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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-75
Household Finance Corporation
(Exact name of registrant as specified in its charter)
Delaware 6-1239445
(State of incorporation) (I.R.S. Employer Identification No.)
2700 Sanders Road 60070
Prospect Heights, Illinois (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (847) 564-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
9% Senior Subordinated Notes, due September 28, New York Stock Exchange
2001
9 5/8% Senior Subordinated Notes, due July 15,
2000 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 16, 2000, there were 1,000 shares of registrant's common stock
outstanding, all of which are owned by Household International, Inc.
The registrant meets the conditions set forth in General Instruction
I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the
reduced disclosure format.
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TABLE OF CONTENTS
PART/Item No. Page
------------- ----
PART I.
Item 1. Business.................................................. 3
Cautionary Statement on Forward-Looking Statements........ 3
Item 2. Properties................................................ 4
Item 3. Legal Proceedings......................................... 4
Item 4. Submission of Matters to a Vote of Security Holders....... 4
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 4
Item 6. Selected Financial Data................................... 5
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 5
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk...................................................... 23
Item 8. Financial Statements and Supplementary Data............... 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 23
PART III.
Item 10. Directors and Executive Officers of the Registrant........ 23
Item 11. Executive Compensation.................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 23
Item 13. Certain Relationships and Related Transactions............ 23
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................. 23
Financial Statements...................................... 23
Reports on Form 8-K....................................... 24
Exhibits.................................................. 24
Signatures............................................................... 25
Report of Independent Public Accountants................................. F-1
Consolidated Statements of Income........................................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Cash Flows.................................... F-4
Consolidated Statements of Changes in Preferred Stock and Common
Shareholder's Equity.................................................... F-5
Notes to Consolidated Financial Statements............................... F-7
Selected Quarterly Financial Data (Unaudited)............................ F-35
2
PART I.
Item 1. Business.
Household Finance Corporation ("HFC") is a wholly-owned subsidiary of
Household International, Inc. ("Household International" or the "parent
company"). HFC and its subsidiaries may also be referred to in this Form 10-K
as "we", "us" or "our." 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 by
Household International to HFC. We primarily offer home equity loans, auto
finance loans, MasterCard* and VISA* credit cards, private label credit cards,
tax refund anticipation loans ("RAL") and other types of unsecured loans to
consumers in the United States. We also have commercial loans and leases,
periodic payment annuities, and corporate owned life insurance products which
we no longer offer. Prior to December 1998 when the holding company for
Beneficial's international operations was merged with an affiliate, we also
provided our consumer lending products to consumers in the United Kingdom and
Canada. Loans are marketed through branch lending offices, direct mail,
Internet applications and telemarketing as well as through dealer networks and
retail stores in connection with our private label business. We also purchase
loans of a similar nature from other lenders and affiliates. Our MasterCard
and Visa credit cards are also offered primarily via strategic affinity
relationships. Our subsidiaries generally service these loans, including loans
made by the credit card operations of Household International. Where
applicable laws permit, credit and specialty insurance is offered to our
customers in connection with our products in the United States and Canada, and
prior to December 1998, in the United Kingdom. Such insurance is generally
written directly by, or reinsured with one of our affiliates.
We have one reportable segment referred to as Consumer, which includes our
branch-based and correspondent consumer finance, private label, auto finance
and our MasterCard and Visa businesses. Information about operating segments
which are not individually reportable are included in the "All Other" caption
within our segment disclosure which also includes our insurance, RAL and
commercial businesses, our corporate and treasury activities, and, prior to
June 30, 1998, Beneficial's international operations.
Cautionary Statement on Forward-Looking Statements
Certain matters discussed throughout this Form 10-K or in the information
incorporated herein by reference may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
as such may involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Forward-looking
statements are based on our current views and assumptions, and involve risks
and uncertainties that could cause our results to be materially different than
those anticipated. The following important factors could affect our actual
results and could cause such results to vary materially from those expressed
herein or in any other document filed with the Securities and Exchange
Commission:
. changes in laws and regulations, including changes in accounting
standards;
. changes in overall economic conditions, including the interest rate
environment in which we operate, the capital markets in which we fund our
operations, recession, employment and currency fluctuations;
. consumer perception of the availability of credit, including price
competition in the market segments we target, and the ramifications or
ease of filing for personal bankruptcy;
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* MasterCard is a registered trademark of MasterCard International,
Incorporated and VISA is a registered trademark of VISA USA, Inc.
3
. the effectiveness of models or programs to predict loan delinquency or
loss and initiatives to improve collections in all business areas;
. continued consumer acceptance of our distribution systems and demand for
our loan products;
. changes associated with, as well as the difficulty in integrating
systems, operational functions and cultures of any organization we
acquire;
. the continued repositioning of our MasterCard/Visa business to further
penetrate selected consumer segments; and
. the ability to attract and retain qualified branch personnel to expand
the sales operations of our consumer finance business.
Item 2. Properties.
Substantially all of our branch offices, servicing locations and
headquarters space is leased, except for a credit card processing facility
located in Las Vegas, Nevada and a processing center in Tampa, Florida. We
believe that such properties are in good condition and are adequate to meet
our current and reasonably anticipated needs.
Item 3. Legal Proceedings.
We have developed and implemented compliance functions to monitor our
operations to ensure that we comply with all applicable laws. However, we are
parties to various legal proceedings resulting from ordinary business
activities. Certain of these actions are or purport to be class actions
seeking damages in very large amounts. Due to the uncertainties in litigation
and other factors, we cannot assure you that we will ultimately prevail in
each instance. We believe that we have meritorious defenses to these actions
and any adverse decision should not materially affect our consolidated
financial condition.
During the past several years, the press has widely reported certain
industry related concerns which may impact us. Some of these involve the
amount of litigation instituted against finance and insurance companies
operating in the states of Alabama and Mississippi and the large punitive
awards obtained from juries in those states. Like other companies in this
industry, we and some of our subsidiaries are involved in a number of lawsuits
pending against us in Alabama and Mississippi, many of which relate to the
financing of satellite television broadcast receivers. We discontinued
financing such receivers in 1995. The Alabama and Mississippi cases generally
allege inadequate disclosure or misrepresentation of financing terms. In many
suits, other parties are also named as defendants. Unspecified compensatory
and punitive damages are sought. Several of these suits purport to be class
actions. The judicial climate in Alabama and Mississippi is such that the
outcome of all of these cases is unpredictable. Although we believe we have
substantive legal defenses to these claims and are prepared to defend each
case vigorously, a number of such cases have been settled or otherwise
resolved for amounts that in the aggregate are not material to our operations.
Appropriate insurance carriers have been notified of each claim, and a number
of reservations of rights letters have been received. Certain of these claims
have been partially covered by insurance.
Prior to Household International's merger with Beneficial, Beneficial was
involved in litigation with the Internal Revenue Service ("IRS") over matters
relating to a former insurance subsidiary that occurred in the mid-to late
1980's. In 1999, a settlement was reached with the IRS and filed with the U.S.
Tax Court. This settlement did not result in any loss to us in excess of the
amounts accrued for this matter by Beneficial.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted.
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
All 1,000 shares of HFC's outstanding common stock are owned by Household
International. Consequently, there is no public market in HFC's common stock.
4
HFC paid cash dividends to Household International of $803 million in 1999,
$690 million in 1998 and $250 million in 1997. Beneficial paid cash dividends
of $75.4 million in 1998 and $200.7 million (including $80.0 million of
treasury share purchases) in 1997. In addition, HFC paid cash dividends on its
preferred stock of $4.6 million in 1997.
Item 6. Selected Financial Data.
Omitted.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FINANCIAL HIGHLIGHTS
Household Finance Corporation and Subsidiaries
1999 1998 1997
-------------- -------------- --------------
(All dollar amounts are stated in millions)
Year ended December 31(1)
Net income.................. $ 1,019.9 $ 304.9(2) $ 767.1
-------------- -------------- --------------
Key Performance Ratios
Return on average owned
assets..................... 2.25% .73%(2) 2.01%
Return on average managed
assets..................... 1.78 .53(2) 1.42
Return on average common
shareholder's equity....... 17.5 5.1(2) 15.4
Managed net interest margin. 8.42 8.09 8.03
Managed consumer net
chargeoff ratio............ 4.20 4.21 3.69
-------------- -------------- --------------
At December 31(1)
Total assets:
Owned..................... $ 46,815.2 $ 42,363.0 $ 39,448.9
Managed(3)................ 59,527.0 55,062.2 57,491.9
Managed receivables(4)...... 50,961.9 47,145.2 50,426.3
Debt to equity ratio........ 6.6:1 5.9:1 5.3:1
-------------- -------------- --------------
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(1) On June 30, 1998, Household International merged with Beneficial. Upon
completion of the merger, substantially all of the net assets of
Beneficial were contributed by Household International to HFC. The merger
was accounted for as a pooling of interests and, accordingly, the
consolidated financial statements for all periods prior to the merger
have been restated.
(2) Excluding merger and integration related costs of $751.0 million after-
tax and the $118.5 million after-tax gain on the sale of Beneficial's
Canadian operations, operating net income was $937.4 million, the return
on average owned assets was 2.24 percent, the return on average managed
assets was 1.64 percent and the return on average common shareholder's
equity was 15.6 percent.
(3) Our managed data includes assets on our balance sheet and those assets
that we service for investors as part of our asset securitization
program.
(4) Managed receivables decreased in 1998 due to the strategic repositioning
of our MasterCard and Visa business, including the sale of $3.8 billion
of receivables during the year.
OPERATIONS SUMMARY
. Our net income increased to $1,019.9 million in 1999 compared to operating
net income (net income excluding merger and integration related costs of
$751.0 million after-tax related to our merger with Beneficial and the
$118.5 million after-tax gain on the sale of Beneficial's Canadian
operations) of $937.4 million and net income of $304.9 million in 1998.
