which we may collectively securitize up to $6.6 billion
of receivables. These facilities are renewable on an annual basis. At December
31, 1997, these facilities were fully utilized, of which we had securitized $5.6
billion. The amount available under these facilities will vary based on the
timing and volume of public securitization transactions.
At December 31, 1997, our long-term debt and the long-term debt and
preferred stock of our parent company have been assigned an investment grade
rating by four rating agencies. Furthermore, these agencies included our
commercial paper in their highest rating category. Three of these agencies also
include our parent company's commercial paper in their highest rating category.
With our back-up lines of credit and securitization programs, we believe we have
sufficient funding capacity to refinance maturing debts and fund business
growth.
CAPITAL EXPENDITURES
During 1997 we made $51 million in capital expenditures compared to the
prior-year level of $69 million.
YEAR 2000
The conversion of certain computer systems to permit continued use in the
Year 2000 and beyond began in prior years. The Year 2000 issue exists because
many computer systems and applications currently use two-digit date fields to
designate a year. As the century date change occurs, date-sensitive systems may
recognize the Year 2000 as 1900, or not at all. The inability to recognize or
properly treat the Year 2000 may cause systems to process critical financial and
operational information incorrectly. We have identified our Year 2000 issues and
compliance for significant systems is scheduled to be completed by the end of
1998. The costs for Year 2000 compliance have not been, and are not expected to
be, material to our operations. While we are reviewing our third-party vendors'
Year 2000 compliance, we cannot assure that the systems of our vendors, upon
which we rely, will be converted in a timely manner, or that their failure to
convert would not have an adverse effect on our systems.
RISK MANAGEMENT
We have a comprehensive program to address potential financial risks. These
risks include interest rate, counterparty and currency risk. The Finance
Committee of Household International's Board of Directors sets acceptable limits
for each of these risks annually and reviews the limits semi-annually.
Interest rate risk is defined as the impact of changes of market interest
rates on our earnings. We utilize simulation models to measure the impact on net
interest margin of changes in interest rates. The key assumptions used in this
model include the rate at which we expect our loans to pay off, loan volumes and
pricing, cash flows from derivative financial instruments and changes in market
conditions. The assumptions we make are based on our best estimates of actual
conditions. The model cannot precisely predict the actual impact of changes in
interest rates on net income because these assumptions are highly uncertain. At
December 31, 1997, we had managed our interest rate risk to levels substantially
below those allowed by our policy.
11
<PAGE> 14
We generally fund our assets with liabilities that have similar interest
rate features. This reduces structural interest rate risk. Over time, customer
demand for our receivable products shifts between fixed rate and floating rate
products, based on market conditions and preferences. These shifts result in
different funding strategies and produce different interest rate risk exposures.
To manage these exposures, as well as our liquidity position, we may use
derivatives to synthetically alter the terms of our assets or liabilities, or
off-balance sheet transactions. We do not use any exotic or leveraged
derivatives.
At December 31, 1997, we managed about $17 billion of domestic receivables
that have variable interest rates, including credit card, home equity and other
unsecured products. These receivables have been funded with $5.0 billion of
short-term debt, with the remainder funded by long-term liabilities. This
position exposes us to interest rate risk. We primarily use interest rate swaps
to alter our exposure to interest rate risk while still controlling liquidity
risk. Interest rate swaps also are used sometimes to synthetically alter our
exposure to basis risk. This type of risk exists because the pricing of some of
our assets is tied to the prime rate, while the funding for these assets is tied
to LIBOR. The prime rate and LIBOR react differently to changes in market
interest rates; that is, the prime rate does not change as quickly as LIBOR. We
assign all of our synthetic alteration and hedge transactions to specific groups
of assets, liabilities or off-balance sheet items.
The economic risk related to our interest rate swap portfolio is minimal.
The face amount of a swap transaction is referred to as the notional amount. The
notional amount is used to determine the interest payment to be paid by each
counterparty, but does not result in an exchange of principal payments. For
example, let's assume we have entered into a swap with the counterparty whom we
will call Bank A. Bank A agrees to pay us a fixed interest rate while we agree
to pay a variable rate. If variable rates for the accrual period are below the
fixed rate in the swap, Bank A owes us the difference between the fixed rate and
variable rate multiplied by the notional amount.
The primary exposure on our interest rate swap portfolio is the risk that
the counterparty (Bank A in this example) does not pay us the money they owe us.
We protect ourselves against counterparty risk in several ways. Counterparty
limits have been set and are closely monitored as part of the overall risk
management process. These limits ensure that we do not have significant exposure
to any individual counterparty. Based on peak exposure at December 31, 1997, all
of our derivative counterparties are rated A+ or better. We have never suffered
a loss due to counterparty failure. Certain swap agreements that we have entered
into require that payments be made to, or received from, the counterparty when
the fair value of the agreement reaches a certain level.
We also utilize interest rate futures, and purchased put and call options
in our hedging strategy to reduce interest rate risk. We use these instruments
to hedge the changes in interest rates on our variable rate assets and
liabilities. For example, short-term borrowings expose us to interest rate risk
because the interest rate we must pay to others may change faster than the rate
we received from borrowers on the asset our borrowings are funding. We use
futures and options to fix our interest cost on these borrowings at a desired
rate. We hold these contracts until the interest rate on the variable rate asset
or liability change. We then terminate, or close out the contracts. These
terminations are necessary because the date the interest rate changes is usually
not the same as the expiration date of the futures contract or option.
At December 31, 1997, we estimate that our earnings would decline by about
$35 million following a gradual 200 basis point increase in interest rates over
a twelve month period and would increase by about $45 million following a
gradual 200 basis point decrease in interest rates. These estimates assume we
would not take any corrective action to lessen the impact and, therefore, exceed
what most likely would occur if rates were to change.
We enter into currency swaps in order to minimize currency risk. These
swaps convert both principal and interest payments on debt issued from one
currency to another. For example, we may issue debt based on the French franc
and then execute a currency swap to convert the obligation to U.S. dollars.
See Note 7, "Derivative Financial Instruments and Other Financial
Instruments With Off-Balance Sheet Risk," for additional information related to
interest rate risk management.
In the accompanying consolidated financial statements, Note 9, "Fair Value
of Financial Instruments," provides information regarding the fair value of
certain financial instruments.
12
<PAGE> 15
GLOSSARY OF TERMS
ACQUIRED INTANGIBLES AND GOODWILL -- Intangible assets reflected on our
consolidated balance sheet resulting from the market value premium attributable
to our credit card accounts in excess of the aggregate outstanding managed
credit card loans acquired. Goodwill represents the purchase price over the fair
value of identifiable assets acquired less liabilities assumed from business
combinations.
AFFINITY CREDIT CARD -- A MasterCard or Visa account that is jointly
sponsored by an organization that has a membership with a common interest (e.g.,
the AFL-CIO Union Privilege Credit Card Program).
ASSET SECURITIZATION -- The process where interests in a pool of financial
assets, such as credit card or home equity receivables, are sold to investors.
Typically, the receivables are sold to a trust that issues interests that are
sold to investors.
AUTO FINANCE LOANS -- Closed-end loans secured by a first lien on a
vehicle.
CO-BRANDED CREDIT CARD -- A MasterCard or Visa account that is jointly
sponsored by the issuer of the card and another corporation. The account holder
typically receives some form of added benefit for using the card (e.g., the GM
Card).
CONSUMER NET CHARGEOFF RATIO -- Net chargeoffs of receivables divided by
average receivables outstanding.
CONTRACTUAL DELINQUENCY -- A method of determining delinquent accounts
based on the contractual terms of the original loan agreement.
CREDIT LIFE INSURANCE -- Insurance products that either pay off or continue
repaying a debt in the event of death, or temporary or permanent disability of
the borrower.
FEE INCOME -- Income associated with interchange on credit cards and
annual, late and other fees and from the origination or acquisition of loans.
FOREIGN EXCHANGE CONTRACT -- A contract used to minimize our exposure to
changes in foreign currency exchange rates.
FUTURES CONTRACT -- An exchange-traded contract to buy or sell a stated
amount of a financial instrument or index at a specified future date and price.
HOME EQUITY LOAN -- Closed-end loans and revolving lines of credit secured
by first or second mortgages on residential real estate.
INTERCHANGE FEES -- Fees received for processing a credit card transaction
through the MasterCard or Visa network.
INTEREST RATE SWAP -- Contract between two parties to exchange interest
payments on a stated principal amount (notional principal) for a specified
period. Typically, one party makes fixed rate payments while the other party
makes payments using a variable rate.
LIBOR -- London Interbank Offered Rate. A widely-quoted market rate which
is frequently the index used to determine that rate at which we borrow funds.
LIQUIDITY -- A measure of how quickly we can convert assets to cash or
raise additional cash by issuing debt.
MANAGED BASIS -- Method of reporting whereby net interest margin, other
revenues and credit losses on securitized receivables are reported as if those
receivables were still held on our balance sheet.
MANAGED NET INTEREST MARGIN -- Interest income from managed receivables and
noninsurance investment securities reduced by interest expense.
MANAGED RECEIVABLES -- The sum of receivables on our balance sheet and
those that we service for investors as part of our asset securitization program.
13
<PAGE> 16
GLOSSARY OF TERMS -- (CONTINUED)
MASTERCARD/VISA RECEIVABLES -- Receivables generated through customer usage
of MasterCard and Visa credit cards.
NONACCRUAL LOANS -- Loans on which we no longer accrue interest because
ultimate collection is unlikely.
OPTIONS -- A contract giving the owner the right, but not the obligation,
to buy or sell a specified item at a fixed price for a specified period.
OTHER UNSECURED RECEIVABLES -- Unsecured lines of credit or closed-end
loans made to individuals.
OVER-THE-LIFE RESERVES -- Credit loss reserves established for securitized
receivables to cover the estimated probable losses that we expect to incur over
the life of the transaction.
PRIVATE LABEL CREDIT CARD -- A line of credit made available to customers
of retail merchants evidenced by a credit card bearing the merchant's name.
PROMOTIONAL ACCOUNT -- A private label credit card account that allows for
limited or deferred interest and/or principal payments for a certain period.
RECEIVABLES OWNED -- Those receivables held on our balance sheet.
RECEIVABLES SERVICED WITH LIMITED RECOURSE -- Those receivables that we
have securitized and for which we have some level of potential loss if defaults
occur.
RETURN ON ASSETS -- Net income divided by average assets.
RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY -- Net income divided by
average common shareholder's equity.
SYNTHETIC ALTERATION -- Process by which derivative financial instruments
are used to alter the risk characteristics of an asset, liability or off-balance
sheet item.
14
<PAGE> 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Reference is made to the information contained under the caption "Risk
Management" of Item 7 of this Form 10-K for the information required by this
Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the list of financial statements under Item 14(a)
herein for the financial statements required by this Item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted.
15
<PAGE> 18
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements.
Report of Independent Public Accountants.
Consolidated Statements of Income for the Three Years Ended
December 31, 1997.
Consolidated Balance Sheets, December 31, 1997 and 1996.
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1997.
Consolidated Statements of Changes in Preferred Stock and Common
Shareholder's Equity for the Three Years Ended December 31,
1997.
Notes to Consolidated Financial Statements.
Selected Quarterly Financial Data (Unaudited).
(b) Reports on Form 8-K
No Current Report on Form 8-K was filed by HFC during the three
months ended December 31, 1997.
