- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1177
BENEFICIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0003820
(State of incorporation) (I.R.S. Employer Identification No.)
301 North Walnut Street
Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 425-2500
-------------------
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 twelve 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 May 1, 1998, the number of shares outstanding of the registrant's common
stock was 54,704,509.
================================================================================
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
March 31, December 31,
1998 1997
---------- ---------
<TABLE>
ASSETS
<S> <C> <C>
Cash and Equivalents . . . . . . . . . . . .$ 224.6 $ 253.9
Finance Receivables (Note 3). . . . . . . . . . 14,550.8 15,030.2
Allowance for Credit Losses (Note 4) . . . . . . (554.3) (559.9)
--------- ---------
Net Finance Receivables. . . . . . . . . . 13,996.5 14,470.3
Investment Securities (Note 5) . . . . . . . . . 903.4 866.2
Property and Equipment. . . . . . . . . . . . 233.0 229.3
Other Assets . . . . . . . . . . . . . . . 1,260.5 1,825.4
--------- ----------
TOTAL ASSETS . . . . . . . . . . . . .$16,618.0 $17,645.1
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-Term Debt (Note 7) . . . . . . . . . . .$ 3,935.6 $ 4,585.1
Deposits Payable. . . . . . . . . . . . . . 509.7 555.3
Long-Term Debt (Note 8) . . . . . . . . . . . 8,662.7 8,887.2
--------- ---------
Total Interest-Bearing Debt . . . . . . . . . 13,108.0 14,027.6
Accounts Payable and Accrued Liabilities. . . . . . 892.8 708.0
Insurance Policy and Claim Reserves . . . . . . . 569.2 1,137.2
--------- ---------
Total Liabilities. . . . . . . . . . . . . 14,570.0 15,872.8
--------- ---------
Shareholders' Equity:
Preferred Stock . . . . . . . . . . . . . 114.8 114.8
Common Stock . . . . . . . . . . . . . . 54.4 53.3
Additional Capital . . . . . . . . . . . . 349.7 250.7
Accumulated Other Comprehensive Income (Note 11) . . (22.3) (43.0)
Retained Earnings. . . . . . . . . . . . . 1,551.4 1,396.5
--------- ---------
Total Shareholders' Equity . . . . . . . . . 2,048.0 1,772.3
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . .$16,618.0 $17,645.1
========= =========
</TABLE>
See Notes to Financial Statements.
<PAGE>
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share amounts)
Three Months Ended
March 31,
1998 1997
<TABLE>
REVENUE
<S> <C> <C>
Finance Charges and Fees . . . . . . . . . $614.6 $579.4
Interest Expense. . . . . . . . . . . . 223.6 214.7
------ ------
Lending Spread. . . . . . . . . . . . 391.0 364.7
Insurance Premiums . . . . . . . . . . . 45.0 45.9
Other (Note 2) . . . . . . . . . . . . 317.1 147.3
------ ------
Total . . . . . . . . . . . . . . 753.1 557.9
------ ------
OPERATING EXPENSES
Salaries and Employee Benefits . . . . . . . 111.0 105.1
Insurance Benefits . . . . . . . . . . . 15.9 22.8
Provision for Credit Losses . . . . . . . . 139.8 93.1
Other . . . . . . . . . . . . . . . 173.1 174.5
------ ------
Total . . . . . . . . . . . . . 439.8 395.5
------ ------
Income Before Income Taxes . . . . . . . . . 313.3 162.4
Provision for Income Taxes . . . . . . . . . 125.8 61.7
------ ------
NET INCOME . . . . . . . . . . . . . . 187.5 100.7
Other Comprehensive Income (Note 11). . . . . . 20.7 (7.6)
COMPREHENSIVE INCOME . . . . . . . . . . . ------ ------
$208.2 $ 93.1
====== ======
BASIC EARNINGS PER COMMON SHARE (Note 10) . . . . $ 3.49 $ 1.85
====== ======
DILUTED EARNINGS PER COMMON SHARE (Note 10) . . . $ 3.34 $ 1.80
====== ======
DIVIDENDS PER COMMON SHARE . . . . . . . . . $ .57 $ .52
====== ======
</TABLE>
See Notes to Financial Statements.