Operating net income in 1998 was up 22 percent compared to net income
5
of $767.1 million in 1997. Our improved results were due to strong growth in
our consumer finance and auto finance businesses and significant declines in
operating expenses partially offset by lower revenues from our MasterCard and
Visa credit card and private label businesses due to lower average
receivables. Average MasterCard and Visa receivables have been impacted by
attrition and our third party and affiliate sales due to the repositioning of
this business. Average private label receivables have been impacted by new
volume being originated by an affiliate as described below.
. Core managed receivables grew 8 percent to $50.3 billion in 1999. Growth was
strongest in our consumer finance business, which includes our home equity
and unsecured products, and auto finance business. Excluding MasterCard and
Visa receivables which declined $.6 billion, our managed portfolio grew 11
percent in 1999. Our MasterCard and Visa portfolio declined due to attrition
associated with the repositioning of our portfolio which commenced in 1998
and was partially offset by solid growth in our Union Privilege affinity
portfolio in the second half of the year. In late 1998, an affiliate began
originating substantially all private label receivables generated from new
merchant relationships. This change has resulted in an overall decrease in
our private label portfolio, further tempering overall growth in our core
managed receivables.
. Our return on average common shareholder's equity ("ROE") rose to 17.5
percent in 1999 compared to 15.6 percent in 1998, excluding merger and
integration related costs and the gain on sale of Beneficial Canada, and
15.4 percent in 1997. Our return on average owned assets ("ROA") was 2.25
percent in 1999 compared to 2.24 percent in 1998, excluding the nonrecurring
items, and 2.01 percent in 1997. Our return on average managed assets
("ROMA") improved to 1.78 percent in 1999 compared to 1.64 percent in 1998,
excluding the nonrecurring items, and 1.42 percent in 1997. Including the
merger and integration related costs and the gain on sale of Beneficial
Canada, ROE was 5.1 percent, ROA was .73 percent and ROMA was .53 percent in
1998. Our operating net income, ROA, ROMA and ROE have increased over the
past three years as a result of our focus on higher-return core businesses
and improved efficiency. We expect this trend to continue as we focus on
growth of these higher return core businesses.
. Our consolidated managed net interest margin expanded to 8.42 percent in
1999 from 8.09 percent in 1998 and 8.03 percent in 1997. Our margins have
increased because we have continued to raise the interest rates we charge on
our MasterCard and Visa and other unsecured products while lowering our cost
of funds. Interest rates decreased during the last half of 1998 and
increased during the last half of 1999, and the timing of the changes
resulted in a lower average rate in 1999 than in 1998. The increase in net
interest margin from repricing and lower cost of funds was partially offset
by a higher mix of secured loans in our portfolio. Secured loans carry a
lower yield than unsecured products because they experience lower credit
losses.
Acquisitions and Dispositions
. In August 1999, we acquired all of the outstanding capital stock of Decision
One Mortgage Company LLC ("Decision One") for approximately $60 million.
Decision One originates loans through a 30-state broker network and packages
them for sale to investors. The acquisition was accounted for as a purchase
and, accordingly, earnings from Decision One have been included in our
results of operations subsequent to the acquisition date.
. On June 30, 1998, Household International merged with Beneficial, a consumer
finance holding company headquartered in Wilmington, Delaware. Each
outstanding share of Beneficial common stock was converted into 3.0666
shares of Household International common stock, resulting in the issuance of
approximately 168.4 million shares of common stock. Each share of Beneficial
$5.50 Convertible Preferred Stock (the "Beneficial Convertible Stock") was
converted into the number of shares of Household International common stock
the holder would have been entitled to receive in the merger had the
Beneficial Convertible Stock been converted into shares of Beneficial common
stock immediately prior to the merger. Additionally, each other share of
Beneficial preferred stock outstanding was converted into one share of a
newly-created series of Household International preferred stock with terms
substantially similar to those of existing Beneficial preferred stock. The
merger was accounted for as a pooling of interests and, therefore, the
consolidated financial statements include the results of operations,
financial position, and changes in cash flows of Beneficial for all periods
presented.
6
In connection with the Beneficial merger, Household International and HFC
established an integration plan. The plan was approved by the appropriate
levels of management and identified activities that would not be continued as
a result of the merger and the related costs of exiting those activities. Our
plan also identified the number of employees who would be involuntarily
terminated and established the benefit levels those employees would receive
upon termination. These benefit levels were communicated to employees in
April 1998. Pursuant to our plan, we accrued pretax merger and integration
related costs of approximately $1 billion ($751 million after-tax) in 1998
which have been reflected in the statement of income in total costs and
expenses. The merger and integration plan was completed during 1999. The
costs incurred to execute the plan were consistent with our originally
estimated cost of $1 billion.
The merger and integration costs were comprised of the following:
Restructure Restructure
1998 Activity Reserve Reserve
Restructure ----------------- Balance at 1999 Balance at
Reserve at Cash Non-Cash December 31, Cash December 31,
Inception Payments Items 1998 Payments 1999
----------- -------- -------- ------------ -------- ------------
(In millions)
Employee termination
costs.................. $ 270 $(240) $30 $(30) --
------ ----- ----- --- ---- -----
Facility closures:
Lease termination
costs:
Beneficial corporate
office............... 100 (100) -- --
Branch offices and
other operating
facilities........... 142 (115) 27 (27) --
Fixed asset
writedowns........... 40 $ (40) -- --
Vendor contract
termination
penalties............ 37 (14) 23 (23) --
------ ----- ----- --- ---- -----
Total facility closure
costs.................. 319 (229) (40) 50 (50) --
------ ----- ----- --- ---- -----
Asset writedowns to
reflect modified
business plans:
Goodwill and other
intangibles.......... 183 (183) -- --
Real estate interests. 68 (68) -- --
------ ----- ----- --- ---- -----
Total asset writedowns.. 251 -- (251) -- -- --
------ ----- ----- --- ---- -----
Investment banking fees. 75 (75) -- --
Legal and other
expenses............... 25 (25) -- --
Debt prepayment
premiums............... 60 (60) -- --
------ ----- ----- --- ---- -----
$1,000 $(629) $(291) $80 $(80) --
====== ===== ===== === ==== =====
Employee termination costs of $270 million (of which $86 million related to
key executives with pre-existing severance agreements) were accrued to cover
costs related to approximately 3,000 employees whose functions were
eliminated due to redundancy and consolidation of branches, corporate staff
and back office operations. As of December 31, 1998, substantially all
identified employees had been severed and approximately $240 million of
severance payments had been made to terminated employees. The remaining $30
million was paid in 1999 pursuant to our plan.
Facility closure costs of $319 million were accrued related to planned costs
to be incurred in connection with the exiting of the Beneficial corporate
office lease, early termination of branch offices and other operating
facility leases and the cancellation of contracts with third party vendors,
primarily for technology, whose services would no longer be required. The
accrual for facility closures included lease termination and other exit costs
for closures of 335 duplicative U.S. and U.K. branch offices and 8 redundant
operating centers as well as fixed asset write downs primarily related to the
closed facilities. In November 1998, we entered into an agreement to sublease
the Beneficial corporate offices to a third party to whom we paid total
consideration
7
of approximately $100 million. As of December 31, 1998, $115 million of lease
termination and other costs for closed branch offices and operating centers
had been incurred. The remaining $27 million in lease termination costs were
incurred in 1999. In addition, $14 million of charges were incurred in 1998
due to early termination of third party vendor contracts. During 1999, the
termination of vendor contracts was completed and the remaining $23 million
of charges were incurred.
In connection with the merger, we re-assessed Beneficial's existing business
plans and assumptions used in evaluating goodwill and other related
intangibles related to various operations, loan product and acquired
receivable portfolios. Our plan identified modifications to these existing
business plans. In connection with these modifications, we utilized
discounted cash flow analysis to value the related goodwill and other
intangible assets using assumptions which reflected our modified business
plans. As a result of our analysis, we wrote off goodwill and other related
intangible assets of $183 million to their estimated fair values. None of the
items included in the goodwill and other intangibles classification were
individually significant to warrant separate disclosure. In addition, we
wrote down real estate interests to reflect their net realizable values.
Assets held for disposal are not material.
We and Beneficial incurred merger-related investment banking fees of $75
million and legal and other expenses of $25 million. In addition, in order to
align the asset liability position of the combined company, we paid $60
million in prepayment premiums to retire outstanding debt.
The merger and integration related costs included approximately $291 million
in non-cash charges. Cash payments of $709 million were funded through our
existing operations. In addition, tax benefits of approximately $249 million
were recorded.
. In December 1998, BFC Insurance Agency of America ("BFCIAA"), the holding
company of Beneficial's foreign operations, was merged with and into
Household Global Funding, Inc. ("Global"), an affiliate of HFC and a wholly-
owned subsidiary of Household International. HFC received cash of
approximately $340.0 million from Global equal to the net book value of the
assets transferred and liabilities assumed. In accordance with the guidance
established for mergers involving affiliates under common control, the
financial statements of HFC exclude the results of operations of BFCIAA
subsequent to June 30, 1998, the date which BFCIAA came under the control of
Household International.
. 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. In 1997, Beneficial announced its intent to sell the German
operations and recorded an after-tax loss of approximately $27.8 million
after consideration of a $31.0 million tax benefit.
. In June 1997, Household International and a wholly-owned subsidiary of HFC
acquired the capital stock of Transamerica Financial Services Holding
Company ("TFS"), the branch-based consumer finance subsidiary of
Transamerica Corporation for $1.1 billion. We also repaid $2.7 billion of
debt that TFS owed to affiliates of Transamerica Corporation. The
acquisition strengthened our core consumer finance operations by adding new
markets, new customer accounts, seasoned employees and receivables secured
by collateral. In June 1997, we received a capital contribution from
Household International of $976.5 million which was used to repay certain
short-term borrowings in connection with the acquisition of TFS.
. In October 1997, Household International and its wholly-owned subsidiary
acquired the capital stock of ACC Consumer Finance Corporation ("ACC"), a
non-prime auto finance company, for approximately 4.2 million shares of
common stock and cash. Upon the consummation of this transaction, Household
International contributed the investment in ACC to HFC. This purchase
expanded our business of making loans to non-prime borrowers secured by
automobiles, primarily used vehicles sold through franchised dealers, and
increased our market share in the non-prime auto finance market.
