<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-75
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HOUSEHOLD FINANCE CORPORATION
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1239445
- ------------------------ -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
2700 Sanders Road, Prospect Heights, Illinois 60070
- ----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 564-5000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At July 31, 1999, 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> 2
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
Table of Contents
PART I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
(Unaudited) - Three Months and Six Months
Ended June 30, 1999 and 1998..................................... 2
Condensed Consolidated Balance Sheets -
June 30, 1999 (Unaudited) and December 31, 1998.................. 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended
June 30, 1999 and 1998........................................... 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....................11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.................................20
Signature ................................................................ 21
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -----------------------------------------------------------
All amounts are stated in millions.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income $ 1,264.9 $ 1,165.9 $ 2,445.1 $ 2,281.6
Other interest income 17.4 6.6 34.0 15.3
Interest expense 523.9 508.5 1,030.6 1,008.7
------- -------- ------- --------
Net interest margin 758.4 664.0 1,448.5 1,288.2
Provision for credit losses on owned
receivables 326.2 318.5 657.9 655.1
------- -------- ------- --------
Net interest margin after provision for
credit losses 432.2 345.5 790.6 633.1
------- -------- ------- --------
Securitization income 155.7 268.4 347.9 591.7
Insurance revenues 88.3 90.6 180.3 182.0
Investment income 38.4 35.6 75.9 72.8
Fee income 94.3 120.0 193.9 245.8
Other income 26.6 49.5 97.3 136.0
Gain on the sale of Beneficial Canada - - - 189.4
------- -------- ------- --------
Total other revenues 403.3 564.1 895.3 1,417.7
------- -------- ------- --------
Salaries and fringe benefits 238.7 243.7 460.2 494.4
Occupancy and equipment expense 54.6 76.0 108.0 151.7
Other marketing expenses 33.7 49.3 75.8 114.2
Other servicing and administrative expenses 72.5 107.2 167.4 237.9
Amortization of acquired intangibles
and goodwill 35.9 44.7 72.0 85.9
Policyholders' benefits 58.7 48.3 117.5 105.8
Merger and integration related costs - 1,000.0 - 1,000.0
------- -------- ------- --------
Total costs and expenses 494.1 1,569.2 1,000.9 2,189.9
------- -------- ------- --------
Income (loss) before income taxes 341.4 (659.6) 685.0 (139.1)
Income taxes (benefit) 117.2 (131.4) 239.0 64.6
------- -------- ------- --------
Net income (loss)* $ 224.2 $ (528.2) $ 446.0 $ (203.7)
======= ======== ======= ========
</TABLE>
* Operating net income, which excludes merger and integration related costs
and the gain on the sale of Beneficial Canada was $222.8 million for the
three months ended June 30, 1998 and $428.8 million for the six months
ended June 30, 1998.
See notes to interim condensed consolidated financial statements.
2
<PAGE> 4
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------
In millions, except share data.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
- -------
<S> <C> <C>
Cash $ 200.5 $ 428.4
Investment securities 3,563.6 2,944.4
Receivables, net 36,987.1 34,283.2
Advances to parent company and affiliates 662.8 494.0
Acquired intangibles and goodwill, net 1,591.5 1,682.7
Properties and equipment, net 386.0 376.9
Real estate owned 238.6 235.1
Other assets 2,107.8 1,918.3
--------- ---------
Total assets $ 45,737.9 $ 42,363.0
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
- ---------------------------------------------
Debt:
Commercial paper, bank and other borrowings $ 8,357.4 $ 7,143.1
Senior and senior subordinated debt (with
original maturities over one year) 29,644.0 27,186.1
--------- ---------
Total debt 38,001.4 34,329.2
Insurance policy and claim reserves 1,087.0 1,076.2
Other liabilities 947.1 1,147.2
--------- ---------
Total liabilities 40,035.5 36,552.6
--------- ---------
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding at
June 30, 1999 and December 31, 1998,
and additional paid-in capital 2,966.2 2,960.3
Retained earnings 2,787.5 2,836.4
Accumulated other comprehensive income, net of tax (51.3) 13.7
--------- ---------
Total common shareholder's equity 5,702.4 5,810.4
--------- ---------
Total liabilities and shareholder's equity $ 45,737.9 $ 42,363.0
========= =========
</TABLE>
See notes to interim condensed consolidated financial statements.
3
<PAGE> 5
Household Finance Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
In millions.
- --------------------------------------------------------------------------------------------------------------------
Six months ended June 30 1999 1998
- --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS
<S> <C> <C>
Net income (loss) $ 446.0 $ (203.7)
Adjustments to reconcile net income (loss) to cash
provided by operations:
Provision for credit losses on owned receivables 657.9 655.1
Non-cash merger and integration related costs - 291.0
Insurance policy and claim reserves 68.5 (53.8)
Depreciation and amortization 140.8 147.4
Net realized gains from sales of assets - (190.4)
Other, net (84.9) 110.6
--------- ---------
Cash provided by operations 1,228.3 756.2
--------- ---------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (712.0) (689.3)
Matured 226.9 209.1
Sold 465.7 443.0
Short-term investment securities, net change (639.1) (381.6)
Receivables:
Originations, net (4,756.9) (7,489.0)
Purchases and related premiums (1,769.3) (2,272.5)
Sold 2,799.5 7,154.5
Properties and equipment purchased (51.0) (44.5)
Properties and equipment sold 14.9 20.8
Advances to parent company and affiliates, net (168.8) (573.8)
--------- ---------
Cash decrease from investments in operations (4,590.1) (3,623.3)
--------- ---------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt and deposits, net change 1,214.3 480.1
Senior and senior subordinated debt issued 5,659.2 5,601.7
Senior and senior subordinated debt retired (3,205.8) (2,576.3)
Prepayment of debt - (607.4)
Policyholders' benefits paid (60.8) (51.4)
Cash received from policyholders 22.0 22.0
Dividends paid to parent company (495.0) (150.0)
Dividends paid - pooled affiliate - (75.4)
Capital contributions from parent company - 200.0
--------- ---------
Cash increase from financing and
capital transactions 3,133.9 2,843.3
--------- ---------
Decrease in cash (227.9) (23.8)
Cash at January 1 428.4 545.3
--------- ---------
Cash at June 30 $ 200.5 $ 521.5
========= =========
Supplemental cash flow information:
Interest paid $ 1,029.7 $ 897.4
--------- ---------
Income taxes paid 168.9 148.7
--------- ---------
</TABLE>
See notes to interim condensed consolidated financial statements.
