-----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, WHIW2Cd3H9LxrvHBKUgXmfooNKEwVTTk/FQkBNMymGjxiYFWb2EQkpzqlN/BNhKS SzmdjBZAXKIkJjgkvoD4sg== 0000950137-98-001296.txt : 19980331 0000950137-98-001296.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950137-98-001296 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: CSX SROS: NYSE 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-K405 SEC ACT: SEC FILE NUMBER: 001-08198 FILM NUMBER: 98578385 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-K405 1 10-K405 1 ================================================================================ 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, 1997 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) DELAWARE 36-3121988 (State of incorporation) (I.R.S. Employer Identification No.) 2700 SANDERS ROAD 60070 PROSPECT HEIGHTS, ILLINOIS (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (847) 564-5000 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- --------------------- COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE AND CHICAGO STOCK EXCHANGE SERIES A JUNIOR PARTICIPATING PREFERRED NEW YORK STOCK EXCHANGE STOCK PURCHASE RIGHTS (ATTACHED TO AND TRANSFERABLE ONLY WITH THE COMMON STOCK) DEPOSITARY SHARES (EACH REPRESENTING ONE-FORTIETH SHARE NEW YORK STOCK EXCHANGE OF 8 1/4% CUMULATIVE PREFERRED STOCK, SERIES 1992-A, NO PAR, $1,000 STATED VALUE) DEPOSITARY SHARES (EACH REPRESENTING ONE-FORTIETH SHARE NEW YORK STOCK EXCHANGE OF 7.35% CUMULATIVE PREFERRED STOCK, SERIES 1993-A, NO PAR, $1,000 STATED VALUE)
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. /X/ THE AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK HELD BY NONAFFILIATES OF THE REGISTRANT AT MARCH 18, 1998 WAS APPROXIMATELY $15.073 BILLION. THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING AT MARCH 18, 1998 WAS 107,304,658. DOCUMENTS INCORPORATED BY REFERENCE CERTAIN PORTIONS OF THE REGISTRANT'S 1997 ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997: PARTS I, II AND IV. CERTAIN PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS 1998 ANNUAL MEETING SCHEDULED TO BE HELD MAY 13, 1998: PART III. ================================================================================ 2 TABLE OF CONTENTS
PART/ITEM NO. PAGE ------------- ---- PART I. Item 1. Business.................................................... 1 General..................................................... 1 Operations.................................................. 3 Funding..................................................... 5 Regulation and Competition.................................. 5 Year 2000................................................... 6 Cautionary Statement on Forward-Looking Statements.......... 6 Item 2. Properties.................................................. 7 Item 3. Legal Proceedings........................................... 7 Item 4. Submission of Matters to a Vote of Security Holders......... 7 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 8 Item 6. Selected Financial Data..................................... 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 8 Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 8 Item 8. Financial Statements and Supplementary Data................. 8 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 8 PART III. Item 10. Directors and Executive Officers of the Registrant Executive Officers.................................................... 8 Item 11. Executive Compensation...................................... 10 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 10 Item 13. Certain Relationships and Related Transactions.............. 10 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 10 Financial Statements........................................ 10 Reports on Form 8-K......................................... 10 Exhibits.................................................... 10 Schedules................................................... 12 Signatures.................................................................... 13 Report of Independent Public Accountants...................................... F-1 Schedule I.................................................................... F-2 Schedule II................................................................... F-6
3 PART I. ITEM 1. BUSINESS. GENERAL Household International, Inc. ("Household"), through its subsidiaries primarily provides consumers with several types of loan products. Household and its subsidiaries may also be referred to in this Form 10-K as "we," "us" or "our." We offer home equity loans, auto finance loans and other unsecured loans as well as MasterCard*, Visa* and private label credit cards. At December 31, 1997, we employed approximately 14,900 people and served approximately 23.2 million customer accounts with $45.4 billion in managed receivables and $23.8 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 1981, we were operating in the financial services, manufacturing, transportation and merchandising industries. In 1985 we began to restructure our operations to focus on the financial services business. In late 1994 we further narrowed our focus to operate in those areas of the consumer finance business that offered us higher returns. From late 1994 through 1995 we exited from our first mortgage origination and servicing businesses in the United States and Canada and sold our individual life and annuity product lines of our individual life insurance business. However, we retained our credit life insurance business, which compliments some of our consumer loan products and provides us with additional revenue. In 1995 and 1996 we sold our consumer bank branches, including approximately $6.2 billion of consumer deposits. During the fourth quarter of 1996 we also sold approximately $1.7 billion of lower-margin loans, primarily from our former first mortgage and consumer banking businesses. These assets had been retained in order to satisfy certain regulatory requirements applicable to our savings bank subsidiary but were no longer required following changes in banking laws. Our summary financial information is set forth in our Annual Report to Shareholders (the "1997 Annual Report"), portions of which are incorporated herein by reference. See pages 18 through 63 and 65 through 67 of our 1997 Annual Report. The products we offer, our operating markets and our marketing methods are described under OPERATIONS in this Form 10-K. 1997 DEVELOPMENTS AND RESULTS. The following results and developments occurred during 1997: - Our managed assets increased to $51.9 billion at year-end 1997 from $48.1 billion at year-end 1996 and $44.1 billion at year-end 1995. Our owned assets increased to $30.3 billion at year-end 1997 from $29.6 billion at year-end 1996 and $29.2 billion at year-end 1995. - 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. - --------------- * MasterCard is a registered trademark of MasterCard International, Incorporated and VISA is a registered trademark of VISA USA, Inc. 1 4 - In connection with our acquisition of TFS, we completed a public offering in June 1997 of 9.1 million shares of Household's common stock and received proceeds from such offering of approximately $1.0 billion. These proceeds repaid certain of our short-term borrowings. - In October 1997 we purchased ACC Consumer Finance Corporation ("ACC"), an automobile finance company, for about 1.4 million shares of Household's common stock and cash. ACC primarily makes loans to non-prime borrowers secured by used automobiles. - In December 1997 Household Bank, f.s.b. (the "Bank") sold approximately $900 million in student loans and decided to exit from the business of originating and acquiring student loans. We periodically review our product mix to enable us to design a means of maximizing our profits while simultaneously limiting our exposure to delinquency and charge-off risk. Accordingly, our product mix may change from time to time. In recent years our product mix has shifted toward unsecured products. Unsecured loans were 72 percent of our managed consumer receivables at year-end 1997 compared to 79 percent at year-end 1996 and 69 percent at year-end 1995. We charge higher interest rates and fees on our unsecured products than our secured products to compensate us for taking more risk. Unsecured products historically have higher delinquencies and charge-off rates than secured products. Our managed consumer two-month-and-over contractual delinquency as a percentage of managed consumer receivables increased to 4.82% at year-end 1997 from 4.15% at year-end 1996 and 3.46% at year-end 1995. The increase in our managed delinquency ratio from a year ago was mainly due to the seasoning of our receivables and the expiration of certain special no-interest and no-payment promotions in our private label credit card business. The financial services industry in general experienced a record amount of personal bankruptcies in 1997 as personal bankruptcy filings for 1997 were at an all time high. Our charge-off levels were impacted by higher personal bankruptcies in our unsecured portfolios, the expiration of certain promotions in our private label credit card business and the continued seasoning of our receivables. Our ratio of net consumer charge-offs to average managed receivables was 4.47% for 1997 compared to 3.35% for 1996 and 2.95% for 1995. We continued to tighten and refine our credit standards throughout 1997 and increased the number of people hired to collect delinquent loans. We also increased our credit loss reserves which are maintained to cover probable losses of principal and interest. Our managed credit loss reserves as a percentage of managed receivables were 4.29 percent at year-end 1997, 3.75 percent at year-end 1996 and 3.22 percent at year-end 1995. Earnings from our consumer finance business in the United States increased in 1997 due mainly to higher levels of average managed receivables. This business also achieved a higher net interest margin in 1997 from 1996 which was partially offset by higher credit losses due primarily to an increase in personal bankruptcies. By year-end 1997 we completed the integration of TFS into our operations. As part of our acquisition of TFS, we acquired $3.1 billion of home equity receivables secured primarily by home mortgages and $100 million of other unsecured receivables. This acquisition strengthened our core consumer finance operations by, among other things, adding new markets, new customer accounts and more receivables secured by collateral. Earnings from our MasterCard/Visa business also increased in 1997 due to improved efficiency and higher net interest margin and fee income. We sold certain non-strategic portfolios, increased fees and eliminated unprofitable accounts in this business during 1997. This business continued to benefit from our co-branding and affinity credit card relationships, including our alliance with General Motors Corporation ("GM") to issue the GM Card, a co-branded credit card, and our alliance with the AFL-CIO to issue the Union Privilege affinity card ("Union Privilege"). We acquired the Union Privilege credit card portfolio in June 1996. Our private label credit card business reported lower income as a result of higher credit losses in 1997 due to the end of certain special promotions and increased personal bankruptcies. Such credit losses were partially offset by a higher net interest margin. At year-end 1997, the Bank's assets totaled $3.4 billion, while its total deposits were approximately $1.3 billion. At year-end 1996 the Bank had assets of $5.1 billion and deposits of approximately $1.8 billion. Consumer receivables generated by our United Kingdom operations accounted for 8 percent of our total managed consumer receivables at year-end 1997 while consumer receivables generated by our Canadian operations accounted for 3 percent of our total managed consumer receivables at year-end 1997. Our 2 5 operations in the United Kingdom and Canada accounted for approximately 15 percent of our total owned consumer receivables and 11 percent of our total managed consumer receivables at year-end 1997. Managed receivables from our United Kingdom operations increased 16 percent at year-end 1997 from year-end 1996 to $3.5 billion. The majority of this increase was due to the success of our co-branded credit card relationships in the United Kingdom, including the Goldfish Card issued under an alliance with the Centrica Group, the United Kingdom's major natural gas supplier. Net income for our United Kingdom operations increased to $84.0 million compared to $61.1 million in 1996 and $44.9 million in 1995. Our Canadian operations reported increased profits as it continued to become more efficient. Receivables from our Canadian operations at year-end 1997 decreased 2 percent from year-end 1996 and increased 12 percent from year-end 1995. 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. Total managed receivables at December 31, classified by type, consisted of the following (in millions):
1997 1996 1995 --------- --------- --------- Home equity................... $11,059.1 $ 7,985.4 $ 8,810.1 Auto finance(1)............... 883.4 -- -- MasterCard/Visa............... 18,264.3 18,737.4 13,343.1 Private label................. 5,707.9 5,587.0 4,446.2 Other unsecured............... 8,291.3 8,620.2 6,660.8 --------- --------- --------- Core Products................. 44,206.0 40,930.0 33,260.2 --------- --------- --------- First Mortgage................ 396.6 725.6 2,066.9 Commercial.................... 774.2 937.8 1,289.6 --------- --------- --------- Total managed receivables..... $45,376.8 $42,593.4 $36,616.7 ========= ========= =========