. In December 1997, Beneficial acquired Endeavour Personal Finance Ltd.
("Endeavour"), including receivables of approximately $250 million.
All of the 1997 acquisitions were accounted for as purchases. Thus, our
statement of income for 1997 included the results of operations of TFS, ACC
and Endeavour from the closing dates of the transactions.
8
Segment Results
Our Consumer segment's earnings were flat compared to 1998, but higher
compared with 1997. Net income was $883.6 million in 1999 compared with $880.1
million in 1998 and $725.3 million in 1997. In 1999, improved operating
results in our consumer finance business was offset by lower net interest
margin and other revenues from our MasterCard and Visa portfolio due to lower
average receivables as a result of prior restructuring initiatives and lower
net income from our private label business due to lower average receivables as
an affiliate now originates these receivables. Improved results in 1998 as
compared with 1997 reflected higher net interest margin and fee income due
mainly to higher average receivables. Results for 1999 and 1998 also reflect
efficiencies achieved as Beneficial's branch operations were integrated with
HFC's. Managed receivables grew to $50.7 billion at year-end 1999, up 8
percent from $46.8 billion in 1998 and 1997. Our higher managed receivables in
1999 were driven by solid growth in home equity, other unsecured and auto
finance receivables. This growth was partially offset by attrition in our
MasterCard and Visa portfolio due to the repositioning initiatives which
commenced in 1998 and a decrease in private label receivables as a result of
our affiliate originating substantially all receivables generated from new
merchant relationships which began late in 1998. Managed receivable levels at
year-end 1998 reflect the sale of $1.9 billion of non-core receivables to
third parties in the fourth quarter of 1998 and the sale of $1.9 billion of GM
Card receivables to an affiliate in the second quarter of 1998 which masked
the solid growth in our home equity, other unsecured and auto finance
receivables during 1998.
We completed the following repositioning initiatives during 1999 which were
initiated in 1998 to improve receivable growth and overall profitability of
our MasterCard and Visa business:
. During the second quarter we repriced the Union Privilege portfolio, our
affinity card relationship with the AFL-CIO labor federation. This repricing
resulted in higher revenues and lower than expected attrition. We also
implemented initiatives to increase receivables such as expanding risk-based
underwriting, improving our capabilities in credit line assignments and
customer retention and testing new products. These initiatives resulted in
approximately 8 percent growth in the portfolio and more new accounts during
the second half of 1999.
. We repositioned our Household Bank branded portfolio to target our
traditional middle-market customer. In early 1999, we entered into a
marketing alliance with Renaissance Holdings, Inc. ("Renaissance"), a
privately held issuer of secured and unsecured credit cards to non-prime
consumers, to facilitate this effort. The success of this alliance led to
our parent's February 2000 acquisition of Renaissance.
. Return on average owned assets was 2.25 percent in 1999 compared with 2.52
percent in 1998 and 2.08 percent in 1997. Return on average managed assets
was 1.72 percent in 1999 compared with 1.75 percent in 1998 and 1.45 percent
in 1997.
BALANCE SHEET REVIEW
Receivables growth has been a key contributor to our improved results. The
strongest growth came in our consumer finance business, which includes home
equity and unsecured products, and our auto finance business.
. Our managed assets (total assets on our balance sheet plus receivables
serviced with limited recourse) increased $4.4 billion to $59.5 billion at
December 31, 1999. Managed core receivables, which exclude commercial
receivables, increased 8 percent in 1999. Our growth was slowed by attrition
associated with the repositioning of our MasterCard and Visa portfolio which
continued into the first half of 1999 and changes in our private label
portfolio. Beginning in late 1998, an affiliate began originating
substantially all private label receivables generated from new merchant
relationships. Although we subsequently purchase a portion of these
receivables from the affiliate, this change has resulted in an overall
decrease in our private label portfolio.
9
The growth in the managed portfolio is shown in the following table:
Increase (Decrease) Increase (Decrease)
December 31, 1999 in 1999/1998 in 1998/1997
----------------- ------------------- -------------------
(All dollar amounts are stated in millions)
Managed receivables:
Home equity........... $23,503.3 13% 12%
Auto finance.......... 3,031.8 72 102
MasterCard/Visa....... 6,567.2 (9) (39)
Private label......... 6,497.5 (17) (10)
Other unsecured....... 10,686.8 21 3
--------- --- ----
Core products(1).... 50,286.6 8 (4)
--------- --- ----
Commercial.............. 675.3 (1) (21)
Discontinued
products(2)............ -- -- (100)
--------- --- ----
Total............... $50,961.9 8% (7)%
========= === ====
- --------
(1) Excluding MasterCard and Visa, core product growth was 11 percent in 1999
and 7 percent in 1998.
(2) Discontinued products include receivables relating to Beneficial's
disposed Canadian operations in March 1998 and German operations in April
1998.
. Our distribution channels and growth strategies vary across product lines.
The consumer finance business originates real estate and unsecured products
through its retail branch network, correspondents, direct mail,
telemarketing and Internet applications. Auto finance loan volume is
generated primarily through dealer relationships from which installment
contracts are purchased. Additional auto finance volume is generated through
direct lending which includes alliance partner referrals, Internet
applications and direct mail. Private label receivables are purchased from
an affiliate. MasterCard and Visa loan volume is generated primarily through
direct mail, telemarketing, Internet applications, application displays and
promotional activity associated with our affinity relationship. We also
supplement internally generated receivable growth with opportunistic
portfolio acquisitions.
The potential for selling more products to existing customers is an
identified growth opportunity and results from our broad product array,
recognized brand names, varied distribution channels, and large, diverse
customer base. During 1999, we expanded these cross-selling initiatives,
including selling credit cards to home equity, private label and RAL
customers. We also believe the internet will be an increasingly important
distribution channel for our lending products and will enable us to expand
into new customer segments and service current customers in a cost-effective
manner.
. Home equity receivables increased 13 percent to $23.5 billion during 1999.
Strong growth in our HFC and Beneficial branches and correspondent business
resulted from several factors. First, the productivity of our branch account
executives increased due to installation of our loan system into
Beneficial's branches. Momentum in our branches is strong and we continue to
build our strength by adding branch sales people and increasing our cross-
selling programs. Second, we benefited from the failure of several of the
monoline home equity loan players as reduced competition positively affected
pricing, origination and retention. Third, improved customer service and
retention programs resulted in lower attrition. Finally, we acquired 2
portfolios totaling approximately $1.5 billion.
Our auto finance receivables increased $1.3 billion to $3.0 billion during
1999. This business benefited from continued industry consolidation and an
expanded sales force which increased our dealer relationships by over 50
percent. Over one-third of auto receivable growth came from our new
Millennium product. We believe this product enables us to target higher
quality customers at competitive rates and to balance our non-prime and
subprime segments. In addition to its positive impact on receivable growth,
the Millennium product should also positively impact our credit loss
characteristics over time.
Private label receivables decreased 17 percent to $6.5 billion during 1999
due to the affiliate originations discussed above.
10
Other unsecured receivables were up 21 percent to $10.7 billion during 1999,
due to strong growth in our consumer finance branches. We realized a full
year's benefits of offering products to Beneficial customers which were not
available prior to the merger. New customer growth also contributed to the
higher receivables.
MasterCard and Visa receivables declined 9 percent to $6.6 billion during
1999. The decrease, principally due to the repositioning of our MasterCard
and Visa portfolio in late 1998 and the first half of 1999, was partially
offset by growth in our Union Privilege portfolio.
. Owned assets totaled $46.8 billion at December 31, 1999 and $42.4 billion at
year-end 1998. Owned receivables may vary from period to period depending on
the timing and size of asset securitization transactions. We had initial
securitizations, excluding replenishments of prior securitizations, of $3.9
billion of receivables in 1999 and $2.9 billion in 1998. We refer to the
securitized receivables that are serviced for investors and not on our
balance sheet as our off-balance sheet portfolio.
. The managed consumer two-months-and-over contractual delinquency ratio was
5.45 percent at December 31, 1999 compared with 5.41 percent at December 31,
1998. The 1999 managed consumer net chargeoff ratio was 4.20 percent
compared with 4.21 percent in 1998 and 3.69 percent in 1997.
. The owned consumer two-months-and-over contractual delinquency ratio was
5.58 percent at December 31, 1999 compared with 5.49 percent at December 31,
1998. The 1999 owned consumer net chargeoff ratio was 3.98 percent compared
with 3.89 percent in 1998 and 3.46 percent in 1997.
. Our managed credit loss reserves were $2.2 billion at December 31, 1999
compared with $2.1 billion at December 31, 1998. Credit loss reserves as a
percent of managed receivables were 4.33 percent at December 31, 1999
compared with 4.47 percent at year-end 1998.
. Our owned credit loss reserves were $1.5 billion at December 31, 1999
compared with $1.4 billion at December 31, 1998. Credit loss reserves as a
percent of owned receivables were 3.84 percent at December 31, 1999 compared
with 4.21 percent at year-end 1998. The decline in this ratio reflects a
growing percentage of real estate secured receivables and the run-off of
Household Bank branded MasterCard and Visa receivables which have higher
loss rates.
. Our debt to equity ratio was 6.6 to 1 at December 31, 1999 compared with 5.9
to 1 at December 31, 1998. The increase in the ratio was due to higher debt
levels primarily attributable to higher average owned receivables at
December 31, 1999.
STATEMENT OF INCOME REVIEW
Net Interest Margin
Our net interest margin expanded to $3,054.4 million for 1999, up from
$2,622.4 million in 1998 and $2,386.7 million in 1997. As a percent of average
owned interest-earning assets, net interest margin was 7.91 percent in 1999,
7.53 percent in 1998, and 7.49 percent in 1997. The dollar increase in 1999
was due to growth in average owned interest-earning assets and higher interest
spreads. The interest spread represents the difference between the yield
earned on interest-earning assets and the cost of the debt used to fund the
assets. Although interest rates decreased during the last half of 1998 and
increased during the last half of 1999, the timing of these rate changes
resulted in a lower average rate for 1999 than for 1998. Net interest margin
is also 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 related income.