4
<PAGE> 6
Household Finance Corporation and Subsidiaries
FINANCIAL HIGHLIGHTS
- --------------------
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating net income (1) $ 224.2 $ 222.8 $ 446.0 $ 428.8
Merger and integration related costs - (751.0) - (751.0)
Beneficial Canada gain - - - 118.5
------- ------- ------- -------
Net income (loss) 224.2 (528.2) 446.0 (203.7)
======= ======= ======= =======
Net interest margin 758.4 664.0 1,448.5 1,288.2
------- ------- ------- -------
Other revenues (2) 344.6 515.8 777.8 1,311.9
------- ------- ------- -------
Return on average common shareholder's
equity (3) 15.6% 14.1% 15.4% 14.0%
------- ------- ------- -------
Return on average common shareholder's equity 15.6 (33.4) 15.4 (6.6)
------- ------- ------- -------
Return on average owned assets (3) 1.99 2.10 2.00 2.05
------- ------- ------- -------
Return on average owned assets 1.99 (5.03) 2.00 (.98)
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
- -------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total assets:
Owned $45,737.9 $42,363.0
Managed 57,391.5 55,062.2
-------- --------
Receivables:
Owned $37,254.2 $34,446.0
Serviced with limited recourse 11,653.6 12,699.2
-------- --------
Managed $48,907.8 $47,145.2
======== ========
Debt to total shareholder's equity 6.7:1 5.9:1
--------- --------
</TABLE>
(1) Excludes merger and integration related costs and the gain on the sale of
Beneficial Canada.
(2) Policyholders' benefits have been netted against other revenues.
(3) Annualized. Excludes merger and integration related costs and the gain on
the sale of Beneficial Canada.
See notes to interim condensed consolidated financial statements.
5
<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.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 1999 should not be
considered indicative of the results for any future quarters or the year ending
December 31, 1999. HFC and its subsidiaries may also be referred to in this Form
10-Q as "we," "us" or "our." For further information, refer to the consolidated
financial statements and footnotes included in our Annual Report on Form 10-K
for the year ended December 31, 1998.
2. INVESTMENT SECURITIES
- --------------------------
Investment securities consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
In millions. June 30, 1999 December 31, 1998
- --------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities $ 26.9 $ 29.3 $ 68.2 $ 70.8
Corporate debt securities 1,817.9 1,753.3 1,691.9 1,717.8
U.S. government and federal
agency debt securities 397.0 390.6 290.0 295.2
Other 1,357.0 1,356.9 829.6 829.6
-------- -------- -------- --------
Subtotal 3,598.8 3,530.1 2,879.7 2,913.4
Accrued investment income 33.5 33.5 31.0 31.0
-------- -------- -------- --------
Total investment securities $3,632.3 $3,563.6 $2,910.7 $2,944.4
======== ======== ======== ========
</TABLE>
6
<PAGE> 8
3. RECEIVABLES
- ---------------
<TABLE>
<CAPTION>
Receivables consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
June 30, December 31,
In millions. 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 19,773.7 $ 17,158.7
Auto finance 1,103.0 805.0
MasterCard/Visa 2,948.7 3,805.5
Private label 6,303.1 7,041.4
Other unsecured 6,494.0 4,953.3
Commercial 631.7 682.1
--------- ---------
Total owned receivables 37,254.2 34,446.0
Accrued finance charges 588.9 470.8
Credit loss reserve for owned receivables (1,458.5) (1,448.9)
Unearned credit insurance premiums and
claims reserves (429.5) (410.6)
Amounts due and deferred from
receivables sales 1,663.5 1,882.3
Reserve for receivables serviced with
limited recourse (631.5) (656.4)
--------- ---------
Total owned receivables, net 36,987.1 34,283.2
Receivables serviced with limited recourse 11,653.6 12,699.2
--------- ---------
Total managed receivables, net $ 48,640.7 $ 46,982.4
========= =========
<CAPTION>
The outstanding balance of receivables serviced with limited recourse consisted
of the following:
- -------------------------------------------------------------------------------------------------------------------
June 30, December 31,
In millions. 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 2,853.9 $ 3,637.4
Auto finance 1,248.4 960.3
MasterCard/Visa 3,374.4 3,397.5
Private label 700.9 811.5
Other unsecured 3,476.0 3,892.5
--------- ---------
Total $ 11,653.6 $ 12,699.2
========= =========
<CAPTION>
The combination of receivables owned and receivables serviced with limited
recourse, which we consider our managed portfolio, is shown below:
- -------------------------------------------------------------------------------------------------------------------
June 30, December 31,
In millions. 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 22,627.6 $ 20,796.1
Auto finance 2,351.4 1,765.3
MasterCard/Visa 6,323.1 7,203.0
Private label 7,004.0 7,852.9
Other unsecured 9,970.0 8,845.8
Commercial 631.7 682.1
--------- ---------
Total $ 48,907.8 $ 47,145.2
========= =========
</TABLE>
7
<PAGE> 9
The amounts due and deferred from receivables sales were $1,663.5 million at
June 30, 1999 and $1,882.3 million at December 31, 1998. The amounts due and
deferred included unamortized securitization assets and funds set up under the
recourse requirements for certain sales totaling $1,710.8 million at June 30,
1999 and $1,802.5 million at December 31, 1998. It also included net customer
payments (owed by us) not received from the securitization trustee of $(62.4)
million at June 30, 1999 and $62.3 million at December 31, 1998. 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 $631.5 million at June 30, 1999 and $656.4
million at December 31, 1998 and represents our best estimate of probable losses
on receivables serviced with limited recourse.
