<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-75
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HOUSEHOLD FINANCE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1239445
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
2700 Sanders Road, Prospect Heights, Illinois 60070
- -------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 564-5000
--------------
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At October 31, 1998, there were 1,000 shares of registrant's
common stock outstanding.
The registrant meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q and is therefore
filing this Form 10-Q with the reduced disclosure format.
<PAGE>
<PAGE> 2
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
Table of Contents
PART I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Income
(Unaudited) - Three Months and Nine Months
Ended September 30, 1998 and 1997 2
Condensed Consolidated Balance Sheets -
September 30, 1998 (Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended
September 30, 1998 and 1997 4
Financial Highlights 5
Notes to Interim Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
<PAGE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------
All amounts are stated in millions.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income $1,200.4 $1,084.8 $3,482.0 $3,127.9
Other interest income 13.6 7.3 28.9 29.8
Interest expense 521.6 482.2 1,530.3 1,382.4
-------- -------- -------- --------
Net interest margin 692.4 609.9 1,980.6 1,775.3
Provision for credit losses on owned
receivables 300.3 313.2 955.4 925.4
-------- -------- -------- --------
Net interest margin after provision for
credit losses 392.1 296.7 1,025.2 849.9
-------- -------- -------- --------
Securitization income 241.7 350.3 833.4 929.4
Insurance revenues 101.7 86.0 283.7 260.6
Investment income 39.4 41.3 112.2 115.1
Fee income 124.8 135.1 370.6 337.9
Other income 47.0 65.5 183.0 288.4
Gain on sale of Beneficial Canada - - 189.4 -
-------- -------- -------- --------
Total other revenues 554.6 678.2 1,972.3 1,931.4
-------- -------- -------- --------
Salaries and fringe benefits 231.7 236.2 726.2 672.5
Occupancy and equipment expense 61.5 71.7 209.0 215.5
Other marketing expenses 50.4 65.1 164.6 188.8
Other servicing and administrative expenses 104.0 140.0 346.0 437.3
Amortization of acquired intangibles
and goodwill 44.8 38.6 130.7 105.0
Policyholders' benefits 50.2 56.9 156.0 179.7
Merger and integration related costs - - 1,000.0 -
-------- -------- -------- --------
Total costs and expenses 542.6 608.5 2,732.5 1,798.8
-------- -------- -------- --------
Income before income taxes 404.1 366.4 265.0 982.5
Income taxes 141.0 132.7 205.6 355.0
-------- -------- -------- --------
Net income $ 263.1 $ 233.7 $ 59.4 $ 627.5
======== ======== ======== ========
</TABLE>
See notes to interim condensed consolidated financial
statements.
<PAGE>
<PAGE> 4
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------
In millions, except share data.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
September 30, December 31,
1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Unaudited)
- ------
Cash $ 441.2 $ 545.3
Investment securities 3,118.4 2,336.8
Receivables, net 35,270.5 32,152.5
Advances to parent company and affiliates 316.4 10.5
Acquired intangibles and goodwill, net 1,839.0 1,777.9
Properties and equipment, net 380.9 464.8
Real estate owned 212.9 187.8
Other assets 2,027.6 1,973.3
--------- ---------
Total assets $43,606.9 $39,448.9
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Debt:
Deposits - $ 555.3
Commercial paper, bank and other borrowings $ 9,021.8 9,547.1
Senior and senior subordinated debt (with
original maturities over one year) 25,600.9 20,909.2
--------- ---------
Total debt 34,622.7 31,011.6
Insurance policy and claim reserves 1,091.6 1,182.3
Other liabilities 2,051.7 1,451.3
--------- ---------
Total liabilities 37,766.0 33,645.2
--------- ---------
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding at
September 30, 1998 and December 31, 1997,
and additional paid-in capital 2,910.2 2,555.1
Retained earnings 2,941.3 3,296.9
Foreign currency translation adjustments (37.7) (56.5)
Unrealized gain on investments, net 27.1 8.2
--------- ---------
Total common shareholder's equity 5,840.9 5,803.7
--------- ---------
Total liabilities and shareholder's equity $43,606.9 $39,448.9
========= =========
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE>
<PAGE> 5
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
In millions.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Nine months ended September 30 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income $ 59.4 $ 627.5
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 955.4 925.4
Merger and integration related costs 1,000.0 -
Insurance policy and claim reserves (18.6) 45.8
Depreciation and amortization 230.3 201.6
Net realized (gains) losses from sales of assets (172.5) (74.9)
Other, net (417.7) (27.5)
---------- ----------
Cash provided by operations 1,636.3 1,697.9
---------- ----------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (1,079.9) (1,321.0)
Matured 262.7 210.5
Sold 715.0 1,081.0
Short-term investment securities, net change (727.9) 59.5
Receivables:
Originations, net (11,083.2) (10,554.0)
Purchases and related premiums (2,345.9) (584.7)
Sold 9,266.1 12,622.7
Purchase capital stock of Transamerica Financial
Services Holding Company - (1,059.6)
Properties and equipment purchased (60.3) (36.7)
Properties and equipment sold 35.8 2.6
Advances to parent company and affiliates, net (305.9) (176.8)
---------- ----------
Cash increase (decrease) from investments in operations (5,323.5) 243.5
---------- ----------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt and deposits, net change (852.8) (1,449.3)
Senior and senior subordinated debt issued 8,533.3 6,162.4
Senior and senior subordinated debt retired (3,111.7) (4,602.5)
Prepayment of debt (767.2) -
Repayment of Transamerica Financial Services Holding
Company debt - (2,679.7)
Policyholders' benefits paid (81.9) (93.2)
Cash received from policyholders 79.3 57.1
Dividends paid to parent company (350.0) (75.0)
Dividends paid - pooled affiliate (75.4) (169.5)
Dividends on preferred stock - (4.7)
Capital contributions from parent company 200.0 976.5
Redemption of preferred stock - (100.0)
---------- ----------
Cash increase (decrease) from financing and
capital transactions 3,573.6 (1,977.9)
---------- ----------
Effect of exchange rate changes on cash 9.5 (10.9)
---------- ----------
Decrease in cash (104.1) (47.4)
Cash at January 1 545.3 508.1
---------- ----------
Cash at September 30 $ 441.2 $ 460.7
========== ==========
Supplemental cash flow information:
Interest paid $ 1,414.2 $ 1,265.2
---------- ----------
Income taxes paid 160.2 301.7
---------- ----------
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE>
<PAGE> 6
Household Finance Corporation and Subsidiaries
FINANCIAL HIGHLIGHTS
- --------------------
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income excluding merger costs
and Beneficial Canada gain $ 691.9 $627.5
Merger and integration related costs (751.0) -
Beneficial Canada gain 118.5 -
------- ------
Net income $ 59.4 $627.5
======= ======
</TABLE>
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest margin and other revenues <F1> $1,196.8 $1,231.2 $3,796.9 $3,527.0
-------- -------- -------- --------
Return on average common shareholder's equity <F2> 18.0% 16.8% 17.9% 17.3%
-------- -------- -------- --------
Return on average owned assets <F2> 2.44 2.38 2.55 2.22
-------- -------- -------- --------
</TABLE>
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
September 30, December 31,
1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Total assets:
Owned $43,606.9 $39,448.9
Managed 58,262.2 57,491.9
--------- ---------
Receivables:
Owned $35,501.5 $32,383.3
Serviced with limited recourse 14,655.3 18,043.0
--------- ---------
Managed $50,156.8 $50,426.3
========= =========
Debt to total shareholder's equity 5.9:1 5.3:1
--------- ---------
<FN>
<F1> Policyholders' benefits have been netted against other revenues.