(c) Exhibits.
3(i) Restated Certificate of Incorporation of Household Finance
Corporation, as amended (incorporated by reference to
Exhibit 3(i) of our Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
3(ii) Bylaws of Household Finance Corporation (incorporated by
reference to Exhibit 3(b) of our Annual Report on Form 10-K
for the fiscal year ended December 31, 1992).
4(a) Indenture dated as of May 15, 1989, between HFC and Bankers
Trust Company, as Trustee (incorporated by reference to
Exhibit 4 of our Current Report on Form 8-K dated August
3,1989), as supplemented by a First Supplemental Indenture
dated as of June 15, 1989 (incorporated by reference to
Exhibit 4 of our Current Report on Form 8-K dated June 15,
1989), as amended by Amendment No. 1 dated October 18, 1990
to the First Supplemental Indenture dated as of June 15,
1989 (incorporated by reference to Exhibit 4 of our Current
Report on Form 8-K dated October 18, 1990).
4(b) Standard Multiple-Series Indenture Provisions for Senior
Debt Securities dated as of June 1, 1992 (incorporated by
reference to Exhibit 4(b) of our Registration Statement on
Form S-3, No. 33-48854).
4(c) Indenture dated as of December 1, 1993 for Senior Debt
Securities between HFC and The Chase Manhattan Bank
(National Association), as Trustee (incorporated by
reference to Exhibit 4(b) of our Registration Statement on
Form S-3, No. 33-55561).
4(d) The principal amount of debt outstanding under each other
instrument defining the rights of holders of our long-term
debt does not exceed 10 percent of our total assets on a
consolidated basis. We agree to furnish to the Securities
and Exchange Commission, upon request, a copy of each
instrument defining the rights of holders of our long-term
debt.
12 Statement of Computation of Ratios of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
23 Consent of Arthur Andersen LLP, Certified Public
Accountants.
27 Financial Data Schedule.
99.1 Ratings of Household Finance Corporation and its significant
subsidiaries.
(d) Schedules.
Household Finance Corporation and Subsidiaries:
II Valuation and Qualifying Accounts.
16
<PAGE> 19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, HOUSEHOLD FINANCE CORPORATION HAS DULY CAUSED THIS REPORT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
HOUSEHOLD FINANCE CORPORATION
Dated: March 30, 1998
By: /s/ G. D. GILMER
------------------------------------
G. D. Gilmer, President and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF HOUSEHOLD
FINANCE CORPORATION AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
/s/ G. D. GILMER President and Chief
- -------------------------------- Executive Officer,
G. D. Gilmer Director
/s/ G. O. FICK Executive Vice President
- -------------------------------- and Director
G. O. Fick Dated: March 30, 1998
/s/ D. A. SCHOENHOLZ Vice President, Chief
- -------------------------------- Accounting Officer and
D. A. Schoenholz Chief Financial Officer,
Director
/s/ W. F. ALDINGER Director
- --------------------------------
W. F. Aldinger
</TABLE>
17
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Household Finance Corporation:
We have audited the accompanying consolidated balance sheets of Household
Finance Corporation (a Delaware corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
preferred stock and common shareholder's equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Household
Finance Corporation and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in Item
14(d) is presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
January 21, 1998
F-1
<PAGE> 21
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Finance income............................................. $2,131.3 $1,927.9 $1,724.6
Other interest income...................................... 22.1 35.9 33.9
Interest expense........................................... 998.5 911.1 824.6
-------- -------- --------
Net interest margin........................................ 1,154.9 1,052.7 933.9
Provision for credit losses on owned receivables........... 801.1 522.8 511.0
-------- -------- --------
Net interest margin after provision for credit losses...... 353.8 529.9 422.9
-------- -------- --------
Securitization income...................................... 994.2 720.1 424.6
Insurance revenues......................................... 175.1 167.9 251.7
Investment income.......................................... 109.0 145.2 453.8
Fee income................................................. 335.7 178.4 125.2
Other income............................................... 144.1 69.8 100.2
-------- -------- --------
Total other revenues....................................... 1,758.1 1,281.4 1,355.5
-------- -------- --------
Salaries and fringe benefits............................... 479.5 392.8 298.9
Other operating expenses................................... 537.8 543.8 519.4
Amortization of acquired intangibles and goodwill.......... 143.4 121.1 70.6
Policyholders' benefits.................................... 165.5 204.0 452.3
-------- -------- --------
Total costs and expenses................................... 1,326.2 1,261.7 1,341.2
-------- -------- --------
Income before income taxes................................. 785.7 549.6 437.2
Income taxes............................................... 272.3 180.6 175.4
-------- -------- --------
Net income................................................. $ 513.4 $ 369.0 $ 261.8
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 22
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------
1997 1996
--------- ---------
(IN MILLIONS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash........................................................ $ 291.4 $ 228.5
Investment securities....................................... 1,723.8 1,720.0
Receivables, net............................................ 17,677.8 16,391.7
Advances to parent company and affiliates................... 10.5 --
Acquired intangibles and goodwill, net...................... 1,734.2 938.2
Properties and equipment, net............................... 235.5 268.7
Real estate owned........................................... 102.3 112.1
Other assets................................................ 1,159.2 928.2
--------- ---------
Total assets................................................ $22,934.7 $20,587.4
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt:
Commercial paper, bank and other borrowings............... $ 4,962.0 $ 5,223.5
Senior and senior subordinated debt (with original
maturities over one year).............................. 12,022.0 10,648.3
--------- ---------
Total debt........................................ 16,984.0 15,871.8
Insurance policy and claim reserves......................... 1,057.1 1,021.7
Borrowings from parent company and affiliates............... -- 7.6
Other liabilities........................................... 862.2 993.5
--------- ---------
Total liabilities................................. 18,903.3 17,894.6
Preferred stock............................................. -- 100.0
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding at December 31, 1997 and 1996,
and additional paid-in capital......................... 2,056.3 892.8
Retained earnings......................................... 1,980.4 1,721.6
Foreign currency translation adjustments.................. (8.3) (8.9)
Unrealized gain (loss) on investments, net................ 3.0 (12.7)
--------- ---------
Total common shareholder's equity................. 4,031.4 2,592.8
--------- ---------
Total liabilities and shareholder's equity........ $22,934.7 $20,587.4
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 23
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income.................................................. $ 513.4 $ 369.0 $ 261.8
Adjustments to reconcile net income to net cash provided by
operations:
Provision for credit losses on owned receivables.......... 801.1 522.8 511.0
Insurance policy and claim reserves....................... 111.9 40.5 408.2
Depreciation and amortization............................. 226.0 196.0 176.8
Net realized gains from sales of assets................... (78.3) (11.3) (36.4)
Deferred income tax provision............................. 89.3 -- 26.8
Other, net................................................ (368.1) 89.8 132.2
---------- ---------- ---------
Cash provided by operations................................. 1,295.3 1,206.8 1,480.4
---------- ---------- ---------
INVESTMENTS IN OPERATIONS
Investment securities available-for-sale:
Purchased................................................. (1,393.0) (1,594.9) (3,176.8)
Matured................................................... 186.5 318.4 116.9
Sold...................................................... 1,347.1 1,873.6 2,428.4
Investment securities held-to-maturity:
Purchased................................................. -- -- (341.8)
Matured................................................... -- -- 242.7
Sold...................................................... -- -- 31.9
Short-term investment securities, net change................ (32.3) (63.1) 273.6
Receivables:
Originations, net......................................... (13,573.1) (12,518.6) (8,935.6)
Purchased................................................. (1,120.9) (4,384.3) (1,414.9)
Sold...................................................... 15,602.6 12,570.7 8,042.5
Purchase of Transamerica Financial Services Holding Company
capital stock............................................. (1,059.6) -- --
Disposition of product lines of life insurance business..... -- -- 575.0
(Acquisition) disposition of portfolios, net................ -- (640.7) (135.0)
Properties and equipment purchased.......................... (51.4) (68.8) (45.5)
Properties and equipment sold............................... 2.7 5.6 3.4
Advances to parent company and affiliates, net.............. (18.1) 127.2 362.7
---------- ---------- ---------
Cash decrease from investments in operations................ (109.5) (4,374.9) (1,972.5)
---------- ---------- ---------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change................................. (348.2) 1,069.3 353.6
Senior and senior subordinated debt issued.................. 4,571.5 5,289.1 2,493.7
Senior and senior subordinated debt retired................. (3,224.6) (2,897.3) (2,047.9)
Repayment of Transamerica Financial Services Holding Company
debt...................................................... (2,679.7) -- --
Policyholders' benefits paid................................ (120.9) (510.4) (741.7)
Cash received from policyholders............................ 57.1 98.2 652.6
Dividends on preferred stock................................ (4.6) (7.2) (7.2)
Redemption of preferred stock............................... (100.0) -- --
Dividends paid to parent company............................ (250.0) -- (155.0)
Capital contributions from parent company................... 976.5 200.2 1.4
---------- ---------- ---------
Cash increase (decrease) from financing and capital
transactions.............................................. (1,122.9) 3,241.9 549.5
---------- ---------- ---------
Increase in cash............................................ 62.9 73.8 57.4
Cash at January 1........................................... 228.5 154.7 97.3
---------- ---------- ---------
Cash at December 31......................................... $ 291.4 $ 228.5 $ 154.7
========== ========== =========
Supplemental Cash Flow Information:
Interest paid............................................... $ 979.5 $ 1,131.0 $ 740.4
Income taxes paid........................................... 134.1 318.4 (110.3)
---------- ---------- ---------
Supplemental Non-Cash Investing and Financing Activities:
Contribution of acquired company from parent................ $ 187.0 -- --
---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 24
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK
AND COMMON SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON SHAREHOLDER'S EQUITY
---------------------------------------------------
COMMON
STOCK AND TOTAL
ADDITIONAL COMMON
PREFERRED PAID-IN RETAINED SHAREHOLDER'S
STOCK CAPITAL EARNINGS OTHER(1) EQUITY
--------- ---------- -------- -------- -------------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994............... $ 100.0 $ 691.2 $1,260.2 $ (92.3) $1,859.1
Net income............................... 261.8 261.8
Dividends to parent company.............. (155.0) (155.0)
Dividends on preferred stock............. (7.2) (7.2)
Contribution of capital from parent
company............................... 1.4 1.4
Foreign currency translation
adjustments........................... (.1) (.1)
Unrealized gain on investments, net...... 177.1 177.1
------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1995............... 100.0 692.6 1,359.8 84.7 2,137.1
Net income............................... 369.0 369.0
Dividends on preferred stock............. (7.2) (7.2)
Contribution of capital from parent
company............................... 200.2 200.2
Foreign currency translation
adjustments........................... .1 .1
Unrealized loss on investments, net (106.4) (106.4)
------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1996............... 100.0 892.8 1,721.6 (21.6) 2,592.8
Net income............................... 513.4 513.4
Dividends to parent company.............. (250.0) (250.0)
Dividends on preferred stock............. (4.6) (4.6)
Redemption of preferred stock............ (100.0)
Capital contributions from parent
company............................... 1,163.5 1,163.5
Foreign currency translation
adjustments........................... .6 .6
Unrealized gain on investments, net...... 15.7 15.7
------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1997............... $ -- $2,056.3 $1,980.4 $ (5.3) $4,031.4
======= ======== ======== ======= ========
</TABLE>
- ---------------
(1) At December 31, 1997, 1996, 1995 and 1994 items in the other column include
cumulative adjustments for unrealized gains (losses) on available-for-sale
investments of $3.0, $(12.7), $93.7 and $(83.4) million, respectively. The
gross unrealized gain (loss) on available-for-sale investments at December
31, 1997, 1996 and 1995 of $4.6, $(19.5) and $141.5 million, respectively,
is recorded net of income taxes (benefit) of $1.6, $(6.8) and $47.8 million,
respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 25
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Household Finance Corporation ("HFC" or the "company") is a wholly-owned
subsidiary of Household International, Inc. ("Household International" or the
"parent company"). The company is a leading provider of consumer lending
products to middle-market customers in the United States, with $32.6 billion of
managed receivables at December 31, 1997. The company's lending products
include: home equity loans, auto finance loans, MasterCard* and Visa* and
private label credit cards, and other unsecured loans. The company also offers
credit and specialty insurance in the United States and Canada. The company also
has commercial loans and leases, periodic payment annuities, and corporate owned
life insurance products which it no longer offers.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include the
accounts of Household Finance Corporation and all subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Certain prior year
amounts have been reclassified to conform with the current year's presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Investment Securities. The company maintains investment portfolios in both
its noninsurance and insurance operations. These portfolios are comprised
primarily of debt securities. The company's entire investment securities
portfolio was classified as available-for-sale at December 31, 1997 and 1996.