- --------------- (1) In October 1997, we purchased ACC, an auto finance company. Prior to the fourth quarter of 1997, auto finance receivables were not significant and were included in other unsecured receivables. Total owned receivables at December 31, classified by type, consisted of the following (in millions):
1997 1996 1995 --------- --------- --------- First mortgage................ $ 396.6 $ 725.6 $ 2,066.9 Home equity................... 7,933.2 3,647.9 4,148.2 Auto finance(1)............... 487.5 -- -- MasterCard/Visa............... 5,927.3 8,587.7 5,512.0 Private label................. 4,682.9 5,070.0 3,696.2 Other unsecured............... 3,609.3 5,098.0 5,019.2 Commercial.................... 774.2 937.8 1,289.6 --------- --------- --------- Total owned receivables....... $23,811.0 $24,067.0 $21,732.1 ========= ========= =========
- --------------- (1) In October 1997, we purchased ACC, an auto finance company. Prior to the fourth quarter of 1997, auto finance receivables were not significant and were included in other unsecured receivables. OPERATIONS Branch Based Consumer Finance in the United States Operated under the HFC name, these operations primarily focus on revolving and closed-end home equity and unsecured lines of credit, which are offered on both a fixed rate and floating rate basis. Credit insurance is offered in connection with these products. These products are marketed primarily through a network of 644 branch lending offices located in 45 states as well as direct mail and telemarketing. HFC also 3 6 purchases loans and credit lines originated by other lenders. HFC's home equity loans and unsecured consumer credit products represented approximately 37 percent of our managed consumer receivables at year-end 1997. Private label Household Retail Services ("HRS") operates a revolving private label credit card business in all 50 states. HRS purchases and services revolving charge accounts originated by merchants. These accounts result from consumer purchases of electronics, furniture, appliances, home improvement products and other durable merchandise, and generally are without credit recourse to the originating merchant. HRS also originates closed-end sales contracts and offers credit insurance products. These products are marketed through dealer networks and retail stores, as well as direct mail. HRS is the second largest issuer of third-party private label credit cards in the United States. Credit Cards Our national credit card banks and the Bank offer MasterCard and Visa credit cards throughout the United States and Puerto Rico. In addition, the Bank offers corporate and small business credit cards and revolving lines of credit. Credit insurance is offered in connection with these products. Household Credit Services, which services our credit card operations, solicits applications through direct mail, telemarketing and event marketing efforts, as well as on-counter displays. It has developed strategic affinity and co-branding relationships in order to build its MasterCard/VISA business under alliances with industry leaders generating such products as the Union Privilege affinity credit card and the co-branded GM Card. Our largest account base for MasterCard and VISA credit cards is in California. International Our United Kingdom operations offer secured and unsecured lines of credit, secured and unsecured closed-end loans and credit cards (including the GM Card from Vauxhall and the Goldfish Card). Credit insurance is offered in connection with these products. Such operations are conducted in England, Scotland, Wales and Northern Ireland. Loans are marketed through a branch network consisting of 143 branches, merchants and direct mail. Our Canadian consumer finance business offers home equity and unsecured lines of credit, secured and unsecured closed-end loans and private label credit cards that are marketed through 74 branch offices in 10 provinces, direct mail and telemarketing. Credit insurance is also offered in connection with these products. Information concerning foreign owned receivables, and comparative revenues, operating profits/losses and identifiable assets for the years ended December 31, 1997, 1996 and 1995 are incorporated by reference to pages 46 and 63 of our 1997 Annual Report. Auto Finance We have continued to expand our auto finance business, principally by acquiring ACC in October 1997. We offer loans to non-prime borrowers secured by automobiles throughout the United States which are marketed principally through dealer networks. Credit Insurance Where applicable laws permit, we offer credit life, credit accident, health and disability, term and specialty insurance products to our customers. Such products are currently offered in 47 states, Canada and the United Kingdom. Insurance is generally directly written by or reinsured with one or more of our subsidiaries. 4 7 Other Since we exited from the consumer banking business, the Bank has operated primarily as a vehicle for managing consumer, credit card, student loan and other unsecured loan receivables. The Bank offers its products through telemarketing and direct mail throughout the United States. 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, 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 28, 29, 31, 51 through 54, 56 and 57 of our 1997 Annual Report. We also maintain an investment portfolio which at year-end 1997 was approximately $2.3 billion. Approximately $1.6 billion of such investment securities were held by our insurance subsidiaries. At year-end 1997, our long-term debt and preferred stock, together with that of HFC and the Bank, have been assigned investment 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 1997 we securitized approximately $6.7 billion of receivables compared to $6.9 billion in 1996 and $5.4 billion in 1995. Additional information on our sources and availability of funding are incorporated by reference to pages 27 through 30 of our 1997 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. HFC's 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. HFC's 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 one of 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. 5 8 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 adopted new 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. 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, divided 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 are in some markets and certain of our products compete with banks, thrifts and other financial institutions in the United States, Canada and the United Kingdom. A slow-down in consumer spending in recent years is an example of the industry challenges we face. In addition, the recent consolidation in the financial services industry also provides challenges as well as opportunities to our ability to compete in the marketplace. We can use our centralized underwriting, collection and processing functions to adapt our credit standards and collection efforts to market conditions. 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. YEAR 2000 The conversion of certain computer systems to permit continued use in the Year 2000 and beyond began in prior years. 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 Year 2000 may cause systems to process critical financial and operational information incorrectly. We have identified our Year 2000 issues and compliance for significant systems is scheduled to be completed by the end of 1998. The costs for Year 2000 compliance have not been, and are not expected to be, material to our operations. While we are reviewing our third-party vendors' Year 2000 compliance, we cannot assure that the systems of our vendors, 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. 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 6 9 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 these results to be materially different. For example, operating results may be affected by external factors such as: changes in laws and regulations, including changes in accounting standards; changes in overall economic conditions, including the interest rate environment in which we operate and currency fluctuations; consumer perception of the availability of credit, including the ramifications of filing for personal bankruptcy; the effectiveness of programs to predict delinquency or loss or improve collections; and consumer acceptance and demand for our loan products. ITEM 2. PROPERTIES. Our operations are located in 47 states in the United States, 10 provinces in Canada and in the United Kingdom with principal facilities located in Anaheim, California; Chesapeake, Virginia; Virginia Beach, Virginia; Elmhurst, Illinois; Hanover, Maryland; 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 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. During 1997 we invested $65 million in capital expenditures, compared to $97 million in 1996 and $76 million in 1995. 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 and environmental 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 7 10 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. As of March 18, 1998 there were 10,081 record shareholders of Household's common stock. Additional information required by this Item is incorporated by reference to pages 37 and 67 of our 1997 Annual Report. ITEM 6. SELECTED FINANCIAL DATA. Information required by this Item is incorporated by reference to page 18 of our 1997 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 36 of our 1997 Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Information required by this Item is incorporated by reference to pages 28, 29 and 31 of our 1997 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 page 32, pages 37 through 63 and page 65 of our 1997 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 50, 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), SunAmerica Inc., and Stone Container Corporation. Lawrence N. Bangs, age 61, 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. Robert F. Elliott, age 57, was appointed Vice Chairman in 1998 having previously served as Group Executive-U.S. Consumer Finance since 1994. Prior thereto, from April 1993 to September 1994, he was Group Executive-Office of the President and from 1988 to 1993 he was Group Executive-U.S. Consumer Finance and Australia. Mr. Elliott joined Household Finance Corporation in 1964 and has served in various capacities in our consumer finance business. 8 11 Gary D. Gilmer, age 48, 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. David A. Schoenholz, age 46, 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. David B. Barany, age 54, was appointed Senior Vice President-Chief Information Officer in 1996, having previously served as Vice President-Chief Information Officer since 1988. Mr. Barany joined Household in 1985 as Vice President/Controller of our financial services business. Colin P. Kelly, age 55, 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 51, was appointed 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 45, 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 42, 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 49, 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. Richard J. Kolb, age 45, was appointed Vice President-Management Reporting and Analysis in 1996. He joined Household in 1995 as Vice President-Controller. Prior to joining Household, Mr. Kolb held a variety of financial positions with Wells Fargo Bank, most recently serving as Vice President and Group Finance Officer. Steven L. McDonald, age 37, joined Household in 1996 as Vice President-Corporate Controller. From 1991 until joining Household, he was Senior Vice President-Accounting and Finance of First USA, Inc. Randall L. Raup, age 44, was appointed Managing Director-Strategy and Development in 1996, having previously served as Vice President-Strategy and Development since 1995. Since joining Household in 1984, Mr. Raup has held positions in the planning, treasury control, corporate reporting and internal audit areas. Paul R. Shay, age 44, was appointed Assistant General Counsel and Secretary in 1996, having previously served as Executive Director/General Counsel and Secretary for our insurance subsidiary. Prior to joining Household in 1993, Mr. Shay held various positions in Citicorp's legal department from 1978 to 1993. Craig A. Streem, age 48, 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. 9 12 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 1998 Annual Meeting of Stockholders scheduled to be held May 13, 1998 (the "1998 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 "Directors' Compensation" in our 1998 Proxy Statement. 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 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required by this Item is incorporated by reference to "Incentive and Stock Option Plans" in our 1998 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 21, 1998, 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, 1997. Consolidated Balance Sheets, December 31, 1997 and 1996. Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997. Consolidated Statements of Changes in Preferred Stock and Common Shareholders' Equity for the Three Years Ended December 31, 1997. Notes to Consolidated Financial Statements. Report of Independent Public Accountants. Selected Quarterly Financial Data (Unaudited). (B) REPORTS ON FORM 8-K. We did not file any Current Report on Form 8-K during the three months ended December 31, 1997. (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, 1997). 3(ii) Bylaws of Household International, Inc. as amended November 11, 1997.