<PAGE>
BENEFICIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
Three Months Ended
March 31,
<TABLE>
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income . . . . . . . . . . . . . . $ 187.5 $ 100.7
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Provision for Credit Losses . . . . . . . . 139.8 93.1
Provision for Deferred Income Taxes . . . . . (3.8) (10.8)
Depreciation and Amortization . . . . . . . 10.4 12.9
Insurance Policy & Claim Reserves . . . . . . (568.0) (.9)
Accounts Payable & Accrued Liabilities . . . . 184.8 161.5
-------- --------
Net Cash (Used in) Provided by Operating Activities (49.3) 356.5
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Receivables Originated or Acquired . . . . . . (3,517.9) (3,170.3)
Receivables Collected. . . . . . . . . . . 3,080.2 2,921.5
Canadian Receivables Sold . . . . . . . . . 804.0 --
Investment Securities Purchased . . . . . . . (92.4) (110.0)
Investment Securities Sold . . . . . . . . . 42.0 68.1
Investment Securities Matured . . . . . . . . 31.7 26.2
Deposit from Reinsurer . . . . . . . . . . 576.5 --
Other . . . . . . . . . . . . . . . . 81.6 (27.3)
-------- --------
Net Cash Provided by (Used in) Investing Activities 1,005.7 (291.8)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-Term Debt, Net Change. . . . . . . . . (665.2) (196.4)
Deposits Payable, Net Change . . . . . . . . (39.2) (30.6)
Long-Term Debt Issued. . . . . . . . . . . 703.0 1,081.8
Long-Term Debt Repaid. . . . . . . . . . . (940.7) (905.1)
Dividends Paid . . . . . . . . . . . . . (32.6) (29.8)
Common Stock Repurchased. . . . . . . . . . (11.0) (15.1)
-------- --------
Net Cash Used in Financing Activities . . . . (985.7) (95.2)
-------- --------
NET DECREASE IN CASH AND EQUIVALENTS . . . . . . (29.3) (30.5)
Cash and Equivalents at Beginning of Period. . . . 253.9 279.6
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD. . . . . . $ 224.6 $ 249.1
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid . . . . . . . . . . . . . $ 165.1 $ 135.1
Income Taxes Paid . . . . . . . . . . . . (25.7) .4
</TABLE>
See Notes to Financial Statements.
<PAGE>
BENEFICIAL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(in millions, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies used in the preparation of the unaudited quarterly
financial statements are consistent with accounting policies described in the
notes to financial statements contained in the Beneficial Corporation (the
Company) Annual Report on Form 10-K for the fiscal year-ended December 31, 1997.
In the opinion of management, all adjustments, consisting of a normal recurring
nature, necessary for a fair presentation have been reflected. Certain prior
period amounts have been reclassified to conform with the 1998 presentation.
Interim results are not necessarily indicative of results for a full year.
2. SALE OF CANADIAN SUBSIDIARY
On March 2, 1998, the Company sold its Canadian subsidiary, Beneficial
Canada Holdings Inc., to Associates Capital Corporation of Canada, a subsidiary
of Associates First Capital Corporation, resulting in a net aftertax gain of
$118.5 million, which is included in other income.
3. FINANCE RECEIVABLES
Finance receivables consisted of the following:
March 31, December 31,
1998 1997
<TABLE>
Receivables Owned:
<S> <C> <C>
Real Estate Secured. . . . . . $ 6,124.5 $ 5,905.3
Personal Unsecured . . . . . . 3,080.8 3,262.4
Credit Cards . . . . . . . . 4,200.6 4,685.4
Sales Finance Contracts . . . . 962.0 994.3
Commercial. . . . . . . . . 182.9 182.8
--------- ---------
Total Owned. . . . . . . . 14,550.8 15,030.2
Receivables Sold with Servicing Retained
(all real estate secured). . . 2,629.8 2,912.7
--------- ---------
Total Managed Receivables . . . . $17,180.6 $17,942.9
======== ========
</TABLE>
4. ALLOWANCE FOR CREDIT LOSSES
An analysis of the allowance for credit losses follows:
1998
<TABLE>
<S> <C>
Balance at January 1 . . . . . . . . . . . . . $559.9
Accounts Charged Off . . . . . . . . . . . . . (135.4)
Recoveries on Accounts Previously Charged Off . . . . . 13.6
Provision for Credit Losses . . . . . . . . . . . 139.8
Sale of Canada . . . . . . . . . . . . . . . (25.7)
Other . . . . . . . . . . . . . . . . . . 2.1
------
Balance at March 31. . . . . . . . . . . . . . $554.3
======
</TABLE>
<PAGE>
5. INVESTMENT SECURITIES
Investment securities were as follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Carrying Market Carrying Market
Value Value Value Value
<TABLE>
AVAILABLE-FOR-SALE
Debt Securities:
<S> <C> <C> <C> <C>
Corporate $314.0 $314.0 $300.1 $300.1
Mortgage-backed 33.5 33.5 30.7 30.7
Municipal 5.1 5.1 5.3 5.3
U.S. Government 132.4 132.4 116.8 116.8
Foreign Government 54.2 54.2 60.5 60.5
Other 5.4 5.4 5.5 5.5
------ ------ ------ ------
544.6 544.6 518.9 518.9
Equity Securities .6 .6 .6 .6
------ ------ ------ ------
Total $545.2 $545.2 $519.5 $519.5
====== ====== ====== ======
HELD-TO-MATURITY
Debt Securities:
Corporate $ 44.8 $ 45.1 $ 48.8 $ 49.1
Mortgage-backed 1.8 1.8 2.2 2.2
Municipal 10.8 11.1 10.8 11.1
U.S. Government 8.4 8.3 10.4 10.3
Foreign Government 1.1 1.0 1.1 1.0
Other 10.2 10.2 10.2 10.2
------ ------ ------ ------
Total $ 77.1 $ 77.5 $ 83.5 $ 83.9
====== ====== ====== ======
</TABLE>
Included in total investment securities is $281.1 and $263.2 at
March 31, 1998 and December 31, 1997, respectively, classified as
trading securities.