Available-for-sale investments are intended to be invested for an indefinite
period but may be sold in response to events reasonably expected in the
foreseeable future. These investments are carried at fair value. Unrealized
holding gains and losses on available-for-sale investments are recorded as
adjustments to common shareholder's equity, net of income taxes. Any decline in
the fair value of investments which is deemed to be other than temporary is
charged against current earnings.
Cost of investment securities sold is determined using the specific
identification method. Interest income earned on the noninsurance investment
portfolio is classified in the statements of income in net interest margin.
Realized gains and losses from the investment portfolio and investment income
from the insurance portfolio are recorded in investment income. Accrued
investment income is classified with investment securities.
Receivables. Receivables are carried at amortized cost. The company
periodically sells receivables from its home equity, auto finance, MasterCard
and Visa, private label and other unsecured portfolios. Because these
receivables were originated with variable rates of interest or rates comparable
to those currently offered by the company, carrying value approximates fair
value.
Finance income is recognized using the effective yield method. Origination
fees are deferred and amortized to finance income over the estimated life of the
related receivables, except to the extent they offset directly related lending
costs. Annual fees are netted with direct lending costs associated with the
issuance of MasterCard and Visa receivables and are deferred and amortized on a
straight-line basis over one year. Net deferred lending costs related to these
receivables totaled $8.6 and $1.2 million at December 31, 1997 and 1996,
respectively. Premiums and discounts on purchased receivables are recognized as
adjustments of the yield of the related receivables.
Insurance reserves applicable to credit risks on consumer receivables are
treated as a reduction of receivables in the balance sheets, since payments on
such policies generally are used to reduce outstanding receivables.
- ---------------
* MasterCard is a registered trademark of Mastercard International, Incorporated
and Visa is a registered trademark of VISA USA, Inc..
F-6
<PAGE> 26
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Provision and Credit Loss Reserves. Provision for credit losses on owned
receivables is made in an amount sufficient to maintain credit loss reserves at
a level considered adequate to cover probable losses of principal and interest
in the existing owned portfolio. Probable losses are estimated for consumer
receivables based on contractual delinquency status and historical loss
experience. For commercial loans, probable losses are calculated using estimates
of amounts and timing of future cash flows expected to be received on loans. In
addition, general loss reserves on consumer and commercial receivables are
maintained to reflect management's judgment of portfolio risk factors. Loss
reserve estimates are reviewed periodically and adjustments are reported in
earnings when they become known. As these estimates are influenced by factors
outside the company's control, such as consumer payment patterns and economic
conditions, there is uncertainty inherent in these estimates, making it
reasonably possible that they could change.
The company's chargeoff policy for consumer receivables varies by product.
Receivables are written off, or for secured products written down to net
realizable value, at the following stages of contractual delinquency: auto
finance--5 months; home equity and MasterCard and Visa--6 months; private
label--9 months; and other unsecured--9 months and no payment received in 6
months. Commercial receivables are written off when it becomes apparent that an
account is uncollectible.
Nonaccrual Loans. Nonaccrual loans are loans on which accrual of interest
has been suspended. Interest income is suspended on all loans when principal or
interest payments are more than three months contractually past due, except for
MasterCard and Visa and private label credit cards and auto finance receivables.
On credit card receivables, interest continues to accrue until the receivable is
charged off. On auto finance receivables, accrual of interest income is
discontinued when payments are more than two months contractually past due.
There were no commercial loans at December 31, 1997 which were 90 days or more
past due which remained on accrual status. Accrual of income on nonaccrual
consumer receivables is not resumed until such receivables become less than
three months contractually past due (two months for auto finance receivables).
Accrual of income on nonaccrual commercial loans is not resumed until such loans
become contractually current. Cash payments received on nonaccrual commercial
loans are either applied against principal or reported as interest income,
according to management's judgment as to the collectibility of principal.
Receivables Sold and Serviced with Limited Recourse and Securitization
Income. Certain home equity, auto finance, MasterCard and Visa, private label
and other unsecured receivables have been securitized and sold to investors with
limited recourse. The servicing rights to these receivables have been retained
by the company. Upon sale, the receivables are removed from the balance sheet,
and a gain on sale is recognized for the difference between the carrying value
of the receivables and the adjusted sales proceeds. The adjusted sales proceeds
are based on a present value estimate of future cash flows to be received over
the lives of the receivables. Future cash flows are based on estimates of
prepayments, the impact of interest rate movements on yields of receivables sold
and securities issued, delinquency of receivables sold, servicing fees,
operating expenses and other factors. The resulting gain is adjusted by
establishing a reserve for estimated probable losses under the recourse
provisions. Gains on sale, recourse provisions and servicing cash flows on
receivables sold are reported in the accompanying consolidated statements of
income as securitization income. Unamortized securitization assets are reviewed
for impairment whenever events indicate that the carrying value may not be
recovered.
Effective January 1, 1997, the company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FAS No. 125"), which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on a derecognition
approach that focuses on control of the assets and extinguishment of the
liabilities. The statement was effective for securitization transactions
occurring subsequent to December 31, 1996. The adoption of FAS No. 125 did not
have a material impact on the company's consolidated financial statements.
F-7
<PAGE> 27
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Properties and Equipment. Properties and equipment, which include leasehold
improvements, are recorded at cost, net of accumulated depreciation and
amortization of $318.7 and $344.2 million at December 31, 1997 and 1996,
respectively. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets for financial reporting purposes. Leasehold
improvements are amortized over the lesser of the economic useful life of the
improvement or the term of the lease.
Repossessed Collateral. Real estate owned is valued at the lower of cost or
fair value less estimated costs to sell. These values are periodically reviewed
and reduced, if appropriate. Costs of holding real estate, and related gains and
losses on disposition, are credited or charged to operations as incurred.
Vehicles acquired for nonpayment of indebtedness are recorded at the lower
of the estimated fair market value or the outstanding receivable balance. Such
assets are generally sold within 60 days of repossession and any difference
between the sales price, net of expenses, and the carrying value is credited or
charged to operations as incurred.
Insurance. Insurance revenues on revolving credit insurance policies are
recognized when billed. Insurance revenues on the remaining insurance contracts
are recorded as unearned premiums and recognized into income based on the nature
and term of the underlying contracts. Liabilities for credit insurance policies
are based upon estimated settlement amounts for both reported and incurred but
not yet reported losses. Liabilities for future benefits on annuity contracts
and specialty and corporate owned life insurance products are based on actuarial
assumptions as to investment yields, mortality and withdrawals.
Acquired Intangibles and Goodwill. Acquired intangibles consist of acquired
credit card relationships which are amortized on a straight-line basis over
their estimated remaining lives, not to exceed 10 years.
Goodwill represents the purchase price over the fair value of identifiable
assets acquired less liabilities assumed from business combinations and is
amortized over 25 years on a straight-line basis. Goodwill is reviewed for
impairment whenever events indicate that the carrying amount may not be
recoverable.
Interest Rate Contracts. The nature and composition of the company's assets
and liabilities and off-balance sheet items expose the company to interest rate
risk. The company enters into a variety of interest rate contracts for managing
its interest rate exposure. Interest rate swaps are the principal vehicle used
to manage interest rate risk; however, interest rate futures, options, caps and
floors, and forward contracts also are utilized. The company also has entered
into currency swaps to convert both principal and interest payments on debt
issued from one currency to the appropriate functional currency.
Interest rate swaps are designated, and effective, as synthetic alterations
of specific assets or liabilities (or specific groups of assets or liabilities)
and off-balance sheet items. The interest rate differential to be paid or
received on these contracts is accrued and included in net interest margin in
the statements of income. Interest rate futures, forwards, options, and caps and
floors used in hedging the company's exposure to interest rate fluctuations are
designated, and effective, as hedges of balance sheet items.
Correlation between all interest rate contracts and the underlying asset,
liability or off-balance sheet item is direct because the company uses interest
rate contracts which mirror the underlying item being hedged/ synthetically
altered. If correlation between the hedged/synthetically altered item and
related interest rate contract would cease to exist, the interest rate contract
would be recorded at fair value and the associated unrealized gain or loss would
be included in net interest margin, with any future realized and unrealized
gains or losses recorded in other income.
Interest rate contracts are recorded at amortized cost. If interest rate
contracts are terminated early, the realized gains and losses are deferred and
amortized over the life of the hedged/synthetically altered item as adjustments
to net interest margin. These deferred gains and losses are recorded on the
accompanying consolidated balance sheets as adjustments to the carrying value of
the hedged items. In circumstances where the underlying assets or liabilities
are sold, any remaining carrying value adjustments or cumulative change in
F-8
<PAGE> 28
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value on any open positions are recognized immediately as a component of the
gain or loss upon disposition. Any remaining interest rate contracts previously
designated to the sold hedged/synthetically altered item are recorded at fair
value with realized and unrealized gains and losses included in other income.
Income Taxes. The company and its subsidiaries are included in Household
International's consolidated federal income tax return and in various
consolidated state income tax returns. In addition, the company files some
unconsolidated state tax returns. Federal income taxes are accounted for
utilizing the liability method. Deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
2. BUSINESS COMBINATIONS
On June 23, 1997, Household International and a wholly-owned subsidiary of
HFC acquired the capital stock of Transamerica Financial Services Holding
Company ("TFS"), the branch-based consumer finance subsidiary of Transamerica
Corporation ("TA"). The company paid $1.1 billion for the stock of TFS and
repaid approximately $2.7 billion of TFS debt owed to affiliates of TA. The
acquisition added approximately $3.1 billion of real estate secured receivables.
The acquisition of TFS was accounted for as a purchase, and accordingly,
earnings from TFS' operations have been included in the company's results of
operations from June 24, 1997. The acquisition of TFS was not material to the
company's consolidated financial statements.
In June 1997, the company received a capital contribution from Household
International of $976.5 million which was used to repay certain short-term
borrowings in connection with the acquisition of TFS.