<F2> Annualized. Excludes merger and integration related costs and
the Beneficial Canada gain.
</FN>
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE>
<PAGE> 7
Household Finance Corporation and Subsidiaries
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
- --------------------------
The accompanying unaudited condensed consolidated financial
statements of Household Finance Corporation ("HFC") and its
subsidiaries have been prepared in accordance with generally
accepted accounting principles for interim financial
information. Additionally, these financial statements have
been prepared in accordance with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete
financial statements. Certain prior period amounts have been
reclassified to conform with the current period's
presentation. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results
for the three and nine months ended September 30, 1998 should
not be considered indicative of the results for any future
quarters or the year ending December 31, 1998. HFC and its
subsidiaries may also be referred to in this Form 10-Q as
"we," "us" or "our." These financial statements should be read
in conjunction with the consolidated financial statements for
the year ended December 31, 1997 contained in HFC's Current
Report on Form 8-K dated September 1, 1998.
2. HOUSEHOLD INTERNATIONAL MERGER WITH BENEFICIAL CORPORATION
- ---------------------------------------------------------------
On June 30, 1998, Household International, Inc., our parent
company, completed its merger with Beneficial Corporation
("Beneficial"), a consumer finance holding company
headquartered in Wilmington, Delaware. Beneficial's total
assets were $16.1 billion and common shareholder's equity was
$2.0 billion on the date of the merger, excluding the impact
of the merger and integration related costs. Each outstanding
share of Beneficial common stock was converted into 3.0666
shares of Household International's common stock, resulting in
the issuance of approximately 168.4 million common shares to
the former Beneficial shareholders. Each share of Beneficial
$5.50 Convertible Preferred Stock was converted into the
number of shares of Household International common stock the
holder would have been entitled to receive in the merger had
the holder converted his or her shares of Beneficial $5.50
Convertible Preferred Stock into shares of Beneficial common
stock immediately prior to the merger. Additionally, each
other share of preferred stock of Beneficial outstanding
immediately prior to the merger has been converted into one
share of a newly created series of preferred stock of
Household International with terms substantially similar to
those of existing Beneficial preferred stock. The merger was
accounted for as a pooling of interests. Upon completion of
the merger, substantially all the net assets of Beneficial
were contributed by Household International to HFC. Therefore,
these interim condensed consolidated financial statements
include the results of operations, financial position, and
changes in cash flows of Beneficial for all periods presented.
Net interest margin and other revenues for Beneficial for the
three and nine months ended September 30, 1997 was $505.8
million and $1,530.9 million, respectively. Net income for
Beneficial for the three and nine months ended September 30,
1997 was $77.5 million and $266.5 million, respectively.
<PAGE>
<PAGE> 8
In connection with the merger, we incurred pre-tax merger and
integration related costs of approximately $1 billion ($751
million after-tax) in the second quarter. These costs included
approximately $285 million in lease exit costs, $40 million in
fixed asset write-offs related to closed facilities, $275
million in severance and change in control payments, $240
million in asset writedowns to reflect modified business
plans, $75 million in investment banking fees, $25 million in
legal and other expenses, and $60 million in prepayment
premiums related to debt.
The following table summarizes the activity in the merger and
restructuring reserve:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Nine Months Ended
In millions. September 30, 1998
- -----------------------------------------------------------
<S> <C>
Balance at January 1, 1998 -
Establishment of reserve $1,000.0
Cash payments (255.0)
Non-cash items (291.0)
--------
Balance at September 30, 1998 $ 454.0
========
</TABLE>
3. BUSINESS DIVESTITURES
- --------------------------
On April 28, 1998, the sale of Beneficial's German operations
was completed. An after-tax loss of $27.8 million was recorded
in the fourth quarter of 1997. This loss was recorded after
consideration of a $31.0 million tax benefit, primarily
generated by the expected utilization of capital losses to
cover the expected loss associated with disposing of the
German operations. No additional losses were realized in 1998
as a result of the sale.
On March 2, 1998, the sale of Beneficial's Canadian operations
was completed. An after-tax gain of $118.5 million was
recorded upon consummation of the transaction.
4. INVESTMENT SECURITIES
- --------------------------
Investment securities consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
In millions. September 30, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities $ 68.7 $ 71.0 $ 129.0 $ 132.5
Corporate debt securities 1,745.6 1,777.6 1,575.4 1,594.0
U.S. government and federal
agency debt securities 254.6 262.0 380.2 370.0
Other 972.8 972.8 206.2 206.9
-------- -------- -------- --------
Subtotal 3,041.7 3,083.4 2,290.8 2,303.4
Accrued investment income 35.0 35.0 33.4 33.4
-------- -------- -------- --------
Total investment securities $3,076.7 $3,118.4 $2,324.2 $2,336.8
======== ======== ======== ========
/TABLE
<PAGE>
<PAGE> 9
5. RECEIVABLES
- ----------------
Receivables consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
September 30, December 31,
In millions. 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Home equity $16,825.3 $12,806.1
Auto finance 601.0 476.5
MasterCard/Visa 4,634.5 5,052.4
Private label 7,320.3 8,039.2
Other unsecured 5,453.8 5,071.3
Commercial 666.6 937.8
--------- ---------
Total owned receivables 35,501.5 32,383.3
Accrued finance charges 451.8 400.1
Credit loss reserve for owned receivables (1,559.0) (1,417.5)
Unearned credit insurance premiums and
claims reserves (381.8) (344.2)
Amounts due and deferred from
receivables sales 1,984.6 1,838.6
Reserve for receivables serviced with
limited recourse (726.6) (707.8)
--------- ---------
Total owned receivables, net 35,270.5 32,152.5
Receivables serviced with limited recourse 14,655.3 18,043.0
--------- ---------
Total managed receivables, net $49,925.8 $50,195.5
========= =========
</TABLE>
The outstanding balance of receivables serviced with limited recourse consisted
of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
September 30, December 31,
In millions. 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 4,114.5 $ 6,038.6
Auto finance 900.3 395.9
MasterCard/Visa 5,117.8 6,775.7
Private label 869.6 1,025.0
Other unsecured 3,653.1 3,807.8
--------- ---------
Total $14,655.3 $18,043.0
========= =========
</TABLE>
The combination of receivables owned and receivables serviced with limited
recourse, which we consider our managed portfolio, is shown below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
September 30, December 31,
In millions. 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Home equity $20,939.8 $18,844.7
Auto finance 1,501.3 872.4
MasterCard/Visa 9,752.3 11,828.1
Private label 8,189.9 9,064.2
Other unsecured 9,106.9 8,879.1
Commercial 666.6 937.8
--------- ---------
Total $50,156.8 $50,426.3
========= =========
/TABLE
<PAGE>
<PAGE> 10
The amounts due and deferred from receivables sales were
$1,984.6 million at September 30, 1998 and $1,838.6 million at
December 31, 1997. The amounts due and deferred included
unamortized securitization assets and other assets established
under the recourse provisions for certain sales totaling
$1,883.1 million at September 30, 1998 and $1,846.3 million at
December 31, 1997. It also included net customer payments not
yet received from (paid to) the securitization trustee of
$83.0 million at September 30, 1998 and $(53.6) million at
December 31, 1997. In addition, we have subordinated interests
in certain transactions, which were recorded as receivables,
of $878.4 million at September 30, 1998 and $888.7 million at
December 31, 1997. We have agreements with a "AAA"-rated third
party who will insure us for up to $21.2 million in losses
relating to certain securitization transactions. We maintain
credit loss reserves under the recourse requirements for
receivables serviced with limited recourse which are based on
estimated probable losses under those requirements. The
reserves totaled $726.6 million at September 30, 1998 and
$707.8 million at December 31, 1997 and represents our best
estimate of probable losses on receivables serviced with
limited recourse.