Net interest margin on a managed basis, which assumes receivables
securitized were held in our portfolio, increased to $4,262.3 million for
1999, up from $4,049.8 million in 1998 and $3,827.8 million in 1997 due to
receivable growth. The net interest margin percentage on a managed basis
increased to 8.42 percent from 8.09 percent in 1998 and 8.03 percent in 1997.
During 1999, pricing improvements in our MasterCard and Visa and other
unsecured portfolios were partially offset by an increase in the percentage of
secured loans, which carry a lower yield than unsecured products. The 1998
increase was also slightly offset by lower margin from a higher mix of secured
loans in the portfolio. Lower cost of funds contributed to increases in both
years.
11
Net interest margin as a percent of receivables on a managed basis is
greater than on an owned basis because auto finance, MasterCard and Visa, and
other unsecured receivables, which have wider spreads, are a larger portion of
the off-balance sheet portfolio than of the owned portfolio.
Provision for Credit Losses
The provision for credit losses includes current period credit losses and
an amount which we believe is sufficient to maintain reserves for credit
losses at a level that reflects known and inherent risks in the portfolio. The
managed basis provision for credit losses also includes the over-the-life
reserve requirement established on the off-balance sheet portfolio when
receivables are securitized.
The provision for credit losses on an owned basis totaled $1,407.4 million
in 1999 compared to $1,253.1 million in 1998 and $1,252.1 million in 1997. The
increase was due to higher chargeoffs in our unsecured and private label
portfolios. The provision for credit losses on an owned basis may vary from
year to year, depending on the amount of securitizations in a particular
period. As a percent of average owned receivables, the provision was 3.81
percent compared to 3.68 percent in 1998 and 3.98 percent in 1997. The
increase in this ratio is primarily due to increased provision for unsecured
and private label receivables.
Other Revenues
Total other revenues on an owned basis were $1,886.0 million in 1999,
$2,485.4 million in 1998, and $2,562.8 million in 1997. Total other revenues
in 1998 included a pretax gain of $189.4 million from the sale of Beneficial's
Canadian operations.
Securitization income consists of income associated with the securitization
and sale of receivables with limited recourse, including net interest margin,
fee and other income, and provision for credit losses related to those
receivables. Securitization income declined to $794.9 million in 1999, from
$1,058.5 million in 1998 and $1,232.0 million in 1997. The decrease in 1999
was due to lower average securitized receivables. Securitization income was
lower in 1998 compared with 1997 as we securitized fewer receivables.
Insurance revenues of $357.7 million in 1999 were up slightly from $352.9
million in 1998 and 1997. The increase reflects increased sales on a larger
loan portfolio and improved retention in our consumer finance branch systems.
Investment income includes interest income on investment securities in the
insurance business as well as realized gains and losses from the sale of
investment securities. Investment income was $154.4 million in 1999 compared
with $146.7 million in 1998 and $152.6 million in 1997. The increase in 1999
was due to higher average investment balances. The decrease in 1998 was due to
lower average investment balances and yields.
Fee income includes revenues from fee-based products such as credit cards.
Fee income was $414.1 million in 1999, $498.7 million in 1998, and $514.8
million in 1997. The decreases reflect the impact of lower average credit card
receivables due to the previously discussed repositioning of the credit card
portfolio, which included the sale of $3.8 billion of receivables in 1998. Fee
income will also vary from year to year depending upon the amount of
securitizations in a particular period.
Other income, which includes revenue from our RAL business, was $164.9
million in 1999, $239.2 million in 1998, and $310.5 million in 1997. The
decline in 1999 was attributable to lower non-recurring gains on sales of non-
strategic assets and lower commercial income partially offset by higher RAL
income. The 1999 RAL increase was primarily due to a higher number of
electronic filings of tax returns and smooth refund processing with the
Internal Revenue Service ("IRS"). The decrease in 1998 was due to lower RAL
income as measures taken by the IRS delayed payment on the returns of selected
taxpayers claiming an earned income tax credit. Other income in 1997 included
non-recurring gains on the sales of MasterCard and Visa receivables from our
non co-branded portfolio and a gain from the sale of a Beneficial life
insurance portfolio.
12
Expenses
Total costs and expenses were $1,962.3 million in 1999, $3,188.0 million in
1998, and $2,538.7 million in 1997. Expenses in 1998 include merger and
integration related costs of $1.0 billion. Expenses in 1997 include $90
million of Beneficial non-operating charges (including a $59 million provision
for the planned disposition of Beneficial's German operations) and expenses
related to Beneficial's Canadian and German operations which were sold in
early 1998.
Operating expenses, excluding the one-time merger related costs of $1.0
billion, were down in 1999 and 1998. Cost savings and operating efficiencies
from the Beneficial integration and continued cost control efforts resulted in
lower occupancy and equipment, salaries and fringe benefits and other costs.
Integration-related decreases in salaries and fringe benefits were offset by
growth throughout our businesses. In connection with the Beneficial merger, we
originally estimated annual pretax cost savings of approximately $350 million
through the elimination of redundant staff functions and corporate overhead,
consolidation of product lines, key data-processing and back office functions
and the elimination of certain duplicate or excess office facilities. As of
December 31, 1999, we had achieved savings on a run rate basis which were
consistent with our expectations.
Salaries and fringe benefits were $964.9 million in 1999, up from $921.7
million in 1998 and $925.3 million in 1997. The increase was mostly due to
higher sales incentives for our consumer finance branch employees and more
employees in our auto finance business, both directly related to receivables
growth. These increases were partially offset by efficiencies resulting from
Beneficial staff reductions.
Occupancy and equipment expense was $218.8 million in 1999 compared with
$266.3 million in 1998 and $295.9 million in 1997. The reductions were
primarily due to the elimination of duplicate branch offices and operating
centers, including the sublease of the Beneficial office complex in Peapack,
New Jersey, as a result of the Beneficial merger.
Other marketing expenses include payments for advertising, direct mail
programs and other marketing expenditures. These expenses were $158.6 million
in 1999 compared to $205.8 million in 1998 and $280.7 million in 1997. The
decrease in 1999 was due to lower spending on marketing programs on our
Household Bank branded MasterCard and Visa portfolio. Amounts for 1997
included marketing initiatives for several Beneficial private label merchants.
Other servicing and administrative expenses were $252.0 million in 1999,
$417.8 million in 1998, and $656.5 million in 1997. The decreases were
primarily due to the consolidation of Beneficial's operations which provided
cost savings in system and administrative costs. Included in 1997 is
Beneficial's non-operating charge of $90 million and the expenses related to
Beneficial's Canadian and German operations sold in early 1998.
Amortization of acquired intangibles and goodwill was $143.3 million in
1999, $168.8 million in 1998, and $143.4 million in 1997. The decrease in 1999
reflects lower levels of intangible assets resulting from the Household Bank
branded credit card portfolio sales in 1998. The increase in 1998 reflects
higher goodwill from our acquisitions of TFS and ACC in 1997.
Policyholders' benefits were $224.7 million in 1999, $207.6 million in
1998, and $236.6 million in 1997. The increase in the 1999 expense is
consistent with the increase in insurance revenues resulting from increased
policy sales. The lower expense in 1998 was due to fewer policies in our life
insurance business.
Income taxes. The effective tax rate was 35.1 percent in 1999, 36.5 percent
in 1998 (excluding merger and integration related costs and the gain on sale
of Beneficial Canada) and 33.8 percent in 1997.
13
CREDIT QUALITY
Delinquency and Chargeoffs
Our delinquency and net chargeoff ratios reflect, among other factors, the
quality of receivables, the average age of our loans, the success of our
collection efforts and general economic conditions. The levels of personal
bankruptcies also have a direct effect on the asset quality of our overall
portfolio and others in our industry.
We track delinquency and chargeoff levels on an owned and a managed basis.
We apply the same credit and portfolio management procedures to both our owned
and off-balance sheet portfolios. Our focus is to use risk-based pricing and
effective collection efforts for each loan. We have a process which we believe
gives us a reasonable basis for predicting the asset quality of new accounts.
This process is based on our experience with numerous marketing, credit and
risk management tests. We also believe that our frequent and early contact
with delinquent customers is helpful in managing net credit losses. Despite
these efforts to manage in the current credit environment, bankruptcies remain
an industry-wide issue and are harder to predict.
During 1999, our delinquency and net chargeoff levels were positively
affected by lower bankruptcies but were negatively affected by the continued
maturing of our receivables.
Our chargeoff policy for consumer receivables varies by product. Unsecured
receivables are written off at the following stages of contractual
delinquency: MasterCard and Visa--6 months; private label--9 months; and other
unsecured--9 months and no payment received in 6 months. For real estate
secured receivables, carrying values are written down to net realizable value
at the time of foreclosure. For loans secured by automobiles, carrying values
are written down to net realizable value when the loan becomes 5 months
contractually delinquent. Commercial receivables are written off when it
becomes apparent that an account is uncollectible.
Consumer Two-Month-and-Over Contractual Delinquency Ratios
1999 Quarter End 1998 Quarter End
---------------------- ----------------------
4 3 2 1 4 3 2 1
---- ---- ---- ---- ---- ---- ---- ----
Managed:
Home equity..................... 3.34% 3.42% 3.09% 3.36% 3.55% 3.59% 3.39% 3.59%
Auto finance.................... 2.44 2.26 1.87 1.74 2.29 2.05 1.67 1.84
MasterCard/Visa................. 3.46 3.90 3.73 4.69 5.19 4.67 4.35 3.32
Private label................... 9.30 9.69 8.46 8.00 7.38 7.32 6.27 6.22
Other unsecured................. 9.83 9.58 9.12 8.62 8.86 9.15 8.74 8.22
---- ---- ---- ---- ---- ---- ---- ----
Total Managed................... 5.45% 5.57% 5.14% 5.22% 5.41% 5.39% 5.03% 4.79%
==== ==== ==== ==== ==== ==== ==== ====
Total Owned..................... 5.58% 5.92% 5.28% 5.34% 5.49% 5.50% 4.99% 4.67%
==== ==== ==== ==== ==== ==== ==== ====
Our managed consumer delinquency ratio at year end declined from the third
quarter level, reflecting solid improvement in our home equity, MasterCard and
Visa and private label portfolios. The trend towards lower delinquency in our
MasterCard and Visa portfolio over the past several quarters is the result of
run-off associated with our Household Bank branded portfolio, tightened credit
extension policies and re-engineered collection efforts. Our improved home
equity delinquency reflects the growing percentage of loans in our portfolio
on which we hold a first lien position. The increase in our other unsecured
delinquency reflects the continued seasoning of our Beneficial unsecured
products.
