-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OoSQuVak5DM0XSvmVMmtexvsNYmvwxe7JdqaSeBsda/I/BiKtVBTKFXmRmnP+cVq edTtrOsd/+qzDdhulaDr5w== 0000950131-99-001897.txt : 19990331 0000950131-99-001897.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950131-99-001897 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOUSEHOLD INTERNATIONAL INC CENTRAL INDEX KEY: 0000354964 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 363121988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08198 FILM NUMBER: 99577511 BUSINESS ADDRESS: STREET 1: 2700 SANDERS RD CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 BUSINESS PHONE: 8475645000 MAIL ADDRESS: STREET 1: 2700 SANDERS ROAD CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8198 Household International, Inc. (Exact name of registrant as specified in its charter) 36-3121988 Delaware (I.R.S. Employer Identification No.) (State of incorporation) 60070 2700 Sanders Road (Zip Code) Prospect Heights, Illinois (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 ------------------- --------------------- Common Stock, $1 par value New York Stock Exchange and Chicago Stock Exchange Series A Junior Participating Preferred Stock Purchase Rights (attached to and transferable only with the Common Stock) New York Stock Exchange Depositary Shares (each representing one- fortieth share of 8 1/4% Cumulative Preferred Stock, Series 1992-A, no par, $1,000 stated value) New York Stock Exchange 5% Cumulative Preferred Stock New York Stock Exchange $4.50 Cumulative Preferred Stock New York Stock Exchange $4.30 Cumulative Preferred Stock 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. [_] The aggregate market value of the voting common stock held by nonaffiliates of the registrant at March 17, 1999 was approximately $44.9375 billion. The number of shares of the registrant's common stock outstanding at March 17, 1999 was 485,203,774. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the registrant's 1998 Annual Report to Shareholders for the fiscal year ended December 31, 1998: Parts I, II and IV. Certain portions of the registrant's definitive Proxy Statement for its 1999 Annual Meeting scheduled to be held May 12, 1999: Part III. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
PART/Item No. Page ------------- ---- PART I. Item 1. Business...................................................... 3 General....................................................... 3 Operations.................................................... 4 Funding....................................................... 5 Regulation and Competition.................................... 6 Cautionary Statement on Forward-Looking Statements............ 7 Item 2. Properties.................................................... 8 Item 3. Legal Proceedings............................................. 8 Item 4. Submission of Matters to a Vote of Security Holders........... 8 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................................... 8 Item 6. Selected Financial Data....................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 9 Item 7A. Quantitative and Qualitative Disclosure About Market Risk..... 9 Item 8. Financial Statements and Supplementary Data................... 9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................... 9 PART III. Item 10. Directors and Executive Officers of the Registrant............ 9 Executive Officers of the Registrant........................ 9 Item 11. Executive Compensation........................................ 10 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................... 11 Item 13. Certain Relationships and Related Transactions................ 11 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................................... 11 Financial Statements.......................................... 11 Reports on Form 8-K........................................... 11 Exhibits...................................................... 11 Schedules..................................................... 13 Signatures............................................................... 14 Report of Independent Public Accountants................................. F-1 Schedule I............................................................... F-2
2 PART I. Item 1. Business. General Household International, Inc. ("Household"), through its subsidiaries primarily provides consumers with several types of loan products in the United States, the United Kingdom and Canada. Household and its subsidiaries (including the operations of Beneficial Corporation which we acquired in 1998) may also be referred to in this Form 10-K as "we," "us" or "our." We offer home equity loans, auto finance loans, MasterCard* and Visa* credit cards, private label credit cards, tax refund anticipation loans and other types of unsecured loans. We also offer credit and specialty insurance in the United States, the United Kingdom and Canada. At December 31, 1998, we had approximately 23,500 employees and served approximately 30 million customer accounts with $63.9 billion in managed receivables and $44.2 billion in owned receivables. Information that is reported on a managed basis relates to receivables that have been sold and which we service with limited recourse ("securitize"), together with receivables that appear on our balance sheet. Information that is reported on an owned basis relates to the assets and liabilities we have on our balance sheet. Owned assets may vary from period to period depending on the timing and size of securitizations. Household was created as a holding company in 1981 as a result of a shareholder approved restructuring of Household Finance Corporation ("HFC"), which was established in 1878. In the last five years, we have been restructuring our operations to focus on the financial services business, specifically on those areas of the consumer finance business that we believe offer us the best opportunity to achieve the highest returns on our capital. From late 1994 through 1996 we exited from several businesses that were providing insufficient returns on our investment, such as our first mortgage origination and servicing business in the United States and Canada, our individual life and annuity business and our consumer branch banking business, including the sale of our consumer deposits. In June 1997 we purchased Transamerica Financial Services Holding Company ("TFS"), the branch-based consumer finance subsidiary of Transamerica Corporation for $1.1 billion and repaid $2.8 billion of TFS debt. In connection with this acquisition, we completed a $1.0 billion public offering of Household common stock. In October 1997, we purchased all of the outstanding capital stock of ACC Consumer Finance Corporation ("ACC"), an automobile finance company for 4.2 million shares of Household common stock and cash. In December 1997, we decided to exit from the business of originating and acquiring student loans. 1998 Developments and Results. The following results and developments occurred during 1998: . In June 1998, Household merged with Beneficial Corporation ("Beneficial"), a consumer finance holding company. Each outstanding share of Beneficial common stock was converted into 3.0666 shares of Household's common stock, resulting in the issuance of approximately 168.4 million shares of common stock. Because this merger was accounted for as a pooling of interests, our consolidated financial statements have been restated to include the results of operations, financial position and changes in cash flows of Beneficial for all periods presented. . In 1998, we effected a three-for-one split of Household's common stock in the form of a dividend, issued on June 1, 1998 to shareholders of record as of May 14, 1998. Accordingly, all common share and per common share data reported in this Form 10-K include the effect of our stock split. . In 1998 prior to our merger with Beneficial, Beneficial sold its Canadian and German operations representing combined assets of approximately $1.0 billion. . During 1998 we began to refocus our United States MasterCard and Visa operations to de-emphasize undifferentiated credit card programs. As part of this process we sold approximately $1.9 billion of credit card receivables. . Our managed assets increased to $72.6 billion at year-end 1998 from $71.3 billion at year-end 1997 and $66.2 billion at year-end 1996. Our owned assets increased to $52.9 billion at year-end 1998 from $46.8 billion at year-end 1997 and $45.3 billion at year-end 1996. - -------- * MasterCard is a registered trademark of MasterCard International, Incorporated and VISA is a registered trademark of VISA USA, Inc. 3 . Operating net income (net income excluding merger and integration related costs and the gain on the sale of Beneficial's Canadian operations) was $1,156.6 million in 1998, an increase of 23 percent over 1997 and 41 percent over 1996. Net income in 1997 was $940.3 million, 15 percent higher than 1996 earnings of $819.6 million. Diluted operating earnings per share was $2.30 in 1998, up 19 percent from $1.93 in 1997, which was up 12 percent from $1.73 in 1996. Net income was $524.1 million and diluted earnings per share was $1.03 in 1998. . In March 1998 one of our subsidiary trusts issued $200 million of company obligated mandatorily redeemable preferred securities. . In October 1998 we redeemed, at par, all outstanding shares of our 7.35% Preferred Stock, Series 1993-A for $25 per depositary share plus accrued and unpaid dividends. The state of California accounts for 19 percent of our managed consumer portfolio in the United States. California is the only state with more than ten percent of this portfolio. Our summary financial information is set forth in our Annual Report to Shareholders (the "1998 Annual Report"), portions of which are incorporated herein by reference. See pages 18 through 73 and 75 through 77 of our 1998 Annual Report. The segment information contained for the years ended December 31, 1997 and December 31, 1996 has been restated following the change in the composition or our reported segments. The products we offer, our operating markets and our marketing methods are described under OPERATIONS in this Form 10-K. Operations Our operations are divided into three reportable segments: Consumer, which includes our branch-based consumer finance, private label and auto finance businesses in the United States; Credit Card, which includes our MasterCard and Visa business in the United States; and International, which comprises our foreign operations which include the United Kingdom and Canada. Information about operating segments that are not individually reportable includes our insurance, refund anticipation loans and commercial operations, as well as our corporate and treasury activities which are included in the "All Other" caption within our segment disclosure. Consumer Our branch-based consumer finance business constitutes the second largest consumer finance company in the United States. Collectively, this business has 1,400 branches located in 46 states and 3 million open customer accounts. It is marketed under both the HFC and Beneficial brand names, each of which caters to a slightly different type of customer in the middle-market population. Both brands offer secured and unsecured products. These products are marketed through our retail branch network, direct mail, telemarketing, correspondents and brokers. We are the second largest provider of third party private label credit cards in the United States. The private label business of our consumer segment has over 100 merchant relationships with approximately $8.3 billion in managed receivables and 6.8 million active customer accounts. Approximately 33 percent of our private label receivables are in the electronics industry while approximately 32 percent are in the furniture industry. Over 10 percent of our private label receivables are in the home products industry and approximately 7 percent are in the recreational vehicle industry. These products are generated through merchant promotions, application displays, direct mail, telemarketing and the Internet. We are the second largest non-captive sub-prime automobile lender in the United States. We have over 5,400 dealer relationships nationwide with approximately $1.8 billion in managed receivables. While the sub-prime auto finance market generally continues to grow, it also has recently experienced some consolidation thereby increasing the competitiveness in this industry. Our auto finance business generates loan volume primarily through dealer relationships from which installment contracts are purchased. Loans are also generated from alliance partners, direct mail and the Internet. 4 Credit Cards Our Mastercard and Visa operations in the United States reported lower earnings in 1998 primarily due to lower average receivables and higher credit losses. Last year we hired new senior operating management for this segment, actively repriced portions of our Mastercard and Visa portfolios and reduced credit lines which led to increased account attrition. We also decided to de- emphasize the undifferentiated Mastercard and Visa portfolios in the United States and to refocus such product to target customers and prospects of our other businesses. Our MasterCard and Visa business is generated primarily through direct mail, telemarketing, application displays and promotional activity associated with our affinity and co-branding relationships, including our alliance with General Motors Corporation ("GM") to issue the GM Card, a co-branded credit card, and our alliance with Union Privilege to issue the Union Privilege affinity card ("Union Privilege"). Our largest account base for MasterCard and VISA credit cards is in California. Approximately 52 percent of managed receivables for this segment were originated under the GM Card program while approximately 26 percent were originated under the Union Privilege program. International We are the second largest consumer finance company, the third largest provider of retail finance and the fifth largest credit card issuer in the United Kingdom. Our United Kingdom operations offer secured and unsecured lines of credit, secured and unsecured closed-end loans, insurance products and credit cards (including the GM Card from Vauxhall and the Goldfish Card issued under an alliance with the Centrica Group--the United Kingdom's major natural gas supplier). Such operations are conducted in England, Scotland, Wales, Ireland and Northern Ireland. Loans are marketed through a branch network consisting of 179 branches, merchants and direct mail. Our Canadian consumer finance business offers consumer loans, mortgages, revolving credit, retail finance and accepts deposits. Their products include home equity and unsecured lines of credit, secured and unsecured closed-end loans and private label credit cards. These products are marketed through 75 branch offices in 10 provinces, direct mail and telemarketing. Information concerning foreign owned receivables, and comparative revenues, income before income taxes, and identifiable assets and long-lived assets for the years ended December 31, 1998, 1997 and 1996 are incorporated by reference to pages 54 and 73 of our 1998 Annual Report. All Other Where applicable laws permit, we offer credit life, credit accident, health and disability, term and specialty insurance products to our customers. Such products currently are offered throughout the United States and Canada. Insurance is directly written by or reinsured with one or more of our subsidiaries. Our tax refund anticipation loan ("RAL") business is a cooperative program with H&R Block Tax Services, Inc. ("H&R Block") and certain of its franchises, along with other independent tax preparers, to provide loans to customers who are entitled to tax refunds and who electronically file their income tax returns with the Internal Revenue Service. Our remaining commercial operations have continued to decline in size. Funding As a financial services organization, we must have access to funds at competitive rates, terms and conditions to be successful. We fund our operations in the global capital markets, primarily through the use of securitizations, commercial paper, Federal funds borrowing, bank lines, thrift notes, medium term notes and long-term debt. We also use derivative financial instruments to hedge our currency and interest rate exposure. A description of our use of derivative financial instruments, including interest rate swaps, foreign exchange contracts, and other quantitative and qualitative information about our market risk is set forth on pages 29-31, 33, 34 and 58 through 65 of our 1998 Annual Report. We also maintain an investment portfolio which at year-end 1998 was approximately $3.2 billion. Approximately $2.6 billion of such investment securities were held by our insurance subsidiaries. At year- end 1998, Household's long-term debt, together with that of HFC, Beneficial and Household Bank, f.s.b. (the "Bank") and the preferred stock of Household, have been assigned investment 5 grade ratings by four nationally recognized statistical rating organizations. These organizations have also rated the commercial paper of HFC in their highest rating category. Three of these organizations have rated Household's commercial paper in their highest rating category. For a detailed listing of the ratings that have been assigned to Household and our significant subsidiaries, see Exhibit 99(b) to this Form 10-K. Securitizations of consumer receivables are an important source of our liquidity. During 1998 we securitized approximately $3.6 billion of receivables compared to $8.3 billion in 1997 and $8.6 billion in 1996. Additional information on our sources and availability of funding are incorporated by reference to pages 29 through 32 of our 1998 Annual Report. Regulation and Competition Regulation. Our consumer finance businesses operate in a highly regulated environment. Those businesses are subject to laws relating to discrimination in extending credit, use of credit reports, disclosure of credit terms and correction of billing errors. Our consumer branch lending offices are also subject to certain regulations and legislation that limit their operations in certain jurisdictions. For example, limitations may be placed on the amount of interest or fees that a loan may bear, the amount that may be borrowed or the types of actions that may be taken to collect or foreclose upon delinquent loans. Our consumer branch lending offices are generally licensed in those jurisdictions in which they operate. Such licenses have limited terms but are renewable, and are revocable for cause. Our private label operations are conducted through state-licensed companies and our credit card banks. The Bank is chartered by the Office of Thrift Supervision ("OTS") and is a member of the Federal Home Loan Bank System. It is subject to examination and supervision by the OTS and the Federal Deposit Insurance Corporation ("FDIC"). It is also subject to federal regulations concerning its general investment authority as well as its ability to acquire financial institutions, enter into transactions with affiliates and pay dividends. Such regulations also govern the permissible activities and investments of its subsidiaries. It is also subject to regulatory requirements setting forth minimum capital and liquidity levels. Because of our ownership of the Bank, Household is a savings and loan holding company subject to reporting and other regulations of the OTS. Household and HFC have agreed with the OTS to maintain the regulatory capital of the Bank at certain specified levels. Our national credit card banks are chartered by the Comptroller of the Currency and are members of the Federal Reserve System. The deposit accounts of these national banks are insured up to $100,000 by the FDIC. National banks are generally subject to the same type of regulatory supervision and restrictions as the Bank, but our national banks only engage in credit card operations. The Bank and our credit card banks are also subject to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). Among other things, FDICIA creates a five-tiered system of capital measurement for regulatory purposes, places limits on the ability of depository institutions to acquire brokered deposits, and gives broad powers to federal banking regulators, in particular the FDIC, to require undercapitalized institutions to adopt and implement a capital restoration plan and to restrict or prohibit a number of activities, including the payment of cash dividends, which may impair or threaten the capital adequacy of the insured depository institution. Federal banking regulators may apply corrective measures to an insured depository institution, even if it is adequately capitalized, if such institution is determined to be operating in an unsafe or unsound condition or engaging in an unsafe or unsound activity. In addition, federal banking regulatory agencies have recently adopted safety and soundness standards governing operational and managerial activities of insured depository institutions and their holding companies regarding internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation. Under FIRREA, the FDIC may assess an affiliated insured depository institution for the estimated losses incurred by the FDIC upon the default of any affiliated insured institution. On February 10, 1999, four federal bank regulatory agencies revised its joint "retail credit classification policy" which establishes guidelines for classification of credit based on delinquency status and 6 mandates specified timeframes for recognizing losses in consumer loan portfolios. This policy will apply to any consumer loan held in our credit card banks or the Bank and will become effective in stages beginning April 1, 1999. Substantially all of the policy changes impacting our credit card banks or the Bank will become effective October 1, 2000. We expect to adopt the changes to the policy on October 1, 2000 and have not yet quantified its impact on our financial statements. Our credit insurance business is subject to regulatory supervision under the laws of the states in which it operates. Regulations vary from state to state but generally cover licensing of insurance companies, premium and loss rates, dividend restrictions, types of insurance that may be sold, permissible investments, policy reserve requirements, and insurance marketing practices. Competition. The consumer financial services industry in which we operate is highly fragmented and intensely competitive. We generally compete with banks, thrifts and other financial institutions in the United States, Canada and the United Kingdom. One of the industry challenges and opportunities we face is the recent consolidation in the financial services industry. We can use our centralized underwriting, collection and processing functions to adapt our credit standards and collection efforts to market conditions. This capability was leveraged to the Beneficial branch network as the Beneficial branches were integrated with HFC's in 1998. Our use of highly automated systems and processing facilities to support our underwriting, loan administration and collection functions across all of our consumer businesses assists us in this regard. A centralized collection system for past due accounts is augmented by early collection efforts in the consumer finance branch network for products other than credit cards. Maximizing our technology and otherwise streamlining our operations and reducing our costs has allowed us to improve our efficiency through specialization and economies of scale and allows us to operate more efficiently than some of our competitors. We also compete with other finance companies, banks, savings and loan companies, credit unions and retailers, by offering a variety of consumer products, maintaining a strong service orientation and developing innovative marketing programs. 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 and currency fluctuations; . our ability and the ability of our key service providers, vendors or suppliers to replace, modify or upgrade our business systems to adequately address Year 2000 issues; . consumer perception of the availability of credit, including price competition in the market segments we target and the ramifications of filing for personal bankruptcy; . the effectiveness of models or programs to predict loan delinquency or loss and initiatives to improve collections in all business areas; . consumer acceptance and demand for our loan products; . inability to continue to integrate systems, operational functions and cultures of Beneficial with those of Household; and . the repositioning of our MasterCard/Visa business to successfully market to selected consumer segments. 7 Item 2. Properties. Our operations are located throughout the United States, in 10 provinces in Canada and in the United Kingdom with principal facilities located in Anaheim, California; Wilmington, Delaware; Jacksonville, Florida; Tampa, Florida; Chesapeake, Virginia; Virginia Beach, Virginia; Elmhurst, Illinois; Hanover, Maryland; Bridgewater, New Jersey; Las Vegas, Nevada; Pomona, California; Prospect Heights, Illinois; Salinas, California; San Diego, California; Wood Dale, Illinois; North York, Ontario, Canada; Birmingham, United Kingdom and Windsor, Berkshire, United Kingdom. Substantially all branch offices, divisional offices, corporate offices, regional processing and regional servicing center space is operated under lease with the exception of the headquarters building for our United Kingdom operations, our processing facility in Tampa, Florida and a credit card processing facility in Las Vegas, Nevada. We believe that such properties are in good condition and 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, including product liability related claims, resulting from ordinary business activities relating to our current and/or former operations. Certain of these actions are or purport to be class actions seeking damages in very large amounts. Due to the uncertainties in litigation and other factors, we cannot assure you that we will ultimately prevail in each instance. We believe that we have meritorious defenses to these actions and any adverse decision should not materially affect our consolidated financial condition. During the past several years, the press has widely reported certain industry related concerns which may impact us. Some of these involve the amount of litigation instituted against finance and insurance companies operating in the state of Alabama and the large punitive awards obtained from juries in that state. Like other companies in this industry, some of our subsidiaries are involved in a number of lawsuits pending against them in Alabama, many of which relate to the financing of satellite television broadcast receivers. We discontinued financing such receivers in 1995. The Alabama cases generally allege inadequate disclosure or misrepresentation of financing terms. In many suits, other parties are also named as defendants. Unspecified compensatory and punitive damages are sought. Several of these suits purport to be class actions. The judicial climate in Alabama is such that the outcome of all of these cases is unpredictable. Although our subsidiaries believe they 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 our 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 early 1999, a basis for settlement with the IRS was reached and filed with the U.S. Tax Court. It is expected that this settlement will be finalized in 1999 and will not result in any loss or charge to us in excess of the amounts accrued for this matter by Beneficial. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. As of March 17, 1999 there were 20,492 record shareholders of Household's common stock. 8 Additional information required by this Item is incorporated by reference to pages 41 and 77 of our 1998 Annual Report. Item 6. Selected Financial Data. Information required by this Item is incorporated by reference to page 18 of our 1998 Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information required by this Item is incorporated by reference to pages 20 through 40 of our 1998 Annual Report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Information required by this Item is incorporated by reference to pages 30, 31, 33 and 34 of our 1998 Annual Report. Item 8. Financial Statements and Supplementary Data. Our Financial Statements meet the requirements of Regulation S-X. Such Financial Statements and supplementary financial information specified by Item 302 of Regulation S-K, are incorporated by reference to pages 41 through 73 and page 75 of our 1998 Annual Report. 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. Executive Officers of the Registrant. The following information on our executive officers is included pursuant to Item 401(b) of Regulation S-K. William F. Aldinger, age 51, joined Household in September 1994, as President and Chief Executive Officer. In May 1996 he was appointed our Chairman and Chief Executive Officer. Mr. Aldinger served as Vice Chairman of Wells Fargo Bank and a Director of several Wells Fargo subsidiaries from 1986 until joining us. Mr. Aldinger is also a director of Household Finance Corporation (one of our subsidiaries), Illinois Tool Works Inc. and MasterCard International, Incorporated. Lawrence N. Bangs, age 62, was appointed Group Executive--Private Label, United Kingdom, Canada, Insurance, Auto Finance and U.S. Consumer Banking in 1995. Since joining Household Finance Corporation in 1959, Mr. Bangs has served in various capacities in our U.S. consumer finance and United Kingdom operations, most recently as Managing Director and Chief Executive Officer of our United Kingdom operations. Gary D. Gilmer, age 49, was appointed Group Executive--U.S. Consumer Finance in 1998. Since joining Household Finance Corporation in 1972, Mr. Gilmer has served in various capacities in our consumer banking, private label and life insurance businesses, most recently as Managing Director and Chief Executive Officer of our United Kingdom operations. Siddarth N. Mehta, age 40, joined Household in June 1998, as Group Executive--U.S. BankCard. Prior to joining Household, Mr. Mehta was Senior Vice President of Boston Consulting Group in Los Angeles and co-leader of Boston Consulting Group Financial Services Practice in the United States. 9 David A. Schoenholz, age 47, was appointed Executive Vice President--Chief Financial Officer in 1996, having previously served as Senior Vice President-- Chief Financial Officer since 1994, Vice President--Chief Accounting Officer since 1993, Vice President since 1989 and Controller since 1987. He joined Household in 1985 as Director--Internal Audit. Colin P. Kelly, age 56, was appointed Senior Vice President--Human Resources in 1996, having previously served as Vice President--Human Resources since 1988. Mr. Kelly joined Household Finance Corporation in 1965 and has served in various management positions. Kenneth H. Robin, age 52, was appointed Corporate Secretary in 1998 and Senior Vice President--General Counsel in 1996, having previously served as Vice President--General Counsel since 1993. He joined Household in 1989 as Assistant General Counsel--Financial Services. Prior to joining Household, Mr. Robin held various positions in the legal departments of Citicorp and Citibank, N.A. from 1977 to 1989. Edgar D. Ancona, age 46, was appointed Managing Director--Treasurer in 1996, having previously served as Vice President--Treasurer since joining Household in 1994. For the previous 17 years he held a variety of treasury and operational positions with Citicorp. John W. Blenke, age 43, was appointed Vice President--Corporate Law and Assistant Secretary in 1996, having previously served as Assistant General Counsel and Secretary since 1993, and Assistant General Counsel--Securities and Corporate Law and Assistant Secretary since 1991. Mr. Blenke joined Household in 1989 as Corporate Finance Counsel. Michael A. DeLuca, age 50, was appointed Managing Director--Taxes in 1996, having previously served as Vice President--Taxes from 1988 to 1996. Mr. DeLuca joined Household in 1985 as Director of Tax Planning and Tax Counsel. Kenneth H. Harvey, age 38, was appointed Managing Director--Chief Information Officer in 1999, having previously served in various systems and technology areas since joining us in 1989. Steven L. McDonald, age 38, was appointed Managing Director and Corporate Controller in 1999 having previously served as Vice President--Controller since 1996. From 1991 until joining Household in 1996, he was Senior Vice President--Accounting and Finance of First USA, Inc. Craig A. Streem, age 49, joined Household in 1996 as Vice President-- Investor Relations. Prior to joining Household, he was Corporate Vice President and Director of Investor Relations of PaineWebber Group, Inc., from 1995 to 1996, Vice President of Investor Relations and Corporate Secretary of National Media Corporation from 1992 to 1994, and held various positions in the investor relations, corporate treasury and corporate accounting and reporting areas of American Express Company from 1979 to 1992. There are no family relationships among our executive officers. The term of office of each executive officer is at the discretion of the Board of Directors. Additional information required by this Item is incorporated by reference to "Nominees For Director" and "Shares of Household Stock Beneficially Owned by Directors and Executive Officers" in our definitive Proxy Statement for our 1999 Annual Meeting of Stockholders scheduled to be held May 12, 1999 (the "1999 Proxy Statement"). Item 11. Executive Compensation. Information required by this Item is incorporated by reference to "Executive Compensation", "Report of the Compensation Committee on Executive Compensation", "Performance of Household", "Employment Agreements", "Savings-- Stock Ownership and Pension Plans", "Incentive and Stock Option Plans", and "Director Compensation" in our 1999 Proxy Statement. 10 Item 12. Security Ownership of Certain Beneficial Owners and Management. Information required by this Item is incorporated by reference to "Shares of Household Stock Beneficially Owned by Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in our 1999 Proxy Statement. Item 13. Certain Relationships and Related Transactions. Information required by this Item is incorporated by reference to "Incentive and Stock Option Plans" and "Consulting Agreements with Messrs. Farris and Gilliam" in our 1999 Proxy Statement. PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Financial Statements. The consolidated financial statements listed below, together with an opinion of Arthur Andersen LLP, dated January 20, 1999, with respect thereto, are incorporated by reference herein pursuant to Item 8. Financial Statements and Supplementary Data of this Form 10-K. An opinion of Arthur Andersen LLP is also included in this Annual Report on Form 10-K. Household International, Inc. and Subsidiaries: Consolidated Statements of Income for the Three Years Ended December 31, 1998. Consolidated Balance Sheets, December 31, 1998 and 1997. Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1998. Consolidated Statements of Changes in Preferred Stock and Common Shareholders' Equity for the Three Years Ended December 31, 1998. Notes to Consolidated Financial Statements. Report of Independent Public Accountants. Selected Quarterly Financial Data (Unaudited). (b) Reports on Form 8-K. Household did not file any Current Report on Form 8-K during the three months ended December 31, 1998. (c) Exhibits. 3(i) Restated Certificate of Incorporation of Household International, Inc. as amended (incorporated by reference to Exhibit 3(i) of our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3(ii) Bylaws of Household International, Inc. as amended June 4, 1998 (incorporated by reference to Exhibit 3(ii) of our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 4(a) Rights Agreement dated as of July 9, 1996, between Household International, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K dated July 9, 1996). 4(b) Standard Multiple-Series Indenture Provisions for Senior Debt Securities of Household Finance Corporation dated as of June 1, 1992 (incorporated by reference to Exhibit 4(b) to the Registration Statement on Form S-3 of Household Finance Corporation, No. 33-48854).
11 4(c) Indenture dated as of December 1, 1993 for Senior Debt Securities between Household Finance Corporation and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4(b) to the Registration Statement on Form S-3 of Household Finance Corporation, No. 33-55561). 4(d) The principal amount of debt outstanding under each other instrument defining the rights of holders of our long-term senior and senior subordinated debt does not exceed 10 percent of our total assets. Household agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each instrument defining the rights of holders of our long-term senior and senior subordinated debt. 10.1 Household International, Inc. Key 1998 Executive Bonus Plan (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.2 Household International, Inc. Corporate Executive Bonus Plan. 10.3 Household International, Inc. Long-Term Executive Incentive Compensation Plan, as amended (incorporated by reference to Exhibit 10.3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.4 Forms of stock option and restricted stock rights agreements under the Household International, Inc. Long-Term Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.4 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.5 Household International, Inc. 1996 Long-Term Executive Incentive Compensation Plan, as amended. 10.6 Forms of stock option and restricted stock rights agreements under the Household International, Inc. 1996 Long-Term Executive Incentive Compensation Plan. 10.7 Household International, Inc. Deferred Fee Plan for Directors (incorporated by reference to Exhibit 10.7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.8 Household International, Inc. Deferred Phantom Stock Plan for Directors (incorporated by reference to Exhibit 10.8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.9 Household International, Inc. Non-Qualified Deferred Compensation Plan for Executives, as amended. 10.10 Executive Employment Agreement between Household International, Inc. and W.F. Aldinger. 10.11 Executive Employment Agreement between Household International, Inc. and L.N. Bangs. 10.12 Executive Employment Agreement between Household International, Inc. and G.D. Gilmer. 10.13 Executive Employment Agreement between Household International, Inc. and D.A. Schoenholz. 10.14 Executive Employment Agreement between Household International, Inc. and S.N. Mehta. 10.15 Amended and Restated Supplemental Executive Retirement Plan for W.F. Aldinger. 10.16 Beneficial Corporation 1990 Non-qualified Stock Option Plan (incorporated by reference to Exhibit 4.4 of Beneficial Corporation's Form S-8 filed on April 23, 1996, File No. 333- 02737). 10.17 Amendment to Beneficial Corporation 1990 Non-qualified Stock Option Plan (incorporated by reference to Exhibit 4.2 of Beneficial Corporation's Form S-8 filed July 1, 1998, File No. 333-58291). 11 Statement of Computation of Earnings per Share.
12 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 13 Material incorporated by reference to Household International, Inc.'s 1998 Annual Report to Shareholders. 21 List of our subsidiaries. 23 Consent of Arthur Andersen LLP, Certified Public Accountants. 24 Power of Attorney, included on page 14 hereof. 27 Financial Data Schedule. 99(a) Annual Report on Form 11-K for the Household International, Inc. Tax Reduction Investment Plan (to be filed by amendment). 99(b) Ratings of Household International, Inc. and its significant subsidiaries.
We will furnish copies of the exhibits referred to above to our stockholders upon receiving a written request therefor. We charge fifteen cents per page for providing these copies. Requests should be made to Household International, Inc., 2700 Sanders Road, Prospect Heights, Illinois 60070, Attention: Corporate Secretary. (d) Schedules. Report of Independent Public Accountants. I--Condensed Financial Information of Registrant. 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Household International, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Household International, Inc. Dated: March 30, 1999 /s/ W.F. Aldinger By:__________________________________ W.F. Aldinger, Chairman and Chief Executive Officer Each person whose signature appears below constitutes and appoints J.W. Blenke, L.S. Mattenson and P.D. Schwartz and each or any of them (with full power to act alone), as his/her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him/her in his/her name, place and stead, in any and all capacities, to sign this Form 10-K and any and all amendments to this Form 10-K and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorneys-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or their substitutes may lawfully do or cause to be done by virtue hereof. 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 International, Inc. and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ W.F. Aldinger Chairman and Chief Executive ____________________________________ Officer and Director (as (W.F. Aldinger) principal executive officer) /s/ R.C. Clark Director ____________________________________ (R.C. Clark) /s/ R.J. Darnall Director ____________________________________ (R.J. Darnall) /s/ G.G. Dillon Director March 30, 1999 ____________________________________ (G.G. Dillon) /s/ J.A. Edwardson Director ____________________________________ (J.A. Edwardson) /s/ M.J. Evans Director ____________________________________ (M.J. Evans) /s/ D.J. Farris Director ____________________________________ (D.J. Farris)
14
Signature Title Date --------- ----- ---- /s/ J.D. Fishburn Director ____________________________________ (J.D. Fishburn) /s/ C.F. Freidheim, Jr. Director ____________________________________ (C.F. Freidheim, Jr.) /s/ J.H. Gilliam, Jr. Director ____________________________________ (J.H. Gilliam, Jr.) /s/ L.E. Levy Director ____________________________________ (L.E. Levy) /s/ G.A. Lorch Director ____________________________________ (G.A. Lorch) /s/ J.D. Nichols Director March 30, 1999 ____________________________________ (J.D. Nichols) /s/ J.B. Pitblado Director ____________________________________ (J.B. Pitblado) /s/ S.J. Stewart Director ____________________________________ (S.J. Stewart) /s/ L.W. Sullivan, M.D. Director ____________________________________ (L.W. Sullivan, M.D.) /s/ D.A. Schoenholz Executive Vice President-- ____________________________________ Chief Financial Officer (D.A. Schoenholz) (also the principal financial and accounting officer)
15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Household International, Inc.: We have audited in accordance with generally accepted auditing standards, the financial statements included in Household International, Inc.'s 1998 annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 20, 1999. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14(d) is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP /s/ Arthur Andersen LLP Chicago, Illinois January 20, 1999 F-1 SCHEDULE I HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME (In millions)
Year ended December 31 -------------------- 1998 1997 1996 ------ ------ ------ Equity in earnings of subsidiaries........................ $546.3 $970.9 $877.1 Other income.............................................. 24.6 26.3 24.4 ------ ------ ------ Total income.......................................... 570.9 997.2 901.5 ------ ------ ------ Expenses: Administrative.......................................... 49.2 59.0 99.1 Interest................................................ 45.2 37.9 28.9 ------ ------ ------ Total expenses........................................ 94.4 96.9 128.0 ------ ------ ------ Income before income tax benefit.......................... 476.5 900.3 773.5 Income tax benefit........................................ 47.6 40.0 46.1 ------ ------ ------ Net income............................................ $524.1 $940.3 $819.6 ====== ====== ====== Total comprehensive income............................ $546.7 $955.0 $698.0 ====== ====== ======
See accompanying note to condensed financial statements. F-2 SCHEDULE I (continued) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (In millions)
December 31 ----------------- 1998 1997 -------- -------- Assets Cash....................................................... $ 2.1 $ 2.1 Investments in and advances to (from) subsidiaries......... 7,142.2 7,015.7 Other assets............................................... 473.7 412.9 -------- -------- Total assets............................................... $7,618.0 $7,430.7 ======== ======== Liabilities and shareholders' equity Commercial paper........................................... $ 315.6 $ 281.5 Senior debt (with original maturities over one year)....... 189.7 189.7 -------- -------- Total debt................................................. 505.3 471.2 Other liabilities.......................................... 351.9 346.0 -------- -------- Total liabilities.......................................... 857.2 817.2 Company obligated mandatorily redeemable preferred securities of subsidiary trusts*.......................... 375.0 175.0 Preferred stock............................................ 164.4 264.5 Common shareholders' equity................................ 6,221.4 6,174.0 -------- -------- Total liabilities and shareholders' equity................. $7,618.0 $7,430.7 ======== ========
- -------- *The sole assets of the three trusts are Junior Subordinated Deferrable Interest Notes issued by Household International, Inc. in March 1998, June 1996 and June 1995, bearing interest at 7.25, 8.70 and 8.25 percent, respectively, with principal balances of $206.2, $103.1 and $77.3 million, respectively, and due December 31, 2037, June 30, 2036 and June 30, 2025, respectively. See accompanying note to condensed financial statements. F-3 SCHEDULE I (continued) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (In millions)
Year ended December 31 ---------------------------- 1998 1997 1996 -------- --------- ------- Cash provided by (used in) operations Net income..................................... $ 524.1 $ 940.3 $ 819.6 Adjustments to reconcile net income to net cash provided by (used in) operations: Equity in earnings of subsidiaries........... (546.3) (970.9) (877.1) Other operating activities................... 193.8 53.5 367.1 -------- --------- ------- Cash provided by operations...................... 171.6 22.9 309.6 -------- --------- ------- Investment in Operations Dividends from subsidiaries.................... 1,067.3 313.1 265.0 Dividends from pooled affiliate................ 75.4 200.7 110.5 Investment in and advances to (from) subsidiaries, net............................. (709.3) (1,047.7) (322.0) Other investing activities..................... 1.9 2.1 (9.4) -------- --------- ------- Cash increase (decrease) from investment in operations...................................... 435.3 (531.8) 44.1 -------- --------- ------- Financing and Capital Transactions Net increase (decrease) in commercial paper and bank borrowings............................... 34.1 78.2 (83.2) Retirement of senior debt...................... -- (100.0) (150.0) Issuance of senior debt........................ -- 100.0 89.9 Shareholders' dividends........................ (256.5) (186.5) (163.6) Shareholders' dividends--pooled affiliate...... (61.8) (115.5) (105.3) Issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts........................................ 200.0 -- 100.0 Purchase of treasury stock..................... (412.0) (155.7) (56.7) Treasury stock activity--pooled affiliate...... (11.4) (80.0) -- Issuance of common stock....................... 0.8 1,023.8 16.6 Redemption of preferred stock.................. (100.1) (55.0) -- -------- --------- ------- Cash increase (decrease) from financing and capital transactions............................ (606.9) 509.3 (352.3) -------- --------- ------- Increase in cash................................. -- 0.4 1.4 Cash at January 1................................ 2.1 1.7 0.3 -------- --------- ------- Cash at December 31.............................. $ 2.1 $ 2.1 $ 1.7 ======== ========= =======
See accompanying note to condensed financial statements. F-4 SCHEDULE I (continued) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTE TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT The condensed financial statements of Household International, Inc. have been prepared on a parent company unconsolidated basis. Under an agreement with the Office of Thrift Supervision, Household will maintain the capital of the Bank at a level consistent with certain minimum capital requirements. Household received cash dividends from the Bank of $75, $50 and $265 million in 1998, 1997 and 1996, respectively. Household has guaranteed payment of all long-term debt obligations of Household Financial Corporation Limited ("HFCL"), a Canadian subsidiary. The amount of guaranteed debt outstanding at HFCL on December 31, 1998 and 1997 was $575 and $749 million, respectively. Household has also guaranteed payment of all debt obligations (excluding certain deposits) of Household International (U.K.) Limited ("HIUK"). The amount of guaranteed debt outstanding at HIUK on December 31, 1998 and 1997 was approximately $3.1 and $1.6 billion, respectively. F-5 EXHIBIT INDEX
Exhibit No. Description ------- ----------- 3(i) Restated Certificate of Incorporation of Household International, Inc. as amended (incorporated by reference to Exhibit 3(i) of our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3(ii) Bylaws of Household International, Inc. as amended June 4, 1998 (incorporated by reference to Exhibit 3(ii) of our Quarterly Report on Form 10-Q for the quarter year ended June 30, 1998.). 4(a) Rights Agreement dated as of July 9, 1996, between Household International, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K dated July 9, 1996). 4(b) Standard Multiple-Series Indenture Provisions for Senior Debt Securities of Household Finance Corporation dated as of June 1, 1992 (incorporated by reference to Exhibit 4(b) to the Registration Statement on Form S-3 of Household Finance Corporation, No. 33-48854). 4(c) Indenture dated as of December 1, 1993 for Senior Debt Securities between Household Finance Corporation and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4(b) to the Registration Statement on Form S-3 of Household Finance Corporation, No. 33-55561). 4(d) The principal amount of debt outstanding under each other instrument defining the rights of holders of our long-term senior and senior subordinated debt does not exceed 10 percent of our total assets. Household agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each instrument defining the rights of holders of our long- term senior and senior subordinated debt. 10.1 Household International, Inc. 1998 Key Executive Bonus Plan (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.2 Household International, Inc. Corporate Executive Bonus Plan. 10.3 Household International, Inc. Long-Term Executive Incentive Compensation Plan, as amended (incorporated by reference to Exhibit 10.3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.4 Forms of stock option and restricted stock rights agreements under the Household International, Inc. Long-Term Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.4 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.5 Household International, Inc. 1996 Long-Term Executive Incentive Compensation Plan, as amended. 10.6 Forms of stock option and restricted stock rights agreements under the Household International, Inc. 1996 Long-Term Executive Incentive Compensation Plan. 10.7 Household International, Inc. Deferred Fee Plan for Directors (incorporated by reference to Exhibit 10.7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.8 Household International, Inc. Deferred Phantom Stock Plan for Directors (incorporated by reference to Exhibit 10.8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.9 Household International, Inc. Non-Qualified Deferred Compensation Plan for Executives, as amended. 10.10 Executive Employment Agreement between Household International, Inc. and W. F. Aldinger. 10.11 Executive Employment Agreement between Household International, Inc. and L. N. Bangs. 10.12 Executive Employment Agreement between Household International, Inc. and G. D. Gilmer.
Exhibit No. Description ------- ----------- 10.13 Executive Employment Agreement between Household International, Inc. and D. A. Schoenholz. 10.14 Executive Employment Agreement between Household International, Inc. and S. N. Mehta. 10.15 Amended and Restated Supplemental Executive Retirement Plan for W. F. Aldinger. 10.16 Beneficial Corporation 1990 Non-qualified Stock Option Plan (incorporated by reference to Exhibit 4.4 of Beneficial Corporations Form S-8 filed on April 23, 1996, File No. 333- 02737). 10.17 Amendment to Beneficial Corporation 1990 Non-qualified Stock Option Plan (incorporated by reference to Exhibit 4.2 of Beneficial Corporation's Form S-8 filed July 1, 1998, File No. 333-58291). 11 Statement of Computation of Earnings per Share. 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 13 Material incorporated by reference to Household International, Inc.'s 1998 Annual Report to Shareholders. 21 List of our subsidiaries. 23 Consent of Arthur Andersen LLP, Certified Public Accountants. 24 Power of Attorney, included on page 14 hereof. 27 Financial Data Schedule. 99(a) Annual Report on Form 11-K for the Household International, Inc. Tax Reduction Investment Plan (to be filed by amendment). 99(b) Ratings of Household International, Inc. and its significant subsidiaries.