4. CREDIT LOSS RESERVES
- -------------------------
An analysis of credit loss reserves for the three and six months ended June 30
was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
In millions. 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit loss reserves for owned
receivables at beginning
of period $ 1,448.8 $ 1,510.0 $ 1,448.9 $ 1,417.5
Provision for credit losses 326.2 318.5 657.9 655.1
Chargeoffs (371.2) (354.0) (761.0) (693.1)
Recoveries 40.7 29.1 76.2 59.6
Portfolio acquisitions, net 14.0 21.3 36.5 85.8
--------- --------- --------- ---------
TOTAL CREDIT LOSS RESERVES FOR
OWNED RECEIVABLES AT JUNE 30 1,458.5 1,524.9 1,458.5 1,524.9
--------- --------- --------- ---------
Credit loss reserves for
receivables serviced with
limited recourse at beginning
of period 658.8 684.6 656.4 707.8
Provision for credit losses 125.0 177.2 270.9 356.8
Chargeoffs (159.7) (204.6) (320.0) (420.8)
Recoveries 7.3 17.3 14.2 30.8
Other, net .1 9.0 10.0 8.9
--------- --------- --------- ---------
TOTAL CREDIT LOSS RESERVES FOR
RECEIVABLES SERVICED WITH
LIMITED RECOURSE AT JUNE 30 631.5 683.5 631.5 683.5
--------- --------- --------- ---------
TOTAL CREDIT LOSS RESERVES FOR
MANAGED RECEIVABLES AT JUNE 30 $ 2,090.0 $ 2,208.4 $ 2,090.0 $ 2,208.4
========= ========= ========= =========
</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. Reserve levels also reflect the impact of a growing percentage of
secured loans.
8
<PAGE> 10
5. MERGER AND INTEGRATION RESERVE
- -----------------------------------
As of June 30, 1999, we have completed the execution of our merger and
integration plan relating to the Beneficial acquisition. The costs incurred to
execute the plan were consistent with our original estimate of $1.0 billion
recorded in the second quarter of 1998.
6. INCOME TAXES
- -----------------
The effective tax rate was 34.9 percent for the six months ended June 30, 1999
and 36.4 percent for the first six months of 1998 excluding merger and
integration related costs. The inclusion of this item resulted in a $249 million
net tax benefit for the first six months of 1998. The effective tax rate differs
from the statutory federal income tax rate in these years primarily because of
the effects of (a) state and local income taxes and (b) leveraged lease tax
benefits.
7. 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 $662.8 million at June 30, 1999 compared
to $494.0 million at December 31, 1998. There were no advances from parent
company and affiliates at June 30, 1999 and December 31, 1998. Net interest
income on affiliated balances was $11.3 million for the second quarter of 1999
and $7.3 million for the prior year quarter. In the first six months of 1999 net
interest income on affiliated balances was $23.2 million compared to $9.2
million for the same period last year.
8. COMPREHENSIVE INCOME (LOSS)
- ----------------------------------
In accordance with the interim reporting guidelines of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," comprehensive
income (loss) was $182.2 million for the quarter ended June 30, 1999, $(515.4)
million for the quarter ended June 30, 1998, $381.0 million for the six months
ended June 30, 1999 and $(165.6) million for the six months ended June 30, 1998.
Excluding the impact of the merger and integration related costs as well as the
gain on the sale of Beneficial Canada, comprehensive income was $235.6 million
for the quarter ended June 30, 1998 and $466.9 million for the six months ended
June 30, 1998.
The components of accumulated other comprehensive income, net of tax, are as
follows:
- --------------------------------------------------------------------------------
June 30, December 31,
In millions. 1999 1998
- --------------------------------------------------------------------------------
Foreign currency translation adjustments $ (7.4) $ (8.3)
Unrealized gain (loss) on investments, net (43.9) 22.0
------- -------
Accumulated other comprehensive income, net of tax $ (51.3) $ 13.7
======= =======
9. SEGMENT REPORTING
- -----------------------
We have one reportable segment, Consumer, which includes our branch-based
consumer finance, private label, auto finance and domestic MasterCard and Visa
businesses. This differs from the basis of segmentation presented in our Annual
Report on Form 10-K for the year ended December 31, 1998 where we presented the
domestic MasterCard and Visa business as a separate reportable segment. The
domestic MasterCard and Visa business is included in Consumer because discrete
financial information about HFC's domestic MasterCard and Visa business is not
regularly reviewed by the chief operating decision maker in allocating resources
and assessing performance. There has been no change in the measurement of
segment profit as compared with our Form 10-K.