On October 21, 1997, Household International and its wholly-owned
subsidiary acquired the capital stock of ACC Consumer Finance Corporation
("ACC"), a non-prime auto finance company, for approximately 1.4 million shares
of its common stock and cash. Upon the consummation of this transaction,
Household International contributed the investment in ACC to HFC. The
acquisition of ACC was accounted for as a purchase, and accordingly, earnings
from ACC's operations have been included in the company's results of operations
from October 22, 1997. The acquisition of ACC was not material to the company's
consolidated financial statements.
3. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------
1997 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities................................ $ 131.9 $ 213.1
Corporate debt securities................................... 1,245.1 1,058.5
U.S. government and federal agency debt securities.......... 209.9 243.7
Other....................................................... 113.5 180.5
-------- --------
Subtotal.......................................... 1,700.4 1,695.8
Accrued investment income................................... 23.4 24.2
-------- --------
Total investment securities....................... $1,723.8 $1,720.0
======== ========
</TABLE>
Proceeds from the sale of available-for-sale investments totaled
approximately $1.4, $1.9 and $2.4 billion in 1997, 1996 and 1995, respectively.
Gross gains of $20.5, $21.4 and $6.8 million in 1997, 1996 and 1995,
respectively, and gross losses of $2.9 and $3.7 million in 1997 and 1996,
respectively, were realized on those sales.
F-9
<PAGE> 29
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The gross unrealized gains (losses) of investment securities were as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------
1997 1996
---------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
INVESTMENTS
Marketable equity
securities................. $ 128.4 $ 3.7 $ (.2) $ 131.9 $ 212.7 $ 1.9 $ (1.5) $ 213.1
Corporate debt securities.... 1,231.9 30.3 (17.1) 1,245.1 1,069.5 16.9 (27.9) 1,058.5
U.S. government and federal
agency debt securities..... 222.0 1.0 (13.1) 209.9 252.6 1.0 (9.9) 243.7
Other........................ 113.5 -- -- 113.5 180.5 -- -- 180.5
-------- ----- ------ -------- -------- ----- ------ --------
Total
available-for-sale
investments....... $1,695.8 $35.0 $(30.4) $1,700.4 $1,715.3 $19.8 $(39.3) $1,695.8
======== ===== ====== ======== ======== ===== ====== ========
</TABLE>
See Note 9, "Fair Value of Financial Instruments," for further discussion
of the relationship between the fair value of the company's assets, liabilities
and off-balance sheet financial instruments.
Contractual maturities of and yields on investments in debt securities were
as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------------------------------------------------
U.S. GOVERNMENT AND FEDERAL
CORPORATE DEBT SECURITIES AGENCY DEBT SECURITIES
----------------------------------- ---------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE YIELD* COST VALUE YIELD*
--------- ----- ------ --------- ----- ------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Due within 1 year.................... $ 170.2 $ 169.9 6.19% $ 19.0 $ 19.0 5.33%
After 1 but within 5 years........... 75.0 75.8 6.79 19.7 19.8 6.04
After 5 but within 10 years.......... 212.0 214.4 6.76 50.5 50.0 5.72
After 10 years....................... 774.7 785.0 7.65 132.8 121.1 6.49
-------- -------- ---- ------ ------ ----
Total...................... $1,231.9 $1,245.1 7.25% $222.0 $209.9 6.17%
======== ======== ==== ====== ====== ====
</TABLE>
- ---------------
* Computed by dividing annualized interest by the amortized cost of the
respective investment securities.
F-10
<PAGE> 30
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. RECEIVABLES
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------------
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Home equity................................................. $ 6,953.1 $ 2,513.9
Auto finance(1)............................................. 476.5 --
MasterCard/Visa............................................. 4,105.0 6,308.9
Private label............................................... 3,365.2 3,807.0
Other unsecured............................................. 1,857.5 2,564.4
Commercial.................................................. 755.0 892.6
--------- ---------
Total owned receivables........................... 17,512.3 16,086.8
Accrued finance charges..................................... 240.9 215.8
Credit loss reserve for owned receivables................... (857.6) (671.5)
Unearned credit insurance premiums and claims reserves...... (120.1) (82.6)
Amounts due and deferred from receivables sales............. 1,591.5 1,404.8
Reserve for receivables serviced with limited recourse...... (689.2) (561.6)
--------- ---------
Total owned receivables, net...................... 17,677.8 16,391.7
Receivables serviced with limited recourse.................. 15,130.3 12,509.4
--------- ---------
Total managed receivables, net.................... $32,808.1 $28,901.1
========= =========
</TABLE>
- ---------------
(1) Prior to the fourth quarter of 1997, auto finance receivables were not
significant and were included in other unsecured receivables.
The company has securitized certain receivables which it services with
limited recourse. Securitizations of receivables, including replenishments of
certificate holder interests, were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------------------
1997 1996 1995
--------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Home equity.......................................... $ 312.6 $ 1,755.8 $1,135.2
MasterCard/Visa...................................... 10,036.1 7,875.1 4,755.8
Private label........................................ 2,270.2 697.4 644.0
Other unsecured...................................... 2,428.5 2,255.1 1,074.8
--------- --------- --------
Total...................................... $15,047.4 $12,583.4 $7,609.8
========= ========= ========
</TABLE>
The outstanding balance of receivables serviced with limited recourse
consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Home equity................................................. $ 3,125.9 $ 4,337.5
Auto finance(1)............................................. 395.9 --
MasterCard/Visa............................................. 6,775.7 5,043.5
Private label............................................... 1,025.0 517.0
Other unsecured............................................. 3,807.8 2,611.4
--------- ---------
Total............................................. $15,130.3 $12,509.4
========= =========
</TABLE>
- ---------------
(1) Auto finance receivables were previously securitized by ACC before its
acquisition in October 1997.
F-11
<PAGE> 31
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the expected weighted average remaining life of these
securitization transactions was 2.3 years.
The combination of receivables owned and receivables serviced with limited
recourse, which the company considers its managed portfolio, is shown below:
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Home equity................................................. $10,079.0 $ 6,851.4
Auto finance(1)............................................. 872.4 --
MasterCard/Visa............................................. 10,880.7 11,352.4
Private label............................................... 4,390.2 4,324.0
Other unsecured............................................. 5,665.3 5,175.8
Commercial.................................................. 755.0 892.6
--------- ---------
Managed receivables............................... $32,642.6 $28,596.2
========= =========
</TABLE>
- ---------------
(1) Prior to the fourth quarter of 1997, auto finance receivables were not
significant and were included in other unsecured receivables.
At December 31, 1997 and 1996, the amounts due and deferred from
receivables sales of $1,591.5 and $1,404.8 million, respectively, included
unamortized securitization assets and funds established pursuant to the recourse
provisions for certain sales totaling $1,480.3 and $1,096.5 million,
respectively. The amounts due and deferred also included customer payments not
yet remitted by the securitization trustee to the company of $90.7 and $52.3
million at December 31, 1997 and 1996, respectively. The company made guarantees
relating to certain securitizations of $90.2 million plus unpaid interest at
December 31, 1996. The company made no such guarantees at December 31, 1997. The
company has subordinated interests in certain transactions, which were recorded
as receivables, of $888.7 and $388.5 million at December 31, 1997 and 1996,
respectively. The company has agreements with a "AAA"-rated third party who will
indemnify the company for up to $21.2 million in losses related to certain
securitization transactions. The company maintains credit loss reserves pursuant
to the recourse provisions for receivables serviced with limited recourse which
are based on estimated probable losses under such provisions. These reserves
totaled $689.2 and $561.6 million at December 31, 1997 and 1996, respectively,
and represent the company's best estimate of probable losses on receivables
serviced with limited recourse.
The providers of the credit enhancements have no recourse to the company.
The company maintains facilities with third parties which provide for the
securitization of receivables on a revolving basis totaling $6.6 billion through
the issuance of commercial paper. At December 31, 1997, these facilities were
fully utilized, of which HFC had securitized $5.6 billion. The amount available
under these facilities will vary based on the timing and volume of public
securitization transactions.
F-12
<PAGE> 32
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contractual maturities of owned receivables were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------------------------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Home equity.............. $1,906.0 $1,397.6 $ 997.6 $ 721.0 $ 522.0 $1,408.9 $ 6,953.1
Auto finance............. 78.0 92.1 104.1 107.5 82.2 12.6 476.5
MasterCard/Visa.......... 350.9 371.1 298.8 274.5 249.9 2,559.8 4,105.0
Private label............ 332.4 323.7 288.6 243.3 210.5 1,966.7 3,365.2
Other unsecured.......... 670.7 402.5 245.9 155.7 101.9 280.8 1,857.5
Commercial............... 156.7 64.8 31.6 53.5 30.1 418.3 755.0
-------- -------- -------- -------- -------- -------- ---------
Total.......... $3,494.7 $2,651.8 $1,966.6 $1,555.5 $1,196.6 $6,647.1 $17,512.3
======== ======== ======== ======== ======== ======== =========
</TABLE>
A substantial portion of consumer receivables, based on the company's
experience, will be renewed or repaid prior to contractual maturity. The above
maturity schedule should not be regarded as a forecast of future cash
collections. The ratio of annual cash collections of principal to average
principal balances, excluding MasterCard and Visa receivables, approximated 42
and 38 percent in 1997 and 1996, respectively.
The following table summarizes contractual maturities of owned receivables
due after one year by repricing characteristic:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------
OVER 1 BUT
WITHIN OVER
5 YEARS 5 YEARS
---------- --------
(IN MILLIONS)
<S> <C> <C>
Receivables at predetermined interest rates................. $5,291.2 $3,808.3
Receivables at floating or adjustable rates................. 2,079.3 2,838.8
-------- --------
Total............................................. $7,370.5 $6,647.1
======== ========
</TABLE>
Nonaccrual owned consumer receivables totaled $310.7 and $204.8 million at
December 31, 1997 and 1996, respectively. Interest income that would have been
recorded in 1997 and 1996 if such nonaccrual receivables had been current and in
accordance with contractual terms was approximately $48.8 and $35.2 million,
respectively. Interest income that was included in net income for 1997 and 1996,
prior to these loans being placed on nonaccrual status, was approximately $27.6
and $19.5 million, respectively.