There were no investments transferred from Held-To-Maturity to
Available-For-Sale, nor were there any sales of Held-To-Maturity
investments during the three-month period ended March 31, 1998.
<PAGE>
6. SERVICING ASSET AND INTEREST-ONLY STRIPS
The activity in the servicing asset is summarized as follows:
<TABLE>
1998
<S> <C>
Balance at January 1 . . . . . . . . . . . . $11.4
Amortization . . . . . . . . . . . . . . . (1.1)
----
Balance at March 31. . . . . . . . . . . . . $10.3
=====
</TABLE>
Previously recognized servicing assets that exceed contractually
specified servicing fees were reclassified as interest-only strips and are
carried at fair value which amounted to $66.3 at March 31, 1998. Both the
servicing assets and the interest-only strips are included in other assets on
the balance sheet. The servicing assets and interest-only strips are amortized
in proportion to and over the period of estimated net future servicing fee
income. The servicing assets and interest-only strips are periodically reviewed
for valuation impairment. This review is performed on a disaggregated basis for
the predominate risk characteristics of the underlying loans which are loan
type, term, interest rate, prepayment rate and loss rate. The fair value of the
servicing assets and interest-only strips are determined by present valuing the
estimated net future cash flows. The weighted-average assumptions used in the
fair value calculations include: discount rate - 15%, prepayment rate - 34%,
loss rate - 1.4%, and servicing fees - 1.0%. As of March 31, 1998, fair value
approximates carrying value and therefore no valuation allowance is required.
7. SHORT-TERM DEBT
Short-term debt outstanding consisted of the following:
March 31, December 31,
1998 1997
<TABLE>
<S> <C> <C>
Commercial Paper. . . . . . . . . . $3,471.7 $3,770.5
Bank Borrowings . . . . . . . . . . 463.9 814.6
-------- --------
Total . . . . . . . . . . . $3,935.6 $4,585.1
======== ========
</TABLE>
The weighted average interest rates (including the costs of maintaining
lines of credit) on short-term borrowings during the three months ended March 31
were as follows:
1998 1997
-------- ------
<TABLE>
<S> <C> <C>
U.S. Dollar Borrowings. . . . . . . . 5.70% 5.47%
Other Currency Borrowings. . . . . . . 7.22 5.63
Overall. . . . . . . . . . . . . 6.02% 5.49%
</TABLE>
The impact of interest rate hedging activities on the Company's
weighted average short-term borrowing rates and on the reported short-term
interest expense for the three months ended March 31 was a decrease of .04%
(annualized) and $0.5 in 1998 and an increase of .13% (annualized) and $1.4 in
1997.
<PAGE>
8. LONG-TERM DEBT
Long-term debt is shown below in the earliest year it could become
payable:
Weighted Average
Interest Rates at March 31, December 31,
Maturity March 31,1998 1998 1997
-------- ----------------- ----------- ---------
<TABLE>
<S> <C> <C> <C> <C>
1998 6.75% $1,529.2 $2,246.1
1999 6.69 1,912.6 1,990.7
2000 6.68 1,174.2 1,254.1
2001 7.00 934.1 946.3
2002 6.77 1,259.3 1,293.4
2003-2007 6.78 1,634.0 959.3
2008-2023 7.49 219.3 197.3
-------- --------
Total 6.78% $8,662.7 $8,887.2
======== ========
</TABLE>
The weighted average interest rates (including issuance costs) on the
Company's long-term debt during the three months ended March 31 were as follows:
<TABLE>
1998 1997
------ -----
<S> <C> <C>
U.S. Dollar Borrowings. . . . . . . . 6.82% 6.87%
Other Currency Borrowings. . . . . . . 7.56 6.89
Overall. . . . . . . . . . . . . 6.91% 6.87%
</TABLE>
Long-term debt outstanding at March 31, 1998, and December 31, 1997,
includes $4,198.3 and $4,174.6, respectively, of variable-rate debt that
reprices based on various indices. Such variable-rate debt generally has an
original maturity of one-to-three years.
The impact of interest rate hedging activities on the Company's
weighted average long-term borrowing rates and on the reported long-term
interest expense for the three months ended March 31 was an increase of .05%
(annualized) and $1.2 in 1998 and .01% (annualized) and $0.3 in 1997.