9
<PAGE> 11
Information about our reportable segment for the second quarter and first six
months of 1999 compared to the corresponding prior year periods was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
Owned Basis June 30, June 30,
In millions. 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest margin and other
revenues (1) $ 1,095.8 $ 1,078.4 $ 2,158.3 $ 2,134.2
Intersegment revenues 31.0 25.0 65.1 50.0
Segment net income 198.5 212.2 376.0 401.1
Total segment assets 39,389.6 34,555.4 39,389.6 34,555.4
Total segment assets - managed 51,075.2 49,790.9 51,075.2 49,790.9
--------- --------- -------- --------
</TABLE>
(1) Net interest margin and other revenues, including intersegment revenues, net
of policyholders' benefits.
A reconciliation of the total reportable segment's net income to consolidated
net income for the second quarter and first six months of 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
Owned Basis June 30, June 30,
In millions. 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reportable segment net income $ 198.5 $ 212.2 $ 376.0 $ 401.1
Other operations not
individually reportable * 54.1 (710.8) 127.1 (547.4)
Adjustments/eliminations (28.4) (29.6) (57.1) (57.4)
------ ------ ------ ------
Total consolidated net income (loss) $ 224.2 $ (528.2) $ 446.0 $ (203.7)
====== ====== ====== ======
</TABLE>
* Includes merger and integration related costs of $751.0 million after-tax
incurred in the second quarter of 1998 related to the Beneficial merger and
the gain on the sale of Beneficial Canada of $118.5 million after-tax
recorded in the first quarter of 1998.
10. ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 1998, the Financial Accounting Standards Board ("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 a derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset the related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
In June 1999, the FASB deferred the effective date for FAS No. 133 to fiscal
years beginning after June 15, 2000. A company may also implement FAS No. 133 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. FAS No. 133 must be applied to (a) derivative instruments and (b)
certain derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1998. We expect to adopt
FAS No. 133 on January 1, 2001 and have not yet quantified its impact on our
financial statements.
10
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in this report and in the
Household Finance Corporation Annual Report on Form 10-K for the year ended
December 31, 1998 (the "1998 Form 10-K") filed with the Securities and Exchange
Commission. Management's discussion and analysis may contain certain estimates
and projections that may be forward-looking in nature, as defined by the Private
Securities Litigation Reform Act of 1995. A variety of factors may cause actual
results to differ materially from the results discussed in these forward-looking
statements. Factors that might cause such a difference are discussed herein and
in the 1998 Form 10-K.
OPERATIONS SUMMARY
- ------------------
Our net income for the second quarter of 1999 was $224.2 million, compared to
operating net income of $222.8 million a year ago. Net income for the first six
months of 1999 was $446.0 million, compared to operating net income of $428.8
million in the year ago period. The results reflect strong growth in our
branch-based consumer finance business and significant declines in operating
expenses partially offset by lower revenues in our non-affinity MasterCard* and
Visa* portfolio from prior restructuring iniatives. In addition, the first
quarter included higher income from our tax refund anticipation loan ("RAL")
business. Including merger and integration related costs and, for the first six
months of 1998, the gain on the sale of Beneficial Canada, we recognized a net
loss of $(528.2) million for the second quarter and $(203.7) million for the
first six months of 1998.
Our annualized return on average common shareholders' equity was 15.6 percent
for the second quarter of 1999 and 15.4 percent for the first six months of
1999. Excluding merger and integration related costs and the gain on the sale of
Beneficial Canada, our annualized return on average common shareholders' equity
was 14.1 percent for the second quarter of 1998 and 14.0 percent for the first
six months of 1998. Our annualized return on average owned assets was 1.99
percent in the second quarter of 1999 and 2.00 percent for the first six months
of 1999. Excluding merger and integration related costs and the gain on the sale
of Beneficial Canada, our annualized return on average owned assets was 2.10
percent in the second quarter of 1998 and 2.05 percent for the first six months
of 1998. The decreases in return on owned assets reflect higher levels of
average owned assets in the current year periods compared to the same periods in
1998. Our annualized return on average managed assets was 1.58 percent in the
second quarter of 1999 and 1.57 percent for the first six months of 1999.
Excluding merger and integration related costs and the gain on the sale of
Beneficial Canada, our annualized return on average managed assets was 1.54
percent in the second quarter of 1998 and 1.46 percent for the first six months
of 1998.
* MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
11
<PAGE> 13
- - The following summarizes our operating results for our reportable operating
segment for the second quarter and first six months of 1999 compared to the
corresponding prior year periods:
Our Consumer segment reported lower results from the prior year periods.
Return on average owned assets was 2.04 and 1.95 percent in the second
quarter and first six months of 1999 compared to 2.45 and 2.40 percent in
the year-ago periods. Return on average managed assets was 1.57 and 1.49
percent in the second quarter and first six months of 1999 compared to 1.68
and 1.60 percent in the year-ago periods. Improved operating results in our
branch-based consumer finance business driven by solid managed receivable
growth was offset by lower net interest margin and other revenues related
to our non-affinity MasterCard and Visa portfolio from prior restructuring
initiatives. Average managed credit card receivables declined from both the
prior year quarter and prior year period due to our sale of $1.9 billion of
GM card receivables to an affiliate in the second quarter of 1998 and the
restructuring of our MasterCard and Visa portfolio which began in the
second half of 1998. Managed receivables were $48.7 billion at June 30,
1999, $48.0 billion at March 31, 1999 and $49.4 billion at June 30, 1998.
The decline from the prior year quarter reflects attrition associated with
the restructuring of our MasterCard and Visa portfolio as mentioned above,
which included the sale of $1.9 billion of non-core receivables to third
parties and the impact of repricing initiatives which began late last year.