EX-10.2 2 CORPORATE EXECUTIVE BONUS PLAN Exhibit 10.2 Household International Corporate Executive Bonus Plan 1998 Summary The Household International Executive Bonus Plan is a short-term, annual incentive plan. The purpose of the annual bonus is to place a significant part of pay at risk and reward executives for the achievements of individual, business unit and corporate financial and operational goals. Performance goals and award opportunities will be communicated to plan participants at the beginning of each calendar year. Participation Participation in the Plan will be restricted to key line and staff executives. For purposes of the Plan, participants will be divided into groups. (See attached list). Any changes in the group of executives participating in the Plan will be made by the Chief Executive Officer, subject to the approval of the Compensation Committee in the case of any participant whose base salary must be determined by the Committee. Level of Awards The corporate measurement of performance is company-wide earnings per share, return on equity, efficiency ratio, loan loss reserve to non-performing loans, core receivables growth, and equity to managed assets ratio. Household's performance will be measured against pre-established minimum, target and maximum levels. Individual performance is also measured and the percentage attributed to any particular performance objective varies by executive and may change from year- to-year as circumstances warrant. Management may reduce bonus awards in light of overall business conditions or other exceptional circumstances. Target/Maximum Awards Target awards will be paid for fully satisfactory financial and individual performance in a given year. The target award percentage for each group will approximate the guideline percentage shown below of the executive's base salary at the end of the plan year. Guideline % of Annual Base Salary Determined by
Group Target Bonus Maximum Bonus - --------------------------------------------------- A 100% 200% B 75% 125% C 62.5% 125% D 60% 90% E 50% 100% F 50% 80% G 40% 100% H 40k 80k I 40% 60% J 30% 60% K 30% 50% L 25% 50% M 20% 50% N 20% 40% O 20% 30%
Detailed information relating to the assignment and weighing of goals is available by individual and is maintained by the business unit and/or corporate. Determination of Awards - ----------------------- A. Financial Performance Awards A portion of each executive's annual bonus will be determined by meeting specific financial performance objectives. An award will be paid out if achieved results are at the pre-established minimum, target or maximum financial results levels. B. Individual Performance Awards Early in each plan year, goals for individual performance for that year will be established for each participant. The goals should require the level of performance which is expected of a fully satisfactory incumbent and must be agreed to by the immediate superior. The Compensation Committee of the Board of Directors must approve the goals for those executives whose salaries are determined by the Committee. These goals will be the primary criteria for measuring 2 individual performance and determining the individual performance portion of the bonus for that year. The Chief Executive Officer will recommend the awards for participants, excluding himself, whose salaries are determined by the Compensation Committee of the Board of Directors. The Compensation Committee will then determine the awards for all such participants, as well as the award for the Chief Executive Officer. The Chief Executive Officer, will determine the awards for all participants whose salaries are not determined by the Compensation Committee. The CEO's direct reports, in consultation with their appropriate subordinates, will recommend to the Chief Executive Officer the awards for all other participants. Payment of Awards Awards will be paid as soon as practical at the end of the plan period, subject to all required tax withholdings. Awards may be paid in cash, shares of Household common stock, or some combination thereof. Neither eligible participation in the plan, nor award payments thereunder shall guarantee an employee, any right to continued employment. The plan does not give any employee right or claim to an award under the program. Management reserves the right to change or discontinue the plan at any time. Administrative Matters A. Promotions/New Plan Participants Normally awards will be pro-rated according to the portion of the plan year that an incumbent is eligible for the bonus. B. Effect on Benefits Payments made under this plan shall be included in an employee's income for purposes of determining pension benefits, life insurance, long-term disability, and participation in the TRIP plan. C. Termination of Employment Normally awards will be pro-rated in the case of death, permanent and total disability, or retirement under one of the Corporation's pension plans during a plan year. If a participant terminates employment for any other reason prior to the last working day of a plan year, he will normally forfeit any right to an award for the plan year. 3 The Goal Setting Process Before the beginning of the plan year, the manager and subordinate will meet in a goal setting session. The purpose of the session is to discuss areas where goals will be established and agree on their priority and establish the number of points that will be earned based upon various levels of achievement during the plan period. Preparation for the Goal Setting Meeting To prepare for the goal setting session with the bonus eligible subordinate, the manager should have a clear idea of function or department goals and objectives for the plan year, priorities for the subordinate's unit or area, and three or four possible objectives to suggest as appropriate. During the session, the manager's role will be to direct the discussion and ensure that its results are jointly understood. The subordinate will prepare for the session by establishing a list of priorities for the unit or area during the plan year, and developing four to eight potential goals for discussion. The subordinate's role during the session will be to actively discuss goals and expected levels of achievement with the manager in order to ensure that the final agreement is realistic and achievable and that there is a clear understanding of expected performance and the amount of bonus associated with various levels of achievement. Guidelines for Setting Goals For the purpose of establishing goals for the plan year, the following criteria should apply: . They should be consistent and supportive of goals reflected in the Company's strategic business plans. . They should be primarily job or task oriented. They must be realistic and achievable yet challenging with built in "stretch" to test individual capabilities. They should clearly specify action, tasks or results to be accomplished as well as a clear understanding of how the accomplishment will be evaluated. . They must be understood and agreed to by both the manager and the subordinate. Setting goals for staff positions is somewhat more difficult than for line-type positions because staff performance is usually not measured numerically and rarely lends itself to quantitative measurement. Staff responsibilities tend to be contributory, interpretive and are more easily measured qualitatively. Frequently, the goals may include completion of specific projects. Non- quantitative goals should clearly state the criteria that will be used for evaluating successful achievement. The results of the goal setting process will be documented in the format of the Executive Bonus Plan Goal Setting Form and approved by the appropriate level of management. 4 CORPORATE EXECUTIVE BONUS PLAN POSITIONS GROUP/TITLE Group A - 100%/200% - ------------------- Managing Director-Specialty Finance HFC Regional General Manager Group B - 75%/125% - ------------------ Chief Operating Officer-HAF Director-Strategic Initiatives-HAF Managing Director-HAF Group C - 62.5%/125% - -------------------- VP-Consumer Collections VP-Collections Group D - 60%/90% - ----------------- VP Chief Credit Officer Group E - 50%/100% - ------------------ Director Personal Banking Division General Manager Group Director-Sales & Marketing Group Director Taxmasters Group VP-Indirect Lending, GMJV Managing Director-Lending National Director of Sales-Canada SVP-Director of Sales-HRSI VP Household Recovery Services Group F - 50%/80% - ----------------- SVP-Portfolio Marketing SVP-Real Estate Asset Management VP-Corporate Finance Group G - 40%/100% - ------------------ Director HFC Wholesale-Sales Group H - 40k/80k - ----------------- Director-HRSC Collections VP External Collections HRSC Group I - 40%/60% - ----------------- Assistant General Counsel-Litigation Chief Financial Officer-HFC Chief Financial Officer-HRSI Group Director-Risk Control Group General Counsel Managing Director-Canada Managing Director-CEO HRS USA Managing Director-HIG Managing Director-HRSI Managing Director-Networked Systems Managing Director CEO-HB FSB 5 Group I 40%/60% (continued) - --------------------------- Managing Director-Applications Systems Managing Director-Operations VP-Applications Systems VP-Corporate Law & Assistant Secretary VP-Corporate Controller-HI VP-Government Relations VP-Taxes VP-Treasurer Group J - 30%/60% - ----------------- Director Client Relations National Director-Sales MRSL Special Project Consultant VP-Director of Sales-HRSI Group K - 30%/50% - ----------------- Director-Retail & Affinity - UK Director-Sales & Credit Administration Director-Fraud/Operations Director of Operations UK General Counsel Group Director-Business Planning Group Director-HCS Marketing Managing Director/CFO Managing Director-Marketing National Director Customer Service President-Equipment Finance Division+C25 VP-Audit VP-Chief Collection Officer VP-Investor Relations VP-Management Reporting & Analysis VP-Strategy & Development VP Credit Risk Group L - 25%/50% - ----------------- Director-Marketing Director-Sales SVP Sales, Operations & Compliance VP Client Services/Operations Group M - 20%/50% - ----------------- Director-Credit Policy Administration Director-Business Analysis Director-Credit Analysis Director-Customer Care Director-Risk Control Director-Risk Management Group Director-Risk Management Group Director-Pricing & Profit & Risk Management VP Chief Credit Officer 6 Group N - 20%/40% - ----------------- Assistant General Counsel-Employee Relations Assistant General Counsel & Corporate Secretary Director-Item Processing Director-Credit Risk Director-Financial Control Director-Operations General Counsel Group Director-Human Resources-HRS USA National Director HR - HCS Vice President-HR HFC VP-Chief Financial Officer-HTS VP-Compensation & HR Administration VP-Facilities Management VP-Human Resources-HTS VP-Networked Systems VP Data Center Operations Group Director-Human Resources-HRS USA National Director HR - HCS Vice President-HR HFC VP-Chief Financial Officer-HTS VP-Compensation & HR Administration VP-Facilities Management VP-Human Resources-HTS VP-Networked Systems VP Data Center Operations Group O - 20%/30% - ----------------- CFO Financial Control Chief Financial Officer-HAF Controller-HCS Controller-HRSI Director-Accounting Research & Policy Director-Asset Backed Financing Director-Communication & Distributed Services Director-External Reporting & Corporate Accounting Director-Federal & State Tax Compliance Director-HCS Marketing Director-Information Technology Director-Investor Analysis & Merchant Control+C156 Director-Operations Support Director-Processing Services-Canada Director-Sales Management Reporting+C105 & Analysis Director-Strategy & Development Director-Wholesale Acquisition Director-Actuarial & Regulatory Reporting Director-ALM Director-Business Systems Director-Business Treasury Director-Commercial Credit Director-Consumer Services Director-Corporate Security Management Director-Corporate Purchasing Director-Credit Risk Director-Customer Relations 7 Group O - 20%/30% (continued) - ----------------------------- Director-Data Administration Director-Federal Tax Audit Director-Financial Control Director-Financial Data Management Director-Government & Regulatory Issues Director-Government Relations Director-HCS Marketing Director-Human Resources Director-Human Resources-HFCPS Director-Integration Director-Investor Relations Director-Item Processing Director-Law & Compliance Director-Marketing Director-Merchant Funding Director-Management Rptg & Analysis Director-Operations Services Director-Plng & Bus Intelligence Director-Property Management Director-Regulatory Reporting Director-Strategic Initiatives Director-Tax Plng & Tax Counsl Director-Technology & Planning Director-Telephone Services Director-Treasury & Trust Director Business Planning CWT Director Cash Operations Director Customer Service HRSI Director HCS Marketing Director Human Resources Group Director-Customer Svc & Col Wilmington Group Director-Operations & Credit Wilmington Special Project Consultant SVP Bank Mktg & Strategic Plng Treasury Controller VP- Lending VP-Benefits VP-Fin-Specialty Finance HFC VP-Finance & Administration VP-Govnt Rel & Public Affairs VP-Group Financial Controller VP-HFC Operation Support VP-Insurance & Risk Finance VP-Items Processing VP-Marketing VP-Money & Capital Markets VP-Portfolio Management VP-Quality Assurance-HTS VP-Speciality Finance VP-Strategic Initiatives VP-Training & Development VP Distributed Systems VP InterCorporate Risk 8 EX-10.5 3 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN Exhibit 10.5 HOUSEHOLD INTERNATIONAL 1996 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN (as amended December 1, 1998) 1. Purpose ------- The purpose of the Household International 1996 Long-Term Executive Incentive Compensation Plan (the "Plan") is to further the long-term growth of Household International, Inc. and its subsidiaries ("Household") by strengthening the ability of Household to attract and retain employees of outstanding ability, to provide an effective means for employees to acquire and maintain ownership of Household Common Stock, to motivate such employees to achieve long-range performance goals and objectives, and to provide incentive compensation opportunities competitive with those of other major corporations. Household senior executives, in particular, are charged with enhancing shareholder value and except under extraordinary circumstances, will only receive options under this Plan. The options, if granted, to Household senior executives will comprise a significant portion of their total annual compensation. In addition, the Plan provides for the issuance of options to purchase Household Common Stock to non-employee Directors of Household in order to facilitate ownership of Household Common Stock by Directors and to more fully align the interests of Household's Directors with that of its Common stockholders. 2. Administration -------------- The Plan shall be administered by the Compensation Committee of Household's Board of Directors (the "Committee"), a committee of the Board appointed from time to time by the Board consisting solely of two or more non-employee directors, each of whom shall be an "outside director" as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations thereunder and a "disinterested person" as defined in Rule 16b-3 under Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act"). The Committee shall have such powers to administer the Plan as are delegated to it by the Plan and the Board of Directors, including, to the extent permissible under the terms of the Plan, the power to interpret the Plan and any agreements executed thereunder, to prescribe rules and regulations relating to the Plan, to determine the terms, restrictions, and provisions of any agreement relating to awards granted pursuant to the Plan, and to make all other determinations necessary or advisable for administering the Plan. Except as required by Rule 16b-3 (or any successor Rule thereto) with respect to grants of awards to individuals who are subject to Section 16 of the Exchange Act or as otherwise required for -1- compliance with Rule 16b-3 or other applicable law, the Committee may delegate all or any part of its authority under the Plan to any officer of Household. All decisions made by the Committee, or (unless the Committee has specified an appeal process to the contrary) any other person to whom the Committee has delegated authority pursuant to the provisions hereof, shall be final and binding on all persons. 3. Grant of Awards; Shares Subject to Plan --------------------------------------- (a) The Committee may grant any type of award permitted under the terms of the Plan to employees (all such awards in the aggregate being hereinafter referred to as "Awards"). Employees of Household and its subsidiaries may be selected by the Committee for Awards under the Plan. In addition, non-employee Directors of Household will receive options pursuant to the provisions of Section 6. (b) The number of shares of Common Stock of Household that may be issued under the Plan is equal to the sum of the number of shares remaining available under the Household International Long-Term Executive Incentive Compensation Plan (the "1984 Plan") plus 12,000,000, all of which shares may be made subject to options. The shares issued pursuant to an Award may consist of authorized and unissued shares of Household's Common Stock, Common Stock held in Household's treasury or Common Stock purchased on the open market. If any Award granted under the Plan or the 1984 Plan shall terminate or lapse for any reason, any shares of Common Stock subject to such Award shall again be available for grant under the Plan. The maximum number of shares or share equivalents that may be granted through an Award to any one participant in one year is 1,200,000 shares. (c) In the event of corporate changes affecting Household's Common Stock, this Plan or Awards granted to employees and options granted to non-employee Directors hereunder (including, without limiting the generality of the foregoing, stock dividends, stock splits, recapitalizations, reorganizations, mergers, consolidations, or other relevant changes in capitalization), appropriate adjustments in price, number and kind of shares of Common Stock or other consideration subject to such Awards or in the terms of such Awards, shall be made so as to prevent dilution or enlargement of rights under the Awards. In addition, the aggregate number or remaining number or kind of shares which may be issued under the Plan will be adjusted to equitably reflect any such corporate changes. (d) The Committee may, in its discretion and subject to such rules as it may adopt, permit an employee to satisfy, in whole or in part, withholding tax obligations incurred in connection with Awards: (i) by electing to have Household -2- withhold shares of Household Common Stock (otherwise deliverable to the employee in connection with an Award) in payment for such withholding tax obligation or (ii) by delivering shares of Household Common Stock owned by such employee in payment for such withholding tax obligation. Any shares of Common Stock surrendered by an employee in full or partial payment of withholding tax obligations must have been held by such employee at least six months prior to the date such shares are surrendered in payment. (e) The Committee may provide that any Award to employees under the Plan earn dividend equivalents. Such dividend equivalents may be paid currently or may be credited to a participant's account, including during any deferral period. Any crediting of dividend equivalents may be subject to such restrictions and conditions as the Committee may establish, including reinvestment in additional shares or share equivalents. However, the payment of dividend equivalents will not be conditioned upon the employee exercising an option. (f) Except as may be provided in the agreement for any specific employee Award or otherwise limited in this Plan, the Committee may, in its sole discretion, in whole or in part, waive any restrictions or conditions applicable to, or accelerate the vesting of, any Award to an employee. (g) To the extent the Committee deems it necessary, appropriate or desirable to comply with foreign law or practice and to further the purpose of this Plan, the Committee may, without amending this Plan, (i) establish special rules applicable to Awards granted to employees who are foreign nationals, are employed outside the United States, or both, including rules that differ from those set forth in this Plan and (ii) grant Awards to such employees in accordance with those rules. 4. Employee Options ---------------- (a) The Committee may grant to employees any type of statutory or non- statutory option to purchase shares of Household Common Stock as is permitted by law at the time the option is granted. The term of the initial grant of each option shall not be more than ten years and one day from the date of grant and may be exercised at the rate set by the Committee or as stated herein; provided, however, that no option shall be exercised less than one year from the date of grant, except as provided herein. The Committee may, in its discretion, extend the expiration date of certain outstanding employee options, provided no expiration date of any option may exceed fifteen years from the date of the grant of that option. -3- (b) The per share purchase price of Household Common Stock which may be acquired pursuant to an employee option shall be at least 100% of the fair market value of one share of Common Stock of Household on the date on which the option is granted. Within this limitation, such price shall be determined by the Committee. (c) Payment for shares purchased upon the exercise of an employee option shall be made in cash or, in the discretion of the Committee, in shares of Common Stock of Household valued at the then fair market value of such shares or by a combination of cash and shares of Common Stock. Any shares of Common Stock surrendered by an employee in full or partial payment of the exercise price of an option must have been held by such employee at least six months prior to the date such shares are surrendered in payment. (d) The Committee may, in its discretion and subject to such rules as it may adopt, authorize an extension of credit from Household to an employee holding an option granted under this Plan (including an employee who is an officer or director of Household) to assist the employee in exercising the option. Household may extend or guarantee loans under this provision. Loans extended under the Plan will bear interest at a variable rate that is adjusted annually to equal the greater of the average annual rate for three-year U.S. Treasury notes for the calendar year immediately preceding the year in which the adjustment is to be made and the applicable rate in effect under Section 1274(d) of the Internal Revenue Code on the day the loan is made. Payment terms will be established by the Committee and may or may not require periodic payments of interest and/or principal. The term of loans will be established by the Committee, as well as provisions governing the acceleration of maturity upon termination of employment or default. Loans financed or guaranteed by Household will be secured by retention of the issued stock certificates by Household and execution of an agreement with respect to such shares. To the extent necessary to satisfy the provisions of Regulation G or another similar regulatory restriction, other security may be required by the Committee. 5. Transfer of Employee Options; Exercise of Employee Options Following Termination of Employment ---------------------------------------------------------- (a) Options may be exercised only by the employee and shall not be transferable other than by will or the laws of descent and distribution. These restrictions on transferability shall not apply to the extent (i) such restrictions are not at the time required for the Plan to continue to meet the requirements of Rule 16b-3 of the Exchange Act, or any successor Rule, (ii) the Committee has established rules concerning the transferability of employee options and (iii) the agreement relating to an Award so -4- specifies or the holder has received notice from the Office of the Secretary of Household that such restrictions are no longer applicable. If the holder of an option shall cease to be an employee of Household or a subsidiary, and unless otherwise provided by the Committee, all rights under such option shall immediately terminate, except: (i) in the event of termination of employment of a holder to which Section 11(b) hereof applies, or of a holder who is retirement-eligible under the terms of a pension plan of Household or a subsidiary, the option may be exercised within five years of the date of termination of employment or as otherwise provided in the agreement for the Award; (ii) in the event of termination of employment due to permanent and total disability, and the holder is not retirement-eligible under the terms of a pension plan of Household or a subsidiary, the option may be exercised within twelve months following the date of such termination of employment or as otherwise provided in the agreement for the Award; (iii) in the event of death during employment, the option may be exercised by the executor, administrator, or other personal representative of the holder within five years succeeding death if such holder was retirement-eligible under the terms of a pension plan of Household or a subsidiary, or twelve months if such holder was not retirement-eligible under the terms of a pension plan of Household or a subsidiary or as otherwise provided in the agreement for the Award; (iv) except in the event an employee is terminated for cause, following termination of employment other than as set forth in subsections (i), (ii) or (iii) above, the option may be exercised within three months following the date of termination, or prior to the expiration of the option, whichever period is shorter; or (v) in the event of death of a holder of an option following termination of employment, the option may be exercised by the executor, administrator, or other personal representative of the holder, notwithstanding the time period specified in (i), (ii), (iii) or (iv) above, within a) twelve months following death or b) the remainder of the period in which the holder was entitled to exercise the option, whichever period is longer. If the Committee determines that the termination is for cause, the option will not under any circumstances be exercisable following termination of employment. Notwithstanding the foregoing, in the case where the employee is a party to an -5- employment, termination protection or similar agreement with Household or a subsidiary which is in effect at the time of termination of employment that defines "cause" (or words of similar import), the Committee shall not determine such termination of employment to be for "cause" unless a "cause" termination would be permitted under such agreement at that time. (b) An option may not be exercised pursuant to this Section after the expiration of the term of such option and may be exercised only to the extent that the holder was entitled to exercise such option on the date of termination of employment. 6. Non-Employee Director Options ----------------------------- (a) Each non-employee Director of Household will be granted an option for 8,000 shares of Household Common Stock annually on the same date grants are made to employees. The Committee will have no discretion to select which non-employee Directors will be granted options or to determine the number of option shares, price, vesting schedule or any other term of the options granted to non-employee Directors. All options granted to non-employee Directors will be non-qualified stock options. (b) The per share purchase price of Common Stock which may be acquired pursuant to a non-employee Director option shall be 100% of the fair market value of one share of Common Stock on the date the option is granted. For purposes of establishing the fair market value of Household's Common Stock on any day under Section 6 of this Plan, such value shall be the average of the highest and lowest sales prices per share of the Common Stock as reported in the NYSE-Composite Transactions in The Wall Street Journal for such date. However, if the NYSE is not open for trading on a given day, the fair market value will be the average of the highest and lowest sales prices per share on the next succeeding business day. (c) Subject to Section 11 of this Plan, each option granted to a non- employee Director vests and shall be fully exercisable beginning six months from the date the option was granted. Each such option expires ten years and one day from the date of the grant. However, if a non-employee Director ceases to be a Director of Household, outstanding vested options are exercisable as follows: (i) in the event service on the Board of Directors terminates due to permanent and total disability, outstanding options may be exercised within twelve months following the date such service terminates or prior to the expiration of the outstanding options, whichever period is shorter; -6- (ii) in the event of death of a non-employee Director whether during service as a Director of Household or after ceasing such service, outstanding options may be exercised by the executor, administrator, or other personal representative of such Director within twelve months after the death of the Director or prior to the expiration of the outstanding options, whichever period is longer; (iii) in the event a non-employee Director's service on the Board of Directors terminates because such Director has reached the mandatory retirement age of 70 (or age 72 if a Director was serving on the Board as of January 1, 1989) or if a non-employee Director retires from the Board prior to reaching the mandatory retirement age but after having served on the Board of Directors continuously for at least fifteen years, outstanding options may be exercised at any time prior to the expiration of the outstanding options; and (iv) in the event service on the Board of Directors terminates other than as set forth in subsections (i), (ii) or (iii) above, outstanding options may be exercised within three months following the date such service terminates or prior to the expiration of the outstanding options, whichever period is shorter. (d) Payment for shares purchased upon exercise of a non-employee Director option shall be made in cash, in shares of Household Common Stock valued at the then fair market value of such shares or by a combination of cash and shares of Common Stock. Any shares of Common Stock surrendered in full or partial payment of the exercise price of an option must have been held by such Director at least six months prior to the date such shares are surrendered in payment. A non-employee Director may also satisfy, in whole or in part, income tax obligations incurred in connection with the exercise of an option by (i) electing to have Household withhold shares of Common Stock (otherwise deliverable to the Director in connection with the exercise of an option) in payment for such income tax obligation or (ii) by delivering shares of Household Common Stock owned by such Director in payment for such income tax obligation. Any shares of Common Stock surrendered in full or partial payment of income tax obligations must have been held by such Director at least six months prior to the date such shares are surrendered. (e) Non-employee Director options are not transferable other than by will and the laws of descent and distribution. 7. Restricted Stock Rights ----------------------- -7- (a) Upon such terms as it deems appropriate, the Committee from time to time may grant Restricted Stock Rights ("RSRs") to any employee selected by the Committee, which entitle such employee to receive a stated number of shares of Common Stock of Household. The RSRs are subject to forfeiture if the employee fails to remain continuously employed by Household or any subsidiary for the period(s) stipulated by the Committee (each, a "Restricted Period"). (b) RSRs shall be subject to the following restrictions and limitations: (i) the RSRs may not be transferred except by will or the laws of descent and distribution; and (ii) except as otherwise provided in Paragraphs (d) and (e) of this Section 7, an RSR and the shares subject to an RSR shall be forfeited and all rights of a holder of an RSR shall terminate without any payment of consideration by Household if such employee fails to remain continuously employed by Household or any subsidiary for the Restricted Period. A holder of an RSR shall remain continuously employed if such holder leaves the employ of Household or any subsidiary for immediate reemployment with Household or any subsidiary. (c) Other than as may be specified pursuant to Section 3(e), the holder of an RSR shall not be entitled to any of the rights of a holder of the Common Stock with respect to the shares subject to such RSR prior to the issuance of such shares pursuant to the Plan. (d) The Committee in its sole discretion may accelerate the payment of Household Common Stock under an RSR prior to the termination of the Restricted Period if the holder of an RSR has achieved certain performance levels established by the Committee at the time an RSR is granted. The Committee in its sole judgment may revise such performance levels as it deems appropriate to reflect significant, unforeseen events or changes. (e) In the event that the employment of a holder of an RSR terminates by reason of death or permanent and total disability or as a result of Section 11(b) hereof, such holder shall be entitled to receive the number of shares subject to the RSR multiplied by a fraction (x) the numerator of which shall be the number of full months between the date of grant of each such RSR and the date of such termination of employment, and (y) the denominator of which shall be the number of full months in the respective Restricted Period; provided, however, no fractional share shall be awarded. A holder of an RSR whose employment terminates for reasons other than those listed in this paragraph will forfeit all rights under any outstanding RSR. This automatic forfeiture may be waived in whole or in part by the Committee in its sole discretion. (f) When a holder shall be entitled to receive shares -8- pursuant to an RSR, Household shall issue the appropriate number of shares registered in the name of the holder. 8. Other Stock-Based Awards ------------------------ The Committee may make awards of unrestricted shares of Household Common Stock to eligible employees in recognition of outstanding achievements. 9. Forfeiture ---------- If it is determined that an employee or former employee, while employed by Household or any subsidiary or otherwise associated with Household or any subsidiary as a consultant, advisor or in another similar capacity, engaged at any time in any activity in competition with any activity of Household or any subsidiary or inimical, contrary or harmful to the interests of Household or any subsidiary including, but not limited to: (i) conduct related to the participant's position for which either criminal or civil penalties against the participant may be sought, (ii) violation of Household policies, notwithstanding Household's decision or inability to, or not to, terminate the participant for such violation, (iii) accepting employment with or serving as a consultant, advisor or in any other capacity to an employer that is in competition with or acting against the interests of Household or any subsidiary, including employing or recruiting any present employee of Household or any subsidiary for such competitor, (iv) disclosing or misusing any confidential information or material concerning Household or any subsidiary, or (v) participating in a hostile takeover attempt of Household, then the Committee, in its sole discretion, may cancel any unexpired or unpaid Award at any time. 10. Amendment and Termination of the Plan ------------------------------------- This Plan will expire on May 8, 2006. However, the Board of Directors may terminate the Plan at any time except as provided in Section 11(d), but such termination shall not affect Awards previously granted under the Plan. During the Plan term, the Committee may amend the Plan or any Award granted to an employee under the Plan at any time, except (i) the Plan may not be amended or terminated in the circumstances set forth in Section 11(d), (ii) the Committee may not, without shareholder approval, and except as permitted by Section 3(c), increase the number of shares of Common Stock of Household which may be issued pursuant to the Plan, change the purchase price of an Option, and (iii) the Committee may not make any other amendment to the Plan which is required by law to be approved by the shareholders of Household. -9- Notwithstanding the preceding paragraph, the provisions of Section 6 of the Plan relating to non-employee Directors may not be amended more than once every six months, except to comply with changes to the Code or the rules and regulations thereunder. 11. Change in Control ----------------- (a) In order to protect participants in the Plan who have outstanding Awards in the event there is a "Change in Control" (as defined below), (i) all outstanding Awards will immediately vest or the Restricted Period with respect thereto shall lapse and such Awards shall become exercisable or payable in full, and (ii) the Committee, in its sole discretion (notwithstanding any contrary provision in Section 3(f)), may: (i) accelerate the time periods for exercising or realizing any Awards, notwithstanding any minimum holding or restricted periods set forth in the Plan or established by the Committee at the time of the grant of the Award; (ii) provide for the purchase by Household of any Awards in cash equal to the amount that could have been received upon the exercise or realization of such Awards had the Awards been currently exercisable or payable on the day before said cash payment is made; (iii) make such adjustments, including the granting of additional Awards, to any outstanding Award as the Committee deems appropriate to reflect the Change in Control; and (iv) cause outstanding Awards to be assumed, or new rights of equal value to be substituted therefor, by any corporation that is the successor to Household. (b) Any employee whose position with Household or any of its subsidiaries is "Materially Changed" (as defined below) within twenty-four (24) months after a Change in Control shall be deemed to be involuntarily terminated without "cause" (as defined below) from Household and be entitled to exercise or receive the payment of Awards previously granted to the employee that were outstanding immediately prior to the event causing such termination or were awarded subsequent to the event causing such termination, in each case, in accordance with subsection 5(a)(i) with respect to Options or 7(e) of the Plan with respect to any RSRs with respect to which the Restricted Period has not lapsed, without any action by the Committee or Board of Directors. (c) For purposes of this Section and to determine the rights of any participant who has an outstanding Award, the term: -10- (i) "Change in Control" means: (1) any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose Household or any subsidiary of Household, or any employee benefit plan of Household, or any subsidiary of Household, or any person or entity organized, appointed or established by Household for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of Household, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of Household representing twenty percent (20%) or more of the combined voting power of Household's then outstanding securities; provided, however, that no Change in Control shall be deemed to have occurred as the result of an acquisition of securities of Household by Household which, by reducing the number of voting securities outstanding, increases the direct or indirect beneficial ownership interest of any person to twenty percent (20%) or more of the combined voting power of Household's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such person in Household shall be deemed a Change in Control; and provided further that if the Board of Directors of Household determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of Household representing twenty percent (20%) or more of the combined voting power of Household's then outstanding securities has inadvertently reached that level of ownership interest, and if such person divests as promptly as practicable a sufficient amount of securities of Household so that the person no longer has a direct or indirect beneficial ownership interest in twenty percent (20%) or more of the combined voting power of Household's then outstanding securities, then no Change in Control shall be deemed to have occurred; (2) during any period of two (2) consecutive years (not including any period prior to -11- November 9, 1998) individuals who at the beginning of such two-year period constitute the Board of Directors of Household and any new director or directors (except for any director designated by a person who has entered into an agreement with Household to effect a transaction described in subparagraph (1), above, or subparagraph (3), below) whose election by the Board or nomination for election by Household's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board (such individuals and any such new directors being referred to as the "Incumbent Board"); (3) consummation of (x) an agreement for the sale or disposition of Household or all or substantially all of Household's assets, (y) a plan of merger or consolidation of Household with any other corporation, or (z) a similar transaction or series of transactions involving Household (any transaction described in parts (x) through (z) of this subparagraph (3) being referred to as a "Business Combination"), in each case unless after such a Business Combination (I) the stockholders of Household immediately prior to the Business Combination continue to own, directly or indirectly, more than sixty percent (60%) of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the new (or continued) entity (including, but not by way of limitation, an entity which as a result of such transaction owns Household, or all or substantially all of Household's former assets either directly or through one or more subsidiaries) immediately after such Business Combination, in substantially the same proportion as their ownership of Household immediately prior to such Business Combination, (II) no person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of Household or of such entity resulting from such -12- Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of the then combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination, and (III) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; (4) approval by the stockholders of Household of a complete liquidation or dissolution of Household; (5) a tender offer is made for thirty percent (30%) or more of the common stock of Household, which tender offer has not been approved by the Board of Directors of Household; or (6) a solicitation subject to Rule 14a-11 under the Exchange Act (or any successor Rule) relating to the election or removal of 50% or more of the members of the Incumbent Board is made by any person other than Household. (ii) "Materially Changed" means the occurrence of one or more of the following events: (1) the termination of the employee, without cause, and other than by reason of death, permanent and total disability or retirement under the terms of a pension plan of Household or any subsidiary; (2) the employee was assigned to a position of lesser rank or status; (3) the employee's annual target bonus or targeted performance unit awards were reduced and compensation equivalent in aggregate value was not substituted; (4) the employee's annual salary was reduced; (5) the employee's benefits under the Household -13- Retirement Income Plan or any successor tax qualified defined benefit plan were reduced for reasons other than to maintain its tax qualified status and such reductions were not supplemented in the Household Supplemental Retirement Income Plan ("HSRIP"); or the employee's benefits under HSRIP, if applicable, were reduced; (6) the employee's other benefits or perquisites were reduced and such reductions were not uniformly applied with respect to all similarly situated employees; or (7) the employee was reassigned to a geographical area outside of the metropolitan area in which the employee was assigned at the time of the Change in Control. (iii) "cause" (1) in the case of an employee who is a party to an employment, termination protection or similar agreement that defines "cause" (or words of similar import), means "cause" (or words of similar import) as defined in such agreement, and (2) in the case of any other employee, means willful and deliberate misconduct, which is detrimental in a significant way to the interests of Household or any subsidiary thereof. (d) Notwithstanding anything set forth in Section 11 hereof, with the occurrence of a Change in Control the Plan may not be amended or terminated by the Committee, the Board of Directors or the stockholders of Household. 12. Miscellaneous ------------- (a) The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments or deliveries of shares of Household Common Stock not yet made to a participant by Household, nothing contained herein shall give any rights to a participant that are greater than those of a general creditor of Household. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver shares of Household Common Stock or payments hereunder consistent with the foregoing. (b) With respect to participants subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable provisions of Rule 16b-3 or its successor under the Exchange Act. To the extent any provision of the Plan or action by the Committee or its designee fails to so -14- comply, it shall be deemed null and void. (c) This Plan and each agreement with respect to an Award shall be construed and administered in accordance with the laws of the State of Delaware without giving effect to principles relating to conflict of laws. (d) Neither the adoption of the Plan nor any Award granted hereunder shall confer upon any participant any right to continued employment or service with Household or any subsidiary thereof, nor shall the Plan or any Award interfere in any way with the right of Household or a subsidiary to terminate the employment or relationship of any of the participants at any time. -15- EX-10.6 4 FORMS OF STOCK & RESTRICTED STOCK RTS. AGMT EXHIBIT 10.6 HOUSEHOLD INTERNATIONAL NOTICE OF STOCK OPTIONS AND GRANT AGREEMENT (DATE) (NAME) (SOCIAL SECURITY NUMBER) (ADDRESS) On (DATE), the Compensation Committee of Household's Board of Directors granted you stock options under the Household International 1996 Long-Term Executive Incentive Compensation Plan as follows:
Date of Grant (DATE) Option Price Per Share (PRICE) # of Shares Granted (NUMBER)
Enclosed for your signature are two(2) copies of the Stock Option Agreement which state the terms and conditions under which these options were granted. Please retain one copy for your files and return one signed copy of the Agreement by (DATE), using the attached pre-addressed envelope, or mail to: Household International, Inc. ATTENTION: Shareholder Services 2700 Sanders Road Prospect Heights, IL 60070 Sincerely, Colin P. Kelly Senior Vice President- Human Resources ___________________________________________ ____________________ Employee's Signature Date -1- HOUSEHOLD INTERNATIONAL, INC. 1996 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN ---------- NON-TAX QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, between HOUSEHOLD INTERNATIONAL, INC., a Delaware corporation (the "Company"), and the employee referenced on the cover sheet to this Agreement (the "Employee"), is made pursuant to the Household International 1996 Long-Term Executive Incentive Compensation Plan (the "Incentive Plan"). The terms of such agreement are as follows: 1. The Company hereby grants to the Employee an option, for a period of 10 years and one day from the grant date, to purchase, on these terms and conditions and also subject to the Incentive Plan, shares of the common stock of the Company as set forth in the cover sheet to this Agreement. 2. No shares may be purchased under this option for one year from the grant date. After one year, this option may, unless sooner terminated under the provisions hereof, be exercised in numbers of shares not to exceed 25 percent of the aggregate number of shares under option on and after each of the first, second, third and fourth anniversaries of the grant date, provided that 100% of the shares in this option may be exercised (a) on the last day of employment in the case of an Employee who is retirement-eligible under the terms of a pension plan of the Company or a subsidiary, or (b) if so determined by the Compensation Committee of the Board of Directors (the "Committee") during the Employee's employment. An Employee may exercise all or a portion of a vested option during the option term. To exercise an option you must give the Company ten days written notice of exercise specifying the number of shares to be purchased, which must be a minimum of twenty-five (25) shares, and include payment for the shares. Payment for the option may be made by cash or check to the order of the Company, and also may be made with shares of common stock of the Company valued at the then fair market value of such shares or by a combination of cash and shares of common stock pursuant to such Committee or Board of Directors rules in effect at the time the option is exercised. The Committee or Board of Directors may, at any time, rescind the right to use common stock of the Company in payment for shares purchased through the option. 3. The option may not be transferred except by will or the laws of descent and distribution. The option may be exercised during the lifetime of the Employee only by the Employee and only while he or she is an employee of the Company (or a subsidiary thereof) and shall have been continuously so employed from the grant date, except that: (i) in the event of termination of employment of the Employee and the Employee is retirement-eligible under the terms of a pension plan of the Company or a subsidiary, the option may be exercised within five years of the date of termination of employment; (ii) in the event of termination of employment due to permanent and total disability of the Employee and the Employee is not retirement-eligible under the terms of a pension plan of the Company or a subsidiary, the option may be exercised within twelve months following the date of such termination of employment; (iii) in the event of death during employment, the option may be exercised by the executor, administrator, or other personal representative of the Employee within five years succeeding death if such Employee was retirement-eligible under the terms of a pension plan of the Company or a subsidiary, or twelve months if such Employee was not retirement-eligible under the terms of a pension plan of the Company or a subsidiary; (iv) in the event of termination of employment other than as set forth in subsections (i), (ii) or (iii) above, the option may be exercised within three months following the date of termination, except for termination for cause; (v) in the event of death of the Employee following termination of employment, the option may be exercised by the executor, administrator, or other personal representative of the Employee, notwithstanding the time periods specified in (i), (ii), (iii) or (iv) above, within -2- a) twelve months following death or b) the remainder of the period in which the Employee was entitled to exercise the option, whichever period is longer. If the Committee determines that the termination is for cause, the option will not under any circumstances be exercisable following termination of employment. Notwithstanding anything herein to the contrary, the option may not be exercised pursuant to this Section after the expiration of the term of such option and may be exercised only to the extent that the holder was entitled to exercise such option on the date of termination of employment. The option will expire in all events and for all purposes 10 years and one day from the grant date. 4. If it is determined that the Employee or former Employee, while employed by the Company or any subsidiary or otherwise associated with the Company or any subsidiary as a consultant, advisor or in another similar capacity, engaged at any time in any activity in competition with any activity of the Company or any subsidiary or inimical, contrary or harmful to the interests of the Company or any subsidiary including, but not limited to: (i) conduct related to the Employee's position for which either criminal or civil penalties against the Employee may be sought, (ii) violation of the Company's policies, notwithstanding the Company's decision or inability to, or not to, terminate the Employee for such violation, (iii) accepting employment with or serving as a consultant, advisor or in any other capacity to an employer that is in competition with or acting against the interests of the Company or any subsidiary, including employing or recruiting any present employee of the Company or any subsidiary for such competitor, (iv) disclosing or misusing any confidential information or material concerning the Company or any subsidiary, or (v) participating in a hostile takeover attempt of the Company, then the Committee, in its sole discretion, may cancel any outstanding option at any time. 5. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of the option herein granted prior to the listing of such shares on all stock exchanges on which the Company's stock shall then be listed. Upon any exercise of said option, the Company shall take the steps required for listing. 6. Neither the Employee nor his personal representative shall have any of the rights or privileges of a stockholder with respect to any shares subject to this option unless and until certificates evidencing such shares shall have been delivered. 7. Notice to the Company shall be addressed to the Company in care of the Shareholder Services Department at 2700 Sanders Road, Prospect Heights, Illinois 60070 and notice to the Employee shall be addressed to him or her at the address as set forth on the cover sheet of this Agreement, or at such other address as either party may hereafter designate in writing to the other. 8. Anything herein to the contrary notwithstanding, this option agreement shall be subject to amendment by the Company from time to time to the extent permitted by the Incentive Plan and is subject to the provisions of the Incentive Plan. -3- HOUSEHOLD INTERNATIONAL, INC. 1996 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN ---------- NON-TAX QUALIFIED STOCK OPTION AGREEMENT FOR SENIOR MANAGEMENT TEAM THIS AGREEMENT, between HOUSEHOLD INTERNATIONAL, INC., a Delaware corporation (the "Company"), and the employee referenced on the cover sheet to this Agreement (the "Employee"), is made pursuant to the Household International 1996 Long-Term Executive Incentive Compensation Plan (the "Incentive Plan"). The terms of such agreement are as follows: 1. The Company hereby grants to the Employee an option, for a period of 10 years and one day from the grant date, to purchase, on these terms and conditions and also subject to the Incentive Plan, shares of the common stock of the Company as set forth in the cover sheet to this Agreement. 2. No shares may be purchased under this option for one year from the grant date. After one year, this option may, unless sooner terminated under the provisions hereof, be exercised in numbers of shares not to exceed 25 percent of the aggregate number of shares under option on and after each of the first, second, third and fourth anniversaries of the grant date, provided that 100% of the shares in this option may be exercised (a) on the last day of employment in the case of an Employee who is retirement-eligible under the terms of a pension plan of the Company or a subsidiary, or (b) if so determined by the Compensation Committee of the Board of Directors (the "Committee") during the Employee's employment. An Employee may exercise all or a portion of a vested option during the option term. To exercise an option you must give the Company ten days written notice of exercise specifying the number of shares to be purchased, which must be a minimum of twenty-five (25) shares, and include payment for the shares. Payment for the option may be made by cash or check to the order of the Company, and also may be made with shares of common stock of the Company valued at the then fair market value of such shares or by a combination of cash and shares of common stock pursuant to such Committee or Board of Directors rules in effect at the time the option is exercised. The Committee or Board of Directors may at any time rescind the right to use common stock of the Company in payment for shares purchased through the option. 3. The option may not be transferred except by will or the laws of descent and distribution, unless the Company has notified you to the contrary. The option may be exercised during the lifetime of the Employee only by the Employee and only while he or she is an employee of the Company (or a subsidiary thereof) and shall have been continuously so employed from the grant date, except that: (i) in the event of termination of employment of the Employee and the Employee is retirement-eligible under the terms of a pension plan of the Company or a subsidiary, the option may be exercised at any time before the expiration date of the option; (ii) in the event of termination of employment due to permanent and total disability of the Employee and the Employee is not retirement-eligible under the terms of a pension plan of the Company or a subsidiary, the option may be exercised within twelve months following the date of such termination of employment; (iii) in the event of death during employment, the option may be exercised by the executor, administrator, or other personal representative of the Employee within five years succeeding death if such Employee was retirement- eligible under the terms of a pension plan of the Company or a subsidiary, or twelve months if such Employee was not retirement-eligible under the terms of a pension plan of the Company or a subsidiary; (iv) in the event of termination of employment other than as set forth in subsections (i), (ii) or (iii) above, the option may be exercised within three months following the date of termination, except for termination for cause; (v) in the event of death of the Employee following termination of employment, the option may be exercised by the -4- executor, administrator, or other personal representative of the Employee, notwithstanding the time periods specified in (i), (ii), (iii) or (iv) above, within a) twelve months following death or b) the remainder of the period in which the Employee was entitled to exercise the option, whichever period is longer. If the Committee determines that the termination is for cause, the option will not under any circumstances be exercisable following termination of employment. Notwithstanding anything herein to the contrary, the option may not be exercised pursuant to this Section after the expiration of the term of such option and may be exercised only to the extent that the holder was entitled to exercise such option on the date of termination of employment. The option will expire in all events and for all purposes 10 years and one day from the grant date. 4. If it is determined that the Employee or former Employee, while employed by the Company or any subsidiary or otherwise associated with the Company or any subsidiary as a consultant, advisor or in another similar capacity, engaged at any time in any activity in competition with any activity of the Company or any subsidiary or inimical, contrary or harmful to the interests of the Company or any subsidiary including, but not limited to: (i) conduct related to the Employee's position for which either criminal or civil penalties against the Employee may be sought, (ii) violation of the Company's policies, notwithstanding the Company's decision or inability to, or not to, terminate the Employee for such violation, (iii) accepting employment with or serving as a consultant, advisor or in any other capacity to an employer that is in competition with or acting against the interests of the Company or any subsidiary, including employing or recruiting any present employee of the Company or any subsidiary for such competitor, (iv) disclosing or misusing any confidential information or material concerning the Company or any subsidiary, or (v) participating in a hostile takeover attempt of the Company, then the Committee, in its sole discretion, may cancel any outstanding option at any time. 5. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of the option herein granted prior to the listing of such shares on all stock exchanges on which the Company's stock shall then be listed. Upon any exercise of said option, the Company shall take the steps required for listing. 6. Neither the Employee nor his personal representative shall have any of the rights or privileges of a stockholder with respect to any shares subject to this option unless and until certificates evidencing such shares shall have been delivered. 7. Notice to the Company shall be addressed to the Company in care of the Shareholder Services Department at 2700 Sanders Road, Prospect Heights, Illinois 60070 and notice to the Employee shall be addressed to him or her at the address as set forth on the cover sheet of this Agreement, or at such other address as either party may hereafter designate in writing to the other. 8. Anything herein to the contrary notwithstanding, this option agreement shall be subject to amendment by the Company from time to time to the extent permitted by the Incentive Plan and is subject to the provisions of the Incentive Plan. -5- HOUSEHOLD INTERNATIONAL, INC. 1996 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN ---------- U.K. NON-TAX QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, between HOUSEHOLD INTERNATIONAL, INC., a Delaware corporation (the "Company"), and the employee referenced on the cover sheet to this Agreement (the "Employee"), is made pursuant to the Household International 1996 Long-Term Executive Incentive Compensation Plan (the "Incentive Plan"). The terms of such agreement are as follows: 1. The Company hereby grants to the Employee an option, for a period of 10 years from the grant date, to purchase, on these terms and conditions and also subject to the Incentive Plan, shares of the common stock of the Company as set forth in the cover sheet to this Agreement. 2. No shares may be purchased under this option for one year from the grant date. After one year, this option may, unless sooner terminated under the provisions hereof, be exercised in numbers of shares not to exceed 25 percent of the aggregate number of shares under option on and after each of the first, second, third and fourth anniversaries of the grant date, provided that 100% of the shares in this option may be exercised (a) on the last day of employment in the case of an Employee who is retirement-eligible under the terms of a pension plan of the Company or a subsidiary, or (b) if so determined by the Compensation Committee of the Board of Directors (the "Committee") during the Employee's employment. An employee may exercise all or a portion of a vested option during the option term. To exercise an option you must give the Company ten days written notice of exercise specifying the number of shares to be purchased, which must be a minimum of twenty-five (25) shares, and include payment for the shares. Payment for the option may be made by cash or check to the order of the Company, and also may be made with shares of common stock of the Company valued at the then fair market value of such shares or by a combination of cash and shares of common stock pursuant to such Committee or Board of Directors rules in effect at the time the option is exercised. The Committee or Board of Directors may, at any time, rescind the right to use common stock of the Company in payment for shares purchased through the option. 3. The option may not be transferred except by will or the laws of descent and distribution. The option may be exercised during the lifetime of the Employee only by the Employee and only while he or she is an employee of the Company (or a subsidiary thereof) and shall have been continuously so employed from the grant date, except that: (i) in the event of termination of employment of the Employee and the Employee is retirement-eligible under the terms of a pension plan of the Company or a subsidiary, the option may be exercised within five years of the date of termination of employment; (ii) in the event of termination of employment due to permanent and total disability of the Employee and the Employee is not retirement-eligible under the terms of a pension plan of the Company or a subsidiary, the option may be exercised within twelve months following the date of such termination of employment; (iii) in the event of death during employment, the option may be exercised by the executor, administrator, or other personal representative of the Employee within five years succeeding death if such Employee was retirement-eligible under the terms of a pension plan of the Company or a subsidiary, or twelve months if such Employee was not retirement-eligible under the terms of a pension plan of the Company or a subsidiary; (iv) in the event of termination of employment other than as set forth in subsections (i), (ii) or (iii) above, the option may be exercised within three months following the date of termination, except for termination for cause; (v) in the event of death of the Employee following termination of employment, the option may be exercised by the executor, administrator, or other personal representative of the Employee, notwithstanding the time periods specified in (i), (ii), (iii) or (iv) above, within -6- a) twelve months following death or b) the remainder of the period in which the Employee was entitled to exercise the option, whichever period is longer. If the Committee determines that the termination is for cause, the option will not under any circumstances be exercisable following termination of employment. Notwithstanding anything herein to the contrary, the option may not be exercised pursuant to this Section after the expiration of the term of such option and may be exercised only to the extent that the holder was entitled to exercise such option on the date of termination of employment. The option will expire in all events and for all purposes 10 years from the grant date. 4. If it is determined that the Employee or former Employee, while employed by the Company or any subsidiary or otherwise associated with the Company or any subsidiary as a consultant, advisor or in another similar capacity, engaged at any time in any activity in competition with any activity of the Company or any subsidiary or inimical, contrary or harmful to the interests of the Company or any subsidiary including, but not limited to: (i) conduct related to the Employee's position for which either criminal or civil penalties against the Employee may be sought, (ii) violation of the Company's policies, notwithstanding the Company's decision or inability to, or not to, terminate the Employee for such violation, (iii) accepting employment with or serving as a consultant, advisor or in any other capacity to an employer that is in competition with or acting against the interests of the Company or any subsidiary, including employing or recruiting any present employee of the Company or any subsidiary for such competitor, (iv) disclosing or misusing any confidential information or material concerning the Company or any subsidiary, or (v) participating in a hostile takeover attempt of the Company, then the Committee, in its sole discretion, may cancel any outstanding option at any time. 5. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of the option herein granted prior to the listing of such shares on all stock exchanges on which the Company's stock shall then be listed. Upon any exercise of said option, the Company shall take the steps required for listing. 6. Neither the Employee nor his personal representative shall have any of the rights or privileges of a stockholder with respect to any shares subject to this option unless and until certificates evidencing such shares shall have been delivered. 7. Notice to the Company shall be addressed to the Company in care of the Shareholder Services Department at 2700 Sanders Road, Prospect Heights, Illinois 60070 and notice to the Employee shall be addressed to him or her at the address as set forth on the cover sheet of this Agreement, or at such other address as either party may hereafter designate in writing to the other. 8. Anything herein to the contrary notwithstanding, this option agreement shall be subject to amendment by the Company from time to time to the extent permitted by the Incentive Plan and is subject to the provisions of the Incentive Plan. -7- HOUSEHOLD INTERNATIONAL, INC. 1996 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN ---------- NON-TAX QUALIFIED STOCK OPTION AGREEMENT FOR NON-EMPLOYEE DIRECTORS THIS AGREEMENT, between HOUSEHOLD INTERNATIONAL, INC., a Delaware corporation (the "Company"), and the Non-Employee Director referenced on the cover sheet to this Agreement (the "Director"), is made pursuant to the Household International 1996 Long-Term Executive Incentive Compensation Plan (the "Incentive Plan"). The terms of such agreement are as follows: 1. The Company hereby grants to the Director an option, for a period of 10 years and one day from the grant date, to purchase, on these terms and conditions and also subject to the Incentive Plan, shares of the common stock of the Company as set forth in the cover sheet to this Agreement. 2. No shares may be purchased under this option for six months from the grant date. After six months, 100% of the shares in this option may be exercised. A Director may exercise all or a portion of a vested option during the option term. 3. To exercise an option you must give the Company written notice of exercise specifying the number of shares to be purchased, which must be a minimum of twenty-five (25) shares, and include payment for the shares. Payment for the option may be made by cash or check to the order of the Company, and also may be made with shares of common stock of the Company valued at the then fair market value of such shares or by a combination of cash and shares of common stock pursuant to the Compensation Committee or Board of Directors rules in effect at the time the option is exercised. The Compensation Committee or Board of Directors may at any time rescind the right to use common stock of the Company in payment for shares purchased through the option. 4. The option may not be transferred except by will or the laws of descent and distribution, unless the Company has notified you to the contrary. The option may be exercised during the lifetime of the Director only by the Director and only while he or she is a non-employee director of the Company and shall have been continuously so retained from the grant date, except that: (i) in the event the Director's service terminates because such Director has reached the Company's mandatory retirement age for Directors, or if a Director retires from the Board prior to reaching the mandatory retirement age but after having served on the Board continuously for at least fifteen years, outstanding options may be exercised at any time prior to the expiration of the outstanding options; (ii) in the event service on the Board terminates due to permanent and total disability, outstanding options may be exercised within twelve months following the date such service terminates or prior to the expiration of the outstanding options, whichever period is shorter; (iii) in the event of death of a Director whether during service as a Director or after ceasing such service, outstanding options may be exercised by the executor, administrator, or other personal representative of the Director within twelve months succeeding death if such Director or prior to the expiration of the outstanding options, whichever period is longer; (iv) in the event service on the Board terminates other than as set forth in subsections (i), (ii) or (iii) above, outstanding options may be exercised within three months following the date such service terminates or prior to the expiration of the outstanding options, whichever period is shorter. Notwithstanding anything herein to the contrary, the option may not be exercised pursuant to this Section after the expiration of the term of such option and may be exercised only to the extent that the holder was entitled to exercise such option on the date of termination of service. The option will expire in all events and for all purposes 10 years and one day from the grant date. -8- 5. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of the option herein granted prior to the listing of such shares on all stock exchanges on which the Company's stock shall then be listed. Upon any exercise of said option, the Company shall take the steps required for listing. 6. Neither the Director nor his or her personal representative shall have any of the rights or privileges of a stockholder with respect to any shares subject to this option unless and until certificates evidencing such shares shall have been delivered. 7. Notice to the Company shall be addressed to the Company in care of the Shareholder Services Department at 2700 Sanders Road, Prospect Heights, Illinois 60070 and notice to the Director shall be addressed to him or her at the address as set forth on the cover sheet of this Agreement, or at such other address as either party may hereafter designate in writing to the other. 8. Anything herein to the contrary notwithstanding, this option agreement shall be subject to amendment by the Company from time to time to the extent permitted by the Incentive Plan and is subject to the provisions of the Incentive Plan. -9- HOUSEHOLD INTERNATIONAL NOTICE OF RESTRICTED STOCK RIGHTS AGREEMENT (DATE) (NAME) (SOCIAL SECURITY NUMBER) (ADDRESS) On (DATE), the Compensation Committee of Household's Board of Directors granted you restricted stock rights under the Household International 1996 Long-Term Executive Incentive Compensation Plan as follows: Date of Grant (DATE) # of Shares Granted (NUMBER) Enclosed for your signature are two(2) copies of the Restricted Stock Rights Agreement which state the terms and conditions under which these rights were granted. Please retain one copy for your files and return one signed copy of the Agreement by (DATE), using the attached pre-addressed envelope, or mail to: Household International, Inc. ATTENTION: Shareholder Services 2700 Sanders Road Prospect Heights, IL 60070 Sincerely, Colin P. Kelly Senior Vice President- Human Resources - -------------------------------------------- ---------------------- Employee's Signature Date -10- HOUSEHOLD INTERNATIONAL, INC. 1996 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN ---------- RESTRICTED STOCK RIGHTS AGREEMENT THIS AGREEMENT, between HOUSEHOLD INTERNATIONAL, INC., a Delaware corporation (the "Company"), and the employee referenced on the cover sheet to this Agreement (the "Employee"), is made pursuant to the Household International 1996 Long-Term Executive Incentive Compensation Plan (the "Incentive Plan"). The terms of such agreement are as follows: 1. The Company hereby grants to the Employee Restricted Stock Rights (the "RSRs"), which shall fully vest five (5) years from the date hereof (the "Restricted Period"), pursuant to the terms and conditions set forth herein and subject to the provisions set forth in the Incentive Plan. The RSRs entitle the Employee to receive the number of shares of Common Stock of the Company as set forth in the cover sheet to this Agreement. 2. No shares may be issued under RSRs for one year from the date hereof. After said one-year period, shares subject to RSRs will vest one-third on each of the third, fourth and fifth anniversaries (the "Vesting Dates") from the grant date. On each Vesting Date an Employee shall be entitled to receive shares representing the vested RSRs, and the Company shall issue the appropriate number of vested shares (rounded down to the nearest whole share) registered in the name of the Employee or his or her estate or administrator, as deemed appropriate by the Company, provided the Employee has satisfied all tax obligations with respect to such shares as required herein. The unvested shares subject to such RSRs shall be forfeited and all rights of a holder of such RSRs and shares shall terminate without any payment of consideration by the Company if the Employee fails to remain continuously as an Employee of the Company or any subsidiary for the Restricted Period, except (i) in the case of an Employee who is retirement-eligible under the terms of a pension plan of the Company or a subsidiary, the Employee will receive either (1) the number of shares subject to the RSR multiplied by a fraction (x) the numerator of which shall be the number of full months between the date of grant of such RSR and the date of such termination of employment, and (y) the denominator of which shall be the number of full months in the Restricted Period; provided however, that any fractional share shall not be awarded; and provided further, the Compensation Committee of the Board of Directors (the "Committee"), in its sole discretion, may determine that full vesting is appropriate under the circumstances or (2) 100% of the shares subject to RSRs on his or her last day of employment if retirement occurs on or after age 65, and (ii) in the event that the employment of a holder of RSRs terminates by reason of death or permanent and total disability, such holder shall be entitled to receive the number of shares subject to the RSR multiplied by a fraction (x) the numerator of which shall be the number of full months between the date of grant of such RSR and the date of such termination of employment, and (y) the denominator of which shall be the number of full months in the Restricted Period; provided however, that any fractional share shall not be awarded. Any shares that the Employee is entitled to receive in accordance with the preceding sentence will be reduced by any shares that the Employee has already received because of vesting on the third, fourth and fifth anniversaries of the grant date. An Employee shall not be deemed to have terminated his or her period of continuous employment with the Company if he or she leaves the employ of the Company or any subsidiary for immediate reemployment with the Company or any subsidiary. A holder of RSRs whose employment terminates for reasons other than those listed in this paragraph 2 (other than a change-in-control of the Company) will forfeit his or her unvested rights under any outstanding RSRs. This automatic forfeiture may be waived in whole or in part by the Committee in its sole discretion. 3. If it is determined that the Employee or former Employee, while employed by the Company or any subsidiary or otherwise associated with the Company or any -11- subsidiary as a consultant, advisor or in another similar capacity, engaged at any time in any activity in competition with any activity of the Company or any subsidiary or inimical, contrary or harmful to the interests of the Company or any subsidiary including, but not limited to: (i) conduct related to the Employee's position for which either criminal or civil penalties against the Employee may be sought, (ii) violation of the Company's policies, notwithstanding the Company's decision or inability to, or not to, terminate the Employee for such violation, (iii) accepting employment with or serving as a consultant, advisor or in any other capacity to an employer that is in competition with or acting against the interests of the Company or any subsidiary, including employing or recruiting any present employee of the Company or any subsidiary for such competitor, (iv) disclosing or misusing any confidential information or material concerning the Company or any subsidiary, or (v) participating in a hostile takeover attempt of the Company, then the Committee, in its sole discretion, may cancel any unexpired or unpaid RSR at any time. 4. The RSRs may not be transferred except by will or the laws of descent and distribution. 5. The holder of RSRs shall not be entitled to any of the rights of a holder of the Common Stock with respect to the shares subject to such RSRs prior to the issuance of such shares pursuant to the Plan. However, during the Restricted Period, for each unvested share subject to an RSR, the Company will pay the Employee as additional income, less applicable taxes, an amount in cash equal to the cash dividend declared on a share of Common Stock of the Company during the Restricted Period on or about the date the Company pays such dividend to its stockholders of record. 6. Any and all taxes required to be withheld by the Company as a result of the issuance of any shares pursuant to the RSRs shall be the sole responsibility of the Employee. 7. Notice to the Company shall be addressed to the Company in care of the Shareholder Services Department at 2700 Sanders Road, Prospect Heights, Illinois 60070 and notice to the Employee shall be addressed to him or her at the address as set forth on the cover sheet of this Agreement, or at such other address as either party may hereafter designate in writing to the other. 8. Anything herein to the contrary notwithstanding, this RSR agreement shall be subject to amendment by the Company from time to time to the extent permitted by the Incentive Plan and is subject to the provisions of the Incentive Plan. -12- EX-10.9 5 NON-QUALIFIED DEFERRED COMP. PLAN FOR EXECUTIVES Exhibit 10.9 HOUSEHOLD INTERNATIONAL NON-QUALIFIED DEFERRED COMPENSATION PLAN Section 1. Purpose. The purpose of this Plan is to provide certain executives of Household International, Inc. (the "Company") and certain of its direct and indirect subsidiaries (the Company and such subsidiaries being referred to as the "Employers") the opportunity to defer receipt of compensation and provide for future savings of compensation earned. The provision of such an opportunity is designed to aid the Company in attracting and retaining as executives persons whose abilities, experience and judgment can contribute to the well-being of the Company. Section 2. Name, Effective Date. The effective date of this plan known as the Household International Non-Qualified Deferred Compensation Plan (the "Plan") is December 1, 1996. Section 3. Eligibility. Any executive of the Employers who is on the United States payroll and whose base salary is at least $160,000 as of the November 1 preceding the year for which an election is made is eligible to participate in this Plan. Section 4. Deferred Compensation Account. An unfunded deferred compensation account shall be established for each person who elects to participate in the Plan. Section 5. Amount of Deferral. For calendar year 1997 and for each calendar year thereafter, a participant may elect to defer receipt of a specified portion of the unearned salary that would otherwise be paid in that year and/or all or a specified portion of the cash bonus which will be earned for that year which generally becomes payable to the participant in the following year. An amount equal to the compensation deferred will be credited to the participant's deferred compensation account on the date such compensation would otherwise be initially payable. In no event may a participant make a deferral election with respect to his or her salary that would cause his projected salary expected to be actually paid in that year to be reduced below $160,000. A participant may, however, elect to defer all or any part of his cash bonus earned for a particular year whether it is payable in that year or payable in the next year. The $160,000 amount referred to in this Section 5 and Section 3 shall be automatically 1 adjusted to reflect changes in the limits outlined under Section 401(a)(17) of the Internal Revenue Code (the "Code"). Section 6. Election of Deferral. An election to defer salary and/or bonus for each year shall be made on forms provided by the Compensation Committee of the Board of Directors of the Company (the "Committee") for that purpose and shall be effective on the date indicated, but not before the date filed with the Committee. With respect to salary, the election shall be made prior to the year for which it is applicable and shall be effective with respect to any salary to be earned which would otherwise be payable in that year. With respect to bonus, due to its uncertain nature, the election shall be made by July 1 regarding the potential bonus to be earned and awarded for that year notwithstanding the fact that bonus income is generally distributed in the following calendar year. If a participant has failed to select a deferred distribution date for a deferral or if he terminates employment before such deferred distribution date, then distribution of such deferred compensation will be made in the calendar year following the date of the participant's termination of employment. For any compensation earned for a particular year, the earliest deferred distribution date specified by the participant must be at least two years after the year for which the compensation was earned. Subject to Section 19, with respect to each such calendar year to which it applies, the election shall be irrevocable upon receipt by the Committee. Section 7. Hypothetical Investment. Each deferred compensation account will be credited with earnings from the date on which deferred compensation would initially have been payable until the date of payment. The participant can elect to have the amount credited to his account invested hypothetically in various funds. The funds against which increases or decreases in the participant's deferred compensation account will be measured are: Fund A - Household International, Inc. Common Stock Fund. Fund B - Treasury Fund. This Fund shall be credited with interest at a rate equal to the United States five-year treasury rate plus HFC's borrowing spread over that rate on the first day of each calendar quarter with interest compounded quarterly. 