The increase in the managed delinquency ratio from a year ago reflects
seasoning in our private label and other unsecured portfolios which was
substantially offset by improvements in our MasterCard and Visa portfolio. The
year-over-year trends in other unsecured and MasterCard and Visa delinquencies
are consistent with the quarter-over-quarter trends discussed above. Private
label delinquencies have been impacted by reductions in the portfolio balance
as more originations are booked by our affiliate.
14
Our owned delinquency ratio increased slightly from the prior year.
Improvements in home equity and in particular, MasterCard and Visa
delinquency, were more than offset by higher private label and other unsecured
delinquency due to the same factors which drove managed delinquency for these
products. Owned delinquency by product is higher for MasterCard and Visa,
private label and other unsecured receivables due to the retention of
receivables on balance sheet that do not meet the eligibility requirements for
securitization.
Consumer Net Chargeoff Ratios
1999 Quarter Annualized 1998 Quarter Annualized
Full Year -------------------------- Full Year -------------------------- Full Year
1999 4 3 2 1 1998 4 3 2 1 1997
--------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Managed:
Home equity............. .56% .56% .58% .62% .48% .58% .65% .68% .40% .58% .58%
Auto finance............ 4.96 5.44 4.55 4.41 5.45 5.39 5.63 4.89 5.18 5.95 4.68
MasterCard/Visa......... 8.04 6.13 7.04 9.24 9.60 6.29 7.66 6.98 5.31 5.65 5.35
Private label........... 7.50 8.60 7.63 7.24 6.66 6.05 6.22 5.46 6.43 6.02 4.84
Other unsecured......... 7.51 8.29 8.19 6.27 7.16 7.90 7.89 8.66 8.13 6.91 6.37
---- ----- ----- ----- ----- ---- ----- ----- ----- ----- ----
Total Managed........... 4.20% 4.25% 4.21% 4.05% 4.30% 4.21% 4.35% 4.36% 4.10% 4.04% 3.69%
==== ===== ===== ===== ===== ==== ===== ===== ===== ===== ====
Total Owned............. 3.98% 4.17% 4.00% 3.68% 4.07% 3.89% 4.06% 3.94% 3.82% 3.74% 3.46%
==== ===== ===== ===== ===== ==== ===== ===== ===== ===== ====
During the fourth quarter, we saw continued improvement in our MasterCard
and Visa portfolio as our credit card business posted its third consecutive
quarter of lower chargeoff. This improvement was partially offset by the
impact of our delinquent private label purchases and seasonality in our
private label and auto finance portfolios.
The managed consumer net chargeoff ratio for 1999 was 4.20 percent,
compared with 4.21 percent in 1998, and 3.69 percent in 1997. The 1999 ratio
reflected lower home equity, auto finance and other unsecured chargeoffs and a
lower chargeoff contribution to the total portfolio from our MasterCard and
Visa portfolio due to lower average receivables. Our overall MasterCard and
Visa chargeoff ratio was up in 1999, reflecting the impact of the
repositioning of our Household Bank branded portfolio. These improvements were
substantially offset by the impact of higher private label chargeoffs. The
increase in 1998 was the result of higher bankruptcy chargeoffs and the
continued seasoning of the private label and other unsecured portfolios.
The factors affecting owned chargeoff trends in 1999 are consistent with
those described above for our managed portfolio except for other unsecured
whose chargeoff ratio increased year-over-year. Owned chargeoffs for
MasterCard and Visa, other unsecured and private label are higher than managed
chargeoffs due to the difference in credit quality and seasoning of the
receivables which remain on our balance sheet. This resulted in an overall
increase in the owned chargeoff percentage year-over-year. Chargeoffs on owned
auto finance receivables are lower than managed chargeoffs due to the
predominantly unseasoned nature of the receivables which remain on our balance
sheet. The increase in 1998 is consistent with the factors described above for
our managed portfolio.
Credit Loss Reserves
We maintain credit loss reserves to cover probable losses of principal and
interest in both our owned and off-balance sheet portfolios. We estimate
losses for consumer receivables based on delinquency status and past loss
experience. For securitized receivables, we also record a provision for
estimated probable losses that we expect to incur over the life of the
transaction. For commercial loans, we calculate probable losses by using
expected amounts and timing of future cash flows to be received on loans. In
addition, we provide for general loss reserves on both consumer and commercial
receivables to reflect our assessment of portfolio risk factors. Loss reserve
estimates are reviewed periodically and adjustments are reported in earnings
when they become
15
known. These estimates are influenced by factors outside of our control, such
as economic conditions and consumer payment patterns. As a result, there is
uncertainty inherent in these estimates, making it reasonably possible that
they could change.
The following table sets forth credit loss reserves for the periods
indicated:
At December 31
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(All dollar amounts are stated in millions)
Managed credit loss reserves. $2,208.1 $2,105.3 $2,125.3 $1,745.9 $1,280.1
Reserves as a % of managed
receivables................. 4.33% 4.47% 4.21% 3.85% 3.55%
======== ======== ======== ======== ========
Owned credit loss reserves... $1,470.7 $1,448.9 $1,417.5 $1,169.7 $ 937.9
Reserves as a % of owned
receivables................. 3.84% 4.21% 4.38% 3.84% 3.65%
======== ======== ======== ======== ========
The changes in credit loss reserves reflect the impact of a growing
percentage of secured loans; improving delinquency, chargeoff, and bankruptcy
trends; the 1998 sale of credit card receivables; and continued runoff of our
Household Bank branded MasterCard and Visa portfolio. Home equity receivables,
which have a significantly lower chargeoff rate than unsecured receivables,
represent 46.1 percent of our total managed receivables and 55.6 percent of
our total owned receivables at December 31, 1999 compared to 44.1 percent and
49.8 percent, respectively, in 1998. Prior to the 1998 repositioning of our
MasterCard and Visa business, unsecured receivables represented a higher
percentage of our portfolio and drove the increasing reserve ratios. The
change in portfolio mix in 1999 is important because the loss severity for
home equity loans is significantly less than that for unsecured products, such
as credit cards.
Geographic Concentrations
The state of California accounts for 17 percent of our managed domestic
consumer portfolio and is the only state with more than 10 percent of this
portfolio. Because of our centralized underwriting collections and processing
functions, we can quickly change our credit standards and intensify collection
efforts in specific locations.
16
Nonperforming Assets
At December 31
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(All dollar amounts are stated in millions)
Nonaccrual owned receivables.. $ 1,183.7 $ 822.7 $ 726.0
Accruing owned consumer
receivables 90 or more days
delinquent................... 508.4 602.6 433.6
Renegotiated commercial loans. 12.3 12.3 12.4
-------------- -------------- --------------
Total nonperforming owned
receivables.................. 1,704.4 1,437.6 1,172.0
Real estate owned............. 266.6 235.1 187.8
-------------- -------------- --------------
Total nonperforming owned
assets....................... $ 1,971.0 $ 1,672.7 $ 1,359.8
============== ============== ==============
Nonaccrual managed
receivables.................. $ 1,610.1 $ 1,165.5 $ 1,121.3
Accruing managed consumer
receivables 90 or more days
delinquent................... 605.8 707.7 639.1
Renegotiated commercial loans. 12.3 12.3 12.4
-------------- -------------- --------------
Total nonperforming managed
receivables.................. 2,228.2 1,885.5 1,772.8
Real estate owned............. 266.6 235.1 187.8
-------------- -------------- --------------
Total nonperforming managed
assets....................... $ 2,494.8 $ 2,120.6 $ 1,960.6
============== ============== ==============
Managed credit loss reserves
as a percent of nonperforming
managed receivables.......... 99.1% 111.7% 119.9%
============== ============== ==============
LIQUIDITY AND CAPITAL RESOURCES
Generally, we are funded independently from our parent. Cash flows,
liquidity, and capital are monitored at both HFC and Household International
levels. In managing capital, HFC and our wholly-owned subsidiary, Beneficial,
develop targets for the ratio of equity to managed assets based on discussions
with rating agencies, reviews of regulatory requirements and competitor
capital positions, credit loss reserve strength, risks inherent in the
projected operating environment and acquisition objectives. We also
specifically consider the level of intangibles arising from completed
acquisitions. These targets include capital levels against both on-balance
sheet assets and our off-balance sheet portfolio. We paid cash dividends to
our parent of $803 million in 1999, $690 million in 1998 and $250 million in
1997. Beneficial paid cash dividends of $75.4 million in 1998 and $200.7
million (including $80.0 million of treasury share purchases) in 1997. We
received capital contributions from our parent company of $250.0 million in
1998 and $976.5 million in 1997.
Our major use of cash is the origination or purchase of receivables,
purchases of investment securities or acquisitions of businesses. Our main
sources of cash are the collection of receivable balances, maturities or sales
of investment securities, proceeds from the issuance of debt and deposits and
from the securitization of receivables, capital contributions from our parent
company and cash provided by operations.
We issue commercial paper, medium-term debt, and long-term debt primarily
to wholesale investors. We market our commercial paper through an in-house
sales force. We actively manage the level of commercial paper outstanding to
ensure availability to core investors and proper use of any excess capacity
within internally established targets. Outstanding commercial paper totaled
$8.1 billion at December 31, 1999 and $7.1 billion at December 31, 1998.