The increase in receivables during the quarter was driven by solid growth
in home equity, other unsecured and auto finance receivables partially
offset by a decrease in our MasterCard and Visa portfolio. The home equity
and unsecured loan growth reflects the efforts of a branch sales force that
is trained, motivated and compensated to sell loans as well as the impact
of system enhancement and new loan product rollouts to the Beneficial
branches. The decline in MasterCard and Visa for the quarter reflects the
sale of $150 million of receivables in our bank subsidiary's portfolio and
continued attrition as a result of repricing initiatives in that portfolio,
partially offset by growth in our AFL-CIO's Union Privilege ("UP") affinity
portfolio.
- - Revenue from our RAL business was up substantially from the prior year. The
number of electronic filings of tax returns increased 20 percent over last
year and refund processing with the Internal Revenue Service went smoothly
in 1999.
- - On June 30, 1998, Household International merged with Beneficial
Corporation ("Beneficial"), a consumer finance holding company
headquartered in Wilmington, Delaware. Upon completion of the merger,
substantially all of the net assets of Beneficial were contributed to us.
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 of 1998.
- - During the first quarter of 1998, we completed the sale of Beneficial's
Canadian operations and recorded an after-tax gain of approximately $118.5
million. In April 1998, the sale of Beneficial's German operations was also
completed. Beneficial announced its intent to sell the German operations in
1997 and recorded an after-tax loss of approximately $27.8 million after
consideration of a $31.0 million tax benefit. No additional losses were
realized in 1998 as a result of the sale.
12
<PAGE> 14
BALANCE SHEET REVIEW
- --------------------
- - Managed consumer receivables (receivables on our balance sheet plus
receivables serviced with limited recourse) declined slightly from the year
ago level to $48.3 billion. This decline reflects attrition associated with
the restructuring of our MasterCard and Visa portfolio in 1998, which
included the sale of $1.9 billion of non-core receivables to third parties,
the sale of $1.9 billion of GM Card receivables to an affiliate and the
impact of repricing initiatives which began late last year.
Managed consumer receivables, other than MasterCard and Visa, grew about 10
percent from a year ago. The strongest growth came in our consumer finance,
which includes our home equity and unsecured products, and auto finance
businesses. We are very pleased with receivable growth in our consumer
finance business. Our focused sales force, and our integrated systems and
loan products led to higher growth. In addition, the decline in the number
of monoline lenders has also had a positive impact on pricing, originations
and retention which has helped our branch growth and correspondent
business. Auto finance receivables almost doubled from a year ago
reflecting solid loan growth that was accomplished without dropping prices
while maintaining consistent credit quality. We have also introduced more
effective risk-based pricing, to allow us to target a wide spectrum of
credit quality. This business continued to benefit from less competition
and an expanded sales force. Private label receivables were down from the
prior year as this business experienced attrition as a result of less
promotional activity in 1998.
- - Managed consumer receivables in the second quarter grew 6 percent,
annualized, again with the strongest growth in home equity, unsecured and
auto finance receivables. Excluding the MasterCard and Visa portfolio,
managed consumer receivables grew 10 percent, annualized, in the quarter.
In our consumer finance business, receivables grew at an annualized rate of
12 percent in the quarter. Our home equity portfolio grew 6 percent,
annualized, from the prior quarter due to strong branch and correspondent
originations. Second quarter growth of 24 percent, annualized, in other
unsecured receivables was driven by strong responses to direct mail and
branch-originated programs. Auto finance receivables grew from the prior
quarter due to continued weakened competition in the industry and an
expanded sales force. Our MasterCard and Visa portfolio declined around
$350 million in the quarter, including the sale of about $150 million from
our bank subsidiary's credit card portfolio. We also experienced further
attrition in the bank subsidiary's credit card portfolio as a result of
repricing initiatives which began late last year. Our UP credit card
affinity portfolio increased 5 percent, annualized, in the quarter. Our
private label portfolio was down slightly in the quarter. We expect growth
in this business in the second half of the year consistent with seasonal
factors.
- - Consumer receivables on our balance sheet were $36.6 billion at June 30,
1999, up from $35.0 billion at March 31, 1999 and $33.6 billion at June 30,
1998. The level of our owned receivables may vary from period to period
depending on the timing and size of securitization transactions.
- - Owned consumer two-months-and-over contractual delinquency as a percent of
owned consumer receivables was 5.28 percent, compared with 5.34 percent at
March 31, 1999 and 4.99 percent at June 30, 1998. The annualized total
consumer owned chargeoff ratio in the second quarter of 1999 was 3.68
percent, compared with 4.07 percent in the prior quarter and 3.82 percent
in the year-ago quarter. Managed consumer two-months-and-over contractual
delinquency ("delinquency") as a percent of managed consumer receivables
was 5.14 percent, compared with 5.22 percent at March 31, 1999 and 5.03
percent at June 30, 1998. The annualized total consumer managed chargeoff
ratio in the second quarter of 1999 was 4.05 percent, compared with 4.30
percent in the prior quarter and 4.10 percent in the year-ago quarter.
13
<PAGE> 15
- - Our debt to total shareholder's equity ratio was 6.7 to 1 compared with 5.9
to 1 at December 31, 1998. The increase was due to higher debt levels
primarily attributable to higher average owned receivables at June 30,
1999.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our major use of cash is the origination or purchase of receivables or purchases
of investment securities. Our main sources of cash are the collection of
receivable balances, maturities or sales of investment securities, proceeds from
the issuance of debt and securitization of consumer receivables, and cash
provided by operations.
The following describes major changes in our funding base from December 31, 1998
to June 30, 1999:
- - We paid $225 million of dividends to our parent company during the second
quarter of 1999. A total of $495 million of dividends were paid to our
parent company during the first six months of 1999.