2 The participant can change his or her investment election as to the amount already credited or to be credited to his account on a quarterly basis by filing an appropriate election form with the Committee prior to the first day of the quarter in which the election is to be effective. There is no guarantee a participant's deferred compensation account invested in Fund A will increase; amounts may decrease based on the performance of Fund A. Section 8. Value of Deferred Compensation Accounts. The value of each participant's deferred compensation account shall include compensation deferred, adjusted for any increase or decrease thereon, pursuant to Section 7 of the Plan. Section 9. Payment of Deferral. Subject to Section 19, no distribution may be made from the participant's deferred compensation account prior to the first day of the calendar year following the date of the termination of the participant's employment, unless an earlier date is specified by the participant in his election to defer compensation. If a participant elected to defer any year's compensation to a specific date other than his or her termination of employment, such year's deferred compensation and earnings or losses thereon will be payable in cash in a lump sum on the date specified unless it is paid earlier due to termination of employment. The value of a participant's deferred compensation account will be payable in cash in a lump sum as soon as practicable following the end of the year in which a participant terminates employment. In the event that the participant becomes totally disabled, the Committee, in its absolute discretion, may distribute all or a portion of the participant's deferred compensation account according to a revised payment schedule. Section 10. Withholding. There shall be deducted from all deferrals and payments under this Plan the amount of any taxes required to be withheld by any federal, state or local government. The participants and their beneficiaries, distributees, and personal representatives will bear any and all federal, foreign, state, local or other income or other taxes imposed on amounts deferred or paid under this Plan. Section 11. Designation of Beneficiary. A participant may designate a beneficiary or beneficiaries which shall be effective upon filing written notice with the Committee on the form provided by the Committee for that purpose. If no beneficiary is designated, the beneficiary will be the participant's estate. If more than one beneficiary statement has been filed, the beneficiary or beneficiaries designated in the statement bearing the most recent date will be deemed the valid beneficiary or beneficiaries. Section 12. Death of Participant or Beneficiary. In the event of a participant's death before he has received the full value of his deferred compensation account, the then current value of the participant's deferred compensation account shall be determined and such amount shall be paid to the beneficiary or beneficiaries of the deceased participant as soon as practicable thereafter in cash in a lump sum. If no designated beneficiary has been named or survives the participant, the beneficiary will be the participant's estate. Section 13. Participant's Rights Unsecured. The right of any participant or beneficiary to receive payment under the provisions of the Plan shall be an unsecured claim against the general assets of the Company, and any successor company in the event of a merger, consolidation, reorganization or any other event which causes the Company's assets or business to be acquired by another company. No provisions contained in the Plan shall be construed to give any participant or beneficiary at any time a security interest in the deferred compensation account or any other assets of the Company. Section 14. Statement of Account. Statements will be sent to participants following the end of each year as to the value of their deferred compensation accounts as of December 31st of such year. Section 15. Assignability. No right to receive payments hereunder shall be transferable or assignable by a participant or a beneficiary. Section 16. Administration of the Plan. The Plan shall be administered by the Committee. The Committee shall conclusively interpret the provisions of the Plan, decide all claims, and shall make all determinations under the Plan. The Committee shall act by vote or written consent of a majority of its members. The Committee may authorize the appointment of an agent to perform recordkeeping and other administrative duties with respect to the Plan. Section 17. Amendment or Termination of Plan. This Plan may at any time or from time to time be amended, modified or terminated by the Committee. No amendment, modification or termination shall, without the consent of a participant, adversely affect such participant's accruals on his prior elections. Rights accrued prior to termination of the Plan will not be canceled by termination of the Plan. Section 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. Section 19. Withdrawals. Notwithstanding anything in this Plan to the contrary, a participant may request withdrawal of all or a portion of the balance of his deferred compensation account by filing a written request with the Committee in a form acceptable to the Committee for that purpose. A minimum of $25,000 (Twenty Five Thousand Dollars) or the balance of the account, if less, must be requested. The withdrawal will be deemed to be made from the deferrals for the year or years whose deferred distribution date is closest to the date of the withdrawal and the Committee, in its sole discretion, shall determine which of the phantom investment accounts of the participant will be charged for the withdrawal. This request may be granted, solely in the absolute discretion of the Committee, provided, however, if the Committee grants a withdrawal request, all pending deferral elections for future compensation under the Plan which the participant has filed with the Committee will be canceled. The participant will be suspended from participation in this Plan with respect to future compensation until the participant files a deferral election with respect to salary and/or bonus earned for the calendar year following the year in which the withdrawal occurs or some later year. The Committee will impose a forfeiture equal to the amount of the withdrawal multiplied by 10 percent. Such amount will be forfeited to the Company. In the event a participant is a Section 16 officer of the Company, a distribution made by the Committee pursuant to this Section 19 shall occur on a date that is at least six (6) months from the date the Committee approves the withdrawal request if the withdrawal comes from the participant's account hypothetically invested in Fund A. Section 20. Payment of Certain Costs of the Participant. If a dispute arises regarding the interpretation or enforcement of this Plan and the participant (or, in the event of his death, his beneficiary) obtains a final judgment in his favor from a court of competent jurisdiction from which no appeal may be taken, whether because the time to do so has expired or otherwise, or his claim is settled by the Company prior to the rendering of such a judgment, all reasonable legal and other professional fees and expenses incurred by the participant in contesting or disputing any such claim or in seeking to obtain or enforce any right or benefit provided for in this Plan or in otherwise pursuing his claim will be promptly paid by the Company with interest thereon at the highest Illinois statutory rate for interest on judgments against private parties from the date of payment thereof by the participant to the date of reimbursement to him by the Company. Section 21. Securities Law. With respect to participants subject to section 16 of the Exchange Act, transactions under this plan are intended to comply with all applicable provisions of Rule 16b-3 or its successor under the Securities Exchange Act of 1934. To the extent any provision of the Plan or action by the Committee or its designee fails to so comply, it shall be deemed null and void. Section 22. Change in Control. A "Change in Control" means a change in the beneficial ownership of the Company's then outstanding securities or a change in the composition of the Company's Board of Directors as a result of any of the following occurrences: 1. any "person" (as the term is used in Section 13(d) and Section 14(d)(2) of the Securities Exchange Act of 1934) other than: (a) a trustee or other fiduciary of securities held under an employee benefit plan of the Company, or (b) the Company or any subsidiary thereof becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; or 2. persons who were directors of the Company as of the effective date hereof, or successor directors nominated by those directors or by such successor directors, cease to constitute a majority of the Board of Directors of the Company or its successor by merger, consolidation or sale of assets. Notwithstanding any other provision of the Plan, if a Change of Control occurs, then the Company shall create a trust or take such other actions as are appropriate to protect each participant's deferred compensation account. FIRST AMENDMENT --------------- OF -- HOUSEHOLD INTERNATIONAL NON-QUALIFIED ------------------------------------- DEFERRED COMPENSATION PLAN -------------------------- WHEREAS, Household International, Inc. (the "Company") maintains The Household International Non-Qualified Deferred Compensation Plan (the "Plan"); and WHEREAS, amendment of the Plan is now considered desirable; NOW, THEREFORE, pursuant to the power reserved to the Compensation Committee under Section 17 of the Plan and resolutions adopted by the Compensation Committee on November 9 and by the Board of Directors of the Company on November 10, 1998, the Plan is hereby amended, effective as of December 1, 1998, by substituting the following for Section 22 of the Plan: "Section 22. Change in Control. A "Change in Control " shall be deemed to have occurred if: (1) Any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose the Company or any subsidiary of the Company, or any employee benefit plan of the Company, or any subsidiary of the Company, or any person or entity organized, appointed or established by the Company for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities; provided, however, that no Change in Control shall be deemed to have occurred as the result of an acquisition of securities of the Company by the Company which, by reducing the number of voting securities outstanding, increases the direct or indirect beneficial ownership interest of any person to twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Company shall be deemed a Change in Control; and provided further that if the Board of Directors of the Company determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities has inadvertently reached that level of ownership interest, and if such person divests as promptly as practicable a sufficient amount of securities of the Company so that the person no longer has a direct or indirect beneficial ownership interest in twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities, then no Change in Control shall be deemed to have occurred; (2) During any period of two (2) consecutive years (not including any period prior to December 1, 1998) individuals who at the beginning of such two- year period constitute the Board of Directors of the Company and any new director or directors (except for any director designated by a person who has entered into an agreement with the Company to effect a transaction described in subparagraph (1), above, or subparagraph (3), below) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board (such individuals and any such new directors being referred to as the "Incumbent Board"); (3) Consummation of (x) an agreement for the sale or disposition of the Company or all or substantially all of the Company's assets,(y) a plan of merger or consolidation of the Company with any other corporation, or (z) a similar transaction or series of transactions involving the Company (any transaction described in parts (x) through (z) of this subparagraph (3) being referred to as a "Business Combination"), in each case unless after such a Business Combination (I) the stockholders of the Company immediately prior to the Business Combination continue to own, directly or indirectly, more than sixty percent (60%) of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the new (or continued) entity (including, but not by way of limitation, an entity which as a result of such transaction owns the Company, or all or substantially all of the Company's former assets either directly or through one or more subsidiaries) immediately after such Business Combination, in substantially the same proportion as their ownership of the Company immediately prior to such Business Combination, (II) no person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or of such entity resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of the then combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination, and (III) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (4) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, this Plan shall constitute a "Contract" and a participant shall be an "Executive" within the meaning of the Household International, Inc. Grantor Trust Agreement for Employees and Former Employees, as may from time to time be amended (such trust and any successor thereto or replacement thereof, the "Grantor Trust"). Upon the occurrence of a Funding Date (as defined in the Grantor Trust), the Company shall pay to the Grantor Trust the amounts required thereby with respect to the benefits hereunder and take such other actions as are appropriate to protect such benefits. If the Grantor Trust is terminated or amended in a manner adverse to a participant, then upon a Change in Control (as defined in Section 4.01 of the Grantor Trust) the Company shall establish a replacement trust in form and substance reasonably acceptable to a participant and shall deliver to the replacement trust cash of a value sufficient to provide for the payment of all accrued benefits under this Plan." HOUSEHOLD INTERNATIONAL, INC. By /s/ George A. Lorch ------------------------------- George A. Lorch Chair, Compensation Committee Dated: December 16, 1998 ATTEST: /s/ Kenneth H. Robin - ----------------------------- Kenneth H. Robin Secretary (CORPORATE SEAL) EX-10.10 6 EXECUTIVE EMPLOYMENT AGREEMENT--W. F. ALDINGER Exhibit 10.10 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, made and entered into as of January 1, 1999 by and between Household International, Inc., a Delaware corporation, (hereinafter called the "Corporation") and William F. Aldinger (hereinafter called the "Executive"). WITNESSETH THAT: WHEREAS, the Executive is currently employed by the Corporation under an employment agreement dated July 9, 1996; and WHEREAS, the Corporation desires to continue to employ the Executive as its Chairman and Chief Executive Officer, and the Executive desires to continue in such employment, on amended and restated terms and conditions; NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. Employment and Term. (a) Employment. The Corporation shall continue to employ the Executive as the Chairman and Chief Executive Officer of the Corporation, and the Executive shall so serve, for the term set forth in Paragraph 1(b). (b) Term. The initial term of the Executive's employment under this Agreement shall commence as of January 1, 1999 (the "Effective Date") and end on June 30, 2000, subject to the extension of such term as hereinafter provided and subject to earlier termination as provided in Paragraph 7, below. Beginning on January 1, 1999, the term of this Agreement shall be extended automatically for one (1) additional day for each day which has then elapsed since January 1, 1999, unless, at any time after January 1, 1999, either the Board of Directors of the Corporation (the "Board"), on behalf of the Corporation, or the Executive gives written notice to the other that such automatic extension of the term of this Agreement shall cease. Any such notice shall be effective immediately upon delivery. The initial term of this Agreement, plus any extension by operation of this Paragraph 1, shall be hereinafter referred to as the "Term." 2. Duties. During the period of employment as provided in Paragraph 1(b) hereof, the Executive shall serve as Chairman and Chief Executive Officer of the Corporation and have all powers and duties consistent with such position, subject to the reasonable direction of the Board. The Executive shall also continue to serve as a member of the Board if elected as such. The Executive shall devote substantially his entire time during reasonable business hours (reasonable sick leave and vacations excepted) and best efforts to fulfill faithfully, responsibly and to the best of his ability his duties hereunder. However, the 1 Executive may, with the approval of the Board, which shall not be withheld unreasonably, serve on corporate, civic and/or charitable boards and committees. 3. Salary. (a) Base Salary. For services performed by the Executive for the Corporation pursuant to this Agreement during the period of employment as provided in Paragraph 1(b) hereof, the Corporation shall pay the Executive a base salary of $1,000,000 per year, payable in substantially equal installments in accordance with the Corporation's regular payroll practices. The Executive's base salary (with any increases under paragraph (b), below) shall not be subject to reduction. Any compensation which may be paid to the Executive under any additional compensation or incentive plan of the Corporation or which may be otherwise authorized from time to time by the Board (or an appropriate committee thereof) shall be in addition to the base salary to which the Executive shall be entitled under this Agreement. (b) Salary Increases. During the period of employment as provided in Paragraph 1(b) hereof, the base salary of the Executive shall be reviewed no less frequently than annually by the Board or the Compensation Committee of the Board to determine whether or not the same should be increased in light of the duties and responsibilities of the Executive and the performance thereof, and if it is determined that an increase is merited, such increase shall be promptly put into effect and the base salary of the Executive as so increased shall constitute the base salary of the Executive for purposes of Paragraph 3(a). 4. Annual Bonuses. For each calendar year during the term of employment, the Executive shall be eligible to receive in cash an annual performance bonus based upon the terms of the Corporation's bonus plan from time to time for senior executives, as adopted by the Board and administered by the Compensation Committee. 5. Equity Incentive Compensation. During the term of employment hereunder the Executive shall be eligible to participate, in the manner and to the extent approved by the Board or the Compensation Committee, in any equity- based incentive compensation plan or program approved by the Board from time to time, including (but not by way of limitation) any plan providing for the granting of (a) options to purchase stock of the Corporation, (b) restricted stock of the Corporation or (c) similar equity-based units or interests, with awards to the Executive that are of appropriate size and nature relative to those for other senior executives and the individual performance of the Executive. 6. Other Benefits. In addition to the compensation described in Paragraphs 3, 4 and 5, above, the Executive shall also be entitled to participate in all of the various retirement, welfare, fringe benefit, executive perquisite, and expense reimbursement plans, programs and arrangements of the Corporation to the extent the Executive is eligible for participation under the terms of such plans, programs and arrangements, with benefit levels and terms of participation at least as favorable to the Executive as those in effect on the Effective Date, 2 except that the Executive's benefits and/or perquisites may be reduced in connection with similar reductions uniformly applied with respect to all similarly situated employees provided, however, that the Executive's overall benefits shall be no less favorable than those for any other executive of the Corporation. 7. Termination. Unless earlier terminated in accordance with the following provisions of this Paragraph 7, the Corporation shall continue to employ the Executive and the Executive shall remain employed by the Corporation during the entire term of this Agreement as set forth in Paragraph 1(b). Paragraph 9 hereof sets forth certain obligations of the Corporation in the event that the Executive's employment hereunder is terminated. Certain capitalized terms used in this Paragraph 7 and in Paragraphs 8 and 9 hereof are defined in Paragraph 7(d), below. (a) Death or Disability. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination payment obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event of the Executive's death or in the event that the Executive becomes disabled. The Executive will be deemed to be disabled upon the earlier of (i) the end of a six (6)-consecutive month period during which, by reason of physical or mental injury or disease, the Executive has been unable to perform substantially all of his usual and customary duties under this Agreement or (ii) the date that a reputable physician selected by the Board, and as to whom the Executive has no reasonable objection, determines in writing that the Executive will, by reason of physical or mental injury or disease, be unable to perform substantially all of the Executive's usual and customary duties under this Agreement for a period of at least six (6) consecutive months. If any question arises as to whether the Executive is disabled, upon reasonable request therefor by the Board, the Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Board shall promptly give the Executive written notice of any such determination of the Executive's disability and of any decision of the Board to terminate the Executive's employment by reason thereof. Until the Date of Termination for disability, the base salary payable to the Executive under Paragraph 3 hereof shall be reduced dollar-for-dollar by the amount of any disability benefits paid to the Executive in accordance with any disability policy or program of the Corporation. (b) Discharge for Cause. In accordance with the procedures hereinafter set forth, the Board may discharge the Executive from his employment hereunder for Cause. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged for Cause. Any discharge of the Executive for Cause shall be communicated by a Notice of Termination to the Executive given in accordance with Paragraph 17 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under 3 the provision so indicated and (iii) specifies the termination date, which may be as early as the date of the giving of such notice. In the case of a discharge of the Executive for Cause, the Notice of Termination shall include a copy of a resolution duly adopted by the Board at a meeting called and held for such purpose (after reasonable notice to the Executive and reasonable opportunity for the Executive, together with the Executive's counsel, to be heard before the Board prior to such vote), finding that, in the reasonable and good faith opinion of the Board, the Executive was guilty of conduct constituting Cause. No purported termination of the Executive's employment for Cause shall be effective without a Notice of Termination. (c) Termination for Other Reasons. The Corporation may discharge the Executive without Cause by giving written notice to the Executive in accordance with Paragraph 17 at least fifteen (15) days prior to the Date of Termination. The Executive may resign from his employment, without liability to the Corporation, by giving written notice to the Corporation in accordance with Paragraph 17 at least fifteen (15) days prior to the Date of Termination. Except to the extent otherwise provided in Paragraph 9 with respect to certain post- Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged without Cause or resigns. (d) Definitions. For purposes of this Agreement, the following capitalized terms shall have the meanings set forth below: (i) "Accrued Obligations" shall mean, as of the Date of Termination, the sum of (A) the Executive's base salary under Paragraph 3 through the Date of Termination to the extent not theretofore paid, (B) the amount of any bonus, incentive compensation, deferred compensation and other cash compensation accrued by the Executive as of the Date of Termination to the extent not theretofore paid and (C) any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive as of the Date of Termination to the extent not theretofore paid. For the purpose of this Paragraph 7(d)(i), amounts shall be deemed to accrue ratably over the period during which they are earned, but no discretionary compensation shall be deemed earned or accrued until it is specifically approved by the Board or the Compensation Committee in accordance with the applicable plan, program or policy. (ii) "Cause" shall mean: (A) the Executive's commission of an act materially and demonstrably detrimental to the financial condition and/or goodwill of the Corporation or any of its subsidiaries, which act constitutes gross negligence or willful misconduct by the Executive in the performance of his material duties to the Corporation or any of its subsidiaries, or (B) the Executive's commission of any material act of dishonesty or breach of trust resulting or intended to result in material personal gain or enrichment of the Executive at the expense of the Corporation or any of its subsidiaries, or (C) the Executive's conviction of a felony involving moral turpitude, but specifically excluding any conviction based entirely on vicarious liability. No act or failure to act will be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief 4 that his action or omission was in the best interests of the Corporation. In addition, no act or omission will constitute Cause unless (A) a resolution finding that Cause exists has been approved by a majority of all of the members of the Board at a meeting at which the Executive is allowed to appear with his legal counsel and (B) the Corporation has given detailed written notice thereof to the Executive and, where remedial action is feasible, he then fails to remedy the act or omission within a reasonable time after receiving such notice. (iii) A "Change in Control" shall be deemed to have occurred if: (A) Any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose the Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities; provided, however, that no Change in Control shall be deemed to have occurred as the result of an acquisition of securities of the Corporation by the Corporation which, by reducing the number of voting securities outstanding, increases the direct or indirect beneficial ownership interest of any person to twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Corporation shall be deemed a Change in Control; and provided further that if the Board of Directors of the Corporation determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities has inadvertently reached that level of ownership interest, and if such person divests as promptly as practicable a sufficient amount of securities of the Corporation so that the person no longer has a direct or indirect beneficial ownership interest in twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities, then no Change in Control shall be deemed to have occurred; (B) During any period of two (2) consecutive years (not including any period prior to the Effective Date of this Agreement), individuals who at the beginning of such two-year period constitute the Board of Directors of the Corporation and any new director or directors (except for any director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in subparagraph (A), above, or subparagraph (C), below) whose election by the Board or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board (such individuals and any such new directors being referred to as the "Incumbent Board"); or 5 (C) Consummation of (1) an agreement for the sale or disposition of the Corporation or all or substantially all of the Corporation's assets, (2) a plan of merger or consolidation of the Corporation with any other corporation, or (3) a similar transaction or series of transactions involving the Corporation (any transaction described in parts (1) through (3) of this subparagraph (C) being referred to as a "Business Combination"), in each case unless after such a Business Combination (x) the shareholders of the Corporation immediately prior to the Business Combination continue to own, directly or indirectly, more than sixty percent (60%) of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the new (or continued) entity (including, but not by way of limitation, an entity which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's former assets either directly or through one or more subsidiaries) immediately after such Business Combination, in substantially the same proportion as their ownership of the Corporation immediately prior to such Business Combination, (y) no person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or of such entity resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of the then combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination, and (z) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (D) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. Any other provision of this Agreement to the contrary notwithstanding, a "Change in Control" shall not include any transaction described in subparagraph (A) or (C), above, where, in connection with such transaction, the Executive and/or any party acting in concert with the Executive substantially increases his or its, as the case may be, ownership interest in the Corporation or a successor to the Corporation (other than through conversion of prior ownership interests in the Corporation and/or through equity awards received entirely as compensation for past or future personal services). (iv) "Date of Termination" shall mean (A) in the event of a discharge of the Executive by the Board for Cause, the date specified in such Notice of Termination, (B) in the event of a discharge of the Executive without Cause or a resignation by the Executive, the date specified in the written notice to the Executive (in the case of discharge) or the Corporation (in the case of resignation), which date shall be no less than fifteen (15) days from the date of such written notice, (C) in the event of the Executive's death, the date of the Executive's death, and (D) in the event of termination of the Executive's employment by reason of disability pursuant to Paragraph 7(a), the date the Executive receives written notice of such termination. 6 (v) "Good Reason" shall mean any of the following without the consent of the Executive: (A) the failure to re-elect the Executive as Chairman and Chief Executive Officer, (B) assignment of duties inconsistent with the Executive's position, authority, duties or responsibilities, or any other action by the Corporation which results in a substantial diminution of such position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, (C) any failure by the Corporation to comply with any of the provisions of this Agreement, including (but not by way of limitation) those provisions regarding compensation and benefits, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (D) the Corporation giving notice to the Executive to stop further operation of the evergreen feature described in Paragraph 1(b), above. However, during the period of three (3) years after a Change in Control, "Good Reason" shall also include the Executive being reassigned, without the Executive's consent, to an office location outside of the Chicago, Illinois metropolitan area. In addition, termination by the Executive for any reason during "the thirty-six (36)-month period beginning with a Change in Control shall be deemed to be a termination for Good Reason; provided, however, that if the Executive dies after a Change in Control but less than six (6) months after a Change in Control, the Executive will be deemed to have terminated employment for Good Reason six (6) months after the Change in Control. (vi) "Qualifying Termination" shall mean termination of the Executive's employment under this Agreement (A) by reason of the discharge of the Executive by the Corporation other than for Cause or disability or (B) by reason of the resignation of the Executive for Good Reason within six (6) months after an event constituting Good Reason or (C) in accordance with the last sentence of the definition of Good Reason in subparagraph (v), above. 8. Vesting of Equity Awards Upon a Change in Control. Immediately upon the Change in Control, all stock options, restricted stock and other equity awards previously made to the Executive which are not otherwise vested shall vest in full, and all such options shall remain exercisable for the remainder of the originally designated respective term of each option. 9. Obligations of the Corporation Upon Termination. The following provisions describe the obligations of the Corporation to the Executive under this Agreement upon termination of his employment. However, except as explicitly provided in this Agreement, nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Corporation or any of its subsidiaries, or under any compensation or benefit plan, program, policy or practice of the Corporation or any of its subsidiaries. 7 (a) Death, Disability, Discharge for Cause, or Resignation Without Good Reason. In the event this Agreement terminates by reason of the death or disability of the Executive, or by reason of the discharge of the Executive by the Corporation for Cause, or by reason of the resignation of the Executive other than for Good Reason, the Corporation shall pay to the Executive, or his heirs or estate, in the event of the Executive's death, all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation, or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive. (b) Death, Disability or Retirement. In the event that Executive's employment is terminated by death, disability or retirement under a retirement plan of the Corporation, the Executive shall be entitled to receive, in addition to the compensation and benefits described in paragraph (a), above, a pro rata cash bonus for the year in which the Date of Termination occurs, determined and paid in accordance with the terms of the then current annual bonus plan applicable to the Executive. (c) Qualifying Termination Without a Change in Control. In the event of a Qualifying Termination without a Change in Control, the Executive shall, upon executing and delivering a release of liability satisfactory to the Corporation, receive the following benefits: (i) Payment of all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to two hundred percent (200%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to two hundred percent (200%) of the average of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, (iv) Continuation, for two (2) years after the Date of Termination, of the welfare benefits and perquisites which are described in paragraph (d) (iv), below,] with the cost of such benefits to be paid by the Corporation, but such benefits may be discontinued earlier to the extent that the Executive becomes entitled to comparable benefits from a subsequent employer, (v) Immediate full vesting of all stock options, restricted stock and other equity or incentive compensation awards to the Executive which are not otherwise 8 vested, options to remain exercisable for the full respective term originally designated for each award, (vi) Outplacement services, at the expense of the Corporation, from a provider reasonably selected by the Executive. In addition, the Executive may, in the discretion of the Compensation Committee, be awarded a pro rata cash bonus for the year in which the Date of Termination occurs. (d) Qualifying Termination After a Change in Control. In the event of a Qualifying Termination within three (3) years after a Change in Control, the Executive shall receive, in addition to the compensation and benefits described in subparagraphs (c)(i) and (c)(vi), above, the following benefits: (i) A pro rata cash bonus for the year in which the Date of Termination occurs, determined and paid in accordance with the terms of the then current annual bonus plan applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to three hundred percent (300%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to three hundred percent (300%) of the highest of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, (iv) Continuation, for a period of three (3) years after the Date of Termination, of the following welfare benefits and senior executive perquisites on terms at least as favorable to the Executive as those which would have been provided if the Executive's employment had continued for that time pursuant to this Agreement: medical and dental benefits, life and disability insurance, executive physical examinations, and automobile and financial counseling allowances, with the cost of such benefits to be paid by the Corporation. To the extent the Corporation is unable to provide comparable insurance for reasons other than cost, the Corporation may provide a lesser level or no coverage and compensate the Executive for the difference in coverage through a cash lump sum payment grossed up for taxes. This payment will be tied to the cost of an individual insurance policy if it were assumed to be available, (v) Immediate vesting of the Executive's interests in all non- qualified or supplemental retirement plans in which the Executive participates (including, but not by way of limitation, supplemental Section 401(k) plans), calculated on the basis of the Executive's actual period of service plus three (3) years, giving effect for that additional period to the salary replacement and bonus replacement amounts described in subparagraphs (ii) and 9 (iii), above, and taking into account the maximum matching contributions by the Corporation under qualified and supplemental Section 401(k) plans. (e) Termination of Employment Prior to Change in Control. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Corporation is terminated within six (6) months prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who was taking steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement the termination of the Executive's employment shall be deemed to have occurred immediately after the Change in Control. 10. Certain Additional Payments by the Corporation. The Corporation agrees that: (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or if any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of paragraph (c), below, all determinations required to be made under this Paragraph 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the accounting firm which is then serving as the auditors for the Corporation (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Corporation. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Paragraph 10, shall be paid by the Corporation to the Executive within five (5) days of the 10 receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any good faith determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to paragraph (c), below, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive. (c) The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which Executive gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Corporation any information reasonably requested by the Corporation relating to such claim, (ii) Take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation, (iii) Cooperate with the Corporation in good faith in order effectively to contest such claim, and (iv) Permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such 11 representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph (c), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation's control of the contest shall be limited to issues with respect to which a Gross- Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to paragraph (c), above, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation's complying with the requirements of said paragraph (c)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon, after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to said paragraph (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid; and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. 11. No Set-Off or Mitigation. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Corporation may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. 12. Payment of Certain Expenses. The Corporation agrees to pay promptly as incurred, to the fullest extent permitted by law, all legal fees and expenses which the 12 Executive may reasonably incur as a result of any contest by the Corporation, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest initiated by the Executive about the amount of any payment due pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, however, that the Corporation shall not be obligated to make such payment with respect to any contest in which the Corporation prevails over the Executive. 13. Indemnification. To the full extent permitted by law, the Corporation shall, both during and after the term of the Executive's employment, indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being (or having been) an officer, director or employee of the Corporation or any of its subsidiaries. In addition, the Executive shall be covered, both during and after the term of the Executive's employment, by director and officer liability insurance to the maximum extent that such insurance covers any officer or director (or former officer or director) of the Corporation. 14. Confidentiality. During and after the period of employment with the Corporation, the Executive shall not, without prior written consent from the General Counsel of the Corporation directly or indirectly disclose to any individual, corporation or other entity, other than to the Corporation or any subsidiary or affiliate thereof or their officers, directors or employees entitled to such information or any other person or entity to whom such information is disclosed in the normal course of the business of the Corporation) or use for the Executive's own benefit or for the benefit of any such individual, corporation or other entity, any Confidential Information of the Corporation. For purposes of this Agreement, "Confidential Information" is information relating to the business of the Corporation or its subsidiaries or affiliates (a) which is not generally known to the public or in the industry, (b) which has been treated by the Corporation and its subsidiaries and affiliates as confidential or proprietary, (c) which provides the Corporation or its subsidiaries or affiliates with a competitive advantage, and (d) in the confidentiality of which the Corporation has a legally protectable interest. Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which the Corporation and its subsidiaries and affiliates cease to have a legally protectable interest, shall cease to be subject to the restrictions of this Paragraph 14. 15. Status Under FDIC Regulations. This Agreement amends and restates a prior employment agreement dated February 13, 1995 which was entered into prior to March 29, 1995, which was the date that regulations were proposed by the Federal Deposit Insurance Corporation (the "FDIC") limiting "golden parachute" and indemnification payments by insured depository institutions and their holding companies. As of March 29, 1995 that prior agreement provided for a lump sum payment equal to 600% of the Executive's base salary. In view of the foregoing, if the payments and other benefits under Paragraph 9 of this Agreement are limited by those FDIC regulations, it is currently anticipated that any limits on "golden 13 parachute" payments resulting from regulations issued by the FDIC should not reduce the payments under this Agreement below the lesser of (a) 600% of the Executive's base salary or (b) the payments and other benefits calculated under Paragraph 9 of this Agreement. However, if FDIC regulations are ultimately determined to further limit payments and other benefits under this Agreement, then such FDIC limits shall supersede the terms of Paragraph 9, above. 16. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law, and such successor shall be deemed the "Corporation" for purposes of this Agreement. 17. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or by recognized commercial delivery service or if mailed within the continental United States by first class certified mail, return receipt requested, postage prepaid, addressed as follows: (1) If to the Board or the Corporation, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: Senior Vice President-Human Resources (2) If to the Executive, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: William F. Aldinger Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. 14 18. Tax Withholding. The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state, or local law with respect to any payment in cash, shares of stock and/or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (a) withhold such taxes from any cash payments owing from the Corporation to the Executive, (b) require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding obligations and/or (c) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 19. Arbitration. Except as to any controversy or claim which the Executive elects, by written notice to the Corporation, to have adjudicated by a court of competent jurisdiction, any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in Chicago, Illinois in accordance with the laws of the State of Illinois. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association. The costs and expenses of the arbitrator(s) shall be borne by the Corporation. The award of the arbitrator(s) shall be binding upon the parties. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. 20. No Assignment. Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 21. Execution in Counterparts. This Agreement may be executed by the parties hereto in two (2) or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 22. Jurisdiction and Governing Law. This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of Illinois, other than the conflict of laws provisions of such laws. 23. Severability. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. Furthermore, if the scope of any restriction or requirement contained in this Agreement is too broad to permit enforcement of such restriction or requirement to its full extent, then such restriction or requirement shall be enforced to the maximum extent permitted by law, and the Executive consents and agrees that any court of competent jurisdiction may so modify such scope in any proceeding brought to enforce such restriction or requirement. 24. Prior Understandings. This Agreement embodies the entire understanding of the parties hereto and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof, including but not by way of limitation by 15 amending and restating the Employment Agreement dated July 9, 1996 and the Employment Agreement dated February 13, 1995 between the parties. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. The headings in this Agreement are for convenience of reference only and shall not be construed as part of this Agreement or to limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. Attest: HOUSEHOLD INTERNATIONAL, INC. /s/ Kenneth H. Robin By /s/ George A. Lorch - ------------------------------------- ------------------------------------ Kenneth H. Robin Title: Chairman of the Compensation Senior Vice President-General Counsel Committee of Household International, and Corporate Secretary Inc. /s/ William F. Aldinger ---------------------------------- William F. Aldinger 16 EX-10.11 7 EXECUTIVE EMPLOYMENT AGREEMENT--L. N. BANGS Exhibit 10.11 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, made and entered into as of January 1, 1999 by and between Household International, Inc., a Delaware corporation, (hereinafter called the "Corporation") and Lawrence N. Bangs (hereinafter called the " Executive"). WITNESSETH THAT: WHEREAS, the Executive is currently employed by the Corporation under an employment agreement dated July 9, 1996; and WHEREAS, the Corporation desires to continue to employ the Executive as its Group Executive, and the Executive desires to continue in such employment, on amended and restated terms and conditions; NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. Employment and Term. (a) Employment. The Corporation shall continue to employ the Executive as the Group Executive of the Corporation, and the Executive shall so serve, for the term set forth in Paragraph 1(b). (b) Term. The initial term of the Executive's employment under this Agreement shall commence as of January 1, 1999 (the "Effective Date") and end on June 30, 2000, subject to the extension of such term as hereinafter provided and subject to earlier termination as provided in Paragraph 7, below. Beginning on January 1, 1999, the term of this Agreement shall be extended automatically for one (1) additional day for each day which has then elapsed since January 1, 1999, unless, at any time after January 1, 1999, either the Board of Directors of the Corporation (the "Board"), on behalf of the Corporation, or the Executive gives written notice to the other that such automatic extension of the term of this Agreement shall cease. Any such notice shall be effective immediately upon delivery. The initial term of this Agreement, plus any extension by operation of this Paragraph 1, shall be hereinafter referred to as the "Term." 2. Duties. During the period of employment as provided in Paragraph 1(b) hereof, the Executive shall serve as Group Executive of the Corporation and have all powers and duties consistent with such position, subject to the reasonable direction of the Board and of the Chief Executive Officer of the Corporation. The Executive shall also continue to serve as a member of the Board if elected as such. The Executive shall devote substantially his entire time during reasonable business hours (reasonable sick leave and vacations excepted) and best efforts to fulfill faithfully, responsibly and to the best of his ability his duties 1 hereunder. However, the Executive may, with the approval of the Board or of the Chief Executive Officer of the Corporation, which shall not be withheld unreasonably, serve on corporate, civic and/or charitable boards and committees. 3. Salary. (a) Base Salary. For services performed by the Executive for the Corporation pursuant to this Agreement during the period of employment as provided in Paragraph 1(b) hereof, the Corporation shall pay the Executive a base salary of $500,000 per year, payable in substantially equal installments in accordance with the Corporation's regular payroll practices. The Executive's base salary (with any increases under paragraph (b), below) shall not be subject to reduction. Any compensation which may be paid to the Executive under any additional compensation or incentive plan of the Corporation or which may be otherwise authorized from time to time by the Board (or an appropriate committee thereof) shall be in addition to the base salary to which the Executive shall be entitled under this Agreement. (b) Salary Increases. During the period of employment as provided in Paragraph 1(b) hereof, the base salary of the Executive shall be reviewed no less frequently than annually by the Board or the Compensation Committee of the Board to determine whether or not the same should be increased in light of the duties and responsibilities of the Executive and the performance thereof, and if it is determined that an increase is merited, such increase shall be promptly put into effect and the base salary of the Executive as so increased shall constitute the base salary of the Executive for purposes of Paragraph 3(a). 4. Annual Bonuses. For each calendar year during the term of employment, the Executive shall be eligible to receive in cash an annual performance bonus based upon the terms of the Corporation's bonus plan from time to time for senior executives, as adopted by the Board and administered by the Compensation Committee. 5. Equity Incentive Compensation. During the term of employment hereunder the Executive shall be eligible to participate, in the manner and to the extent approved by the Board or the Compensation Committee, in any equity-based incentive compensation plan or program approved by the Board from time to time, including (but not by way of limitation) any plan providing for the granting of (a) options to purchase stock of the Corporation, (b) restricted stock of the Corporation or (c) similar equity-based units or interests, with awards to the Executive that are of appropriate size and nature relative to those for other senior executives and the individual performance of the Executive. 6. Other Benefits. In addition to the compensation described in Paragraphs 3, 4 and 5, above, the Executive shall also be entitled to participate in all of the various retirement, welfare, fringe benefit, executive perquisite, and expense reimbursement plans, programs and arrangements of the Corporation to the extent the Executive is eligible for participation under the terms of such plans, programs and arrangements, with benefit levels and terms of 2 participation at least as favorable to the Executive as those in effect on the Effective Date, except that the Executive's benefits and/or perquisites may be reduced in connection with similar reductions uniformly applied with respect to all similarly situated employees. 7. Termination. Unless earlier terminated in accordance with the following provisions of this Paragraph 7, the Corporation shall continue to employ the Executive and the Executive shall remain employed by the Corporation during the entire term of this Agreement as set forth in Paragraph 1(b). Paragraph 9 hereof sets forth certain obligations of the Corporation in the event that the Executive's employment hereunder is terminated. Certain capitalized terms used in this Paragraph 7 and in Paragraphs 8 and 9 hereof are defined in Paragraph 7(d), below. (a) Death or Disability. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination payment obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event of the Executive's death or in the event that the Executive becomes disabled. The Executive will be deemed to be disabled upon the earlier of (i) the end of a six (6)-consecutive month period during which, by reason of physical or mental injury or disease, the Executive has been unable to perform substantially all of his usual and customary duties under this Agreement or (ii) the date that a reputable physician selected by the Board, and as to whom the Executive has no reasonable objection, determines in writing that the Executive will, by reason of physical or mental injury or disease, be unable to perform substantially all of the Executive's usual and customary duties under this Agreement for a period of at least six (6) consecutive months. If any question arises as to whether the Executive is disabled, upon reasonable request therefor by the Board, the Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Board shall promptly give the Executive written notice of any such determination of the Executive's disability and of any decision of the Board to terminate the Executive's employment by reason thereof. Until the Date of Termination for disability, the base salary payable to the Executive under Paragraph 3 hereof shall be reduced dollar-for-dollar by the amount of any disability benefits paid to the Executive in accordance with any disability policy or program of the Corporation. (b) Discharge for Cause. In accordance with the procedures hereinafter set forth, the Board may discharge the Executive from his employment hereunder for Cause. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged for Cause. Any discharge of the Executive for Cause shall be communicated by a Notice of Termination to the Executive given in accordance with Paragraph 16 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, which may be as early as the 3 date of the giving of such notice. No purported termination of the Executive's employment for Cause shall be effective without a Notice of Termination. (c) Termination for Other Reasons. The Corporation may discharge the Executive without Cause by giving written notice to the Executive in accordance with Paragraph 16 at least fifteen (15) days prior to the Date of Termination. The Executive may resign from his employment, without liability to the Corporation, by giving written notice to the Corporation in accordance with Paragraph 16 at least fifteen (15) days prior to the Date of Termination. Except to the extent otherwise provided in Paragraph 9 with respect to certain post- Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged without Cause or resigns. (d) Definitions. For purposes of this Agreement, the following capitalized terms shall have the meanings set forth below: (i) "Accrued Obligations" shall mean, as of the Date of Termination, the sum of (A) the Executive's base salary under Paragraph 3 through the Date of Termination to the extent not theretofore paid, (B) the amount of any bonus, incentive compensation, deferred compensation and other cash compensation accrued by the Executive as of the Date of Termination to the extent not theretofore paid and (C) any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive as of the Date of Termination to the extent not theretofore paid. For the purpose of this Paragraph 7(d)(i), amounts shall be deemed to accrue ratably over the period during which they are earned, but no discretionary compensation shall be deemed earned or accrued until it is specifically approved by the Board or the Compensation Committee in accordance with the applicable plan, program or policy. (ii) "Cause" shall mean: (A) the Executive's commission of an act materially and demonstrably detrimental to the financial condition and/or goodwill of the Corporation or any of its subsidiaries, which act constitutes gross negligence or willful misconduct by the Executive in the performance of his material duties to the Corporation or any of its subsidiaries, or (B) the Executive's commission of any material act of dishonesty or breach of trust resulting or intended to result in material personal gain or enrichment of the Executive at the expense of the Corporation or any of its subsidiaries, or (C) the Executive's conviction of a felony involving moral turpitude, but specifically excluding any conviction based entirely on vicarious liability. No act or failure to act will be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that his action or omission was in the best interests of the Corporation. In addition, no act or omission will constitute Cause unless the Corporation has given detailed written notice thereof to the Executive and, where remedial action is feasible, he then fails to remedy the act or omission within a reasonable time after receiving such notice. (iii) A "Change in Control" shall be deemed to have occurred if: 4 (A) Any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose the Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities; provided, however, that no Change in Control shall be deemed to have occurred as the result of an acquisition of securities of the Corporation by the Corporation which, by reducing the number of voting securities outstanding, increases the direct or indirect beneficial ownership interest of any person to twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Corporation shall be deemed a Change in Control; and provided further that if the Board of Directors of the Corporation determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities has inadvertently reached that level of ownership interest, and if such person divests as promptly as practicable a sufficient amount of securities of the Corporation so that the person no longer has a direct or indirect beneficial ownership interest in twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities, then no Change in Control shall be deemed to have occurred; (B) During any period of two (2) consecutive years (not including any period prior to the Effective Date of this Agreement), individuals who at the beginning of such two-year period constitute the Board of Directors of the Corporation and any new director or directors (except for any director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in subparagraph (A), above, or subparagraph (C), below) whose election by the Board or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board (such individuals and any such new directors being referred to as the "Incumbent Board"); or (C) Consummation of (1) an agreement for the sale or disposition of the Corporation or all or substantially all of the Corporation's assets, (2) a plan of merger or consolidation of the Corporation with any other corporation, or (3) a similar transaction or series of transactions involving the Corporation (any transaction described in parts (1) through (3) of this subparagraph (C) being referred to as a "Business Combination"), in each case unless after such a Business Combination (x) the shareholders of the Corporation immediately prior to the Business Combination continue to own, directly or indirectly, more than sixty 5 percent (60%) of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the new (or continued) entity (including, but not by way of limitation, an entity which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's former assets either directly or through one or more subsidiaries) immediately after such Business Combination, in substantially the same proportion as their ownership of the Corporation immediately prior to such Business Combination, (y) no person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or of such entity resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of the then combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination, and (z) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (D) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. Any other provision of this Agreement to the contrary notwithstanding, a "Change in Control" shall not include any transaction described in subparagraph (A) or (C), above, where, in connection with such transaction, the Executive and/or any party acting in concert with the Executive substantially increases his or its, as the case may be, ownership interest in the Corporation or a successor to the Corporation (other than through conversion of prior ownership interests in the Corporation and/or through equity awards received entirely as compensation for past or future personal services). (iv) "Date of Termination" shall mean (A) in the event of a discharge of the Executive by the Board for Cause, the date specified in such Notice of Termination, (B) in the event of a discharge of the Executive without Cause or a resignation by the Executive, the date specified in the written notice to the Executive (in the case of discharge) or the Corporation (in the case of resignation), which date shall be no less than fifteen (15) days from the date of such written notice, (C) in the event of the Executive's death, the date of the Executive's death, and (D) in the event of termination of the Executive's employment by reason of disability pursuant to Paragraph 7(a), the date the Executive receives written notice of such termination. (v) "Good Reason" shall mean any of the following without the consent of the Executive: (A) the failure to re-elect the Executive as Group Executive, (B) assignment of duties inconsistent with the Executive's position, authority, duties or responsibilities, or any other action by the Corporation which results in a substantial diminution of such position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, (C) any failure by 6 the Corporation to comply with any of the provisions of this Agreement, including (but not by way of limitation) those provisions regarding compensation and benefits, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (D) the Corporation giving notice to the Executive to stop further operation of the evergreen feature described in Paragraph 1(b), above. However, during the period of three (3) years after a Change in Control, "Good Reason" shall also include the Executive being reassigned, without the Executive's consent, to an office location outside of the Chicago, Illinois metropolitan area. In addition, termination by the Executive for any reason during the sixty (60)-day period which begins six (6) months after a Change in Control shall be deemed to be a termination for Good Reason; provided, however, that if the Executive dies after a Change in Control but less than six (6) months after a Change in Control, the Executive will be deemed to have terminated employment for Good Reason six (6) months after the Change in Control. (vi) "Qualifying Termination" shall mean termination of the Executive's employment under this Agreement (A) by reason of the discharge of the Executive by the Corporation other than for Cause or disability or (B) by reason of the resignation of the Executive for Good Reason within six (6) months after an event constituting Good Reason or (C) in accordance with the last sentence of the definition of Good Reason in subparagraph (v), above. 8. Vesting of Equity Awards Upon a Change in Control. Immediately upon the Change in Control, all stock options, restricted stock and other equity awards previously made to the Executive which are not otherwise vested shall vest in full, and all such options shall remain exercisable for the period provided for the applicable plan or award agreement. 9. Obligations of the Corporation Upon Termination. The following provisions describe the obligations of the Corporation to the Executive under this Agreement upon termination of his employment. However, except as explicitly provided in this Agreement, nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Corporation or any of its subsidiaries, or under any compensation or benefit plan, program, policy or practice of the Corporation or any of its subsidiaries. (a) Death, Disability, Discharge for Cause, or Resignation Without Good Reason. In the event this Agreement terminates by reason of the death or disability of the Executive, or by reason of the discharge of the Executive by the Corporation for Cause, or by reason of the resignation of the Executive other than for Good Reason, the Corporation shall pay to the Executive, or his heirs or estate, in the event of the Executive's death, all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation, or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive. 7 (b) Death, Disability or Retirement. In the event that Executive's employment is terminated by death, disability or retirement under a retirement plan of the Corporation, the Executive shall be entitled to receive, in addition to the compensation and benefits described in paragraph (a), above, a pro rata cash bonus for the year in which the Date of Termination occurs, determined and paid in accordance with the terms of the then current annual bonus plan applicable to the Executive. (c) Qualifying Termination Without a Change in Control. In the event of a Qualifying Termination without a Change in Control, the Executive shall, upon executing and delivering a release of liability satisfactory to the Corporation, receive the following benefits: (i) Payment of all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to one hundred fifty percent (150%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to one hundred fifty percent (150%) of the average of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, (iv) Continuation, for a period of eighteen (18) months after the Date of Termination, of health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") with the cost of such benefits to be paid by the Corporation, but such benefits may be discontinued earlier to the extent that the Executive becomes entitled to comparable benefits from a subsequent employer, (v) Immediate pro rata vesting of all stock options, restricted stock and other equity or incentive compensation awards to the Executive which are not otherwise fully vested, with all options to remain exercisable for the period provided for in the applicable plan or award agreement. The proration of each award shall be done by multiplying the full award by a fraction, the numerator of which shall be the number of full months between the date of grant and the Date of Termination, and the denominator of which shall be the number of full months in the period of employment required for full vesting under the original terms of the award, and (vi) Outplacement services, at the expense of the Corporation, from a provider reasonably selected by the Executive. 8 In addition, the Executive may, in the discretion of the Compensation Committee, be awarded a pro rata cash bonus for the year in which the Date of Termination occurs. (d) Qualifying Termination After a Change in Control. In the event of a Qualifying Termination within three (3) years after a Change in Control, the Executive shall receive, in addition to the compensation and benefits described in subparagraphs (c)(i) and (c)(vi), above, the following benefits: (i) A pro rata cash bonus for the year in which the Date of Termination occurs, determined and paid in accordance with the terms of the then current annual bonus plan applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to three hundred percent (300%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to three hundred percent (300%) of the highest of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, (iv) Continuation, for a period of three (3) years after the Date of Termination, of the following welfare benefits and senior executive perquisites on terms at least as favorable to the Executive as those which would have been provided if the Executive's employment had continued for that time pursuant to this Agreement: medical and dental benefits, life and disability insurance, executive physical examinations, and automobile and financial counseling allowances, with the cost of such benefits to be paid by the Corporation. To the extent the Corporation is unable to provide comparable insurance for reasons other than cost, the Corporation may provide a lesser level or no coverage and compensate the Executive for the difference in coverage through a cash lump sum payment grossed up for taxes. This payment will be tied to the cost of an individual insurance policy if it were assumed to be available, (v) Immediate vesting of the Executive's interests in all non- qualified or supplemental retirement plans in which the Executive participates (including, but not by way of limitation, supplemental Section 401(k) plans), calculated on the basis of the Executive's actual period of service plus three (3) years, giving effect for that additional period to the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii), above, and taking into account the maximum matching contributions by the Corporation under qualified and supplemental Section 401(k) plans. (e) Termination of Employment Prior to Change in Control. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Corporation is terminated within six (6) months prior to the 9 date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who was taking steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement the termination of the Executive's employment shall be deemed to have occurred immediately after the Change in Control. 10. Certain Additional Payments by the Corporation. The Corporation agrees that: (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or if any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of paragraph (c), below, all determinations required to be made under this Paragraph 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the accounting firm which is then serving as the auditors for the Corporation (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Corporation. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Paragraph 10, shall be paid by the Corporation to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any good faith determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the 10 time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to paragraph (c), below, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive. (c) The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which Executive gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Corporation any information reasonably requested by the Corporation relating to such claim, (ii) Take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation, (iii) Cooperate with the Corporation in good faith in order effectively to contest such claim, and (iv) Permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph (c), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; and the Executive agrees to prosecute such 11 contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to paragraph (c), above, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation's complying with the requirements of said paragraph (c)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon, after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to said paragraph (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid; and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. 11. No Set-Off or Mitigation. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Corporation may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment . 12. Payment of Certain Expenses. The Corporation agrees to pay promptly as incurred, to the fullest extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest by the Corporation, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest initiated by the Executive about the amount of any payment due pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, 12 however, that the Corporation shall not be obligated to make such payment with respect to any contest in which the Corporation prevails over the Executive. 13. Indemnification. To the full extent permitted by law, the Corporation shall, both during and after the term of the Executive's employment, indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being (or having been) an officer, director or employee of the Corporation or any of its subsidiaries. In addition, the Executive shall be covered, both during and after the term of the Executive's employment, by director and officer liability insurance to the maximum extent that such insurance covers any officer or director (or former officer or director) of the Corporation. 14. Confidentiality. During and after the period of employment with the Corporation, the Executive shall not, without prior written consent from the Chief Executive Officer or the General Counsel of the Corporation directly or indirectly disclose to any individual, corporation or other entity, other than to the Corporation or any subsidiary or affiliate thereof or their officers, directors or employees entitled to such information or any other person or entity to whom such information is disclosed in the normal course of the business of the Corporation) or use for the Executive's own benefit or for the benefit of any such individual, corporation or other entity, any Confidential Information of the Corporation. For purposes of this Agreement, "Confidential Information" is information relating to the business of the Corporation or its subsidiaries or affiliates (a) which is not generally known to the public or in the industry, (b) which has been treated by the Corporation and its subsidiaries and affiliates as confidential or proprietary, (c) which provides the Corporation or its subsidiaries or affiliates with a competitive advantage, and (d) in the confidentiality of which the Corporation has a legally protectable interest. Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which the Corporation and its subsidiaries and affiliates cease to have a legally protectable interest, shall cease to be subject to the restrictions of this Paragraph 14. 15. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law, and such successor shall be deemed the "Corporation" for purposes of this Agreement. 13 16. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or by recognized commercial delivery service or if mailed within the continental United States by first class certified mail, return receipt requested, postage prepaid, addressed as follows: (1) If to the Board or the Corporation, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: Senior Vice President-Human Resources (2) If to the Executive, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: Lawrence N. Bangs Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. 17. Tax Withholding. The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state, or local law with respect to any payment in cash, shares of stock and/or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (a) withhold such taxes from any cash payments owing from the Corporation to the Executive, (b) require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding obligations and/or (c) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 18. Arbitration. Except as to any controversy or claim which the Executive elects, by written notice to the Corporation, to have adjudicated by a court of competent jurisdiction, any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in Chicago, Illinois in accordance with the laws of the State of Illinois. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association. The costs and expenses of the arbitrator(s) shall be borne by the Corporation. The award of the arbitrator(s) shall be binding upon the parties. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. 19. No Assignment. Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be 14 subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 20. Execution in Counterparts. This Agreement may be executed by the parties hereto in two (2) or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 21. Jurisdiction and Governing Law. This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of Illinois, other than the conflict of laws provisions of such laws. 22. Severability. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. Furthermore, if the scope of any restriction or requirement contained in this Agreement is too broad to permit enforcement of such restriction or requirement to its full extent, then such restriction or requirement shall be enforced to the maximum extent permitted by law, and the Executive consents and agrees that any court of competent jurisdiction may so modify such scope in any proceeding brought to enforce such restriction or requirement. 23. Prior Understandings. This Agreement embodies the entire understanding of the parties hereto and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof, including but not by way of limitation by amending and restating the Employment Agreement dated July 9, 1996 and the Employment Agreement dated June 9, 1995 between the parties. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. The headings in this Agreement are for convenience of reference only and shall not be construed as part of this Agreement or to limit or otherwise affect the meaning hereof. 15 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. Attest: HOUSEHOLD INTERNATIONAL, INC. /s/ Kenneth H. Robin By: /s/ William F. Aldinger - -------------------------------- ---------------------------------------- Kenneth H. Robin Title: Chairman and Chief Executive Officer Senior Vice President-General Counsel and Corporate Secretary /s/ Lawrence N. Bangs ------------------------------------ Lawrence N. Bangs 16 EX-10.12 8 EXECUTIVE EMPLOYMENT AGREEMENT--G. D. GILMER Exhibit 10.12 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, made and entered into as of January 1, 1999 by and between Household International, Inc., a Delaware corporation, (hereinafter called the "Corporation") and Gary D. Gilmer (hereinafter called the "Executive"). WITNESSETH THAT: WHEREAS, the Executive is currently employed by the Corporation under an employment agreement dated July 9, 1996; and WHEREAS, the Corporation desires to continue to employ the Executive as its Group Executive, and the Executive desires to continue in such employment, on amended and restated terms and conditions; NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. Employment and Term. ------------------- (a) Employment. The Corporation shall continue to employ the Executive as the Group Executive of the Corporation, and the Executive shall so serve, for the term set forth in Paragraph 1(b). (b) Term. The initial term of the Executive's employment under this Agreement shall commence as of January 1, 1999 (the "Effective Date") and end on June 30, 2000, subject to the extension of such term as hereinafter provided and subject to earlier termination as provided in Paragraph 7, below. Beginning on January 1, 1999, the term of this Agreement shall be extended automatically for one (1) additional day for each day which has then elapsed since January 1, 1999, unless, at any time after January 1, 1999, either the Board of Directors of the Corporation (the "Board"), on behalf of the Corporation, or the Executive gives written notice to the other that such automatic extension of the term of this Agreement shall cease. Any such notice shall be effective immediately upon delivery. The initial term of this Agreement, plus any extension by operation of this Paragraph 1, shall be hereinafter referred to as the "Term." 2. Duties. During the period of employment as provided in Paragraph 1(b) hereof, the Executive shall serve as Group Executive of the Corporation and have all powers and duties consistent with such position, subject to the reasonable direction of the Board and of the Chief Executive Officer of the Corporation. The Executive shall also continue to serve as a member of the Board if elected as such. The Executive shall devote substantially his entire time during reasonable business hours (reasonable sick leave and vacations excepted) and best efforts to fulfill faithfully, responsibly and to the best of his ability his duties 1 hereunder. However, the Executive may, with the approval of the Board or of the Chief Executive Officer of the Corporation, which shall not be withheld unreasonably, serve on corporate, civic and/or charitable boards and committees. 3. Salary. ------ (a) Base Salary. For services performed by the Executive for the Corporation pursuant to this Agreement during the period of employment as provided in Paragraph 1(b) hereof, the Corporation shall pay the Executive a base salary of $500,000 per year, payable in substantially equal installments in accordance with the Corporation's regular payroll practices. The Executive's base salary (with any increases under paragraph (b), below) shall not be subject to reduction. Any compensation which may be paid to the Executive under any additional compensation or incentive plan of the Corporation or which may be otherwise authorized from time to time by the Board (or an appropriate committee thereof) shall be in addition to the base salary to which the Executive shall be entitled under this Agreement. (b) Salary Increases. During the period of employment as provided in Paragraph 1(b) hereof, the base salary of the Executive shall be reviewed no less frequently than annually by the Board or the Compensation Committee of the Board to determine whether or not the same should be increased in light of the duties and responsibilities of the Executive and the performance thereof, and if it is determined that an increase is merited, such increase shall be promptly put into effect and the base salary of the Executive as so increased shall constitute the base salary of the Executive for purposes of Paragraph 3(a). 4. Annual Bonuses. For each calendar year during the term of employment, the Executive shall be eligible to receive in cash an annual performance bonus based upon the terms of the Corporation's bonus plan from time to time for senior executives, as adopted by the Board and administered by the Compensation Committee. 5. Equity Incentive Compensation. During the term of employment hereunder the Executive shall be eligible to participate, in the manner and to the extent approved by the Board or the Compensation Committee, in any equity- based incentive compensation plan or program approved by the Board from time to time, including (but not by way of limitation) any plan providing for the granting of (a) options to purchase stock of the Corporation, (b) restricted stock of the Corporation or (c) similar equity-based units or interests, with awards to the Executive that are of appropriate size and nature relative to those for other senior executives and the individual performance of the Executive. 6. Other Benefits. In addition to the compensation described in Paragraphs 3, 4 and 5, above, the Executive shall also be entitled to participate in all of the various retirement, welfare, fringe benefit, executive perquisite, and expense reimbursement plans, programs and arrangements of the Corporation to the extent the Executive is eligible for participation under the terms of such plans, programs and arrangements, with benefit levels and terms of 2 participation at least as favorable to the Executive as those in effect on the Effective Date, except that the Executive's benefits and/or perquisites may be reduced in connection with similar reductions uniformly applied with respect to all similarly situated employees. 7. Termination. Unless earlier terminated in accordance with the following provisions of this Paragraph 7, the Corporation shall continue to employ the Executive and the Executive shall remain employed by the Corporation during the entire term of this Agreement as set forth in Paragraph 1(b). Paragraph 9 hereof sets forth certain obligations of the Corporation in the event that the Executive's employment hereunder is terminated. Certain capitalized terms used in this Paragraph 7 and in Paragraphs 8 and 9 hereof are defined in Paragraph 7(d), below. (a) Death or Disability. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination payment obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event of the Executive's death or in the event that the Executive becomes disabled. The Executive will be deemed to be disabled upon the earlier of (i) the end of a six (6)-consecutive month period during which, by reason of physical or mental injury or disease, the Executive has been unable to perform substantially all of his usual and customary duties under this Agreement or (ii) the date that a reputable physician selected by the Board, and as to whom the Executive has no reasonable objection, determines in writing that the Executive will, by reason of physical or mental injury or disease, be unable to perform substantially all of the Executive's usual and customary duties under this Agreement for a period of at least six (6) consecutive months. If any question arises as to whether the Executive is disabled, upon reasonable request therefor by the Board, the Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Board shall promptly give the Executive written notice of any such determination of the Executive's disability and of any decision of the Board to terminate the Executive's employment by reason thereof. Until the Date of Termination for disability, the base salary payable to the Executive under Paragraph 3 hereof shall be reduced dollar-for-dollar by the amount of any disability benefits paid to the Executive in accordance with any disability policy or program of the Corporation. (b) Discharge for Cause. In accordance with the procedures hereinafter set forth, the Board may discharge the Executive from his employment hereunder for Cause. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged for Cause. Any discharge of the Executive for Cause shall be communicated by a Notice of Termination to the Executive given in accordance with Paragraph 17 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, which may be as early as the 3 date of the giving of such notice. No purported termination of the Executive's employment for Cause shall be effective without a Notice of Termination. (c) Termination for Other Reasons. The Corporation may discharge the Executive without Cause by giving written notice to the Executive in accordance with Paragraph 17 at least fifteen (15) days prior to the Date of Termination. The Executive may resign from his employment, without liability to the Corporation, by giving written notice to the Corporation in accordance with Paragraph 17 at least fifteen (15) days prior to the Date of Termination. Except to the extent otherwise provided in Paragraph 9 with respect to certain post- Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged without Cause or resigns. (d) Definitions. For purposes of this Agreement, the following capitalized terms shall have the meanings set forth below: (i) "Accrued Obligations" shall mean, as of the Date of Termination, the sum of (A) the Executive's base salary under Paragraph 3 through the Date of Termination to the extent not theretofore paid, (B) the amount of any bonus, incentive compensation, deferred compensation and other cash compensation accrued by the Executive as of the Date of Termination to the extent not theretofore paid and (C) any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive as of the Date of Termination to the extent not theretofore paid. For the purpose of this Paragraph 7(d)(i), amounts shall be deemed to accrue ratably over the period during which they are earned, but no discretionary compensation shall be deemed earned or accrued until it is specifically approved by the Board or the Compensation Committee in accordance with the applicable plan, program or policy. (ii) "Cause" shall mean: (A) the Executive's commission of an act materially and demonstrably detrimental to the financial condition and/or goodwill of the Corporation or any of its subsidiaries, which act constitutes gross negligence or willful misconduct by the Executive in the performance of his material duties to the Corporation or any of its subsidiaries, or (B) the Executive's commission of any material act of dishonesty or breach of trust resulting or intended to result in material personal gain or enrichment of the Executive at the expense of the Corporation or any of its subsidiaries, or (C) the Executive's conviction of a felony involving moral turpitude, but specifically excluding any conviction based entirely on vicarious liability. No act or failure to act will be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that his action or omission was in the best interests of the Corporation. In addition, no act or omission will constitute Cause unless the Corporation has given detailed written notice thereof to the Executive and, where remedial action is feasible, he then fails to remedy the act or omission within a reasonable time after receiving such notice. (iii) A "Change in Control" shall be deemed to have occurred if: 4 (A) Any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose the Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities; provided, however, that no Change in Control shall be deemed to have occurred as the result of an acquisition of securities of the Corporation by the Corporation which, by reducing the number of voting securities outstanding, increases the direct or indirect beneficial ownership interest of any person to twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Corporation shall be deemed a Change in Control; and provided further that if the Board of Directors of the Corporation determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities has inadvertently reached that level of ownership interest, and if such person divests as promptly as practicable a sufficient amount of securities of the Corporation so that the person no longer has a direct or indirect beneficial ownership interest in twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities, then no Change in Control shall be deemed to have occurred; (B) During any period of two (2) consecutive years (not including any period prior to the Effective Date of this Agreement), individuals who at the beginning of such two-year period constitute the Board of Directors of the Corporation and any new director or directors (except for any director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in subparagraph (A), above, or subparagraph (C), below) whose election by the Board or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board (such individuals and any such new directors being referred to as the "Incumbent Board"); or (C) Consummation of (1) an agreement for the sale or disposition of the Corporation or all or substantially all of the Corporation's assets, (2) a plan of merger or consolidation of the Corporation with any other corporation, or (3) a similar transaction or series of transactions involving the Corporation (any transaction described in parts (1) through (3) of this subparagraph (C) being referred to as a "Business Combination"), in each case unless after such a Business Combination (x) the shareholders of the Corporation immediately prior to the Business Combination continue to own, directly or indirectly, more than sixty 5 percent (60%) of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the new (or continued) entity (including, but not by way of limitation, an entity which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's former assets either directly or through one or more subsidiaries) immediately after such Business Combination, in substantially the same proportion as their ownership of the Corporation immediately prior to such Business Combination, (y) no person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or of such entity resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of the then combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination, and (z) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (D) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. Any other provision of this Agreement to the contrary notwithstanding, a "Change in Control" shall not include any transaction described in subparagraph (A) or (C), above, where, in connection with such transaction, the Executive and/or any party acting in concert with the Executive substantially increases his or its, as the case may be, ownership interest in the Corporation or a successor to the Corporation (other than through conversion of prior ownership interests in the Corporation and/or through equity awards received entirely as compensation for past or future personal services). (iv) "Date of Termination" shall mean (A) in the event of a discharge of the Executive by the Board for Cause, the date specified in such Notice of Termination, (B) in the event of a discharge of the Executive without Cause or a resignation by the Executive, the date specified in the written notice to the Executive (in the case of discharge) or the Corporation (in the case of resignation), which date shall be no less than fifteen (15) days from the date of such written notice, (C) in the event of the Executive's death, the date of the Executive's death, and (D) in the event of termination of the Executive's employment by reason of disability pursuant to Paragraph 7(a), the date the Executive receives written notice of such termination. (v) "Good Reason" shall mean any of the following without the consent of the Executive: (A) the failure to re-elect the Executive as Group Executive, (B) assignment of duties inconsistent with the Executive's position, authority, duties or responsibilities, or any other action by the Corporation which results in a substantial diminution of such position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, (C) any failure by 6 the Corporation to comply with any of the provisions of this Agreement, including (but not by way of limitation) those provisions regarding compensation and benefits, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (D) the Corporation giving notice to the Executive to stop further operation of the evergreen feature described in Paragraph 1(b), above. However, during the period of three (3) years after a Change in Control, "Good Reason" shall also include the Executive being reassigned, without the Executive's consent, to an office location outside of the Chicago, Illinois metropolitan area. In addition, termination by the Executive for any reason during the sixty (60)-day period which begins six (6) months after a Change in Control shall be deemed to be a termination for Good Reason; provided, however, that if the Executive dies after a Change in Control but less than six (6) months after a Change in Control, the Executive will be deemed to have terminated employment for Good Reason six (6) months after the Change in Control. (vi) "Qualifying Termination" shall mean termination of the Executive's employment under this Agreement (A) by reason of the discharge of the Executive by the Corporation other than for Cause or disability or (B) by reason of the resignation of the Executive for Good Reason within six (6) months after an event constituting Good Reason or (C) in accordance with the last sentence of the definition of Good Reason in subparagraph (v), above. 