<PAGE>
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign exchange forward agreements, options
and currency swaps to hedge its net investment in foreign subsidiaries. At March
31, 1998, the Company had purchased options to deliver British pounds in
exchange for US$475.6, as compared to December 31, 1997, when the Company owned
the right to deliver British pounds for US$386.3. Concurrently, the Company had
sold options to buy British pounds for US$483.0 at March 31, 1998, as compared
with sales of call options on British pounds for US$391.2 at year-end 1997.
The Company's outstanding forward agreements as of March 31, 1998,
consisted of forward sales of (pound)61.1 in exchange for US$101.0 and a forward
purchase of DM18.0 in exchange for US$9.8. This compared to a forward sale of
(pound)46.0 in exchange for US$71.6 and a net forward purchase of DM17.0 in
exchange for US$9.6 at December 31, 1997.
Currency swaps outstanding at year-end were terminated during the
period based on market prices at the time of termination.
The Company accrued pretax losses of $9.3 at March 31, 1998, and pretax
gains of $6.0 at December 31, 1997 on open hedges. These gains and losses
represent a mark to spot on all open hedges and are recognized in a separate
component of equity. There were no gains or losses recognized in net income
attributable to the above hedging programs.
The Company and its subsidiaries utilize interest-rate swaps to allow
it to match fund its variable- and fixed-rate receivables and to manage basis
risk. The amounts to be paid or received under the agreements are accrued in
interest expense consistent with the terms of the agreements. At March 31, 1998,
accrued interest payable related to these interest-rate swaps totaled $13.5,
which is largely offset by $12.3 of accrued interest receivable. The impact of
interest rate hedging activities on the Company's weighted average borrowing
rates and on the reported interest expense for the three months ended March 31,
was an increase of .02% (annualized) and $0.7 in 1998 and .05% (annualized) and
$1.6 in 1997.
<PAGE>
The following table summarizes the interest-rate swaps outstanding at
March 31, 1998:
Weighted Average Weighted
Notional Interest Rates Average
Amount Pay Receive Maturity*
<TABLE>
<S> <C> <C> <C> <C>
Pay fixed-rate - receive floating-rate $ 741.8 7.40% 7.40% 2.6
Pay floating-rate - receive fixed-rate
Denominated in:
US$ 153.0 5.83 6.51 8.2
British pounds 143.0 8.06 7.94 1.3
Pay floating-rate - receive
floating-rate 724.6 5.98 5.57 1.5
------
Total $1,762.4 6.73% 6.61% 2.5
========
</TABLE>
*Remaining term in years.
10. EARNINGS PER COMMON SHARE
Computations of basic and diluted earnings per common share are as follows:
Per Share
Income Shares Amount
<TABLE>
March 31, 1998
<S> <C> <C> <C>
Net Income. . . . . . . . . . . . . . $187.5
Less: Preferred stock dividends . . . . . . (1.3)
Basic Earnings per Share:
Income available to common stockholders . . . 186.2 53.4 $3.49
------ ---- -----
Convertible preferred stock . . . . . . . -- 0.1
Options . . . . . . . . . . . . . . -- 1.9
Employee stock purchase plan . . . . . . . -- 0.3
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions . . . . . . . . . $186.2 55.7 $3.34
====== ==== =====
March 31, 1997
Net Income. . . . . . . . . . . . . . $100.7
Less: Preferred stock dividends . . . . . . (1.3)
Basic Earnings per Share:
Income available to common stockholders . . . 99.4 53.6 $1.85
------ ---- -----
Convertible preferred stock . . . . . . . -- 0.2
Options . . . . . . . . . . . . . . -- 1.2
Employee stock purchase plan . . . . . . . -- 0.3
Diluted Earnings per Share:
Income available to common stockholders and
assumed conversions . . . . . . . . . $ 99.4 55.3 $1.80
====== ==== =====
</TABLE>
<PAGE>
11. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 was adopted by the
Company effective January 1, 1998. As a result, the income statement includes an
amount for other comprehensive income, as well as total comprehensive income.
Other comprehensive income includes revenues, expenses, gain and losses that
have affected shareholders' equity but not net income, such as foreign currency
translation adjustments and unrealized gains and losses on the
available-for-sale investment portfolio. Other comprehensive income of $20.7
million for the three months ended March 31, 1998 resulted from $20.8 of
aftertax foreign currency translation adjustments, primarily as a result of a
$20.4 million reclassification adjustment for the sale of the Canadian
operations, and $.1 million related to unrealized losses on available-for-sale
investments, compared to a loss of $7.6 million for the three months ended March
31, 1997.
On the balance sheet, accumulated other comprehensive income totaled
($22.3) at March 31, 1998 compared to ($43.0) at December 31, 1997. These
amounts are net of accumulated foreign currency translation adjustments of
($27.4) and ($48.2) and net unrealized gain on investment securities of $5.1 and
$5.2 at March 31, 1998 and December 31, 1997, respectively.