10 13 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. Key Executive Bonus Plan (incorporated by reference to Exhibit 10.1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 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. 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. 10.8 Household International, Inc. Deferred Phantom Stock Plan for Directors. 10.9 Household International, Inc. Non-Qualified Deferred Compensation Plan for Executives. 10.10 Executive Employment Agreement between Household International, Inc. and W. F. Aldinger (incorporated by reference to Exhibit 10.9 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.11 Executive Employment Agreement between Household International, Inc. and R. F. Elliott (incorporated by reference to Exhibit 10.12 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.12 Executive Employment Agreement between Household International, Inc. and D. A. Schoenholz (incorporated by reference to Exhibit 10.13 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.13 Executive Employment Agreement between Household International, Inc. and L. N. Bangs (incorporated by reference to Exhibit 10.13 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 10.14 Executive Employment Agreement between Household International, Inc. and G. D. Gilmer. 10.15 Supplemental Executive Retirement Plan for W. F. Aldinger. 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.
11 14 13 Material incorporated by reference to Household International, Inc.'s 1997 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 13 hereof. 27 Financial Data Schedule. 27.1 Restated Financial Data Schedule. 27.2 Restated 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: Office of the Secretary. (D) SCHEDULES. Report of Independent Public Accountants. I--Condensed Financial Information of Registrant. II--Valuation and Qualifying Accounts. 12 15 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, 1998 By /s/ W.F. ALDINGER ------------------------------------- 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. J. DARNALL Director - --------------------------------------------------- (R. J. Darnall) /s/ G. G. DILLON Director - --------------------------------------------------- (G. G. Dillon) /s/ J. A. EDWARDSON Director - --------------------------------------------------- (J. A. Edwardson) /s/ M. J. EVANS Director - --------------------------------------------------- (M. J. Evans) /s/ J. D. FISHBURN Director - --------------------------------------------------- (J. D. Fishburn) /s/ C. F. FREIDHEIM, JR. Director - --------------------------------------------------- (C. F. Freidheim, Jr.)
March 30, 1998 13 16
SIGNATURE TITLE DATE --------- ----- ---- /s/ L. E. LEVY Director - --------------------------------------------------- (L. E. Levy) /s/ G. A. LORCH Director - --------------------------------------------------- (G. A. Lorch) /s/ J. D. NICHOLS Director - --------------------------------------------------- (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 (also (D. A. Schoenholz) the principal financial and accounting officer)
March 30, 1998 14 17 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 1997 annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 21, 1998. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in Item 14(d) are the responsibility of the company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Chicago, Illinois January 21, 1998 F-1 18 SCHEDULE I HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT ================================================================================ CONDENSED STATEMENTS OF INCOME (IN MILLIONS)
YEAR ENDED DECEMBER 31 ---------------------------------- 1997 1996 1995 -------- -------- -------- Equity in earnings of subsidiaries.......................... $717.2 $596.1 $489.2 Finance and other income.................................... 26.3 24.4 36.5 ------ ------ ------ Total income........................................... 743.5 620.5 525.7 ------ ------ ------ Expenses: Administrative......................................... 59.0 99.1 69.0 Interest............................................... 37.9 28.9 27.3 ------ ------ ------ Total expenses......................................... 96.9 128.0 96.3 ------ ------ ------ Income before income tax benefit............................ 646.6 492.5 429.4 Income tax benefit.......................................... 40.0 46.1 23.8 ------ ------ ------ Net income............................................. $686.6 $538.6 $453.2 ====== ====== ======
See accompanying note to condensed financial statements. ================================================================================ F-2 19 SCHEDULE I (CONTINUED) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT ================================================================================ CONDENSED BALANCE SHEETS (IN MILLIONS)
DECEMBER 31 ----------------------- 1997 1996 -------- -------- Assets: Cash................................................... $ 2.1 $ 1.7 Investments in and advances to (from) subsidiaries..... 5,243.4 3,639.7 Other assets........................................... 412.9 396.5 -------- -------- Total assets........................................... $5,658.4 $4,037.9 ======== ======== Liabilities and shareholders' equity: Commercial paper....................................... $ 281.5 $ 203.3 Senior debt (with original maturities over one year)... 189.7 189.7 -------- -------- Total debt............................................. 471.2 393.0 Other liabilities...................................... 346.0 323.7 -------- -------- Total liabilities...................................... 817.2 716.7 Company obligated mandatorily redeemable preferred securities of subsidiary trusts*...................... 175.0 175.0 Preferred stock........................................ 150.0 205.0 Common shareholders' equity............................ 4,516.2 2,941.2 -------- -------- Total liabilities and shareholders' equity............. $5,658.4 $4,037.9 ======== ========
* The sole assets of the two trusts are Junior Subordinated Deferrable Interest Notes issued by Household International, Inc. in June 1996 and June 1995, bearing interest at 8.70 and 8.25 percent, respectively, with principal balances of $103.1 and $77.3 million, respectively, and due June 30, 2036 and June 30, 2025, respectively. See accompanying note to condensed financial statements. ================================================================================ F-3 20 SCHEDULE I (CONTINUED) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT ================================================================================ CONDENSED STATEMENTS OF CASH FLOWS (IN MILLIONS)
YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- ------- ------- CASH PROVIDED BY (USED IN) OPERATIONS Net income.................................................. $ 686.6 $ 538.6 $ 453.2 Adjustments to reconcile net income to net cash provided by (used in) operations: Equity in earnings of subsidiaries........................ (717.2) (596.1) (489.2) Other operating activities................................ 33.1 331.4 (299.7) --------- ------- ------- Cash provided by (used in) operations....................... 2.5 273.9 (335.7) --------- ------- ------- INVESTMENT IN OPERATIONS Dividends from subsidiaries................................. 313.1 265.0 401.4 Investment in and advances to (from) subsidiaries, net...... (1,025.8) (284.9) (90.7) Sale of finance receivables to subsidiary................... -- -- 165.8 Other investing activities.................................. 2.1 (9.4) (2.6) --------- ------- ------- Cash increase (decrease) from investment in operations...... (710.6) (29.3) 473.9 --------- ------- ------- FINANCING AND CAPITAL TRANSACTIONS Net increase (decrease) in commercial paper................. 78.2 (83.2) 186.5 Retirement of senior debt................................... (100.0) (150.0) (100.0) Issuance of senior debt..................................... 100.0 89.9 -- Shareholders' dividends..................................... (181.3) (158.4) (154.0) Issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts................. -- 100.0 75.0 Purchase of treasury stock.................................. (155.7) (56.7) (59.7) Issuance of common stock.................................... 1,022.3 15.2 24.7 Redemption of preferred stock............................... (55.0) -- (115.0) --------- ------- ------- Cash increase (decrease) from financing and capital transactions.............................................. 708.5 (243.2) (142.5) --------- ------- ------- Increase (decrease) in cash................................. .4 1.4 (4.3) Cash at January 1........................................... 1.7 .3 4.6 --------- ------- ------- CASH AT DECEMBER 31......................................... $ 2.1 $ 1.7 $ .3 ========= ======= =======
See accompanying note to condensed financial statements. ================================================================================ F-4 21 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 $50, $265 and $246 million in 1997, 1996 and 1995, 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, 1997 and 1996 was $749 and $856 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, 1997 and 1996 was approximately $1.6 and $1.4 billion, respectively. ================================================================================ F-5 22 SCHEDULE II HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS ================================================================================
YEAR ENDED DECEMBER 31 ------------------------------ 1997 1996 1995 -------- -------- -------- (IN MILLIONS) Unearned credit insurance premiums and claims reserves: Unearned credit insurance premiums: Balance at January 1................................... $118.5 $ 100.9 $ 64.4 Earned premiums........................................ (79.8) (90.4) (64.1) Net premiums written and reinsurance assumed........... 99.0 98.4 68.1 Other items............................................ 8.4 9.6 32.5 ------ -------- -------- Balance at December 31................................. 146.1 118.5 100.9 ------ -------- -------- Claims reserves: Balance at January 1................................... 66.1 59.0 57.8 Provision for claims................................... 75.6 81.6 69.9 Benefits paid.......................................... (65.1) (77.0) (66.2) Other items............................................ 5.7 2.5 (2.5) ------ -------- -------- Balance at December 31................................. 82.3 66.1 59.0 ------ -------- -------- Total at December 31...................................... $228.4 $ 184.6 $ 159.9 ====== ======== ========
================================================================================ F-6 23 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, 1997). 3(ii) Bylaws of Household International, Inc. as amended November 11, 1997. 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. 33-44854). 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 Executive Bonus Plan (incorporated by reference to Exhibit 10.1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 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. 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. 10.8 Household International, Inc. Deferred Phantom Stock Plan for Directors. 10.9 Household International, Inc. Non-Qualified Deferred Compensation Plan for Executives. 10.10 Executive Employment Agreement between Household International, Inc. and W. F. Aldinger (incorporated by reference to Exhibit 10.9 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 1996).