8. Vesting of Equity Awards Upon a Change in Control. Immediately upon the Change in Control, all stock options, restricted stock and other equity awards previously made to the Executive which are not otherwise vested shall vest in full, and all such options shall remain exercisable for the period provided for the applicable plan or award agreement. 9. Obligations of the Corporation Upon Termination. The following provisions describe the obligations of the Corporation to the Executive under this Agreement upon termination of his employment. However, except as explicitly provided in this Agreement, nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Corporation or any of its subsidiaries, or under any compensation or benefit plan, program, policy or practice of the Corporation or any of its subsidiaries. (a) Death, Disability, Discharge for Cause, or Resignation Without Good Reason. In the event this Agreement terminates by reason of the death or disability of the Executive, or by reason of the discharge of the Executive by the Corporation for Cause, or by reason of the resignation of the Executive other than for Good Reason, the Corporation shall pay to the Executive, or his heirs or estate, in the event of the Executive's death, all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation, or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive. 7 (b) Death, Disability or Retirement. In the event that Executive's employment is terminated by death, disability or retirement under a retirement plan of the Corporation, the Executive shall be entitled to receive, in addition to the compensation and benefits described in paragraph (a), above, a pro rata cash bonus for the year in which the Date of Termination occurs, determined and paid in accordance with the terms of the then current annual bonus plan applicable to the Executive. (c) Qualifying Termination Without a Change in Control. In the event of a Qualifying Termination without a Change in Control, the Executive shall, upon executing and delivering a release of liability satisfactory to the Corporation, receive the following benefits: (i) Payment of all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to one hundred fifty percent (150%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to one hundred fifty percent (150%) of the average of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, (iv) Continuation, for a period of eighteen (18) months after the Date of Termination, of health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") with the cost of such benefits to be paid by the Corporation, but such benefits may be discontinued earlier to the extent that the Executive becomes entitled to comparable benefits from a subsequent employer, (v) Immediate pro rata vesting of all stock options, restricted stock and other equity or incentive compensation awards to the Executive which are not otherwise fully vested, with all options to remain exercisable for the period provided for in the applicable plan or award agreement. The proration of each award shall be done by multiplying the full award by a fraction, the numerator of which shall be the number of full months between the date of grant and the Date of Termination, and the denominator of which shall be the number of full months in the period of employment required for full vesting under the original terms of the award, and (vi) Outplacement services, at the expense of the Corporation, from a provider reasonably selected by the Executive. 8 In addition, the Executive may, in the discretion of the Compensation Committee, be awarded a pro rata cash bonus for the year in which the Date of Termination occurs. (d) Qualifying Termination After a Change in Control. In the event of a Qualifying Termination within three (3) years after a Change in Control, the Executive shall receive, in addition to the compensation and benefits described in subparagraphs (c)(i) and (c)(vi), above, the following benefits: (i) A pro rata cash bonus for the year in which the Date of Termination occurs, determined and paid in accordance with the terms of the then current annual bonus plan applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to three hundred percent (300%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to three hundred percent (300%) of the highest of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, (iv) Continuation, for a period of three (3) years after the Date of Termination, of the following welfare benefits and senior executive perquisites on terms at least as favorable to the Executive as those which would have been provided if the Executive's employment had continued for that time pursuant to this Agreement: medical and dental benefits, life and disability insurance, executive physical examinations, and automobile and financial counseling allowances, with the cost of such benefits to be paid by the Corporation. To the extent the Corporation is unable to provide comparable insurance for reasons other than cost, the Corporation may provide a lesser level or no coverage and compensate the Executive for the difference in coverage through a cash lump sum payment grossed up for taxes. This payment will be tied to the cost of an individual insurance policy if it were assumed to be available, (v) Immediate vesting of the Executive's interests in all non- qualified or supplemental retirement plans in which the Executive participates (including, but not by way of limitation, supplemental Section 401(k) plans), calculated on the basis of the Executive's actual period of service plus three (3) years, giving effect for that additional period to the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii), above, and taking into account the maximum matching contributions by the Corporation under qualified and supplemental Section 401(k) plans. (e) Termination of Employment Prior to Change in Control. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Corporation is terminated within six (6) months prior to the 9 date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who was taking steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement the termination of the Executive's employment shall be deemed to have occurred immediately after the Change in Control. 10. Certain Additional Payments by the Corporation. The Corporation agrees that: (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or if any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of paragraph (c), below, all determinations required to be made under this Paragraph 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the accounting firm which is then serving as the auditors for the Corporation (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Corporation. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Paragraph 10, shall be paid by the Corporation to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any good faith determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the 10 time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to paragraph (c), below, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive. (c) The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which Executive gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Corporation any information reasonably requested by the Corporation relating to such claim, (ii) Take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation, (iii) Cooperate with the Corporation in good faith in order effectively to contest such claim, and (iv) Permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph (c), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; and the Executive agrees to prosecute such 11 contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to paragraph (c), above, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation's complying with the requirements of said paragraph (c)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon, after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to said paragraph (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid; and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. 11. No Set-Off or Mitigation. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Corporation may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. 12. Payment of Certain Expenses. The Corporation agrees to pay promptly as incurred, to the fullest extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest by the Corporation, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest initiated by the Executive about the amount of any payment due pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, 12 however, that the Corporation shall not be obligated to make such payment with respect to any contest in which the Corporation prevails over the Executive. 13. Indemnification. To the full extent permitted by law, the Corporation shall, both during and after the term of the Executive's employment, indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being (or having been) an officer, director or employee of the Corporation or any of its subsidiaries. In addition, the Executive shall be covered, both during and after the term of the Executive's employment, by director and officer liability insurance to the maximum extent that such insurance covers any officer or director (or former officer or director) of the Corporation. 14. Confidentiality. During and after the period of employment with the Corporation, the Executive shall not, without prior written consent from the Chief Executive Officer or the General Counsel of the Corporation directly or indirectly disclose to any individual, corporation or other entity, other than to the Corporation or any subsidiary or affiliate thereof or their officers, directors or employees entitled to such information or any other person or entity to whom such information is disclosed in the normal course of the business of the Corporation) or use for the Executive's own benefit or for the benefit of any such individual, corporation or other entity, any Confidential Information of the Corporation. For purposes of this Agreement, "Confidential Information" is information relating to the business of the Corporation or its subsidiaries or affiliates (a) which is not generally known to the public or in the industry, (b) which has been treated by the Corporation and its subsidiaries and affiliates as confidential or proprietary, (c) which provides the Corporation or its subsidiaries or affiliates with a competitive advantage, and (d) in the confidentiality of which the Corporation has a legally protectable interest. Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which the Corporation and its subsidiaries and affiliates cease to have a legally protectable interest, shall cease to be subject to the restrictions of this Paragraph 14. 15. Status Under FDIC Regulations. This Agreement amends and restates a prior employment agreement dated July 11, 1994 which was entered into prior to March 29, 1995, which was the date that regulations were proposed by the Federal Deposit Insurance Corporation (the "FDIC") limiting "golden parachute" and indemnification payments by insured depository institutions and their holding companies. As of March 29, 1995 that prior agreement provided for a lump sum payment equal to 488% of the Executive's base salary. In view of the foregoing, if the payments and other benefits under Paragraph 9 of this Agreement are limited by those FDIC regulations, it is currently anticipated that any limits on "golden parachute" payments resulting from regulations issued by the FDIC should not reduce the payments under this Agreement below the lesser of (a) 488% of the Executive's base salary or (b) the payments and other benefits calculated under Paragraph 9 of this Agreement. However, if FDIC regulations are ultimately determined to further limit payments and other 13 benefits under this Agreement, then such FDIC limits shall supersede the terms of Paragraph 9, above. 16. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law, and such successor shall be deemed the "Corporation" for purposes of this Agreement. 17. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or by recognized commercial delivery service or if mailed within the continental United States by first class certified mail, return receipt requested, postage prepaid, addressed as follows: (1) If to the Board or the Corporation, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: Senior Vice President-Human Resources (2) If to the Executive, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: Gary D. Gilmer Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. 18. Tax Withholding. The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state, or local law with respect to any payment in cash, shares of stock and/or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (a) withhold such taxes from any cash payments owing from the Corporation to the 14 Executive, (b) require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding obligations and/or (c) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 19. Arbitration. Except as to any controversy or claim which the Executive elects, by written notice to the Corporation, to have adjudicated by a court of competent jurisdiction, any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in Chicago, Illinois in accordance with the laws of the State of Illinois. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association. The costs and expenses of the arbitrator(s) shall be borne by the Corporation. The award of the arbitrator(s) shall be binding upon the parties. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. 20. No Assignment. Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 21. Execution in Counterparts. This Agreement may be executed by the parties hereto in two (2) or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 22. Jurisdiction and Governing Law. This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of Illinois, other than the conflict of laws provisions of such laws. 23. Severability. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. Furthermore, if the scope of any restriction or requirement contained in this Agreement is too broad to permit enforcement of such restriction or requirement to its full extent, then such restriction or requirement shall be enforced to the maximum extent permitted by law, and the Executive consents and agrees that any court of competent jurisdiction may so modify such scope in any proceeding brought to enforce such restriction or requirement. 24. Prior Understandings. This Agreement embodies the entire understanding of the parties hereto and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof, including but not by way of limitation by amending and restating the Employment Agreement dated July 9, 1996 between the parties. This Agreement supersedes the Employment Agreement dated July 11, 1994 between the Executive and Alexander Hamilton, the Employment Agreement dated May 28, 1993, between the Executive and Alexander Hamilton, and the Employment Agreement dated March 9, 1992, between the Executive and the Corporation. No change, alteration or 15 modification hereof may be made except in a writing, signed by each of the parties hereto. The headings in this Agreement are for convenience of reference only and shall not be construed as part of this Agreement or to limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. Attest: HOUSEHOLD INTERNATIONAL, INC. /s/ Kenneth H. Robin By: /s/ William F. Aldinger - ------------------------------- --------------------------------- Kenneth H. Robin Title: Chairman and Chief Executive Senior Vice President-General Counsel Officer and Corporate Secretary /s/ Gary D. Gilmer ---------------------------------- Gary D. Gilmer 16 EX-10.13 9 EXECUTIVE EMPLOYMENT AGREEMENT--D. A. SCHOENHOLZ Exhibit 10.13 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, made and entered into as of January 1, 1999 by and between Household International, Inc., a Delaware corporation, (hereinafter called the "Corporation") and David A. Schoenholz (hereinafter called the "Executive"). WITNESSETH THAT: WHEREAS, the Executive is currently employed by the Corporation under an employment agreement dated July 9, 1996; and WHEREAS, the Corporation desires to continue to employ the Executive as its Executive Vice President, and the Executive desires to continue in such employment, on amended and restated terms and conditions; NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. Employment and Term. ------------------- (a) Employment. The Corporation shall continue to employ the Executive as the Executive Vice President of the Corporation, and the Executive shall so serve, for the term set forth in Paragraph 1(b). (b) Term. The initial term of the Executive's employment under this Agreement shall commence as of January 1, 1999 (the "Effective Date") and end on June 30, 2000, subject to the extension of such term as hereinafter provided and subject to earlier termination as provided in Paragraph 7, below. Beginning on January 1, 1999, the term of this Agreement shall be extended automatically for one (1) additional day for each day which has then elapsed since January 1, 1999, unless, at any time after January 1, 1999, either the Board of Directors of the Corporation (the "Board"), on behalf of the Corporation, or the Executive gives written notice to the other that such automatic extension of the term of this Agreement shall cease. Any such notice shall be effective immediately upon delivery. The initial term of this Agreement, plus any extension by operation of this Paragraph 1, shall be hereinafter referred to as the "Term." 2. Duties. During the period of employment as provided in Paragraph 1(b) hereof, the Executive shall serve as Executive Vice President of the Corporation and have all powers and duties consistent with such position, subject to the reasonable direction of the Board and of the Chief Executive Officer of the Corporation. The Executive shall also continue to serve as a member of the Board if elected as such. The Executive shall devote substantially his entire time during reasonable business hours (reasonable sick leave and vacations excepted) and best efforts to fulfill faithfully, responsibly and to the best of his 1 ability his duties hereunder. However, the Executive may, with the approval of the Board or of the Chief Executive Officer of the Corporation, which shall not be withheld unreasonably, serve on corporate, civic and/or charitable boards and committees. 3. Salary. ------ (a) Base Salary. For services performed by the Executive for the Corporation pursuant to this Agreement during the period of employment as provided in Paragraph 1(b) hereof, the Corporation shall pay the Executive a base salary of $500,000 per year, payable in substantially equal installments in accordance with the Corporation's regular payroll practices. The Executive's base salary (with any increases under paragraph (b), below) shall not be subject to reduction. Any compensation which may be paid to the Executive under any additional compensation or incentive plan of the Corporation or which may be otherwise authorized from time to time by the Board (or an appropriate committee thereof) shall be in addition to the base salary to which the Executive shall be entitled under this Agreement. (b) Salary Increases. During the period of employment as provided in Paragraph 1(b) hereof, the base salary of the Executive shall be reviewed no less frequently than annually by the Board or the Compensation Committee of the Board to determine whether or not the same should be increased in light of the duties and responsibilities of the Executive and the performance thereof, and if it is determined that an increase is merited, such increase shall be promptly put into effect and the base salary of the Executive as so increased shall constitute the base salary of the Executive for purposes of Paragraph 3(a). 4. Annual Bonuses. For each calendar year during the term of employment, the Executive shall be eligible to receive in cash an annual performance bonus based upon the terms of the Corporation's bonus plan from time to time for senior executives, as adopted by the Board and administered by the Compensation Committee. 5. Equity Incentive Compensation. During the term of employment hereunder the Executive shall be eligible to participate, in the manner and to the extent approved by the Board or the Compensation Committee, in any equity-based incentive compensation plan or program approved by the Board from time to time, including (but not by way of limitation) any plan providing for the granting of (a) options to purchase stock of the Corporation, (b) restricted stock of the Corporation or (c) similar equity-based units or interests, with awards to the Executive that are of appropriate size and nature relative to those for other senior executives and the individual performance of the Executive. 6. Other Benefits. In addition to the compensation described in Paragraphs 3, 4 and 5, above, the Executive shall also be entitled to participate in all of the various retirement, welfare, fringe benefit, executive perquisite, and expense reimbursement plans, programs and arrangements of the Corporation to the extent the Executive is eligible for participation under the terms of such plans, programs and arrangements, with benefit levels and terms of 2 participation at least as favorable to the Executive as those in effect on the Effective Date, except that the Executive's benefits and/or perquisites may be reduced in connection with similar reductions uniformly applied with respect to all similarly situated employees. 7. Termination. Unless earlier terminated in accordance with the following provisions of this Paragraph 7, the Corporation shall continue to employ the Executive and the Executive shall remain employed by the Corporation during the entire term of this Agreement as set forth in Paragraph 1(b). Paragraph 9 hereof sets forth certain obligations of the Corporation in the event that the Executive's employment hereunder is terminated. Certain capitalized terms used in this Paragraph 7 and in Paragraphs 8 and 9 hereof are defined in Paragraph 7(d), below. (a) Death or Disability. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination payment obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event of the Executive's death or in the event that the Executive becomes disabled. The Executive will be deemed to be disabled upon the earlier of (i) the end of a six (6)-consecutive month period during which, by reason of physical or mental injury or disease, the Executive has been unable to perform substantially all of his usual and customary duties under this Agreement or (ii) the date that a reputable physician selected by the Board, and as to whom the Executive has no reasonable objection, determines in writing that the Executive will, by reason of physical or mental injury or disease, be unable to perform substantially all of the Executive's usual and customary duties under this Agreement for a period of at least six (6) consecutive months. If any question arises as to whether the Executive is disabled, upon reasonable request therefor by the Board, the Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Board shall promptly give the Executive written notice of any such determination of the Executive's disability and of any decision of the Board to terminate the Executive's employment by reason thereof. Until the Date of Termination for disability, the base salary payable to the Executive under Paragraph 3 hereof shall be reduced dollar-for-dollar by the amount of any disability benefits paid to the Executive in accordance with any disability policy or program of the Corporation. (b) Discharge for Cause. In accordance with the procedures hereinafter set forth, the Board may discharge the Executive from his employment hereunder for Cause. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged for Cause. Any discharge of the Executive for Cause shall be communicated by a Notice of Termination to the Executive given in accordance with Paragraph 17 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, which may be as early as the 3 date of the giving of such notice. No purported termination of the Executive's employment for Cause shall be effective without a Notice of Termination. (c) Termination for Other Reasons. The Corporation may discharge the Executive without Cause by giving written notice to the Executive in accordance with Paragraph 17 at least fifteen (15) days prior to the Date of Termination. The Executive may resign from his employment, without liability to the Corporation, by giving written notice to the Corporation in accordance with Paragraph 17 at least fifteen (15) days prior to the Date of Termination. Except to the extent otherwise provided in Paragraph 9 with respect to certain post- Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged without Cause or resigns. (d) Definitions. For purposes of this Agreement, the following capitalized terms shall have the meanings set forth below: (i) "Accrued Obligations" shall mean, as of the Date of Termination, the sum of (A) the Executive's base salary under Paragraph 3 through the Date of Termination to the extent not theretofore paid, (B) the amount of any bonus, incentive compensation, deferred compensation and other cash compensation accrued by the Executive as of the Date of Termination to the extent not theretofore paid and (C) any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive as of the Date of Termination to the extent not theretofore paid. For the purpose of this Paragraph 7(d)(i), amounts shall be deemed to accrue ratably over the period during which they are earned, but no discretionary compensation shall be deemed earned or accrued until it is specifically approved by the Board or the Compensation Committee in accordance with the applicable plan, program or policy. (ii) "Cause" shall mean: (A) the Executive's commission of an act materially and demonstrably detrimental to the financial condition and/or goodwill of the Corporation or any of its subsidiaries, which act constitutes gross negligence or willful misconduct by the Executive in the performance of his material duties to the Corporation or any of its subsidiaries, or (B) the Executive's commission of any material act of dishonesty or breach of trust resulting or intended to result in material personal gain or enrichment of the Executive at the expense of the Corporation or any of its subsidiaries, or (C) the Executive's conviction of a felony involving moral turpitude, but specifically excluding any conviction based entirely on vicarious liability. No act or failure to act will be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that his action or omission was in the best interests of the Corporation. In addition, no act or omission will constitute Cause unless the Corporation has given detailed written notice thereof to the Executive and, where remedial action is feasible, he then fails to remedy the act or omission within a reasonable time after receiving such notice. (iii) A "Change in Control" shall be deemed to have occurred if: 4 (A) Any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose the Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities; provided, however, that no Change in Control shall be deemed to have occurred as the result of an acquisition of securities of the Corporation by the Corporation which, by reducing the number of voting securities outstanding, increases the direct or indirect beneficial ownership interest of any person to twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Corporation shall be deemed a Change in Control; and provided further that if the Board of Directors of the Corporation determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities has inadvertently reached that level of ownership interest, and if such person divests as promptly as practicable a sufficient amount of securities of the Corporation so that the person no longer has a direct or indirect beneficial ownership interest in twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities, then no Change in Control shall be deemed to have occurred; (B) During any period of two (2) consecutive years (not including any period prior to the Effective Date of this Agreement), individuals who at the beginning of such two-year period constitute the Board of Directors of the Corporation and any new director or directors (except for any director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in subparagraph (A), above, or subparagraph (C), below) whose election by the Board or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board (such individuals and any such new directors being referred to as the "Incumbent Board"); or (C) Consummation of (1) an agreement for the sale or disposition of the Corporation or all or substantially all of the Corporation's assets, (2) a plan of merger or consolidation of the Corporation with any other corporation, or (3) a similar transaction or series of transactions involving the Corporation (any transaction described in parts (1) through (3) of this subparagraph (C) being referred to as a "Business Combination"), in each case unless after such a Business Combination (x) the shareholders of the Corporation immediately prior to the Business Combination continue to own, directly or indirectly, more than sixty 5 percent (60%) of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the new (or continued) entity (including, but not by way of limitation, an entity which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's former assets either directly or through one or more subsidiaries) immediately after such Business Combination, in substantially the same proportion as their ownership of the Corporation immediately prior to such Business Combination, (y) no person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or of such entity resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of the then combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination, and (z) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (D) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. Any other provision of this Agreement to the contrary notwithstanding, a "Change in Control" shall not include any transaction described in subparagraph (A) or (C), above, where, in connection with such transaction, the Executive and/or any party acting in concert with the Executive substantially increases his or its, as the case may be, ownership interest in the Corporation or a successor to the Corporation (other than through conversion of prior ownership interests in the Corporation and/or through equity awards received entirely as compensation for past or future personal services). (iv) "Date of Termination" shall mean (A) in the event of a discharge of the Executive by the Board for Cause, the date specified in such Notice of Termination, (B) in the event of a discharge of the Executive without Cause or a resignation by the Executive, the date specified in the written notice to the Executive (in the case of discharge) or the Corporation (in the case of resignation), which date shall be no less than fifteen (15) days from the date of such written notice, (C) in the event of the Executive's death, the date of the Executive's death, and (D) in the event of termination of the Executive's employment by reason of disability pursuant to Paragraph 7(a), the date the Executive receives written notice of such termination. (v) "Good Reason" shall mean any of the following without the consent of the Executive: (A) the failure to re-elect the Executive as Executive Vice President, (B) assignment of duties inconsistent with the Executive's position, authority, duties or responsibilities, or any other action by the Corporation which results in a substantial diminution of such position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, (C) any failure by 6 the Corporation to comply with any of the provisions of this Agreement, including (but not by way of limitation) those provisions regarding compensation and benefits, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (D) the Corporation giving notice to the Executive to stop further operation of the evergreen feature described in Paragraph 1(b), above. However, during the period of three (3) years after a Change in Control, "Good Reason" shall also include the Executive being reassigned, without the Executive's consent, to an office location outside of the Chicago, Illinois metropolitan area. In addition, termination by the Executive for any reason during the sixty (60)-day period which begins six (6) months after a Change in Control shall be deemed to be a termination for Good Reason; provided, however, that if the Executive dies after a Change in Control but less than six (6) months after a Change in Control, the Executive will be deemed to have terminated employment for Good Reason six (6) months after the Change in Control. (vi) "Qualifying Termination" shall mean termination of the Executive's employment under this Agreement (A) by reason of the discharge of the Executive by the Corporation other than for Cause or disability or (B) by reason of the resignation of the Executive for Good Reason within six (6) months after an event constituting Good Reason or (C) in accordance with the last sentence of the definition of Good Reason in subparagraph (v), above. 8. Vesting of Equity Awards Upon a Change in Control. Immediately upon the Change in Control, all stock options, restricted stock and other equity awards previously made to the Executive which are not otherwise vested shall vest in full, and all such options shall remain exercisable for the period provided for the applicable plan or award agreement. 9. Obligations of the Corporation Upon Termination. The following provisions describe the obligations of the Corporation to the Executive under this Agreement upon termination of his employment. However, except as explicitly provided in this Agreement, nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Corporation or any of its subsidiaries, or under any compensation or benefit plan, program, policy or practice of the Corporation or any of its subsidiaries. (a) Death, Disability, Discharge for Cause, or Resignation Without Good Reason. In the event this Agreement terminates by reason of the death or disability of the Executive, or by reason of the discharge of the Executive by the Corporation for Cause, or by reason of the resignation of the Executive other than for Good Reason, the Corporation shall pay to the Executive, or his heirs or estate, in the event of the Executive's death, all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation, or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive. 7 (b) Death, Disability or Retirement. In the event that Executive's employment is terminated by death, disability or retirement under a retirement plan of the Corporation, the Executive shall be entitled to receive, in addition to the compensation and benefits described in paragraph (a), above, a pro rata cash bonus for the year in which the Date of Termination occurs, determined and paid in accordance with the terms of the then current annual bonus plan applicable to the Executive. (c) Qualifying Termination Without a Change in Control. In the event of a Qualifying Termination without a Change in Control, the Executive shall, upon executing and delivering a release of liability satisfactory to the Corporation, receive the following benefits: (i) Payment of all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to one hundred fifty percent (150%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to one hundred fifty percent (150%) of the average of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, (iv) Continuation, for a period of eighteen (18) months after the Date of Termination, of health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") with the cost of such benefits to be paid by the Corporation, but such benefits may be discontinued earlier to the extent that the Executive becomes entitled to comparable benefits from a subsequent employer, (v) Immediate pro rata vesting of all stock options, restricted stock and other equity or incentive compensation awards to the Executive which are not otherwise fully vested, with all options to remain exercisable for the period provided for in the applicable plan or award agreement. The proration of each award shall be done by multiplying the full award by a fraction, the numerator of which shall be the number of full months between the date of grant and the Date of Termination, and the denominator of which shall be the number of full months in the period of employment required for full vesting under the original terms of the award, and (vi) Outplacement services, at the expense of the Corporation, from a provider reasonably selected by the Executive. 8 In addition, the Executive may, in the discretion of the Compensation Committee, be awarded a pro rata cash bonus for the year in which the Date of Termination occurs. (d) Qualifying Termination After a Change in Control. In the event of a Qualifying Termination within three (3) years after a Change in Control, the Executive shall receive, in addition to the compensation and benefits described in subparagraphs (c)(i) and (c)(vi), above, the following benefits: (i) A pro rata cash bonus for the year in which the Date of Termination occurs, determined and paid in accordance with the terms of the then current annual bonus plan applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to three hundred percent (300%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to three hundred percent (300%) of the highest of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, (iv) Continuation, for a period of three (3) years after the Date of Termination, of the following welfare benefits and senior executive perquisites on terms at least as favorable to the Executive as those which would have been provided if the Executive's employment had continued for that time pursuant to this Agreement: medical and dental benefits, life and disability insurance, executive physical examinations, and automobile and financial counseling allowances, with the cost of such benefits to be paid by the Corporation. To the extent the Corporation is unable to provide comparable insurance for reasons other than cost, the Corporation may provide a lesser level or no coverage and compensate the Executive for the difference in coverage through a cash lump sum payment grossed up for taxes. This payment will be tied to the cost of an individual insurance policy if it were assumed to be available, (v) Immediate vesting of the Executive's interests in all non- qualified or supplemental retirement plans in which the Executive participates (including, but not by way of limitation, supplemental Section 401(k) plans), calculated on the basis of the Executive's actual period of service plus three (3) years, giving effect for that additional period to the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii), above, and taking into account the maximum matching contributions by the Corporation under qualified and supplemental Section 401(k) plans. (e) Termination of Employment Prior to Change in Control. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Corporation is terminated within six (6) months prior to the 9 date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who was taking steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement the termination of the Executive's employment shall be deemed to have occurred immediately after the Change in Control. 10. Certain Additional Payments by the Corporation. The Corporation agrees that: (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or if any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of paragraph (c), below, all determinations required to be made under this Paragraph 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the accounting firm which is then serving as the auditors for the Corporation (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Corporation. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Paragraph 10, shall be paid by the Corporation to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any good faith determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the 10 time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to paragraph (c), below, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive. (c) The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which Executive gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Corporation any information reasonably requested by the Corporation relating to such claim, (ii) Take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation, (iii) Cooperate with the Corporation in good faith in order effectively to contest such claim, and (iv) Permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph (c), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; and the Executive agrees to prosecute such 11 contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to paragraph (c), above, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation's complying with the requirements of said paragraph (c)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon, after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to said paragraph (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid; and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. 11. No Set-Off or Mitigation. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Corporation may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. 12. Payment of Certain Expenses. The Corporation agrees to pay promptly as incurred, to the fullest extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest by the Corporation, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest initiated by the Executive about the amount of any payment due pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, 12 however, that the Corporation shall not be obligated to make such payment with respect to any contest in which the Corporation prevails over the Executive. 13. Indemnification. To the full extent permitted by law, the Corporation shall, both during and after the term of the Executive's employment, indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being (or having been) an officer, director or employee of the Corporation or any of its subsidiaries. In addition, the Executive shall be covered, both during and after the term of the Executive's employment, by director and officer liability insurance to the maximum extent that such insurance covers any officer or director (or former officer or director) of the Corporation. 14. Confidentiality. During and after the period of employment with the Corporation, the Executive shall not, without prior written consent from the Chief Executive Officer or the General Counsel of the Corporation directly or indirectly disclose to any individual, corporation or other entity, other than to the Corporation or any subsidiary or affiliate thereof or their officers, directors or employees entitled to such information or any other person or entity to whom such information is disclosed in the normal course of the business of the Corporation) or use for the Executive's own benefit or for the benefit of any such individual, corporation or other entity, any Confidential Information of the Corporation. For purposes of this Agreement, "Confidential Information" is information relating to the business of the Corporation or its subsidiaries or affiliates (a) which is not generally known to the public or in the industry, (b) which has been treated by the Corporation and its subsidiaries and affiliates as confidential or proprietary, (c) which provides the Corporation or its subsidiaries or affiliates with a competitive advantage, and (d) in the confidentiality of which the Corporation has a legally protectable interest. Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which the Corporation and its subsidiaries and affiliates cease to have a legally protectable interest, shall cease to be subject to the restrictions of this Paragraph 14. 15. Status Under FDIC Regulations. This Agreement amends and restates a prior employment agreement dated July 11, 1994 which was entered into prior to March 29, 1995, which was the date that regulations were proposed by the Federal Deposit Insurance Corporation (the "FDIC") limiting "golden parachute" and indemnification payments by insured depository institutions and their holding companies. As of March 29, 1995 that prior agreement provided for a lump sum payment equal to 560% of the Executive's base salary. In view of the foregoing, if the payments and other benefits under Paragraph 9 of this Agreement are limited by those FDIC regulations, it is currently anticipated that any limits on "golden parachute" payments resulting from regulations issued by the FDIC should not reduce the payments under this Agreement below the lesser of (a) 560% of the Executive's base salary or (b) the payments and other benefits calculated under Paragraph 9 of this Agreement. However, if FDIC regulations are ultimately determined to further limit payments and other 13 benefits under this Agreement, then such FDIC limits shall supersede the terms of Paragraph 9, above. 16. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law, and such successor shall be deemed the "Corporation" for purposes of this Agreement. 17. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or by recognized commercial delivery service or if mailed within the continental United States by first class certified mail, return receipt requested, postage prepaid, addressed as follows: (1) If to the Board or the Corporation, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: Senior Vice President-Human Resources (2) If to the Executive, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: David A. Schoenholz Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. 18. Tax Withholding. The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state, or local law with respect to any payment in cash, shares of stock and/or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (a) withhold such taxes from any cash payments owing from the Corporation to the 14 Executive, (b) require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding obligations and/or (c) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 19. Arbitration. Except as to any controversy or claim which the Executive elects, by written notice to the Corporation, to have adjudicated by a court of competent jurisdiction, any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in Chicago, Illinois in accordance with the laws of the State of Illinois. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association. The costs and expenses of the arbitrator(s) shall be borne by the Corporation. The award of the arbitrator(s) shall be binding upon the parties. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. 20. No Assignment. Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 21. Execution in Counterparts. This Agreement may be executed by the parties hereto in two (2) or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 22. Jurisdiction and Governing Law. This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of Illinois, other than the conflict of laws provisions of such laws. 23. Severability. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. Furthermore, if the scope of any restriction or requirement contained in this Agreement is too broad to permit enforcement of such restriction or requirement to its full extent, then such restriction or requirement shall be enforced to the maximum extent permitted by law, and the Executive consents and agrees that any court of competent jurisdiction may so modify such scope in any proceeding brought to enforce such restriction or requirement. 24. Prior Understandings. This Agreement embodies the entire understanding of the parties hereto and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof, including but not by way of limitation by amending and restating the Employment Agreement dated July 9, 1996 between the parties. This Agreement also supersedes the Employment Agreement dated July 11, 1994, the Employment Agreement dated January 3, 1994, the Employment Agreement dated May 28, 1993, the Employment Agreement dated December 1, 1989, the Senior Executive Employment Agreement dated January 1, 1988, and the Supplemental Employment 15 Agreement dated January 1, 1988, between the parties. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. The headings in this Agreement are for convenience of reference only and shall not be construed as part of this Agreement or to limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. Attest: HOUSEHOLD INTERNATIONAL, INC. /s/ Kenneth H. Robin By: /s/ William F. Aldinger - ------------------------------- --------------------------------------- Kenneth H. Robin Title: Chairman and Chief Executive Officer Senior Vice President-General Counsel and Corporate Secretary /s/ David A. Schoenholz ------------------------------------------- David A. Schoenholz 16 EX-10.14 10 EXECUTIVE EMPLOYMENT AGREEMENT--S. N. MEHTA Exhibit 10.14 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, made and entered into as of January 1, 1999 by and between Household International, Inc., a Delaware corporation, (hereinafter called the "Corporation") and Siddharth N. (Bobby) Mehta (hereinafter called the "Executive"). WITNESSETH THAT: WHEREAS, the Executive is currently employed by the Corporation under an employment agreement dated June 11, 1998; and WHEREAS, the Corporation desires to continue to employ the Executive as its Group Executive, and the Executive desires to continue in such employment, on amended and restated terms and conditions; NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. Employment and Term. ------------------- (a) Employment. The Corporation shall continue to employ the Executive as the Group Executive of the Corporation, and the Executive shall so serve, for the term set forth in Paragraph 1(b). (b) Term. The initial term of the Executive's employment under this Agreement shall commence as of January 1, 1999 (the "Effective Date") and end on June 30, 2000, subject to the extension of such term as hereinafter provided and subject to earlier termination as provided in Paragraph 7, below. Beginning on January 1, 1999, the term of this Agreement shall be extended automatically for one (1) additional day for each day which has then elapsed since January 1, 1999, unless, at any time after January 1, 1999, either the Board of Directors of the Corporation (the "Board"), on behalf of the Corporation, or the Executive gives written notice to the other that such automatic extension of the term of this Agreement shall cease. Any such notice shall be effective immediately upon delivery. The initial term of this Agreement, plus any extension by operation of this Paragraph 1, shall be hereinafter referred to as the "Term." 2. Duties. During the period of employment as provided in Paragraph 1(b) hereof, the Executive shall serve as Group Executive of the Corporation and have all powers and duties consistent with such position, subject to the reasonable direction of the Board and of the Chief Executive Officer of the Corporation. The Executive shall also continue to serve as a member of the Board if elected as such. The Executive shall devote substantially his entire time during reasonable business hours (reasonable sick leave and vacations excepted) and best efforts to fulfill faithfully, responsibly and to the best of his ability his duties 1 hereunder. However, the Executive may, with the approval of the Board or of the Chief Executive Officer of the Corporation, which shall not be withheld unreasonably, serve on corporate, civic and/or charitable boards and committees. 3. Salary. ------ (a) Base Salary. For services performed by the Executive for the Corporation pursuant to this Agreement during the period of employment as provided in Paragraph 1(b) hereof, the Corporation shall pay the Executive a base salary of $500,000 per year, payable in substantially equal installments in accordance with the Corporation's regular payroll practices. The Executive's base salary (with any increases under paragraph (b), below) shall not be subject to reduction. Any compensation which may be paid to the Executive under any additional compensation or incentive plan of the Corporation or which may be otherwise authorized from time to time by the Board (or an appropriate committee thereof) shall be in addition to the base salary to which the Executive shall be entitled under this Agreement. (b) Salary Increases. During the period of employment as provided in Paragraph 1(b) hereof, the base salary of the Executive shall be reviewed no less frequently than annually by the Board or the Compensation Committee of the Board to determine whether or not the same should be increased in light of the duties and responsibilities of the Executive and the performance thereof, and if it is determined that an increase is merited, such increase shall be promptly put into effect and the base salary of the Executive as so increased shall constitute the base salary of the Executive for purposes of Paragraph 3(a). 4. Annual Bonuses. For each calendar year during the term of employment, the Executive shall be eligible to receive in cash an annual performance bonus based upon the terms of the Corporation's bonus plan from time to time for senior executives, as adopted by the Board and administered by the Compensation Committee. 5. Equity Incentive Compensation. During the term of employment hereunder the Executive shall be eligible to participate, in the manner and to the extent approved by the Board or the Compensation Committee, in any equity-based incentive compensation plan or program approved by the Board from time to time, including (but not by way of limitation) any plan providing for the granting of (a) options to purchase stock of the Corporation, (b) restricted stock of the Corporation or (c) similar equity-based units or interests, with awards to the Executive that are of appropriate size and nature relative to those for other senior executives and the individual performance of the Executive. 6. Other Benefits. In addition to the compensation described in Paragraphs 3, 4 and 5, above, the Executive shall also be entitled to participate in all of the various retirement, welfare, fringe benefit, executive perquisite, and expense reimbursement plans, programs and arrangements of the Corporation to the extent the Executive is eligible for participation under the terms of such plans, programs and arrangements, with benefit levels and terms of 2 participation at least as favorable to the Executive as those in effect on the Effective Date, except that the Executive's benefits and/or perquisites may be reduced in connection with similar reductions uniformly applied with respect to all similarly situated employees. 7. Termination. Unless earlier terminated in accordance with the following provisions of this Paragraph 7, the Corporation shall continue to employ the Executive and the Executive shall remain employed by the Corporation during the entire term of this Agreement as set forth in Paragraph 1(b). Paragraph 9 hereof sets forth certain obligations of the Corporation in the event that the Executive's employment hereunder is terminated. Certain capitalized terms used in this Paragraph 7 and in Paragraphs 8 and 9 hereof are defined in Paragraph 7(d), below. (a) Death or Disability. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination payment obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event of the Executive's death or in the event that the Executive becomes disabled. The Executive will be deemed to be disabled upon the earlier of (i) the end of a six (6)-consecutive month period during which, by reason of physical or mental injury or disease, the Executive has been unable to perform substantially all of his usual and customary duties under this Agreement or (ii) the date that a reputable physician selected by the Board, and as to whom the Executive has no reasonable objection, determines in writing that the Executive will, by reason of physical or mental injury or disease, be unable to perform substantially all of the Executive's usual and customary duties under this Agreement for a period of at least six (6) consecutive months. If any question arises as to whether the Executive is disabled, upon reasonable request therefor by the Board, the Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Board shall promptly give the Executive written notice of any such determination of the Executive's disability and of any decision of the Board to terminate the Executive's employment by reason thereof. Until the Date of Termination for disability, the base salary payable to the Executive under Paragraph 3 hereof shall be reduced dollar-for-dollar by the amount of any disability benefits paid to the Executive in accordance with any disability policy or program of the Corporation. (b) Discharge for Cause. In accordance with the procedures hereinafter set forth, the Board may discharge the Executive from his employment hereunder for Cause. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged for Cause. Any discharge of the Executive for Cause shall be communicated by a Notice of Termination to the Executive given in accordance with Paragraph 16 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, which may be as early as the 3 date of the giving of such notice. No purported termination of the Executive's employment for Cause shall be effective without a Notice of Termination. (c) Termination for Other Reasons. The Corporation may discharge the Executive without Cause by giving written notice to the Executive in accordance with Paragraph 16 at least fifteen (15) days prior to the Date of Termination. The Executive may resign from his employment, without liability to the Corporation, by giving written notice to the Corporation in accordance with Paragraph 16 at least fifteen (15) days prior to the Date of Termination. Except to the extent otherwise provided in Paragraph 9 with respect to certain post- Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged without Cause or resigns. (d) Definitions. For purposes of this Agreement, the following capitalized terms shall have the meanings set forth below: (i) "Accrued Obligations" shall mean, as of the Date of Termination, the sum of (A) the Executive's base salary under Paragraph 3 through the Date of Termination to the extent not theretofore paid, (B) the amount of any bonus, incentive compensation, deferred compensation and other cash compensation accrued by the Executive as of the Date of Termination to the extent not theretofore paid and (C) any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive as of the Date of Termination to the extent not theretofore paid. For the purpose of this Paragraph 7(d)(i), amounts shall be deemed to accrue ratably over the period during which they are earned, but no discretionary compensation shall be deemed earned or accrued until it is specifically approved by the Board or the Compensation Committee in accordance with the applicable plan, program or policy. (ii) "Cause" shall mean: (A) the Executive's commission of an act materially and demonstrably detrimental to the financial condition and/or goodwill of the Corporation or any of its subsidiaries, which act constitutes gross negligence or willful misconduct by the Executive in the performance of his material duties to the Corporation or any of its subsidiaries, or (B) the Executive's commission of any material act of dishonesty or breach of trust resulting or intended to result in material personal gain or enrichment of the Executive at the expense of the Corporation or any of its subsidiaries, or (C) the Executive's conviction of a felony involving moral turpitude, but specifically excluding any conviction based entirely on vicarious liability. No act or failure to act will be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that his action or omission was in the best interests of the Corporation. In addition, no act or omission will constitute Cause unless the Corporation has given detailed written notice thereof to the Executive and, where remedial action is feasible, he then fails to remedy the act or omission within a reasonable time after receiving such notice. (iii) A "Change in Control" shall be deemed to have occurred if: 4 (A) Any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose the Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities; provided, however, that no Change in Control shall be deemed to have occurred as the result of an acquisition of securities of the Corporation by the Corporation which, by reducing the number of voting securities outstanding, increases the direct or indirect beneficial ownership interest of any person to twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Corporation shall be deemed a Change in Control; and provided further that if the Board of Directors of the Corporation determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities has inadvertently reached that level of ownership interest, and if such person divests as promptly as practicable a sufficient amount of securities of the Corporation so that the person no longer has a direct or indirect beneficial ownership interest in twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities, then no Change in Control shall be deemed to have occurred; (B) During any period of two (2) consecutive years (not including any period prior to the Effective Date of this Agreement), individuals who at the beginning of such two-year period constitute the Board of Directors of the Corporation and any new director or directors (except for any director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in subparagraph (A), above, or subparagraph (C), below) whose election by the Board or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board (such individuals and any such new directors being referred to as the "Incumbent Board"); or (C) Consummation of (1) an agreement for the sale or disposition of the Corporation or all or substantially all of the Corporation's assets, (2) a plan of merger or consolidation of the Corporation with any other corporation, or (3) a similar transaction or series of transactions involving the Corporation (any transaction described in parts (1) through (3) of this subparagraph (C) being referred to as a "Business Combination"), in each case unless after such a Business Combination (x) the shareholders of the Corporation immediately prior to the Business Combination continue to own, directly or indirectly, more than sixty 5 percent (60%) of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the new (or continued) entity (including, but not by way of limitation, an entity which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's former assets either directly or through one or more subsidiaries) immediately after such Business Combination, in substantially the same proportion as their ownership of the Corporation immediately prior to such Business Combination, (y) no person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or of such entity resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of the then combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination, and (z) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (D) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. Any other provision of this Agreement to the contrary notwithstanding, a "Change in Control" shall not include any transaction described in subparagraph (A) or (C), above, where, in connection with such transaction, the Executive and/or any party acting in concert with the Executive substantially increases his or its, as the case may be, ownership interest in the Corporation or a successor to the Corporation (other than through conversion of prior ownership interests in the Corporation and/or through equity awards received entirely as compensation for past or future personal services). (iv) "Date of Termination" shall mean (A) in the event of a discharge of the Executive by the Board for Cause, the date specified in such Notice of Termination, (B) in the event of a discharge of the Executive without Cause or a resignation by the Executive, the date specified in the written notice to the Executive (in the case of discharge) or the Corporation (in the case of resignation), which date shall be no less than fifteen (15) days from the date of such written notice, (C) in the event of the Executive's death, the date of the Executive's death, and (D) in the event of termination of the Executive's employment by reason of disability pursuant to Paragraph 7(a), the date the Executive receives written notice of such termination. (v) "Good Reason" shall mean any of the following without the consent of the Executive: (A) the failure to re-elect the Executive as Group Executive, (B) assignment of duties inconsistent with the Executive's position, authority, duties or responsibilities, or any other action by the Corporation which results in a substantial diminution of such position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, (C) any failure by 6 the Corporation to comply with any of the provisions of this Agreement, including (but not by way of limitation) those provisions regarding compensation and benefits, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (D) the Corporation giving notice to the Executive to stop further operation of the evergreen feature described in Paragraph 1(b), above. However, during the period of three (3) years after a Change in Control, "Good Reason" shall also include the Executive being reassigned, without the Executive's consent, to an office location outside of the Salinas, California metropolitan area. In addition, termination by the Executive for any reason during the sixty (60)-day period which begins six (6) months after a Change in Control shall be deemed to be a termination for Good Reason; provided, however, that if the Executive dies after a Change in Control but less than six (6) months after a Change in Control, the Executive will be deemed to have terminated employment for Good Reason six (6) months after the Change in Control. (vi) "Qualifying Termination" shall mean termination of the Executive's employment under this Agreement (A) by reason of the discharge of the Executive by the Corporation other than for Cause or disability or (B) by reason of the resignation of the Executive for Good Reason within six (6) months after an event constituting Good Reason or (C) in accordance with the last sentence of the definition of Good Reason in subparagraph (v), above. 8. Vesting of Equity Awards Upon a Change in Control. Immediately upon the Change in Control, all stock options, restricted stock and other equity awards previously made to the Executive which are not otherwise vested shall vest in full, and all such options shall remain exercisable for the period provided for the applicable plan or award agreement. 9. Obligations of the Corporation Upon Termination. The following provisions describe the obligations of the Corporation to the Executive under this Agreement upon termination of his employment. However, except as explicitly provided in this Agreement, nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Corporation or any of its subsidiaries, or under any compensation or benefit plan, program, policy or practice of the Corporation or any of its subsidiaries. (a) Death, Disability, Discharge for Cause, or Resignation Without Good Reason. In the event this Agreement terminates by reason of the death or disability of the Executive, or by reason of the discharge of the Executive by the Corporation for Cause, or by reason of the resignation of the Executive other than for Good Reason, the Corporation shall pay to the Executive, or his heirs or estate, in the event of the Executive's death, all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation, or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive. 7 (b) Death, Disability or Retirement. In the event that Executive's employment is terminated by death, disability or retirement under a retirement plan of the Corporation, the Executive shall be entitled to receive, in addition to the compensation and benefits described in paragraph (a), above, a pro rata cash bonus for the year in which the Date of Termination occurs, determined and paid in accordance with the terms of the then current annual bonus plan applicable to the Executive. (c) Qualifying Termination Without a Change in Control. In the event of a Qualifying Termination without a Change in Control, the Executive shall, upon executing and delivering a release of liability satisfactory to the Corporation, receive the following benefits: (i) Payment of all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to one hundred fifty percent (150%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to one hundred fifty percent (150%) of the average of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, (iv) Continuation, for a period of eighteen (18) months after the Date of Termination, of health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") with the cost of such benefits to be paid by the Corporation, but such benefits may be discontinued earlier to the extent that the Executive becomes entitled to comparable benefits from a subsequent employer, (v) Immediate pro rata vesting of all stock options, restricted stock and other equity or incentive compensation awards to the Executive which are not otherwise fully vested, with all options to remain exercisable for the period provided for in the applicable plan or award agreement. The proration of each award shall be done by multiplying the full award by a fraction, the numerator of which shall be the number of full months between the date of grant and the Date of Termination, and the denominator of which shall be the number of full months in the period of employment required for full vesting under the original terms of the award, and (vi) Outplacement services, at the expense of the Corporation, from a provider reasonably selected by the Executive. 8 In addition, the Executive may, in the discretion of the Compensation Committee, be awarded a pro rata cash bonus for the year in which the Date of Termination occurs. (d) Qualifying Termination After a Change in Control. In the event of a Qualifying Termination within three (3) years after a Change in Control, the Executive shall receive, in addition to the compensation and benefits described in subparagraphs (c)(i) and (c)(vi), above, the following benefits: (i) A pro rata cash bonus for the year in which the Date of Termination occurs, determined and paid in accordance with the terms of the then current annual bonus plan applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to three hundred percent (300%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to three hundred percent (300%) of the highest of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, (iv) Continuation, for a period of three (3) years after the Date of Termination, of the following welfare benefits and senior executive perquisites on terms at least as favorable to the Executive as those which would have been provided if the Executive's employment had continued for that time pursuant to this Agreement: medical and dental benefits, life and disability insurance, executive physical examinations, and automobile and financial counseling allowances, with the cost of such benefits to be paid by the Corporation. To the extent the Corporation is unable to provide comparable insurance for reasons other than cost, the Corporation may provide a lesser level or no coverage and compensate the Executive for the difference in coverage through a cash lump sum payment grossed up for taxes. This payment will be tied to the cost of an individual insurance policy if it were assumed to be available, (v) Immediate vesting of the Executive's interests in all non- qualified or supplemental retirement plans in which the Executive participates (including, but not by way of limitation, supplemental Section 401(k) plans), calculated on the basis of the Executive's actual period of service plus three (3) years, giving effect for that additional period to the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii), above, and taking into account the maximum matching contributions by the Corporation under qualified and supplemental Section 401(k) plans. (e) Termination of Employment Prior to Change in Control. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Corporation is terminated within six (6) months prior to the 9 date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who was taking steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement the termination of the Executive's employment shall be deemed to have occurred immediately after the Change in Control. 10. Certain Additional Payments by the Corporation. The Corporation agrees that: (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or if any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of paragraph (c), below, all determinations required to be made under this Paragraph 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the accounting firm which is then serving as the auditors for the Corporation (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Corporation. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Paragraph 10, shall be paid by the Corporation to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any good faith determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the 10 time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to paragraph (c), below, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive. (c) The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which Executive gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Corporation any information reasonably requested by the Corporation relating to such claim, (ii) Take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation, (iii) Cooperate with the Corporation in good faith in order effectively to contest such claim, and (iv) Permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph (c), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; and the Executive agrees to prosecute such 11 contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to paragraph (c), above, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation's complying with the requirements of said paragraph (c)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon, after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to said paragraph (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid; and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. 11. No Set-Off or Mitigation. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Corporation may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. 12. Payment of Certain Expenses. The Corporation agrees to pay promptly as incurred, to the fullest extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest by the Corporation, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest initiated by the Executive about the amount of any payment due pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, 12 however, that the Corporation shall not be obligated to make such payment with respect to any contest in which the Corporation prevails over the Executive. 13. Indemnification. To the full extent permitted by law, the Corporation shall, both during and after the term of the Executive's employment, indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being (or having been) an officer, director or employee of the Corporation or any of its subsidiaries. In addition, the Executive shall be covered, both during and after the term of the Executive's employment, by director and officer liability insurance to the maximum extent that such insurance covers any officer or director (or former officer or director) of the Corporation. 14. Confidentiality. During and after the period of employment with the Corporation, the Executive shall not, without prior written consent from the Chief Executive Officer or the General Counsel of the Corporation directly or indirectly disclose to any individual, corporation or other entity, other than to the Corporation or any subsidiary or affiliate thereof or their officers, directors or employees entitled to such information or any other person or entity to whom such information is disclosed in the normal course of the business of the Corporation) or use for the Executive's own benefit or for the benefit of any such individual, corporation or other entity, any Confidential Information of the Corporation. For purposes of this Agreement, "Confidential Information" is information relating to the business of the Corporation or its subsidiaries or affiliates (a) which is not generally known to the public or in the industry, (b) which has been treated by the Corporation and its subsidiaries and affiliates as confidential or proprietary, (c) which provides the Corporation or its subsidiaries or affiliates with a competitive advantage, and (d) in the confidentiality of which the Corporation has a legally protectable interest. Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which the Corporation and its subsidiaries and affiliates cease to have a legally protectable interest, shall cease to be subject to the restrictions of this Paragraph 14. 15. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law, and such successor shall be deemed the "Corporation" for purposes of this Agreement. 13 16. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or by recognized commercial delivery service or if mailed within the continental United States by first class certified mail, return receipt requested, postage prepaid, addressed as follows: (1) If to the Board or the Corporation, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: Senior Vice President-Human Resources (2) If to the Executive, to: Household International, Inc. 1441 Schilling Place Salinas, California 93901 Attention: Siddharth N. Mehta Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. 17. Tax Withholding. The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state, or local law with respect to any payment in cash, shares of stock and/or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (a) withhold such taxes from any cash payments owing from the Corporation to the Executive, (b) require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding obligations and/or (c) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 18. Arbitration. Except as to any controversy or claim which the Executive elects, by written notice to the Corporation, to have adjudicated by a court of competent jurisdiction, any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in Chicago, Illinois in accordance with the laws of the State of Illinois. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association. The costs and expenses of the arbitrator(s) shall be borne by the Corporation. The award of the arbitrator(s) shall be binding upon the parties. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. 19. No Assignment. Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be 14 subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 20. Execution in Counterparts. This Agreement may be executed by the parties hereto in two (2) or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 21. Jurisdiction and Governing Law. This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of Illinois, other than the conflict of laws provisions of such laws. 22. Severability. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. Furthermore, if the scope of any restriction or requirement contained in this Agreement is too broad to permit enforcement of such restriction or requirement to its full extent, then such restriction or requirement shall be enforced to the maximum extent permitted by law, and the Executive consents and agrees that any court of competent jurisdiction may so modify such scope in any proceeding brought to enforce such restriction or requirement. 23. Prior Understandings. This Agreement embodies the entire understanding of the parties hereto and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof, including but not by way of limitation by amending and restating the Employment Agreement dated June 11, 1998 between the parties. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. The headings in this Agreement are for convenience of reference only and shall not be construed as part of this Agreement or to limit or otherwise affect the meaning hereof. 15 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. Attest: HOUSEHOLD INTERNATIONAL, INC. /s/ Kenneth H. Robin By: /s/ William F. Aldinger - ------------------------------- ---------------------------------------- Kenneth H. Robin Title: Chairman and Chief Executive Officer Senior Vice President-General Counsel and Corporate Secretary /s/ Siddharth N. Mehta ---------------------------------- Siddharth N. Mehta 16 EX-10.15 11 SUPP. EXECUTIVE RETIREMENT PLAN--W. F. ALDINGER Exhibit 10.15 AMENDED AND RESTATED WFA SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN WHEREAS, Household International, Inc., by resolution of its Board of Directors dated November 10, 1998, has authorized its proper officers to adopt the Amended and Restated WFA Supplemental Executive Retirement Plan, NOW, THEREFORE, the Amended and Restated WFA Supplemental Executive Retirement Plan is adopted as follows: 1. Adoption of Plan. William F. Aldinger ("WFA") is a participant in the Household Retirement Income Plan ("RIP") and the Household Supplemental Retirement Income Plan ("SRIP"). The WFA Supplemental Executive Retirement Plan was previously adopted to supplement the benefits payable to WFA under both RIP and SRIP. The Board of Directors has determined to amend the WFA Supplemental Executive Retirement Plan as set forth in this Amended and Restated WFA Supplemental Executive Retirement Plan (hereafter called the "Plan"). 2. Eligible Employees. William F. Aldinger is the only employee of Household International, Inc. ("Household") eligible to participate in the Plan. 3. Vesting of Benefits. Except as otherwise provided below, if WFA continues to be employed by Household or one of its subsidiaries until he attains age 60, then he will become eligible for benefits under the Plan. 4. Amount of Benefit. If WFA terminates employment with Household and all its subsidiaries on or after he has attained age 60, then he will be eligible to receive upon his termination of employment a monthly single life annuity benefit under the Plan where the annual amount of the annuity equals 50% of his "Final Average Salary" as defined in RIP (but without any limits imposed by Section 401(a)(17) of the Internal Revenue Code), offset by the equivalent monthly single life annuity he would be eligible to receive under RIP and SRIP. If WFA terminates employment with Household and all its subsidiaries on or after he has attained age 65, then his benefit will be based upon 55% of his Final Average Salary (without any limits imposed by Section 401(a)(17) of the Internal Revenue Code) instead of 50%. 5. Effect of Termination of Employment Prior to Age 60. In the event WFA's employment with Household and all of its subsidiaries terminates prior to the date he attains age 60 due to (a) WFA's death, (b) WFA's disability (as defined in the Employment Agreement dated as of January 1, 1999 between Household and WFA, such Employment Agreement hereinafter referred to as the "Employment Agreement"), or (c) a Qualifying Termination of Employment (as defined in the Employment Agreement), then, notwithstanding the provisions of Paragraph 3 above, WFA (or in the event of his death, his spouse or other designated beneficiary) shall be entitled to receive a prorated benefit under the Plan (the "Prorated Benefit"). The Prorated Benefit will be a monthly single life annuity payable upon WFA's attainment of age 60 (or the date he would have reached age 60), where the annual amount of the annuity equals 50% of his Final Average Salary, multiplied by a fraction the numerator of which is WFA's years of vesting service credited under the RIP, and the denominator of which is the total number of years of vesting service with which WFA would be credited under the RIP if his employment continued until age 60. For purposes of determining the Prorated Benefit, WFA's Final Average Salary shall be as defined in Paragraph 4 above, but determined as of the date of his termination of employment; provided, however, that if WFA's termination of employment is a Qualifying Termination of Employment (as defined in the Employment Agreement), then for purpose of determining the Prorated Benefit (A) WFA's Final Average Salary shall be determined as if WFA's employment continued for another 24 months and the lump sum salary and bonus replacement amounts payable to WFA under the Employment Agreement on account of such Qualifying Termination were paid ratably to him over such 24 month period, and (B) his years of vesting service for purposes of the numerator of the fraction described above shall be determined as if WFA's employment continued for such 24 month period. In the event that the Qualifying Termination occurs within six months prior to, or on or after, a Change in Control (as defined in the Employment Agreement), for purposes of determining the Prorated Benefit payable to WFA pursuant to this Paragraph 5, (I) WFA's Final Average Salary amount shall be determined as if WFA's employment continued for another 36 months and the lump sum salary and bonus replacement amounts payable to WFA under the Employment Agreement on account of such Qualifying Termination of Employment were paid ratably to him over such 36 month period, (II) the fraction described above shall be deemed to equal one (1.0), and (III) the benefit shall be a single life annuity payable upon the expiration of such 36 month period (or, if earlier, WFA's attainment of age 60). 6. Form of Payment. The benefits under this Plan shall be paid to WFA (or, in the event of his death, his spouse or other designated beneficiary) in accordance with this Paragraph 6. As of the date of WFA's termination of employment, the single life annuity payable to WFA shall be converted into an actuarially equivalent lump sum value (hereinafter referred to as the "Lump Sum Amount") as of the date of WFA's termination, using the actuarial factors applicable to lump sum payments as are then in effect under RIP. Such lump sum amount shall be paid in five equal installments, the first to be made no later than thirty days after the termination of WFA's employment, and the second through fifth installments to be made on the first through fourth anniversaries of WFA's termination of employment. The second through fifth installments shall be accompanied by interest credited on the unpaid balance at the prime rate of interest as from time to time published in The Wall Street Journal, Midwest Edition. Notwithstanding the foregoing, the Senior Vice President -- Human Resources of Household, or his successor, may approve an alternative form of benefit, including a single lump sum payment of the Lump Sum Amount. To the extent that WFA shall have elected, prior to the January 1 of the calendar year in which his termination of employment occurs, that his benefit under the Plan be paid in a single lump sum amount, or in any form of payment offered under RIP which is actuarially equivalent to Lump Sum Amount, determined in accordance with the factors used under RIP, then the Senior Vice President -- Human Resources of Household or his successor shall be obligated to approve such form of payment. The form of benefit chosen from the Plan may differ from that elected under RIP or SRIP. In the event that a payment required to be made under this Paragraph 6 would not be fully deductible by Household if paid in one taxable year, then the payment will be spread over the minimum number of years needed to allow for deductibility by Household. The amounts not immediately paid in accordance with the preceding sentence will be credited with interest up until the date of distribution at the prime rate referred to above. 7. Death Benefit. If WFA should die after payment of benefits to him under the Plan has begun, then payments will cease or continue in accordance with the manner of payment selected. If WFA should die before payments commence, then either the Prorated Benefit described in Paragraph 5 (in the case of WFA's death before age 60) or the benefit under the Plan to which he would have been entitled had his employment terminated on the day before his death (in the case of WFA's death on or after age 60), will be paid to his spouse or other beneficiary designated by him. 8. Financing of the Plan. The benefits provided under the Plan shall be paid directly by Household and the Plan shall not create a funded account or security interest for the benefit of any person. Notwithstanding the foregoing, this Plan shall constitute a "Contract" and WFA shall be an "Executive" within the meaning of the Household International, Inc. Grantor Trust Agreement for Employees and Former Employees, as may from time to time be amended (such trust and any successor thereto or replacement thereof, the "Grantor Trust"). Upon the occurrence of a Funding Date (as defined in the Grantor Trust), the Company shall pay to the Grantor Trust the amounts required thereby with respect to the benefits hereunder and take such other actions as are appropriate to protect such benefits. If the Grantor Trust is terminated or amended in a manner adverse to WFA, then upon a Change in Control (as defined in Section 4.01 of the Grantor Trust) the Company shall establish a replacement trust in form and substance reasonably acceptable to WFA and shall deliver to the replacement trust cash of a value sufficient to provide for the payment of all accrued benefits under this Plan. 9. Amendment and Termination. The Plan may be amended from time to time or terminated by Household with the consent of WFA. IN WITNESS WHEREOF, the undersigned has caused this instrument to be executed in its name and on its behalf and its corporate seal to be hereunto affixed and attested by its officers thereunto duly authorized this 23rd day of December, 1998. HOUSEHOLD INTERNATIONAL, INC. /s/ Colin P. Kelly ------------------------------------- By Colin P. Kelly Senior Vice President-Human Resources (Corporate Seal) ATTEST: /s/ Kenneth H. Robin - --------------------------- Kenneth H. Robin Secretary EX-11 12 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (In millions, except per share data.)