12. RATIO OF EARNINGS TO FIXED CHARGES
Three Months Ended
March 31,
1998 1997
<TABLE>
<S> <C> <C>
Net Income. . . . . . . . . . . $187.5 $100.7
Add Provision for Income Taxes . . . . 125.8 61.7
------ ------
Earnings Before Income Taxes . . . 313.3 162.4
------ ------
Fixed Charges:
Interest and Debt Expense . . . . . 223.6 214.7
Interest Factor Portion of Rentals . . 7.9 6.2
------ ------
Total Fixed Charges . . . . . . 231.5 220.9
------ ------
Earnings Before Income Taxes and Fixed Charges $544.8 $383.3
====== ======
Ratio of Earnings to Fixed Charges . . . 2.35 1.74
====== ======
Preferred Dividend Requirements . . . . $ 2.2 $ 2.1
====== ======
Ratio of Earnings to Fixed Charges and Preferred
Dividend Requirements . . . . . . . 2.33 1.72
====== ======
</TABLE>
In computing the ratio of earnings to fixed charges, earnings consist
of net income to which has been added income taxes and fixed charges. Fixed
charges consist principally of interest on all indebtedness and that portion of
rentals considered to represent an appropriate interest factor. Preferred
dividend requirements are grossed up to their pretax equivalent.
<PAGE>
13. CONTINGENT LIABILITIES
In July 1992, the Internal Revenue Service (IRS) completed its
examination of the Company's federal income tax returns for 1984 through 1987.
The IRS proposed $142.0 in adjustments relating to 1986 and 1987 additions to
the loss reserves of the Company's former subsidiary, American Centennial
Insurance Company (ACIC), prior to the Company's sale of its entire interest in
ACIC in May 1987.
In order to limit the further accrual of interest on the proposed
adjustments, the Company paid $105.5 of tax and interest during the third
quarter 1992.
The issues were not resolved during the administrative appeals process,
and the IRS issued a statutory Notice of Deficiency asserting the unresolved
adjustments and increased the disallowance to $195.0 in the third quarter of
1996.
The Company has initiated litigation in the United States Tax Court to
oppose the disallowance. While the conclusion of this matter cannot be predicted
with certainty, management does not anticipate the ultimate resolution to differ
materially from amounts accrued.
The Company and subsidiaries are involved in various other claims and
lawsuits incidental to the business. In the opinion of management, these claims
and suits in the aggregate will not have a material adverse effect on the
Company's consolidated financial statements.
<PAGE>
BENEFICIAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Recent Events
On April 7, 1998, Beneficial Corporation ("the Company") announced that
it had entered into a definitive merger agreement (the "Merger Agreement") with
Household International, Inc. ("Household") and Household Acquisition
Corporation II ("HAC"), pursuant to which the Company and Household would
combine their business operations by means of a merger (the "Merger") of HAC
with and into the Company with the Company continuing as the surviving
corporation and a wholly owned subsidiary of Household. In the Merger, (i)
holders of common stock, par value $1.00 per share (Beneficial Common Stock"),
will receive 1.0222 shares of common stock, par value $1.00 per share
("Household Common Stock"), of Household for each such share; (ii) holders of
shares of the $5.50 Dividend Cumulative Convertible Preferred Stock, without par
value ("Beneficial Convertible Preferred Stock"), of the Company will receive
for each such share the number of shares of Household Common Stock they would
have been entitled to receive had they converted such shares of Beneficial
Common Stock immediately prior to the effective time of the Merger; and (iii)
holders of the Company's other series of preferred stock will receive shares of
Household preferred stock with identical terms, except that all such shares will
be entitled to one vote per share, voting as a single class with the holders of
shares of Household Common Stock. Consummation of the Merger is subject to
regulatory approval, the approval of the stockholders of both the Company and
Household and other customary conditions. The companies will have combined pro
forma 1997 managed revenues of over $7 billion, managed receivables of $62
billion and over 30 million customer accounts.
On March 2, 1998, the Company sold its Canadian subsidiary, Beneficial
Canada Holdings, Inc., to Associates Capital Corporation of Canada, a subsidiary
of Associates First Capital Corporation, resulting in a net aftertax gain of
$118.5 million.
On April 28, 1998, the Company sold Beneficial Bank AG, its subsidiary
based in Stuttgart, Germany, to Banque Sofinco, a large European consumer lender
based in Paris, France. At December 31, 1997, the Company had accrued an
aftertax loss of $27.8 million associated with the sale. No additional losses
were realized as a result of the sale.
<PAGE>
Financial Condition
Total owned receivables decreased $479 million, or 3%, during the first
three months of 1998, compared with an increase of $61 million, or 1%, during
the first three months of 1997. Managed receivables, which include loans sold in
securitizations but still serviced, decreased $762 million during the quarter
compared with a decrease of $126 million in the prior year. The decline in both
owned and managed receivables for the quarter resulted primarily from the sale
of the Canadian operations, which reduced finance receivables by $804 million.