F-13
<PAGE> 33
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the activity in the company's credit loss
reserves for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1997 1996 1995
--------- --------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Credit loss reserves for owned receivables at January 1..... $ 671.5 $ 531.8 $ 413.7
Provision for credit losses-owned receivables............... 801.1 522.8 511.0
Owned receivables charged off............................... (765.2) (528.4) (555.3)
Recoveries on owned receivables............................. 85.5 74.7 82.0
Portfolio acquisitions, net................................. 64.7 70.6 80.4
--------- --------- -------
Total credit loss reserves for owned receivables at
December 31.......................................... 857.6 671.5 531.8
--------- --------- -------
Credit loss reserves for receivables serviced with limited
recourse at January 1..................................... 561.6 334.2 181.7
Provision for credit losses-receivables serviced with
limited recourse.......................................... 731.8 568.1 322.3
Receivables charged off..................................... (692.3) (356.0) (181.1)
Recoveries.................................................. 43.7 17.1 8.5
Other, net.................................................. 44.4 (1.8) 2.8
--------- --------- -------
Total credit loss reserves for receivables serviced
with limited recourse at December 31................. 689.2 561.6 334.2
--------- --------- -------
Total credit loss reserves for managed receivables at
December 31.......................................... $ 1,546.8 $ 1,233.1 $ 866.0
========= ========= =======
</TABLE>
5. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------------------------------
BANK AND
COMMERCIAL OTHER
PAPER BORROWINGS TOTAL
------------- ------------- -----------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C>
1997
Balance............................................ $4,578.5 $383.5 $4,962.0
Highest aggregate month-end balance................ 5,898.0
Average borrowings................................. 4,974.5 277.3 5,251.8
Weighted average interest rate:
At year end...................................... 5.9% 6.4% 5.9%
Paid during year................................. 5.8 5.0 5.7
1996
Balance............................................ $4,825.2 $398.3 $5,223.5
Highest aggregate month-end balance................ 5,961.7
Average borrowings................................. 4,864.0 105.8 4,969.8
Weighted average interest rate:
At year end...................................... 5.6% 6.8% 5.7%
Paid during year................................. 5.4 5.1 5.4
1995
Balance............................................ $4,042.4 $111.8 $4,154.2
Highest aggregate month-end balance................ 4,733.8
Average borrowings................................. 4,244.2 126.5 4,370.7
Weighted average interest rate:
At year end...................................... 5.8% 6.0% 5.8%
Paid during year................................. 5.9 6.0 5.9
</TABLE>
F-14
<PAGE> 34
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense for commercial paper, bank and other borrowings totaled
$294.3, $268.8 and $259.6 million for 1997, 1996 and 1995, respectively.
The company maintains various bank credit agreements primarily to support
commercial paper borrowings. At December 31, 1997 and 1996, the company had
committed back-up lines of $6.2 and $5.2 billion, respectively, $400 million of
which were available to the parent company. None of these back-up lines were
utilized by HFC or its parent company at December 31, 1997 and 1996. Formal
credit lines are reviewed annually, and expire at various dates from 1998 to
2002. Borrowings under these lines generally are available at a surcharge over
LIBOR. Annual commitment fee requirements to support availability of these lines
at December 31, 1997 totaled $5.1 million.
6. SENIOR AND SENIOR SUBORDINATED DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR)
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------
1997 1996
---------- ----------
(ALL DOLLAR AMOUNTS ARE
STATED IN MILLIONS)
<S> <C> <C>
SENIOR DEBT
3.50% to 6.49%; due 1998 to 2009............................ $ 1,005.7 $ 1,344.6
6.50% to 6.99%; due 1998 to 2007............................ 1,826.6 1,303.3
7.00% to 7.49%; due 1998 to 2012............................ 1,359.4 1,024.9
7.50% to 7.99%; due 1998 to 2012............................ 1,035.8 1,309.1
8.00% to 8.99%; due 1998 to 2005............................ 951.8 956.8
9.00% and greater; due 1998 to 2001......................... 155.6 140.9
Variable interest rate debt; 5.25% to 8.50%; due 1998 to
2015...................................................... 5,268.7 4,173.8
SENIOR SUBORDINATED DEBT
9.00% to 9.63%; due 2000 to 2001............................ 400.0 400.0
10.25%; due 2003............................................ 20.0 --
Unamortized discount........................................ (1.6) (5.1)
--------- ---------
Total senior and senior subordinated debt............ $12,022.0 $10,648.3
========= =========
</TABLE>
Weighted average coupon interest rates were 6.7 percent at December 31,
1997 and 1996. Interest expense for senior and senior subordinated debt was
$704.2, $642.3 and $565.0 million for 1997, 1996 and 1995, respectively. The
only financial covenant contained in the terms of the company's debt agreements
is the maintenance of minimum shareholder's equity of $1.5 billion.
Maturities of senior and senior subordinated debt were:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997
---------------
(IN MILLIONS)
<S> <C>
1998........................................ $ 1,929.0
1999........................................ 2,351.4
2000........................................ 1,441.8
2001........................................ 1,566.9
2002........................................ 839.6
Thereafter.................................. 3,893.3
---------
Total................................ $12,022.0
=========
</TABLE>
F-15
<PAGE> 35
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
In the normal course of business and in connection with its asset/liability
management program, the company enters into various transactions involving
derivative and other off-balance sheet financial instruments. These instruments
primarily are used to manage the company's exposure to fluctuations in interest
rates and foreign exchange rates. The company does not serve as a financial
intermediary to make markets in any derivative financial instruments. For
further information on the company's strategies for managing interest rate and
foreign exchange rate risk, see Risk Management on pages 11 and 12.
The financial instruments used by the company include interest rate
contracts and foreign exchange rate contracts and have varying degrees of credit
risk and/or market risk.
Credit Risk. Credit risk is the possibility that a loss may occur because
the counterparty to a transaction fails to perform according to the terms of the
contract. The company's exposure to credit loss related to interest rate swaps,
cap and floor transactions, forward and futures contracts and options is the
amount of uncollected interest or premium related to these instruments. These
interest rate related instruments are generally expressed in terms of notional
principal or contract amounts which are much larger than the amounts potentially
at risk for nonpayment by counterparties. The company controls the credit risk
of its off-balance sheet financial instruments through established credit
approvals, risk control limits and ongoing monitoring procedures. The company
has never experienced nonperformance by any derivative instrument counterparty.
Market Risk. Market risk is the possibility that a change in interest rates
or foreign exchange rates will cause a financial instrument to decrease in value
or become more costly to settle. The company mitigates this risk by establishing
limits for positions and other controls.
Interest Rate and Foreign Exchange Contracts. The following table
summarizes the activity in interest rate and foreign exchange contracts for
1997, 1996 and 1995:
F-16
<PAGE> 36
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HEDGING/SYNTHETIC ALTERATION INSTRUMENTS
<TABLE>
<CAPTION>
NON EXCHANGE TRADED
------------------------------------------
EXCHANGE TRADED
-------------------------------------------
INTEREST RATE FOREIGN EXCHANGE
FUTURES CONTRACTS OPTIONS INTEREST RATE CONTRACTS
--------------------- ------------------- RATE CURRENCY -------------------
PURCHASED SOLD PURCHASED WRITTEN SWAPS SWAPS PURCHASED SOLD
--------- --------- --------- ------- --------- -------- --------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
Notional amount, 1994........ -- $ (93.0) -- -- $14,074.8 $ 297.3 -- $ (69.0)
New contracts................ $2,003.0 (1,850.0) $ 300.0 $(300.0) 790.0 -- $ 809.9 (885.2)
Matured or expired
contracts................... -- 290.0 -- -- (4,932.8) -- (36.7) 40.9
Terminated contracts......... -- -- -- -- (4,275.3) -- -- --
In-substance maturities(1)... (1,653.0) 1,653.0 (300.0) 300.0 -- -- (773.2) 913.3
--------- --------- ------- ------- --------- -------- ------- -------
Notional amount, 1995........ $ 350.0 -- -- -- $ 5,656.7 $ 297.3 -- --
========= ========= ======= ======= ========= ======== ======= =======
Fair value, 1995(2).......... $ .1 -- -- -- $ 136.6 $ 80.2 -- --
--------- --------- ------- ------- --------- -------- ------- -------
1996
Notional amount, 1995........ $ 350.0 -- -- -- $ 5,656.7 $ 297.3 -- --
New contracts................ 6,611.9 $(4,202.9) $ 440.0 $(440.0) 3,845.8 674.3 -- --
Matured or expired
contracts................... (1,471.0) 50.0 -- -- (1,392.1) (117.0) -- --
Terminated contracts......... -- -- -- -- (1,215.0) -- -- --
In-substance maturities(1)... (4,152.9) 4,152.9 (440.0) 440.0 -- -- -- --
--------- --------- ------- ------- --------- -------- ------- -------
Notional amount, 1996........ $1,338.0 -- -- -- $ 6,895.4 $ 854.6 -- --
========= ========= ======= ======= ========= ======== ======= =======
Fair value, 1996(2).......... -- -- -- -- $ 45.7 $ (43.2) -- --
--------- --------- ------- ------- --------- -------- ------- -------
1997
Notional amount, 1996........ $1,338.0 -- -- -- $ 6,895.4 $ 854.6 -- --
New contracts................ 8,584.0 $(7,350.0) -- -- 2,998.9 940.4 -- --
Matured or expired
contracts................... (2,020.0) 120.0 -- -- (2,006.9) (57.6) -- --
Terminated contracts......... -- -- -- -- (762.0) (102.4) -- --
In-substance maturities(1)... (7,030.0) 7,030.0 -- -- -- -- -- --
--------- --------- ------- ------- --------- -------- ------- -------
Notional amount, 1997........ $ 872.0 $ (200.0) -- -- $ 7,125.4 $1,635.0 -- --
========= ========= ======= ======= ========= ======== ======= =======
Fair value, 1997(2).......... -- -- -- -- $ 134.4 $ (84.0) -- --
--------- --------- ------- ------- --------- -------- ------- -------
<CAPTION>
NON EXCHANGE TRADED
-----------------------
INTEREST
RATE
FORWARD
CONTRACTS OTHER RISK
--------- MANAGEMENT
PURCHASED INSTRUMENTS
--------- -----------
(IN MILLIONS)
<S> <C> <C>
1995
Notional amount, 1994........ $ 180.0 $ 100.0
New contracts................ -- --
Matured or expired
contracts................... -- --
Terminated contracts......... (180.0) --
In-substance maturities(1)... -- --
------- --------
Notional amount, 1995........ -- $ 100.0
======= ========
Fair value, 1995(2).......... -- $ .8
------- --------
1996
Notional amount, 1995........ -- $ 100.0
New contracts................ -- 1,250.0
Matured or expired
contracts................... -- --
Terminated contracts......... -- --
In-substance maturities(1)... -- --
------- --------
Notional amount, 1996........ -- $1,350.0
======= ========
Fair value, 1996(2).......... -- $ 7.0
------- --------
1997
Notional amount, 1996........ -- $1,350.0
New contracts................ -- --
Matured or expired
contracts................... -- --
Terminated contracts......... -- --
In-substance maturities(1)... -- --
------- --------
Notional amount, 1997........ -- $1,350.0
======= ========
Fair value, 1997(2).......... -- $ .5
------- --------
</TABLE>
- ---------------
(1) Represent contracts terminated as the market execution technique of closing
the transaction either (a) just prior to maturity to avoid delivery of the
underlying instrument, or (b) at the maturity of the underlying items being
hedged.
(2) (Bracketed) unbracketed amounts represent amounts to be (paid) received by
the company had these positions been closed out at the respective balance
sheet date. Bracketed amounts do not necessarily represent risk of loss for
hedging instruments, as the fair value of the hedging instrument and the
items being hedged must be evaluated together. See Note 9, "Fair Value of
Financial Instruments" for further discussion of the relationship between
the fair value of the company's assets, liabilities and off-balance sheet
financial instruments.
F-17
<PAGE> 37
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest rate swaps are contractual agreements between two counterparties
for the exchange of periodic interest payments generally based on a notional
principal amount and agreed-upon fixed or floating rates. The company primarily
enters into interest rate swap transactions to synthetically alter balance sheet
items. These transactions are specifically designated to a particular
asset/liability, off-balance sheet item or anticipated transaction of a similar
characteristic. Specific assets or liabilities may consist of groups of
individually small dollar homogeneous assets or liabilities of similar economic
characteristics. Credit and market risk exists with respect to these
instruments. The following table reflects the items so altered at December 31,
1997:
<TABLE>
<CAPTION>
(IN MILLIONS)
---------------
<S> <C>
Investment securities....................................... $ 70.7
Receivables:
Home equity............................................... 775.0
MasterCard/Visa........................................... 550.0
Other unsecured........................................... 19.3
--------
Total owned receivables.............................. 1,344.3
Commercial paper, bank and other borrowings................. 1,660.0
Senior and senior subordinated debt......................... 4,017.0
Receivables serviced with limited recourse.................. 33.4
--------
Total items synthetically altered with interest rate
swaps............................................... $7,125.4
========
</TABLE>
- ---------------
Note: In all instances, the notional amount is not greater than the carrying
value of the related asset/liability or off-balance sheet item.