We market domestic medium-term notes through investment banks and our in-
house sales force. A total of $4.0 billion domestic medium-term notes was
issued in 1999. To obtain a broader investment base, HFC and our subsidiary,
Household Bank (Nevada) N.A., a credit card bank issuing non-GM cards,
periodically issue medium-term notes in foreign markets. During 1999, $203
million in medium-term notes were issued in these foreign markets compared
with $2.1 billion in 1998. In order to eliminate future foreign exchange risk,
currency
17
swaps were used to convert the notes to U.S. dollars at the time of issuance.
During 1999, we also issued $4.6 billion of long-term debt with a weighted
average original maturity of 7.07 years. These long-term issuances lengthened
the term of our funding, reduced reliance on commercial paper and
securitizations, and preserved liquidity. In November, we conveyed $.5 billion
of closed end home equity loans to a Household Home Equity Loan Trust, Series
1999-1 to support the issuance of certificates from the trust.
We had committed back-up lines of credit totaling $9.0 billion at December
31, 1999, of which $400 million was also available to our parent company. None
of these back-up lines were used in 1999. In addition, none of these lines
contained a material adverse change clause which could restrict availability.
Our back-up lines expire on various dates from 2000 through 2004. The most
restrictive financial covenant contained in the terms of our credit agreements
is the maintenance of minimum shareholder's equity of $3.0 billion.
In connection with the Beneficial merger, we repurchased approximately $.7
billion of senior and senior subordinated debt in 1998 in order to better
align the asset/liability position of the combined company. These debt
repurchases were funded with senior debt and other borrowings. Also, cash
payments of approximately $709 million for merger and integration related
costs were funded through existing operations.
In 1998, our wholly-owned subsidiary, Beneficial, had foreign operating
subsidiaries located in the United Kingdom, Canada and Germany. As previously
discussed, Beneficial sold its Canadian and German operations during the first
and second quarters of 1998, respectively. Additionally, the United Kingdom
operations were merged with and into Household Global Funding, Inc. on
December 22, 1998, effective June 30, 1998, as previously discussed.
In 1997, we paid $1.1 billion for the stock of TFS and repaid about $2.7
billion of TFS debt owed to affiliates of Transamerica Corporation. We funded
this acquisition through the issuance of commercial paper, bank and other
borrowings. In addition, in 1997, we received a capital contribution of $1.0
billion from our parent company to repay debt.
Capital Expenditures
During 1999 we made $94 million in capital expenditures compared to the
prior-year level of $108 million.
Asset Securitizations
Securitizations of consumer receivables have been, and will continue to be,
a source of liquidity for us. We believe the market for securities issued by
an investment grade issuer and backed by receivables is a reliable and cost-
effective source of funds.
The following table summarizes the composition of receivables securitized
(excluding replenishments of certificate holder interests) during the year:
1999 1998 1997
---- ---- ----
(In billions)
MasterCard/Visa.................................................. $ .5 $ .8 $1.9
Auto finance..................................................... 1.4 .8 --
Home equity...................................................... -- -- 1.6
Private label.................................................... .5 -- .7
Other unsecured.................................................. 1.5 1.3 1.9
---- ---- ----
Total............................................................ $3.9 $2.9 $6.1
==== ==== ====
18
The following table summarizes the expected amortization of our
securitizations by type:
At December 31, 1999
---------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
-------- -------- -------- -------- ------ ---------- ---------
(In millions)
Home equity............. $1,004.9 $ 599.9 $ 361.0 $ 307.8 -- -- $ 2,273.6
Auto finance............ 713.6 533.3 350.8 208.6 -- -- 1,806.3
MasterCard/Visa......... 1,011.1 1,058.5 631.7 909.1 -- -- 3,610.4
Private label........... 162.5 487.5 208.3 291.7 -- -- 1,150.0
Other unsecured......... 1,480.5 823.8 553.5 665.8 $227.0 $120.9 3,871.5
-------- -------- -------- -------- ------ ------ ---------
Total................. $4,372.6 $3,503.0 $2,105.3 $2,383.0 $227.0 $120.9 $12,711.8
======== ======== ======== ======== ====== ====== =========
At December 31, 1999, the expected weighted average remaining life of these
transactions was 1.8 years.
For MasterCard and Visa and private label securitizations, the issued
securities may pay off sooner than originally scheduled if certain events
occur. One example of such an event is if the annualized portfolio yield
(defined as the sum of finance income and applicable fees, less net
chargeoffs) for a certain period drops below a base rate (generally equal to
the sum of the rate paid to the investors and the servicing fee). For home
equity and other unsecured securitizations, early pay off of the securities
begins if the annualized portfolio yield falls below various limits, or if
certain other events occur. We do not presently believe that any early payoff
will take place. If early payoff occurred, our funding requirements would
increase. These additional requirements could be met through securitizations,
issuance of various types of debt or borrowings under existing back-up lines
of credit. We believe we would continue to have more than adequate sources of
funds if an early payoff event occurred.
At December 31, 1999, HFC and our affiliate, Household Bank, f.s.b. have
facilities with commercial banks under which they may securitize up to $9.6
billion of receivables. These facilities are renewable on an annual basis. At
December 31, 1999, $9.4 billion of receivables were securitized under these
programs. The amount available under these facilities will vary based on the
timing and volume of public securitization transactions.
YEAR 2000
We completed the Year 2000 conversion and testing of our mission-critical
internally developed and non-internally developed systems in the first half of
1999. We implemented changes and tested these systems over the remainder of
the year. We have not experienced any significant Year 2000 delays or
interruptions in our operations, and will maintain our contingency plans for
the near term in case such a delay or interruption should occur in the future.
The actual cost to Household International for Year 2000 compliance through
December 31, 1999 did not exceed its estimate of $20 million after-tax.
RISK MANAGEMENT
We have a comprehensive program to address potential financial risks, such
as interest rate, counterparty and currency risk. The Finance Committee of the
Board of Directors sets acceptable limits for each of these risks annually and
reviews the limits semi-annually.
Interest rate risk is defined as the impact of changes in market interest
rates on our earnings. We utilize simulation models to measure the impact on
net interest margin of changes in interest rates. The key assumptions used in
this model include the rate at which we expect our loans to pay off, loan
volumes and pricing, cash flows from derivative financial instruments and
changes in market conditions. The assumptions we make are based on our best
estimates of actual conditions. The model cannot precisely predict the actual
impact of changes in interest rates on net income because these assumptions
are highly uncertain. At December 31, 1999, our interest rate risk levels were
substantially below those allowed by our existing policy.
19
We generally fund our assets with liabilities that have similar interest
rate features. This reduces structural interest rate risk. Over time, customer
demand for our receivable products shifts between fixed rate and floating rate
products, based on market conditions and preferences. These shifts result in
different funding strategies and produce different interest rate risk
exposures. To manage these exposures, as well as our liquidity position, we
may use derivatives to synthetically alter the repricing terms of our assets
or liabilities, or off-balance sheet transactions. We do not use any exotic or
leveraged derivatives.
At December 31, 1999, we managed about $15 billion of receivables that have
variable interest rates, including credit card, home equity and other
unsecured products. These receivables have been funded with $8.8 billion of
short-term debt, with the remainder funded by intermediate and long-term
liabilities. This position exposes us to interest rate risk. We primarily use
interest rate swaps to alter our exposure to interest rate risk. These
transactions have no impact on liquidity risk. Interest rate swaps also are
used sometimes to synthetically alter our exposure to basis risk. This type of
risk exists because the pricing of some of our assets is tied to the prime
rate, while the funding for these assets is tied to LIBOR. The prime rate and
LIBOR react differently to changes in market interest rates; that is, the
prime rate does not change as quickly as LIBOR. We assign all of our synthetic
alteration and hedge transactions to specific groups of assets, liabilities or
off-balance sheet items.
The economic risk related to our interest rate swap portfolio is minimal.
The face amount of a swap transaction is referred to as the notional amount.
The notional amount is used to determine the interest payment to be paid by
each counterparty, but does not result in an exchange of principal payments.
Our primary exposure on our interest rate swap portfolio is the risk that
the counterparty does not pay us the money they owe us. We protect ourselves
against counterparty risk in several ways. Counterparty limits have been set
and are closely monitored as part of the overall risk management process.
These limits ensure that we do not have significant exposure to any individual
counterparty. Based on peak exposure at December 31, 1999, substantially all
of our derivative counterparties are rated A+ or better. We have never
suffered a loss due to counterparty failure. Certain swap agreements that we
have entered into require that payments be made to, or received from, the
counterparty when the fair value of the agreement reaches a certain level.
We also use interest rate futures and purchased put and call options to
reduce interest rate risk. We use these instruments to hedge interest rate
changes on our variable rate assets and liabilities. For example, short-term
borrowings expose us to interest rate risk because the interest rate we must
pay to others may change faster than the rate we receive from borrowers on the
asset our borrowings are funding. Futures and options are used to fix our
interest cost on these borrowings at a desired rate and are held until the
interest rate on the variable rate asset or liability changes. We then
terminate, or close out, the contracts. These terminations are necessary
because the date the interest rate changes is usually not the same as the
expiration date of the futures contract or option.
At December 31, 1999 and 1998, we estimated that our after-tax earnings
would decline by about $55 and $26 million, respectively, following a gradual
200 basis point increase in interest rates over a twelve month period and
would increase by about $53 and $28 million, respectively, following a gradual
200 basis point decrease in interest rates. These estimates assume we would
not take any corrective action to lessen the impact and, therefore, exceed
what most likely would occur if rates were to change.
We enter into currency swaps in order to minimize currency risk. Currency
risk results from changes in the value of underlying foreign denominated
assets or liabilities. These swaps convert both principal and interest
payments on debt issued from one currency to another. For example, we may
issue Euro-denominated debt and then execute a currency swap to convert the
obligation to U. S. dollars.