The current quarter decline also reflects the anticipated significant paydown of
certain maturing special financing portfolio tranches, in addition to the
planned run-off of certain convenience user balances at Beneficial National Bank
USA (BNB USA), the Company's private-label credit card subsidiary. BNB USA's
receivables declined $311 million during the quarter, compared with a decline of
$222 million a year earlier. Conversely, internally-generated receivables growth
in the U.S. loan office system for the quarter was $132 million, compared to a
gain of $111 million a year earlier. Portfolio acquisitions added $100 million
to 1998's growth for the quarter, while contributing $44 million last year.
Reflecting the remaining balance of receivables serviced from prior
securitizations, total receivables sold with servicing retained were $2,630
million at March 31, 1998, compared with $2,138 million at March 31, 1997.
At March 31, 1998, the allowance for credit losses was $554.3 million,
or 3.81%, as a percentage of owned finance receivables compared with $559.9
million, or 3.73%, at December 31, 1997, and $494.5 million, or 3.39%, at March
31, 1997. This minor reduction in the allowance from 1997 year-end relates
primarily to the reduction of the receivable portfolio as a result of the sale
of the Canadian operations and to the BNB USA runoff discussed above offset by
increases to the current quarter provision due to higher delinquency experience.
At March 31, 1998, the reserve covered annualized net chargeoffs 1.14 times,
compared with 1.36 times at December 31, 1997 and 1.33 times at March 31, 1997.
As a percentage of average owned receivables, annualized net chargeoffs were
3.26%, compared with 2.56% in the first quarter of 1997, reflecting higher
consumer bankruptcy experience in North America.
As disclosed in the table that follows, all owned receivables
delinquent two months and greater on a contractual basis increased to 4.33% of
total outstandings at March 31, 1998, from 3.70% a year earlier and 4.24% at the
end of 1997. The increase reflects somewhat higher delinquency rates on the BNB
USA portfolio. On a managed basis, delinquency increased to 4.16% at March 31,
from 3.58% a year earlier and 4.02% at December 31, 1997. The table that follows
details delinquency by product type on both an owned and managed basis.
<TABLE>
Delinquency % on a Delinquency % on an
Managed Basis Product Type Owned Basis
------------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
March 31, Dec. 31, March 31, March 31, Dec. 31, March 31,
1998 1997 1997 1998 1997 1997
- -------- ------- -------- -------- ------- ------
3.16% 3.03% 2.58% Real Estate Secured 3.13% 3.14% 2.56%
5.82 5.86 6.08 Personal Unsecured 5.82 5.86 6.08
4.84 4.47 3.67 Credit Card 4.84 4.47 3.67
4.97 4.17 3.70 Sales Finance 4.97 4.17 3.70
4.16% 4.02% 3.58% Overall 4.33% 4.24% 3.70%
</TABLE>
<PAGE>
The Company's leverage (the ratio of interest-bearing debt to total
equity) was sharply reduced to 6.40 to 1 at March 31, 1998, from 7.91 to 1 at
year-end 1997 resulting primarily from the strong earnings of the first quarter.
Additional capital also increased $99 million during the first quarter, largely
due to the exercise of employee stock options. Similarly, the managed leverage
ratio, which recharacterizes securitized receivables as debt, improved
dramatically to 7.68 to 1 from 9.56 to 1 at year-end 1997.
Results of Operations
First-quarter 1998 net income increased to $187.5 million, up 86% from
net income of $100.7 million in the first quarter of 1997. Diluted earnings per
share also increased 86% to $3.34 from $1.80 in the 1997 period. 1998 results
benefited from a net aftertax, non-recurring gain of $110.8 million, or $1.99
per share, consisting of a $118.5 million gain-on-sale of the Company's Canadian
consumer finance subsidiary, partially offset by a $7.7 million addition to tax
reserves for certain outstanding tax issues. Aftertax profits from the Company's
tax refund anticipation loan (RAL) business declined to $25.6 million ($42.6
million pretax) from $42.1 million ($70.1 million pretax) in the first quarter
of 1997, 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. Removing the influence of the Canadian gain-on-sale, the
addition to tax reserves, and the full impact of RAL profits in both years, the
Company's earnings declined 13%, chiefly reflecting an increase in the loan loss
reserve percentage.
Lending spread exceeded 10% on both an owned and managed basis,
benefiting from strong yields on the personal unsecured loan portfolio and in
BNB USA. Lending spread increased $26.3 million or 7% for the quarter as
compared with the first quarter of 1997. As a percentage of average owned
receivables, the lending spread was 10.47% for the 1998 quarter, compared to
10.05% in the first quarter of 1997. As a percentage of average managed
receivables, the lending spread was 10.04% for the 1998 quarter, compared to
9.74% in the first quarter of 1997. For the 1998 quarter, the gross yield as a
percentage of average owned receivables increased to 16.46% from 15.97% in 1997,
while interest expense increased to 5.99% for the 1998 quarter compared to 5.92%
in 1997. The increase in lending spread was primarily the result of higher
margins at BNB USA.