The company manages its exposure to interest rate risk primarily through
the use of interest rate swaps. These swaps synthetically alter the interest
rate risk inherent in balance sheet assets, liabilities or off-balance sheet
items. The majority of the company's interest rate swaps are used to convert
floating rate assets to fixed rate, fixed rate debt to floating rate, floating
rate assets or debt from one floating rate index to another, fixed rate assets
to a floating rate, or floating rate debt to fixed rate. Interest rate swaps
also are used to synthetically alter interest rate characteristics on certain
receivables that are sold and serviced with limited recourse. These off-balance
sheet items expose the company to the same interest rate risk as on-balance
sheet items. Interest rate swaps are used to synthetically alter the interest
rate provisions of the securitization transaction whereby the underlying
receivables pay a fixed (floating) rate and the pass-through rate to the
investor is floating (fixed). The company also has entered into currency swaps
to convert both principal and interest payments on debt issued from one currency
to the appropriate functional currency.
F-18
<PAGE> 38
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the maturities and related weighted average
receive/pay rates of interest rate swaps outstanding at December 31, 1997:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003 THEREAFTER TOTAL
-------- -------- ------ ------ ------ ------ ---------- --------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay a fixed rate/receive a
floating rate:
Notional value............... $ 550.0 $ 625.0 $194.3 -- -- -- -- $1,369.3
Weighted average receive
rate....................... 5.98% 5.95% 5.97% -- -- -- -- 5.97%
Weighted average pay rate.... 6.05 6.77 6.44 -- -- -- -- 6.44
Pay a floating rate/receive a
fixed rate:
Notional value............... $ 526.4 $ 196.9 $150.0 $597.5 $149.4 $300.0 $1,787.9 $3,708.1
Weighted average receive
rate....................... 7.09% 6.32% 6.59% 6.55% 6.58% 6.74% 6.96% 6.83%
Weighted average pay rate.... 5.93 5.96 5.83 5.98 5.96 5.97 5.91 5.93
Pay a floating rate/receive a
different floating rate:
Notional value............... $ 550.0 $1,288.0 $200.0 -- $ 10.0 -- -- $2,048.0
Weighted average receive
rate....................... 5.72% 6.05% 5.82% -- 6.50% -- -- 5.94%
Weighted average pay rate.... 5.89 5.97 5.90 -- 5.81 -- -- 5.94
-------- -------- ------ ------ ------ ------ -------- --------
Total notional value........... $1,626.4 $2,109.9 $544.3 $597.5 $159.4 $300.0 $1,787.9 $7,125.4
======== ======== ====== ====== ====== ====== ======== ========
Total weighted average rates on
swaps:
Receive rate................... 6.25% 6.05% 6.08% 6.55% 6.57% 6.74% 6.96% 6.41%
Pay rate....................... 5.96 6.21 6.07 5.98 5.95 5.97 5.91 6.03
</TABLE>
The floating rates paid or received by the company are based on spot rates
from independent market sources for the index contained in each interest rate
swap contract, which generally are based on either 1-, 3-or 6-month LIBOR. These
current floating rates are different than the floating rates in effect when the
contracts were initiated. Changes in spot rates impact the variable rate
information disclosed above. However, these changes in spot rates also impact
the interest rate on the underlying assets or liabilities. Hedging/synthetic
alteration instruments are used by the company to manage the volatility of net
interest margin resulting from changes in interest rates on the underlying
hedged/synthetically altered items. Owned net interest margin would have
declined by 21 and 30 basis points in 1997 and 1996, respectively, had these
instruments not been utilized. These instruments had a negligible impact on
owned net interest margin in 1995.
Forwards and futures are agreements between two parties, committing one to
sell and the other to buy a specific quantity of an instrument on some future
date. The parties agree to buy or sell at a specified price in the future, and
their profit or loss is determined by the difference between the arranged price
and the level of the spot price when the contract is settled. Foreign exchange
contracts have been utilized by the company to reduce its exposure to foreign
currency exchange risk. Interest rate forward and futures contracts are used to
hedge resets of interest rates on the company's floating rate assets and
liabilities. The company's exposure to credit risk for futures is limited, as
these contracts are traded on organized exchanges. Each day, changes in contract
values are settled in cash. In contrast, forward contracts have credit risk
relating to the performance of the counterparty. These instruments also are
subject to market risk. Cash requirements for forward contracts include the
receipt or payment of cash upon the sale or purchase of the instrument.
Purchased options grant the purchaser the right, but not the obligation, to
either purchase or sell a financial instrument at a specified price within a
specified period. The seller of the option has written a
F-19
<PAGE> 39
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contract which creates an obligation to either sell or purchase the financial
instrument at the agreed-upon price if, and when, the purchaser exercises the
option.
Other risk management instruments consist of caps and floors. Caps and
floors written expose the company to market risk but not to credit risk. Market
risk associated with caps and floors purchased is limited to the premium paid
which is recorded on the balance sheets in other assets.
Deferred gains of $37.8 and $43.6 million and deferred losses of $2.4 and
$8.5 million from hedging/synthetic alteration instruments were recorded on the
balance sheets at December 31, 1997 and 1996, respectively. The weighted average
amortization period associated with the deferred gains was 5.4 and 6.8 years at
December 31, 1997 and 1996, respectively. The weighted average amortization
period for the deferred losses was 1.6 and 1.5 years at December 31, 1997 and
1996, respectively.
At December 31, 1997 and 1996, the accrued interest, unamortized premium
and other assets recorded for agreements which would be written off should all
related counterparties fail to meet the terms of their contracts was $53.9 and
$47.6 million, respectively.
CONCENTRATIONS OF CREDIT RISK
A concentration of credit risk is defined as a significant credit exposure
with an individual or group engaged in similar activities or affected similarly
by economic conditions.
Because the company primarily lends to consumers, it does not have
receivables from any industry group that equal or exceed 10 percent of total
managed receivables at December 31, 1997 and 1996. The company lends nationwide,
with the following geographic areas comprising more than 10 percent of total
managed domestic receivables at December 31, 1997: California--20 percent;
Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)--24 percent; Middle
Atlantic (DE, DC, MD, NJ, PA, VA, WV)--14 percent; Northeast (CT, ME, MA, NH,
NY, RI, VT)--12 percent; and Southeast (AL, FL, GA, KY, MS, NC, SC, TN)--16
percent.
8. PREFERRED STOCK
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------
1997 1996
------- -------
(ALL DOLLAR AMOUNTS ARE
STATED IN MILLIONS)
<S> <C> <C>
7.25% term cumulative preferred, Series 1992-A, 1,000,000
depositary shares......................................... -- $100.0
</TABLE>
On August 15, 1997, the company redeemed, at par, all outstanding shares of
its 7.25 percent term cumulative preferred Series 1992-A, for $100 per
depositary share plus accrued and unpaid dividends.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The company has estimated the fair value of its financial instruments in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments" ("FAS No. 107"). Fair
value estimates, methods and assumptions set forth below for the company's
financial instruments are made solely to comply with the requirements of FAS No.
107 and should be read in conjunction with the financial statements and notes in
this Annual Report.
For a significant portion of the company's financial instruments, fair
values for items lacking a quoted market price were estimated by discounting
estimated future cash flows at estimated current market discount rates.
Assumptions used to estimate future cash flows are consistent with management's
assessments regarding ultimate collectibility of assets and related interest and
with estimates of product lives and repricing characteristics used in the
company's asset/liability management process. All assumptions are based on
F-20
<PAGE> 40
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
historical experience adjusted for future expectations. Assumptions used to
determine fair values for financial instruments for which no active market
exists are inherently judgmental, and changes in these assumptions could
significantly affect fair value calculations.
As required under generally accepted accounting principles, a number of
other assets recorded on the balance sheets (such as acquired credit card
relationships) and other intangible assets not recorded on the balance sheets
(such as the value of consumer lending relationships for originated receivables
and the franchise values of the company's business units) are not considered
financial instruments and, accordingly, are not valued for purposes of this
disclosure. The company believes there is substantial value associated with
these assets based on current market conditions and historical experience.
Accordingly, the estimated fair value of financial instruments, as disclosed,
does not fully represent the entire value, nor the changes in the entire value,
of the company.
The following is a summary of the carrying value and estimated fair value
of the company's financial instruments:
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE DIFFERENCE VALUE VALUE DIFFERENCE
-------- --------- ---------- -------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Cash........................... $ 291 $ 291 -- $ 229 $ 229 --
Investment securities.......... 1,724 1,724 -- 1,720 1,720 --
Receivables.................... 17,678 17,787 $ 109 16,392 16,780 $ 388
Advances to parent company and
affiliates................... 11 11 -- -- -- --
-------- -------- ----- -------- -------- -----
Subtotal..................... 19,704 19,813 109 18,341 18,729 388
-------- -------- ----- -------- -------- -----
Commercial paper, bank and
other borrowings............. (4,962) (4,962) -- (5,224) (5,224) --
Senior and senior subordinated
debt......................... (12,022) (12,202) (180) (10,648) (10,775) (127)
Insurance reserves............. (1,057) (1,286) (229) (1,022) (1,238) (216)
Borrowings from parent company
and affiliates............... -- -- -- (8) (8) --
-------- -------- ----- -------- -------- -----
Subtotal..................... (18,041) (18,450) (409) (16,902) (17,245) (343)
-------- -------- ----- -------- -------- -----
Interest rate and foreign
exchange contracts........... 36 51 15 33 10 (23)
Commitments to extend credit
and guarantees............... -- 50 50 -- 40 40
-------- -------- ----- -------- -------- -----
Subtotal..................... 36 101 65 33 50 17
-------- -------- ----- -------- -------- -----
Total........................ $ 1,699 $ 1,464 $(235) $ 1,472 $ 1,534 $ 62
======== ======== ===== ======== ======== =====
</TABLE>
The following methods and assumptions were used to estimate the fair value
of the company's financial instruments:
Cash: The carrying value approximates fair value for this instrument due to
its liquid nature.
Investment securities: Investment securities are classified as
available-for-sale and are carried at fair value on the balance sheets.
F-21
<PAGE> 41
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Receivables: The fair value of adjustable rate consumer receivables was
determined to approximate existing carrying value because interest rates on
these receivables adjust with changing market interest rates. The fair value of
fixed rate consumer receivables was estimated by discounting future expected
cash flows at interest rates approximating those offered by the company on such
products at the respective valuation dates. This approach to estimating fair
value for fixed rate receivables results in a disclosed fair value that is less
than amounts the company believes could be currently realizable on a sale of
these receivables. These receivables are relatively insensitive to changes in
overall market interest rates and, therefore, have additional value compared to
alternative uses of funds. The fair value of commercial receivables was
determined by discounting estimated future cash flows at estimated market
interest rates.