6. CREDIT LOSS RESERVES
- -------------------------
An analysis of credit loss reserves for the three and nine
months ended September 30 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
In millions. 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit loss reserves for owned
receivables at beginning
of period $1,524.9 $1,330.8 $1,417.5 $1,169.7
Provision for credit losses 300.3 313.2 955.4 925.4
Chargeoffs (365.9) (314.5) (1,059.0) (883.8)
Recoveries 34.2 33.7 93.8 102.7
Portfolio acquisitions, net 65.5 (3.4) 151.3 45.8
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
OWNED RECEIVABLES AT
SEPTEMBER 30 1,559.0 1,359.8 1,559.0 1,359.8
-------- -------- -------- --------
Credit loss reserves for
receivables serviced with
limited recourse at beginning
of period 683.5 574.5 707.8 576.2
Provision for credit losses 233.4 226.1 590.2 506.5
Chargeoffs (203.9) (187.2) (624.7) (485.8)
Recoveries 11.3 12.9 42.1 27.0
Other, net 2.3 (.1) 11.2 2.3
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
RECEIVABLES SERVICED WITH
LIMITED RECOURSE AT
SEPTEMBER 30 726.6 626.2 726.6 626.2
-------- -------- -------- --------
TOTAL CREDIT LOSS RESERVES FOR
MANAGED RECEIVABLES AT
SEPTEMBER 30 $2,285.6 $1,986.0 $2,285.6 $1,986.0
======== ======== ======== ========
</TABLE>
<PAGE>
<PAGE> 11
7. INCOME TAXES
- -----------------
The effective tax rate for the first nine months of 1998 was
35.9 percent excluding merger and integration related costs.
The inclusion of this item resulted in a $249 million net tax
benefit for the first nine months of 1998. The effective tax
rate was 36.1 percent in the year-ago period. The effective
tax rate differs from the statutory federal income tax rate in
these years primarily because of the effects of (a) state and
local income taxes, (b) in 1997, capital losses from the sale
of German operations and (c) leveraged lease tax benefits.
8. TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
- ----------------------------------------------------
We periodically advance funds to Household International and
affiliates or receive amounts in excess of our parent
company's current requirements. Advances to parent company and
affiliates were $316.4 million at September 30, 1998 compared
to $10.5 million at December 31, 1997. Advances from parent
company and affiliates, which are included in commercial
paper, bank and other borrowings, were $250.0 million at
December 31, 1997. There were no advances from parent company
and affiliates at September 30, 1998. Net interest income on
affiliated balances was $6.4 million for the third quarter of
1998 and $4.8 million for the prior year quarter. In the first
nine months of 1998 net interest income on affiliated balances
was $13.7 million compared to $15.5 million for the same
period last year.
9. COMPREHENSIVE INCOME
- -----------------------
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS No. 130"), effective
for fiscal years beginning after December 15, 1997. This
statement establishes standards for the reporting and
presentation of comprehensive income. Comprehensive income, in
addition to traditional net income, includes the mark-to-
market adjustments on available-for-sale securities,
cumulative translation adjustments and other items which
represent a change in equity from "nonowner" sources. FAS No.
130 does not change existing requirements for certain items to
be reported as a separate component of shareholder's equity.
In accordance with the interim reporting guidelines of FAS No.
130, comprehensive income was $262.7 million for the quarter
ended September 30, 1998, $255.4 million for the quarter ended
September 30, 1997, $97.1 million for the nine months ended
September 30, 1998 and $638.3 million for the nine months
ended September 30, 1997. Excluding the impact of the merger
and integration related costs as well as the gain on sale of
Beneficial Canada, comprehensive income was $729.6 million for
the nine months ended September 30, 1998.
10. COMMITMENTS AND CONTINGENT LIABILITIES
- -------------------------------------------
In 1992, the Internal Revenue Service ("IRS") completed its
examination of Beneficial's federal income tax returns for
1984 through 1987. The IRS proposed $142.0 million in
adjustments that relate principally to activities of a former
subsidiary, American Centennial Insurance Company, prior to
its sale in 1987.
In order to limit the further accrual of interest on the
proposed adjustments, Beneficial paid $105.5 million of tax
and interest during the third quarter of 1992.
<PAGE>
<PAGE> 12
The issues were not resolved during the administrative appeals
process, and the IRS issued a statutory Notice of Deficiency
asserting the unresolved adjustments and increased the
disallowance to $195.0 million in the third quarter of 1996.
Beneficial has initiated litigation in the United States Tax
Court to oppose the disallowance. While the conclusion of this
matter in its entirety cannot be predicted with certainty,
management does not anticipate the ultimate resolution to
differ materially from amounts accrued.
11. ACCOUNTING PRONOUNCEMENTS
- ------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS No. 131").
This statement establishes standards for reporting information about
operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial
reports issued to shareholders. FAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas
and major customers. We expect to adopt FAS No. 131 in the fourth
quarter of 1998.
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS No. 133"). FAS No.
133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its
fair value. FAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. FAS No. 133
is effective for fiscal years beginning after June 15, 1999,
and can be implemented as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning
June 16, 1998 and thereafter). FAS No. 133 cannot be applied
retroactively. We expect to adopt FAS No. 133 on January 1,
2000 and have not yet quantified the impacts of adopting this
statement on our financial statements.