- ------------------------------------------------------------------------------------------- 1998 1997 1996 ----------------- --------------- ------------------ Year ended December 31 Diluted Basic Diluted Basic Diluted Basic - ------------------------------------------------------------------------------------------- Earnings: Net income $524.1 $524.1 $940.3 $940.3 $819.6 $819.6 Preferred dividends (15.0) (15.0) (17.0) (17.0) (21.9) (21.9) - ------------------------------------------------------------------------------------------- Earnings available to common shareholders $509.1 $509.1 $923.3 $923.3 $797.7 $797.7 =========================================================================================== Average shares: Common 487.2 487.2 470.2 470.2 454.6 454.6 Common equivalents 9.2 -- 8.9 -- 7.7 -- - ------------------------------------------------------------------------------------------- Total 496.4 487.2 479.1 470.2 462.3 454.6 =========================================================================================== Earnings per common share $ 1.03 $ 1.04 $ 1.93 $ 1.97 $1.73 $ 1.76 ===========================================================================================
EX-12 13 STATEMENT OF COMP. OF RATIO OF EARNINGS/FIXED CHRGS EXHIBIT 12 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (All dollar amounts are stated in millions.)
- ---------------------------------------------------------------------------------------------------- Year ended December 31 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- Net income $ 524.1 $ 940.3 $ 819.6 $ 603.7 $ 545.3 Income taxes 428.6 462.2 461.2 420.4 309.1 - ---------------------------------------------------------------------------------------------------- Income before income taxes 952.7 1,402.5 1,280.8 1,024.1 854.4 - ---------------------------------------------------------------------------------------------------- Fixed charges: Interest expense (1) 2,530.8 2,367.9 2,337.4 2,378.7 1,923.9 Interest portion of rentals (2) 56.8 53.4 55.4 55.8 51.8 - ---------------------------------------------------------------------------------------------------- Total fixed charges 2,587.6 2,421.3 2,392.8 2,434.5 1,975.7 - ---------------------------------------------------------------------------------------------------- Total earnings as defined $3,540.3 $3,823.8 $3,673.6 $3,458.6 $2,830.1 ==================================================================================================== Ratio of earnings to fixed charges (4) 1.37 1.58 1.54 1.42 1.43 ==================================================================================================== Ratio of earnings to fixed charges, excluding merger and integration related costs 1.75 -- -- -- -- ==================================================================================================== Preferred stock dividends (3) $ 23.0 $ 25.3 $ 34.0 $ 53.4 $ 50.4 ==================================================================================================== Ratio of earnings to combined fixed charges and preferred stock dividends (4) 1.36 1.56 1.51 1.39 1.40 ==================================================================================================== Ratio of earnings to combined fixed charges and preferred stock dividends, excluding merger and integration related costs 1.74 -- -- -- -- ====================================================================================================
(1) For financial statement purposes, interest expense includes income earned on temporary investment of excess funds, generally resulting from over- subscriptions of commercial paper. (2) Represents one-third of rentals, which approximates the portion representing interest. (3) Preferred stock dividends are grossed up to their pre-tax equivalents. (4) The 1998 ratios have been negatively impacted by the one-time merger and integration related costs associated with our merger with Beneficial Corporation. As a result, ratios excluding these costs have also been presented for comparative purposes. EX-13 14 MATERIAL INCORPORATED BY REFERENCE EXHIBIT 13 Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 18 1998 Annual Report Selected Financial Data and Statistics
All dollar amounts except per share data are stated in millions. 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Statement of Income Data-Year Ended December 31/1/ Net interest margin and other revenues $ 6,380.0 $ 6,036.2 $ 5,451.6 $ 5,131.5 $ 4,795.9 Provision for credit losses on owned receivables 1,516.8 1,493.0 1,144.2 1,025.1 795.1 Operating expenses 2,672.3 2,884.8 2,714.7 2,527.4 2,595.5 Policyholders' benefits 238.2 255.9 311.9 554.9 550.9 Merger and integration related costs 1,000.0 - - - - Income taxes 428.6 462.2 461.2 420.4 309.1 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 524.1 $ 940.3 $ 819.6 $ 603.7 $ 545.3 - ------------------------------------------------------------------------------------------------------------------------------------ Operating net income/2/ $ 1,156.6 $ 940.3 $ 819.6 $ 603.7 $ 545.3 ==================================================================================================================================== Per Common Share Data/1/,/3/ Basic earnings $ 1.04 $ 1.97 $ 1.76 $ 1.26 $ 1.15 Diluted earnings 1.03 1.93 1.73 1.24 1.13 Diluted operating earnings/2/ 2.30 1.93 1.73 1.24 1.13 Dividends declared .60 .54 .49 .44 .41 Book value 12.88 12.81 9.96 8.96 7.72 - ------------------------------------------------------------------------------------------------------------------------------------ Balance Sheet Data at December 31/1/ Total assets/4/: Owned $ 52,892.7 $ 46,817.0 $ 45,332.0 $ 44,723.0 $ 48,527.1 Managed 72,594.6 71,295.5 66,183.2 60,721.1 61,652.6 - ------------------------------------------------------------------------------------------------------------------------------------ Managed receivables/5/: First mortgage $ 156.3 $ 396.6 $ 725.6 $ 2,066.9 $ 3,364.2 Home equity 22,330.1 19,824.8 16,197.5 16,506.7 14,734.5 Auto finance/6/ 1,765.3 883.4 - - - MasterCard/Visa 16,610.8 19,211.7 19,528.2 13,894.5 11,458.9 Private label 10,377.5 10,381.9 10,252.5 7,774.3 5,873.1 Other unsecured 11,970.6 11,505.1 11,557.6 9,375.1 7,784.9 Commercial 697.1 957.0 1,037.3 1,392.5 2,058.0 - ------------------------------------------------------------------------------------------------------------------------------------ Total managed receivables 63,907.7 63,160.5 59,298.7 51,010.0 45,273.6 Receivables serviced with limited recourse (19,701.9) (24,478.5) (20,851.2) (15,998.1) (13,125.5) - ------------------------------------------------------------------------------------------------------------------------------------ Owned receivables $ 44,205.8 $ 38,682.0 $ 38,447.5 $ 35,011.9 $ 32,148.1 ==================================================================================================================================== Deposits/7/ $ 2,105.0 $ 2,344.2 $ 3,000.1 $ 5,351.3 $ 9,093.4 Total other debt 40,356.5 34,402.3 34,030.5 29,703.7 25,444.9 Company obligated mandatorily redeemable preferred securities of subsidiary trusts 375.0 175.0 175.0 75.0 - Convertible preferred stock - - - - 2.6 Preferred stock 164.4 264.5 319.5 319.5 434.6 Common shareholders' equity/8/ 6,221.4 6,174.0 4,521.5 4,079.4 3,486.1 - ------------------------------------------------------------------------------------------------------------------------------------ Selected Financial Ratios/1/ Return on average owned assets/2/, /9/ 2.29% 2.03% 1.82% 1.25% 1.15% Return on average managed assets/2/, /9/ 1.60 1.38 1.30 .98 .94 Return on average common shareholders' equity/2/, /9/ 18.2 17.3 18.7 15.1 15.2 Total shareholders' equity as a percent of managed assets/10/ 9.31 9.28 7.58 7.37 6.36 Tangible equity to tangible managed assets 7.11 6.92 6.20 6.26 5.52 Managed net interest margin 7.86 7.72 7.45 7.05 7.27 Managed consumer net chargeoff ratio 4.29 3.84 2.96 2.51 2.36 Managed basis efficiency ratio, normalized 37.6 41.0 45.0 50.7 55.2 Common dividends to operating net income 26.2 30.3 30.1 36.8 37.0 - ------------------------------------------------------------------------------------------------------------------------------------
/1/On June 30, 1998, Household merged with Beneficial Corporation, a consumer finance holding company. In connection with the merger, Household issued approximately 168.4 million shares of its common stock and three series of preferred stock. The transaction was accounted for as a pooling of interests, and accordingly, the consolidated financial statements have been restated for all periods presented. /2/Excludes merger and integration related costs of $751.0 million after-tax related to the Beneficial merger and the gain on sale of Beneficial Canada of $118.5 million after-tax. /3/All share information has been adjusted for our 3-for-1 stock split effected in the form of a stock dividend and paid on June 1, 1998. /4/In 1996, Beneficial's annuity product line was sold. In late 1995, Household sold its individual life and annuity product lines of its life insurance business and its first mortgage servicing portfolio and servicing business. In 1994, Household sold its Australian subsidiary and retail securities brokerage business. /5/In 1998, we sold $1.9 billion of our non-core MasterCard and Visa receivables. Also in 1998, Beneficial's German and Canadian operations were sold. Net receivables relating to these disposed German and Canadian operations were $272 million and $775 million, respectively. In 1997, we acquired the capital stock of Transamerica Financial Services Holding Company ("TFS"). The acquisition included $3.1 billion of home equity receivables. We also sold our entire portfolio of student loans totaling about $900 million in 1997, as we exited this business. In 1996, we acquired credit card portfolios with outstandings of $4.1 billion and sold $1.7 billion of lower margin loans primarily from the previously divested mortgage and consumer banking businesses. /6/In October 1997, we purchased ACC Consumer Finance Corporation, an auto finance company. Prior to the fourth quarter of 1997, auto finance receivables were not significant and were included in other unsecured receivables. /7/We sold our domestic consumer banking operations, including deposits of $2.8 billion in 1996 and $3.4 billion in 1995. Our Canadian subsidiary also sold $725 million in deposits in 1995. /8/In 1997, we issued 27.3 million shares of common stock in a public offering, raising about $1.0 billion. The net proceeds were used to repay certain short- term borrowings incurred in connection with the acquisition of TFS. /9/Including the merger and integration related costs and the gain on sale of Beneficial Canada for the year ended December 31, 1998, the return on average owned assets was 1.04 percent, the return on average managed assets was .72 percent and the return on average common shareholders' equity was 8.1 percent. /10/Total shareholders' equity at December 31, 1998, 1997, 1996 and 1995 includes common shareholders' equity, preferred stock and company obligated mandatorily redeemable preferred securities of subsidiary trusts. Total shareholders' equity excludes convertible preferred stock that was fully converted or redeemed during 1995. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 19 1998 Annual Report Credit Quality Statistics
All dollar amounts are stated in millions. At December 31, unless otherwise indicated. 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- Managed Consumer Two-Month-and-Over Contractual Delinquency Ratios First mortgage 14.90% 10.35% 9.49% 3.29% 1.81% Home equity 3.67 3.69 3.04 2.76 2.49 Auto finance/1/ 2.29 2.09 - - - MasterCard/Visa 3.75 3.10 2.73 2.19 2.23 Private label 6.20 5.81 4.60 3.93 3.50 Other unsecured 7.94 7.81 6.21 5.68 5.25 - -------------------------------------------------------------------------------------------------------------------------- Total 4.90% 4.64% 3.92% 3.36% 3.00% --------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Ratio of Net Chargeoffs to Average Managed Receivables for the Year First mortgage .39% 1.05% .45% .35% .41% Home equity .63 .64 .60 .64 .83 Auto finance/1/ 5.39 4.60 - - - MasterCard/Visa 5.95 5.55 4.54 4.12 4.18 Private label 5.65 4.62 3.42 3.75 2.24 Other unsecured 6.97 5.48 4.29 3.60 4.01 - -------------------------------------------------------------------------------------------------------------------------- Total consumer loan products 4.29 3.84 2.96 2.51 2.36 Commercial .52 1.66 .92 2.10 3.10 - -------------------------------------------------------------------------------------------------------------------------- Total 4.24% 3.80% 2.92% 2.49% 2.40% --------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Nonaccrual Owned Receivables Domestic: First mortgage $ 19.5 $ 31.7 $ 50.0 $ 39.6 $ 38.6 Home equity 486.5 378.4 198.3 205.8 155.9 Auto finance/1/ 23.3 - - - - Private label 29.0 25.0 22.5 58.3 30.2 Other unsecured 297.9 283.6 240.6 245.2 209.1 Foreign 178.3 189.1 177.4 169.2 165.5 - -------------------------------------------------------------------------------------------------------------------------- Total consumer loan products 1,034.5 907.8 688.8 718.1 599.3 Commercial 29.6 31.2 60.0 146.8 117.7 - -------------------------------------------------------------------------------------------------------------------------- Total $1,064.1 $ 939.0 $ 748.8 $ 864.9 $717.0 --------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Nonaccrual Managed Receivables Domestic: First mortgage $ 19.5 $ 31.7 $ 50.0 $ 39.6 $ 38.6 Home equity 550.8 492.1 315.7 310.8 257.8 Auto finance/1/ 40.3 - - - - Private label 29.0 25.0 22.5 80.4 46.7 Other unsecured 559.5 565.2 399.1 295.0 209.1 Foreign 210.5 219.7 198.8 179.3 165.5 - -------------------------------------------------------------------------------------------------------------------------- Total consumer loan products 1,409.6 1,333.7 986.1 905.1 717.7 Commercial 29.6 31.2 60.0 146.8 117.7 - -------------------------------------------------------------------------------------------------------------------------- Total $1,439.2 $1,364.9 $1,046.1 $1,051.9 $835.4 --------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Accruing Owned Receivables 90 or More Days Delinquent/2/ Domestic $ 630.6 $ 468.3 $ 415.9 $ 181.1 $147.3 Foreign 21.8 31.3 23.8 12.2 7.5 - -------------------------------------------------------------------------------------------------------------------------- Total $ 652.4 $ 499.6 $ 439.7 $ 193.3 $154.8 --------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Accruing Managed Receivables 90 or More Days Delinquent/2/ Domestic $ 852.8 $ 776.5 $ 621.7 $ 308.1 $239.8 Foreign 21.8 31.3 23.8 12.2 7.5 - -------------------------------------------------------------------------------------------------------------------------- Total $ 874.6 $ 807.8 $ 645.5 $ 320.3 $247.3 --------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Renegotiated Commercial Loans $ 12.3 $ 12.4 $ 12.9 $ 21.2 $ 41.8 - -------------------------------------------------------------------------------------------------------------------------- Real Estate Owned Domestic $ 249.5 $ 200.0 $ 217.2 $ 208.4 $206.7 Foreign 4.4 12.8 19.6 29.3 47.3 - -------------------------------------------------------------------------------------------------------------------------- Total $ 253.9 $ 212.8 $ 236.8 $ 237.7 $254.0 --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------
/1/Prior to the fourth quarter of 1997, credit quality statistics for auto finance receivables were not significant. Credit quality data for these receivables were included in other unsecured receivables. Net chargeoff data includes ACC Consumer Finance Corporation subsequent to our acquisition in October 1997. /2/Includes MasterCard and Visa and private label credit card receivables, consistent with industry practice. There were no commercial loans 90 or more days past due which remained on accrual status. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg.20 1998 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations Household International, Inc., through its subsidiaries, provides consumers with home equity loans, auto finance loans, MasterCard* and Visa* credit cards, private label credit cards, tax refund anticipation loans and other types of unsecured loans. We serve middle-market customers primarily in the United States, United Kingdom and Canada. Our operations are divided into three reportable segments: Consumer, which includes our branch-based consumer finance, private label and auto finance businesses; Credit Card, which includes our domestic MasterCard and Visa business; and International, which comprises our foreign operations including the United Kingdom and Canada. At December 31, 1998, we had managed receivables of $63.9 billion. Our managed receivables portfolio includes receivables on our balance sheet and those that we service for investors as part of our asset securitization program. On June 30, 1998, Household International ("Household") merged with Beneficial Corporation ("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's common stock, resulting in the issuance of approximately 168.4 million shares of common stock. Each share of Beneficial $5.50 Convertible Preferred Stock (the "Beneficial Convertible Stock") was converted into the number of shares of Household 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 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. In connection with the merger, we established an integration plan which 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) which has been reflected in the statement of income in total costs and expenses. As of December 31, 1998, approximately $80 million remains in the merger and restructuring reserve. The merger and integration related costs were comprised of the following: . Approximately $270 million (of which $86 million related to key executives with pre-existing severance agreements) was accrued to cover employee termination 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 have been severed and approximately $240 million of severance payments have been made to terminated employees. Most of the remaining $30 million is expected to be paid in the first quarter of 1999 pursuant to our plan. . Approximately $319 million was 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. Of this amount, $100 million related to the exiting of the Beneficial corporate office lease, $142 million related to lease termination and other exit costs for closures of 335 duplicative U.S. and U.K. branch offices and 8 redundant operating centers, $40 million pertained to fixed asset writedowns, primarily related to closed facilities, and $37 million related to termination penalties associated with third party vendor contracts whose services would no longer be required. In November 1998, we entered into an agreement to sublease the Beneficial corporate offices to a third party to whom we paid total consideration 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 remainder of the estimated lease termination payments will be made in the first quarter of 1999. In addition, $14 million of charges were incurred due to early termination of third party vendor contracts. Most of the remaining vendor contracts will be terminated in the first quarter of 1999. . We re-assessed Beneficial's existing business plans and assumptions used in evaluating goodwill and other related intangibles associated with various operations, loan products and acquired receivable portfolios. Our plan identified modifications to these existing business plans. In connection with these modifications, we utilized discounted cash flow analyses to value the related goodwill and other intangible assets using assumptions which reflected our modified business plans. As a result of our analyses, we have written off approximately $183 million *MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of VISA USA, Inc. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg.21 1998 Annual Report of goodwill and other related intangible assets to their estimated fair values. In addition, we wrote down real estate interests by $68 million to reflect their net realizable values. Assets held for disposal are not material. . We and Beneficial incurred investment banking fees of $75 million and legal and other expenses of $25 million. In addition, in order to better align the asset liability position of the combined company, we paid $60 million in prepayment premiums related to outstanding debt. The merger and integration related costs included approximately $291 million in non-cash charges. Cash payments of approximately $709 million have been and will continue to be funded through our existing operations. In addition, we will receive tax benefits of approximately $249 million. On March 10, 1998, the Board of Directors approved a three-for-one split of Household's common stock effected in the form of a dividend, issued on June 1, 1998, to shareholders of record as of May 14, 1998. Accordingly, all common share and per common share data in the following discussion includes the effect of Household's stock split. Operations Summary . Our operating net income (net income excluding merger and integration related costs and the gain on the sale of Beneficial's Canadian operations) increased 23 percent to $1,156.6 million in 1998. Net income in 1997 was $940.3 million, 15 percent higher than 1996 earnings of $819.6 million. Diluted operating earnings per share was $2.30 in 1998, up 19 percent from $1.93 in 1997, which was up 12 percent from $1.73 in 1996. Net income was $524.1 million and diluted earnings per share was $1.03 in 1998. . Receivables of our core consumer finance businesses, other than MasterCard and Visa, grew 12 percent during 1998 with the strongest growth coming in our secured lending products. In total, in 1998 our managed portfolio of core receivables rose 4 percent, reflecting the sale of $1.9 billion in credit card receivables during the year and lower levels of GM Card receivables. . Our return on average common shareholders' equity ("ROE"), excluding merger and integration related costs and the gain on the sale of Beneficial's Canadian operations, was 18.2 percent in 1998. This compares to ROE of 17.3 percent in 1997 and 18.7 percent in 1996. Our return on average owned assets ("ROA"), excluding the nonrecurring items, was 2.29 percent, up from 2.03 percent in 1997 and 1.82 percent in 1996. Our return on average managed assets ("ROMA"), excluding the nonrecurring items, was 1.60 percent, up from 1.38 percent in 1997 and 1.30 percent in 1996. Our operating net income, ROA and ROMA increased over the past three years as a result of our focus on higher-return core businesses and improved efficiency. . 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. No additional losses were realized in 1998 as a result of the sale. . During 1998, our U.S. MasterCard and Visa business experienced declining profitability due to higher credit losses and intensifying competitive pressures. We took a number of steps during 1998 to minimize the impact of these negative trends. In the first half of the year, we actively repriced portions of our MasterCard and Visa portfolios and we also reduced credit lines to minimize future losses. This resulted in increased account attrition. In mid-year, new senior operating management joined our domestic bankcard unit. The new management team completed a comprehensive review of our bankcard strategy. Their objective was to boost returns and improve this business's competitive position. As a result, we reaffirmed our commitment to our two major credit card relationships: the GM Card, our co- branded relationship with General Motors Corporation; and the Union Privilege program, our affinity card relationship with the AFL-CIO labor federation. We intend to further enhance these programs during 1999 with the close collaboration of our partners. We also decided to refocus the Household Bank branded portfolio to target customers and prospects of our core consumer finance business. In addition, we will target other well-defined market segments offering higher potential returns and consumers whose borrowing needs have not been met by traditional lenders. To facilitate this effort, we have entered into a proposed alliance with Renaissance Holdings, Inc. ("Renaissance"), a privately held issuer of secured and unsecured credit cards to non-prime consumers. We intend to leverage Renaissance's capabilities with our access to markets, customer information, technology and other scale benefits. We will jointly originate new accounts which we will fund and own. Renaissance will service the credit card accounts that come under our joint program, and will be paid a servicing fee. As this business grows, Renaissance will begin to earn a share of the revenue and the servicing fee will decrease. As part of our redefined strategy, we will continue to de-emphasize undifferentiated credit card programs that do not offer the potential returns of our other businesses. This repositioning of our Household Bank portfolio led to $1.9 billion in portfolio sales in the second half of the year. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg.22 1998 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) In connection with these portfolio sales, we received premiums totaling approximately $200 million. Against these gains, we wrote off related intangible assets and other costs of $159 million and related securitization assets, net of related off-balance sheet loss reserves, of $45 million. The net result of these three components, all of which are included in other income, was a $4 million pretax loss. . In June 1997, we purchased Transamerica Financial Services Holding Company ("TFS"), the branch-based consumer finance subsidiary of Transamerica Corporation, for $1.1 billion. We also repaid $2.8 billion of debt that TFS owed to affiliates of Transamerica Corporation. This acquisition included $3.1 billion of home equity receivables secured primarily by home mortgages, and $100 million of other unsecured receivables. The acquisition strengthened our core consumer finance operations by adding new markets, new customer accounts, seasoned employees and receivables secured by collateral. This type of security helps to reduce the amount of loss we might incur if borrowers do not pay off their loans. In connection with this acquisition, in June 1997, we completed a public offering of 27.3 million shares of common stock for $1.0 billion. We used the net proceeds from the offering to repay short-term borrowings related to the acquisition. In October 1997, we purchased all of the outstanding capital stock of ACC Consumer Finance Corporation ("ACC"), an auto finance company, for about 4.2 million shares of our common stock and cash. 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 late December 1997, Beneficial acquired Endeavour Personal Finance Ltd. ("Endeavour"), including receivables of approximately $250 million, for cash, thus expanding our United Kingdom presence. Each of these 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. . In 1996, we exited several businesses that were providing insufficient returns on our investment. Over the course of 1996, we completed the sale of our consumer banking branches in Illinois, including the sale of about $2.8 billion of deposits and $340 million of home equity and other unsecured receivables. We wrote off acquired intangibles related to these deposits of $110 million in 1996. On March 31, 1996, Beneficial's $957 million annuity portfolio was sold through a co-insurance agreement. Approximately $900 million of investment securities were sold as part of this disposition. . The following summarizes operating results for our reportable operating segments for 1998 compared to 1997 and 1996: Results for our Consumer segment improved in 1998 from the prior year periods. Return on average owned assets increased to 2.77 percent in 1998 from 2.39 percent in 1997 and 2.34 percent in 1996. Return on average managed assets increased to 2.09 percent in 1998 from 1.70 percent in 1997 and 1996. The improvement in operating results from the prior year periods reflect higher net interest margin and fee income due mainly to higher average receivables. Managed receivables grew 13 percent to $41.2 billion at year-end 1998, up from $36.5 billion in 1997 and $31.4 billion in 1996. The growth in managed receivables in 1998 and 1997 was driven by solid growth in home equity, other unsecured and auto finance receivables. The Consumer segment has also benefited from reduced operating expenses from efficiencies achieved as Beneficial's branch operations were consolidated in the second half of the year and continued cost control efforts. The integration of Beneficial is proceeding on target. Offsetting these favorable trends, the Consumer segment continued to experience higher credit losses reflecting increased personal bankruptcies as well as the maturing of promotional balances in our private label business. The 1997 operating results were impacted by higher provisions for credit losses. In 1996, Beneficial recorded a $65 million up-front loss provision for the strong private label receivables growth experienced during the year. Our Credit Card segment reported lower earnings in 1998. Return on average owned assets was 1.80 percent in 1998, compared with 2.79 percent in 1997 and 2.38 percent in 1996. Return on average managed assets was .75 percent, compared with 1.17 percent in 1997 and 1.13 percent in 1996. The decrease in operating results in 1998 was primarily due to lower average receivables and higher credit losses, partially offset by higher fee income. Managed receivables were $14.8 billion at year-end 1998, compared to $17.8 billion in 1997 and $18.2 billion in 1996. The decrease in managed receivables in 1998 reflects portfolio attrition and the sale of non-core MasterCard and Visa receivables during the year totaling $1.9 billion. The improvement in operating results for 1997 compared with 1996 was due to higher net interest margin and fees and improved efficiency, partially offset by higher credit losses. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 23 1998 Annual Report Our International segment reported improved results. Return on average owned assets increased to 2.16 percent in 1998 from 1.95 percent in 1997 and 1.80 percent in 1996. Return on average managed assets increased to 1.86 percent in 1998 from 1.73 percent in 1997 and 1.62 percent in 1996. The improvement in operating results was primarily due to improved efficiency, as well as higher revenues due to receivables growth in the U.K. Total managed receivables fell 5 percent to $7.4 billion at year-end 1998, down from $7.8 billion in 1997, but up from $6.7 billion in 1996. The decline in managed receivables reflected our sale of Beneficial Canada and Beneficial Germany early in 1998. Our U.K. business had excellent growth, primarily in MasterCard and Visa, private label and other unsecured receivables. The Goldfish Card, issued in alliance with the Centrica Group, contributed significantly to the growth in managed receivables during the year. . Our tax refund anticipation loan ("RAL") business reported lower profits in 1998 due to measures taken by the Internal Revenue Service to delay payment on the returns of selected taxpayers claiming an earned income tax credit. The RAL program reported lower profits in 1997 compared with 1996, which benefited from very strong collections on loans previously written off during the 1995 season. Additionally, 1997 earnings were lower due to the July 1996 agreement with H&R Block Tax Services, Inc., which gave them a share in both the revenue and credit risk of certain RALs. . Our consolidated managed net interest margin expanded to 7.86 percent in 1998 from 7.72 percent in 1997 and 7.45 percent in 1996. Our margins have increased because we have continued to raise the interest rates we charge on most of our products. In addition, our margin expanded in 1998 as a result of lower cost of funds. The expansion was slightly offset by lower margin from a higher mix of secured loans in the portfolio which carry a lower yield compared to unsecured products. . Our normalized managed basis efficiency ratio was 37.6 percent in 1998, 41.0 percent in 1997 and 45.0 percent in 1996. The efficiency ratio is the ratio of operating expenses to the sum of our managed net interest margin and other revenues less policyholders' benefits. We normalize, or adjust for, items that are not indicative of ongoing operations. The improvement in the 1998 ratio was due to cost savings and operating efficiencies achieved from the consolidation of Beneficial's operations in the second half of the year and to continued cost control in our businesses. Balance Sheet Review . Managed assets (total assets on our balance sheet plus receivables serviced with limited recourse) increased to $72.6 billion at December 31, 1998 from $71.3 billion at year-end 1997 due to receivables growth in our core businesses. Receivables of our core consumer finance businesses, other than MasterCard and Visa, grew 12 percent in 1998. In total, our managed core portfolio rose only 4 percent from the level of a year ago. Growth was depressed by the sale of $1.9 billion in credit card receivables during the year. Owned assets totaled $52.9 billion at December 31, 1998, up from $46.8 billion at year-end 1997. Owned assets 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 $3.6 billion of receivables in 1998 and $8.3 billion of receivables during 1997. We refer to the securitized receivables that are serviced for investors and not on our balance sheet as our off-balance sheet portfolio. . Our core products and total portfolio grew during 1998, as shown in the following table:
Increase (Decrease) Increase (Decrease) All dollar amounts are stated in millions. December 31, 1998 in 1998/1997 in 1997/1996 ------------------------------------------------------------------------------------------------------- Managed receivables: Home equity $22,330.1 15% 24% Auto finance/1/ 1,765.3 100 - MasterCard/Visa 16,610.8 (14) (2) Private label 10,377.5 4 1 Other unsecured 11,970.6 7 7 ------------------------------------------------------------------------------------------------------- Core products/2/ 63,054.3 4 9 ------------------------------------------------------------------------------------------------------- First mortgage 156.3 (61) (45) Commercial 697.1 (21) (15) Discontinued products/3/ - (100) (42) ------------------------------------------------------------------------------------------------------- Total $63,907.7 1% 7% =======================================================================================================
/1/Prior to 1997, auto finance receivables were not significant and were included in other unsecured receivables. /2/Core products growth from the prior year, excluding MasterCard and Visa due to the strategic repositioning, was 12 percent in 1998. /3/Discontinued products include receivables relating to Beneficial's disposed Canadian operations in March 1998 and German operations in April 1998 and Household's student loan receivables sold in the fourth quarter of 1997. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 24 1998 Annual report Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Our distribution channels and growth strategies vary across product lines. The consumer branch business, which offers both real estate secured and unsecured loans, originates its products through its retail branch network, direct mail, telemarketing and correspondents and brokers. The private label business generates loan volume through merchant promotions, application displays, direct mail and telemarketing. The auto finance business generates loan volume primarily through dealer relationships from which installment contracts are purchased. The private label and auto finance businesses concentrate on both increasing volume from existing relationships and actively seeking new relationships. Our MasterCard and Visa business generates loan volume primarily through direct mail, telemarketing, application displays and promotional activity associated with our co-branding and affinity relationships. We supplement internally- generated receivables growth with opportunistic portfolio acquisitions depending on the pricing and customer profile of the portfolio. Home equity receivables increased 15 percent during 1998, with new originations up approximately 27 percent. Volumes were good in both the HFC and Beneficial branches. Additionally, in the last half of the year, we benefited from the fallout of some of the smaller home equity loan players. This reduced competition contributed to improved pricing, which we also took advantage of by increasing our correspondent business. The level of refinancings also began to decrease in the second half of 1998. The combination of reduced competitive pressures, prepayment penalties and focus on customer service and retention have slowed portfolio runoff. Growth in auto finance receivables in 1998 resulted from a continued focus on underserved customers in the non-prime sector and benefited from weakened competition and an expanded sales force. Private label receivables were up 4 percent in 1998 due to growth from our existing merchant base, particularly from merchants signed late last year, as well as growth from new merchants added during the year. In late 1998, we signed four new retailers which added over $700 million in receivables. Growth from these new and existing merchants was partially offset by attrition due to less promotional activity at two major retailers in the second quarter. Other unsecured receivables were up reflecting the purchase of an $850 million portfolio in the first quarter and steady growth during the year in both the domestic consumer finance and U.K. businesses. Our MasterCard and Visa receivables declined from a year ago due to attrition in the domestic portfolio and sale of $1.9 billion of non-core Household Bank branded credit card receivables. The decrease in the domestic portfolio was offset by growth of approximately $500 million in our U.K. bankcard business. . The managed consumer two-months-and-over contractual delinquency ratio increased to 4.90 percent at December 31, 1998 from 4.64 percent at December 31, 1997. The 1998 managed consumer net chargeoff ratio was 4.29 percent compared with 3.84 percent in 1997 and 2.96 percent in 1996. . Our managed credit loss reserves totaled $2.5 billion at December 31, 1998, essentially unchanged from 1997. Credit loss reserves as a percent of managed receivables were 3.99 percent at year-end 1998 and 1997, reflecting the growing percentage of secured loans. Reserves as a percent of nonperforming managed receivables were 109.5 percent compared with 115.5 percent at December 31, 1997. . The ratio of total shareholders' equity to managed assets was 9.31 percent, compared with 9.28 percent at December 31, 1997. The ratio of tangible equity to tangible managed assets was 7.11 percent, compared with 6.92 percent at year-end 1997. Pro Forma Managed Statements of Income Securitizations of consumer receivables have been, and will continue to be, a source of liquidity and capital management for us. We continue to service securitized receivables after they have been sold and retain a limited recourse liability for future credit losses. We include revenues and credit-related expenses related to the off-balance sheet portfolio in one line item in our owned statements of income. Specifically, we report net interest margin, fee and other income, and provision for credit losses for securitized receivables as a net amount in securitization income. We monitor our operations on a managed basis as well as on the owned basis shown in our statements of income. The managed basis assumes that the securitized receivables have not been sold and are still on our balance sheet. The income and expense items discussed above are reclassified from securitization income into the appropriate caption. Pro forma managed statements of income, which reflect these reclassifications, are presented below. For purposes of this analysis, the managed results do not reflect the differences between our accounting policies for owned receivables and the off-balance sheet portfolio. Therefore, net income on a pro forma managed basis equals net income on an owned basis. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 25 1998 Annual Report Pro Forma Managed Statements of Income
In millions. Year ended December 31 1998 1997 1996 ------------------------------------------------------------------------------------------ Finance and other interest income $ 8,975.4 $ 8,412.5 $ 7,617.6 Interest expense 3,881.3 3,692.2 3,413.2 ------------------------------------------------------------------------------------------ Net interest margin 5,094.1 4,720.3 4,204.4 Provision for credit losses 2,716.0 2,620.6 2,033.3 ------------------------------------------------------------------------------------------ Net interest margin after provision for credit losses 2,378.1 2,099.7 2,171.1 ------------------------------------------------------------------------------------------ Insurance revenues 492.8 454.2 422.1 Investment income 161.2 173.1 220.7 Fee income 1,398.0 1,460.5 1,073.9 Other income 243.7 355.7 419.6 Gain on sale of Beneficial Canada 189.4 - - ------------------------------------------------------------------------------------------ Total other revenues 2,485.1 2,443.5 2,136.3 ------------------------------------------------------------------------------------------ Salaries and fringe benefits 1,127.5 1,085.3 976.9 Occupancy and equipment expense 316.1 333.6 328.9 Other marketing expenses 403.2 449.6 431.5 Other servicing and administrative expenses 654.9 857.9 833.7 Amortization of acquired intangibles and goodwill 170.6 158.4 143.7 Policyholders' benefits 238.2 255.9 311.9 Merger and integration related costs 1,000.0 - - ------------------------------------------------------------------------------------------ Total costs and expenses 3,910.5 3,140.7 3,026.6 ------------------------------------------------------------------------------------------ Income before income taxes 952.7 1,402.5 1,280.8 Income taxes 428.6 462.2 461.2 ------------------------------------------------------------------------------------------ Net income $ 524.1 $ 940.3 $ 819.6 ========================================================================================== Average managed receivables $63,677.1 $60,447.2 $54,959.0 Average noninsurance investments 803.7 661.4 1,477.6 Other interest-earning assets 302.6 - - ------------------------------------------------------------------------------------------ Average managed interest-earning assets $64,783.4 $61,108.6 $56,436.6 ==========================================================================================
The following discussion on revenues, where applicable, and provision for credit losses includes comparisons to amounts reported on our historical owned statements of income ("Owned Basis"), as well as on the above pro forma managed statements of income ("Managed Basis"). Net Interest Margin Net interest margin on an Owned Basis was $3,144.3 million for 1998, up from $2,822.4 million in 1997 and $2,695.7 million in 1996. As a percent of average owned interest-earning assets, net interest margin was 7.34 percent in 1998, 7.16 percent in 1997 and 7.02 percent in 1996. The dollar increase over 1997 and 1996 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. See pages 38 and 39 for an analysis of our Owned Basis net interest margin. Net interest margin on a Managed Basis increased to $5,094.1 million for 1998 from $4,720.3 million in 1997 and $4,204.4 million in 1996, primarily due to receivables growth. The net interest margin percentage on a Managed Basis increased to 7.86 percent from 7.72 percent in 1997 and 7.45 percent in 1996. The increase in 1998 resulted from a lower cost of funds. The overall rate of increase was slightly offset by lower margin from a higher mix of secured loans in the portfolio which carry a lower yield compared to unsecured products. Net interest margin as a percentage of receivables on a Managed Basis is greater than on an Owned Basis because 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. It also includes an amount which, in our judgment, is sufficient to maintain reserves for credit losses at a level that reflects known and inherent risks in the portfolio. The Managed Basis provision for credit losses also includes the over-the-life reserve requirement established on the off-balance sheet portfolio when receivables are securitized. The provision for credit losses on an Owned Basis totaled $1,516.8 million in 1998, compared to $1,493.0 million in 1997 and $1,144.2 million in 1996. The increases in 1998 and 1997 were due to higher chargeoffs in our unsecured portfolios and continued seasoning of the private label portfolio. In 1996, Beneficial recorded a Household International, Inc. and Subsidiaries ---------------------------------------------- Pg.26 1998 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) $65 million up-front loss provision for the strong private label receivables growth experienced during the year. As a percent of average owned receivables, the provision was 3.64 percent compared to 3.85 percent in 1997 and 3.10 percent in 1996. The decrease in this ratio in 1998 was due to a higher mix of secured loans as compared to 1997. The provision for credit losses on a Managed Basis totaled $2,716.0 million in 1998, $2,620.6 million in 1997 and $2,033.3 million in 1996. The provision as a percent of average managed receivables was 4.27 percent in 1998, 4.34 percent in 1997 and 3.70 percent in 1996. The Managed Basis provision is impacted by the type and amount of receivables securitized during the year and substantially offsets the income recorded on the securitization transactions. In 1998, excluding replenishments of prior securitizations, we securitized approximately $3.6 billion of receivables, compared to approximately $8.3 billion in 1997 and $8.8 billion in 1996. Other Revenues Securitization income was $1,548.9 million in 1998, $1,638.4 million in 1997 and $1,341.3 million in 1996. Securitization income was lower in 1998 as we securitized fewer receivables than in 1997. Securitization income increased in 1997 primarily due to growth in average securitized receivables. The components of securitization income are reclassified to the appropriate caption in the statements of income on a Managed Basis. Insurance revenues of $492.8 million in 1998 were up from $454.2 million in 1997 and $422.1 million in 1996. The increases were primarily due to increased insurance sales on a larger portfolio. 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 $161.2 million in 1998 compared with $173.1 million in 1997 and $220.7 million in 1996. The decrease in 1998 and 1997 from each of the prior years was due to lower average investment balances and lower yields on the securities in the portfolio. Fee income on an Owned Basis includes revenues from fee-based products such as credit cards and, through mid-1996, consumer banking deposits. Fee income was $599.7 million in 1998, up from $592.4 million in 1997 and $352.2 million in 1996. The increases in fee income reflected higher credit card fees and interchange income. Fee income on a Managed Basis includes, in addition to the items discussed above, fees and other income related to the off-balance sheet portfolio. Managed Basis fee income was $1,398.0 million in 1998 compared to $1,460.5 million in 1997 and $1,073.9 million in 1996. The decrease in 1998 was primarily due to lower securitization activity, partially offset by an increase in interchange and late fees. The increase in 1997 was due to higher credit card fees and interchange income as a result of increased average managed credit card receivables. Other income was $243.7 million in 1998, $355.7 million in 1997 and $419.6 million in 1996. The decline in 1998 reflected a decrease in RAL income from the prior year, as previously discussed. Other income in 1997 included 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. RAL income in 1996 benefited from very strong collections on loans previously written off during the 1995 season. Other income in 1996 included the premium from the sale of our Illinois banking operations and the gain related to the sale of our annuity portfolio in the first quarter. Total other revenues in 1998 also included a pretax gain of $189.4 million from the sale of Beneficial's Canadian operations, as previously discussed. Expenses Operating expenses, excluding the one-time merger related costs of approximately $1.0 billion, were $2,672.3 million in 1998, $2,884.8 million in 1997 and $2,714.7 million in 1996. In 1998, operating expenses were down sharply. During 1997, Beneficial recorded non-operating pretax charges of $90 million including a $59 million provision for the planned disposition of Beneficial's German operations. Also included in 1997 were expenses related to Beneficial's Canadian and German operations, which were sold in early 1998. In addition, cost savings and operating efficiencies were achieved from the consolidation of Beneficial's operations in the second half of the year and continued cost control in our remaining businesses. Our overall normalized managed efficiency ratio was 37.6 percent in 1998 compared with 41.0 percent in 1997 and 45.0 percent in 1996. Salaries and fringe benefits were $1,127.5 million in 1998, up from $1,085.3 million in 1997 and $976.9 million in 1996. The increase was mostly due to higher sales incentives for our consumer finance branch employees and a higher number of employees in our auto finance business, partially offset by Beneficial staff reductions. Occupancy and equipment expense was $316.1 million in 1998, compared to $333.6 million in 1997 and $328.9 million in 1996. Expenses in 1998 were 5 percent lower due to the elimination of duplicative branch offices and operating centers as a result of the Beneficial merger. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg.27 1998 Annual Report Other marketing expenses include payments for advertising, direct mail programs and other marketing expenditures. These expenses were $403.2 million in 1998, compared to $449.6 million in 1997 and $431.5 million in 1996. Included in 1997 were marketing initiatives for several Beneficial private label merchants. Other servicing and administrative expenses were $654.9 million in 1998, $857.9 million in 1997 and $833.7 million in 1996. Included in 1997 were Beneficial's non-operating charge of $90 million and the expenses related to Beneficial's Canadian and German operations sold in early 1998. During 1996, we recorded charges of $78 million primarily related to settling legal matters of a former subsidiary. Amortization of acquired intangibles and goodwill was $170.6 million in 1998, $158.4 million in 1997 and $143.7 million in 1996. The increase reflects our acquisitions of TFS and ACC in 1997 and the Union Privilege portfolio in 1996. Policyholders' benefits were $238.2 million in 1998, $255.9 million in 1997 and $311.9 million in 1996. The lower expense in 1998 was due to fewer policies in our life insurance business. Income taxes. The 1998 effective tax rate, excluding merger and integration related costs and the gain on sale of Beneficial Canada, was 34.4 percent compared with 33.0 percent in 1997 and 36.0 percent in 1996. The effective rate in 1997 recognized tax benefits related to the anticipated sale of Beneficial's German operations. Credit Quality Our delinquency and net chargeoff ratios reflect, among other factors, the quality of receivables, the average age of our loans, the success of our collection efforts and general economic conditions. Specifically, the high levels of personal bankruptcies over the last three years have had a direct effect on the asset quality of our overall portfolio and others in our industry. During 1998 our delinquency and net chargeoff levels were affected by higher consumer bankruptcies in our unsecured portfolios and the continued maturing of our receivables. We track delinquency and chargeoff levels on a managed basis. We include the off-balance sheet portfolio since we apply the same credit and portfolio management procedures as on our owned portfolio. This results in a similar credit loss exposure. Our focus is to continue using risk-based pricing and effective collection efforts for each loan. We have a process that gives us a reasonable basis for predicting the asset quality of new accounts. This process is based on our experience with numerous marketing, credit and risk management tests. We also believe that our frequent and early contact with delinquent customers is helpful in managing net credit losses. Despite these efforts to manage the current credit environment, bankruptcies remain an industry-wide issue and are unpredictable. Our chargeoff policy for consumer receivables varies by product. 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. The state of California accounts for 19 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. This capability was leveraged to the Beneficial branch network as the Beneficial branches were integrated with Household in 1998. Our foreign consumer operations located in the United Kingdom and Canada accounted for 10 and 2 percent, respectively, of managed consumer receivables at December 31, 1998. Managed Consumer Two-Months-and-Over Contractual Delinquency Ratios
1998 Quarter End 1997 Quarter End --------------------------------- -------------------------------- 4 3 2 1 4 3 2 1 --------------------------------------------------------------------------------------- First mortgage 14.90% 11.80% 11.07% 9.33% 10.35% 9.27% 10.27% 8.19% Home equity 3.67 3.73 3.55 3.68 3.69 3.16 2.97 3.23 Auto finance/1/ 2.29 2.05 1.67 1.84 2.09 - - - MasterCard/Visa 3.75 3.73 3.30 3.10 3.10 3.20 3.13 3.15 Private label 6.20 6.55 6.10 6.04 5.81 5.72 5.15 4.78 Other unsecured 7.94 8.03 7.82 7.72 7.81 7.14 6.70 6.68 --------------------------------------------------------------------------------------- Total 4.90% 4.96% 4.65% 4.65% 4.64% 4.47% 4.18% 4.25% =======================================================================================
/1/Prior to the fourth quarter of 1997, delinquency statistics for auto finance receivables were not significant. For prior periods, delinquency data for these receivables were included in other unsecured receivables. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 28 1998 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Our managed consumer delinquency ratio at year end improved from the third quarter level due to a $40 million decrease in dollars of delinquency, driven by declines in our MasterCard and Visa and other unsecured portfolios. The increase in the managed delinquency ratio from a year ago was mainly due to the seasoning of the MasterCard and Visa and other unsecured portfolios and the maturing of certain special promotional balances in our private label portfolio. The owned consumer delinquency ratio was 5.31 percent at December 31, 1998 and 4.87 percent at December 31, 1997. Managed Consumer Net Chargeoff Ratios
Full Year 1998 Quarter Annualized Full Year 1997 Quarter Annualized Full Year ----------------------------- ----------------------------- 1998 4 3 2 1 1997 4 3 2 1 1996 ------------------------------------------------------------------------------------------------------------------- First mortgage .39% 1.04% (.32) .21% .81% 1.05% 1.29% 1.21% .87% .94% .45% Home equity .63 .68 .72 .52 .61 .64 .62 .53 .67 .75 .60 Auto finance/1/ 5.39 5.63 4.89 5.18 5.94 4.60 5.31 - - - - MasterCard/Visa 5.95 6.61 5.96 5.49 5.78 5.55 5.56 6.22 5.66 4.79 4.54 Private label 5.65 5.47 5.33 6.05 5.73 4.62 5.19 4.79 4.37 4.16 3.42 Other unsecured 6.97 6.94 7.50 7.26 6.22 5.48 5.85 5.66 5.23 5.09 4.29 ------------------------------------------------------------------------------------------------------------------- Total 4.29% 4.39% 4.33% 4.26% 4.17% 3.84% 3.94% 3.98% 3.86% 3.55% 2.96% ===================================================================================================================
/1/Includes ACC net chargeoffs subsequent to our acquisition in October 1997. Prior to the fourth quarter of 1997, chargeoff statistics for auto finance receivables were not significant and were included in other unsecured receivables. The annualized fourth quarter chargeoff ratio was up from the third quarter. Excluding the effect of lower MasterCard and Visa receivables, the fourth quarter chargeoff ratio was 4.32 percent. The managed consumer net chargeoff ratio for full-year 1998 was 4.29 percent, up from 3.84 percent in 1997 and 2.96 percent in 1996. The increase was due to higher bankruptcy chargeoffs and the continued seasoning of the private label and other unsecured portfolios. The owned consumer net chargeoff ratio was 3.76 percent in 1998, 3.39 percent in 1997 and 2.66 percent in 1996. Nonperforming Assets
All dollar amounts are stated in millions. At December 31 1998 1997 1996 --------------------------------------------------------------------------------------------------------------- Nonaccrual managed receivables $1,439.2 $1,364.9 $1,046.1 Accruing managed consumer receivables 90 or more days delinquent 874.6 807.8 645.5 Renegotiated commercial loans 12.3 12.4 12.9 --------------------------------------------------------------------------------------------------------------- Total nonperforming managed receivables 2,326.1 2,185.1 1,704.5 Real estate owned 253.9 212.8 236.8 --------------------------------------------------------------------------------------------------------------- Total nonperforming managed assets $2,580.0 $2,397.9 $1,941.3 =============================================================================================================== Managed credit loss reserves as a percent of nonperforming managed receivables 109.5% 115.5% 123.7% ---------------------------------------------------------------------------------------------------------------
Credit Loss Reserves We maintain credit loss reserves to cover probable losses of principal and interest in both our owned and off-balance sheet portfolios. We estimate losses for consumer receivables based on delinquency status and past loss experience. For securitized receivables, we also record a provision for estimated probable losses that we will incur over the life of the transaction. For commercial loans, we calculate probable losses by using expected amounts and timing of future cash flows to be received on loans. In addition, we provide for general loss reserves on consumer and commercial receivables to reflect our assessment of portfolio risk factors. Loss reserve estimates are reviewed periodically and adjustments are reported in earnings when they become known. These estimates are influenced by factors outside of our control, such as economic conditions and consumer payment patterns. As a result, there is uncertainty inherent in these estimates, making it reasonably possible that they could change. Owned credit loss reserves were $1,734.2 million, compared to $1,642.1 million at December 31, 1997. The ratio of credit loss reserves to total owned receivables was 3.92 percent, compared with 4.25 percent at December 31, 1997, reflecting the growing percentage of secured loans. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg.29 1998 Annual Report Total managed credit loss reserves were $2,548.1 million, compared with $2,523.0 million at December 31, 1997. The ratio of credit loss reserves to total managed receivables was 3.99 percent at December 31, 1998 and 1997. The ratio of total credit loss reserves to total nonperforming managed receivables was 109.5 percent, compared with 115.5 percent at December 31, 1997. Over the past few years, we have increased our credit loss reserves for managed receivables to reflect the change in mix to unsecured products and seasoning of receivables. Unsecured products historically have higher chargeoff rates than secured products. In 1996, Beneficial recorded a $65 million up-front loss provision for the strong private label receivables growth experienced during the year. During 1998, managed credit loss reserves reflected the impact of the growing percentage of secured loans. We have continued to refine and improve our underwriting standards and account management techniques to better manage our credit risk. The following table sets forth the managed credit loss reserves for the periods indicated:
All dollar amounts are stated in millions. At December 31 1998 1997 1996 1995 1994 --------------------------------------------------------------------------------------------- Managed credit loss reserves $2,548.1 $2,523.0 $2,109.0 $1,591.5 $1,219.2 Reserves as a % of managed receivables 3.99% 3.99% 3.56% 3.12% 2.69% ==============================================================================================
Liquidity and Capital Resources In managing capital, we develop targets for equity to managed assets based on discussions with rating agencies, reviews of regulatory requirements and competitor capital positions, credit loss reserve strength, risks inherent in the projected operating environment and acquisition objectives. We also specifically consider the level of intangibles arising from completed acquisitions. Targets are set for each legal entity that raises funds to protect debt investors. These targets include capital levels against both on-balance sheet assets and our off-balance sheet portfolio. Relative to our capital targets for 1999, we expect to begin generating capital in excess of our normal operating requirements. Consolidated capital ratios were as follows:
At December 31 1998 1997 --------------------------------------------------------------------------- Total shareholders' equity/1/ as a percent of owned assets 12.78% 14.13% Total shareholders' equity/1/ as a percent of managed assets 9.31 9.28 Tangible equity to tangible managed assets 7.11 6.92 ---------------------------------------------------------------------------