The fair value of consumer receivables also included an estimate, on a
present value basis, of cash flows associated with securitizations of certain
home equity, auto finance, MasterCard and Visa, private label and other
unsecured receivables.
Advances to parent company and affiliates: The carrying value approximates
fair value for this instrument due to its short-term nature.
Commercial paper, bank and other borrowings: The fair value of these
instruments was determined to approximate existing carrying value because
interest rates on these instruments adjust with changes in market interest rates
due to their short-term maturity or repricing characteristics.
Senior and senior subordinated debt: The estimated fair value of these
instruments was computed by discounting future expected cash flows at interest
rates offered for similar types of debt instruments.
Insurance reserves: The fair value of insurance reserves for periodic
payment annuities was estimated by discounting future expected cash flows at
estimated market interest rates at December 31, 1997 and 1996. The fair value of
other insurance reserves is not required to be determined in accordance with FAS
No. 107.
Borrowings from parent company and affiliates: The fair value of this
instrument was determined to approximate existing carrying value due to its
short-term nature.
Interest rate and foreign exchange contracts: Where practical, quoted
market prices were used to determine fair value of these instruments. For
non-exchange traded contracts, fair value was determined through the use of
accepted and established valuation methods (including input from independent
third parties) which consider the terms of the contracts and market expectations
on the valuation date for forward interest rates (for interest rate contracts)
or forward foreign currency exchange rates (for foreign exchange contracts). See
Note 7, "Derivative Financial Instruments and Other Financial Instruments with
Off-Balance Sheet Risk," for a discussion of the nature of these items.
Commitments to extend credit and guarantees: These commitments were valued
by considering the company's relationship with the counterparty, the
creditworthiness of the counterparty and the difference between committed and
current interest rates.
10. LEASES
The company leases certain offices, buildings and equipment for periods of
up to 22 years with various renewal options. The office space leases generally
require the company to pay certain operating expenses. The majority of the
company's leases are noncancelable operating leases. Net rental expense under
operating leases was $43.4, $37.5 and $36.4 million for 1997, 1996 and 1995,
respectively.
F-22
<PAGE> 42
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future net minimum lease commitments under noncancelable operating lease
arrangements were:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997
---------------
(IN MILLIONS)
<S> <C>
1998........................................................ $ 43.1
1999........................................................ 31.2
2000........................................................ 21.7
2001........................................................ 14.0
2002........................................................ 10.0
Thereafter.................................................. 66.7
------
Net minimum lease commitments............................... $186.7
======
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The company and its U.S. subsidiaries participate in Household
International's Retirement Income Plan ("RIP"), which covers substantially all
U.S. full-time employees. No separate actuarial valuation has been made for the
company's participation in RIP. At December 31, 1997, Household International's
plan assets included an investment in 1,258,807 shares of its common stock with
a fair value of $160.7 million. Dividends declared by Household International on
theses shares in 1997 totaled approximately $2 million. The fair value of plan
assets in RIP exceeded Household International's projected benefit obligation by
$313.9 and $284.2 million at December 31, 1997 and 1996, respectively. The 1997
and 1996 projected benefit obligations for RIP were determined using an assumed
weighted average discount rate of 7.50 percent and an assumed compensation
increase of 4.00 percent. The assumed weighted average long-term rate of return
on plan assets was 10.00 percent in 1997, 1996 and 1995. At December 31, 1997
and 1996, the company's estimated share of prepaid pension cost was $137.2 and
$130.0 million, respectively. Plan benefits are based primarily on years of
service. The company's share of total pension income due to the overfunded
status of RIP was $9.0, $8.6 and $8.2 million for 1997, 1996 and 1995,
respectively.
The company participates in Household International's defined contribution
plan where each participant's contribution is matched by the company up to a
maximum of 6 percent of the participant's compensation. For 1997, 1996 and 1995
the company's costs totaled $13.9, $7.1 and $6.4 million, respectively.
The company also participates in Household International's plans which
provide medical, dental and life insurance benefits to retirees and eligible
dependents. The plans are funded on a pay-as-you-go basis and cover
substantially all employees who meet certain age and vested service
requirements. Household International has instituted dollar limits on its
payments under the plans to control the cost of future medical benefits.
Household International recognizes the expected postretirement costs on an
accrual basis, similar to pension accounting. The expected cost of
postretirement benefits is required to be recognized over the employees' years
of service with the company instead of the period in which the benefits are
paid. Household International is recognizing the transition obligation over a
period of 20 years. The transition obligation represents the unfunded and
unrecognized accumulated postretirement benefit obligation.
While no separate actuarial valuation has been made for the company's
participation in Household International's plans for postretirement medical,
dental and life benefits, its share of the liability and expense has been
estimated. Household International's accumulated postretirement benefit
obligation was $111.7 and $104.9 million at December 31, 1997 and 1996,
respectively. The company's estimated share of Household International's accrued
postretirement benefit obligation was $51.3 and $42.5 million at December 31,
1997
F-23
<PAGE> 43
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 1996, respectively. In addition, the company's estimated share of
postretirement benefit expense recognized in 1997, 1996 and 1995 was $12.1,
$11.7 and $14.0 million, respectively.
Household International's accumulated postretirement benefit obligation at
December 31, 1997 and 1996 was determined using an assumed weighted average
discount rate of 7.50 percent and an assumed annual compensation increase of 4.0
percent. A 10.0 and 11.0 percent annual rate of increase in the gross cost of
covered health care benefits was assumed for 1998 and 1997, respectively. This
rate of increase is assumed to decline by 1 percent in each year after 1998.
The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rate by 1
percent would have increased the company's share of the 1997 and 1996 net
periodic postretirement benefit cost by $.5 and $.7 million, respectively, and
its share of the accumulated postretirement benefit obligation at December 31,
1997 and 1996 by $5.9 and $6.5 million, respectively. A 1 percentage point
increase would have increased Household International's accumulated
postretirement benefit obligation at December 31, 1997 and 1996 by $6.1 and $7.5
million, respectively.
Employees of the company may participate in Household International's
Employee Stock Purchase Plan (the "ESPP"). The ESPP provides a means for
employees to purchase shares of the parent company's common stock at 85 percent
of the lesser of its market price at the beginning or end of a one year
subscription period.
Key officers and employees of the company participate in Household
International's executive compensation plans which provide for the issuance of
nonqualified stock options and restricted stock rights ("RSRs"). Stock options
permit the holder to purchase, under certain limitations, the parent company's
common stock at a price not less than 100 percent of the market value of the
stock on the date the option is granted. Stock options vest equally over four
years and expire 10 years from the date of grant. RSRs entitle an employee to
receive a stated number of shares of the parent company's common stock if the
employee satisfies the conditions set by Household International's Compensation
Committee for the award.
Household International accounts for options and shares issued under the
ESPP in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," pursuant to which no compensation cost has been
recognized.
12. INCOME TAXES
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Provision for income taxes related to operations............ $272.3 $180.6 $175.4
Income taxes related to adjustments included in common
shareholder's equity:
Unrealized gain (loss) on investments, net................ 8.4 (54.6) 92.6
------ ------ ------
Total.................................................. $280.7 $126.0 $268.0
====== ====== ======
</TABLE>
F-24
<PAGE> 44
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Provisions for income taxes related to operations were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
CURRENT
United States............................................. $181.2 $244.8 $147.6
Foreign................................................... 1.8 1.4 1.0
------ ------ ------
Total current.......................................... 183.0 246.2 148.6
------ ------ ------
DEFERRED
United States............................................. 89.3 (65.6) 26.8
------ ------ ------
Total income taxes..................................... $272.3 $180.6 $175.4
====== ====== ======
</TABLE>
The significant components of deferred income tax provisions attributable
to income from operations were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1996 1995
----- ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Deferred income tax provision............................... $83.9 $(60.3) $26.8
Operating loss carryforwards................................ 5.4 (5.3) --
----- ------ -----
Deferred income tax provision............................... $89.3 $(65.6) $26.8
===== ====== =====
</TABLE>
Income before income taxes from foreign operations was $5.1, $3.9 and $2.7
million in 1997, 1996 and 1995, respectively.
Effective tax rates are analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit............. 2.4 2.2 2.5
Amortization and disposition of intangibles and
goodwill............................................... 1.4 1.7 1.4
Leveraged lease tax benefits.............................. (3.5) (2.6) (3.3)
Recapture of life insurance policyholders' surplus account
balance................................................ -- -- 6.7
Net operating loss........................................ -- (2.3) --
Other..................................................... (.6) (1.1) (2.2)
---- ---- ----
Effective tax rate..................................... 34.7% 32.9% 40.1%
==== ==== ====
</TABLE>
F-25
<PAGE> 45
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences which gave rise to a significant portion of deferred
tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
DEFERRED TAX LIABILITIES
Receivables sold.......................................... $406.6 $235.1
Leveraged lease transactions, net......................... 312.7 383.3
Pension plan assets....................................... 54.7 51.9
Other..................................................... 198.6 121.4
------ ------
Total deferred tax liabilities......................... 972.6 791.7
------ ------
DEFERRED TAX ASSETS
Credit loss reserves...................................... 612.4 473.0
Other..................................................... 138.9 177.0
------ ------
Total deferred tax assets.............................. 751.3 650.0
------ ------
Net deferred tax liability at end of year.............. $221.3 $141.7
====== ======
</TABLE>
13. TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
HFC periodically advances funds to Household International and affiliates
or receives amounts in excess of the parent company's current requirements.
Advances to (from) parent company and affiliates consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Parent company and other subsidiaries....................... $ 76.2 $ 73.9
Household Bank, f.s.b....................................... (70.5) (79.8)
Household Global Funding, Inc............................... 4.8 (1.7)
------ ------
Advances to (from) parent company and affiliates....... $ 10.5 $ (7.6)
====== ======
</TABLE>
These advances bear interest at various market interest rates. Net interest
income on advances to (from) parent company and affiliates was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1997 1996 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Parent company and other subsidiaries....................... $20.8 $13.3 $26.6
Household Bank, f.s.b....................................... .1 (3.6) (10.9)
----- ----- -----
Net interest income on advances to (from) parent
company and affiliates............................... $20.9 $ 9.7 $15.7
===== ===== =====
</TABLE>
Household Bank, f.s.b. ("the Bank") has agreements with certain
wholly-owned bank subsidiaries of the company to provide loans of up to $450
million to fund their credit card operations. The outstanding balance at
December 31, 1997 and 1996 was $250 and $15 million, respectively, and was
included in commercial paper, bank and other borrowings for financial statement
purposes. Interest expense on these borrowings totaled $5.8, $3.9 and $13.9
million during 1997, 1996 and 1995, respectively.
F-26
<PAGE> 46
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the GM Card program, Household International designates the issuer of
the GM Card under a written contractual arrangement. From June 1994 to May 1997,
Household International designated the company's wholly-owned bank subsidiary as
the issuer of the new GM Card accounts for customers who previously did not have
an account with the previous designated issuer. In effect, Household
International licensed to the bank subsidiary, the GM Card account relationships
and GM's obligation to administer its rebate program in an arrangement similar
to an operating lease. Under this arrangement, the bank subsidiary pays a
licensing fee to Household International for each open account for the privilege
of maintaining the account relationship. Fees paid to Household International
under this arrangement were $27.6, $27.2 and $19.1 million in 1997, 1996 and
1995, respectively, and are recorded in other operating expenses on the
consolidated statements of income.