<PAGE>
<PAGE> 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains certain estimates and projections
regarding HFC and Household International, Inc., our parent
company, and its merger with Beneficial Corporation
("Beneficial"), that may be forward looking in nature, as
defined by the Private Securities Litigation Reform Act of
1995. A variety of factors may cause actual results to differ
materially from the results discussed in these forward looking
statements. Factors that might cause such a difference are
discussed herein under the caption "Forward Looking
Statements".
On June 30, 1998, Household International merged with
Beneficial, a consumer finance holding company headquartered
in Wilmington, Delaware. Each outstanding share of Beneficial
common stock was converted into 3.0666 shares of Household
International's common stock, resulting in the issuance of
approximately 168.4 million shares of common stock. Each share
of Beneficial $5.50 Convertible Preferred Stock (the
"Beneficial Convertible Stock") was converted into the number
of shares of Household International common stock the holder
would have been entitled to receive in the merger had the
Beneficial Convertible Stock been converted into shares of
Beneficial common stock immediately prior to the merger.
Additionally, each other share of Beneficial preferred stock
outstanding was converted into one share of a newly-created
series of Household International preferred stock with terms
substantially similar to those of existing Beneficial
preferred stock. The merger was accounted for as a pooling of
interests. Upon completion of the merger, substantially all
the net assets of Beneficial were contributed by Household
International to HFC. Therefore, the information included in
this report presents the combined results of HFC and
Beneficial as if the two companies had operated as a combined
entity for all periods presented.
In connection with the merger, Household International and HFC
incurred pre-tax merger and integration related costs of
approximately $1 billion ($751 million after-tax) in the
second quarter. These costs included approximately $285
million in lease exit costs, $40 million in fixed asset write-
offs related to closed facilities, $275 million in severance
and change in control payments, $240 million in asset
writedowns to reflect modified business plans, $75 million in
investment banking fees, $25 million in legal and other
expenses, and $60 million in prepayment premiums related to
debt.
The merger and integration related costs included
approximately $291 million in non-cash charges. Cash payments
of approximately $709 million have been and will continue to
be funded through our existing operations and by issuing
additional commercial paper and other borrowings. In addition,
we received tax benefits of approximately $249 million.
Substantially all of the cash payments are expected to be made
by the end of 1998.
The integration of Beneficial is progressing well. Cost
reductions from the integration are proceeding as planned.
OPERATIONS SUMMARY
- ------------------
Our net income for the third quarter of 1998 was $263.1
million, up from $233.7 million in 1997. Operating income (net
income excluding merger and integration related costs and the
gain on sale of Beneficial's Canadian operations) for the
first nine months of 1998 was $691.9 million, up from $627.5
million a year ago. Including merger and integration related
costs and the gain on sale of Beneficial's Canadian
operations, we recognized net income of $59.4 million for the
first nine months of 1998.
<PAGE>
<PAGE> 14
Our annualized return on average common shareholder's equity
was 18.0 percent for the third quarter of 1998 and, excluding
merger and integration related costs and the gain on sale of
Beneficial's Canadian operations, 17.9 percent for the first
nine months of 1998. This compares to an annualized return on
average common shareholder's equity of 16.8 percent for the
third quarter of 1997 and 17.3 percent for the first nine
months of 1997.
- - On April 28, the sale of Beneficial's German operations
was completed. An after-tax loss of $27.8 million was recorded
in the fourth quarter of 1997. This loss was recorded after
consideration of a $31.0 million tax benefit, primarily
generated by the expected utilization of capital losses to
cover the expected loss associated with disposing of the
German operations. No additional losses were realized in 1998
as a result of the sale.
- - On March 2, 1998, the sale of Beneficial's Canadian
operations was completed. An after-tax gain of $118.5 million
was recorded upon consummation of the transaction.
- - The following summarizes our operating results for our
key businesses for the third quarter and first nine months of
1998 compared to the corresponding prior year periods:
Results for our consumer finance business improved from the
prior year periods reflecting higher net interest margin
and fee income due mainly to higher levels of average
managed receivables. These improvements were partially
offset by higher credit losses resulting primarily from
increased personal bankruptcy filings as compared to the
prior year.
Our MasterCard* and Visa* credit card business reported
lower earnings from the prior year periods as lower net
interest margin, higher credit losses and increased
marketing spending were partially offset by higher fee
income. During the third quarter, we sold a $500 million
portfolio related to the previously discontinued Ameritech
cobranding program. Our MasterCard and Visa business has
suffered from industry trends of slowing growth and
profits. The sale of the former Ameritech portfolio was a
first step taken by new credit card management, hired in
June, to improve the performance of this business. In
November 1998, we entered into an agreement to sell $1.3
billion of our undifferentiated bank subsidiary's branded
portfolio. Further profitability initiatives are being
evaluated. These initiatives include repositioning the non-
affinity portfolios and improving returns in all
portfolios, including the GM co-branded credit card and the
AFL-CIO's Union Privilege affinity credit card.
Our private label credit card business reported improved
earnings from the prior year periods reflecting higher fee
income, improved efficiency and, for the first nine months,
higher net interest margin, partially offset by higher
credit losses. Higher credit losses reflected higher
personal bankruptcies as compared to the prior year, as
well as the maturing of promotional balances in the first
quarter of 1998.
Beneficial's tax refund anticipation loan ("RAL") business
profits declined in the first nine months, reflecting
certain limited measures taken by the Internal Revenue
Service to delay payment on the returns of selected
taxpayers claiming an earned income tax credit.
* MasterCard is a registered trademark of MasterCard
International, Incorporated and Visa is a registered
trademark of VISA USA, Inc.
<PAGE>
<PAGE> 15
BALANCE SHEET REVIEW
- --------------------
- - Managed consumer receivables (receivables on our balance
sheet plus receivables serviced with limited recourse) grew 5
percent over the prior year. Excluding Beneficial's German and
Canadian receivables which were sold in the first half of
1997, managed consumer receivables grew 7 percent year-over-
year. Growth in auto finance receivables reflect the
acquisition of ACC Consumer Finance Corporation ("ACC") in
October 1997. Home equity receivables were up 16 percent from
a year ago. The combination of prepayment penalties and focus
on customer service and retention have contributed to the
increase over the prior year. The level of refinancings also
began to stabilize, although at a higher level than we prefer.
Private label receivables were down slightly from a year ago
as a result of attrition at two major merchants in the second
quarter of 1998 due to less promotional activity by
Beneficial. This decrease was offset by the signing of a major
furniture retailer which added over $500 million in
receivables. Other unsecured receivables were up 8 percent
compared to the prior year reflecting the purchase of an $850
million portfolio in the first quarter. MasterCard and Visa
receivables were down from a year ago reflecting the third
quarter sale of the $500 million Ameritech portfolio, as
previously discussed, coupled with attrition in our bankcard
business. This decrease was partially offset by the purchase
of a $925 million portfolio in the first quarter of 1998.