During the first quarter, other revenue increased $169.8 million, or
115%, to $317.1 million from $147.3 million in the first quarter of 1997
resulting primarily from the gain-on-the-sale of the Canadian operations, offset
to some extent by the reduction in RAL income.
Insurance pretax earnings increased 9% to $24.7 million from $22.7
million in the prior year reflecting strong premium revenues and lower loss
ratios corresponding to continued strong growth in the consumer finance
subsidiaries.
Subsidiaries outside the United States contributed $12.9 million to
pretax income for the 1998 quarter, an increase of 21%, compared to $10.7
million in the first quarter of 1997. The favorable earnings comparisons were
driven by the United Kingdom and Ireland. Endeavor Personal Finance, a recent
United Kingdom acquisition, contributed $1.6 million to pretax income.
<PAGE>
First-quarter chargeoffs increased to $121.8 million from $92.9 million
in the first quarter of 1997. As a result of the significant increase in net
chargeoffs as a percentage of average owned receivables and an increase in the
average receivable base for the quarter, the provision for credit losses
increased 50% for the quarter to $139.8 million from $93.1 million in the first
quarter of 1997. As an annualized percentage of average owned receivables, net
chargeoffs increased to 3.26% from 2.56% a year earlier, but were unchanged from
the fourth quarter of 1997. As an annualized percentage of average managed
receivables, net chargeoffs increased to 2.75% from 2.22% a year earlier and
2.73% in the fourth quarter of 1997. From a product line perspective, the
increase in net chargeoffs to average finance receivables was most evident in
the credit card portfolio which rose to 5.73% compared to 3.93% in the first
quarter of 1997 and 4.84% for the full year 1997 and in the sales finance
portfolio which increased to 3.43% from 2.70% during the first quarter of 1997
and 2.88% for the full year 1997. These trends reflect the continued high level
of consumer bankruptcy in North America. The increase in credit card rates also
reflects the maturing of BNB USA's private-label credit card portfolio.
Management expects chargeoffs in the credit card portfolio to continue at high
levels in the short term as the portfolio continues to mature and consumer
bankruptcies remain high. Chargeoff rates will continue to reflect the economic
cycle and economic health of the consumer.
Owned receivables delinquent two months and greater on a contractual
basis increased to 4.33% from 3.70% a year earlier, but were only slightly up
from 4.24% at the end of 1997. Delinquent accounts two months and greater on a
managed basis exhibited a similar pattern, up to 4.16% at the 1998 quarter from
3.58% for the first quarter of 1997 and 4.02% at year-end 1997.
Salaries and other operating expenses in total increased $4.5 million,
or 2%, for the first quarter of 1998 compared to the 1997 quarter. Relating
these operating expenses to average owned receivables generates an operating
expense ratio of 7.61% in the first quarter of 1998 compared with 7.71% in the
first quarter of 1997. As a percentage of average managed receivables, the first
three months operating expense ratio declined to 6.45% from 6.73% a year
earlier. The effective tax rate was 40% for the first three months of 1998
compared to 38% for the comparable 1997 quarter. The higher rate reflects the
$7.7 million addition to the tax reserves for certain outstanding tax issues.
Other comprehensive income, which includes foreign currency translation
adjustments and unrealized gains and losses on the available-for-sale investment
portfolio, was $20.7 million compared to a loss of $7.6 million in the first
quarter of 1997. The increase in 1998 is largely the result of a $20.4 million
reclassification to net income of accumulated foreign currency translation
losses related to the sale of the Canadian operations.
<PAGE>
Changes in Cash Flow and Liquidity
The principal sources of cash are collections of finance receivables,
proceeds from the issuance of short- and long-term debt, proceeds from the sale
of receivables through securitizations, and cash provided through operations.
The monthly collections of cash principal as a percentage of average receivables
was 6.87% in the first three months of 1998, compared to 6.55% in the first
three months of 1997 reflecting the paydown of certain maturing same-as-cash
portfolio tranches at BNB USA.
Substantial additional liquidity is available through committed bank
lines that the Company maintains in support of its commercial paper borrowings
and through long-term borrowings through both private and public debt offerings.
Also, subsidiaries of the Company sell, from time to time, home equity loans
through securitizations in the capital markets.
The principal uses of cash are loans to customers, repayments of
maturing debt, dividends to shareholders, and general operating needs.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, the Company and its subsidiaries are named as parties to
various legal proceedings resulting from its activities in the ordinary course
of business. These legal proceedings may be purported class actions or
individual actions. While it is impossible to estimate with certainty the
ultimate legal and financial liability with respect to such actions, the Company
believes that the amount of such liabilities will not result in monetary damages
which in the aggregate would have a material adverse effect on the financial
position of the Company.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits -
Exhibit
Number Exhibit
3(i) Copy of the Company's Restated Certificate of Incorporation, as
amended, is incorporated by reference to Exhibit 3.1 of the
Annual Report on Form 10-K for the year ended December 31, 1997.