Household International has a Regulatory Capital Maintenance/Dividend
Agreement with the Office of Thrift Supervision. Under this agreement, as
amended, as long as Household International is the parent company of the Bank,
Household International and the company agree to maintain the capital of the
Bank at the required levels. The agreement also requires that any capital
deficiency be cured by Household International and/or the company within thirty
days. There were no cash capital contributions made by Household International
to the Bank in 1997 and 1996.
In July 1995 the company acquired from Household International an
affiliated entity that provides certain support services, such as item
processing, collections and billings, accounts payable and payroll processing,
primarily for Household International's domestic credit card portfolio. The
company acquired this servicing subsidiary, including approximately $125 million
of property and equipment, at net book value. HFC and this servicing subsidiary
have negotiated a market rate agreement with the Bank for services such as
underwriting, data processing, item processing, check clearing, bank operations,
accounts payable, and payroll processing. Fees for these services totaled $47.8,
$50.9 and $89.0 million during 1997, 1996 and 1995, respectively.
The company was allocated costs incurred on its behalf by Household
International for administrative expenses, including insurance, credit
administration, legal and other fees. These administrative expenses were
recorded in other operating expenses and totaled approximately $58, $55 and $56
million in 1997, 1996 and 1995, respectively.
14. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business there are various legal proceedings
pending against the company. Management believes the aggregate liabilities, if
any, resulting from such actions would not have a material adverse effect on the
consolidated financial position of the company. However, as the ultimate
resolution of these proceedings is influenced by factors that are outside of the
company's control, it is reasonably possible the company's estimated liability
under these proceedings may change. See Note 10 for discussion of lease
commitments.
15. SALE OF PRODUCT LINES
In October 1995 the company sold the individual life and annuity product
lines of the Individual Life Insurance segment for $525 million in cash and $50
million of preferred stock of the purchaser. For the first nine months of 1995,
these sold product lines generated approximately $400 million of revenues and
earned approximately $35 million of net income.
F-27
<PAGE> 47
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997--THREE MONTHS ENDED 1996--THREE MONTHS ENDED
--------------------------------- ---------------------------------
DEC. SEPT. JUNE MAR. DEC. SEPT. JUNE MAR.
------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance income................................ $558.2 $561.1 $510.4 $501.6 $556.0 $509.4 $442.9 $419.6
Other interest income......................... 1.6 4.0 11.5 5.0 5.6 5.6 18.7 6.0
Interest expense.............................. 259.5 266.0 239.8 233.2 252.9 239.8 223.8 194.6
------ ------ ------ ------ ------ ------ ------ ------
Net interest margin........................... 300.3 299.1 282.1 273.4 308.7 275.2 237.8 231.0
Provision for credit losses on owned
receivables................................. 178.9 194.5 194.2 233.5 149.8 114.7 129.4 128.9
------ ------ ------ ------ ------ ------ ------ ------
Net interest margin after provision for credit
losses...................................... 121.4 104.6 87.9 39.9 158.9 160.5 108.4 102.1
------ ------ ------ ------ ------ ------ ------ ------
Securitization income......................... 260.6 267.9 236.9 228.8 191.1 178.4 196.0 154.6
Insurance revenues............................ 43.5 45.7 44.0 41.9 43.8 42.0 38.3 43.8
Investment income............................. 27.9 30.3 25.5 25.3 22.9 32.6 34.5 55.2
Fee income.................................... 129.1 87.6 64.3 54.7 52.5 50.0 39.7 36.2
Other income.................................. 5.3 45.8 23.7 69.3 6.7 27.8 17.7 17.6
------ ------ ------ ------ ------ ------ ------ ------
Total other revenues.......................... 466.4 477.3 394.4 420.0 317.0 330.8 326.2 307.4
------ ------ ------ ------ ------ ------ ------ ------
Salaries and fringe benefits.................. 129.4 127.3 115.2 107.6 114.0 98.1 90.5 90.2
Other operating expenses...................... 160.7 127.6 111.0 138.5 121.4 147.6 155.5 119.3
Amortization of acquired intangibles and
goodwill.................................... 38.4 38.6 33.3 33.1 33.0 32.1 34.0 22.0
Policyholders' benefits....................... 39.7 42.6 41.1 42.1 39.0 50.3 47.1 67.6
------ ------ ------ ------ ------ ------ ------ ------
Total costs and expenses...................... 368.2 336.1 300.6 321.3 307.4 328.1 327.1 299.1
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes.................... 219.6 245.8 181.7 138.6 168.5 163.2 107.5 110.4
Income taxes.................................. 67.2 89.6 66.0 49.5 58.1 57.8 33.3 31.4
------ ------ ------ ------ ------ ------ ------ ------
Net income.................................... $152.4 $156.2 $115.7 $ 89.1 $110.4 $105.4 $ 74.2 $ 79.0
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
F-28
<PAGE> 48
SCHEDULE II
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Unearned credit insurance premiums and claims reserves:
Unearned credit insurance premiums:
Balance at January 1................................... $ 38.4 $ 36.9 $ 5.3
Earned premiums........................................ (8.6) (16.6) (1.7)
Net premiums written and reinsurance assumed........... 24.4 18.0 1.8
Other items............................................ 5.8 .1 31.5
------ ------ ------
Balance at December 31................................. 60.0 38.4 36.9
------ ------ ------
Claims reserves:
Balance at January 1................................... 44.2 41.5 40.6
Provision for claims................................... 63.6 62.2 51.7
Benefits paid.......................................... (53.4) (60.0) (48.5)
Other items............................................ 5.7 .5 (2.3)
------ ------ ------
Balance at December 31................................. 60.1 44.2 41.5
------ ------ ------
Total at December 31...................................... $120.1 $ 82.6 $ 78.4
====== ====== ======
</TABLE>
F-29
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3(i) Restated Certificate of Incorporation of Household Finance
Corporation, as amended (incorporated by reference to
Exhibit 3(i) of our Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
3(ii) By-laws of Household Finance Corporation (incorporated by
reference to Exhibit 3(b) of our Annual Report on Form 10-K
for the fiscal year ended December 31, 1992).
4(a) Indenture dated as of March 15, 1989 between HFC and Bankers
Trust Company, as Trustee (incorporated by reference to
Exhibit 4 of our Current Report on Form 8-K dated August 3,
1989), as supplemented by a First Supplemental Indenture
dated as of June 15, 1989 (incorporated by reference to
Exhibit 4 of our Current Report on Form 8-K dated June 15,
1989), as amended by Amendment No. 1 dated October 18, 1990
to the First Supplemental Indenture dated as of June 15,
1989 (incorporated by reference to Exhibit 4 of our Current
Report on Form 8-K dated October 18, 1990).
4(b) Standard Multiple-Series Indenture Provisions for Senior
Debt Securities dated as of June 1, 1992 (incorporated by
reference to Exhibit 4(b) of our Registration Statement on
Form S-3, No. 33-48854).
4(c) Indenture dated as of December 1, 1993 for Senior Debt
Securities between HFC and The Chase Manhattan Bank
(National Association), as Trustee (incorporated by
reference to Exhibit 4(b) of our Registration Statement on
Form S-3, No. 33-55561).
4(d) The principal amount of debt outstanding under each other
instrument defining the rights of holders of our long-term
debt does not exceed 10 percent of our total assets on a
consolidated basis. We agree to furnish to the Securities
and Exchange Commission, upon request, a copy of each
instrument defining the rights of holders of our long-term
debt.
12 Statement of Computation of Ratios of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
23 Consent of Arthur Andersen LLP, Certified Public
Accountants.
27 Financial Data Schedule.
99.1 Ratings of Household Finance Corporation and its significant
subsidiaries.
</TABLE>
<PAGE> 1
EXHIBIT 12
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net income.................................... $ 513.4 $ 369.0 $ 261.8 $ 256.4 $220.4
Income taxes.................................. 272.3 180.6 175.4 103.6 107.4
-------- -------- -------- -------- ------
Income before income taxes.................... 785.7 549.6 437.2 360.0 327.8
-------- -------- -------- -------- ------
Fixed charges:
Interest expense(1)......................... 1,008.0 915.1 859.7 656.6 532.9
Interest portion of rentals(2).............. 20.3 21.9 14.8 8.6 4.9
-------- -------- -------- -------- ------
Total fixed charges........................... 1,028.3 937.0 874.5 665.2 537.8
-------- -------- -------- -------- ------
Total earnings as defined..................... $1,814.0 $1,486.6 $1,311.7 $1,025.2 $865.6
======== ======== ======== ======== ======
Ratio of earnings to fixed charges............ 1.76 1.59 1.50 1.54 1.61
======== ======== ======== ======== ======
Preferred stock dividends(3).................. $ 7.0 $ 10.9 $ 12.0 $ 10.1 $ 12.9
======== ======== ======== ======== ======
Ratio of earnings to combined fixed charges
and preferred stock dividends............... 1.75 1.57 1.48 1.52 1.57
======== ======== ======== ======== ======
</TABLE>
- ---------------
(1) For financial statement purposes, these amounts are reduced for income
earned on temporary investment of excess funds, generally resulting from
over-subscriptions of commercial paper issuances.
(2) Represents one-third of rental which approximates the portion representing
interest.
(3) Preferred stock dividends are grossed up to their pre-tax equivalents based
on effective tax rates of 34.7, 32.9, 40.1, 28.8 and 32.8 percent for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Household Finance Corporation:
As independent public accountants, we hereby consent to the incorporation
of our report dated January 21, 1998, included in this annual report on Form
10-K of Household Finance Corporation for the year ended December 31, 1997, into
the Company's previously filed Registration Statements No. 33-55043, No.
33-55561, No. 33-64175 and No. 333-14459 on Form S-3.
/s/ Arthur Andersen LLP
Chicago, Illinois
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND ITS SUBSIDIARIES
IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL
STATEMENTS PREVIOUSLY FILED WITH THE SECURITIES & EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 291,400
<SECURITIES> 1,723,800
<RECEIVABLES> 17,512,300
<ALLOWANCES> 1,546,800
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 554,200
<DEPRECIATION> 318,700
<TOTAL-ASSETS> 22,934,700
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 12,022,000
0
0
<COMMON> 1
<OTHER-SE> 4,031,400
<TOTAL-LIABILITY-AND-EQUITY> 22,934,700
<SALES> 0
<TOTAL-REVENUES> 3,911,500
<CGS> 0
<TOTAL-COSTS> 1,326,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 801,100
<INTEREST-EXPENSE> 998,500
<INCOME-PRETAX> 785,700
<INCOME-TAX> 272,300
<INCOME-CONTINUING> 513,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 513,400
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH FINANICAL
INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S BALANCE SHEETS WERE
NON-CLASSIFIED.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
DEBT SECURITIES RATINGS
<TABLE>
<CAPTION>
STANDARD MOODY'S FITCH DUFF & PHELPS
& POOR'S INVESTORS INVESTORS CREDIT THOMSON
CORPORATION SERVICE SERVICE RATING CO. BANKWATCH
----------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Household Finance Corporation
Senior debt............................ A A2 A+ A+ A+
Senior subordinated debt............... A- A3 A A A
Commercial paper....................... A-1 P-1 F-1 Duff 1+ TBW-1
Household Bank (Nevada), N.A.
Senior debt............................ A A2 A+ A+ A+
</TABLE>