- - Compared to the second quarter, managed consumer
receivables were up 2 percent. Home equity receivables were up
6 percent from the second quarter. Although impacted by the
integration process, production volumes at the Beneficial
branches remained strong during the quarter. Additionally, the
level of refinancings began to stabilize. Auto finance
receivables increased $263 million in the quarter. Growth in
private label receivables in the quarter reflect the addition
of over $500 million in receivables as discussed above. Also,
during the quarter, our private label business signed a
contract with a regional consumer electronics merchant and
extended the terms of relationship with two of Beneficial's
largest merchants. MasterCard/Visa receivables declined in the
quarter. The decline is attributable to attrition in our
bankcard business coupled with the sale of the $500 million
portfolio discussed above.
- - Consumer receivables on our balance sheet were $34.8
billion at September 30, 1998, up from $33.6 billion at June
30, 1998 and $30.1 billion at September 30, 1997. Changes in
these owned receivables from period to period may vary
depending on the timing and significance of securitization
transactions.
- - Our managed credit loss reserves were $2,285.6 million at
September 30, 1998, up from $2,208.4 million at June 30, 1998
and $1,986.0 million at September 30, 1997. Credit loss
reserves as a percent of managed receivables were 4.56
percent, up from 4.47 percent at June 30, 1998 and 4.12
percent at September 30, 1997. Reserves as a percent of
nonperforming managed receivables were 116.7 percent, compared
to 117.8 percent at June 30, 1998 and 125.1 percent at
September 30, 1997. Consumer two-months-and-over contractual
delinquency ("delinquency") as a percent of managed consumer
receivables was 5.37 percent, up from 5.01 percent at June 30,
1998 and 4.57 percent at September 30, 1997. The annualized
total consumer managed chargeoff ratio in the third quarter of
1998 was 4.27 percent, compared to 4.10 percent in the prior
quarter and 3.81 percent in the year-ago quarter.
- - Our debt to total shareholder's equity ratio was 5.9 to 1
compared to 5.3 to 1 at December 31, 1997. The increase was
due to higher debt levels primarily attributable to higher
average owned receivables at September 30, 1998.
<PAGE>
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our major use of cash is the origination or purchase of
receivables or purchases of investment securities. Our main
sources of cash are the collection of receivable balances,
maturities or sales of investment securities, proceeds from
the issuance of debt and securitization of consumer
receivables, and cash provided by operations.
Although concerns have been raised in our industry about the
inability of certain companies to obtain financing, we have
experienced no problems in issuing commercial paper, long-term
debt at a variety of maturities, or asset-backed securities.
The following describes major changes in our funding base from
December 31, 1997 to September 30, 1998:
- - We paid $200 million of dividends to our parent company
during the third quarter of 1998. A total of $350 million of
dividends were paid to our parent company during the first
nine months of 1998.
- - Deposits decreased due to the sale of Beneficial's German
operations, as previously discussed.
- - Commercial paper, bank and other borrowings decreased to
$9.0 billion from $9.5 billion. Senior and senior subordinated
debt (with original maturities over one year) increased 22
percent to $25.6 billion from $20.9 billion. The increase in
total debt levels from year end is primarily attributable to
the increase in owned receivables.
- - In connection with the Beneficial merger, we have
repurchased approximately $.7 billion of senior and senior
subordinated debt and bank and other borrowings. We funded the
debt repurchase with senior debt and other borrowings.
Cash payments of approximately $709 million for merger and
integration related costs have been and will continue to be
funded through our existing operations, senior debt and
other borrowings.
- - In March 1998, we received a capital contribution from
our parent company of $200 million in connection with the
acquisition of a credit card portfolio during the first
quarter.
- - Our securitized portfolio of home equity, auto finance,
MasterCard and Visa, private label and other unsecured
receivables totaled $14.7 billion at September 30, 1998,
compared to $18.0 billion at December 31, 1997. During the
three months ended September 30, 1998, we securitized,
excluding replenishments of certificate holder interests, $.7
billion of auto finance and other unsecured receivables.
During the nine months ended September 30, 1998, we
securitized, excluding replenishments of certificate holder
interests, $2.2 billion of auto finance, MasterCard/Visa and
other unsecured receivables.
<PAGE>
<PAGE> 17
The composition of these securitizations by type is as follows
(in billions):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
1998 1998
- ---------------------------------------------------------------
<S> <C> <C>
Auto finance $ .3 $ .7
Visa/MasterCard - .8
Other unsecured .4 .7
------- -------
Total $ .7 $ 2.2
======= =======
</TABLE>
The market for securities backed by receivables is a reliable,
efficient and cost-effective source of funds, which we plan to
continue to utilize in the future.
INCOME STATEMENT REVIEW
- -----------------------
Net interest margin
- -------------------
Net interest margin was $692.4 million for the third quarter
of 1998, up from $609.9 million for the prior year quarter.
Net interest margin for the first nine months of 1998 was
$1,980.6 million, up from $1,775.3 million in the prior year
period. Net interest margin as a percent of average owned
interest-earning assets, annualized, was 7.62 percent in the
third quarter of 1998 compared to 7.42 percent in the year-ago
quarter. The increase in the net interest margin percentage in
1998 resulted from higher unsecured loan yields and lower cost
of funds, slightly offset by lower margin from a higher mix of
secured loans in the portfolio. The dollar increase was
primarily due to an increase in average owned home equity
loans as a result of the acquisition of Transamerica Financial
Services Holding Company ("TFS") in 1997, but was partially
offset by a decrease in average owned MasterCard/Visa and
private label receivables.
Due to the securitization of assets over the past several
years, the comparability of net interest margin between years
may be affected by the level and type of assets securitized.
As receivables are securitized rather than held in our
portfolio, net interest income is reclassified to
securitization income. Net interest margin on a managed basis,
assuming receivables securitized were held in our portfolio,
was $1,024.2 million for the third quarter of 1998, up from
$992.5 million in the year-ago period. Net interest margin on
a managed basis for the first nine months of 1998 was $3,086.1
million, up 9 percent compared to $2,819.5 million in the
prior year period. Net interest margin on a managed basis as a
percent of average managed interest-earning assets,
annualized, was 8.05 percent compared to 8.12 percent in the
year-ago quarter. The decrease in the net interest margin
percentage compared to the prior year quarter was attributable
to a change in our product mix. Our receivables portfolio in
the third quarter of 1998 was comprised of a larger portion of
home equity loans as compared to the prior year. Home equity
loans typically carry lower interest rates than our unsecured
loan products which carry more risk.
Provision for credit losses
- ---------------------------
The provision for credit losses for receivables on an owned
basis for the third quarter of 1998 totaled $300.3 million,
compared to $313.2 million in the prior year quarter. The
provision for the first nine months of 1998 was $955.4
million, up from $925.4 million in the year-ago period. The
provision for credit losses on an owned basis may vary from
quarter to quarter, depending on the amount of securitizations
in a particular period.