3(ii) Copy of the Company's By-Laws, as amended through February 17,
1998, is incorporated by reference to Exhibit 3.2 of the Annual
Report on Form 10-K for the year ended December 31, 1997.
27 Financial Data Schedule (in EDGAR filing only).
b) The Company filed the following reports on Form 8-K during the
period covered by this Form 10-Q:
1) A report on Form 8-K, dated January 28, 1998, relating to
the Company's fourth-quarter earnings, which were announced
on January 28, 1998.
2) A report on Form 8-K, dated February 10, 1998, relating to
a definitive agreement to sell its Canadian subsidiary,
Beneficial Canada Holdings Inc. to Associates First Capital
Corporation.
3) A report on Form 8-K, dated February 10, 1998, relating to
the Terms Agreement dated February 10, 1998 between the
Company and UBS Securities LLC with Union Bank of
Switzerland, London branch, joining solely for the purposes
of the assignment of the Call Option, executed in
connection with the Company's Medium-Term Notes program.
4) A report on Form 8-K, dated February 17, 1998, relating to a
special letter sent to shareholders of the
Company.
<PAGE>
5) A report on Form 8-K, dated February 17, 1998, relating to
action by the Board of Directors in setting the time and
date of the Annual Meeting of Stockholders and amending the
Company's By-Laws.
6) A report on Form 8-K, dated March 2, 1998, relating to the
finalization of the previously announced sale of the
Company's Canadian subsidiary, Beneficial Canada Holdings
Inc. to Associates Capital Corporation of Canada, a
subsidiary of Associates First Capital Corporation.
<PAGE>
BENEFICIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
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.
Date May 11, 1998 /s/ Jonathan Macey
-------------- ------------------
Jonathan Macey
Sr. Vice President
and Controller
(Chief Accounting
Officer)
Date May 11, 1998 /s/ Andrew C. Halvorsen
-------------- -----------------------
Andrew C. Halvorsen
Member of the Office
of the President and
Director (Chief
Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit
3(i) Copy of the Company's Restated Certificate of Incorporation, as
amended, is incorporated by reference to Exhibit 3.1 of the
Annual Report on Form 10-K for the year ended December 31,
1997.
3(ii) Copy of the Company's By Laws, as amended through February 17,
1998, is incorporated by reference to Exhibit 3.2 of the Annual
Report on Form 10-K for the year ended December 31, 1997.
27 Financial Data Schedule (in EDGAR filing only).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AND STATEMENT OF INCOME (BOTH DATED 3/31/98) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 225
<SECURITIES> 0 <F1>
<RECEIVABLES> 14,551
<ALLOWANCES> 554
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F2>
<PP&E> 561 <F3>
<DEPRECIATION> 328 <F3>
<TOTAL-ASSETS> 16,618
<CURRENT-LIABILITIES> 0 <F2>
<BONDS> 8,663 <F4>
0
115
<COMMON> 54
<OTHER-SE> 1,879 <F5>
<TOTAL-LIABILITY-AND-EQUITY> 16,618
<SALES> 0
<TOTAL-REVENUES> 977 <F6>
<CGS> 0
<TOTAL-COSTS> 224 <F7>
<OTHER-EXPENSES> 300 <F8>
<LOSS-PROVISION> 140
<INTEREST-EXPENSE> 0 <F9>
<INCOME-PRETAX> 313
<INCOME-TAX> 126
<INCOME-CONTINUING> 187
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 187
<EPS-PRIMARY> 3.49
<EPS-DILUTED> 3.34
<FN>
<F1> CURRENT MARKETABLE EQUITY SECURITIES ARE NOT SEPARATELY STATED.
<F2> DO NOT PREPARE CLASSIFIED BALANCE SHEET.
<F3> PP&E PER BALANCE SHEET (233.0) IS SHOWN NET OF DEPRECIATION.
<F4> LONG-TERM DEBT PER BALANCE SHEET.
<F5> INCLUDES ADDITIONAL CAPITAL (349.7),
ACCUMULATED OTHER COMPREHENSIVE INCOME (-22.3), & RETAINED EARNINGS (1551.4)
PER BALANCE SHEET = 1878.8.
<F6> INCLUDES FINANCE CHARGES AND FEES (614.6), INSURANCE PREMIUMS (45.0),
AND OTHER REVENUE (317.1) PER INCOME STATEMENT = 976.7.
<F7> INTEREST EXPENSE PER INCOME STATEMENT.
<F8> INCLUDES SALARIES & BENEFITS (111.0), INSURANCE BENEFITS (15.9) AND
OTHER (173.1) PER INCOME STATEMENT = 300.0.
<F9> COMPANY'S PRIMARY COST OF GENERATING REVENUE IS INTEREST EXPENSE WHICH
IS INCLUDED IN TOTAL COSTS (ABOVE).
</FN>
</TABLE>