24
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.11 Executive Employment Agreement between Household International, Inc. and R. F. Elliott (incorporated by reference to Exhibit 10.12 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.12 Executive Employment Agreement between Household International, Inc. and D. A. Schoenholz (incorporated by reference to Exhibit 10.13 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.13 Executive Employment Agreement between Household International, Inc. and L. N. Bangs (incorporated by reference to Exhibit 10.13 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 10.14 Executive Employment Agreement between Household International, Inc. and G. D. Gilmer. 10.15 Supplemental Executive Retirement Plan for W. F. Aldinger. 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 1997 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 13 hereof. 27 Financial Data Schedule. 27.1 Restated Financial Data Schedule. 27.2 Restated 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-3.II 2 BYLAWS OF HOUSEHOLD INTERNATIONAL, INC. 1 EXHIBIT 3(ii) HOUSEHOLD INTERNATIONAL, INC. Bylaws -------------- (As in effect November 11, 1997) 2 ------------------------------------------------------------------------------- BYLAWS OF HOUSEHOLD INTERNATIONAL, INC. ------------------------------------------------------------------------------- ARTICLE I. DEFINITIONS, PLACES OF MEETINGS. SECTION l. Definitions. When used herein, "Board" shall mean the Board of Directors of this Corporation, and "Chairman" shall mean Chairman of the Board of Directors. SECTION 2. Places of Meetings of Stockholders and Directors. Unless the Board shall fix another place for the holding of the meeting, meetings of stockholders and of the Board shall be held at the Corporation's International Headquarters, Prospect Heights, Cook County, Illinois, or at such other place in Cook County specified by the person or persons calling the meeting. ARTICLE II. STOCKHOLDERS MEETINGS. SECTION l. Annual Meeting of Stockholders. The annual meeting of stockholders shall be held on such date and at such time as is fixed by the Board. Any previously scheduled annual meeting of stockholders may be postponed by resolution of the Board of Directors upon public announcement given prior to the date previously scheduled for such annual meeting of stockholders. SECTION 2. Special Meetings. CALL. Special meetings of the stockholders may be called at any time by the Chairman of the Board, the President, or a majority of the Board of Directors. Any previously scheduled special meeting of stockholders may be postponed by resolution of the Board of Directors upon public announcement given prior to the date previously scheduled for such special meeting of stockholders. REQUISITES OF CALL. A call for a special meeting of stockholders shall be in writing, filed with the Secretary, and shall specify the time and place of holding such meeting and the purpose or purposes for which it is called. -2- 3 SECTION 3. Notice of Meetings. Written notice of a meeting of stockholders setting forth the place, date, and hour of the meeting and the purpose or purposes for which the meeting is called shall be mailed not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at the meeting. SECTION 4. Quorum and Adjournments. At any meeting of stockholders, the holders of a majority of all the outstanding shares entitled to vote, present in person or by proxy, shall constitute a quorum for the transaction of business, and a majority of such quorum shall prevail except as otherwise required by law, the Certificate of Incorporation, or the bylaws. If the stockholders necessary for a quorum shall fail to be present at the time and place fixed for any meeting, the holders of a majority of the shares entitled to vote who are present in person or by proxy may adjourn the meeting from time to time, until a quorum is present, provided, however, that any stockholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the Chairman of the meeting. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. SECTION 5. Inspectors of Election. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. The inspectors shall (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. SECTION 6. List of Stockholders. The Secretary shall prepare, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the -3- 4 meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder present. SECTION 7. Polls. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery of the State of Delaware upon application by a stockholder shall determine otherwise. SECTION 8. Nomination and Stockholder Business. (A) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made (a) by or at the direction of the Board of Directors pursuant to the Corporation's proxy statement or notice of meeting or at the annual meeting of stockholders, or (b) other than as permitted by Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), by any stockholder of the Corporation at the annual meeting of stockholders, provided such stockholder is entitled to vote at the meeting, has complied with the notice and the other procedures set forth in this Section 8, and was a stockholder of record at the time of giving of notice provided for in this Section 8. (2) For proposed nominees or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (b) of paragraph (A)(1) of this Section 8, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than 120 days nor more than 150 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 150th day prior to such annual meeting and not later than the close of business on the later of the 120th day prior to such annual meeting or the 10th day -4- 5 following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate at the annual meeting for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to serving as a director if elected). Any individual proposed to be nominated to the Board of Directors by a stockholder pursuant to this procedure shall only become a nominee for election to the Board of Directors if the stockholder who has provided the notice, or his proxy, presents such individual as a nominee at the annual meeting; (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as it appears on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section 8 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for Director or specifying the size of the increased Board of Directors made by the Corporation at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 8 shall also be considered timely, but only with respect to proposed nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (B) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's proxy statement or notice of meeting. Nominations of persons for election to the Board of Directors at a special meeting of stockholders at which directors are to be elected may be made (a) by or at the direction of the Board of Directors pursuant to the Corporation's proxy statement or notice of meeting or at the meeting, or (b) at the meeting by any -5- 6 stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this paragraph (B) of Section 8, who shall be entitled to vote at the meeting and who complies with the procedures set forth in clause (a) of paragraph (A)(2) of of this Section 8. Stockholder's notice required by this paragraph (B) of this Section 8 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the 150th day prior to such special meeting and not later than the close of business on the later of the 120th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (C) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 8 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 8. The Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 8 and, if any proposed nomination or business is not in compliance with this Section 8, to declare that such defective nomination or proposal shall be disregarded. (2) For purposes of this Article II, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding anything set forth herein to the contrary, any stockholder may submit a notice delivered to the Secretary at the principal executive offices of the Corporation containing names of individuals for the Board of Directors to consider as potential nominees to the Board of Directors at the next meeting of stockholders called for the purpose of electing directors. In connection with such notice, the stockholder shall provide the information required in clause (a) of paragraph (A)(2) of this Section 8, including, the written consent of each individual to be named in the Corporation's proxy statement or notice of meeting if the Board of Directors, in its sole discretion, determines to nominate such individual. Any such notice provided by a stockholder must be timely received by the Corporation to enable the Board of Directors to review the qualifications of any person to be considered for a nomination. For purposes hereof, the notice shall be deemed timely if it is delivered to the Secretary of the Corporation within the time -6- 7 periods required for notices of stockholder proposals as set forth in Rule 14a-8 of the Exchange Act. (4) Nothing in this Section 8 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement or notice of meeting pursuant to Rule 14a-8 of the Exchange Act. (5) Notwithstanding the foregoing provisions of this Section 8, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 8. ARTICLE III. BOARD OF DIRECTORS. SECTION l. General Powers. The business and affairs of this Corporation shall be managed under the direction of the Board. NUMBER. The number of directors shall be fixed from time to time by resolution of the Board. TENURE. The directors shall be elected at the annual meeting of stockholders. Each director shall hold office until his successor is elected and qualified or until his earlier resignation or removal. VACANCIES. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office though less than a quorum. SECTION 2. Annual Meetings of the Board. The annual meeting of the Board shall be held following the annual meeting of stockholders and shall be a meeting of the directors elected at such meeting of stockholders. No notice shall be required. SECTION 3. Regular Meetings of the Board. Regular meetings of the Board shall be held at such times and places as the Board may fix. No notice shall be required. SECTION 4. Special Meetings of the Board. Special meetings of the Board shall be held whenever called by the Chairman, the President, or any four or more directors. At least twenty-four hours' written or oral notice of each special meeting shall be given to each director. If mailed, notice must be deposited in the United States mail at least seventy-two hours before the meeting. -7- 8 SECTION 5. Quorum. A majority of the members of the Board if the total number is odd or one-half thereof if the total number is even shall constitute a quorum for the transaction of business, but if at any meeting of the Board there is less than a quorum the majority of those present may adjourn the meeting from time to time until a quorum is present. At any such adjourned meeting, a quorum being present, any business may be transacted which might have been transacted at the original meeting. Except as otherwise provided by law, the Certificate of Incorporation, or the bylaws, all actions of the Board shall be decided by vote of a majority of those present. SECTION 6. Committees. The Board may, by resolution passed by a majority of the entire Board, designate one or more committees of directors which to the extent provided in the resolution shall have and may exercise powers and authority of the Board in the management of the business and affairs of the Corporation. SECTION 7. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if all the members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. ARTICLE IV. OFFICERS. SECTION l. Officers. The General Officers of the Corporation shall be a Chairman of the Board, a Chief Executive Officer, a President, such number of Executive Vice Presidents, Group Executives or Senior Vice Presidents as may be determined by the Board, a Secretary and a Treasurer. The Chairman and President shall be directors. The Board may from time to time designate, employ, or appoint such other officers and assistant officers, agents, employees, counsel, and attorneys at law or in fact as it shall deem desirable for such periods and on such terms as it may deem advisable, and such persons shall have such titles, only such power and authority, and perform such duties as the Board may determine. SECTION 2. Duties of Chairman of the Board. The Chairman shall sign and issue, jointly with the President, all reports to the stockholders and shall preside at all meetings of stockholders and of the Board. He shall, in general, perform all duties incident to the office of Chairman, and such other duties -8- 9 as may be prescribed by the Board and perform the duties of the President in his absence or inability to act. SECTION 3. Duties of Chief Executive Officer. At each annual meeting of the Board, or other meeting at which General Officers are or may be elected, the Board shall designate the Chairman or the President as the Chief Executive Officer of the Corporation. The Chief Executive Officer shall have general authority over all matters relating to the business and affairs of the Corporation subject to the control and direction of the Board. SECTION 4. Duties of President. The President shall, in general, perform all duties incident to the office of President and shall perform such other duties as may be prescribed by the Board. In the absence or inability of the Chairman to act, the President shall perform the duties of the Chairman pertaining to management of the Corporation, and the Chairman of the Executive Committee of the Board shall perform those duties of the Chairman pertaining to Board functions. SECTION 5. Duties of Executive Vice President, Group Executives and Senior Vice Presidents. Each Executive Vice President, Group Executive and Senior Vice President shall have such powers and perform such duties as may be prescribed by the Chief Executive Officer of the Corporation or the Board. The order of seniority, if any, among the Executive Vice Presidents, Group Executives and Senior Vice Presidents shall be as designated from time to time by the Chief Executive Officer of the Corporation. In the absence or inability of the Chairman and the President to act, the senior of the Executive Vice Presidents, Group Executives and Senior Vice Presidents, if one has been so designated, shall perform the duties of the President. In the absence of any such designation, the director who is the acting Chairman of the Executive Committee of the Board of Directors shall assume the duties of the President for such time period as required. SECTION 6. Duties of Secretary. The Secretary shall record the proceedings of meetings of the stockholders and directors, give notices of meetings, and shall, in general, perform all duties incident to the office of Secretary and such other duties as may be prescribed by the Board. SECTION 7. Duties of Treasurer. The Treasurer shall have custody of all funds, securities, evidences of indebtedness, and other similar property of the Corporation, and shall, in general, perform all duties incident to the office of Treasurer and such other duties as may be prescribed by the Board." -9- 10 ARTICLE V. MISCELLANEOUS PROVISIONS. SECTION l. Waiver of Notice. Whenever notice is required to be given, a written waiver thereof signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 2. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action; except that the establishment of a record date for determination of stockholders entitled to express consent to corporate action in writing without a meeting shall be established pursuant to Article VII of the bylaws. ARTICLE VI. EMERGENCY BYLAWS. SECTION l. When Operative. Notwithstanding any different provision in the preceding Articles of the bylaws or in the Certificate of Incorporation, the emergency bylaws provided in this Article VI shall be operative during any emergency resulting from an attack on the United States or on a locality in which the Corporation conducts its business or customarily holds meetings of its Board or its stockholders, or during any nuclear or atomic disaster, or during the existence of any catastrophe, or other similar emergency condition, as a result of which a quorum of the Board or a standing committee thereof cannot readily be convened for action. SECTION 2. Board Meetings. During any such emergency, a meeting of the Board may be called by any director or, if necessary, by any officer who is not a director. The meeting shall be held at such time and place, within or without Cook County, Illinois, specified by the person calling the meeting and in the notice of the meeting which shall be given to such of the -10- 11 directors as it may be feasible to reach at the time and by such means as may be feasible at the time, including publication or radio. Such advance notice shall be given as, in the judgment of the person calling the meeting, circumstances permit. Two directors shall constitute a quorum for the transaction of business. To the extent required to constitute a quorum at the meeting, the officers present shall be deemed, in order of rank and within the same rank in order of seniority, directors for the meeting. SECTION 3. Amendments to Emergency Bylaws. These emergency bylaws may be amended, either before or during any emergency, to make any further or different provision that may be practical and necessary for the circumstances of the emergency. ARTICLE VII. CONSENTS TO CORPORATE ACTION. SECTION 1. Action by Written Consent. Unless otherwise provided in the Certificate of Incorporation, any action which is required to be or may be taken at any annual or special meeting of stockholders of the Corporation, subject to the provisions of Sections (2) and (3) of this Article VII, may be taken without a meeting, without prior notice and without a vote if a consent in writing, setting forth the action so taken, shall have been signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or to take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided, however, that prompt notice of the taking of the corporate action without a meeting and by less than unanimous written consent shall be given to those stockholders who have not consented in writing. SECTION 2. Determination of Record Date for Action by Written Consent. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting shall be fixed by the Board of Directors of the Corporation. Any stockholder seeking to have the stockholders authorize or take corporate action by written consent without a meeting shall, by written notice to the Secretary, request the Board of Directors to fix a record date. Upon receipt of such a request, the Secretary shall, as promptly as practicable, call a special meeting of the Board of Directors to be held as promptly as practicable. At such meeting, the Board of Directors shall fix a record date as provided in Section 213(b) (or its successor provision) of the Delaware General Corporation Law; that record date, however, shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board nor more than 15 days from the date of the receipt of the stockholder's request. Notice of the record date shall be -11- 12 published in accordance with the rules and policies of any stock exchange on which securities of the Corporation are then listed. Should the Board fail to fix a record date as provided for in this Section 2, then the record date shall be the day on which the first written consent is duly delivered pursuant to Section 213(b) (or its successor provision) of the Delaware General Corporation Law, or, if prior action is required by the Board with respect to such matter, the record date shall be at the close of business on the day on which the Board adopts the resolution taking such action. SECTION 3. Procedures for Written Consent. In the event of the delivery to the Corporation of a written consent or consents purporting to represent the requisite voting power to authorize or take corporate action and/or related revocations, the Secretary of the Corporation shall provide for the safekeeping of such consents and revocations and shall promptly engage nationally recognized independent inspectors of elections for the purpose of promptly performing a ministerial review of the validity of the consents and revocations. No action by written consent without a meeting shall be effective until such inspectors have completed their review, determined that the requisite number of valid and unrevoked consents has been obtained to authorize or take the action specified in the consents, and certified such determination for entry in the records of the Corporation kept for the purpose of recording the proceedings of meetings of stockholders. -12- EX-10.2 3 HOUSEHOLD INT'L, INC. CORPORATE EXEC. BONUS PLAN 1 EXHIBIT 10.2 HOUSEHOLD INTERNATIONAL CORPORATE EXECUTIVE BONUS PLAN 1997 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 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. 2 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 90% 135% B 60% 90% C 100% 200% D 75% 125% E 50% 100% F 50% 80% G 40% 60% H 30% 60% I 30% 50% J 25% 50% K 20% 50% L 20% 40% M 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 individual performance and determining the individual performance portion of the bonus for that year. 2 3 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. 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. 3 4 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 5 CORPORATE EXECUTIVE BONUS PLAN POSITIONS GROUP/TITLE GROUP A - 90%/135% EVP-Chief Financial Officer Group Executive GROUP B - 60%/90% Managing Director/CEO UK SVP CIO SVP General Counsel SVP Human Resources VP Chief Credit Officer GROUP C - 100%/200% Managing Director of Sales GROUP D - 75%/125% Auto Executive GROUP E - 50%/100% Director Personal Banking Group VP-Regional Director of Sales Managing Director Auto Finance Managing Director Marketing & Non-Branch Sales Managing Director Recovery Services VP Sales & Marketing Auto GROUP F - 50%/80% SVP Corporate Finance SVP Portfolio Marketing SVP Real Estate Management GROUP G - 40%/60% CFO HFC Division General Manager (U.K.) Group Director Risk Control Group General Counsel Managing Director HRSI Managing Director Strategic Initiatives & Partnership Alliances Managing Director/CEO HB Managing Director Collections Managing Director Lending Managing Director Applications Systems Managing Director Operations Systems & HR Managing Director Canada VP Application Systems VP Government Relations GROUP H - 30%/60% VP Director of Sales HRSI GROUP I - 30%/50% Assistant General Counsel Litigation Chief Operating Officer (U.K.) Chief Financial Officer (U.K.) Director Collections HRSI Director of Operations UK Group Director Marketing Group Director Business Planning Group Director GM Marketing 5 6 GROUP I - 30%/50% (CONTINUED) Managing Director/CFO Managing Director Carlson JV Managing Director Equipment Finance National Director Customer Service President & CEO HLIC VP Chief Collections Officer VP Corporate Law & Assistant Secretary VP Controller HI VP Investor Relations VP Management Reporting & Analysis VP Strategy & Development VP Taxes VP Treasury GROUP J - 25%/50% Director Customer Acquisitions Director Customer Relationships Director Sales, Operations & Compliance Director Sales SVP Student Loans GROUP K - 20%/50% Director Credit Analysis Director Risk Control Director Business Analysis Director Credit Policy Administration Director Risk Management Group Director Risk Management VP Credit Risk GROUP L - 20%/40% Director HBNA Product National Director HR HCS VP CFO HTS VP Data Center Operations VP HR HTS VP Network Systems GROUP M - 20%/30% STAFF DEPARTMENTS CHIEF FINANCIAL OFFICE Director Accounting Research & Policy Director ALM Director Asset Backed Financing Director Business Treasury Services Director Business Unit Accounting Director Data Administration Director External Reporting & Corporate Accounting Director Federal Tax Audit Director Federal/State Compliance Director Financial Data Management Director Investor Relations Director Management Reporting & Analysis Director Regulatory Reporting Director Strategy & Development Director Tax Planning & Counsel Treasury Controller VP Audit VP Finance & Administration 6 7 CHIEF FINANCIAL OFFICE (CONTINUED) VP Insurance & Risk Finance VP Money & Capital Markets VP Portfolio Management VP Specialty Finance HUMAN RESOURCES VP HR Administration VP Training & Development VP Compensation OFFICE OF GENERAL COUNSEL Assistant General Counsel & Corporate Secretary Assistant General Counsel Employee Relations Director Government Relations General Counsel VP Government Relations & Public Affairs BUSINESS UNITS AUTO, BANK, HLIC, HRSI Chief Credit Officer Director Customer Service Director Financial Control Director HR HRSI Director Marketing & Strategic Planning Director of Merchant Funding Director Operations SVP Commercial Credit VP Administration VP Credit Risk VP Director of Marketing VP Financial Control Auto VP Intercorporate Finance HOUSEHOLD CREDIT SERVICES Controller HCS Director Business Planning CWT Director Combined Card Director Fraud & Operations Director GM Marketing Director International Market Development Director Marketing & Product Development CWT Director Marketing Services HCS B Director National Marketing B Director Real Estate, Facilities, & Financial Operations Marketing Director HCS HFC CFO-HFS Controller HCFS Director HFC Wholesale Sales Director Sales Management Reporting & Analysis Director Strategic Initiatives Director USCF Customer Data Administration Manager Research Analysis Portfolio Risk Manager VP Collections USCF VP Group Financial Control VP HR CF Sales VP Strategic Initiatives 7 8 HFCPS CFO HFCPS Director Branch Quality Control & Assurance Director Customer Relations Director Customer Service Director Household Processing Director HR Director Operations Support Executive Director Underwriting Group VP Indirect Lending HTS Assistant to CIO Director Business Systems Director Cash Operations Director Communication Services Director Corporate Security Management Director Information Technology Director Property Management VP Distributed Systems VP Facilities Management VP Items Processing CANADA Director Financial Control Director Human Resources Director Law & Compliance Director Marketing Director Merchant Sales Director MRSL Collections Canada Director Technology & Planning Director Treasury & Trust General Manager Processing National Director of Sales U.K. Commercial Director HDB Corporate Finance & Taxation Manager Director Acquisitions & Mortgage Director Application Processing Director Business Development Director Business Relationships Director Collection Services Director Credit Policy Director Direct Marketing & Advertising Director Goldbrand & Corporate Communications Director HDB Direct/Tele Services Director HFC Finance Director HFC Marketing Director Human Resources Director Information Technology Director Insurance Services Director Internal Audit Director Legal Director Operations Support Director Operations, Compensation & Benefits Director Property & Facilities General Manager Business Control Head of Credit Policy Training & Development Manager Treasurer 8 EX-10.5 4 HOUSEHOLD INT'L,INC. 96 LONG-TERM EXEC. COMP. PLAN 1 EXHIBIT 10.5 HOUSEHOLD INTERNATIONAL 1996 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN (AS AMENDED NOVEMBER 11, 1997) 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 - 2 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 4,000,000, 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 400,000 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 - 3 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 - 4 (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 - 5 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. - 5 - 6 (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 2,500 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; (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; - 6 - 7 (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 (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"). - 7 - 8 (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 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. - 8 - 9 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. 