<PAGE>
<PAGE> 18
Other revenues
- --------------
Securitization income was $241.7 million for the third quarter
of 1998, compared to $350.3 million for the same period in
1997. Securitization income for the first nine months of 1998
was $833.4 million, compared to $929.4 million in the year-ago
period. Securitization income consists of income associated
with the securitization and sale of receivables with limited
recourse, including net interest income, fee and other income
and provision for credit losses related to those receivables.
The decrease in securitization income in 1998 was primarily
due to Beneficial's securitization gains on home equity loans
in the second and third quarters of 1997.
Fee income on an owned basis includes revenues from fee-based
products such as credit cards. Fee income was $124.8 million
in the third quarter of 1998, compared to $135.1 million in
the comparable period of the prior year. Fee income for the
first nine months of 1998 was $370.6 million, up from $337.9
million for the same period in 1997. The decrease in fee
income in the third quarter was due to higher revenue sharing
payments to GM as compared to the year-ago quarter. The
increase in fee income for the first nine months reflected
higher credit card fees as compared to the prior year period.
Other income was $47.0 million in the third quarter of 1998,
down from $65.5 million in the third quarter of 1997. Other
income for the first nine months of 1998 was $183.0 million,
compared to $288.4 million in the year-ago period. The
decrease in other income in 1998 is due to lower RAL income.
Also contributing to the decrease in the third quarter were
nonrecurring gains recognized in 1997 on the sales of
MasterCard/Visa receivables from our non co-branded portfolio.
Additionally, the 1997 year-to-date amount included
approximately $50 million of nonrecurring gains on the sales
of certain non-strategic assets and a gain from the sale of a
Beneficial life insurance portfolio in June 1997.
Total other revenue for the first nine months of 1998 included
a pretax gain of $189.4 million from the sale of Beneficial's
Canadian operations, as previously discussed.
Expenses
- --------
Operating expenses for the third quarter of 1998 were $492.4
million, compared to $551.6 million in the comparable prior
year quarter. Operating expenses for the first nine months of
1998, excluding the one-time merger related costs of
approximately $1.0 billion, were $1,576.5 million, compared to
$1,619.1 million in the year-ago period.
Salaries and fringe benefits for the third quarter were $231.7
million compared to $236.2 million in the third quarter of
1997. Salaries and fringe benefits for the first nine months
of 1998 were $726.2 million compared to $672.5 million for the
same period in 1997. The expense was down slightly in the
third quarter compared with the prior year quarter as the
increase in the average number of employees in our consumer
finance and auto finance businesses in connection with HFC's
acquisitions of TFS in June 1997 and ACC in October 1997 were
offset by the sale of Beneficial's Canadian operations in
March 1998 and German operations in April 1998. The higher
expense for the first nine months was primarily due to the
increase in the average number of employees in connection with
the acquisitions of TFS and ACC.
Other marketing expenses for the third quarter were $50.4
million, compared to $65.1 million in 1997. Other marketing
expense for the first nine months of 1998 totaled $164.6
million, compared to $188.8 million in the year-ago period.
Other marketing expense was down from the prior year periods
due to increased spending in 1997 on Beneficial's marketing
programs in the United Kingdom and on private label programs
for several Beneficial private label merchants. The decreases
in expense in 1998 were partially offset by higher marketing
spending on programs in our MasterCard/Visa business.
<PAGE>
<PAGE> 19
Other servicing and administrative expenses were $104.0
million in the third quarter of 1998, down from $140.0 million
in the prior year. Other servicing and administrative expenses
for the first nine months of 1998 were $346.0 million, down
from $437.3 million for the same period in 1997. The decreases
from the prior year periods were primarily due to reductions
in fraud losses coupled with higher expenses in 1997 related
to Beneficial's Canadian and German operations sold in early
1998.
Amortization of acquired intangibles and goodwill was $44.8
million in the third quarter of 1998, up from $38.6 million in
the prior year quarter. Amortization expense for the first
nine months of 1998 was $130.7 million, up from $105.0 million
in the prior year period. The increase reflects our
acquisitions of TFS and ACC in 1997.
CREDIT LOSS RESERVES
- --------------------
Our consumer credit management policies focus on product type
and specific portfolio risk factors. The consumer credit
portfolio is diversified by product and geographic location.
See Note 5, "Receivables" in the accompanying financial
statements for receivables by product type.
Total managed credit loss reserves, which include reserves
established on the off-balance sheet portfolio when
receivables are securitized, were as follows (in millions):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
September 30, June 30, December 31, September 30,
1998 1998 1997 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned $1,559.0 $1,524.9 $1,417.5 $1,359.8
Serviced with limited
recourse 726.6 683.5 707.8 626.2
-------- -------- -------- --------
Total $2,285.6 $2,208.4 $2,125.3 $1,986.0
======== ======== ======== ========
</TABLE>
Managed credit loss reserves as a percent of nonperforming
managed receivables were 116.7 percent, compared to 117.8
percent at June 30, 1998 and 125.1 percent at September 30,
1997.
Total owned and managed credit loss reserves as a percent of
receivables were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
September 30, June 30, December 31, September 30,
1998 1998 1997 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned 4.39% 4.45% 4.38% 4.38%
Managed 4.56 4.47 4.21 4.12
---- ---- ---- ----
</TABLE>
The level of reserves for consumer credit losses is based on
delinquency and chargeoff experience by product and judgmental
factors. We also evaluate the potential impact of existing and
anticipated national and regional economic conditions on the
managed receivable portfolio when establishing credit loss
reserves. See Note 6, "Credit Loss Reserves" in the
accompanying financial statements for analyses of reserves.
CREDIT QUALITY
- --------------
Delinquency and chargeoff levels in the consumer portfolio
were higher compared to the prior and year-ago quarters. We
track delinquency and chargeoff levels on a managed basis. We
include the off-balance sheet portfolio since we apply the
same credit and portfolio management procedures as on our
owned portfolio. This results in a similar credit loss
exposure for us.<PAGE>
<PAGE> 20
Delinquency
- -----------
Two-Months-and-Over Contractual Delinquency (as a percent of
managed consumer receivables):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
9/30/98 6/30/98 3/31/98 12/31/97 9/30/97
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity 3.66% 3.48% 3.59% 3.59% 3.03%
Auto finance <F1> 2.05 1.67 1.84 1.97 -
MasterCard/Visa 4.68 4.31 3.32 3.28 3.42
Private label 7.21 6.22 6.22 6.01 5.85
Other unsecured 8.92 8.55 8.22 8.25 7.89
---- ---- ---- ---- ----
Total 5.37% 5.01% 4.79% 4.77% 4.57%
==== ==== ==== ==== ====
<FN>
<F1> Prior to the fourth quarter of 1997, delinquency
statistics for auto finance receivables were not
significant. For prior periods, delinquency data for these
receivables were included in other unsecured receivables.
</FN>
</TABLE>
Delinquency as a percent of managed consumer receivables
increased from the prior quarter and the prior year. The
increase from the prior quarter is primarily due to the
integration of the Beneficial merger and was not unexpected.