- - Commercial paper, bank and other borrowings increased 17 percent to $8.4
billion from $7.1 billion. Senior and senior subordinated debt (with
original maturities over one year) increased 9 percent to $29.6 billion
from $27.2 billion. The increase in debt levels from year end is consistent
with the increase in owned receivables. During the first six months of 1999
we issued approximately $3.1 billion of five year-and-over debt to lengthen
maturities on our funding in order to reduce reliance on commercial paper
and securitizations as well as to preserve liquidity.
- - Our securitized portfolio of home equity, auto finance, MasterCard and
Visa, private label and other unsecured receivables totaled $11.7 billion
at June 30, 1999, compared with $12.7 billion at December 31, 1998. In the
second quarter of 1999, we securitized, excluding replenishments of
certificateholder interests, $.3 billion of auto finance receivables.
During the six months ended June 30, 1999, we securitized, excluding
replenishments of certificateholder interests, $1.1 billion of auto
finance, MasterCard and Visa and other unsecured receivables.
The composition of these securitizations by type is as follows (in billions):
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1999 1999
- --------------------------------------------------------------------------------
Auto finance $ .3 $ .6
MasterCard/Visa - .2
Other unsecured - .3
---- ----
Total $ .3 $1.1
==== ====
The market for securities backed by receivables is a reliable, efficient and
cost-effective source of funds. Although they currently represent a smaller
portion of our total funding mix, we plan to continue utilizing securitizations
as a source of funding in the future. At June 30, 1999, securitizations
represented 24 percent of the funding associated with our managed portfolio
compared to 31 percent a year ago.
14
<PAGE> 16
INCOME STATEMENT REVIEW
- -----------------------
Net interest margin
- -------------------
Net interest margin was $758.4 million for the second quarter of 1999, up from
$664.0 million for the prior year quarter. Net interest margin for the first six
months of 1999 was $1,448.5 million, up from $1,288.2 million in the prior year
period. Owned margin improved due to receivable growth. Net interest margin as a
percent of average owned interest-earning assets, annualized was 7.85 percent
compared to 7.53 percent in the year-ago quarter. The improvement reflected
lower funding costs and better pricing.
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 $1,053.5 million for the second quarter of 1999
compared to $1,017.1 million in the year-ago quarter. Managed basis net interest
margin for the first six months of 1999 was $2,041.7 million compared to
$2,061.9 million in the year-ago period. The decrease for the six month period
was primarily due to a decline in average managed MasterCard and Visa
receivables, partially offset by an increase in average managed home equity
loans. Net interest margin as a percent of average managed interest-earning
assets, annualized, was 8.43 percent, up from 7.98 percent in the previous
quarter, and up from 8.04 percent in the year-ago quarter. The improvement
reflected lower funding costs and, on a larger scale, better pricing. The most
significant improvements in pricing were in our consumer finance and MasterCard
and Visa businesses.
Provision for credit losses
- ---------------------------
The provision for credit losses for receivables on an owned basis for the second
quarter of 1999 totaled $326.2 million, compared to $318.5 million in the prior
year quarter. The provision for the first six months of 1999 was $657.9 million,
compared to $655.1 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.
Other revenues
- --------------
Securitization income was $155.7 and $347.9 million for the second quarter and
the first six months of 1999, compared to $268.4 and $591.7 million for the same
periods in 1998. 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 decreases in securitization income compared to the second
quarter and first six months of 1998 was primarily due to the decrease in
average securitized receivables.
Fee income includes revenues from fee-based products such as credit cards. Fee
income was $94.3 and $193.9 million in the second quarter and first six months
of 1999, down from $120.0 and $245.8 million in the year-ago periods. The
decrease in fee income reflected higher account program fees paid to our UP
credit card affinity partners and lower credit card and interchange fees due to
the sale of $1.9 billion of GM Card receivables to an affiliate in the second
quarter of 1998.
Other income was $26.6 and $97.3 million in the second quarter and first six
months of 1999, compared to $49.5 and $136.0 million in the prior year periods.
The decreases in other income were primarily due to lower commercial and
miscellaneous income, partially offset by higher RAL income.
15
<PAGE> 17
Total other revenues for the first six months of 1998 included a pretax gain of
$189.4 million from the sale of Beneficial's Canadian operations, as previously
discussed.
Expenses
- --------
Operating expenses for the second quarter and first six months of 1999 were
$435.4 and $883.4 million, down from $520.9 and $1,084.1 million, in the
comparable prior year periods, excluding merger and integration related costs of
$1.0 billion. The decreases reflect cost saves from the Beneficial integration,
as well as continued cost control efforts.
Salaries and fringe benefits for the second quarter and first six months of 1999
were $238.7 and $460.2 million compared to $243.7 and $494.4 million in the
second quarter and first six months of 1998. Efficiencies from the Beneficial
merger were partially offset by higher sales-related compensation directly
related to growth in the consumer finance business.
Occupancy and equipment expense for the second quarter and first six months of
1999 was $54.6 and $108.0 million, as compared to $76.0 and $151.7 million in
the comparable prior year periods. The decreases were primarily due to the
elimination of duplicative branch offices and operating centers as a result of
the Beneficial merger and sublease of the Beneficial office complex in Peapack,
New Jersey.
Other marketing expenses for the second quarter and first six months of 1999
were $33.7 and $75.8 million, as compared to $49.3 and $114.2 million in the
comparable prior year periods. The decreases reflect lower marketing spending on
programs in our MasterCard and Visa business which was primarily due to the sale
of $1.9 billion of GM Card receivables to an affiliate in the second quarter of
1998.
Other servicing and administrative expenses for the second quarter and first six
months were $72.5 and $167.4 million down from $107.2 and $237.9 million in the
comparable prior year periods. The decreases were primarily due to cost saves in
systems as a result of the consolidation of Beneficial's operations, partially
offset by higher real estate owned expenses.