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" - 9 - 10 (as defined below), (i) all outstanding Options will immediately vest and will become fully exercisable and (ii) as to any other Awards to employees, 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 involuntary 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 Sections 5(a)(i) or 7(e) of the Plan, 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: (i) "Change in Control" means: (1) any individual, firm, corporation or other entity (including any successor of such entity) other than: (x) a trustee or other fiduciary of securities held under an employee benefit plan of Household, or (y) Household or any subsidiary thereof becomes a beneficial owner, directly or indirectly, of common stock of Household representing ten percent (10%) or more of the total voting power of Household's then outstanding Common Stock and Household - 10 - 11 acquires actual knowledge thereof; (2) 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 (3) 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 Board of Directors is made by any person other than Household or less than 50% of the members of the Household Board of Directors are "Continuing Directors" (as defined below). Notwithstanding subsection (c)(i)(1) above, if the Board of Directors of Household determines in good faith that a person who has met the foregoing definition has done so inadvertently, and such person divests as promptly as practicable a sufficient number of shares to be below the noted threshold, then such person, in regard to that event, shall not trigger a "Change in Control" for purposes of the Plan. (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 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 - 11 - 12 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 uniformally 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" means willful and deliberate misconduct, which is detrimental in a significant way to the interests of Household or any subsidiary thereof; (iv) "Continuing Director" means a director of Household who either (i) was a Director of Household on May 8, 1996, or (ii) is an individual whose election, or nomination for election, as a Director of Household was approved by a vote of at least two-thirds of the Directors then still in office who were Continuing Directors other than an individual whose initial assumption of office is in connection with an active or threatened election contest relating to the election of Directors of Household which would be subject to Rule 14a-11 under the Exchange Act (or any successor Rule). (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 - 12 - 13 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 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. - 13 - 14 AMENDMENT TO THE HOUSEHOLD INTERNATIONAL, INC. 1996 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN NOVEMBER 11, 1997 On November 11, 1997 the Household International Board of Directors, upon the recommendation of the Board's Compensation Committee, adopted an amendment to the 1996 Long-Term Executive Incentive Compensation Plan (the "Plan") relating to the transferability of options granted under the Plan. TRANSFERABILITY OF OPTIONS GRANTED TO NONEMPLOYEE DIRECTORS AND SENIOR MANAGERS This amendment only applies to Nonemployee Directors and Senior Managers (defined under this amendment as the Chief Executive Officer and employees with a direct reporting relationship to the Chief Executive Officer) who have received or in the future receive options to purchase Household Common Stock under the Plan. This section modifies Plan Section 5(a) as regards the transferability of options granted to Nonemployee Directors and Senior Managers; all other provisions continue to apply. WHO IS ELIGIBLE This provision only applies to Nonemployee Directors and Senior Managers ("Eligible Persons"). TRANSFER OF OPTIONS; MINIMUM NUMBER Options granted under the Plan may be transferred by will or through the laws of descent and distribution. In addition, Eligible Persons may transfer their options ONLY to family members, family trusts, and family partnerships (collectively, "Transferees"). Transferees may not retransfer any options except by will or through the laws of descent and distribution. Any option transferred to a single Transferee must represent the right to purchase a minimum of 100 shares. WHICH OPTIONS MAY BE TRANSFERRED Eligible Persons may transfer any option, including vested and unvested portions of any award granted under the Plan. Options granted under previous benefit plans are not covered by this amendment. EXERCISE Options will vest in accordance with applicable Plan provisions. A Transferee may only exercise vested options, and only as provided in the Plan. - 14 - 15 TAXATION OF OPTIONS The Eligible Person remains liable for any income tax related to the exercise of transferred options. Income tax will be calculated as of the exercise date. The Eligible Person is solely responsible for tax liability related to any options gifted to a Transferee. LAW AND REGULATION In addition to laws and regulations that apply to the Plan, the Transfer of options must be completed in accordance with securities registration and disclosure regulations applicable at the time of transfer. Eligible Persons and Transferees may be subject to certain waiting periods limiting transfer or exercise. Eligible Persons, or their agents agree to notify the Corporation at least five days before any option they own or control is exercised. - 15 - EX-10.6 5 CERTAIN FORMS OF STK OPT & RESTRICTED STK RGTS AGR 1 EXHIBIT 10.6 HOUSEHOLD INTERNATIONAL, INC. HOUSEHOLD INTERNATIONAL 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 a) twelve months 2 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 its Secretary 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. HOUSEHOLD INTERNATIONAL 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 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. 4 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 its Secretary 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. HOUSEHOLD INTERNATIONAL 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 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 6 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 its Secretary 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. HOUSEHOLD INTERNATIONAL 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. 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 8 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 its Secretary 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, INC. HOUSEHOLD INTERNATIONAL 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 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 10 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 its Secretary 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. EX-10.7 6 HOUSEHOLD INT'L INC. DEFERRED FEE FOR DIRECTORS 1 EXHIBIT 10.7 HOUSEHOLD INTERNATIONAL DEFERRED FEE PLAN FOR DIRECTORS SECTION 1. PURPOSE. The purpose of the Household International Deferred Fee Plan (the "Plan") is to provide non-management directors (the "Directors") of Household International, Inc. (the "Company") the opportunity to defer receipt of cash compensation paid by the Company to such person in their role as a Director. The Plan is designed to aid the Company in attracting and retaining as members of its Board of Directors persons whose abilities, experience and judgment can contribute to the well-being of the Company. SECTION 2. EFFECTIVE DATE. The effective date of this Plan is January 10, 1995. The Plan was subsequently amended on September 8, 1997. SECTION 3. ELIGIBILITY. Any Director of the Company who is not deemed to be an employee of the Company or any subsidiary thereof is eligible to participate in the Plan. SECTION 4. DEFERRED COMPENSATION ACCOUNT. Except as may be required in accordance with Section 11 hereof, an unfunded deferred compensation account (the "Account") shall be established for each Director who elects to participate in the Plan. SECTION 5. AMOUNT OF DEFERRAL. A participant may elect to defer receipt of all or a specified part of the compensation payable to the participant for serving on the Board of Directors or committees of the Board of Directors of the Company or any of its subsidiaries. An amount equal to the compensation deferred, as reflected in the election referred to in Section 6 hereof, will be credited to the participant's Account, in the form of cash (the "Cash Component") or phantom Company Common Stock units (the "Stock Component"), on the date such compensation would otherwise be initially payable. SECTION 6. TIME OF ELECTION OF DEFERRAL. Except as set forth herein, an election to defer compensation shall be made on an annual basis on or before December 15th of each year on forms approved for that purpose and shall be effective when filed with the Secretary of the Company with respect to all compensation, or any part thereof so elected to be deferred, that is paid in the calendar year following the calendar year in which the election is made. For the year 1995, the election shall be made prior to January 30, 1995, and shall be effective when made with respect to any compensation to be paid in the period January 30, 1995 - 1 - 2 through December 31, 1995. In the case of newly elected Directors who first become eligible to participate in the Plan subsequent to January 1 of any calendar year, such newly eligible participant shall be entitled to make an election to defer compensation for services to be performed subsequent to the election provided such election is made within 30 days after the date such Director becomes eligible. In this case, such election shall be effective when made with respect to any compensation to be paid during the period beginning with the date following the date of the election through December 31 of the same initial year of participation. SECTION 7. HYPOTHETICAL INVESTMENT. Each Account may have a Cash Component, a Stock Component or a combination of both and will be credited on each date compensation is to be paid to Directors with: (1) if the compensation is to be placed in the Cash Component, the amount elected to be deferred plus interest from the date on which the deferred compensation that is credited to the Cash Component would initially have been payable, until payment, 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 in which such interest is credited to the participant's Account with interest compounded quarterly, or (2) if the compensation is to be placed in the Stock Component, the amount elected to be deferred will be used to purchase phantom units of the Company's Common Stock (including fractional shares) using the fair market value of such Common Stock on the date the compensation would otherwise be paid. The Stock Component will be credited on each dividend payment date for the Company's Common Stock with additional phantom Common Stock units determined by dividing the aggregate cash dividend which would have been paid if the existing phantom Common Stock units were actual shares of the Company's Common Stock by the fair market value of the Company's Common Stock as of the dividend payment date, computed to four decimal places. For purposes of the Plan, the "fair market value" of one share or unit of the Company's Common Stock shall be the average of the high and low sale prices for a share of such Common Stock as published in The Wall Street Journal for the respective determination date. SECTION 8. VALUE OF DEFERRED COMPENSATION ACCOUNTS. The value of each participant's Account shall include compensation deferred and interest or dividends credited thereon, pursuant to Section 7 of the Plan. All deferred amounts to be paid to a - 2 - 3 participant pursuant to the Plan are to be paid as soon as practicable following the payment date, with the value of the phantom Common Stock units being the fair market value of an equal number of shares of the Company's Common Stock on the date of payment. SECTION 9. PAYMENT OF DEFERRED COMPENSATION. No withdrawal may be made from the participant's Account prior to the date specified by the participant in his or her election to defer compensation except as provided in Section 10. At the participant's election, deferral of compensation may be made to a specific date, to immediately after the end of the calendar year in which the participant terminates service as a Director, or to the earlier of either one of such dates. Any deferral must be for a period of at least two years following the year for which the compensation is earned, unless service as a Director terminates earlier. Deferred compensation and interest or