The increase in the managed delinquency ratio for the combined
company from a year ago, in addition to the factor discussed
above, was due to seasoning of the home equity,
MasterCard/Visa and other unsecured portfolios and the
maturing of certain special promotional balances in our
private label portfolio.
Net Chargeoffs of Consumer Receivables
- --------------------------------------
Net Chargeoffs of Consumer Receivables (as a percent,
annualized, of average managed consumer receivables):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
1998 1998 1998 1997 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity .68% .40% .58% .59% .47%
Auto finance <F1> 4.89 5.18 5.95 5.33 -
MasterCard/Visa 6.62 5.31 5.65 5.45 6.24
Private label 5.51 6.43 6.02 5.47 5.02
Other unsecured 8.40 8.13 6.91 6.76 6.48
---- ---- ---- ---- ----
Total 4.27% 4.10% 4.04% 3.83% 3.81%
==== ==== ==== ==== ====
<FN>
<F1> Prior to the fourth quarter of 1997, chargeoff statistics
for auto finance receivables were not significant and were
included in other unsecured receivables.
</FN>
</TABLE>
The third quarter chargeoff ratio was 4.27 percent compared to
4.10 percent in the second quarter. The integration of
Beneficial and Household resulted in the alignment of
chargeoff policies for the private label and consumer finance
businesses. The policy changes accounted for virtually all of
the increase in the home equity chargeoff ratio as well as the
decline in the private label ratio. Higher chargeoff levels in
the MasterCard/Visa and other unsecured product lines resulted
from seasoning of acquired portfolios and higher bankruptcies.
The increase in the chargeoff ratio compared to a year ago was
primarily due to increased bankruptcy filings in and continued
seasoning of the other unsecured portfolio.
<PAGE>
<PAGE> 21
Nonperforming Assets
- --------------------
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
In millions. 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual owned receivables $ 900.1 $ 759.2 $ 708.6 $ 726.0 $ 605.6
Accruing owned consumer
receivables 90 or more days
delinquent 527.0 502.1 451.1 433.6 436.7
Renegotiated commercial loans 12.3 12.3 12.3 12.4 12.9
-------- -------- -------- -------- --------
Total nonperforming owned
receivables 1,439.4 1,273.6 1,172.0 1,172.0 1,055.2
Real estate owned 212.9 202.3 188.1 187.8 194.9
-------- -------- -------- -------- --------
Total nonperforming owned
assets $1,652.3 $1,475.9 $1,360.1 $1,359.8 $1,250.1
======== ======== ======== ======== ========
Owned credit loss reserves as
a percent of nonperforming
owned receivables 108.3% 119.7% 128.8% 120.9% 128.9%
-------- -------- -------- -------- --------
Nonaccrual managed receivables $1,261.9 $1,186.8 $1,165.2 $1,121.3 $ 980.4
Accruing managed consumer
receivables 90 or more days
delinquent 683.8 675.5 662.4 639.1 593.8
Renegotiated commercial
loans 12.3 12.3 12.3 12.4 12.9
-------- -------- -------- -------- --------
Total nonperforming managed
receivables 1,958.0 1,874.6 1,839.9 1,772.8 1,587.1
Real estate owned 212.9 202.3 188.1 187.8 194.9
-------- -------- -------- -------- --------
Total nonperforming managed
assets $2,170.9 $2,076.9 $2,028.0 $1,960.6 $1,782.0
======== ======== ======== ======== ========
Managed credit loss reserves as
a percent of nonperforming
managed receivables 116.7% 117.8% 119.3% 119.9% 125.1%
-------- -------- -------- -------- --------
</TABLE>
YEAR 2000
- ---------
The conversion of certain computer systems to permit continued
use in the Year 2000 ("Y2K") and beyond began in 1996. 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 Y2K may cause
systems to process critical financial and operational
information incorrectly. We have identified our Y2K issues and
are scheduled to substantially complete remediation and
testing of our significant systems by the end of 1998.
To address this issue, Household International has a dedicated
Year 2000 Project team, responsible for all Household
International business entities. The project team is led by a
full time Director of Y2K Compliance. Our plan for addressing
the Year 2000 issue is divided into three major phases:
Business Systems Inventory and Assessment, Remediation and
Replacement, and Testing and Implementation.
<PAGE>
<PAGE> 22
Business Systems Inventory and Assessment
- -----------------------------------------
The internal inventory portion of this phase, which commenced
in 1997, was designed to identify internal business systems
which could be susceptible to processing errors as a result of
the Y2K issue. The Year 2000 Project team, working with
business unit project leaders, has identified approximately
1900 components, consisting of hardware, software, business
application systems, service providers, business partners, and
various systems containing embedded processors. Approximately
500 internally developed business systems ("IT systems") have
been identified, as well as 325 unique pieces of hardware and
430 packaged vendor applications. All of these systems must,
at a minimum, be tested for Y2K compliance. In addition, we
have identified and assessed our 'non-IT' systems. The
remediation and replacement of these systems, which include
security systems, heating, ventilation and air conditioning
systems, elevators, and water treatment systems, are included
in the plans discussed below. Also as part of this phase,
significant service providers, vendors, suppliers, customers,
and government entities believed to be critical to business
operations after January 1, 2000, have been identified and
steps undertaken to ascertain their stage of Y2K readiness
through questionnaires, interviews, contract amendments and
other available means.
Remediation and Replacement
- ---------------------------
Household International and HFC have developed and are in the
process of implementing their remediation and replacement plan
for all affected IT and non-IT systems. This phase, which
commenced in 1998, is approximately 60% complete at September
30. Our plan established priorities for remediation or
replacement. We are utilizing internal and external resources
to execute the plan and expect to substantially complete all
remediation and replacement of significant systems by December
31, 1998, and all remaining systems by second quarter 1999. We
are on schedule to meet these objectives.
Testing and Implementation
- --------------------------
This phase of the project is on-going as systems are
remediated and replaced. Our efforts in this phase include
testing by technical resources, users and determination by
appropriate Y2K project management that the systems are Y2K
compliant. We expect to substantially complete testing of
significant systems by December 31, 1998, and all systems by
second quarter 1999.
Because our Y2K compliance is dependent on key third parties
also being Y2K compliant on a timely basis, we cannot assure
that the systems of our key third parties (RAL program being
dependent on the Internal Revenue Service), 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. In a worse case scenario, one or more of our key
third parties would not be Year 2000 compliant by the end of
1998 which could potentially, among other things, delay the
collection/processing of customer loan payments, impact the
timeliness of loan approvals, or cause the loss of key credit
history information which we use to market our products and
services. We are currently developing contingency plans, which
we expect to have completed by the end of 1998, to address the
potential noncompliance of each of our third-party vendors, as
well as for the potential failure of internal significant
systems. Such contingency plans will be implemented
immediately, if necessary. For each system or service provided
by a key third party, there are alternative suppliers of such
systems in the marketplace. The economical and operational
costs of converting to such alternative vendors or service
providers have not been specifically quantified but would not
be expected to have a material impact on our operations of
financial results.