See Note 7 to the accompanying consolidated financial statements,
"Derivative Financial Instruments and Other Financial Instruments With Off-
Balance Sheet Risk," for additional information related to interest rate risk
management and Note 8, "Fair Value of Financial Instruments," for information
regarding the fair value of certain financial instruments.
20
GLOSSARY OF TERMS
Acquired Intangibles and Goodwill--Intangible assets reflected on our
consolidated balance sheet resulting from the market value premium
attributable to our credit card accounts in excess of the aggregate
outstanding managed credit card loans acquired. Goodwill represents the
purchase price over the fair value of identifiable assets acquired less
liabilities assumed from business combinations.
Affinity Credit Card--A MasterCard or Visa account jointly sponsored by the
issuer of the card and an organization whose members share a common interest
(e.g., the AFL-CIO Union Privilege Credit Card Program).
Asset Securitization--The process where interests in a pool of financial
assets, such as credit card or home equity receivables, are sold to investors.
Typically, the receivables are sold to a trust that issues interests that are
sold to investors.
Auto Finance Loans--Closed-end loans secured by a first lien on a vehicle.
Co-Branded Credit Card--A MasterCard or Visa account that is jointly
sponsored by the issuer of the card and another corporation. (e.g., the GM
Card) The account holder typically receives some form of added benefit for
using the card.
Consumer Net Chargeoff Ratio--Net chargeoffs of receivables divided by
average receivables outstanding.
Contractual Delinquency--A method of determining delinquent accounts based
on the contractual terms of the original loan agreement.
Core Receivables--Managed receivables, excluding commercial and receivables
relating to Beneficial's disposed Canadian and German operations.
Fee Income--Income associated with interchange on credit cards and annual,
late and other fees and from the origination or acquisition of loans.
Foreign Exchange Contract--A contract used to minimize our exposure to
changes in foreign currency exchange rates.
Futures Contract--An exchange-traded contract to buy or sell a stated
amount of a financial instrument or index at a specified future date and
price.
Home Equity Loan--Closed-end loans and revolving lines of credit secured by
first or second liens on residential real estate.
Interchange Fees--Fees received for processing a credit card transaction
through the MasterCard or Visa network.
Interest Rate Swap--Contract between two parties to exchange interest
payments on a stated principal amount (notional principal) for a specified
period. Typically, one party makes fixed rate payments, while the other party
makes payments using a variable rate.
LIBOR--London Interbank Offered Rate. A widely-quoted market rate which is
frequently the index used to determine the rate at which we borrow funds.
Liquidity--A measure of how quickly we can convert assets to cash or raise
additional cash by issuing debt.
21
GLOSSARY OF TERMS--(Continued)
Managed Basis--Method of reporting whereby, net interest margin, other
revenues and credit losses on securitized receivables are reported as if those
receivables were still held on our balance sheet.
Managed Net Interest Margin--Interest income from managed receivables and
noninsurance investment securities reduced by interest expense.
Managed Receivables--The sum of receivables on our balance sheet and those
that we service for investors as part of our asset securitization program.
MasterCard and Visa Receivables--Receivables generated through customer
usage of MasterCard and Visa credit cards.
Nonaccrual Loans--Loans on which we no longer accrue interest because
ultimate collection is unlikely.
Non-prime Accounts--Accounts held by individuals with low credit ratings
caused by occasional delinquencies, prior charge-offs, or other credit
blemishes. These accounts generally are charged higher interest rates and fees
to compensate for the additional risk.
Option--A contract giving the owner the right, but not the obligation, to
buy or sell a specified item at a fixed price for a specified period.
Other Unsecured Receivables--Unsecured lines of credit or closed-end loans
made to individuals.
Over-the-Life Reserves--Credit loss reserves established for securitized
receivables to cover the estimated probable losses we expect to incur over the
life of the transaction.
Owned Receivables--Receivables held on our balance sheet.
Private Label Credit Card--A line of credit made available to customers of
retail merchants evidenced by a credit card bearing the merchant's name.
Promotional Account--A private label credit card account that allows for
limited or deferred interest and/or principal payments for a certain period.
Refund Anticipation Loan ("RAL") Program--A cooperative program with H&R
Block Tax Services, Inc. and certain of its franchises, along with other
independent tax preparers, to provide loans to customers entitled to tax
refunds and who electronically file their returns with the Internal Revenue
Service.
Receivables Serviced with Limited Recourse--Receivables we have securitized
and for which we have some level of potential loss if defaults occur.
Return on Assets--Net income divided by average owned assets.
Return on Average Common Shareholder's Equity--Net income less dividends on
preferred stock divided by average common shareholder's equity.
Return on Managed Assets--Net income divided by average managed assets.
Synthetic Alteration--Process by which derivative financial instruments are
used to alter the risk characteristics of an asset, liability or off-balance
sheet item.
22
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
Reference is made to the information contained under the caption "Risk
Management" of Item 7 of this Form 10-K for the information required by this
Item.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the list of financial statements under Item 14(a)
herein for the financial statements required by this Item.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
Omitted.
Item 11. Executive Compensation.
Omitted.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted.
Item 13. Certain Relationships and Related Transactions.
Omitted.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements.
Report of Independent Public Accountants.
Consolidated Statements of Income for the Three Years Ended December
31, 1999.
Consolidated Balance Sheets, December 31, 1999 and 1998.
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1999.
Consolidated Statements of Changes in Preferred Stock and Common
Shareholder's Equity for the Three Years Ended December 31, 1999.
Notes to Consolidated Financial Statements.
Selected Quarterly Financial Data (Unaudited).
23
(b) Reports on Form 8-K.
HFC did not file any current report on Form 8-K during the three months
ended December 31, 1999.
(c) Exhibits.
3(i) Restated Certificate of Incorporation of Household Finance
Corporation, as amended (incorporated by reference to Exhibit 3(i)
of our Quarterly Report on Form 10-Q for the quarter ended March 31,
1997).
3(ii) Bylaws of Household Finance Corporation (incorporated by reference
to Exhibit 3(b) of our Annual Report on Form 10-K for the fiscal
year ended December 31, 1992).
4(a) Standard Multiple-Series Indenture Provisions for Senior Debt
Securities dated as of June 1, 1992 (incorporated by reference to
Exhibit 4(b) of our Registration Statement on Form S-3, No. 33-48854
filed on June 26, 1992).
4(b) Indenture dated as of December 1, 1993 for Senior Debt Securities
between HFC and The Chase Manhattan Bank (National Association), as
Trustee (incorporated by reference to Exhibit 4(b) of our
Registration Statement on Form S-3, No. 33-55561 filed on September
20, 1994).
4(c) The principal amount of debt outstanding under each other instrument
defining the rights of holders of our long-term debt does not exceed
10 percent of our total assets on a consolidated basis. We agree to
furnish to the Securities and Exchange Commission, upon request, a
copy of each instrument defining the rights of holders of our long-
term debt.
12 Statement of Computation of Ratios of Earnings to Fixed Charges and
to Combined Fixed Charges and Preferred Stock Dividends.
23 Consent of Arthur Andersen LLP, Certified Public Accountants.
27 Financial Data Schedule.
99.1 Ratings of Household Finance Corporation and its significant
subsidiaries.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Household Finance Corporation has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Household Finance Corporation
Dated: March 24, 2000
/s/ G. D. Gilmer
By:__________________________________
G. D. Gilmer, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Household
Finance Corporation and in the capacities and on the dates indicated.