dividends (including appreciation or loss) thereon will be payable in cash from the Cash Component or shares of Household Common Stock, $1.00 par value, from the Stock Component either in a lump sum or in such number of quarterly or annual installments as the participant chooses, subject to the participant's right to change such method of distribution no later than twelve months prior to the first date deferred compensation is to be paid. If a participant elects to receive payment from his or her Account in installments, the participant's Account will continue to accrue interest or dividends (and appreciation or loss) during the installment period. Payments made from the Account shall first be made from the Stock Component of the Account until such Component has been reduced to zero, and then from the Cash Component. Interest or dividends credited to a participant's Account during the installment period will be paid on the next installment payment date. SECTION 10. HARDSHIP. In the event of a substantial, unforeseen hardship, a participant may file a notice with the Secretary of the Company to be presented to the Compensation Committee of the Board of Directors, advising the Committee of the circumstances of the hardship, and requesting a withdrawal of previously deferred amounts, or, where a former Director is receiving annual installment payments, requesting accelerated payment. The Committee, in its sole discretion, may agree to accelerate distribution of all or a part of amounts previously deferred. Should the Committee agree, such distribution shall occur on a date set by the Committee (the "Hardship Distribution Date") that is at least six (6) months from the date the Committee approves the hardship withdrawal request. The Committee shall determine, in its sole discretion, how a current participant's Cash Component and Stock Component shall be charged for the withdrawal. No member of the Committee may vote on, or otherwise influence a decision of the Committee concerning his or her request for a hardship withdrawal. A hardship withdrawal by - 3 - 4 a participant shall have no effect on any amounts remaining in the participant Account, and shall not have any effect on any current or future deferral election after the hardship withdrawal. For purposes of this paragraph, a substantial unforeseen hardship is a severe financial hardship resulting from extraordinary and unforeseeable circumstances arising as a result of one or more recent events beyond the participant's control. To the extent such hardship is or may be relieved (i) through reimbursement or compensation by insurance or otherwise, (ii) by liquidation of the participant's assets, to the extent the liquidation of such assets would not itself cause a financial hardship, and (iii) by cessation of deferrals under the Plan, accelerated payment may not be made. Withdrawals of amounts because of an unforeseen hardship may only be permitted to the extent reasonably necessary to satisfy the hardship. Examples of what are not considered to be unforeseeable hardships include the need to send a participant's child to college, or the desire to purchase a home. SECTION 11. CHANGE IN CONTROL. A "Change in Control" means a change in the beneficial ownership of the Company's Common Stock 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 such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) other than (x) a trustee or other fiduciary of securities held under an employee benefit plan of the Company, or (y) an employee or any person acting in concert with an employee becomes a beneficial owner, directly or indirectly, of the Company's Common Stock representing twenty percent (20%) or more of the total voting power of the Company's then outstanding Common Stock; or (2) a tender offer is made for thirty percent (30%) or more of the Company's Common Stock, which tender offer has not been approved by the Board of Directors of the Company. 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 Account. - 4 - 5 SECTION 12. DESIGNATION OF BENEFICIARY. A participant may designate a beneficiary or beneficiaries which shall be effective upon filing written notice with the Secretary of the Company on the form provided 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 13. DEATH OF PARTICIPANT OR BENEFICIARY. In the event of a participant's death before he or she has received the full value of his or her Account, the then current value of the participant's Account shall be determined as of the day immediately following death 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 14. 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 no provisions contained in the Plan shall be construed to give any participant or beneficiary at any time a security interest in the Account or any other assets of the Company. SECTION 15. STATEMENT OF ACCOUNT. Statements will be sent to participants following the end of each year as to the value of their Accounts as of December 31 of such year. SECTION 16. ASSIGNABILITY. No right to receive payments hereunder shall be transferable or assignable by a participant or a beneficiary, except by will or by the laws of descent and distribution. SECTION 17. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company. The Committee shall conclusively interpret the provisions of the Plan and shall make all determinations under the Plan. The Committee shall act by vote or written consent of a majority of its members. SECTION 18. AMENDMENT OR TERMINATION OF PLAN. This Plan may at anytime or from time to time be amended, modified or terminated by the Board of Directors of the Company. No amendment, modification or termination shall, without the consent of a participant, adversely affect such participant's accruals on his or her prior elections. SECTION 19. GOVERNING LAW. This Plan shall be governed - 5 - 6 by and construed in accordance with the laws of the State of Illinois. - 6 - EX-10.8 7 HOUSEHOLD INT'L DEF. PHANTOM STCK. PL. FOR DIR. 1 EXHIBIT 10.8 HOUSEHOLD INTERNATIONAL DEFERRED PHANTOM STOCK PLAN FOR DIRECTORS SECTION 1. PURPOSE. The purpose of the Household International Deferred Phantom Stock Plan for Directors (the "Plan") is to provide non- management directors (the "Directors") of Household International, Inc. (the "Company") with the opportunity to defer receipt of phantom Company Common Stock units paid by the Company to Directors. The Plan is designed to aid the Company in attracting and retaining as members of its Board of Directors persons whose abilities, experience and judgment can contribute to the well-being of the Company. SECTION 2. EFFECTIVE DATE. The effective date of this Plan is July 11, 1995. The Plan was subsequently amended on January 9, 1996, July 9, 1996, January 14, 1997 and September 8, 1997. SECTION 3. ELIGIBILITY. Any Director of the Company serving on the Board as of January 14, 1997, who is not deemed to be an employee of the Company or any subsidiary thereof will participate in the Plan. SECTION 4. DEFERRED COMPENSATION ACCOUNT. An unfunded deferred compensation account (the "Account") has been established for each Director. SECTION 5. TIME OF ELECTION OF DEFERRAL. Except as set forth herein, a Designation of Beneficiary and Account Distribution Form (the "Forms"), must be filed with the Secretary of the Company. SECTION 6. HYPOTHETICAL INVESTMENT. During the deferred period, the phantom Company Common Stock units will be credited on each dividend payment date for the Company's Common Stock with additional phantom Company Common Stock units determined by dividing the aggregate cash dividend which would have been paid if the existing phantom Common Stock units were actual shares of the Company's Common Stock by the fair market value of the Company's Common Stock as of the dividend payment date, computed to four decimal places. For purposes of the Plan, the "fair market value" of one share or unit of the Company's Common Stock shall be the average of the high and low sale prices for a share of such Common Stock as published in The Wall Street Journal for the respective determination date. SECTION 7. VALUE OF DEFERRED COMPENSATION ACCOUNTS. The value of each participant's Account shall include deferred - 1 - 2 phantom Company Common Stock units and dividends credited thereon, pursuant to Section 6 of the Plan. All deferred amounts to be paid to a participant pursuant to the Plan are to be paid in shares of Company Common Stock, $1.00 par value, with the value of the phantom Company Common Stock units being the fair market value of an equal number of shares of the Company's Common Stock on the date of payment. SECTION 8. PAYMENT OF DEFERRED COMPENSATION. All such payments accumulated under this Plan will be made as soon as practicable following the date on which a Director leaves the Board of Directors. A participant may elect to receive the value of his or her deferred compensation at a later date, but such date may not be prior to the date on which a Director leaves the Board of Directors. Deferred phantom Company Common Stock units and dividends (including appreciation or loss) thereon will be payable in shares of Company Common Stock, $1.00 par value, either in a lump sum or in such number of quarterly or annual installments as the participant chooses up to a maximum ten-year period, subject to the participant's right to change such method of distribution no later than twelve months prior to the first date deferred phantom Company Common Stock units are to be paid. If a participant elects to receive payment from his or her Account in installments, the participant's Account will continue to accrue dividends (and appreciation or loss) during the installment period. Dividends credited to a participant's Account during the installment period will be paid on the next installment payment date. SECTION 9. CHANGE IN CONTROL. A "Change in Control" means a change in the beneficial ownership of the Company's Common Stock 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 such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) other than (x) a trustee or other fiduciary of securities held under an employee benefit plan of the Company, or (y) an employee or any person acting in concert with an employee becomes a beneficial owner, directly or indirectly, of the Company's Common Stock representing twenty percent (20%) or more of the total voting power of the Company's then outstanding Common Stock; or (2) a tender offer is made for thirty percent (30%) or more of the Company's Common Stock, which tender offer has - 2 - 3 not been approved by the Board of Directors of the Company. 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 Account. SECTION 10. DESIGNATION OF BENEFICIARY. A participant may designate a beneficiary or beneficiaries which shall be effective upon filing written notice with the Secretary of the Company on the form provided 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 11. DEATH OF PARTICIPANT OR BENEFICIARY. In the event of a participant's death before he or she has received the full value of his or her Account, the then current value of the participant's Account shall be determined as of the day immediately following death 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 12. 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 no provisions contained in the Plan shall be construed to give any participant or beneficiary at any time a security interest in the Account or any other assets of the Company. SECTION 13. STATEMENT OF ACCOUNT. Statements will be sent to participants quarterly as to the value of their Accounts as of the 15th day of January, April, July and October for each year in which their is Account activity. SECTION 14. ASSIGNABILITY. No right to receive payments hereunder shall be transferable or assignable by a participant or a beneficiary, except by will or by the laws of descent and distribution. SECTION 15. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company. The Committee shall conclusively interpret the provisions of the Plan and shall make all determinations under the Plan. The Committee shall act by vote or written consent of a majority of its members. - 3 - 4 SECTION 16. AMENDMENT OR TERMINATION OF PLAN. This Plan may at anytime or from time to time be amended, modified or terminated by the Board of Directors of the Company. No amendment, modification or termination shall, without the consent of a participant, adversely affect such participant's accruals. SECTION 17. GOVERNING LAW. This Plan shall be governed by and construed in accordance with the laws of the State of Illinois. - 4 - EX-10.9 8 HOUSEHOLD INT'L INC. NON-QUAL. DEF. COMP. PLAN 1 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 2 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. 3 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 4 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. 5 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 6 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. EX-10.14 9 EXECUTIVE EMPLOYMENT AGRMT. 1 EXHIBIT 10.14 July 9, 1996 Mr. Gary D. Gilmer 2700 Sanders Road Prospect Heights, IL 60070 Dear Gary: SUBJECT: AMENDMENT AND RESTATEMENT OF EMPLOYMENT AGREEMENT DATED JULY 11, 1994 We wish you to remain in the employ of Household International, Inc. ("Household" or the "Corporation") and to provide you with fair and equitable treatment along with a competitive compensation package. Also, we wish to assure your continued attention to your duties without any possible distraction arising out of uncertain personal circumstances in a change in control environment. We recognize that in the event of a Change in Control of Household (as such term is defined herein) it is likely that your duties and responsibilities would be substantially altered. 