<PAGE>
<PAGE> 23
The costs for Year 2000 compliance have not been, and are not
expected to be, material to our operations. We currently
estimate that the aggregate cost of our Y2K effort will be
approximately $20 million after tax, of which $11 million has
been incurred as of September 30, 1998.
Forward Looking Statements
- --------------------------
Forward looking statements included herein are based on our
current views and assumptions, and involve risks and
uncertainties that could cause our results to be materially
different than those anticipated. The following important
factors could affect our actual results and could cause such
results to vary materially from those expressed herein or in
any other document filed with the Securities and Exchange
Commission:
- - changes in laws and regulations, including changes in
accounting standards;
- - changes in overall economic conditions, including the
interest rate environment in which we operate, the capital
markets in which we fund our operations, recession and
currency fluctuations;
- - the ability of the company and its key service providers,
vendors or suppliers to replace, modify or upgrade its
business systems to adequately address Year 2000 issues;
- - consumer perception of the availability of credit,
including price competition in the market segments targeted
by the company and the ramifications of filing for personal
bankruptcy;
- - the effectiveness of models or programs to predict loan
delinquency or loss and initiatives to improve collections
in all business areas;
- - consumer acceptance and demand for our loan products;
- - inability to continue to integrate systems, operational
functions and cultures of Beneficial with those of
Household; and
- - the repositioning of our MasterCard/Visa business to
successfully market to selected consumer segments.
<PAGE>
<PAGE> 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 Statement of Computation of Ratio of
Earnings to Fixed Charges and to Combined Fixed
Charges and Preferred Stock Dividends.
27 Financial Data Schedule.
27.1 Restated Financial Data Schedule.
99.1 Debt Securities Ratings.
(b) Reports on Form 8-K
During the third quarter of 1998, the Registrant
filed a Current Report on Form 8-K dated September 1,
1998 with respect to consolidated financial statements
restating HFC's historical consolidated financial
statements as of and for the three years ended
December 31, 1997.
<PAGE>
<PAGE> 25
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
HOUSEHOLD FINANCE CORPORATION
-----------------------------
(Registrant)
Date: November 13, 1998 By: /s/ David A. Schoenholz
---------------- -----------------------------
David A. Schoenholz
Executive Vice President and
Chief Financial Officer,
Director and on behalf of
Household Finance Corporation
<PAGE>
<PAGE> 26
Exhibit Index
-------------
12 Statement of Computation of Ratio of
Earnings to Fixed Charges and to Combined Fixed
Charges and Preferred Stock Dividends.
27 Financial Data Schedule.
27.1 Restated Financial Data Schedule.
99.1 Debt Securities Ratings.
EXHIBIT 12
----------
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
All dollar amounts are stated in millions.
Nine months ended September 30 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Net income $ 59.4 $ 627.5
Income taxes 205.6 355.0
-------- --------
Income before income taxes 265.0 982.5
-------- --------
Fixed charges:
Interest expense <F1> 1,542.0 1,409.0
Interest portion of rentals <F2> 38.8 34.7
-------- --------
Total fixed charges 1,580.8 1,443.7
-------- --------
Total earnings as defined $1,845.8 $2,426.2
======== ========
Ratio of earnings to fixed charges <F4> 1.17 1.68
======== ========
Preferred stock dividends <F3> - $ 7.2
======== ========
Ratio of earnings to combined fixed charges
and preferred stock dividends <F4> 1.17 1.67
======== ========
Ratio of earnings to combined fixed charges
and preferred stock dividends, excluding
merger and integration related costs 1.80 -
======== ========
<FN>
<F1> For financial statement purposes, interest expense includes income
earned on temporary investment of excess funds, generally resulting
from over-subscriptions of commercial paper.
<F2> Represents one-third of rentals, which approximates the portion
representing interest.
<F3> Preferred stock dividends are grossed up to their pretax equivalent
based upon an effective tax rate of 36.1 percent for the nine
months ended September 30, 1997.
<F4> The 1998 ratios have been negatively impacted by the one-time merger
and integration related costs associated with our merger with
Beneficial Corporation. As a result, ratios excluding these costs
have also been presented for comparative purposes.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND ITS
SUBSIDIARIES IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION
AND FINANCIAL STATEMENTS PREVIOUSLY FILED WITH THE SECURITIES &
EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 441,200
<SECURITIES> 3,118,400
<RECEIVABLES> 35,501,500
<ALLOWANCES> (2,285,600)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,046,000
<DEPRECIATION> (665,100)
<TOTAL-ASSETS> 43,606,900
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 25,600,900
0
0
<COMMON> 1
<OTHER-SE> 5,840,900
<TOTAL-LIABILITY-AND-EQUITY> 43,606,900
<SALES> 0
<TOTAL-REVENUES> 5,483,200
<CGS> 0
<TOTAL-COSTS> 2,732,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 955,400
<INTEREST-EXPENSE> 1,530,300
<INCOME-PRETAX> 265,000
<INCOME-TAX> 205,600
<INCOME-CONTINUING> 59,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,400
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH
FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S
BALANCE SHEETS WERE NON-CLASSIFIED.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997<F1>
<PERIOD-END> SEP-30-1997
<CASH> 460,700
<SECURITIES> 2,352,000
<RECEIVABLES> 31,075,100
<ALLOWANCES> (1,986,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 1,100,600
<DEPRECIATION> (641,600)
<TOTAL-ASSETS> 37,641,200
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 20,810,500
0
0
<COMMON> 1
<OTHER-SE> 5,664,900
<TOTAL-LIABILITY-AND-EQUITY> 37,641,200
<SALES> 0
<TOTAL-REVENUES> 5,089,100
<CGS> 0
<TOTAL-COSTS> 1,798,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 925,400
<INTEREST-EXPENSE> 1,382,400
<INCOME-PRETAX> 982,500
<INCOME-TAX> 355,000
<INCOME-CONTINUING> 627,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 627,500
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>RESTATED
<F2>FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH
FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S
BALANCE SHEETS WERE NON-CLASSIFIED.
</FN>
</TABLE>
EXHIBIT 99.1
------------
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
DEBT SECURITIES RATINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Standard Moody's Fitch Duff & Phelps
& Poor's Investors Investors Credit Thomson
Corporation Service Services Rating Co. BankWatch
- ------------------------------------------------------------------------------------------------------------
At September 30, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Household Finance Corporation
Senior debt A A2 A+ A+ A+
Senior subordinated debt A- A3 A A A
Commercial paper A-1 P-1 F-1 Duff 1+ TBW-1
------ ------ ------ ------- ------
Household Bank (Nevada), N.A.
Senior debt A A2 A+ A+ A+
- ------------------------------------------------------------------------------------------------------------
</TABLE>