Amortization of acquired intangibles and goodwill was $35.9 and $72.0 million
compared to $44.7 and $85.9 million in the second quarter and first six months
of 1998. The decreases reflect the writeoff of intangible assets in conjunction
with portfolio sales in 1998 due to the repositioning of our bank subsidiary's
credit card portfolio.
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 3, "Receivables" in the accompanying financial
statements for receivables by product type.
Total managed credit loss reserves, which include reserves established on the
off-balance sheet portfolio when receivables are securitized, were as follows
(in millions):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
1999 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned $1,458.5 $1,448.8 $1,448.9 $1,524.9
Serviced with limited recourse 631.5 658.8 656.4 683.5
-------- -------- -------- --------
Total $2,090.0 $2,107.6 $2,105.3 $2,208.4
======== ======== ======== ========
</TABLE>
16
<PAGE> 18
Managed credit loss reserves as a percent of nonperforming managed receivables
were 105.1 percent, compared to 106.3 percent at March 31, 1999 and 117.8
percent at June 30, 1998.
Total owned and managed credit loss reserves as a percent of receivables were as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
1999 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned 3.91% 4.07% 4.21% 4.45%
Managed 4.27 4.37 4.47 4.47
----- ----- ----- -----
</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. Reserve levels also reflect the impact of a growing percentage of
secured loans. Home equity receivables represent 46 percent of our total managed
receivables, as compared to 40 percent a year ago. MasterCard/Visa products were
13 percent at quarter end, down from 21 percent a year ago. This change in
portfolio mix is important, as the loss severity for home equity loans is
significantly less than for credit cards. See Note 4, "Credit Loss Reserves" in
the accompanying financial statements for analyses of reserves.
CREDIT QUALITY
- --------------
Delinquency and chargeoff levels in the consumer portfolio were down compared to
the prior quarter. Although delinquency levels increased from the prior year
quarter, chargeoff levels were down. 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.
Delinquency
- -----------
Two-Months-and-Over Contractual Managed Delinquency (as a percent of managed
consumer receivables):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
6/30/99 3/31/99 12/31/98 9/30/98 6/30/98
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity 3.09% 3.36% 3.55% 3.59% 3.39%
Auto finance 1.87 1.74 2.29 2.05 1.67
MasterCard/Visa 3.73 4.69 5.19 4.67 4.35
Private label 8.46 8.00 7.38 7.32 6.27
Other unsecured 9.12 8.62 8.86 9.15 8.74
----- ----- ----- ----- -----
Total 5.14% 5.22% 5.41% 5.39% 5.03%
===== ===== ===== ===== =====
</TABLE>
Managed delinquency as a percent of managed consumer receivables was down from
the prior quarter, our second consecutive quarter of delinquency improvement.
The decline from the prior quarter was led by improvement in our MasterCard and
Visa business, where delinquency has dropped over $75 million since March.
Compared to the prior year quarter, managed delinquency as a percent of managed
consumer receivables increased slightly. The increase was primarily due to the
seasoning of our other unsecured portfolio.
17
<PAGE> 19
The owned consumer delinquency ratio was 5.28 percent at June 30, 1999, compared
to 5.34 percent at March 31, 1999 and 4.99 percent at June 30, 1998. The trends
impacting these results are consistent with those described above for our
managed portfolio.
Net Chargeoffs of Consumer Receivables
- --------------------------------------
Net Chargeoffs of Consumer Receivables (as a percent, annualized, of average
managed consumer receivables):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
1999 1999 1998 1998 1998
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home equity .62% .48% .65% .68% .40%
Auto finance 4.41 5.45 5.63 4.89 5.18
MasterCard/Visa 9.24 9.60 7.66 6.98 5.31
Private label 7.24 6.66 6.22 5.46 6.43
Other unsecured 6.27 7.16 7.89 8.66 8.13
----- ----- ----- ----- -----
Total 4.05% 4.30% 4.35% 4.36% 4.10%
===== ===== ===== ===== =====
</TABLE>
Managed net chargeoffs as a percent of average managed consumer receivables for
the second quarter of 1999 decreased from both the prior quarter and the prior
year quarter. Dollars of chargeoffs dropped almost $25 million in the quarter,
again led by improvement in our MasterCard and Visa portfolio. Bankruptcy
chargeoffs in our MasterCard and Visa business were down compared to the first
quarter level.
The lower managed chargeoff ratio compared to a year ago was primarily due to
lower chargeoffs in our other unsecured portfolio, partially offset by a higher
chargeoff contribution from our domestic MasterCard/Visa portfolio due to lower
average receivables.
The owned consumer net chargeoff ratio was 3.68 percent in the second quarter of
1999, compared to 4.07 percent in the prior quarter and 3.82 percent in the
year-ago quarter. Factors influencing this decline were consistent with those
described above for our managed portfolio.