Signature Title
--------- -----
/s/ G. D. Gilmer President and Chief
____________________________________ Executive Officer, Director
G. D. Gilmer
/s/ W. F. Aldinger Director
____________________________________
W. F. Aldinger
/s/ D. A. Schoenholz Executive Vice President and Dated: March 24,
____________________________________ Chief Financial Officer, 2000
D. A. Schoenholz Director (also the
principal financial and
accounting officer)
/s/ J. A. Vozar Vice President and Director
____________________________________
J. A. Vozar
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Household Finance Corporation:
We have audited the accompanying consolidated balance sheets of Household
Finance Corporation (a Delaware corporation) and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of income, changes
in preferred stock and common shareholder's equity and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of Household Finance Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Household Finance Corporation and subsidiaries as of December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Chicago, Illinois
January 14, 2000
F-1
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31
--------------------------
1999 1998 1997
-------- -------- --------
(In millions)
Finance income...................................... $5,139.8 $4,581.4 $4,205.1
Other interest income............................... 67.3 36.5 35.1
Interest expense.................................... 2,152.7 1,995.5 1,853.5
-------- -------- --------
Net interest margin................................. 3,054.4 2,622.4 2,386.7
Provision for credit losses on owned receivables.... 1,407.4 1,253.1 1,252.1
-------- -------- --------
Net interest margin after provision for credit
losses............................................. 1,647.0 1,369.3 1,134.6
-------- -------- --------
Securitization income............................... 794.9 1,058.5 1,232.0
Insurance revenues.................................. 357.7 352.9 352.9
Investment income................................... 154.4 146.7 152.6
Fee income.......................................... 414.1 498.7 514.8
Other income........................................ 164.9 239.2 310.5
Gain on sale of Beneficial Canada................... -- 189.4 --
-------- -------- --------
Total other revenues.............................. 1,886.0 2,485.4 2,562.8
-------- -------- --------
Salaries and fringe benefits........................ 964.9 921.7 925.3
Occupancy and equipment expense..................... 218.8 266.3 295.9
Other marketing expenses............................ 158.6 205.8 280.7
Other servicing and administrative expenses......... 252.0 417.8 656.5
Amortization of acquired intangibles and goodwill... 143.3 168.8 143.4
Policyholders' benefits............................. 224.7 207.6 236.6
Merger and integration related costs................ -- 1,000.0 --
-------- -------- --------
Total costs and expenses.......................... 1,962.3 3,188.0 2,538.4
-------- -------- --------
Income before income taxes.......................... 1,570.7 666.7 1,159.0
Income taxes........................................ 550.8 361.8 391.9
-------- -------- --------
Net income...................................... $1,019.9 $ 304.9 $ 767.1
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At December 31
--------------------
1999 1998
--------- ---------
(In millions,
except share data)
Assets
Cash...................................................... $ 1,487.2 $ 428.4
Investment securities..................................... 2,257.2 2,944.4
Receivables, net.......................................... 38,187.6 34,283.2
Advances to parent company and affiliates................. 691.8 494.0
Acquired intangibles and goodwill, net.................... 1,572.9 1,682.7
Properties and equipment, net............................. 360.3 376.9
Real estate owned......................................... 266.6 235.1
Other assets.............................................. 1,991.6 1,918.3
--------- ---------
Total assets.......................................... $46,815.2 $42,363.0
========= =========
Liabilities and Shareholder's Equity
Debt:
Commercial paper, bank and other borrowings............. $ 8,780.2 $ 7,143.1
Senior and senior subordinated debt (with original
maturities over one year).............................. 30,383.6 27,186.1
--------- ---------
Total debt................................................ 39,163.8 34,329.2
Insurance policy and claim reserves....................... 1,077.2 1,076.2
Other liabilities......................................... 643.0 1,147.2
--------- ---------
Total liabilities......................................... 40,884.0 36,552.6
Common shareholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding at December 31, 1999 and 1998,
and additional paid-in capital......................... 2,955.5 2,960.3
Retained earnings....................................... 3,053.3 2,836.4
Accumulated other comprehensive income (loss)........... (77.6) 13.7
--------- ---------
Total common shareholder's equity......................... 5,931.2 5,810.4
--------- ---------
Total liabilities and shareholder's equity............ $46,815.2 $42,363.0
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
---------------------------------
1999 1998 1997
--------- ---------- ----------
(In millions)
Cash Provided by Operations
Net income.................................. $ 1,019.9 $ 304.9 $ 767.1
Adjustments to reconcile net income to net
cash provided by operations:
Provision for credit losses on owned
receivables............................... 1,407.4 1,253.1 1,252.1
Non-cash merger and integration related
costs..................................... -- 291.0 --
Provision for loss on German disposal...... -- -- 58.8
Insurance policy and claim reserves........ 161.7 28.6 102.5
Depreciation and amortization.............. 271.8 291.9 272.8
Net realized gains from sales of assets.... -- (156.9) (78.3)
Deferred income tax provision.............. 16.1 259.1 17.8
Other, net................................. (435.6) (355.5) (470.1)
--------- ---------- ----------
Cash provided by operations.............. 2,441.3 1,916.2 1,922.7
--------- ---------- ----------
Investments in Operations
Investment securities available-for-sale:
Purchased.................................. (1,279.5) (1,304.4) (1,863.7)
Matured.................................... 675.2 308.5 264.3
Sold....................................... 732.2 848.3 1,694.9
Short-term investment securities, net
change..................................... 481.3 (597.8) (32.3)
Receivables:
Originations, net.......................... (7,865.4) (12,975.2) (15,418.9)
Purchases and related premiums............. (5,164.8) (2,937.8) (1,668.8)
Sold....................................... 7,503.7 10,267.8 17,210.4
Acquisition of business operations.......... (58.4) -- --
Purchase of Transamerica Financial Services
Holding Company capital stock.............. -- -- (1,059.6)
Sale of foreign subsidiary to affiliate..... -- 340.0 --
Properties and equipment purchased.......... (93.8) (107.6) (114.0)
Properties and equipment sold............... 27.5 42.5 2.7
Advances to parent company and affiliates,
net........................................ (212.8) 363.4 (18.1)
--------- ---------- ----------
Cash decrease from investments in
operations.............................. (5,254.8) (5,752.3) (1,003.1)
--------- ---------- ----------
Financing and Capital Transactions
Short-term debt and deposits, net change.... 1,637.1 (2,718.3) (186.1)
Senior and senior subordinated debt issued.. 9,232.3 12,645.8 7,401.0
Senior and senior subordinated debt retired. (6,102.2) (4,869.6) (5,775.0)
Prepayment of debt.......................... -- (767.2) --
Repayment of Transamerica Financial Services
Holding Company debt....................... -- -- (2,679.7)
Policyholders' benefits paid................ (113.9) (119.8) (120.9)
Cash received from policyholders............ 22.0 63.7 57.1
Dividends on preferred stock................ -- -- (4.6)
Redemption of preferred stock............... -- -- (100.0)
Dividends paid to parent company............ (803.0) (690.0) (250.0)
Dividends paid--pooled affiliate............ -- (75.4) (200.7)
Capital contributions from parent company... -- 250.0 976.5
--------- ---------- ----------
Cash increase (decrease) from financing
and capital transactions................ 3,872.3 3,719.2 (882.4)
--------- ---------- ----------
Increase (decrease) in cash.............. 1,058.8 (116.9) 37.2
Cash at January 1........................ 428.4 545.3 508.1
--------- ---------- ----------
Cash at December 31...................... $ 1,487.2 $ 428.4 $ 545.3
========= ========== ==========
Supplemental Cash Flow Information:
Interest paid.............................. $ 2,200.1 $ 1,928.4 $ 1,827.3
Income taxes paid.......................... 317.3 156.9 315.6
--------- ---------- ----------
Supplemental Non-Cash Investing and
Financing Activities:
Contribution of acquired company from
parent.................................... -- -- $187.0
--------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK AND COMMON SHAREHOLDER'S
EQUITY
Common Shareholder's Equity
------------------------------------------------
Common
Stock and Accumulated
Additional Other Total Common
Preferred Paid-in Retained Comprehensive Shareholder's
Stock Capital Earnings Income(1) Equity
--------- ---------- -------- ------------- -------------
(All dollar amounts are stated in millions)
Balance at December 31,
1996................... $ 100.0 $1,366.9 $2,985.1 $(64.4) $4,287.6
------- -------- -------- ------ --------
Net income............. 767.1 767.1
Other comprehensive
income, net of tax
Foreign currency
translation
adjustments......... (2.2) (2.2)
Unrealized gain on
investments, net of
reclassification
adjustment.......... 18.3 18.3
--------
Total comprehensive
income................. 783.2
Dividends to parent
company................ (250.0) (250.0)
Dividends--pooled
affiliate (2).......... (200.7) (200.7)
Dividends on preferred
stock.................. (4.6) (4.6)
Redemption of preferred
stock.................. (100.0)
Contribution of capital
from parent company.... 1,163.5 1,163.5
Contribution of
capital--pooled
affiliate (2).......... 24.7 24.7
------- -------- -------- ------ --------
Balance at December 31,
1997................... -- 2,555.1 3,296.9 (48.3) 5,803.7
------- -------- -------- ------ --------
Net income............. 304.9 304.9
Other comprehensive
income, net of tax
Foreign currency
translation
adjustments......... 48.2 48.2
Unrealized gain on
investments, net of
reclassification
adjustment.......... 13.8 13.8
--------
Total comprehensive
income................. 366.9
Dividends to parent
company................ (690.0) (690.0)
Dividends--pooled
affiliate (2).......... (75.4) (75.4)
Contribution of capital
from parent company.... 250.0 250.0
Contribution of
capital--pooled
affiliate (2).......... 155.2 155.2
------- -------- -------- ------ --------
Balance at December 31,
1998................... -- 2,960.3 2,836.4 13.7 5,810.4
------- -------- -------- ------ --------
Net income............. 1,019.9 1,019.9
Other comprehensive
income, net of tax
Foreign currency
translation
adjustments......... 1.2 1.2
Unrealized loss on
investments, net of
reclassification
adjustment.......... (92.5) (92.5)
--------
Total comprehensive
income................. 928.6
Dividends to parent
company................ (803.0) (803.0)
Premiums on related
party sale............. (4.8) (4.8)
------- -------- -------- ------ --------
Balance at December 31,
1999................... -- $2,955.5 $3,053.3 $(77.6) $5,931.2
======= ======== ======== ====== ========
- --------
(1) At December 31, 1999, 1998, 1997 and 1996 items in the accumulated other
comprehensive income column include cumulative adjustments for: foreign
currency translation adjustments of $(7.1), $(8.3), $(56.5) and $(54.3)
million, respectively, and unrealized gains (losses) on marketable equity
securities and available-for-sale investments of $(70.5), $22.0, $8.2 and
$(10.1) million, respectively. The gross unrealized gain (loss) on
available-for-sale investments at December 31, 1999, 1998 and 1997 of
$(109.6), $33.7 and $12.6 million, respectively, is recorded net of
income taxes (benefit) of $(39.1), $11.7 and $4.4 million, respectively.
(2) Relates to previous equity transactions of Beneficial Corporation.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK AND
COMMON SHAREHOLDER'S EQUITY--(Continued)
Comprehensive Income
The following discloses the related tax effects allocated to each component
of other comprehensive income and reclassification adjustments:
At December 31
-------------------------------
Tax
(Expense)
Before-Tax Benefit Net-of-Tax
---------- --------- ----------
(In millions)
1997
Foreign currency translation adjustments....... $ 5.9 $ (8.1) $ (2.2)
Unrealized gains on investments:
Unrealized holding gains arising during the
period...................................... 52.3 (18.4) 33.9
Less: Reclassification adjustment for gains
realized in net income...................... (24.0) 8.4 (15.6)
------- ------ ------
Net unrealized gains on investments.......... 28.3 (10.0) 18.3
------- ------ ------
Other comprehensive income................. $ 34.2 $(18.1) $ 16.1
======= ====== ======
1998
Foreign currency translation adjustments....... $ 48.0 $ .2 $ 48.2
Unrealized gains on investments:
Unrealized holding gains arising during the
period...................................... 26.9 (9.4) 17.5
Less: Reclassification adjustment for gains
realized in net income...................... (5.8) 2.1 (3.7)
------- ------ ------
Net unrealized gains on investments.......... 21.1 (7.3) 13.8
------- ------ ------
Other comprehensive income................. $ 69.1 $ (7.1) $ 62.0
======= ====== ======
1999
Foreign currency translation adjustments....... $ 1.7 $ (.5) $ 1.2
Unrealized losses on investments:
Unrealized holding losses arising during the