/1/Includes trust preferred securities. Parent Company Household International, Inc. is the holding or parent company that owns the outstanding stock of its subsidiaries. The parent company's main sources of funds are cash received from its subsidiaries in the form of dividends and intercompany borrowings. The parent company received dividends from its subsidiaries of $1,067 million in 1998 and $313 million in 1997. In addition, the parent company receives cash from third parties by issuing debt and common stock. This includes commercial paper that is sold through an in-house sales force totaling $315.6 million at December 31, 1998 and $281.5 million at December 31, 1997. At December 31, 1998, the parent company had $400 million in committed back-up lines of credit that it can use on short notice. These lines are available either to the parent company or its subsidiary, Household Finance Corporation ("HFC"). None of these back-up lines were utilized at December 31, 1998. These lines of credit expire in 2003 and do not contain material adverse change clauses that could restrict availability. The only financial covenant contained in the terms of the parent company's credit agreements is that we must maintain minimum shareholders' equity of $2.0 billion. The parent company has a number of obligations to meet with its available cash. It must be able to service its debt and meet the capital needs of its subsidiaries. It also must pay dividends on its preferred stock and may pay dividends to its common stockholders. The parent company made capital contributions of $.6 billion to subsidiaries in 1998 and $1.2 billion in 1997. The parent company paid $241.5 million in common dividends to shareholders in 1998 and $169.5 million in 1997. Beneficial paid cash dividends of $61.8 million in 1998 and $115.5 million in 1997. The parent company anticipates its ongoing common stock dividend payout ratio to be in the range of 20 to 25 percent. In connection with the Beneficial merger, we repurchased approximately $1.1 billion of senior and senior subordinated debt in order to better align the asset/liability position of the combined company. These debt repurchases were funded with senior debt and other borrowings. Cash payments of approximately $709 million for merger and integration related costs have been and will continue to be funded through existing operations. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 30 1998 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The parent company issued 168.4 million shares of common stock and three series of preferred stock in connection with the Beneficial merger, as previously discussed. In October 1998, we redeemed, at par, all outstanding shares of our 7.35% Preferred Stock, Series 1993-A, for $25 per depositary share plus accrued and unpaid dividends. During 1998, we repurchased 10.5 million shares of our common stock on the open market to fund various employee benefit programs. These repurchases were within all pooling of interests accounting requirements. In March 1998, a subsidiary trust issued $200 million of company obligated mandatorily redeemable preferred securities. In October 1997, the parent company and a wholly-owned subsidiary purchased all of the outstanding capital stock of ACC for about 4.2 million shares of our common stock and cash. After the purchase was completed, the parent company contributed the capital stock of ACC to HFC. In June 1997, the parent company issued 27.3 million shares of common stock, raising $1.0 billion. The parent company contributed this amount to HFC to pay off debt related to the purchase of TFS. In January 1997, the parent company redeemed, at par of $55 million, all outstanding shares of its 9.50% Preferred Stock, Series 1991-A, for $10 per depositary share plus accrued and unpaid dividends. Subsidiaries We have three major subsidiaries: HFC, including its wholly- owned subsidiary, Beneficial; Household Bank, f.s.b. ("the Bank"); and Household Global Funding ("Global"). These subsidiaries use cash to originate loans, purchase loans or investment securities or acquire businesses. Their main sources of cash are the collection of receivable balances, maturities or sales of investment securities, proceeds from the issuance of debt, deposits and securitization of receivables, capital contributions from the parent company, and cash provided by operations. HFC HFC funds its operations by issuing commercial paper, medium- and long-term debt to mainly wholesale investors, securitizing consumer receivables and receiving capital contributions from its parent. HFC's outstanding commercial paper totaled $7.1 billion at December 31, 1998 and $9.1 billion at December 31, 1997. HFC markets its commercial paper through an in-house sales force. HFC actively manages the level of commercial paper outstanding to ensure availability to core investors and proper use of any excess capacity within internally established targets. During 1998, HFC issued approximately $5.2 billion of five year-and-over debt to lengthen maturities on its funding in order to reduce reliance on commercial paper and securitizations as well as preserve liquidity. HFC also markets domestic medium-term notes through investment banks and its in-house sales force. A total of $6.5 billion was issued in 1998. To obtain a broader investment base, HFC and its subsidiary, Household Bank (Nevada) N.A., a credit card bank issuing non-GM Cards, periodically issue medium-term notes in European and Asian markets. These markets provide HFC with a broader investor base beyond the domestic markets. During 1998, $2.1 billion in medium-term notes were issued in European and Asian markets compared with $1.9 billion in 1997. These notes were issued in various European and Asian currencies and currency swaps were used to convert the notes to U.S. dollars to eliminate future foreign exchange risk. During 1998, HFC also issued $3.7 billion of long-term debt with a weighted average original maturity of 8.6 years. In August 1997, HFC redeemed, at par of $100 million, all outstanding shares of its 7.25 percent term cumulative preferred Series 1992-A, for $100 per depositary share plus accrued and unpaid dividends. HFC had committed back-up lines of credit totaling $9.1 billion at December 31, 1998, of which $400 million were also available to its parent company. None of these back-up lines were in use at December 31, 1998. In addition, none of these lines contained a material adverse change clause which could restrict availability. These back-up lines expire on various dates from 1999 through 2003. The only financial covenant contained in the terms of HFC's credit agreements is the maintenance of minimum shareholder's equity of $1.5 billion. It is expected, however, that this covenant will be modified in 1999 to reflect the new size of HFC as a result of the merger with Beneficial. In 1997, HFC paid $1.1 billion for the stock of TFS and repaid about $2.7 billion of TFS debt owed to affiliates of Transamerica Corporation. HFC funded this acquisition through the issuance of commercial paper, bank and other borrowings. In addition, in 1997, HFC received a capital contribution of $1.0 billion from its parent company to repay debt. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 31 1998 Annual Report The Bank The Bank primarily uses wholesale funding for its operations. At December 31, 1998, these sources included securitizations of credit card receivables, domestic and European medium-term notes, deposits and Federal funds borrowings. The Bank is subject to the capital adequacy guidelines adopted by the Office of Thrift Supervision. At December 31, 1998, the leverage, tier 1 and total risk-based capital ratio levels for a "well capitalized" institution were 5.0, 6.0 and 10.0 percent, respectively. The Bank's ratios for each of these categories at December 31, 1998 were 14.3, 16.0 and 20.2 percent, respectively. In the fourth quarter of 1997, the Bank sold its $900 million portfolio of student loans and exited this business. We used the proceeds from the sale to repay debt. During the fourth quarter of 1996, HFC and the Bank sold around $1.7 billion of lower margin loans, primarily from the previously divested mortgage and consumer banking businesses. The cash proceeds from the sales were used to repay debt. During 1996, we sold all remaining consumer banking branch operations. This transaction did not have a material impact on our ability to raise funds sufficient to operate the business. Global Our foreign subsidiaries are located in the United Kingdom and Canada. Global was formed to combine ownership of these businesses. Global's assets were $7.5 billion at year-end 1998. Consolidated shareholders' equity reflects the effect of translating our foreign subsidiaries' assets, liabilities and operating results from their local currency into U.S. dollars. We have entered into foreign exchange contracts to hedge portions of our investment in foreign subsidiaries. The potential loss in net income associated with a 10 percent adverse change in the British pound/U.S. dollar or Canadian dollar/U.S. dollar exchange rates is not material. Each foreign subsidiary conducts its operations using its local currency. While each foreign subsidiary usually borrows funds in their local currency, both our United Kingdom and Canadian subsidiaries have borrowed funds directly in the United States capital markets. This allowed the subsidiaries to achieve a lower cost of funds than that available at that time in their local markets. These borrowings were converted from U.S. dollars to their local currencies using currency swaps. Net realized gains and losses in foreign currency swap transactions were not material to our results of operations or financial position in any of the three years presented. Our United Kingdom operation is funded with wholesale deposits, commercial paper, short and intermediate-term bank lines of credit, medium and long-term debt and securitizations of receivables. Deposits at year-end 1998 were $1,170 million compared with $777 million a year ago. Borrowings from bank lines of credit at year-end 1998 were $1,431 million compared with $864 million a year ago. Long-term debt at year-end 1998 was $1,759 million compared with $592 million a year earlier. At December 31, 1998, the parent company has guaranteed payment of certain debt obligations of its United Kingdom subsidiary. Committed back-up lines of credit for the United Kingdom were approximately $4.0 billion at December 31, 1998. These lines have varying maturities from 1999 through 2001. Our Canadian operation is funded with commercial paper and intermediate and long-term debt. Intermediate and long-term debt totaled $575 million at year-end 1998 compared with $749 million a year ago. Committed back-up lines of credit for Canada were approximately $438 million at December 31, 1998. At December 31, 1998, the parent company has guaranteed payment of the debt obligations of its Canadian subsidiary. Asset Securitizations Securitizations of consumer receivables have been, and will continue to be, a source of liquidity and capital management for HFC, the Bank and the United Kingdom subsidiary. The market for securities backed by receivables is a reliable and cost-effective source of funds. During 1998, excluding replenishments of prior securitizations, these subsidiaries securitized about $3.6 billion of auto finance, MasterCard and Visa and other unsecured receivables, compared with $8.3 billion in 1997 and $8.8 billion in 1996. At December 31, 1998, these three subsidiaries had $19.7 billion of receivables sold under securitization transactions. At December 31, 1998, the expected weighted average remaining life of these transactions was 1.9 years. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 32 1998 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The following table summarizes the expected amortization of our securitizations by type:
In millions. At December 31, 1998 1999 2000 2001 2002 2003 Thereafter ---------------------------------------------------------------------------------- Home equity $1,709.1 $ 926.8 $ 505.3 $ 418.8 $ 77.4 - Auto finance 404.5 275.9 170.9 95.6 13.4 - MasterCard/Visa 2,100.2 3,812.8 2,949.2 568.4 - - Private label 161.5 80.0 570.0 - - - Other unsecured 905.4 1,683.1 712.1 584.4 692.0 $285.0 ---------------------------------------------------------------------------------- Total $5,280.7 $6,778.6 $4,907.5 $1,667.2 $782.8 $285.0 ==================================================================================
For MasterCard and Visa and private label securitizations, the issued securities may pay off sooner than originally scheduled if certain events occur. One example of such an event is if the annualized portfolio yield (defined as the sum of finance income and applicable fees, less net chargeoffs) for a certain period drops below a base rate (generally equal to the sum of the rate paid to the investors and the servicing fee). For home equity and other unsecured securitizations, early pay-off of the securities begins if the annualized portfolio yield falls below various limits, or if certain other events occur. We do not presently believe that any of these events will take place. If any such event occurred, our funding requirements would increase. These additional requirements could be met through securitizations, issuance of various types of debt or borrowings under existing back-up lines of credit. We believe we would continue to have adequate sources of funds if an early pay-off event occurred. HFC and the Bank have facilities with commercial banks under which they may securitize up to $7.5 billion of receivables. These facilities are renewable on an annual basis. At December 31, 1998, $5.8 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. At December 31, 1998, the long-term debt of the parent company, HFC, Beneficial, the Bank, and the preferred stock of the parent company have been assigned an investment grade rating by four rating agencies. Furthermore, these agencies include the commercial paper of HFC in their highest rating category. Three of these agencies also include the parent company's commercial paper in their highest rating category. With our back- up lines of credit and securitization programs, we believe we have sufficient funding capacity to refinance maturing debts and fund business growth of the parent company, HFC, Beneficial and the Bank. Capital Expenditures During 1998 we made $135 million in capital expenditures compared to the prior-year level of $128 million. Year 2000 Our conversion of certain computer systems to permit continued use in the Year 2000 ("Y2K") and beyond began in 1996. The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the century date change occurs, date- sensitive systems may recognize the year 2000 as 1900, or not at all. The inability to recognize or properly treat the Y2K may cause systems to process critical financial and operational information incorrectly. To address this issue, we have a dedicated Year 2000 Project team, responsible for all business entities. The project team is led by a full time Director of Y2K Compliance. Our plan for addressing the Year 2000 issue is divided into three major phases: Business Systems Inventory and Assessment, Remediation and Replacement, and Testing and Implementation. We have identified our Y2K issues and were substantially complete with remediation and testing of our significant systems at December 31, 1998. Business Systems Inventory and Assessment The internal inventory portion of this phase, which commenced in 1997 and has since been completed, was designed to identify internal business systems which could be susceptible to processing errors as a result of the Y2K issue. The Year 2000 Project team, working with business unit project leaders, has identified approximately 2,000 components, consisting of hardware, software, business application systems, service providers, business partners, and various systems containing embedded processors. Approximately 500 internally developed business systems ("IT systems") have been identified, as well as 325 Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 33 1998 Annual Report unique pieces of hardware and 430 packaged vendor applications. All of these systems must, at a minimum, be tested for Y2K compliance. In addition, we have identified and assessed our "non-IT" systems. The remediation and replacement of these systems, which include security systems, heating, ventilation and air conditioning systems, elevators, and water treatment systems, are included in the plans discussed below. Also as part of this phase, significant service providers, vendors, suppliers, customers, and government entities believed to be critical to business operations after January 1, 2000, have been identified and steps have been undertaken to ascertain their stage of Y2K readiness through questionnaires, interviews, contract amendments and other available means. Remediation and Replacement We have developed and are in the process of implementing our remediation and replacement plan for all affected IT and non-IT systems. Our plan established priorities for remediation or replacement. We have used internal and external resources to execute the plan and were substantially complete with all remediation and replacement of significant systems at December 31, 1998, and expect to be substantially complete with our remaining systems by the second quarter of 1999. We are on schedule to meet this objective. Testing and Implementation This third phase of the project is ongoing as systems are remediated and replaced. Our efforts in this phase include testing by technical resources, users and determination by appropriate Y2K project management that the systems are Y2K compliant. We were substantially complete with testing of significant systems at December 31, 1998, and expect to be substantially complete with our remaining IT and non-IT systems by the second quarter of 1999. We are on schedule to meet this objective. Because our Y2K compliance is dependent on key third parties also being Y2K compliant on a timely basis, we cannot assure that the systems of certain of our key third parties (RAL program being dependent on the Internal Revenue Service), upon which we rely, will be converted in a timely manner, or that their failure to convert would not have an adverse effect on our systems. In a worst-case scenario, one or more of our significant systems or key third parties would not be Year 2000 compliant by the end of 1999 which could potentially, among other things, delay the collection/processing of customer loan payments, impact the timeliness of loan approvals, or cause the loss of key credit history information which we use to market our products and services. We are currently developing contingency plans to address the potential noncompliance of each of our third-party vendors, as well as for the potential failure of internal significant systems. Such contingency plans will be implemented immediately, if necessary. For each system or service provided by a key third party, there are alternative suppliers of such systems in the marketplace. The economical and operational costs of converting to such alternative vendors or service providers have not been specifically quantified but would not be expected to have a material impact on our operations or financial results. The costs for Year 2000 compliance have not been, and are not expected to be, material to our operations. We currently estimate that the aggregate cost of our Y2K effort will be approximately $20 million after-tax, of which approximately $15 million has been incurred as of December 31, 1998. 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 of market interest rates on our earnings. Household utilizes 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, 1998, our interest rate risk levels were substantially below those allowed by our existing policy. 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, 1998, we managed about $30 billion of domestic receivables that have variable interest rates, including credit card, home equity and other unsecured products. These receivables have been funded with $8.2 Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 34 1998 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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. For example, let's assume we have entered into a swap with the counterparty whom we will call Bank A. Bank A agrees to pay us a fixed interest rate while we agree to pay a variable rate. If variable rates for the accrual period are below the fixed rate in the swap, Bank A owes us the difference between the fixed rate and variable rate multiplied by the notional amount. The primary exposure on our interest rate swap portfolio is the risk that the counterparty (Bank A in this example) does not pay us the money they owe us. We protect ourselves against counterparty risk in several ways. Counterparty limits have been set and are closely monitored as part of the overall risk management process. These limits ensure that we do not have significant exposure to any individual counterparty. Based on peak exposure at December 31, 1998, about 88 percent of our derivative counterparties were rated AA- or better. (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 utilize interest rate futures and purchased put and call options in our hedging strategy to reduce interest rate risk. We use these instruments to hedge the changes in interest rates on our variable rate assets and liabilities. For example, short-term borrowings expose us to interest rate risk because the interest rate we must pay to others may change faster than the rate we received from borrowers on the asset our borrowings are funding. We use futures and options to fix our interest cost on these borrowings at a desired rate. We hold these contracts until the interest rate on the variable rate asset or liability 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, 1998 and 1997, we estimated that our earnings would decline by about $43 and $45 million, respectively, following a gradual 200 basis point increase in interest rates over a twelve month period and would increase by about $40 and $53 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. These swaps convert both principal and interest payments on debt issued from one currency to another. For example, we may issue debt based on the French franc and then execute a currency swap to convert the obligation to U.S. dollars. See Note 9, "Derivative Financial Instruments and Other Financial Instruments With Off-Balance Sheet Risk," for additional information related to interest rate risk management. In the accompanying consolidated financial statements, Note 13, "Fair Value of Financial Instruments," provides information regarding the fair value of certain financial instruments. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg.35 1998 Annual Report 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 which 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 jointly sponsored by the issuer of the card and another corporation. The account holder typically receives some form of added benefit for using the card (e.g., the GM Card). Consumer Net Chargeoff Ratio--Net chargeoffs of receivables divided by average receivables outstanding. Contractual Delinquency--A method of determining delinquent accounts based on the contractual terms of the original loan agreement. Core Receivables--Managed receivables, excluding commercial, first mortgage, student loan and receivables relating to Beneficial's disposed Canadian and German operations. Dividend Payout Ratio--Dividends divided by net income. Fee Income--Income associated with interchange on credit cards and annual, late and other fees and from the origination or acquisition of loans. Foreign Exchange Contract--A contract used to minimize our exposure to changes in foreign currency exchange rates. Futures Contract--An exchange-traded contract to buy or sell a stated amount of a financial instrument or index at a specified future date and price. Home Equity Loan--Closed-end loans and revolving lines of credit secured by first or second mortgages on residential real estate. Interchange Fees--Fees received for processing a credit card transaction through the MasterCard or Visa network. Interest Rate Swap--Contract between two parties to exchange interest payments on a stated principal amount (notional principal) for a specified period. Typically, one party makes fixed rate payments, while the other party makes payments using a variable rate. LIBOR--London Interbank Offered Rate. A widely-quoted market rate which is frequently the index used to determine that rate at which we borrow funds. Liquidity--A measure of how quickly we can convert assets to cash or raise additional cash by issuing debt. Managed Basis--Method of reporting whereby net interest margin, other revenues and credit losses on securitized receivables are reported as if those receivables were still held on our balance sheet. Managed Efficiency Ratio--Ratio of operating expenses to managed net interest margin and other revenues less policyholders' benefits. The normalized efficiency ratio excludes nonrecurring gains, and charges. 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/Visa Receivables--Receivables generated through use of MasterCard and Visa credit cards. Nonaccrual Loans--Loans on which we no longer accrue interest because ultimate collection is unlikely. Options--A contract giving the owner the right, but not the obligation, to buy or sell a specified item at a fixed price for a specified period. Other Unsecured Receivables--Unsecured lines of credit or closed-end loans made to individuals. Over-the-Life Reserves--Credit loss reserves established for securitized receivables to cover 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. 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 Shareholders' Equity--Net income less dividends on preferred stock divided by average common shareholders' 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. Total Shareholders' Equity--Includes company obligated mandatorily redeemable preferred securities of subsidiary trusts, preferred stock and common shareholders' equity. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 36 1998 Annual Report Analysis of Credit Loss Reserves Activity--Owned Receivables
All dollar amounts are stated in millions. 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- Total Credit Loss Reserves for Owned Receivables at January 1 $1,642.1 $1,398.4 $1,126.5 $ 877.6 $ 900.9 - -------------------------------------------------------------------------------------------------------------------------------- Provision for Credit Losses-Owned Receivables 1,516.8 1,493.0 1,144.2 1,025.1 795.1 - -------------------------------------------------------------------------------------------------------------------------------- Owned Receivables Charged Off Domestic: First mortgage (2.7) (8.2) (8.6) (6.6) (10.3) Home equity (82.8) (46.3) (47.1) (45.7) (61.8) Auto finance/1/ (29.7) (6.4) - - - MasterCard/Visa (454.1) (415.8) (270.0) (260.0) (204.4) Private label (471.4) (407.9) (238.6) (175.5) (125.2) Other unsecured (464.4) (384.6) (374.7) (328.1) (314.5) Foreign (206.4) (197.6) (172.2) (160.5) (129.1) --------------------------------------------------------------------------------------------------------------------------- Total consumer loan products (1,711.5) (1,466.8) (1,111.2) (976.4) (845.3) Commercial (4.8) (18.6) (15.4) (41.0) (87.7) --------------------------------------------------------------------------------------------------------------------------- Total owned receivables charged off (1,716.3) (1,485.4) (1,126.6) (1,017.4) (933.0) - -------------------------------------------------------------------------------------------------------------------------------- Recoveries on Owned Receivables Domestic: First mortgage 1.6 2.3 2.5 2.2 2.9 Home equity 2.6 3.0 2.6 3.3 5.2 Auto finance/1/ .8 .3 - - - MasterCard/Visa 33.3 46.9 17.2 19.8 17.6 Private label 56.8 47.4 24.8 24.1 30.9 Other unsecured 36.7 38.0 70.7 74.5 60.1 Foreign 43.2 50.9 43.9 36.7 31.6 --------------------------------------------------------------------------------------------------------------------------- Total consumer loan products 175.0 188.8 161.7 160.6 148.3 Commercial .6 1.0 4.4 2.9 3.2 --------------------------------------------------------------------------------------------------------------------------- Total recoveries on owned receivables 175.6 189.8 166.1 163.5 151.5 Portfolio acquisitions, net 116.0 46.3 88.2 77.7 (36.9) - -------------------------------------------------------------------------------------------------------------------------------- Total Credit Loss Reserves for Owned Receivables Domestic: First mortgage 2.2 2.4 4.3 4.1 5.1 Home equity 185.3 172.4 62.4 52.9 50.1 Auto finance/1/ 27.8 14.6 - - - MasterCard/Visa 387.7 290.4 268.6 134.5 127.5 Private label 472.5 396.2 363.1 281.4 152.3 Other unsecured 457.6 499.4 388.5 358.2 289.2 Foreign 142.7 179.2 172.1 141.2 99.2 --------------------------------------------------------------------------------------------------------------------------- Total consumer loan products 1,675.8 1,554.6 1,259.0 972.3 723.4 Commercial 58.4 87.5 139.4 154.2 154.2 - -------------------------------------------------------------------------------------------------------------------------------- Total Credit Loss Reserves for Owned Receivables at December 31 $1,734.2 $1,642.1 $1,398.4 $1,126.5 $877.6 ================================================================================================================================ Ratio of Credit Loss Reserves to Owned Receivables Consumer 3.85% 4.12% 3.37% 2.89% 2.40% Commercial 8.34 9.14 13.44 11.07 7.49 --------------------------------------------------------------------------------------------------------------------------- Total 3.92% 4.25% 3.64% 3.22% 2.73% ================================================================================================================================ Ratio of Credit Loss Reserves to Owned Nonperforming Loans Consumer 99.3% 110.5% 111.6% 106.7% 95.9% Commercial 139.0 200.7 191.2 91.8 96.7 --------------------------------------------------------------------------------------------------------------------------- Total 100.3% 113.2% 116.4% 104.4% 96.1% ===========================================================================================================================
/1/Includes ACC subsequent to our acquisition in October 1997. Prior to the fourth quarter of 1997, auto finance receivables were not significant and were included in other unsecured receivables. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 37 1998 Annual Report Analysis of Credit Loss Reserves Activity-Managed Receivables
All dollar amounts are stated in millions. 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Total Credit Loss Reserves for Managed Receivables at January 1 $ 2,523.0 $ 2,109.0 $ 1,591.5 $ 1,219.2 $ 1,123.7 - ----------------------------------------------------------------------------------------------------------------------------------- Provision for Credit Losses-Managed Receivables 2,716.0 2,620.6 2,033.3 1,538.7 1,163.2 - ----------------------------------------------------------------------------------------------------------------------------------- Managed Receivables Charged Off Domestic: First mortgage (2.7) (8.2) (8.6) (6.6) (10.3) Home equity (118.8) (106.3) (86.4) (92.4) (107.2) Auto finance/1/ (70.0) (13.6) - - - MasterCard/Visa (1,166.2) (1,106.7) (771.3) (563.7) (401.1) Private label (544.3) (436.0) (269.9) (232.9) (146.3) Other unsecured (797.9) (639.8) (465.7) (332.5) (314.5) Foreign (250.0) (225.8) (186.6) (160.5) (129.1) ------------------------------------------------------------------------------------------------------------------------------ Total consumer loan products (2,949.9) (2,536.4) (1,788.5) (1,388.6) (1,108.5) Commercial (4.8) (18.6) (15.4) (41.0) (87.7) ------------------------------------------------------------------------------------------------------------------------------ Total managed receivables charged off (2,954.7) (2,555.0) (1,803.9) (1,429.6) (1,196.2) - ----------------------------------------------------------------------------------------------------------------------------------- Recoveries on Managed Receivables Domestic: First mortgage 1.6 2.3 2.5 2.2 2.9 Home equity 4.4 5.8 2.8 3.6 5.2 Auto finance/1/ 2.1 .6 - - - MasterCard/Visa 82.0 94.8 42.5 33.6 25.7 Private label 65.0 50.0 28.2 29.4 32.7 Other unsecured 51.6 50.3 75.5 74.4 60.1 Foreign 47.2 52.8 44.4 36.7 31.6 ------------------------------------------------------------------------------------------------------------------------------ Total consumer loan products 253.9 256.6 195.9 179.9 158.2 Commercial .6 1.0 4.4 2.9 3.2 ------------------------------------------------------------------------------------------------------------------------------ Total recoveries on managed receivables 254.5 257.6 200.3 182.8 161.4 Portfolio acquisitions, net 9.3 90.8 87.8 80.4 (32.9) - ----------------------------------------------------------------------------------------------------------------------------------- Total Credit Loss Reserves for Managed Receivables Domestic: First mortgage 2.2 2.4 4.3 4.1 5.1 Home equity 244.1 235.7 169.0 139.7 132.9 Auto finance/1/ 133.2 49.7 - - - MasterCard/Visa 689.9 704.9 568.7 347.5 319.8 Private label 541.5 462.1 383.2 312.7 205.2 Other unsecured 685.5 759.6 639.1 470.9 289.2 Foreign 193.3 221.1 205.3 162.4 112.8 ------------------------------------------------------------------------------------------------------------------------------ Total consumer loan products 2,489.7 2,435.5 1,969.6 1,437.3 1,065.0 Commercial 58.4 87.5 139.4 154.2 154.2 - ----------------------------------------------------------------------------------------------------------------------------------- Total Credit Loss Reserves for Managed Receivables at December 31 $ 2,548.1 $ 2,523.0 $ 2,109.0 $ 1,591.5 $ 1,219.2 =================================================================================================================================== Ratio of Credit Loss Reserves to Managed Receivables Consumer 3.94% 3.92% 3.38% 2.90% 2.46% Commercial 8.34 9.14 13.44 11.07 7.49 ------------------------------------------------------------------------------------------------------------------------------ Total 3.99% 3.99% 3.56% 3.12% 2.69% =================================================================================================================================== Ratio of Credit Loss Reserves to Managed Nonperforming Loans Consumer 109.0% 113.7% 120.7% 117.3% 110.4% Commercial 139.0 200.7 191.2 91.8 96.7 ------------------------------------------------------------------------------------------------------------------------------ Total 109.5% 115.5% 123.7% 114.2% 108.4% ==============================================================================================================================
/1/Includes ACC subsequent to our acquisition in October 1997. Prior to the fourth quarter of 1997, auto finance receivables were not significant and were included in other unsecured receivables. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg.38 1998 Annual Report Net Interest Margin--1998 Compared to 1997 (Owned Basis)
Finance and Interest Income/ Average Outstanding/2/ Average Rate Interest Expense Increase/(Decrease) Due to: -------------------- ------------ --------------------- -------------------------------- All dollar amounts are Volume Rate stated in millions. 1998 1997 1998 1997 1998 1997 Variance Variance/3/ Variance/3/ - ---------------------------------------------------------------------------------------------------------------------------------- Receivables: First mortgage $ 296.7 $ 565.8 8.4% 7.5% $ 24.8 $ 42.6 $ (17.8) $ (22.3) $ 4.5 Home equity 16,233.4 11,695.2 11.8 11.6 1,909.8 1,361.9 547.9 524.6 23.3 Auto finance 702.8 203.0 19.6 18.0 137.5 36.5 101.0 97.5 3.5 MasterCard/Visa 7,473.4 7,693.7 10.7 11.4 796.4 880.3 (83.9) (26.7) (57.2) Private label 8,783.3 9,743.9 14.0 13.7 1,226.0 1,337.3 (111.3) (138.9) 27.6 Other unsecured 7,411.3 7,783.5 19.9 18.2 1,476.5 1,413.6 62.9 (68.3) 131.2 Commercial 804.3 1,057.2 4.1 5.6 33.2 58.8 (25.6) (12.1) (13.5) ================================================================================================================================== Total receivables $41,705.2 $38,742.3 13.4% 13.2% $5,604.2 $5,131.0 $ 473.2 $ 395.0 $ 78.2 Noninsurance investments 1,106.3 661.4 5.2 7.5 57.1 49.8 7.3 25.9 (18.6) ================================================================================================================================== Total interest-earning assets (excluding insurance investments) $42,811.5 $39,403.7 13.2% 13.1% $5,661.3 $5,180.8 $ 480.5 $ 441.5 $ 39.0 Insurance investments 2,459.1 2,555.0 Other assets 5,203.1 4,366.5 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $50,473.7 $46,325.2 ================================================================================================================================== Debt: Deposits $ 3,144.2 $ 2,976.1 4.9% 5.2% $ 152.7 $ 155.3 $ (2.6) $ 7.5 $ (10.1) Commercial paper 9,495.6 8,974.7 5.5 5.6 525.0 499.9 25.1 32.9 (7.8) Bank and other borrowings 2,640.8 1,458.8 5.6 6.3 147.1 92.5 54.6 66.0 (11.4) Senior and senior subordinated debt (with original maturities over one year) 26,365.4 23,743.4 6.4 6.8 1,692.2 1,610.7 81.5 177.1 (95.6) ================================================================================================================================== Total debt $41,646.0 $37,153.0 6.0% 6.3% $2,517.0 $2,358.4 $ 158.6 $ 273.7 $(115.1) Other liabilities 1,978.5 3,380.9 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 43,624.5 40,533.9 Preferred securities 577.1 442.1 Common shareholders' equity 6,272.1 5,349.2 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $50,473.7 $46,325.2 ================================================================================================================================== Net Interest Margin-- Owned Basis/1/,/5/ 7.3% 7.2% $3,144.3 $2,822.4 $ 321.9 $ 167.8 $ 154.1 ================================================================================================================================== Interest Spread--Owned Basis/4/ 7.2% 6.8% ==================================================================================================================================
/1/Represents net interest margin as a percent of average interest-earning assets.See page 40 for net interest margin on a managed basis for 1998, 1997 and 1996. /2/Nonaccrual loans are included in average outstanding balances. /3/Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total interest variance. For total receivables, total interest-earning assets and total debt, the rate and volume variances are calculated based on the relative weighting of the individual components comprising these totals. These totals do not represent an arithmetic sum of the individual components. /4/Represents the difference between the yield earned on interest-earning assets and the cost of the debt used to fund the assets. /5/The net interest margin analysis includes the following for foreign businesses:
1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Average interest-earning assets $6,339.5 $6,274.2 $5,334.8 Average interest-bearing liabilities 6,194.2 5,274.8 4,734.2 Net interest margin 473.8 513.1 464.0 Net interest margin percentage 7.5% 8.2% 8.7% - ----------------------------------------------------------------------------------------------------------------------------------
Household International, Inc. and Subsidiaries ---------------------------------------------- Pg.39 1998 Annual Report Net Interest Margin--1997 Compared to 1996 (Owned Basis)
Finance and Interest Income/ Average Outstanding/2/ Average Rate Interest Expense Increase/(Decrease) Due to: --------------------- ------------ ---------------------- --------------------------------- All dollar amounts are Volume Rate stated in millions. 1997 1996 1997 1996 1997 1996 Variance Variance/3/ Variance/3/ - ----------------------------------------------------------------------------------------------------------------------------------- Receivables: First mortgage $ 565.8 $ 1,717.8 7.5% 7.6% $ 42.6 $ 130.7 $ (88.1) $(86.4) $ (1.7) Home equity 11,695.2 10,573.0 11.6 11.5 1,361.9 1,216.1 145.8 130.5 15.3 MasterCard/Visa 7,693.7 7,663.5 11.4 12.8 880.3 980.8 (100.5) 4.0 (104.5) Private label 8,809.0 7,071.7 13.7 13.1 1,203.7 924.3 279.4 235.8 43.6 Other unsecured 8,921.4 8,665.9 17.8 18.7 1,583.7 1,619.8 (36.1) 45.5 (81.6) Commercial 1,057.2 1,219.4 5.6 5.3 58.8 64.1 (5.3) (8.9) 3.6 =================================================================================================================================== Total receivables $38,742.3 $36,911.3 13.2% 13.4% $5,131.0 $4,935.8 $ 195.2 $242.9 $ (47.7) Noninsurance investments 661.4 1,477.6 7.5 6.3 49.8 93.3 (43.5) (58.7) 15.2 =================================================================================================================================== Total interest-earning assets (excluding insurance investments) $39,403.7 $38,388.9 13.1% 13.1% $5,180.8 $5,029.1 $ 151.7 $133.4 $ 18.3 Insurance investments 2,555.0 2,946.4 Other assets 4,366.5 3,622.2 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $46,325.2 $44,957.5 =================================================================================================================================== Debt: Deposits $ 2,976.1 $ 4,520.0 5.2% 5.2% $ 155.3 $ 235.2 $ (79.9) $(79.9) -- Commercial paper 8,974.7 8,846.5 5.6 5.3 499.9 472.7 27.2 5.5 $ 21.7 Bank and other borrowings 1,458.8 1,597.9 6.3 7.0 92.5 111.7 (19.2) (8.9) (10.3) Senior and senior subordinated debt (with original maturities over one year) 23,743.4 21,340.7 6.8 7.1 1,610.7 1,513.8 96.9 163.6 (66.7) =================================================================================================================================== Total debt $37,153.0 $36,305.1 6.3% 6.4% $2,358.4 $2,333.4 $ 25.0 $ 58.5 $ (33.5) Other liabilities 3,380.9 3,945.7 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 40,533.9 40,250.8 Preferred securities 442.1 449.0 Common shareholders' equity 5,349.2 4,257.7 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $46,325.2 $44,957.5 ================================================================================================================================== Net Interest Margin-- Owned Basis/1/,/5/ 7.2% 7.0% $2,822.4 $2,695.7 $ 126.7 $ 74.9 $ 51.8 =================================================================================================================================== Interest Spread--Owned Basis/4/ 6.8% 6.7% ===================================================================================================================================
Household International, Inc. and Subsidiaries ---------------------------------------------- Pg.40 1998 Annual Report Net Interest Margin--1998 Compared to 1997 and 1996 (Managed Basis) Net Interest Margin on a Managed Basis As receivables are securitized rather than held in our portfolio, net interest income is reclassified to securitization income. We retain a substantial portion of the profit inherent in the receivable while increasing liquidity. Due to the growing level of securitized receivables, the comparability of net interest margin between periods may be impacted by the level and type of receivables securitized. The following table presents a summarized net interest margin analysis on a managed basis.
Finance and Interest Average Outstanding/1/ Average Rate Income/Interest Expense ------------------------------ -------------------- ----------------------------------- All dollar amounts are stated in millions. 1998 1997 1996 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Receivables: First mortgage $ 296.7 $ 565.8 $ 1,717.8 8.4% 7.5% 7.6% $ 24.8 $ 42.6 $ 130.7 Home equity 20,951.0 18,011.5 16,625.0 12.0 12.2 12.1 2,524.2 2,200.0 2,005.1 Auto finance 1,260.2 282.6 35.2 20.1 18.6 16.5 252.8 52.6 5.8 MasterCard/Visa 18,742.2 18,506.2 16,385.2 12.9 13.1 13.5 2,426.3 2,431.1 2,212.7 Private label 9,710.4 10,180.4 8,604.7 14.1 13.9 13.9 1,370.0 1,413.5 1,195.0 Other unsecured 11,912.3 11,843.5 10,371.7 19.2 18.3 18.4 2,287.0 2,164.1 1,910.9 Commercial 804.3 1,057.2 1,219.4 4.1 5.6 5.3 33.2 58.8 64.1 - ------------------------------------------------------------------------------------------------------------------------------------ Total receivables 63,677.1 60,447.2 54,959.0 14.0 13.8 13.7 8,918.3 8,362.7 7,524.3 Noninsurance investments 1,106.3 661.4 1,477.6 5.2 7.5 6.3 57.1 49.8 93.3 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets (excluding insurance investments) 64,783.4 61,108.6 56,436.6 13.9 13.8 13.5 8,975.4 8,412.5 7,617.6 - ------------------------------------------------------------------------------------------------------------------------------------ Total debt $62,882.3 $58,857.9 $54,352.4 6.2 6.3 6.3 3,881.3 3,692.2 3,413.2 - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Margin- Managed Basis/2/ 7.9% 7.7% 7.4% $5,094.1 $4,720.3 $4,204.4 ==================================================================================================================================== Interest Spread- Managed Basis/3/ 7.7% 7.5% 7.2% ====================================================================================================================================
/1/Nonaccrual loans are included in average outstanding balances. /2/As a percent of average interest-earning assets. /3/Represents the difference between the yield earned on interest-earning assets and cost of the debt used to fund the assets. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 41 1998 Annual Report Selected Quarterly Financial Data (Unaudited)
All dollar amounts except per share 1998--Three Months Ended 1997--Three Months Ended ---------------------------------------- -------------------------------------- data are stated in millions. Dec. Sept. June March Dec. Sept. June March - ------------------------------------------------------------------------------------------------------------------------------------ Finance income $1,492.2 $1,425.8 $1,372.6 $1,313.6 $1,304.7 $1,313.7 $1,239.2 $1,273.4 Other interest income 15.5 15.2 11.1 15.3 10.3 9.5 18.8 11.2 Interest expense 659.9 628.1 616.8 612.2 598.9 605.4 574.3 579.8 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest margin 847.8 812.9 766.9 716.7 716.1 717.8 683.7 704.8 Provision for credit losses on owned receivables 377.5 358.4 391.6 389.3 387.0 376.5 351.0 378.5 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest margin after provision for credit losses 470.3 454.5 375.3 327.4 329.1 341.3 332.7 326.3 - ------------------------------------------------------------------------------------------------------------------------------------ Securitization income 365.3 370.1 394.2 419.3 401.1 448.9 422.2 366.2 Insurance revenues 126.3 129.2 117.8 119.5 121.7 109.9 111.3 111.3 Investment income 40.3 42.5 38.5 39.9 44.1 43.9 39.9 45.2 Fee income 155.6 151.8 145.0 147.3 197.6 156.2 119.7 118.9 Other income 60.1 55.8 40.1 87.7 59.6 68.5 61.6 166.0 Gain on sale of Beneficial Canada - - - 189.4 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Total other revenues 747.6 749.4 735.6 1,003.1 824.1 827.4 754.7 807.6 - ------------------------------------------------------------------------------------------------------------------------------------ Salaries and fringe benefits 268.0 280.1 287.1 292.3 290.4 277.6 264.6 252.7 Occupancy and equipment expense 69.9 74.5 86.1 85.6 85.2 83.7 80.8 83.9 Other marketing expenses 99.5 101.7 99.0 103.0 123.9 112.1 98.8 114.8 Other servicing and administrative expenses 155.5 160.8 161.3 177.3 282.6 185.0 177.4 212.9 Amortization of acquired intangibles and goodwill 38.3 45.1 44.8 42.4 42.1 42.4 37.1 36.8 Policyholders' benefits 62.2 57.1 55.3 63.6 59.1 61.9 65.1 69.8 Merger and integration related costs - - 1,000.0 - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Total costs and expenses 693.4 719.3 1,733.6 764.2 883.3 762.7 723.8 770.9 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes 524.5 484.6 (622.7) 566.3 269.9 406.0 363.6 363.0 Income taxes (benefit) 174.6 166.6 (121.1) 208.5 65.1 141.3 125.0 130.8 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 349.9 $ 318.0 $ (501.6) $ 357.8 $ 204.8 $ 264.7 $ 238.6 $ 232.2 ==================================================================================================================================== Basic earnings per share/1/, /2/ $ .72 $ .64 $ (1.03) $ .73 $ .41 $ .54 $ .51 $ .50 ==================================================================================================================================== Diluted earnings per share/1/, /2/ .71 .63 (1.03) .71 .41 .53 .50 .49 ==================================================================================================================================== Weighted average common and common equivalent shares outstanding/1/, /2/ 489.0 498.3 489.4 497.0 493.2 492.3 465.9 465.5 ==================================================================================================================================== Dividends declared/1/ $ .15 $ .15 $ .15 $ .15 $ .14 $ .14 $ .13 $ .13 ====================================================================================================================================
/1/ All common share and per common share amounts have been restated to reflect our 3-for-1 common stock split effected in the form of a stock dividend and paid on June 1, 1998. /2/ Quarterly earnings per share amounts are computed on the basis of the weighted average number of shares outstanding for each quarter. Changes between quarters in the number of shares outstanding may result in the annual computation differing from the aggregate of the quarterly amounts. The June 1998 quarter's average common and common equivalent shares reflect basic average shares outstanding due to the loss in the quarter. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 42 1998 Annual Report Consolidated Statements of Income
In millions, except per share data. Year ended December 31 1998 1997 1996 ----------------------------------------------------------------------------------------------------------------------------- Finance income $5,604.2 $ 5,131.0 $ 4,935.8 Other interest income 57.1 49.8 93.3 Interest expense 2,517.0 2,358.4 2,333.4 ----------------------------------------------------------------------------------------------------------------------------- Net interest margin 3,144.3 2,822.4 2,695.7 Provision for credit losses on owned receivables 1,516.8 1,493.0 1,144.2 ----------------------------------------------------------------------------------------------------------------------------- Net interest margin after provision for credit losses 1,627.5 1,329.4 1,551.5 ----------------------------------------------------------------------------------------------------------------------------- Securitization income 1,548.9 1,638.4 1,341.3 Insurance revenues 492.8 454.2 422.1 Investment income 161.2 173.1 220.7 Fee income 599.7 592.4 352.2 Other income 243.7 355.7 419.6 Gain on sale of Beneficial Canada 189.4 - - ----------------------------------------------------------------------------------------------------------------------------- Total other revenues 3,235.7 3,213.8 2,755.9 ----------------------------------------------------------------------------------------------------------------------------- Salaries and fringe benefits 1,127.5 1,085.3 976.9 Occupancy and equipment expense 316.1 333.6 328.9 Other marketing expenses 403.2 449.6 431.5 Other servicing and administrative expenses 654.9 857.9 833.7 Amortization of acquired intangibles and goodwill 170.6 158.4 143.7 Policyholders' benefits 238.2 255.9 311.9 Merger and integration related costs 1,000.0 - - ----------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 3,910.5 3,140.7 3,026.6 ----------------------------------------------------------------------------------------------------------------------------- Income before income taxes 952.7 1,402.5 1,280.8 Income taxes 428.6 462.2 461.2 ----------------------------------------------------------------------------------------------------------------------------- Net income $ 524.1 $ 940.3 $ 819.6 ------------------------------------------------------------------------------------------------------------------------------ - ---------------------------------------------------------------------------------------------------------------------------------- Earnings Per Common Share Net income $ 524.1 $ 940.3 $ 819.6 Preferred dividends (15.0) (17.0) (21.9) ----------------------------------------------------------------------------------------------------------------------------- Earnings available to common shareholders $ 509.1 $ 923.3 $ 797.7 ============================================================================================================================= Average common shares 487.2 470.2 454.6 Average common and common equivalent shares 496.4 479.1 462.3 ----------------------------------------------------------------------------------------------------------------------------- Basic earnings per common share $ 1.04 $ 1.97 $ 1.76 ----------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share $ 1.03 $ 1.93 $ 1.73 ----------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 43 1998 Annual Report Consolidated Balance Sheets
In millions, except share data. At December 31 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Assets Cash $ 457.4 $ 534.3 Investment securities 3,202.1 2,898.6 Receivables, net 43,948.1 38,337.6 Acquired intangibles and goodwill, net 1,700.8 1,798.4 Properties and equipment, net 472.1 538.7 Real estate owned 253.9 212.8 Other assets 2,858.3 2,496.6 ----------------------------------------------------------------------------------------------------------------------------- Total assets $52,892.7 $46,817.0 - -----============================================================================================================================== Liabilities and Shareholders' Equity Debt: Deposits $ 2,105.0 $ 2,344.2 Commercial paper, bank and other borrowings 9,917.9 10,666.1 Senior and senior subordinated debt (with original maturities over one year) 30,438.6 23,736.2 ----------------------------------------------------------------------------------------------------------------------------- Total debt 42,461.5 36,746.5 Insurance policy and claim reserves 1,371.7 1,382.6 Other liabilities 2,298.7 2,074.4 ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 46,131.9 40,203.5 Company obligated mandatorily redeemable preferred securities of subsidiary trusts (Note 10)* 375.0 175.0 Preferred stock (Note 11) 164.4 264.5 Common shareholders' equity: Common stock, $1.00 par value, 750,000,000 shares authorized (increased as of May 13, 1998); 544,124,170 and 536,870,946 shares issued at December 31, 1998 and 1997, respectively 544.1 536.9 Additional paid-in capital 1,652.5 1,423.5 Retained earnings 5,184.4 4,978.6 Accumulated other comprehensive income, net of tax (145.1) (167.7) Less common stock in treasury, 60,986,431 and 51,519,429 shares at December 31, 1998 and 1997, respectively, at cost (1,014.5) (597.3) ----------------------------------------------------------------------------------------------------------------------------- Total common shareholders' equity 6,221.4 6,174.0 ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $52,892.7 $46,817.0 =============================================================================================================================
*The sole assets of the three trusts are Junior Subordinated Deferrable Interest Notes issued by Household International, Inc. in March 1998, June 1996 and June 1995, bearing interest at 7.25, 8.70 and 8.25 percent, respectively, with principal balances of $206.2, $103.1 and $77.3 million, respectively, and due December 31, 2037, June 30, 2036 and June 30, 2025, respectively. The accompanying notes are an integral part of these consolidated financial statements. Household International, Inc. and Subsidiaries ---------------------------------------------------- Pg. 44 1998 Annual Report Consolidated Statements of Cash Flows
In millions. Year ended December 31 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Cash Provided by Operations Net income $ 524.1 $ 940.3 $ 819.6 Adjustments to reconcile net income to net cash provided by operations: Provision for credit losses on owned receivables 1,516.8 1,493.0 1,144.2 Non-cash merger and integration related costs 291.0 - - Provision for loss on German disposal - 58.8 - Insurance policy and claim reserves 64.2 98.3 (862.5) Depreciation and amortization 308.1 303.5 290.1 Net realized gains from sales of assets (183.4) (102.5) (137.3) Deferred income tax provision 253.0 75.9 (116.1) Other, net (435.7) (440.8) (93.0) ----------------------------------------------------------------------------------------------------------------------------- Cash provided by operations 2,338.1 2,426.5 1,045.0 - ---------------------------------------------------------------------------------------------------------------------------------- Investments in Operations Investment securities available-for-sale: Purchased (1,526.1) (2,028.0) (2,712.3) Matured 510.4 399.9 1,229.2 Sold 858.3 1,721.3 4,105.5 Short-term investment securities, net change (205.1) (49.0) 117.2 Receivables: Originations, net (28,648.5) (29,356.5) (31,269.3) Purchases and related premiums (2,949.6) (1,737.5) (5,514.7) Sold 24,352.6 32,621.0 31,915.2 Purchase of Transamerica Financial Services Holding Company capital stock - (1,065.0) - Disposition of consumer banking operations: Assets sold, net - - 472.3 Deposits and other liabilities sold, net - - (2,809.8) (Acquisition) disposition of portfolios, net - - (640.7) Properties and equipment purchased (135.1) (127.7) (159.7) Properties and equipment sold 43.7 8.6 14.9 ----------------------------------------------------------------------------------------------------------------------------- Cash increase (decrease) from investments in operations (7,699.4) 387.1 (5,252.2) - ---------------------------------------------------------------------------------------------------------------------------------- Financing and Capital Transactions Short-term debt and demand deposits, net change (1,127.6) (332.2) (78.7) Time certificates, net change 380.3 (438.2) 395.0 Senior and senior subordinated debt issued 13,285.5 7,730.0 10,378.6 Senior and senior subordinated debt retired (5,455.8) (7,383.3) (6,052.6) Prepayment of debt (1,140.8) - - Repayment of Transamerica Financial Services Holding Company debt - (2,795.0) - Policyholders' benefits paid (130.9) (123.5) (512.4) Cash received from policyholders 109.5 98.0 258.5 Shareholders' dividends (256.5) (186.5) (163.6) Shareholders' dividends -- pooled affiliate (61.8) (115.5) (105.3) Issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts 200.0 - 100.0 Redemption of preferred stock (100.1) (55.0) - Purchase of treasury stock (412.0) (155.7) (56.7) Treasury stock activity -- pooled affiliate (11.4) (80.0) - Issuance of common stock .8 1,023.8 16.6 ----------------------------------------------------------------------------------------------------------------------------- Cash increase (decrease) from financing and capital transactions 5,279.2 (2,813.1) 4,179.4 ----------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 5.2 15.0 3.1 ----------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash (76.9) 15.5 (24.7) Cash at January 1 534.3 518.8 543.5 ----------------------------------------------------------------------------------------------------------------------------- Cash at December 31 $ 457.4 $ 534.3 $ 518.8 ============================================================================================================================= Supplemental Cash Flow Information: Interest paid $ 2,431.6 $ 2,348.9 $ 2,371.6 Income taxes paid 311.0 308.7 544.8 ----------------------------------------------------------------------------------------------------------------------------- Supplemental Non-Cash Investing and Financing Activities: Common stock issued for acquisition - $ 157.3 - -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 45 1998 Annual Report Consolidated Statements of Changes in Preferred Stock and Common Shareholders' Equity
Common Shareholders' Equity ---------------------------------------------------------------------------- Accumulated Other Additional Comprehensive Common Total Common All amounts except per share Preferred Common Paid-in Retained Income, Stock in Shareholders' data are stated in millions. Stock Stock Capital Earnings Net of Tax/1/ Treasury Equity - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 $ 319.5 $509.3 $ 312.8 $3,789.6 $ (60.8) $ (471.5) $ 4,079.4 - --------------------------------------------------------------------------------------------------------------------------------- Net income 819.6 819.6 Other comprehensive income, net of tax Foreign currency translation adjustments 1.4 1.4 Unrealized loss on investments, net of reclassification adjustment (123.0) (123.0) - --------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 698.0 Cash dividends: Preferred at stated rates (21.9) (21.9) Common, $.49 per share (141.7) (141.7) Pooled affiliate/2/ (105.3) (105.3) Exercise of stock options 2.6 38.6 11.9 53.1 Issuance of common stock 8.8 7.8 16.6 Purchase of treasury stock (56.7) (56.7) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 319.5 511.9 360.2 4,340.3 (182.4) (508.5) 4,521.5 - --------------------------------------------------------------------------------------------------------------------------------- Net income 940.3 940.3 Other comprehensive income, net of tax Foreign currency translation adjustments (4.4) (4.4) Unrealized gain on investments, net of reclassification adjustment 19.1 19.1 - --------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 955.0 Cash dividends: Preferred at stated rates (17.0) (17.0) Common, $.54 per share (169.5) (169.5) Pooled affiliate/2/ (115.5) (115.5) Exercise of stock options 1.4 36.5 16.2 54.1 Issuance of common stock 27.3 984.1 12.4 1,023.8 Purchase of treasury stock, net (3.7) 42.7 (117.4) (78.4) Redemption of preferred stock (55.0) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 264.5 536.9 1,423.5 4,978.6 (167.7) (597.3) 6,174.0 - --------------------------------------------------------------------------------------------------------------------------------- Net income 524.1 524.1 Other comprehensive income, net of tax Foreign currency translation adjustments 9.0 9.0 Unrealized gain on investments, net of reclassification adjustment 13.6 13.6 - --------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 546.7 Cash dividends: Preferred at stated rates (15.0) (15.0) Common, $.60 per share (241.5) (241.5) Pooled affiliate/2/ (61.8) (61.8) Exercise of stock options 7.4 220.3 13.9 241.6 Issuance of common stock .2 19.7 (19.1) .8 Purchase of treasury stock, net (.4) (11.0) (412.0) (423.4) Redemption of preferred stock (100.1) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ 164.4 $544.1 $1,652.5 $5,184.4 $ (145.1) $ (1,014.5) $ 6,221.4 =================================================================================================================================
/1/ At December 31, 1998, 1997, 1996 and 1995, items in the accumulated other comprehensive income column include cumulative adjustments for: foreign currency translation adjustments of $(167.5), $(176.5), $(172.1) and $(173.5) million, respectively, and unrealized gains (losses) on marketable equity securities and available-for-sale investments of $22.4, $8.8, $(10.3) and $112.7 million, respectively. The gross unrealized gain (loss) on available-for-sale investments at December 31, 1998, 1997 and 1996 of $34.0, $13.1 and $(16.0) million, respectively, is recorded net of income taxes (benefit) of $11.6, $4.3 and $(5.7) million, respectively. /2/ Represents historical common stock dividends of Beneficial Corporation. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 46 1998 Annual Report Consolidated Statements of Changes in Preferred Stock and Common Shareholders' Equity (continued)
Common Stock ------------------------------------------- Shares Outstanding Preferred Stock Issued In Treasury Net Outstanding - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 2,048,279 509,389,283 (54,208,938) 455,180,345 Exercise of common stock options 2,536,431 1,389,636 3,926,067 Issuance of common stock 844,539 844,539 Purchase of treasury stock (2,523,000) (2,523,000) - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 2,048,279 511,925,714 (54,497,763) 457,427,951 Exercise of common stock options 1,390,283 1,618,671 3,008,954 Issuance of common stock 27,340,697 1,359,738 28,700,435 Issuance of common stock -- ACC 4,101,825 4,101,825 Purchase of treasury stock (4,101,900) (4,101,900) Purchase of stock -- pooled affiliates (3,785,748) (3,785,748) Redemption of preferred stock (550,000) - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 1,498,279 536,870,946 (51,519,429) 485,351,517 Exercise of common stock options 7,432,207 1,136,446 8,568,653 Issuance of common stock 244,821 (99,448) 145,373 Purchase of treasury stock (10,504,000) (10,504,000) Purchase of stock -- pooled affiliates (423,804) (423,804) Redemption of preferred stock (100,000) - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 1,398,279 544,124,170 (60,986,431) 483,137,739 =====================================================================================================================
Comprehensive Income The following discloses the related tax effects allocated to each component of other comprehensive income and reclassification adjustments:
Tax In millions. (Expense) At December 31 Before-Tax Benefit Net-of-Tax - ------------------------------------------------------------------------------------------------------------------------- 1996 Foreign currency translation adjustments $ (22.4) $ 23.8 $ 1.4 Unrealized losses on investments: Unrealized holding losses arising during the period (141.9) 48.3 (93.6) Less: Reclassification adjustment for gains realized in net income (44.6) 15.2 (29.4) -------------------------------------------------------------------------------------------------------------------- Net unrealized losses on investments (186.5) 63.5 (123.0) -------------------------------------------------------------------------------------------------------------------- Other comprehensive loss $ (208.9) $ 87.3 $ (121.6) ========================================================================================================================= 1997 Foreign currency translation adjustments $ 15.3 $ (19.7) $ (4.4) Unrealized gains on investments: Unrealized holding gains arising during the period 53.2 (18.3) 34.9 Less: Reclassification adjustment for gains realized in net income (24.1) 8.3 (15.8) -------------------------------------------------------------------------------------------------------------------- Net unrealized gains on investments 29.1 (10.0) 19.1 -------------------------------------------------------------------------------------------------------------------- Other comprehensive income $ 44.4 $ (29.7) $ 14.7 ========================================================================================================================= 1998 Foreign currency translation adjustments $ 9.3 $ (.3) $ 9.0 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 (6.0) 2.1 (3.9) -------------------------------------------------------------------------------------------------------------------- Net unrealized gains on investments 20.9 (7.3) 13.6 -------------------------------------------------------------------------------------------------------------------- Other comprehensive income $ 30.2 $ (7.6) $ 22.6 =========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg.47 1998 Annual Report Notes to Consolidated Financial Statements Household International, Inc. and subsidiaries ("Household") is a leading provider of consumer lending products to middle-market customers in the United States, United Kingdom and Canada, with $63.9 billion of managed receivables at December 31, 1998. Household may also be referred to in these notes to the consolidated financial statements as "we," "us" or "our." Our lending products include: home equity loans, auto finance loans, MasterCard* and Visa* credit cards, private label credit cards, tax refund anticipation loans and other types of unsecured loans. We also offer credit and specialty insurance in the United States, the United Kingdom and Canada. We have three reportable segments: Consumer, which includes our branch-based consumer finance, private label and auto finance businesses; Credit Card, which includes our domestic MasterCard and Visa business; and International, which includes our United Kingdom and Canadian operations. We also have traditional first mortgages, commercial loans and leases, periodic payment annuities, and corporate owned life insurance products which we no longer offer. 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Household International, Inc. and all subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform with the current year's presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On March 10, 1998, the Board of Directors approved a three-for-one split of our common stock effected in the form of a dividend, issued on June 1, 1998, to shareholders of record as of May 14, 1998. Accordingly, all common share and per common share data in these consolidated financial statements includes the effect of our stock split. Investment Securities We maintain investment portfolios (comprised primarily of debt securities) in both our noninsurance and insurance operations. Our entire investment securities portfolio was classified as available-for-sale at December 31, 1998 and 1997. Available-for-sale investments are intended to be invested for an indefinite period but may be sold in response to events we expect to occur in the foreseeable future. These investments are carried at fair value. Unrealized holding gains and losses on available-for-sale investments are recorded as adjustments to common shareholders' equity, net of income taxes. Any decline in the fair value of investments which is deemed to be other than temporary is charged against current earnings. Cost of investment securities sold is determined using the specific identification method. Interest income earned on the noninsurance investment portfolio is classified in the statements of income in net interest margin. Realized gains and losses from the investment portfolio and investment income from the insurance portfolio are recorded in investment income. Accrued investment income is classified with investment securities. Receivables Receivables are carried at amortized cost. We periodically sell home equity, auto finance, MasterCard and Visa, private label and other unsecured receivables. Because these receivables were originated with variable rates of interest or rates comparable to those currently offered by us, carrying value approximates fair value. Finance income is recognized using the effective yield method. Origination fees are deferred and amortized to finance income over the estimated life of the related receivables, except to the extent they offset directly related lending costs. Annual fees are netted with direct lending costs associated with the issuance of MasterCard and Visa receivables and are deferred and amortized on a straight-line basis over one year. Net deferred lending costs related to these receivables totaled $.9 million at December 31, 1998 and $7.8 million at December 31, 1997. Premiums and discounts on purchased receivables are recognized as adjustments of the yield of the related receivables. Insurance reserves applicable to credit risks on consumer receivables are treated as a reduction of receivables in the balance sheets, since payments on such policies generally are used to reduce outstanding receivables. *MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of VISA USA, Inc. Household International, Inc. and Subsidiaries ---------------------------------------------- PG.48 1998 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Provision and Credit Loss Reserves Provision for credit losses on owned receivables is made in an amount sufficient to maintain credit loss reserves at a level considered adequate to cover probable losses of principal and interest in the existing owned portfolio. Probable losses are estimated for consumer receivables based on contractual delinquency status and historical loss experience. For commercial loans, probable losses are calculated using estimates of amounts and timing of future cash flows expected to be received on loans. In addition, general loss reserves on consumer and commercial receivables are maintained to reflect our judgment of portfolio risk factors. Loss reserve estimates are reviewed periodically and adjustments are reported in earnings when they become known. As these estimates are influenced by factors outside our control, such as consumer payment patterns and economic conditions, there is uncertainty inherent in these estimates, making it reasonably possible that they could change. 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. Nonaccrual Loans Nonaccrual loans are loans on which accrual of interest has been suspended. Interest income is suspended on all loans when principal or interest payments are more than three months contractually past due, except for MasterCard and Visa and private label credit cards and auto finance receivables. On credit card receivables, interest continues to accrue until the receivable is charged off. On auto finance receivables, accrual of interest income is discontinued when payments are more than two months contractually past due. There were no commercial loans at December 31, 1998 which were 90 days or more past due and remained on accrual status. Accrual of income on nonaccrual consumer receivables is not resumed until such receivables become less than three months contractually past due (two months for auto finance receivables). Accrual of income on nonaccrual commercial loans is not resumed until such loans become contractually current. Cash payments received on nonaccrual commercial loans are either applied against principal or reported as interest income, according to our judgment as to the collectibility of principal. Receivables Sold and Serviced with Limited Recourse and Securitization Income Certain home equity, auto finance, MasterCard and Visa, private label and other unsecured receivables have been securitized and sold to investors with limited recourse. The servicing rights to these receivables have been retained by us. Upon sale, the receivables are removed from the balance sheet, and a gain is recognized for the difference between the carrying value of the receivables and the adjusted sales proceeds. The adjusted sales proceeds are based on a present value estimate of future cash flows to be received over the lives of the sold receivables. Future cash flows are based on estimates of prepayments, the impact of interest rate movements on yields of receivables and securities issued, delinquency of receivables sold, servicing fees, operating expenses and other factors. The resulting gain is adjusted by establishing an undiscounted reserve for estimated probable losses under the recourse provisions. Gains on sale, recourse provisions and servicing cash flows on receivables sold are reported in the accompanying consolidated statements of income as securitization income. Unamortized securitization assets are reviewed for impairment whenever events indicate that the carrying value may not be recovered. Properties and Equipment Properties and equipment, which include leasehold improvements, are recorded at cost, net of accumulated depreciation and amortization of $755.2 million at December 31, 1998 and $740.8 million at December 31, 1997. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets for financial reporting purposes. Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the term of the lease. Repossessed Collateral Real estate owned is valued at the lower of cost or fair value less estimated costs to sell. These values are periodically reviewed and reduced, if necessary. Costs of holding real estate, and related gains and losses on disposition, are credited or charged to operations as incurred. Vehicles repossessed for nonpayment of indebtedness are recorded at the lower of the estimated fair market value or the outstanding receivable balance. Such assets are generally sold within 60 days of repossession. Household International, Inc. and Subsidiaries ---------------------------------------------- PG.49 1998 Annual Report Insurance Insurance revenues on revolving credit insurance policies are recognized when billed. Insurance revenues on the remaining insurance contracts are recorded as unearned premiums and recognized into income based on the nature and term of the underlying contracts. Liabilities for credit insurance policies are based upon estimated settlement amounts for both reported and incurred but not yet reported losses. Liabilities for future benefits on annuity contracts and specialty and corporate owned life insurance products are based on actuarial assumptions as to investment yields, mortality and withdrawals. Acquired Intangibles and Goodwill Acquired intangibles consist of acquired credit card relationships which are amortized on a straight-line basis over 10 years. Goodwill represents the purchase price over the fair value of identifiable assets acquired less liabilities assumed from business combinations and is amortized over periods not exceeding 25 years on a straight-line basis. We review acquired intangibles and goodwill for impairment whenever events indicate that the carrying amounts may not be recoverable. Treasury Stock We account for repurchases of common stock using the cost method with common stock in treasury classified in the balance sheets as a reduction of common shareholders' equity. Treasury stock reissued is removed from the accounts at average cost. Interest Rate Contracts The nature and composition of our assets and liabilities and off-balance sheet items expose us to interest rate risk. We enter into a variety of interest rate contracts for managing our interest rate exposure. Interest rate swaps are the principal vehicle used to manage interest rate risk; however, interest rate futures, options, caps and floors, and forward contracts also are utilized. We also have entered into currency swaps to convert both principal and interest payments on debt issued from one currency to the appropriate functional currency. Interest rate swaps are designated, and effective, as synthetic alterations of specific assets or liabilities (or specific groups of assets or liabilities) and off-balance sheet items. The interest rate differential to be paid or received on these contracts is accrued and included in net interest margin in the statements of income. Interest rate futures, forwards, options, and caps and floors used in hedging our exposure to interest rate fluctuations are designated, and effective, as hedges of balance sheet items. Correlation between all interest rate contracts and the underlying asset, liability or off-balance sheet item is direct because we use interest rate contracts which mirror the underlying item being hedged/synthetically altered. If correlation between the hedged/synthetically altered item and related interest rate contract would cease to exist, the interest rate contract would be recorded at fair value and the associated unrealized gain or loss would be included in net interest margin, with any future realized and unrealized gains or losses recorded in other income. Interest rate contracts are recorded at amortized cost. If interest rate contracts are terminated early, the realized gains and losses are deferred and amortized over the life of the hedged/synthetically altered item as adjustments to net interest margin. These deferred gains and losses are recorded on the accompanying consolidated balance sheets as adjustments to the carrying value of the hedged items. In circumstances where the underlying assets or liabilities are sold, any remaining carrying value adjustments or cumulative change in value on any open positions are recognized immediately as a component of the gain or loss upon disposition. Any remaining interest rate contracts previously designated to the sold hedged/synthetically altered item are recorded at fair value with realized and unrealized gains and losses included in other income. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. FAS No. 133 requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset the related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. FAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement FAS No. 133 as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). FAS No. 133 cannot be applied retroactively. FAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. We expect to adopt FAS No. 133 on January 1, 2000 and have not yet quantified its impact on our financial statements. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 50 1998 Annual Report Notes to Consolidated Financial Statements (continued) Foreign Currency Translation We have foreign subsidiaries located in the United Kingdom and Canada. The functional currency for each foreign subsidiary is its local currency. Assets and liabilities of these subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rate of exchange prevailing during the year. Resulting translation adjustments are accumulated as a separate component of common shareholders' equity. We periodically enter into forward exchange contracts to hedge our investment in foreign subsidiaries. After-tax gains and losses on contracts to hedge foreign currency fluctuations are included in the foreign currency translation adjustment in common shareholders' equity. Effects of foreign currency translation in the statements of cash flows are offset against the cumulative foreign currency adjustment, except for the impact on cash. Foreign currency transaction gains and losses are included in income as they occur. Stock-Based Compensation We account for stock option and stock purchase plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In accordance with APB 25, no compensation expense is recognized for stock options issued. Income Taxes Household and its subsidiaries file a consolidated federal income tax return. Federal income taxes are accounted for utilizing the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Investment tax credits generated by leveraged leases are accounted for using the deferral method. New Accounting Pronouncements On January 1, 1998, we adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS No. 130"). This statement establishes standards for the reporting and presentation of comprehensive income. Comprehensive income, in addition to traditional net income, includes the mark-to-market adjustments on available-for-sale securities, cumulative translation adjustments and other items which represent a change in equity from "nonowner" sources. FAS No. 130 does not change existing requirements for certain items to be reported as a separate component of shareholders' equity. The disclosures required by FAS No. 130 are presented in the Consolidated Statements of Changes in Preferred Stock and Common Shareholders' Equity. We adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS No. 131") in 1998. This statement establishes standards for reporting information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial reports issued to shareholders. FAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The disclosures required by FAS No. 131 are presented in Note 20, "Segment Reporting." We adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("FAS No. 132") in 1998. This statement revises employers' disclosures about pensions and other postretirement benefit plans. It does not change the measurement or recognition of those plans. The disclosures required by FAS No. 132 are presented in Note 16, "Employee Benefit Plans." 2. Household International Merger with Beneficial Corporation On June 30, 1998, Household merged with Beneficial Corporation ("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's common stock, resulting in the issuance of approximately 168.4 million common shares to the former Beneficial shareholders. Each share of Beneficial $5.50 Convertible Preferred Stock was converted into the number of shares of Household common stock the holder would have been entitled to receive in the merger had the holder converted his or her shares of Beneficial $5.50 Convertible Preferred Stock into shares of Beneficial common stock immediately prior to the merger. Additionally, each other share of preferred stock of Beneficial outstanding immediately prior to the merger was converted into one share of a newly-created series of preferred stock of Household with terms substantially similar to those of existing Beneficial preferred stock. The merger was accounted for as a pooling of interests, therefore, these consoli- Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 51 1998 Annual Report dated financial statements include the results of operations, financial position, and changes in cash flows of Beneficial for all periods presented. The separate results of operations for Household and Beneficial during the periods preceding the merger that are included in the consolidated statements of income were as follows:
Year Ended December 31, Six Months Ended ----------------------- In millions. June 30, 1998 1997 1996 - --------------------------------------------------------------------------------------------- Net interest margin and other revenues/1/ Household $1,915.7 $3,780.6 $3,294.9 Beneficial 1,187.7 1,999.7 1,844.8 - --------------------------------------------------------------------------------------------- Total $3,103.4 $5,780.3 $5,139.7 ============================================================================================= Net income Household $ 372.2 $ 686.6 $ 538.6 Beneficial 116.5 253.7 281.0 Merger and integration related costs (751.0) -- -- Beneficial Canada gain 118.5 -- -- - --------------------------------------------------------------------------------------------- Total $ (143.8) $ 940.3 $ 819.6 =============================================================================================
/1/Policyholders' benefits have been netted against other revenues. As a result of the merger, adjustments were made to align accounting policies of the two companies, particularly relating to chargeoffs for the private label and consumer businesses. These adjustments did not have a material impact on our reported results. In connection with the merger, we established an integration plan which 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) which has been reflected in the statement of income in total costs and expenses. Included in this amount was approximately $270 million (of which $86 million related to key executives with pre-existing severance agreements) of employee termination 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 have been made to terminated employees. Most of the remaining $30 million is expected to be paid in the first quarter of 1999 pursuant to our plan. In addition, approximately $319 million was 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. Of this amount, $100 million related to the exiting of the Beneficial corporate office lease, $142 million related to lease termination and other exit costs for closures of 335 duplicative U.S. and U.K. branch offices and 8 redundant operating centers, $40 million pertained to fixed asset writedowns, primarily related to closed facilities, and $37 million related to termination penalties associated with third party vendor contracts whose services would no longer be required. In November 1998, we entered into an agreement to sublease the Beneficial corporate offices to a third party to whom we paid total consideration 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 remainder of the estimated lease termination payments will be made in the first quarter of 1999. In addition, $14 million of charges were incurred due to early termination of third party vendor contracts. Most of the remaining vendor contracts will be terminated in the first quarter of 1999. In connection with the merger, we re-assessed Beneficial's existing business plans and assumptions used in evaluating goodwill and other related intangibles associated with various operations, loan products and acquired receivable portfolios. Our plan identified modifications to these existing business plans. In connection with these modifications, we utilized discounted cash flow analyses to value the related goodwill and other intangible assets using assumptions which reflected our modified business plans. As a result of our analyses, we have written off approximately $183 million of goodwill and other related intangible assets to their estimated fair values. In addition, we wrote down real estate interests by $68 million to reflect their net realizable values. Assets held for disposal are not material. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 52 1998 Annual Report Notes to Consolidated Financial Statements (continued) In connection with the merger, we and Beneficial incurred investment banking fees of $75 million and legal and other expenses of $25 million. In addition, in order to better align the asset liability position of the combined company, we paid $60 million in prepayment premiums related to outstanding debt. The following table summarizes the activity in the merger and restructuring reserve:
In millions. -------------------------------------------------------------- Balance at January 1, 1998 -- Establishment of reserve $1,000.0 Cash payments (629.0) Non-cash items (291.0) -------------------------------------------------------------- Balance at December 31, 1998 $ 80.0 ==============================================================
3. Other Business Combinations and Divestitures On April 28, 1998, the sale of Beneficial's German consumer banking operations was completed. An after-tax loss of $27.8 million was recorded in the fourth quarter of 1997. This loss was recorded after consideration of a $31.0 million tax benefit. No additional losses were realized in 1998 as a result of the sale. On March 2, 1998, the sale of Beneficial's Canadian operations was completed. An after-tax gain of $118.5 million was recorded upon consummation of the transaction. On June 23, 1997, Household and a wholly-owned subsidiary of Household Finance Corporation (a wholly-owned subsidiary of Household International) acquired the capital stock of Transamerica Financial Services Holding Company ("TFS"), the branch-based consumer finance subsidiary of Transamerica Corporation ("TA"). We paid $1.1 billion for the stock of TFS and repaid approximately $2.8 billion of TFS debt owed to affiliates of TA. The acquisition added approximately $3.2 billion of receivables, of which approximately $3.1 billion were home equity loans secured primarily by home mortgages. The acquisition of TFS was accounted for as a purchase, and accordingly, earnings from TFS' operations have been included in our results of operations from June 24, 1997. In June 1997, we completed a public underwritten offering of 27.3 million shares of our common stock for approximately $1.0 billion. Net proceeds from the offering were used to repay certain short-term borrowings in connection with the acquisition of TFS. On October 21, 1997, Household and a 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. The acquisition of ACC was accounted for as a purchase, and accordingly, earnings from ACC's operations have been included in our results of operations from October 22, 1997. In December 1997, Beneficial acquired Endeavour Personal Finance Ltd. ("Endeavour"), a consumer lending business in the United Kingdom, for cash. The acquisition of Endeavour was accounted for as a purchase, and accordingly, earnings from Endeavour's operations have been included in our results of operations from the acquisition date. 4. Investment Securities
In millions. At December 31 1998 1997 --------------------------------------------------------------------------- Available-For-Sale Investments Marketable equity securities $ 70.8 $ 132.5 Corporate debt securities 1,731.3 1,600.5 U.S. government and federal agency debt securities 373.6 380.5 Other 990.1 746.5 --------------------------------------------------------------------------- Subtotal 3,165.8 2,860.0 Accrued investment income 36.3 38.6 --------------------------------------------------------------------------- Total investment securities $3,202.1 $2,898.6 ===========================================================================
Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 53 1998 Annual Report Proceeds from the sale of available-for-sale investments totaled approximately $.9, $1.7 and $4.1 billion in 1998, 1997 and 1996, respectively. Gross gains of $9.2, $27.4 and $50.5 million and gross losses of $3.2, $3.3 and $5.9 million in 1998, 1997 and 1996, respectively, were realized on those sales. The gross unrealized gains (losses) of investment securities were as follows:
1998 1997 -------------------------------------------- -------------------------------------------- Gross Gross Gross Gross In millions. Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair At December 31 Cost Gains Losses Value Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------------------- Available-For-Sale Investments Marketable equity securities $ 68.2 $ 2.8 $ (.2) $ 70.8 $ 129.0 $ 3.7 $ (.2) $ 132.5 Corporate debt securities 1,705.1 55.3 (29.1) 1,731.3 1,581.8 36.9 (18.2) 1,600.5 U.S. government and federal agency debt securities 368.4 7.0 (1.8) 373.6 390.3 3.3 (13.1) 380.5 Other 990.1 -- -- 990.1 745.8 .8 (.1) 746.5 - --------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale investments $3,131.8 $65.1 $(31.1) $3,165.8 $2,846.9 $44.7 $(31.6) $2,860.0 =================================================================================================================================
See Note 13, "Fair Value of Financial Instruments," for further discussion of the relationship between the fair value of our assets, liabilities and off-balance sheet financial instruments. Contractual maturities of and yields on investments in debt securities were as follows:
U.S. Government and Federal Corporate Debt Securities Agency Debt Securities ---------------------------------- --------------------------------- All dollar amounts are stated in millions. Amortized Fair Amortized Fair At December 31, 1998 Cost Value Yield* Cost Value Yield* - -------------------------------------------------------------------------------------------------------------------------------- Due within 1 year $ 68.1 $ 68.2 6.08% $ 35.7 $ 35.7 7.17% After 1 but within 5 years 258.0 262.5 6.23 90.0 90.9 7.23 After 5 but within 10 years 489.1 497.7 6.66 67.7 68.8 6.55 After 10 years 889.9 902.9 7.12 175.0 178.2 6.44 - -------------------------------------------------------------------------------------------------------------------------------- Total $1,705.1 $1,731.3 6.81% $368.4 $373.6 6.72% ================================================================================================================================
*Computed by dividing annualized interest by the amortized cost of the respective investment securities. 5. Receivables
In millions. At December 31 1998 1997 - ------------------------------------------------------------------------------------------------ First mortgage $ 156.3 $ 396.6 Home equity 18,692.7 13,786.2 Auto finance 805.0 487.5 MasterCard/Visa 7,180.2 6,874.7 Private label 9,566.0 9,356.9 Other unsecured 7,108.6 6,823.1 Commercial 697.1 957.0 - ------------------------------------------------------------------------------------------------ Total owned receivables 44,205.9 38,682.0 Accrued finance charges 642.5 536.7 Credit loss reserve for owned receivables (1,734.2) (1,642.1) Unearned credit insurance premiums and claims reserves (505.1) (452.3) Amounts due and deferred from receivables sales 2,152.9 2,094.2 Reserve for receivables serviced with limited recourse (813.9) (880.9) - ------------------------------------------------------------------------------------------------ Total owned receivables, net 43,948.1 38,337.6 Receivables serviced with limited recourse 19,701.8 24,478.5 - ------------------------------------------------------------------------------------------------ Total managed receivables, net $63,649.9 $62,816.1 ================================================================================================
Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 54 1998 Annual Report Notes to Consolidated Financial Statements (continued) Foreign receivables included in owned receivables were as follows:
United Kingdom Canada Germany In millions. --------------------- --------------------- --------------- At December 31 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------- First mortgage $ 3.2 $ 3.1 -- $ 7.8 -- -- Home equity 913.6 784.0 $ 305.0 632.8 -- $ 20.9 MasterCard/Visa 1,852.4 1,350.8 -- -- -- .5 Private label 1,165.8 975.4 349.2 790.2 -- 134.3 Other unsecured 1,191.5 1,133.2 343.8 617.9 -- 53.3 Commercial -- -- 6.2 18.7 -- 74.4 - ------------------------------------------------------------------------------------------------- Total $5,126.5 $4,246.5 $1,004.2 $2,067.4 -- $283.4 =================================================================================================
Foreign managed receivables represented 12 percent of total managed receivables at December 31, 1998 and 1997. The outstanding balance of receivables serviced with limited recourse consisted of the following:
In millions. At December 31 1998 1997 - --------------------------------------------------------- Home equity $ 3,637.4 $ 6,038.6 Auto finance 960.3 395.9 MasterCard/Visa 9,430.6 12,337.0 Private label 811.5 1,025.0 Other unsecured 4,862.0 4,682.0 - --------------------------------------------------------- Total $19,701.8 $24,478.5 =========================================================
At December 31, 1998, the expected weighted average remaining life of these securitization transactions was 1.9 years. The combination of receivables owned and receivables serviced with limited recourse, which we consider our managed portfolio, is shown below:
In millions. At December 31 1998 1997 - --------------------------------------------------------- First mortgage $ 156.3 $ 396.6 Home equity 22,330.1 19,824.8 Auto finance 1,765.3 883.4 MasterCard/Visa 16,610.8 19,211.7 Private label 10,377.5 10,381.9 Other unsecured 11,970.6 11,505.1 Commercial 697.1 957.0 - --------------------------------------------------------- Managed receivables $63,907.7 $63,160.5 =========================================================
The amounts due and deferred from receivables sales were $2,152.9 million at December 31, 1998 and $2,094.2 million at December 31, 1997. The amounts due and deferred included unamortized securitization assets and other assets established under the recourse provisions for certain sales totaling $2,031.3 million at December 31, 1998 and $2,082.3 million at December 31, 1997. It also included net customer payments not yet received from (paid to) the securitization trustee of $79.6 million at December 31, 1998 and $(11.7) million at December 31, 1997. We have agreements with a "AAA"-rated third party who will insure us for up to $21.2 million in losses relating to certain securitization transactions. We maintain credit loss reserves under the recourse requirements for receivables serviced with limited recourse which are based on estimated probable losses under those requirements. The reserves totaled $813.9 million at December 31, 1998 and $880.9 million at December 31, 1997, and represents our best estimate of probable losses on receivables serviced with limited recourse. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg.55 1998 ANNUAL REPORT The providers of the credit enhancements have no recourse to us. We maintain facilities with third parties which provide for the securitization of receivables on a revolving basis totaling $7.5 billion through the issuance of commercial paper, of which $5.8 billion were utilized at December 31, 1998. The amount available under these facilities will vary based on the timing and volume of public securitization transactions. Contractual maturities of owned receivables were as follows:
In millions At December 31, 1998 1999 2000 2001 2002 2003 Thereafter Total - ----------------------------------------------------------------------------------------------------- First mortgage $ 1.3 $ .3 $ .6 $ .6 $ .8 $ 152.7 $ 156.3 Home equity 4,577.0 3,524.1 2,615.7 1,976.8 1,525.0 4,474.1 18,692.7 Auto finance 4.2 15.8 59.9 181.3 365.7 178.1 805.0 MasterCard/Visa 1,062.4 833.2 686.3 523.5 492.2 3,582.6 7,180.2 Private label 1,561.4 1,204.5 760.1 630.5 530.3 4,879.2 9,566.0 Other unsecured 2,663.6 1,509.2 955.7 585.2 382.0 1,012.9 7,108.6 Commercial 136.4 43.1 41.5 28.4 37.2 410.5 697.1 - ----------------------------------------------------------------------------------------------------- Total $10,006.3 $7,130.2 $5,119.8 $3,926.3 $3,333.2 $14,690.1 $44,205.9 =====================================================================================================
A substantial portion of consumer receivables, based on our experience, will be renewed or repaid prior to contractual maturity. The above maturity schedule should not be regarded as a forecast of future cash collections. The ratio of annual cash collections of principal to average principal balances, excluding MasterCard and Visa receivables, approximated 59 percent in 1998 and 57 percent in 1997. The following table summarizes contractual maturities of owned receivables due after one year by repricing characteristic:
In millions. At December 31, 1998 Over 1 But Within 5 years Over 5 years - -------------------------------------------------------------------------------------- Receivables at predetermined interest rates $10,858.2 $ 6,080.1 Receivables at floating or adjustable rates 8,651.3 8,610.0 - -------------------------------------------------------------------------------------- Total $19,509.5 $14,690.1 ======================================================================================
Nonaccrual owned consumer receivables totaled $1,034.5 and $907.8 million at December 31, 1998 and 1997, respectively, including $178.3 and $189.1 million, respectively, relating to foreign operations. Interest income that would have been recorded in 1998 and 1997 if such nonaccrual receivables had been current and in accordance with contractual terms was approximately $162.4 and $132.4 million, respectively, including $30.3 and $32.4 million, respectively, relating to foreign operations. Interest income that was included in net income for 1998 and 1997, prior to these loans being placed on nonaccrual status, was approximately $91.5 and $73.3 million, respectively, including $16.3 and $15.3 million, respectively, relating to foreign operations. For an analysis of reserves for credit losses, see our Analysis of Credit Loss Reserves Activity on an owned and managed basis. 6. Deposits
1998 1997 -------------------- -------------------- All dollar amounts are stated in millions. Weighted Weighted At December 31 Amount Average Rate Amount Average Rate - --------------------------------------------------------------------------------------------- Domestic Time certificates $ 930.2 6.8% $ 936.7 6.9% Savings accounts 3.5 6.0 181.6 4.5 Demand accounts 1.4 - 82.6 - - --------------------------------------------------------------------------------------------- Total domestic deposits 935.1 6.8 1,200.9 6.0 - --------------------------------------------------------------------------------------------- Foreign Time certificates 453.2 6.7 564.3 6.4 Savings accounts 585.4 6.3 474.1 6.5 Demand accounts 131.3 4.2 104.9 5.7 - --------------------------------------------------------------------------------------------- Total foreign deposits 1,169.9 6.2 1,143.3 6.4 - --------------------------------------------------------------------------------------------- Total deposits $2,105.0 6.5% $2,344.2 6.2% =============================================================================================
Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 56 1998 Annual Report Notes to Consolidated Financial Statements (continued) Average deposits and related weighted average interest rates for 1998, 1997 and 1996 were as follows:
1998 1997 1996 ---------------------- ---------------------- ---------------------- All dollar amounts are stated in millions. Average Weighted Average Weighted Average Weighted At December 31 Deposits Average Rate Deposits Average Rate Deposits Average Rate - ---------------------------------------------------------------------------------------------------------------------- Domestic Time certificates $1,056.3 6.1% $1,167.1 6.8% $1,997.2 6.6% Savings and demand accounts 663.2 .7 617.3 1.4 1,305.5 2.3 - ---------------------------------------------------------------------------------------------------------------------- Total domestic deposits 1,719.5 4.0 1,784.4 4.9 3,302.7 4.9 - ---------------------------------------------------------------------------------------------------------------------- Foreign Time certificates 619.6 5.5 609.0 6.0 719.1 6.1 Savings and demand accounts 805.1 6.2 582.7 5.6 498.2 5.0 - ---------------------------------------------------------------------------------------------------------------------- Total foreign deposits 1,424.7 5.9 1,191.7 5.8 1,217.3 5.7 - ---------------------------------------------------------------------------------------------------------------------- Total deposits $3,144.2 4.9% $2,976.1 5.2% $4,520.0 5.2% ======================================================================================================================
Interest expense on deposits was $152.7, $155.3 and $235.2 million for 1998, 1997 and 1996, respectively. Interest expense on domestic deposits was $68.7, $90.4 and $167.1 million for 1998, 1997 and 1996, respectively. Maturities of time certificates in amounts of $100,000 or more were:
All dollar amounts are stated in millions. At December 31, 1998 Domestic Foreign Total - ---------------------------------------------------------------------------------------------------------------------- 3 months or less $ .1 $207.3 $207.4 Over 3 months through 6 months .1 28.7 28.8 Over 6 months through 12 months 2.5 15.7 18.2 Over 12 months -- 194.0 194.0 - ---------------------------------------------------------------------------------------------------------------------- Total $2.7 $445.7 $448.4 ======================================================================================================================
Contractual maturities of time certificates within each interest rate range were as follows:
All dollar amounts are stated in millions. At December 31, 1998 1999 2000 2001 2002 2003 Thereafter Total - ---------------------------------------------------------------------------------------------------------------------- Interest Rate less-than 4.00% $ 2.2 -- -- -- -- -- $ 2.2 4.00% - 5.99% 59.7 $115.6 $ 71.8 $20.1 $ 39.3 -- 306.5 6.00% - 7.99% 512.5 142.3 283.6 -- 73.6 -- 1,012.0 8.00% - 9.99% 5.4 57.3 -- -- -- -- 62.7 - ---------------------------------------------------------------------------------------------------------------------- Total $579.8 $315.2 $355.4 $20.1 $112.9 -- $1,383.4 ======================================================================================================================
Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 57 1998 ANNUAL REPORT 7. Commercial Paper, Bank and Other Borrowings
All dollar amounts are stated in millions. Commercial Bank and Other At December 31 Paper* Borrowings Total ----------------------------------------------------------------------------------------------------------------- 1998 Balance $ 7,713.2 $2,204.7 $ 9,917.9 Highest aggregate month-end balance 12,677.6 Average borrowings 9,495.6 2,640.8 12,136.4 Weighted average interest rate: At year end 5.2% 7.1% 5.6% Paid during year 5.5 5.6 5.5 ----------------------------------------------------------------------------------------------------------------- 1997 Balance $9,064.7 $ 1,601.4 $10,666.1 Highest aggregate month-end balance 11,654.6 Average borrowings 8,992.5 1,419.5 10,412.0 Weighted average interest rate: At year end 5.7% 7.5% 6.0% Paid during year 5.6 6.3 5.7 ----------------------------------------------------------------------------------------------------------------- 1996 Balance $9,114.1 $ 1,483.3 $10,597.4 Highest aggregate month-end balance 12,027.4 Average borrowings 8,743.7 1,584.1 10,327.8 Weighted average interest rate: At year end 5.4% 7.1% 5.6% Paid during year 5.3 7.0 5.7 -----------------------------------------------------------------------------------------------------------------
*Included in outstanding balances at year-end 1998, 1997 and 1996 were commercial paper obligations of foreign subsidiaries of $322.8, $958.4 and $881.4 million, respectively. Interest expense for commercial paper, bank and other borrowings totaled $672.1, $592.4 and $584.4 million for 1998, 1997 and 1996, respectively. We maintain various bank credit agreements primarily to support commercial paper borrowings. At December 31, 1998 and 1997, we had committed back-up lines and other bank lines of $13.5 and $12.7 billion, respectively, of which $11.7 and $11.8 billion, respectively, were unused. Formal credit lines are reviewed annually, and expire at various dates from 1999 to 2003. Borrowings under these lines generally are available at a surcharge over LIBOR. Annual commitment fee requirements to support availability of these lines at December 31, 1998 totaled $9.0 million. 8. Senior and Senior Subordinated Debt (With Original Maturities Over One Year)
All dollar amounts are stated in millions. At December 31 1998 1997 ----------------------------------------------------------------------------------------------------------------- Senior Debt 5.00% to 6.49%; due 1999 to 2013 $ 6,817.1 $ 2,529.0 6.50% to 6.99%; due 1999 to 2013 4,167.9 3,421.1 7.00% to 7.49%; due 1999 to 2023 1,569.9 1,782.6 7.50% to 7.99%; due 1999 to 2012 1,779.0 1,612.7 8.00% to 8.99%; due 1999 to 2008 1,359.0 1,962.4 9.00% and greater; due 1999 to 2001 480.0 1,353.2 Variable interest rate debt; 5.00% to 9.00%; due 1999 to 2034 13,765.9 10,372.4 Senior Subordinated Debt 6.50% to 9.63%; due 2000 to 2003 494.7 685.0 10.25%; due 2003 20.0 20.0 Unamortized discount (14.9) (2.2) ----------------------------------------------------------------------------------------------------------------- Total senior and senior subordinated debt $30,438.6 $23,736.2 =================================================================================================================
Weighted average coupon interest rates were 6.4 and 6.8 percent at December 31, 1998 and 1997, respectively. Interest expense for senior and senior subordinated debt was $1,692.2, $1,610.7 and $1,513.8 million for 1998, Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 58 1998 Annual Report Notes to Consolidated Financial Statements (continued) 1997 and 1996, respectively. The only financial covenants contained in the terms of our debt agreements are the maintenance of a minimum shareholders' equity of $2.0 billion for Household International, Inc., and the maintenance of a minimum shareholder's equity of $1.5 billion for Household Finance Corporation ("HFC"), a wholly-owned subsidiary of Household. It is expected, however, that the HFC covenant will be modified in 1999 to reflect the new size of HFC as a result of the merger with Beneficial. Maturities of senior and senior subordinated debt were:
In millions. At December 31, 1998 --------------------------------------------------------------------------- 1999 $ 6,808.6 2000 4,289.5 2001 4,731.3 2002 2,830.8 2003 3,552.7 Thereafter 8,225.7 --------------------------------------------------------------------------- Total $30,438.6 ===========================================================================
9. Derivative Financial Instruments and Other Financial Instruments with Off- Balance Sheet Risk In the normal course of business and in connection with our asset/liability management program, we enter into various transactions involving derivative and other off-balance sheet financial instruments. These instruments primarily are used to manage our exposure to fluctuations in interest rates and foreign exchange rates. We do not serve as a financial intermediary to make markets in any derivative financial instruments. For further information on our strategies for managing interest rate and foreign exchange rate risk, see the Risk Management section within the Management's Discussion and Analysis of Financial Condition and Results of Operations. The financial instruments used by us include interest rate contracts and foreign exchange rate contracts and have varying degrees of credit risk and/or market risk. Credit Risk Credit risk is the possibility that a loss may occur because the counterparty to a transaction fails to perform according to the terms of the contract. Our exposure to credit loss related to interest rate swaps, cap and floor transactions, forward and futures contracts and options is the amount of uncollected interest or premium related to these instruments. These interest rate related instruments are generally expressed in terms of notional principal or contract amounts which are much larger than the amounts potentially at risk for nonpayment by counterparties. We control the credit risk of our off-balance sheet financial instruments through established credit approvals, risk control limits and ongoing monitoring procedures. We have never experienced nonperformance by any derivative instrument counterparty. Market Risk Market risk is the possibility that a change in interest rates or foreign exchange rates will cause a financial instrument to decrease in value or become more costly to settle. We mitigate this risk by establishing limits for positions and other controls. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 59 1998 Annual Report Interest Rate and Foreign Exchange Contracts The following table summarizes the activity in interest rate and foreign exchange contracts for 1998, 1997 and 1996: - -------------------------------------------------------------------------------- Hedging/Synthetic Alteration Instruments
Exchange Traded -------------------------------------------- ---------------------- Interest Rate Futures Contracts Options ---------------------- ------------------- Interest Currency In millions. Purchased Sold Purchased Written Rate Swaps Swaps - ------------------------------------------------------------------------------------------------------- 1996 Notional amount, 1995 $ 350.0 $ (250.0) - - $10,865.1 $1,080.4 New contracts 6,611.9 (4,202.9) $ 440.0 $(440.0) 5,379.8 1,494.5 Matured or expired contracts (1,471.0) 300.0 - - (3,779.8) (117.0) Terminated contracts - - - - (1,690.5) - In-substance maturities/1/ (4,152.9) 4,152.9 (440.0) 440.0 - - - ------------------------------------------------------------------------------------------------------- Notional amount, 1996 $ 1,338.0 - - - $10,774.6 $2,457.9 ======================================================================================================= Fair value, 1996/2/ - - - - $ 50.5 $ (156.1) - ------------------------------------------------------------------------------------------------------- 1997 Notional amount, 1996 $ 1,338.0 - - - $10,774.6 $2,457.9 New contracts 8,584.0 $(7,350.0) - - 3,854.0 988.5 Matured or expired contracts (2,020.0) 120.0 - - (3,168.3) (397.3) Terminated contracts - - - - (1,175.9) (205.4) In-substance maturities/1/ (7,030.0) 7,030.0 - - - - - ------------------------------------------------------------------------------------------------------- Notional amount, 1997 $ 872.0 $ (200.0) - - $10,284.4 $2,843.7 ======================================================================================================= Fair value, 1997/2/ $ - $ - - - $ 152.4 $ (126.0) - ------------------------------------------------------------------------------------------------------- 1998 Notional amount, 1997 $ 872.0 $ (200.0) - - $10,284.4 $2,843.7 New contracts 2,736.0 (2,281.0) $1,344.0 - 7,237.1 2,099.9 Matured or expired contracts (1,072.0) 15.0 (800.0) - (2,476.6) (282.7) Terminated contracts - - - - (1,329.3) (254.6) In-substance maturities/1/ (2,466.0) 2,466.0 - - - - - ------------------------------------------------------------------------------------------------------- Notional amount, 1998 $ 70.0 $ - $ 544.0 - $13,715.6 $4,406.3 ======================================================================================================= Fair value, 1998/2/ $ - $ - - - $ 68.9 $ 159.5 - -------------------------------------------------------------------------------------------------------
Non-Exchange Traded --------------------------------------------------------- Foreign Exchange Interest Rate Rate Contracts Forward Contracts Other Risk --------------------- --------------------- Management In millions. Purchased Sold Purchased Sold Instruments - ------------------------------------------------------------------------------------------- 1996 Notional amount, 1995 $ 424.5 $(1,205.2) $ 727.0 $ (93.1) $ 442.9 New contracts 5,723.6 (6,150.0) 3,641.8 (1,036.0) 2,242.2 Matured or expired contracts (894.1) 1,319.1 (2,636.9) 859.9 (8.9) Terminated contracts (391.6) 391.6 - - - In-substance maturities/1/ (4,692.7) 4,692.7 - - - - ------------------------------------------------------------------------------------------- Notional amount, 1996 $ 169.7 $ (951.8) $ 1,731.9 $ (269.2) $ 2,676.2 =========================================================================================== Fair value, 1996/2/ $ (.1) $ (57.0) $ (1.2) $ .2 $ 24.6 - ------------------------------------------------------------------------------------------- 1997 Notional amount, 1996 $ 169.7 $ (951.8) $ 1,731.9 $ (269.2) $ 2,676.2 New contracts 4,256.6 (4,548.5) 6,055.8 (1,326.3) 372.4 Matured or expired contracts (652.6) 843.4 (4,477.7) 1,489.5 (495.9) Terminated contracts (95.6) 95.6 - - (85.3) In-substance maturities/1/ (3,242.2) 3,242.2 - - - - ------------------------------------------------------------------------------------------- Notional amount, 1997 $ 435.9 $(1,319.1) $ 3,310.0 $ (106.0) $ 2,467.4 =========================================================================================== Fair value, 1997/2/ $ 4.5 $ (6.4) $ 1.7 $ - $ 11.3 - ------------------------------------------------------------------------------------------- 1998 Notional amount, 1997 $ 435.9 $(1,319.1) $ 3,310.0 $ (106.0) $ 2,467.4 New contracts 5,869.9 (6,546.5) 3,549.8 (1,199.6) 883.1 Matured or expired contracts (1,450.4) 1,770.1 (4,458.1) 1,069.7 (306.9) Terminated contracts (307.6) 307.6 (139.8) 148.9 (5.8) In-substance maturities/1/ (4,538.0) 4,538.0 - - - - ------------------------------------------------------------------------------------------- Notional amount, 1998 $ 9.8 $(1,249.9) $ 2,261.9 $ (87.0) $ 3,037.8 =========================================================================================== Fair value, 1998/2/ $ (.2) $ 2.1 $ (6.2) $ - $ 2.8 - -------------------------------------------------------------------------------------------
/1/Represent contracts terminated as the market execution technique of closing the transaction either (a) just prior to maturity to avoid delivery of the underlying instrument, or (b) at the maturity of the underlying items being hedged. /2/(Bracketed) unbracketed amounts represent amounts to be (paid) received by us had these positions been closed out at the respective balance sheet date. Bracketed amounts do not necessarily represent risk of loss for hedging instruments, as the fair value of the hedging instrument and the items being hedged must be evaluated together. See Note 13, "Fair Value of Financial Instruments," for further discussion of the relationship between the fair value of our assets, liabilities and off-balance sheet financial instruments. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 60 1998 Annual Report Notes to Consolidated Financial Statements (continued) We operate in three functional currencies: the U.S. dollar, the British pound and the Canadian dollar. Of the above instruments, the U.S. dollar is the functional currency for exchange traded interest rate futures and options. The remaining instruments are restated in U.S. dollars by country as follows:
Foreign Exchange Interest Rate Interest Rate Contracts Forward Contracts Other Risk Rate Currency --------------------- --------------------- Management In millions. Swaps Swaps Purchased Sold Purchased Sold Instruments -------------------------------------------------------------------------------------------------------------- 1996 United States $ 9,519.5 $1,128.5 $169.7 $ (951.8) - - $1,350.0 Canada 518.1 450.1 - - $ 472.1 $(252.2) 135.0 United Kingdom 737.0 879.3 - - 1,259.8 (17.0) 1,191.2 -------------------------------------------------------------------------------------------------------------- $10,774.6 $2,457.9 $169.7 $ (951.8) $1,731.9 $(269.2) $2,676.2 ============================================================================================================== 1997 United States $ 8,883.5 $1,762.1 $435.9 $(1,319.1) - - $1,350.0 Canada 361.6 427.3 - - $ 447.5 $(106.0) 7.0 United Kingdom 1,039.3 654.3 - - 2,862.5 - 1,110.4 -------------------------------------------------------------------------------------------------------------- $10,284.4 $2,843.7 $435.9 $(1,319.1) $3,310.0 $(106.0) $2,467.4 ============================================================================================================== 1998 United States $12,158.4 $3,052.7 $ 6.5 $(1,249.9) - - $2,073.8 Canada 287.3 334.7 3.3 - $ 344.6 $ (45.5) 29.3 United Kingdom 1,269.9 1,018.9 - - 1,917.3 (41.5) 934.7 -------------------------------------------------------------------------------------------------------------- $13,715.6 $4,406.3 $ 9.8 $(1,249.9) $2,261.9 $ (87.0) $3,037.8 ==============================================================================================================
Interest rate swaps are contractual agreements between two counterparties for the exchange of periodic interest payments generally based on a notional principal amount and agreed-upon fixed or floating rates. We primarily enter into interest rate swap transactions to synthetically alter balance sheet items. These transactions are specifically designated to a particular asset/liability, off-balance sheet item or anticipated transaction of a similar characteristic. Specific assets or liabilities may consist of groups of individually small dollar homogeneous assets or liabilities of similar economic characteristics. Credit and market risk exists with respect to these instruments. The following table reflects the items so altered at December 31, 1998:
In millions. -------------------------------------------------------------------------------------------------------------- Investment securities $ 90.3 Receivables: Home equity 5,015.0 MasterCard/Visa 100.0 Private label 31.9 Other unsecured 17.9 -------------------------------------------------------------------------------------------------------------- Total owned receivables 5,164.8 Commercial paper, bank and other borrowings 2,586.6 Senior and senior subordinated debt 5,871.6 Receivables serviced with limited recourse 2.3 -------------------------------------------------------------------------------------------------------------- Total items synthetically altered with interest rate swaps $13,715.6 ==============================================================================================================
In all instances, the notional amount is not greater than the carrying value of the related asset/liability or off-balance sheet item. We manage our exposure to interest rate risk primarily through the use of interest rate swaps. These swaps synthetically alter the interest rate risk inherent in balance sheet assets, liabilities or off-balance sheet items. The majority of our interest rate swaps are used to convert floating rate assets to fixed rate, fixed rate debt to floating rate, floating rate assets or debt from one floating rate index to another, fixed rate assets to a floating rate, or floating rate debt to fixed rate. Interest rate swaps also are used to synthetically alter interest rate characteristics on certain receivables that are sold and serviced with limited recourse. These off-balance sheet items expose us to the same interest rate risk as on- balance sheet items. Interest rate swaps are used to synthetically alter the Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 61 1998 Annual Report interest rate provisions of the securitization transaction whereby the underlying receivables pay a fixed (floating) rate and the pass-through rate to the investor is floating (fixed). We also have entered into currency swaps to convert both principal and interest payments on debt issued from one currency to the appropriate functional currency. The following table summarizes the maturities and related weighted average receive/pay rates of interest rate swaps outstanding at December 31, 1998:
All dollar amounts are stated in millions. 1999 2000 2001 2002 2003 2004 Thereafter Total ------------------------------------------------------------------------------------------------------------------------ Pay a fixed rate/receive a floating rate: Notional value $ 882.7 $1,863.1 $3,160.8 $765.6 $1,580.8 - - $ 8,253.0 Weighted average receive rate 5.79% 5.72% 5.59% 5.82% 5.58% - - 5.66% Weighted average pay rate 6.72 6.32 5.92 6.25 6.01 - - 6.15 ------------------------------------------------------------------------------------------------------------------------ Pay a floating rate/receive a fixed rate: Notional value $ 353.6 $ 211.5 $ 342.1 $149.8 $ 150.0 $13.9 $1,738.0 $ 2,958.9 Weighted average receive rate 6.79% 6.62% 6.59% 6.39% 6.38% 6.57% 7.03% 6.85% Weighted average pay rate 5.59 5.31 5.41 5.31 5.52 5.56 5.43 5.44 ------------------------------------------------------------------------------------------------------------------------ Pay a floating rate/receive a different floating rate: Notional value $1,593.0 $ 470.7 430.0 $ 10.0 - - - $ 2,503.7 Weighted average receive rate 5.36% 5.15% 5.18% 6.45% - - - 5.30% Weighted average pay rate 5.31 5.43 5.39 5.28 - - - 5.35 ------------------------------------------------------------------------------------------------------------------------ Total notional value $2,829.3 $2,545.3 $3,932.9 $ 925.4 $1,730.8 $13.9 $1,738.0 $13,715.6 ======================================================================================================================== Total weighted average rates on swaps: Receive rate 5.68% 5.69% 5.63% 5.92% 5.65% 6.57% 7.03% 5.85% ------------------------------------------------------------------------------------------------------------------------ Pay rate 5.79 6.08 5.82 6.09 5.96 5.56 5.43 5.85 ------------------------------------------------------------------------------------------------------------------------
The floating rates paid or received by us are based on spot rates from independent market sources for the index contained in each interest rate swap contract, which generally are based on either 1-, 3- or 6-month LIBOR. These current floating rates are different than the floating rates in effect when the contracts were initiated. Changes in spot rates impact the variable rate information disclosed above. However, these changes in spot rates also impact the interest rate on the underlying assets or liabilities. Hedging/synthetic alteration instruments are used by us to manage the volatility of net interest margin resulting from changes in interest rates on the underlying hedged/synthetically altered items. Owned net interest margin would have declined by 7, 9 and 14 basis points in 1998, 1997 and 1996, respectively, had these instruments not been utilized. Forwards and futures are agreements between two parties, committing one to sell and the other to buy a specific quantity of an instrument on some future date. The parties agree to buy or sell at a specified price in the future, and their profit or loss is determined by the difference between the arranged price and the level of the spot price when the contract is settled. We have both interest rate and foreign exchange rate forward contracts and interest rate futures contracts. Foreign exchange contracts are utilized by us to reduce our exposure to foreign currency exchange risk. Interest rate forward and futures contracts are used to hedge resets of interest rates on our floating rate assets and liabilities. Our exposure to credit risk for futures is limited, as these contracts are traded on organized exchanges. Each day, changes in contract values are settled in cash. In contrast, forward contracts have credit risk relating to the performance of the counterparty. These instruments also are subject to market risk. Cash requirements for forward contracts include the receipt or payment of cash upon the sale or purchase of the instrument. Purchased options grant the purchaser the right, but not the obligation, to either purchase or sell a financial instrument at a specified price within a specified period. The seller of the option has written a contract which creates an obligation to either sell or purchase the financial instrument at the agreed-upon price if, and when, the purchaser exercises the option. Other risk management instruments consist of caps and floors. Caps and floors written expose us to market risk but not to credit risk. Market risk associated with caps and floors purchased is limited to the premium paid which is recorded on the balance sheets in other assets. Deferred gains of $56.9 and $41.8 million and deferred losses of $1.5 and $4.1 million from hedging/synthetic alteration instruments were recorded on the balance sheets at December 31, 1998 and 1997, respectively. The weighted average amortization period associated with the deferred gains was 5.0 and 5.1 years at December 31, 1998 and 1997, respectively. The weighted average amortization period for the deferred losses was .5 and 1.3 years at December 31, 1998 and 1997, respectively. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 62 1998 Annual Report Notes To Consolidated Financial Statements (continued) At December 31, 1998 and 1997, the accrued interest, unamortized premium and other assets recorded for agreements which would be written off should all related counterparties fail to meet the terms of their contracts was $33.6 and $65.4 million, respectively. Concentrations of Credit Risk A concentration of credit risk is defined as a significant credit exposure with an individual or group engaged in similar activities or affected similarly by economic conditions. Because we primarily lend to consumers, we do not have receivables from any industry group that equal or exceed 10 percent of total managed receivables at December 31, 1998 and 1997. We lend nationwide, with the following geographic areas comprising more than 10 percent of total managed domestic receivables at December 31, 1998: California--19 percent; Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)--21 percent; Middle Atlantic (DE, DC, MD, NJ, PA, VA, WV)--15 percent; Northeast (CT, ME, MA, NH, NY, RI, VT)--12 percent; and Southeast (AL, FL, GA, KY, MS, NC, SC, TN)--15 percent. 10. Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts In March 1998 Household Capital Trust IV ("HCT IV"), a wholly-owned subsidiary of Household, issued 8 million 7.25 percent Trust Preferred Securities ("preferred securities") at $25 per preferred security. The sole asset of HCT IV is $206.2 million of 7.25 percent Junior Subordinated Deferrable Interest Notes issued by Household. The junior subordinated notes held by HCT IV mature on December 31, 2037 and are redeemable by Household in whole or in part beginning on March 19, 2003, at which time the HCT IV preferred securities are callable at par ($25 per preferred security) plus accrued and unpaid dividends. Net proceeds from the issuance of preferred securities were used for general corporate purposes. In June 1996 Household Capital Trust II ("HCT II"), a wholly-owned subsidiary of Household, issued 4 million 8.70 percent preferred securities at $25 per preferred security. The sole asset of HCT II is $103.1 million of 8.70 percent Junior Subordinated Deferrable Interest Notes issued by Household. The junior subordinated notes held by HCT II mature on June 30, 2036 and are redeemable by Household in whole or in part beginning on June 30, 2001, at which time the HCT II preferred securities are callable at par ($25 per preferred security) plus accrued and unpaid dividends. In June 1995 Household Capital Trust I ("HCT I"), a wholly-owned subsidiary of Household, issued 3 million 8.25 percent preferred securities at $25 per preferred security. The sole asset of HCT I is $77.3 million of 8.25 percent Junior Subordinated Deferrable Interest Notes issued by Household. The junior subordinated notes held by HCT I mature on June 30, 2025 and are redeemable by Household in whole or in part beginning on June 30, 2000, at which time the HCT I preferred securities are callable at par ($25 per preferred security) plus accrued and unpaid dividends. HCT I may elect to extend the maturity of the preferred securities to June 30, 2044. The obligations of Household with respect to the junior subordinated notes, when considered together with certain undertakings of Household with respect to HCT I, HCT II and HCT IV, constitute full and unconditional guarantees by Household of HCT I's, HCT II's and HCT IV's obligations under the respective preferred securities. The preferred securities are classified in our balance sheets as company obligated mandatorily redeemable preferred securities of subsidiary trusts (representing the minority interest in the trusts) at their face and redemption amount of $375 million at December 31, 1998 and $175 million at December 31, 1997. The preferred securities have a liquidation value of $25 per preferred security. Dividends on the preferred securities are cumulative, payable quarterly in arrears and are deferrable at Household's option for up to five years from date of issuance. Household cannot pay dividends on its preferred and common stocks during such deferments. Dividends on the preferred securities have been classified as interest expense in the statements of income. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 63 1998 Annual Report 11. Preferred Stock
All dollar amounts are stated in millions. At December 31 1998 1997 --------------------------------------------------------------------------------------------------- $4.30 Cumulative Preferred Stock, 836,585 shares $ 83.6 $ 83.7 $4.50 Cumulative Preferred Stock, 103,976 shares 10.4 10.4 5.00% Cumulative Preferred Stock, 407,718 shares 20.4 20.4 8.25% Cumulative Preferred Stock, Series 1992-A, 2,000,000 depositary shares/1/ 50.0 50.0 7.35% Cumulative Preferred Stock, Series 1993-A, 4,000,000 depositary shares/1/ -- 100.0 --------------------------------------------------------------------------------------------------- Total preferred stock $164.4 $264.5 ===================================================================================================
/1/Depositary share represents 1/40 share of preferred stock. Dividends on the $4.30 preferred stock are cumulative and payable semiannually. We may, at our option, redeem in whole or in part the $4.30 preferred stock for $100 per share plus accrued and unpaid dividends. This stock has a liquidation value of $100 per share plus accrued and unpaid dividends in the event of an involuntary liquidation or $100 in the event of a voluntary liquidation. Dividends on the $4.50 preferred stock are cumulative and payable semiannually. We may, at our option, redeem in whole or in part the $4.50 preferred stock for $103 per share plus accrued and unpaid dividends. This stock has a liquidation value of $100 per share. Dividends on the 5.00 percent preferred stock are cumulative and payable semiannually. We may, at our option, redeem in whole or in part the 5.00 percent preferred stock for $50 per share plus accrued and unpaid dividends. This stock has a liquidation value of $50 per share. Dividends on the 8.25 percent preferred stock, Series 1992-A, are cumulative and payable quarterly. We may, at our option, redeem in whole or in part the 8.25 percent preferred stock, Series 1992-A, on any date after October 15, 2002 for $25 per depositary share plus accrued and unpaid dividends. This stock has a liquidation value of $1,000 per share. Holders of all issues of preferred stock are entitled to payment before any capital distribution is made to common shareholders. Except when dividends payable to holders of the $4.30, $4.50 and 5.00 percent Cumulative Preferred Stock are in arrears as described below, such holders are entitled to one vote for each share held. Other than as described below, holders of the 8.25 percent Cumulative Preferred Stock have no voting rights. However, holders of each issue of preferred shares will be entitled to vote as a separate class to elect two directors if the equivalent of three or more semiannual dividends shall be in arrears, until the dividends in arrears are paid in full. In October 1998, we redeemed, at par, all outstanding shares of our 7.35 percent Cumulative Preferred Stock, Series 1993-A, for $25 per depositary share, plus accrued and unpaid dividends. Household's Board of Directors has adopted a resolution creating an Offering Committee of the Board with the power to authorize the issuance and sale of one or more series of preferred stock. The Offering Committee has the authority to determine the particular designations, powers, preferences and relative, participating, optional or other special rights (other than voting rights which shall be fixed by the Board of Directors) and qualifications, limitations or restrictions of such issuance. At December 31, 1998, up to 2.6 million shares of preferred stock were authorized for issuance. 12. Junior Preferred Share Purchase Rights In 1996, Household issued one preferred share purchase right (a "Right") for each outstanding share of common stock of the company. Under certain conditions, each Right may be exercised to purchase one three-thousandth of a share of a new series of junior participating preferred stock at an exercise price of $100 per one three-thousandth of a share, subject to further adjustment. The Rights may be exercised only after the earlier of: (a) a public announcement that a party or an associated group acquired 15 percent or more of Household's common stock and (b) ten business days (or later date as determined by the Board of Directors of Household) after a party or an associated group initiates or announces its intention to make an offer to acquire 15 percent or more of Household's common stock. The Rights, which cannot vote or receive dividends, expire on July 31, 2006 and may be redeemed by Household at a price of $.0033 per Right at any time prior to expiration or acquisition of 15 percent of Household's common stock. 13. Fair Value of Financial Instruments We have estimated the fair value of our financial instruments in accordance with Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("FAS No. 107"). Fair Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 64 1998 Annual Report Notes to Consolidated Financial Statements (continued) value estimates, methods and assumptions set forth below for our financial instruments are made solely to comply with the requirements of FAS No. 107 and should be read in conjunction with the financial statements and notes in this Annual Report. For a significant portion of our financial instruments, fair values for items lacking a quoted market price were estimated by discounting estimated future cash flows at estimated current market discount rates. Assumptions used to estimate future cash flows are consistent with management's assessments regarding ultimate collectibility of assets and related interest and with estimates of product lives and repricing characteristics used in our asset/liability management process. All assumptions are based on historical experience adjusted for future expectations. Assumptions used to determine fair values for financial instruments for which no active market exists are inherently judgmental, and changes in these assumptions could significantly affect fair value calculations. As required under generally accepted accounting principles, a number of other assets recorded on the balance sheets (such as acquired credit card relationships) and other intangible assets not recorded on the balance sheets (such as the value of consumer lending relationships for originated receivables and the franchise values of our business units) are not considered financial instruments and, accordingly, are not valued for purposes of this disclosure. We believe there is substantial value associated with these assets based on current market conditions and historical experience. Accordingly, the estimated fair value of financial instruments, as disclosed, does not fully represent the entire value, nor the changes in the entire value, of the company. The following is a summary of the carrying value and estimated fair value of our financial instruments:
1998 1997 ------------------------------------ ------------------------------------- In millions. Carrying Estimated Carrying Estimated At December 31 Value Fair Value Difference Value Fair Value Difference -------------------------------------------------------------------------------------------------------------------- Cash $ 457.4 $ 457.4 -- $ 534.3 $ 534.3 -- Investment securities 3,202.1 3,202.1 -- 2,898.6 2,898.6 -- Receivables 43,948.1 44,415.2 $ 467.1 38,337.6 38,576.0 $ 238.4 -------------------------------------------------------------------------------------------------------------------- Subtotal 47,607.6 48,074.7 467.1 41,770.5 42,008.9 238.4 -------------------------------------------------------------------------------------------------------------------- Deposits (2,105.0) (2,113.0) (8.0) (2,344.2) (2,351.0) (6.8) Commercial paper, bank and other borrowings (9,917.9) (9,917.9) -- (10,666.1) (10,666.1) -- Senior and senior subordinated debt (30,438.6) (31,139.9) (701.3) (23,736.2) (24,124.9) (388.7) Insurance reserves (1,371.7) (1,726.2) (354.5) (1,382.6) (1,611.1) (228.5) -------------------------------------------------------------------------------------------------------------------- Subtotal (43,833.2) (44,897.0) (1,063.8) (38,129.1) (38,753.1) (624.0) -------------------------------------------------------------------------------------------------------------------- Interest rate and foreign exchange contracts 15.9 226.9 211.0 40.7 37.5 (3.2) Commitments to extend credit and guarantees -- 55.3 55.3 -- 50.1 50.1 -------------------------------------------------------------------------------------------------------------------- Subtotal 15.9 282.2 266.3 40.7 87.6 46.9 -------------------------------------------------------------------------------------------------------------------- Total $ 3,790.3 $ 3,459.9 $ (330.4) $ 3,682.1 $ 3,343.4 $(338.7) ====================================================================================================================
The following methods and assumptions were used to estimate the fair value of our financial instruments: Cash: The carrying value approximates fair value for this instrument due to its liquid nature. Investment securities: Investment securities are classified as available-for-sale and are carried at fair value on the balance sheets. Receivables: The fair value of adjustable rate consumer receivables was determined to approximate existing carrying value because interest rates on these receivables adjust with changing market interest rates. The fair value of fixed rate consumer receivables was estimated by discounting future expected cash flows at interest rates approximating those offered by us on such products at the respective valuation dates. This approach to estimating fair value for fixed rate receivables results in a disclosed fair value that is less than amounts we believe could be currently realizable on a sale of these receivables. These receivables are relatively insensitive to changes in overall market interest rates and, therefore, have additional value compared to alternative uses of funds. The fair value of commercial receivables was determined by discounting estimated future cash flows at estimated market interest rates. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 65 1998 Annual Report The fair value of consumer receivables also included an estimate, on a present value basis, of cash flows associated with securitizations of certain home equity, auto finance, MasterCard and Visa, private label and other unsecured receivables. Deposits: The fair value of our savings and demand accounts equaled the carrying amount as stipulated in FAS No. 107. The fair value of fixed rate time certificates was estimated by discounting future expected cash flows at interest rates offered by us on such products at the respective valuation dates. Commercial paper, bank and other borrowings: The fair value of these instruments was determined to approximate existing carrying value because interest rates on these instruments adjust with changes in market interest rates due to their short-term maturity or repricing characteristics. Senior and senior subordinated debt: The estimated fair value of these instruments was computed by discounting future expected cash flows at interest rates offered for similar types of debt instruments. Insurance reserves: The fair value of insurance reserves for periodic payment annuities was estimated by discounting future expected cash flows at estimated market interest rates at December 31, 1998 and 1997. The fair value of other insurance reserves is not required to be determined in accordance with FAS No. 107. Interest rate and foreign exchange contracts: Where practical, quoted market prices were used to determine fair value of these instruments. For non-exchange traded contracts, fair value was determined through the use of accepted and established valuation methods (including input from independent third parties) which consider the terms of the contracts and market expectations on the valuation date for forward interest rates (for interest rate contracts) or forward foreign currency exchange rates (for foreign exchange contracts). See Note 9, "Derivative Financial Instruments and Other Financial Instruments with Off-Balance Sheet Risk," for a discussion of the nature of these items. Commitments to extend credit and guarantees: These commitments were valued by considering our relationship with the counterparty, the creditworthiness of the counterparty and the difference between committed and current interest rates. 14. Leases We lease certain offices, buildings and equipment for periods of up to 25 years with various renewal options. The office space leases generally require us to pay certain operating expenses. Net rental expense under operating leases was $118.8, $135.5 and $122.5 million for 1998, 1997 and 1996, respectively. In connection with our merger with Beneficial, we have a lease obligation on a facility located in Peapack, New Jersey expiring in 2010. As of December 1, 1998, this facility was subleased through the end of the lease period with the sublessor assuming our future rental obligations. Future net minimum lease commitments under noncancelable operating lease arrangements were:
Minimum Minimum In millions. Rental Sublease At December 31, 1998 Payments Income Net - -------------------------------------------------------------------------------- 1999 $124.9 $ 29.3 $ 95.6 2000 110.7 28.6 82.1 2001 93.4 28.3 65.1 2002 79.5 28.3 51.2 2003 70.3 27.9 42.4 Thereafter 330.5 147.3 183.2 - -------------------------------------------------------------------------------- Net minimum lease commitments $809.3 $289.7 $519.6 ================================================================================
15. Incentive Compensation and Stock Option Plans Household's executive compensation plans provide for issuance of nonqualified stock options and restricted stock rights ("RSRs"). Stock options permit the holder to purchase, under certain limitations, Household's common stock at a price not less than 100 percent of the market value of the stock on the date the option is granted. Employee stock options generally vest equally over four years and expire 10 years from the date of grant. Beginning in 1997, non-employee directors annually receive an option to purchase 7,500 shares of Household's common stock at the stock's fair market value the day the option is granted. The first option grant was made in November 1997. Prior to this, directors received an annual grant of 7,500 options each May ending with the May 1997 grant. Director options have a term of ten years and one day, fully vest six months from the date granted, and once vested are exercisable at any time during the option term. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 66 1998 Annual Report Notes to Consolidated Financial Statements (continued) Common stock data for the stock option plans is summarized as follows:
1998 1997 1996 -------------------------- --------------------------- --------------------------- Price per Price per Price per Shares Share Shares Share Shares Share ------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 30,166,477 $19.90 23,779,041 $14.81 23,480,063 $12.13 Granted/1/ 2,380,000 38.01 11,362,485 29.03 4,736,971 24.04 Exercised (9,811,659) 20.89 (3,081,428) 11.35 (3,926,067) 10.11 Expired or canceled (1,134,249) 25.67 (1,893,621) 23.49 (511,926) 13.43 ------------------------------------------------------------------------------------------------------------------------------- Outstanding at the end of year 21,600,569 $21.14 30,166,477 $19.90 23,779,041 $14.81 =============================================================================================================================== Exercisable at end of year 16,806,843 $17.39 17,870,085 $17.24 11,254,478 $11.09 =============================================================================================================================== Weighted average fair value of options granted $13.43 $10.82 $10.55 ===============================================================================================================================
/1/Beneficial's stock option grants for 1997 and 1996 were 9,297,318 and 3,196,471 shares, respectively. The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable --------------------------------------------------------- -------------------------------------- Number Number Range of Outstanding at Weighted Average Weighted Average Outstanding at Weighted Average Exercise Prices December 31, 1998 Remaining Life Exercise Price December 31, 1998 Exercise Price ------------------------------------------------------------------------------------------------------------------------------- $5.02-$17.17 10,361,045 4.5 years $12.09 9,979,070 $12.02 $19.88-$51.38 11,239,524 7.4 years $29.49 6,827,773 $25.23 -------------------------------------------------------------------------------------------------------------------------------
RSRs entitle an employee to receive a stated number of shares of Household's common stock if the employee satisfies the conditions set by the Compensation Committee for the award. Household maintains an Employee Stock Purchase Plan (the "ESPP"). The ESPP provides a means for employees to purchase shares of Household's common stock at 85% of the lesser of its market price at the beginning or end of a one year subscription period. Beneficial previously maintained an Employee Stock Purchase Plan ("BESPP") whereby participants could elect to purchase stock subject to certain limitations. Employee stock purchases were eligible to be matched by Beneficial up to certain amounts and vest over a three year period. This plan was closed for contributions effective with the merger of Household and Beneficial. We account for options and shares issued under the ESPP in accordance with APB 25, pursuant to which no compensation cost has been recognized. Under the BESPP, compensation cost on matching contributions was recognized. Had compensation cost been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", our net income and earnings per share, on a pro forma basis, would have been as follows:
1998 1997 1996 In millions, except per share data. ---------------- ---------------- ---------------- Year ended December 31 Diluted Basic Diluted Basic Diluted Basic -------------------------------------------------------------------------------------------------- Earnings available to common shareholders: As Reported $509.1 $509.1 $923.3 $923.3 $797.7 $797.7 Pro Forma 452.6 452.6 902.9 902.9 789.6 789.6 Earnings per share: As Reported $ 1.03 $ 1.04 $ 1.93 $ 1.97 $ 1.73 $ 1.76 Pro Forma .92 .93 1.88 1.92 1.71 1.74 --------------------------------------------------------------------------------------------------
The compensation expense recognized in pro forma net income for 1998, 1997 and 1996 may not be representative of the effects on pro forma net income for future years. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 67 1998 Annual Report The fair value of each option granted was estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1998, 1997 and 1996 grants:
1998 1997 1996 - ------------------------------------------------------------------------------- Risk-free interest rate 4.66% 5.86% 6.03% Expected dividend yield 1.62 1.45 1.55 Expected life 5 years 5 years 5 years Expected volatility 37.7% 23.9% 28.2% - -------------------------------------------------------------------------------
The Black-Scholes model uses different assumptions that can significantly effect the fair value of the options. As a result, the derived fair value estimates cannot be substantiated by comparison to independent markets. 16. Employee Benefit Plans The company sponsors several defined benefit pension plans covering substantially all of its U.S. and non-U.S. employees. At December 31, 1998, plan assets included an investment in 3,776,421 shares of Household's common stock with a fair value of $149.6 million. Approximately $2.3 million in dividends were paid on shares held as plan assets in 1998. Pension income for defined benefit plans, primarily due to the overfunded status of the domestic plan, included the following components:
In millions. Year ended December 31 1998 1997 1996 --------------------------------------------------------------------------- Service cost-benefits earned during the period $(23.0) $(19.0) $(20.5) Interest cost on projected benefit obligation (39.8) (38.0) (38.5) Expected return on assets 75.4 72.6 68.6 Amortization of transition asset 12.1 13.2 13.2 Recognized gains and losses (1.7) (4.9) (3.5) --------------------------------------------------------------------------- Pension income $ 23.0 $ 23.9 $ 19.3 ===========================================================================
In September 1998, the Beneficial defined benefit plan was merged into the Household plan. Prior to 1998, each plan was separately valued based on the individual plan's underlying terms and asset mix. The range of assumptions used in determining the benefit obligation and pension income of the domestic defined benefit plans at December 31 are as follows:
1998 1997 1996 ------------------------------------------------------------------------------------------------------ Discount rate 7.0% 7.0% - 7.5% 7.5% Salary increase assumption 4.0% 4.0% - 4.5% 4.0% - 4.5% Expected long-term rate of return on plan assets 10.0% 9.0% - 10.0% 9.0% - 10.0% ------------------------------------------------------------------------------------------------------
A reconciliation of beginning and ending balances of the projected benefit obligation of the defined benefit pension plans is as follows:
In millions. Year ended December 31 1998 1997 --------------------------------------------------------------------------- Benefit obligation at beginning of year $546.7 $524.4 Service cost 23.0 19.0 Interest cost 39.8 38.0 Actuarial gains/losses 15.7 18.8 Foreign currency exchange rate changes (2.6) (2.0) Plan amendments 3.2 -- Benefits paid (58.6) (51.5) --------------------------------------------------------------------------- Benefit obligation at end of year $567.2 $546.7 ===========================================================================
Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 68 1998 Annual Report Notes to Consolidated Financial Statements (continued) A reconciliation of beginning and ending balances of the fair value of plan assets associated with the defined benefit pension plans is as follows:
In millions. Year ended December 31 1998 1997 ----------------------------------------------------------------------- Fair value of plan assets at beginning of year $824.1 $769.7 Actual return on plan assets 41.8 98.5 Foreign currency exchange rate changes (2.9) (2.2) Employer contributions 7.9 9.6 Transfer of plan assets 9.5 -- Benefits paid (58.6) (51.5) ----------------------------------------------------------------------- Fair value of plan assets at end of year $821.8 $824.1 =======================================================================
The funded status of defined benefit pension plans was as follows:
In millions. Year ended December 31 1998 1997 ----------------------------------------------------------- Funded status $254.6 $277.4 Unrecognized net actuarial loss 89.0 49.5 Unamortized prior service cost (5.9) 1.3 Unamortized assets (.2) (11.8) ----------------------------------------------------------- Prepaid pension cost $337.5 $316.4 ===========================================================
We also sponsor various 401(k) savings plans and profit sharing plans for employees meeting certain eligibility requirements. Under the Household plan, each participant's contribution is matched by the company up to a maximum of 6 percent of the participant's compensation. The Beneficial 401(k) savings plan provided for annual employer contributions up to 2.5% of each eligible employee's annual compensation. Upon completion of the merger, participants of the Beneficial plan could elect to participate in Household's plan. In December 1998, the Beneficial 401(k) plan was merged into the existing Household plan. For 1998, 1997 and 1996, total expense for these plans was $32.2, $23.9 and $22.1 million, respectively. We have several plans which provide medical, dental and life insurance benefits to retirees and eligible dependents. These plans are funded on a pay-as-you-go basis and cover substantially all employees who meet certain age and vested service requirements. We have instituted dollar limits on our payments under the plans to control the cost of future medical benefits. The net postretirement benefit cost included the following:
In millions. Year ended December 31 1998 1997 1996 ------------------------------------------------------------------------------------ Service cost-benefits earned during the period $ (4.6) $ (4.8) $ (4.8) Interest cost on accumulated postretirement benefit obligation (12.7) (12.1) (11.5) Amortization of transition obligation (6.3) (6.3) (6.3) Amortization of prior service cost 1.2 .8 .8 Recognized actuarial gain 1.7 2.7 2.5 ------------------------------------------------------------------------------------ Net periodic postretirement benefit cost $(20.7) $(19.7) $(19.3) ====================================================================================
Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 69 1998 Annual Report A reconciliation of the beginning and ending balances of the accumulated postretirement benefit obligation is as follows:
In millions. Year ended December 31 1998 1997 ------------------------------------------------------------------- Benefit obligation at beginning of year $183.9 $166.0 Service cost 4.6 4.8 Interest cost 12.7 12.1 Actuarial losses 4.5 9.3 Plan amendments (17.6) -- Benefits paid (7.4) (8.3) ------------------------------------------------------------------- Benefit obligation at end of year $180.7 $183.9 ===================================================================
A reconciliation of the funded status for postretirement benefit plans is as follows:
In millions. At December 31 1998 1997 ------------------------------------------------------------------- Funded status $180.7 $183.9 Unamortized prior service cost 24.5 8.2 Unrecognized net actuarial gain 24.4 28.5 Unamortized transition obligation (88.0) (94.3) ------------------------------------------------------------------- Accrued postretirement benefit obligation $141.6 $126.3 ===================================================================
The range of assumptions used in determining the benefit obligation and cost of such plans at December 31 are as follows:
1998 1997 1996 ------------------------------------------------------------------------- Discount rate 7.0% 7.0% - 7.5% 7.5% Salary increase assumption 4.0% 4.0% - 4.5% 4.0% - 4.5% =========================================================================
A 9.4 percent annual rate of increase in the gross cost of covered health care benefits was assumed for 1999. This rate of increase is assumed to decline gradually to 4.2 percent in 2005. Upon completion of the merger, participants of the Beneficial plans became eligible to participate in Household's plans. Assumed health care cost trend rates have an effect on the amounts reported for health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects (in millions):
One Percent One Percent Increase Decrease -------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ (.7) $ .7 Effect on postretirement benefit obligation 7.7 (7.7) ============================================================================================
17. Income Taxes Total income taxes were allocated as follows:
In millions. Year ended December 31 1998 1997 1996 -------------------------------------------------------------------------------------- Provision for income taxes related to operations $428.6 $462.2 $461.2 Income taxes related to adjustments included in common shareholders' equity: Unrealized gain (loss) on investments, net 7.3 10.0 (63.5) Foreign currency translation adjustments .3 19.7 (23.8) Exercise of stock options (77.4) (21.1) (14.3) -------------------------------------------------------------------------------------- Total $358.8 $470.8 $359.6 ======================================================================================
Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 70 1998 Annual Report Notes to Consolidated Financial Statements (continued) Provisions for income taxes related to operations were:
In millions. Year ended December 31 1998 1997 1996 ---------------------------------------------------------- Current United States $122.5 $326.3 $ 522.4 Foreign 53.1 60.0 54.9 ---------------------------------------------------------- Total current 175.6 386.3 577.3 ---------------------------------------------------------- Deferred United States 239.2 66.8 (114.4) Foreign 13.8 9.1 (1.7) ---------------------------------------------------------- Total deferred 253.0 75.9 (116.1) ---------------------------------------------------------- Total income taxes $428.6 $462.2 $ 461.2 ==========================================================
The significant components of deferred income tax provisions attributable to income from operations were:
In millions. Year ended December 31 1998 1997 1996 ------------------------------------------------------------------------- Deferred income tax provision $246.7 $67.9 $ (90.3) Adjustment of valuation allowance (3.3) (4.7) (19.5) Change in operating loss carryforwards 9.6 12.7 (6.3) ------------------------------------------------------------------------- Deferred income tax provision $253.0 $75.9 $(116.1) -------------------------------------------------------------------------
Income before income taxes from foreign operations was $216.9, $143.2 and $166.3 million in 1998, 1997 and 1996, respectively. Effective tax rates are analyzed as follows:
Year ended December 31 1998 1997 1996 -------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% Increase (decrease) in rate resulting from: Nondeductible acquisition costs 12.2 -- -- State and local taxes, net of federal benefit 3.2 2.3 2.0 Capital losses-Germany -- (2.0) -- Leveraged lease tax benefits (4.0) (1.9) (1.1) Other (1.4) (.4) .1 -------------------------------------------------------------------------- Effective tax rate 45.0% 33.0% 36.0% ==========================================================================
Provision for U.S. income taxes had not been made at December 31, 1998 and 1997 on $217.8 and $160.7 million, respectively, of undistributed earnings of foreign subsidiaries. Determination of the amount of unrecognized deferred tax liability related to investments in foreign subsidiaries is not practicable. In addition, provision for U.S. income taxes had not been made at December 31, 1998 and 1997 on $80.1 million of undistributed earnings of life insurance subsidiaries accumulated as policyholders' surplus under tax laws in effect prior to 1984. If this amount was distributed, the additional income tax payable would be approximately $28.0 million. Our U.S. savings and loan subsidiary has credit loss reserves for tax purposes that arose in years beginning before December 31, 1987 in the amount of $55.3 million. The amount of deferred tax liability on the aforementioned credit loss reserves not recognized totaled $20.3 million at December 31, 1998. Because this amount would become taxable only in the event of certain circumstances which we do not expect to occur within the foreseeable future, no deferred tax liability has been established for this item. At December 31, 1998, we had net operating loss carryforwards for tax purposes of $25.4 million, of which $.3 million expire in 2001; $5.6 million expire in 2002; $6.1 million expire in 2003; $12.0 million expire in 2004; and $1.4 million expire in 2005. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 71 1998 Annual Report Temporary differences which gave rise to a significant portion of deferred tax assets and liabilities were as follows:
In millions. At December 31 1998 1997 ------------------------------------------------------------------------------------------------------------------- Deferred Tax Liabilities Receivables sold $ 632.0 $ 456.6 Leveraged lease transactions, net 301.0 312.7 Pension plan assets 135.6 123.1 Other 322.5 269.5 ------------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities $1,391.1 $1,161.9 ------------------------------------------------------------------------------------------------------------------- Deferred Tax Assets Credit loss reserves $ 908.0 $ 864.0 Other 315.0 368.5 ------------------------------------------------------------------------------------------------------------------- Total deferred tax assets 1,223.0 1,232.5 Valuation allowance - (3.3) ------------------------------------------------------------------------------------------------------------------- Total deferred tax assets net of valuation allowance 1,223.0 1,229.2 ------------------------------------------------------------------------------------------------------------------- Net deferred tax (asset) liability at end of year $ 168.1 $ (67.3) ===================================================================================================================
18. Earnings Per Common Share
1998 1997 1996 In millions, except per share data. ---------------- ---------------- ------------------- Year ended December 31 Diluted Basic Diluted Basic Diluted Basic ------------------------------------------------------------------------------------------------------------------- Earnings Net income $524.1 $524.1 $940.3 $940.3 $819.6 $819.6 Preferred dividends (15.0) (15.0) (17.0) (17.0) (21.9) (21.9) ------------------------------------------------------------------------------------------------------------------- Earnings available to common shareholders $509.1 $509.1 $923.3 $923.3 $797.7 $797.7 =================================================================================================================== Average Shares Common 487.2 487.2 470.2 470.2 454.6 454.6 Common equivalents 9.2 - 8.9 - 7.7 - ------------------------------------------------------------------------------------------------------------------- Total 496.4 487.2 479.1 470.2 462.3 454.6 =================================================================================================================== Earnings per common share $ 1.03 $ 1.04 $ 1.93 $ 1.97 $ 1.73 $ 1.76 ===================================================================================================================
19. Commitments And Contingent Liabilities In the ordinary course of business there are various legal proceedings pending against the company. Management believes the aggregate liabilities, if any, resulting from such actions would not have a material adverse effect on our consolidated financial position. However, as the ultimate resolution of these proceedings is influenced by factors that are outside of our control, it is reasonably possible our estimated liability under these proceedings may change. See Note 14 for discussion of lease commitments. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 72 1998 Annual Report Notes to Consolidated Financial Statements (continued) 20.Segment Reporting We adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS No. 131") in 1998. FAS No. 131 established standards for reporting information about operating segments, products and services and geographic areas in annual and interim financial statements. Our reportable operating segments are managed separately and are characterized by different middle- market consumer lending products, origination processes, and locations. We have three reportable segments: Consumer, which includes our branch- based consumer finance, private label and auto finance businesses; Credit Card, which includes our domestic MasterCard and Visa business; and International, which includes our United Kingdom and Canadian operations. The Consumer segment provides real estate secured, automobile secured and unsecured loans. Loans are offered with both revolving and closed-end terms and with fixed or variable interest rates. Loans are originated through branch locations, direct mail, telemarketing or independent merchants or automobile dealers. The Credit Card segment offers MasterCard and Visa credit cards throughout the United States primarily via strategic affinity and co-branding relationships. The International segment offers secured and unsecured lines of credit, and secured and unsecured closed-end loans primarily in the United Kingdom and Canada. In addition, the United Kingdom operation offers MasterCard and Visa credit cards. Credit insurance is also offered in the United Kingdom in connection with these products. The All Other caption includes our insurance, refund anticipation loan and commercial businesses, as well as our corporate and treasury activities, each of which falls below the quantitative threshold tests under FAS No. 131 for determining reportable segments. Our merger and integration related costs of $751 million after-tax, related to the Beneficial merger, were recorded in corporate. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intrasegment transactions have not been eliminated in accordance with FAS No. 131. We evaluate performance and allocate resources based on income from operations after income taxes and returns on equity and managed assets. We generally account for transactions between segments as if they were with third parties.
------------------------------------------------------------------------------------------------------------------------------- Reportable Segments Owned Basis In millions. Total Adjustments/ For the year ended December 31, Total Domestic Reconciling Consolidated 1998 Consumer Credit Card International All Other Totals Items Totals ------------------------------------------------------------------------------------------------------------------------------- Net interest margin and other revenues/7/ $ 3,485.7 $ 1,454.8 $ 746.5 $ 561.2 $ 6,248.2 $ (106.4)/1/ $ 6,141.8 Intersegment revenues 91.4 10.6 3.8 .6 106.4 (106.4)/1/ -- Provision for credit losses 860.3 406.0 167.2 11.7 1,445.2 71.6/2/ 1,516.8 Depreciation and amortization 72.6 136.4 17.9 81.2 308.1 -- 308.1 Income taxes (benefit) 519.6 96.6 57.8 (179.8) 494.2 (65.6)/3/ 428.6 Segment net income (loss) 833.5 140.8 153.7 (491.5)/4/ 636.5 (112.4) 524.1 Total segment assets 34,029.1 7,228.7 7,399.0 9,442.6 58,099.4 (5,206.7)/5/ 52,892.7 Total segment assets-managed 43,330.8 16,387.6 8,640.3 9,442.6 77,801.3 (5,206.7)/5/ 72,594.6 Expenditures for long-lived assets/8/ 21.3 2.8 31.4 79.6 135.1 -- 135.1 ------------------------------------------------------------------------------------------------------------------------------- Owned Basis In millions. Total Adjustments/ For the year ended December 31, Total Domestic Reconciling Consolidated 1997 Consumer Credit Card International All Other Totals Items Totals ------------------------------------------------------------------------------------------------------------------------------- Net interest margin and other revenues/7/ $ 3,088.6 $ 1,523.7 $ 812.6 $ 448.4 $ 5,873.3 $ (93.0)/1/ $ 5,780.3 Intersegment revenues 76.1 11.4 3.7 1.8 93.0 (93.0)/1/ -- Provision for credit losses 901.6 368.3 169.3 24.5 1,463.7 29.3/2/ 1,493.0 Depreciation and amortization 53.6 150.5 20.2 79.2 303.5 -- 303.5 Income taxes (benefit) 350.2 145.2 66.9 (54.9) 507.4 (45.2)/3/ 462.2 Segment net income (loss) 591.4 218.3 134.6/6/ 73.2 1,017.5 (77.2) 940.3 Total segment assets 26,610.6 7,316.5 7,617.6 10,020.8 51,565.5 (4,748.5)/5/ 46,817.0 Total segment assets-managed 37,877.8 19,392.2 8,753.2 10,020.8 76,044.0 (4,748.5)/5/ 71,295.5 Expenditures for long-lived assets/8/ 976.8 7.0 28.2 74.1 1,086.1 -- 1,086.1 -------------------------------------------------------------------------------------------------------------------------------
Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 73 1998 Annual Report
------------------------------------------------------------------------------------------------------------------------------ Reportable Segments (continued) Owned Basis In millions. Total Adjustments/ For the year ended December 31, Total Domestic Reconciling Consolidated 1996 Consumer Credit Card International All Other Totals Items Totals ------------------------------------------------------------------------------------------------------------------------------- Net interest margin and other revenues/7/ $ 2,631.0 $ 1,329.4 $ 705.5 $ 554.3 $ 5,220.2 $ (80.5)/1/ $ 5,139.7 Intersegment revenues 63.4 11.2 3.4 2.5 80.5 (80.5)/1/ -- Provision for credit losses 653.5 272.0 153.3 65.4 1,144.2 -- 1,144.2 Depreciation and amortization 49.8 151.0 19.4 69.9 290.1 -- 290.1 Income taxes (benefit) 310.7 124.0 51.6 4.6 490.9 (29.7)/3/ 461.2 Segment net income (loss) 540.2 185.6 100.6 44.0 870.4 (50.8) 819.6 Total segment assets 22,260.3 9,597.1 6,620.7 10,296.1 48,774.2 (3,442.2)/5/ 45,332.0 Total segment assets-managed 32,051.0 19,746.8 7,531.5 10,296.1 69,625.4 (3,442.2)/5/ 66,183.2 Expenditures for long-lived assets/8/ 45.7 20.5 29.1 64.4 159.7 -- 159.7 -------------------------------------------------------------------------------------------------------------------------------
/1/Eliminates intersegment revenues. /2/Eliminates bad debt recovery sales between operating segments. /3/Tax benefit associated with items comprising adjustments/reconciling items. /4/Includes merger and integration related costs of $751.0 million after- tax related to the Beneficial merger and the gain on the sale of Beneficial Canada of $118.5 million after-tax. /5/Eliminates investments in subsidiaries and intercompany borrowings. /6/Includes the nonrecurring charge of $27.8 million after-tax for the disposition of Beneficial Germany. /7/Net interest margin and other revenues, including intersegment revenues, net of policyholder benefits. /8/Includes goodwill associated with purchase business combinations and capital expenditures. Geographic Data The following is a summary of assets, revenues and income before income taxes of the company by material country:
Identifiable Assets Long-Lived Assets/1/ ----------------------------------- ------------------------------ In millions. 1998 1997 1996 1998 1997 1996 ------------------------------------------------------------------------------------------------ United States $45,387.5 $39,133.1 $38,630.7 $1,315.9 $1,388.1 $482.8 United Kingdom 6,284.8 5,071.3 4,086.5 71.5 66.8 65.6 Canada 1,040.0 2,142.6 2,163.5 2.3 3.5 3.8 Other 180.4 470.0 451.3 .6 6.1 5.8 ------------------------------------------------------------------------------------------------ Total $52,892.7 $46,817.0 $45,332.0 $1,390.3 $1,464.5 $558.0 ================================================================================================
/1/Represents properties and equipment, net of accumulated depreciation, and goodwill, net of accumulated amortization.
Revenues Income Before Income Taxes ---------------------------------- ---------------------------- In millions. 1998 1997 1996 1998 1997 1996 ------------------------------------------------------------------------------------------------ United States $7,712.4 $7,229.2 $6,753.4 $735.8 $1,219.2 $1,138.5 United Kingdom 931.7 760.6 630.4 168.7 146.2 108.8 Canada 211.8 339.8 328.1 28.7 39.2 39.0 Other 41.1 65.0 73.1 19.5 (2.1) (5.5) ------------------------------------------------------------------------------------------------ Total $8,897.0 $8,394.6 $7,785.0 $952.7 $1,402.5 $1,280.8 ================================================================================================
Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 75 1998 Annual Report Report of Independent Public Accountants To the Shareholders of Household International, Inc. We have audited the accompanying consolidated balance sheets of Household International, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in preferred stock and common shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of Household International Inc.'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 International, Inc. and subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Chicago, Illinois January 20, 1999 Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 76 1998 Annual Report Common and Preferred Stock Information Household International common stock is listed on the New York and Chicago stock exchanges. We also have unlisted trading privileges on the Boston, Pacific and Philadelphia stock exchanges. Call and put options are traded on the American Stock Exchange.
Dividends Declared -------------------------- Stock Ticker Symbol 1998 1997 Features Redemption Features - ------------------------------------------------------------------------------------------------------------------------------------ Common HI $ .60 $ .54 Quarterly dividend N/A rate increased to $.15 effective 4/15/98 - ------------------------------------------------------------------------------------------------------------------------------------ 5% Cumulative Preferred/1/ HI + PRM $1.25 N/A Nonconvertible Redeemable at our option - ------------------------------------------------------------------------------------------------------------------------------------ $4.50 Cumulative Preferred/1/ HI + PRN $2.25 N/A Nonconvertible Redeemable at our option - ------------------------------------------------------------------------------------------------------------------------------------ $4.30 Cumulative Preferred/1/ HI + PRO $1.15 N/A Nonconvertible Redeemable at our option - ------------------------------------------------------------------------------------------------------------------------------------ 8 1/4% Cumulative Preferred, Series 1992-A HI + PRZ $2.0625 $2.0625 Nonconvertible Cannot be redeemed Depositary Shares representing prior to 10/15/2002. 1/40 share of 8 1/4% Cumulative Redeemable at our Preferred Stock, Series 1992-A option after 10/15/2002 in whole or in part at $25.00 per depositary share plus accrued and unpaid dividends. - ------------------------------------------------------------------------------------------------------------------------------------
Net Shares Outstanding Shareholders of Record 1998 Market Price 1997 Market Price ------------------------- ---------------------- ------------------- ------------------- Stock 1998 1997 1998 1997 High Low High Low - ------------------------------------------------------------------------------------------------------------------------------------ Common 483,137,739 485,351,517 20,584 10,239 $53 11/16 $23 $43 1/3 $26 13/64 - ------------------------------------------------------------------------------------------------------------------------------------ 5% Cumulative Preferred/1/ 407,718 -- 1,329 -- 49 44 3/4 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ $4.50 Cumulative Preferred/1/ 103,976 -- 283 -- 87 1/2 83 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ $4.30 Cumulative Preferred/1/ 836,585 -- 380 -- 87 80 1/2 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 8 1/4% Cumulative Preferred, Series 1992-A 2,000,000 2,000,000 309 356 29 3/8 27 29 1/2 27 - ------------------------------------------------------------------------------------------------------------------------------------
/1/The 5%, $4.50 and $4.30 Cumulative Preferred Stock was issued by Household to replace Beneficial preferred stock outstanding at the time of the merger. The information presented for these preferred shares is for the period subsequent to the merger. Household International, Inc. and Subsidiaries ---------------------------------------------- Pg. 77 1998 Annual Report
Year ended December 31, unless otherwise indicated/1/ 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Market Value Share of Common Stock (High-Low prices on NYSE) First Quarter 47 51/64-37 45/64 36 5/64-28 1/3 23 53/64-17 1/3 15-11 31/32 11 7/8-9 2/3 - ------------------------------------------------------------------------------------------------------------------------------------ Second Quarter 52 9/16-41 43/64 39 9/64-26 13/64 25 1/2-21 17 11/64-14 3/8 12 3/64-9 1/2 - ------------------------------------------------------------------------------------------------------------------------------------ Third Quarter 53 11/16-35 1/4 43 1/3-36 9/64 27 31/32-22 53/64 20 2/3-16 19/64 13 1/4-10 31/32 - ------------------------------------------------------------------------------------------------------------------------------------ Fourth Quarter 40 1/2-23 43 7/32-36 1/8 32 23/32-27 1/2 22 51/64-18 5/64 13 3/64-10 59/64 - ------------------------------------------------------------------------------------------------------------------------------------ Yearly range 53 11/16-23 43 1/3-26 13/64 32 23/32-17 1/3 22 51/64-11 31/32 13 1/4-9 1/2 - ------------------------------------------------------------------------------------------------------------------------------------ Year-end close 39 5/8 42 35/64 30 3/4 29 53/64 12 3/8 - ------------------------------------------------------------------------------------------------------------------------------------ Composite common shares traded 454,878,500 302,551,200 211,903,500 231,726,900 194,640,600 - ------------------------------------------------------------------------------------------------------------------------------------ Average daily volume 1,805,073 1,195,854 834,267 919,551 772,383 ==================================================================================================================================== Shares Outstanding at December 31 Common 483,137,739 485,351,517 457,427,951 455,180,345 451,451,304 - ------------------------------------------------------------------------------------------------------------------------------------ $6.25 Preferred - - - - 52,010 - ------------------------------------------------------------------------------------------------------------------------------------ 9 1/2% Preferred, Series 1989-A/2/ - - - - 3,000,000 - ------------------------------------------------------------------------------------------------------------------------------------ 9 1/2% Preferred, Series 1991-A/2/ - - 5,500,000 5,500,000 5,500,000 - ------------------------------------------------------------------------------------------------------------------------------------ 5% Cumulative Preferred/3/ 407,718 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ $4.50 Cumulative Preferred/3/ 103,976 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ $4.30 Cumulative Preferred/3/ 836,585 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ 8 1/4% Cumulative Preferred, Series 1992-A/2/ 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 - ------------------------------------------------------------------------------------------------------------------------------------ 7.35% Preferred, Series 1993-A/2/ - 4,000,000 4,000,000 4,000,000 4,000,000 - ------------------------------------------------------------------------------------------------------------------------------------ Flex APS, Series B - - - - 400,000 ==================================================================================================================================== Shareholders of Record at December 31 - ------------------------------------------------------------------------------------------------------------------------------------ Common 20,584 10,239 11,147 13,515 14,379 - ------------------------------------------------------------------------------------------------------------------------------------ $6.25 Preferred - - - - 408 - ------------------------------------------------------------------------------------------------------------------------------------ 9 1/2% Preferred, Series 1989-A/2/ - - - - 535 - ------------------------------------------------------------------------------------------------------------------------------------ 9 1/2% Preferred, Series 1991-A/2/ - - 690 786 895 - ------------------------------------------------------------------------------------------------------------------------------------ 5% Cumulative Preferred/3/ 1,329 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ $4.50 Cumulative Preferred/3/ 283 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ $4.30 Cumulative Preferred/3/ 380 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ 8 1/4% Cumulative Preferred, Series 1992-A/2/ 309 356 408 453 518 - ------------------------------------------------------------------------------------------------------------------------------------ 7.35% Preferred, Series 1993-A/2/ - 247 290 317 343 - ------------------------------------------------------------------------------------------------------------------------------------ Flex APS, Series B - - - - 4 - ------------------------------------------------------------------------------------------------------------------------------------ Total 22,885 10,842 12,535 15,071 17,082 - ------------------------------------------------------------------------------------------------------------------------------------
/1/ Where appropriate, amounts have been restated to reflect the 3-for-1 stock split in the form of a dividend, effective June 1, 1998. /2/ Per depositary share. /3/ The 5%, $4.50 and $4.30 Cumulative Preferred Stock was issued by Household to replace Beneficial preferred stock outstanding at the time of the merger. The information presented for these preferred shares is for the period subsequent to the merger. EX-21 15 LIST OF OUR SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF HOUSEHOLD INTERNATIONAL, INC. - --------------------------------------------- As of December 31, 1998, the following subsidiaries were directly or indirectly owned by the Registrant. Certain subsidiaries which in the aggregate do not constitute significant subsidiaries may be omitted.
% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ Hamilton Investments, Inc. Delaware 100% Craig-Hallum Corporation Delaware 100% Household Bank, f.s.b. U.S. 100% Beneficial Retail Services, Inc. Delaware 100% Beneficial Service Corporation Delaware 100% Beneficial Service Corporation of Delaware Delaware 100% HHTS, Inc. Illinois 100% Household Bank (SB), N.A. U.S. 100% Household Affinity Funding Corporation Delaware 100% Household Service Corporation of Illinois, Inc. Illinois 100% Household Insurance Services, Inc. Illinois 100% Housekey Financial Corporation Illinois 100% Household Mortgage Services, Inc. Delaware 100% Household Capital Corporation Delaware 100% Household Commercial Canada Inc. Canada 100% Household Finance Corporation Delaware 100% Beneficial Corporation Delaware 100% Beneficial Credit Corp. Delaware 100% Guaranty and Indemnity Insurance Company Delaware 100% Bencharge Credit Service Holding Company Delaware 100% Beneficial Credit Services Northeast, Inc. Delaware 100% Bencharge Credit Service of America, Inc. Delaware 100% Beneficial Credit Services of Connecticut Inc. Delaware 100% Beneficial Credit Services of Mississippi Inc. Delaware 100% Beneficial Credit Services of South Carolina Inc. Delaware 100% Beneficial Credit Services Inc. Delaware 100% Beneficial Arizona Inc. Delaware 100%
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% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ Beneficial California Inc. Delaware 100% Beneficial Colorado Inc. Delaware 100% Beneficial Commercial Holding Corporation Delaware 100% Beneficial Commercial Corporation Delaware 100% Beneficial Finance Leasing Corporation Delaware 100% Beneficial Leasing Group, Inc. Delaware 100% Neil Corporation Delaware 100% Silliman Corporation Delaware 100% Beneficial Connecticut Inc. Delaware 100% Beneficial Consumer Discount Company Pennsylvania 100% Beneficial Delaware Inc. Delaware 100% Beneficial Discount Co. of Virginia Delaware 100% Beneficial Finance Co. of West Virginia Delaware 100% Beneficial Finance Limited England 100% Beneficial Finance Services, Inc. Kansas 100% Beneficial Florida Inc. Delaware 100% Beneficial Mortgage Co. of Florida Delaware 100% Beneficial Georgia Inc. Delaware 100% Beneficial Hawaii Inc. Delaware 100% Beneficial Idaho Inc. Delaware 100% Beneficial Illinois Inc. Delaware 100% Beneficial Income Tax Service Holding Co., Inc. Delaware 100% Household Tax Masters Inc. Delaware 100% Beneficial Indiana Inc. Delaware 100% Beneficial Investment Co. Delaware 100% Beneficial Credit Services of New York, Inc. Delaware 100% Beneficial New York Inc. New York 100% Beneficial Homeowner Service Corporation Delaware 100% Beneficial Iowa Inc. Iowa 100% Beneficial Kansas Inc. Kansas 100% Beneficial Kentucky Inc. Delaware 100% Beneficial Land Company, Inc. New Jersey 100% Beneficial Loan & Thrift Co. Minnesota 100% Beneficial Louisiana Inc. Delaware 100% Beneficial Maine Inc. Delaware 100% Beneficial Management Corporation Delaware 100% Beneficial Management Institute, Inc. New York 100% Beneficial Management Corporation of America Delaware 100%
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% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- -------- ------ Beneficial Franchise Company Inc. Delaware 100% Beneficial Business Credit Corp. Delaware 100% Beneficial Mark Holding Inc. Delaware 100% Beneficial Trademark Co. Delaware 100% Beneficial Management Headquarters, Inc. New Jersey 100% Beneficial Facilities Corporation New Jersey 100% Beneficial Maryland Inc. Delaware 100% Beneficial Massachusetts Inc. Delaware 100% Beneficial Michigan Inc. Delaware 100% Beneficial Mississippi Inc. Delaware 100% Beneficial Missouri, Inc. Delaware 100% Beneficial Montana Inc. Delaware 100% Beneficial Mortgage Holding Company Delaware 100% Beneficial Excess Servicing Inc. Delaware 100% Beneficial Home Mortgage Loan Corp. Delaware 100% Beneficial Mortgage Co. of Arizona Delaware 100% Beneficial Mortgage Co. of Colorado Delaware 100% Beneficial Mortgage Co. of Connecticut Delaware 100% Beneficial Mortgage Co. of Georgia Delaware 100% Beneficial Mortgage Co. of Idaho Delaware 100% Beneficial Mortgage Co. of Indiana Delaware 100% Beneficial Mortgage Co. of Kansas, Inc. Delaware 100% Beneficial Mortgage Co. of Louisiana Delaware 100% Beneficial Mortgage Co. of Maryland Delaware 100% Beneficial Mortgage Co. of Massachusetts Delaware 100% Beneficial Mortgage Co. of Mississippi Delaware 100% Beneficial Mortgage Co. of Missouri, Inc. Delaware 100% Beneficial Mortgage Co. of Nevada Delaware 100% Beneficial Mortgage Co. of New Hampshire Delaware 100% Beneficial Mortgage Co. of North Carolina Delaware 100% Beneficial Mortgage Co. of Oklahoma Delaware 100% Beneficial Mortgage Co. of Rhode Island Delaware 100% Beneficial Mortgage Co. of South Carolina Delaware 100% Beneficial Mortgage Co. of Texas Delaware 100% Beneficial Mortgage Co. of Utah Delaware 100% Beneficial Mortgage Co. of Virginia Delaware 100% Beneficial National Bank USA Delaware 100% Beneficial Service Corporation of New Jersey Delaware 100% Beneficial Nebraska Inc. Nebraska 100% Beneficial Nevada Inc. Delaware 100%
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% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ Beneficial New Hampshire Inc. Delaware 100% Beneficial New Jersey Inc. Delaware 100% Beneficial New Mexico Inc. Delaware 100% Beneficial North Carolina Inc. Delaware 100% Beneficial Oklahoma Inc. Delaware 100% Beneficial Oregon Inc. Delaware 100% Beneficial Real Estate Company, Inc. New Jersey 100% Beneficial Rhode Island Inc. Delaware 100% Beneficial South Carolina Inc. Delaware 100% Beneficial South Dakota Inc. Delaware 100% Beneficial Systems Development Corporation Delaware 100% Beneficial Technology Corporation Delaware 100% Beneficial Tennessee Inc. Tennessee 100% Beneficial Texas Inc. Texas 100% Beneficial Utah Inc. Delaware 100% Beneficial Vermont Inc. Delaware 100% Beneficial Virginia Inc. Delaware 100% Beneficial Washington Inc. Delaware 100% Beneficial West Virginia, Inc. West Virginia 100% Beneficial Wisconsin Inc. Delaware 100% Beneficial Wyoming Inc. Wyoming 100% Benevest Group Inc. Delaware 100% Benevest Service Company Delaware 100% Benevest Services, Inc. Washington 100% Benevest Escrow Company Delaware 100% BMC Holding Company Delaware 100% Beneficial Mortgage Corporation Delaware 100% Beneficial Mortgage Services, Inc. Delaware 100% Bon Secour Properties Inc. Alabama 100% Capital Financial Services Inc. Nevada 100% Corporate Security Engineering Services, Inc. New Jersey 100% Harbour Island Inc. Florida 100% Harbour Island Venture One, Inc. Florida 100% Harbour Island Venture Three, Inc. Florida 100% Harbour Island Venture Four, Inc. Florida 100% Tampa Island Transit Company, Inc. Florida 100% Personal Mortgage Holding Company Delaware 100% Personal Mortgage Corporation Delaware 100% Southern Trust Company Delaware 100% Southwest Beneficial Finance, Inc. Illinois 100%
-4-
% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ Wasco Properties, Inc. Delaware 100% Beneficial Real Estate Joint Venture, Inc. Delaware 100% Beneficial Insurance Group Holding Company Delaware 100% BFC Agency, Inc. Delaware 100% BFC Insurance Agency of Nevada Nevada 100% Beneficial Direct, Inc. New Jersey 100% Beneficial Insurance Group, Inc. Delaware 100% Service Administrators, Inc. (USA) Colorado 100% Service General Insurance Company Ohio 100% Beneficial Ohio Inc. Delaware 100% Service Management Corporation Ohio 100% B.I.G. Insurance Agency, Inc. Ohio 100% The Central National Life Insurance Company of Omaha Delaware 100% First Central National Life Insurance Company of New York New York 100% Wesco Insurance Company Delaware 100% Southwest Texas General Agency, Inc. Texas 100% Alabama Properties Delaware 100% HFC Auto Credit Corp. Delaware 100% HFC Card Funding Corporation Delaware 100% HFC Funding Corporation Delaware 100% HFC Revolving Corporation Delaware 100% HFS Funding Corporation Delaware 100% Household Acquisition Corporation Delaware 100% HFTA Corporation Delaware 100% Pacific Agency, Inc. Nevada 100% First Credit Corporation Delaware 100% HFTA Consumer Discount Company Pennsylvania 100% HFTA First Financial Corporation California 100% HFTA Second Corporation Alabama 100% HFTA Third Corporation Delaware 100% HFTA Fourth Corporation Minnesota 100% HFTA Fifth Corporation Nevada 100% HFTA Sixth Corporation Nevada 100% HFTA Seventh Corporation New Jersey 100% HFTA Eighth Corporation Ohio 100% HFTA Ninth Corporation West Virginia 100% HFTA Tenth Corporation Washington 100% Household Finance Corporation of Hawaii Hawaii 100% Household Realty Corporation (1997) Limited B.C. 100%
-5-
% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- -------- ------ Pacific Finance Loans California 100% Household Automotive Finance Corporation Delaware 100% ACC Funding Corp. Delaware 100% ACC Receivables Corp. Delaware 100% Household Automotive Credit Corporation Delaware 100% OFL-A Receivables Corp. Delaware 100% Household Auto Receivables Corporation Nevada 100% Household Bank (Nevada), N.A. U.S. 100% Household Card Funding Corporation Delaware 100% Household Receivables Funding Corporation Nevada 100% Household Receivables Funding Delaware 100% Corporation II Household Receivables Funding, Inc. Delaware 100% Household Capital Markets, Inc. Delaware 100% Household Card Services, Inc. Nevada 100% Household Consumer Loan Corporation Nevada 100% Household Corporation Delaware 100% Household Credit Services, Inc. Delaware 100% Household Credit Services of Mexico, Inc. Delaware 100% Household Financial Services, Inc. Delaware 100% Household Group, Inc. Delaware 100% AHLIC Investment Holdings Corporation Delaware 100% Arcadia Insurance Administrators, Inc. Delaware 100% Cal-Pacific Services, Inc. California 100% HFS Investments, Inc. Nevada 100% JV Mortgage Capital, Inc. Delaware 50% JV Mortgage Capital, L.P. Delaware 50.5% JV Mortgage Capital Consumer Discount Company Pennsylvania 100% Household Insurance Agency, Inc. Michigan 100% Household Insurance Agency, Inc. Nevada 100% Household Insurance Company Michigan 100% Household Life Insurance Co. of Arizona Arizona 100% Household Life Insurance Company Michigan 100% Household Business Services, Inc. Delaware 100% Financial Network Alliance, L.L.P. Illinois 50% FNA Consumer Discount Company Pennsylvania 100% Household Commercial Financial Delaware 100% Services, Inc. The Generra Company Delaware 100%
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% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ Business Realty Inc. Delaware 100% Business Lakeview, Inc. Delaware 100% Capital Graphics, Inc. Delaware 100% CPI Enterprises, Inc. Delaware 100% HCFS Business Equipment Corporation Delaware 100% HFC Commercial Realty, Inc. Delaware 100% G.C. Center, Inc. Delaware 100% Com Realty, Inc. Delaware 100% Lighthouse Property Corporation Delaware 100% Household OPEB I, Inc. Illinois 100% Steward's Glenn Corporation Delaware 100% HFC Leasing, Inc. Delaware 100% First HFC Leasing Corporation Delaware 100% Second HFC Leasing Corporation Delaware 100% Valley Properties Corporation Tennessee 100% Fifth HFC Leasing Corporation Delaware 100% Sixth HFC Leasing Corporation Delaware 100% Seventh HFC Leasing Corporation Delaware 100% Eighth HFC Leasing Corporation Delaware 100% Tenth HFC Leasing Corporation Delaware 100% Eleventh HFC Leasing Corporation Delaware 100% Thirteenth HFC Leasing Corporation Delaware 100% Fourteenth HFC Leasing Corporation Delaware 100% Seventeenth HFC Leasing Corporation Delaware 100% Nineteenth HFC Leasing Corporation Delaware 100% Twenty-second HFC Leasing Corporation Delaware 100% Twenty-sixth HFC Leasing Corporation Delaware 100% Beaver Valley, Inc. Delaware 100% Hull 752 Corporation Delaware 100% Hull 753 Corporation Delaware 100% Third HFC Leasing Corporation Delaware 100% Macray Corporation California 100% Fourth HFC Leasing Corporation Delaware 100% Pargen Corporation California 100% Fifteenth HFC Leasing Corporation Delaware 100% Hull Fifty Corporation Delaware 100% HFC Retail Credit Services, Inc. Delaware 100% Household Capital Investment Corporation Delaware 100% B&K Corporation Michigan 94% Household Commercial of California, Inc. California 100%
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% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ OLC, Inc. Rhode Island 100% OPI, Inc. Virginia 100% Household Finance Consumer Discount Company Pennsylvania 100% Overseas Leasing Two FSC, Ltd. Bermuda 99% Household Finance Corporation II Delaware 100% Household Finance Corporation of Alabama Alabama 100% Household Finance Corporation of California Delaware 100% Household Finance Corporation of Nevada Delaware 100% Household Finance Realty Corporation of New York Delaware 100% Household Finance Corporation of West Virginia West Virginia 100% Household Finance Industrial Loan Company Washington 100% Household Finance Industrial Loan Company of Iowa Iowa 100% Household Finance Realty Corporation of Nevada Delaware 100% Household Finance Corporation III Delaware 100% Amstelveen FSC, Ltd. Bermuda 99% HFC Agency of Connecticut, Inc. Connecticut 100% HFC Agency of Michigan, Inc. Michigan 100% HFC Agency of Missouri, Inc. Missouri 100% Night Watch FSC, Ltd. Bermuda 99% Household Realty Corporation Delaware 100% Overseas Leasing One FSC, Ltd. Bermuda 100% Overseas Leasing Four FSC, Ltd. Bermuda 99% Overseas Leasing Five FSC, Ltd. Bermuda 99% Household Retail Services, Inc. Delaware 100% HRSI Funding, Inc. Nevada 100% Household Financial Center Inc. Tennessee 100% Household Industrial Finance Company Minnesota 100% Household Industrial Loan Co. of Kentucky Kentucky 100% Household Recovery Services Corporation Delaware 100% Household Relocation Management, Inc. Illinois 100% Mortgage One Corporation Delaware 100% Mortgage Two Corporation Delaware 100% Sixty-First HFC Leasing Corporation Delaware 100% Household Pooling Corporation Nevada 100% Household Receivables Acquisition Company Delaware 100% Household REIT Corporation Nevada 100% Household Financial Group, Ltd. Delaware 100%
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% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ Household Global Funding, Inc. Delaware 100% Beneficial Premium Services Limited England 100% BFK Verwaltungsgesellschaft mbH Germany 100% Beneficial Bank plc England 99.9% Beneficial Financial Services Limited England 100% Beneficial Financing Limited England 100% Beneficial Leasing Limited England 100% Beneficial Trust Investments Limited England 100% Beneficial Trust (Guernsey) Limited England 100% Beneficial Trust (Jersey) Limited England 100% Beneficial Trust Nominees Limited England 100% Endeavour Personal Financial Limited England 100% Security Trust Limited England 100% Sterling Credit Limited England 100% Sterling Credit Management Limited England 100% The Loan Corporation Limited England 100% Extracard Corp. Delaware 100% Household Ireland Holdings, Inc. Delaware 100% Household International (U.K.) Limited England 100% D.L.R.S. Limited Cheshire 100% HFC Bank plc England 100% Hamilton Financial Planning Services Limited England 100% Hamilton Insurance Company Limited England 100% Hamilton Life Assurance Co. Limited England 100% HFC Pension Plan Limited England 100% Household Funding Limited England 100% Household Investments Limited England/Wales 100% Household Leasing Limited England 100% Household Management Corporation Limited England/Wales 100% Household Overseas Limited England 100% Household International Netherlands B.V. Netherlands 100% Household Financial Corporation Limited Ontario 100% Household Finance Corporation of Canada Canada 100% Household Realty Corporation Limited Ontario 100% Household Trust Company Canada 100% Merchant Retail Services Limited Ontario 100% Household Reinsurance Ltd. Bermuda 100%
-9- EX-23 16 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- Household International, Inc.: As independent public accountants, we hereby consent to the incorporation of our report dated January 20, 1999, included in this annual report on Form 10-K of Household International, Inc. for the year ended December 31, 1998, into the Company's previously filed Registration Statements No. 2-86383, No. 33-21343, No. 2-97495, No. 33-45454, No. 33-45455, No. 33-52211, No. 33-58727, No. 333- 00397, No. 33-44066, No. 333-03673, No. 333-39639, No. 333-59287, No. 333-58289, No. 333-59291, No. 333-47073 and No. 333-36589 on Form S-8, Registration Statements No. 33-48854, No. 33-56599, No. 33-57249, No. 333-1025, No. 333-65679 and No. 333-27305 on Form S-3, and Registration Statement No. 333-35657 on Form S-4. /s/ Arthur Andersen LLP Chicago, Illinois March 25, 1999 EX-27 17 FINANCIAL DATA SCHEDULE
5 THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND ITS SUBSIDIARIES IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL STATEMENTS PREVIOUSLY FILED WITH THE SECURITIES & EXCHANGE COMMISSION. 1,000 YEAR DEC-31-1998 DEC-31-1998 457,400 3,202,100 44,205,900 (2,548,100) 0 0 1,227,300 (755,200) 52,892,700 0 30,438,600 0 164,400 544,100 6,052,300 52,892,700 0 8,897,000 0 2,910,500 1,000,000 1,516,800 2,517,000 952,700 428,600 524,100 0 0 0 524,100 1.04 1.03 FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S BALANCE SHEETS WERE NON-CLASSIFIED. REPRESENTS MERGER AND INTEGRATION RELATED COSTS ASSOCIATED WITH THE COMPANY'S MERGER WITH BENEFICIAL CORPORATION, ACCOUNTED FOR AS A POOLING OF INTERESTS. REPRESENTS BASIC EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE." AMOUNT REFLECTS HOUSEHOLD'S 3-FOR-1 STOCK SPLIT EFFECTED IN THE FORM OF A STOCK DIVIDEND AND PAID ON JUNE 1, 1998. REPRESENTS DILUTED EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE." AMOUNT REFLECTS HOUSEHOLD'S 3-FOR-1 STOCK SPLIT EFFECTED IN THE FORM OF A STOCK DIVIDEND AND PAID ON JUNE 1, 1998.
EX-99.(B) 18 RATINGS OF HOUSEHOLD INT'L & SIGNIFICANT SUBSDRS EXHIBIT 99(b) HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES DEBT AND PREFERRED STOCK SECURITIES RATINGS OF THE COMPANY AND ITS SIGNIFICANT SUBSIDIARIES
- -------------------------------------------------------------------------------------------------- Duff & Standard Moody's Phelps & Poor's Investors Fitch Credit Thomson Corporation Service IBCA Rating Co. BankWatch - -------------------------------------------------------------------------------------------------- At December 31, 1998 - -------------------------------------------------------------------------------------------------- Household International, Inc. Senior debt A A3 A A A Commercial paper A-1 P-2 F-1 Duff 1 TBW-1 Preferred stock BBB+ baa1 A- A- BBB+ - -------------------------------------------------------------------------------------------------- Household Finance Corporation Senior debt A A2 A+ A+ A+ Senior subordinated debt A- A3 A A A Commercial paper A-1 P-1 F-1 Duff 1+ TBW-1 - -------------------------------------------------------------------------------------------------- Household Bank, f.s.b. Senior debt A A2 A A NR Subordinated debt A- A3 A- A- A Certificates of deposit (long/short-term) A/A-1 A2/P-1 A/F-1 A/Duff 1 TBW-1 Thrift notes A-1 P-1 F-1 Duff 1 TBW-1 - --------------------------------------------------------------------------------------------------
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