Nonperforming Assets
- --------------------
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
In millions. 6/30/99 3/31/99 12/31/98 9/30/98 6/30/98
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual owned receivables $1,014.5 $ 935.9 $ 822.7 $ 806.6 $ 759.2
Accruing owned consumer
receivables 90 or more days
delinquent 519.4 553.0 602.6 527.1 502.1
Renegotiated commercial loans 12.3 12.3 12.3 12.3 12.3
-------- ------- -------- -------- --------
Total nonperforming owned
receivables 1,546.2 1,501.2 1,437.6 1,346.0 1,273.6
Real estate owned 238.6 229.9 235.1 212.9 202.3
-------- ------- -------- -------- --------
Total nonperforming owned assets $1,784.8 $1,731.1 $1,672.7 $1,558.9 $1,475.9
======== ======== ======== ======== ========
Owned credit loss reserves as
a percent of nonperforming
owned receivables 94.3% 96.5% 100.8% 111.3% 119.7%
-------- -------- -------- -------- --------
Nonaccrual managed receivables $1,372.8 $1,307.1 $1,165.5 $1,168.5 $1,186.8
Accruing managed consumer
receivables 90 or more days
delinquent 602.7 663.9 707.7 683.8 675.5
Renegotiated commercial
loans 12.3 12.3 12.3 12.3 12.3
-------- -------- -------- -------- --------
Total nonperforming managed
receivables 1,987.8 1,983.3 1,885.5 1,864.6 1,874.6
Real estate owned 238.6 229.9 235.1 212.9 202.3
-------- -------- -------- -------- --------
Total nonperforming assets $2,226.4 $2,213.2 $2,120.6 $2,077.5 $2,076.9
======== ======== ======== ======== ========
Managed credit loss reserves as
a percent of nonperforming
managed receivables 105.1% 106.3% 111.7% 119.3% 117.8%
-------- -------- -------- -------- --------
</TABLE>
18
<PAGE> 20
Year 2000
- ---------
We have substantially completed the remediation, testing and implementation of
all internally developed and non-internally developed systems for Year 2000
compliance at the end of the second quarter of 1999. Consistent with previous
disclosures, the costs for Year 2000 compliance have not been, and are not
expected to be, material to our operations. Household International currently
estimates that the aggregate cost of the Year 2000 effort remains at $20 million
after-tax, of which approximately $18.5 million has been incurred as of June 30,
1999.
Year 2000 readiness is dependent on external entities and is not limited to
operating risk. We are working extensively with external entities to ensure that
their systems will be Year 2000 compliant; however, we could be adversely
affected if outside parties, such as customers, vendors, utilities and
government agencies, do not appropriately address Year 2000 readiness issues.
Contingency planning is an integral part of our Year 2000 readiness project. We
have developed contingency plans for each of our businesses, which detail the
processes necessary to maintain critical business functions should a critical
system fail. These contingency plans generally include the repair of existing
systems and, in some cases, the use of alternative procedures or systems which
have been tested and are Year 2000 compliant. We will continue to review and
validate the scope and control of our contingency plans throughout 1999.
19
<PAGE> 21
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.
27 Financial Data Schedule.
99.1 Debt Securities Ratings.
(b) Reports on Form 8-K
During the second quarter of 1999, the Registrant filed a Current
Report on Form 8-K dated June 24, 1999, with respect to a Prospectus
Supplement dated June 11, 1999, to a Prospectus dated March 3, 1999 in
connection with the offering of Euro 750,000,000 5 1/8% Notes due June
24, 2009.
20
<PAGE> 22
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUSEHOLD FINANCE CORPORATION
-----------------------------
(Registrant)
Date: August 16, 1999 By: /s/ David A. Schoenholz
---------------- -----------------------------
David A. Schoenholz
Executive Vice President and
Chief Financial Officer, Director
and on behalf of
Household Finance Corporation
21
<PAGE> 23
Exhibit Index
--------------
12 Statement of Computation of Ratio of Earnings to Fixed
Charges.
27 Financial Data Schedule.
99.1 Debt Securities Ratings.
23
<PAGE> 1
EXHIBIT 12
-----------
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
All dollar amounts are stated in millions.
Six months ended June 30 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $ 446.0 $ (203.7)
Income taxes 239.0 64.6
-------- --------
Income (loss) before income taxes 685.0 (139.1)
-------- --------
Fixed charges:
Interest expense (1) 1,034.6 1,018.3
Interest portion of rentals (2) 18.3 25.6
-------- --------
Total fixed charges 1,052.9 1,043.9
-------- --------
Total earnings as defined $1,737.9 $ 904.8
======== ========
Ratio of earnings to fixed charges (3) 1.65 .87
======== ========
Ratio of earnings to fixed charges, excluding
merger and integration related costs 1.65 1.82
======== ========
</TABLE>
(1) For financial statement purposes, interest expense includes income
earned on temporary investment of excess funds, generally resulting
from over-subscriptions of commercial paper.
(2) Represents one-third of rentals, which approximates the portion
representing interest.
(3) 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.
24
<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 AND EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 200,500
<SECURITIES> 3,563,600
<RECEIVABLES> 37,254,200
<ALLOWANCES> (2,090,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,073,900
<DEPRECIATION> (687,900)
<TOTAL-ASSETS> 45,737,900
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 29,644,000
0
0
<COMMON> 1
<OTHER-SE> 5,702,400
<TOTAL-LIABILITY-AND-EQUITY> 45,737,900
<SALES> 0
<TOTAL-REVENUES> 3,374,400
<CGS> 0
<TOTAL-COSTS> 1,000,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 657,900
<INTEREST-EXPENSE> 1,030,600
<INCOME-PRETAX> 685,000
<INCOME-TAX> 239,000
<INCOME-CONTINUING> 446,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 446,000
<EPS-BASIC> 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>
<PAGE> 1
EXHIBIT 99.1
-------------
<TABLE>
<CAPTION>
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
DEBT SECURITIES RATINGS
- -----------------------------------------------------------------------------------------
Standard Moody's Duff & Phelps
& Poor's Investors Fitch Credit Thomson
Corporation Service IBCA Rating Co. BankWatch
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At June 30, 1999
- -----------------------------------------------------------------------------------------
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+ TBA-1
------ ------- ------ --------- ------
Household Bank (Nevada) N.A.
Senior debt A A2 A+ A+ A+
- -----------------------------------------------------------------------------------------
</TABLE>
26