1. At present you are employed by Household as Managing Director-Chief Executive Officer, HFC Bank plc. In that capacity you are entitled to the following: a. A minimum annual salary of $275,000; b. An annual bonus having a targeted value equal to 60% of your annualized salary as of the end of the period in which the bonus is earned. The amount of bonus for any year that you actually receive, if any, will depend on the achievement of the corporate goals and your individual goals established for that year and the terms of the Household International Corporate Executive Bonus Plan, and any successor or substitute plan or plans (the "Bonus Plan"). Your bonus will be prorated based on the number of elapsed months in the performance period in the case of death, permanent and total disability, or retirement under the Household Retirement Income Plan or any successor tax qualified defined benefit plan; c. An annual grant of stock options under the Household International 1996 Long-Term Executive Incentive Compensation Plan, and any successor or substitute plan or plans (the "Long-Term Plan"), having a targeted value of 25% of your then annual salary at the time of the grant. The performance unit awards 2 EMPLOYMENT AGREEMENT - Mr. Gary D. Gilmer Page 2 July 9, 1996 granted in prior years will continue to be earned over a three year cycle, which will be prorated on the number of elapsed months in the performance period in the case of death, permanent and total disability or retirement under the Household Retirement Income Plan or any successor tax qualified defined benefit plan. Stock options will be valued at their economic value at the date of grant; and d. Other compensation, benefits and perquisites as described in, and in accordance with, Household's compensation, benefit and perquisite plans (the "Plans"). 2. Subject to termination as provided herein, the term of this Agreement shall be for 18 whole calendar months, shall commence on the date hereof, and shall be "evergreen"; that is shall continue monthly as an 18 month term, unless the Corporation gives to you not less than 17 whole calendar months notice that the term as monthly continued shall not be so continued; provided further, that in no event shall the term be continued beyond your sixty-fifth birthday. 3. During your employment with Household you will devote your reasonably full time and energies to the faithful and diligent performance of the duties inherent in, and implied by, your executive position. 4. In consideration of your employment with Household, it is mutually agreed that: a. In the event your employment with Household is terminated during the term of this Agreement by Household for any reason other than: i. willful and deliberate misconduct which is detrimental in a significant way to the interests of the Corporation; ii. death; iii. inability, for reasons of disability, reasonably to perform your duties for 6 consecutive calendar months; or, b. In the event that during the term of this Agreement 3 EMPLOYMENT AGREEMENT - Mr. Gary D. Gilmer Page 3 July 9, 1996 you resign your position with Household because within 6 whole calendar months of your resignation one or more of the following events occurred to you: i. your annual salary was reduced; ii. your annual target bonus or the targeted value of stock options calculated as provided in paragraph 1c was reduced and compensation equivalent in aggregate value was not substituted; iii. your benefits under the Household 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 your benefits under HSRIP were reduced; iv. your other benefits or perquisites were reduced and such reductions were not uniformally applied with respect to all similarly situated employees; v. you were reassigned to a geographical area outside of the United Kingdom or Chicago, Illinois metropolitan area; vi. any successor to the Corporation by acquisition of stock or substantially all of the assets, by merger or otherwise, failed to expressly adopt or otherwise repudiated this Employment Agreement; or vii. you received written notice that your employment contract was not renewed; Household shall be required, and hereby agrees, to make promptly a lump sum cash payment to you in an amount equal to 200% of your then annual salary (prior to any of the aforesaid reductions) plus 200% of the average of the last two years' bonuses; provided, however, if the term of this Agreement is less than 18 months because you are within 18 months of becoming age 65, the amount shall be multiplied by a fraction the numerator of which is the number of months left in the term, and the 4 EMPLOYMENT AGREEMENT - Mr. Gary D. Gilmer Page 4 July 9, 1996 denominator of which is 18. This payment shall be in addition to all other compensation and benefits accrued to the date of termination of employment. Also, the Compensation Committee of Household's Board of Directors has determined that you will be entitled to receive a portion of your performance unit awards for the performance period in which your employment terminates. Such portion will be determined on the basis of the portion of the performance period elapsed as of your date of termination over the total performance period, and it will be assumed that individual and corporate target levels have been met. 5. It is further mutually agreed that: a. should your employment be terminated pursuant to the provisions of paragraph 4a, or b. should you resign your position pursuant to the provisions of paragraph 4b, or c. should you resign your position because you are assigned to a position of lesser rank or status than you had immediately prior to the Change in Control at any time within sixty (60) whole calendar months following a Change in Control of Household, Household or its successor shall pay to you the amounts (including the lump sum payment) described in paragraph 4 regardless of whether you are otherwise entitled to them under paragraph 4. In addition, Household or its successor shall promptly make a lump sum cash payment to you in an amount equal to 200% of your then annual salary (prior to any reduction) plus 200% of the average of the last two years' bonuses; provided, however, if the term of this Agreement is less than 18 months because you are within 18 months of becoming age 65, the amount shall be multiplied by a fraction the numerator of which is the number of months left in the term, and the denominator of which is 18. Because of the performance history of Household and your performance with us, we hereby agree to an irrebuttable presumption that a reduction in compensation shall be deemed to have occurred in any year (within five years following a Change in Control) in which you do not receive at least: 5 EMPLOYMENT AGREEMENT - Mr. Gary D. Gilmer Page 5 July 9, 1996 i. a bonus payment under the Bonus Plan, and ii. an award of stock options under the Long-Term Plan for years in which awards were payable under the Long-Term Plan as it existed prior to the Change in Control, both at corporate and individual target levels as those plans existed prior to the Change in Control (or compensation, benefits and perquisites equivalent in aggregate value) and should you choose to resign, payments shall be made to you as outlined earlier in this paragraph 5. For purposes of this Agreement, a Change in Control of Household shall be deemed to occur when and if: A. 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 trustee or other fiduciary of securities held under an employee benefit plan of Household becomes the beneficial owner, directly or indirectly, of securities of Household representing 20% or more of the combined voting power of Household's then outstanding securities; or B. persons who were directors of Household 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 Household or its successor by merger, consolidation or sale of assets. 6. You are not required to mitigate the amount of any payments to be made by Household pursuant to this Agreement by seeking other employment, or otherwise, nor shall the amount of any payments provided for in this Agreement be reduced by any compensation earned by you as the result of self-employment or your employment by another employer after the date of termination of your employment with Household. 7. This Agreement 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. At that March date the Agreement provided 6 EMPLOYMENT AGREEMENT - Mr. Gary D. Gilmer Page 6 July 9, 1996 for a lump sum payment equal to 488% of your annual salary. In view of the foregoing, if the lump sum payments under paragraphs 4 and 5 are otherwise limited by the FDIC regulations, any limits on "golden parachute" payments resulting from regulations issued by the FDIC should not reduce the lump sum payments under this Agreement below the lesser of 488% of your then annual salary (prior to any reduction) or the lump sum amounts calculated under paragraphs 4 and 5. 8. Except as provided below, it is the intent and desire of Household that the salary, bonuses and other benefits provided for herein shall be paid to you without any diminution by reason of the assessment of any "golden parachute" excise tax pursuant to the Internal Revenue Code of 1986, as from time to time amended, (hereinafter the "Code"), or state law. Accordingly, in the event that any excise tax is assessed against you pursuant to the provisions of sections 280G and 4999 of the Code (or successor provisions) or comparable provisions of state law, whether with respect to any payments made to you pursuant to the provisions of this Agreement or payments otherwise arising out of your employment relationship, Household or any successor, upon notification of such assessment, shall promptly pay to you such amount as is necessary to provide you with the same after-tax benefit that you would have received had there been no "golden parachute" excise tax. For this purpose, Household or its successor shall assume that you are taxed at the highest individual federal and state income tax rates (without regard to Section 1(g) of the Code or successor provisions thereto). However, if any part or all of the amounts to be paid to you constitute "parachute payments" within the meaning of section 280G(b)(2)(A) of the Code, and a reduction of the amount by 10% or less would totally avoid the imposition of any excise tax, such amounts shall be reduced so that the aggregate present value of the amounts constituting such parachute payments will be equal to 299% of your "annualized includible compensation for the base period," as such term is defined in section 280G(d)(1) of the Code. For the purpose of this subparagraph, present value shall be determined in accordance with section 280G(d)(4) of the Code. 9. If a dispute arises regarding the termination of your 7 EMPLOYMENT AGREEMENT - Mr. Gary D. Gilmer Page 7 July 9, 1996 employment or the interpretation or enforcement of this Agreement and you obtain a final judgment in your 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 your claim is settled by Household or its successor prior to the rendering of such a judgment, all reasonable legal and other professional fees and expenses incurred by you in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided for in this Agreement or in otherwise pursuing your claim will be promptly paid by Household or its successor with interest thereon at the highest statutory rate of your state of domicile for interest on judgments against private parties from the date of payment thereof by you to the date of reimbursement to you by Household or its successor. 10. You agree that you will not, without prior written consent of the Chief Executive Officer or the General Counsel of Household, during the term of or after the termination of your employment under this Agreement, directly or indirectly, disclose to any individual, corporation, or other entity (other than Household, or any subsidiary or affiliate thereof, or its officers, directors, or employees entitled to such information, or any other person or entity to whom such information is regularly disclosed in the normal course of Household's business), or use for your own benefit or for the benefit of such individual, corporation or other entity, any information whether or not reduced to written or other tangible form, which: a. is not generally known to the public or in the industry; b. has been treated by Household as confidential or proprietary; and c. is of competitive advantage to Household and in the confidentiality of which Household has a legally protectible interest, (such information being referred to herein as "Confidential Information"). Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which Household ceases to have a legally protectible interest, shall 8 EMPLOYMENT AGREEMENT - Mr. Gary D. Gilmer Page 8 July 9, 1996 cease to be subject to the restrictions of this paragraph. 11. The provisions of this Agreement shall be construed, to the extent possible, so as to guarantee their enforceability. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained in it. 12. This Agreement is an Amendment and Restatement of the Employment Agreement dated July 11, 1994, between you and Alexander Hamilton and supersedes said Agreement. This Agreement also supersedes the Employment Agreement dated May 28, 1993, between you and Alexander Hamilton, and the Employment Agreement dated March 9, 1992, between you and Household, all in furtherance of the objectives authorized and deemed by the Board of Directors of Household to serve the best interests of the Corporation. 13. Any successor to the Corporation, by acquisition of stock or substantially all of the assets, by merger or otherwise, shall be required to adopt and abide by the terms of this Agreement. This Agreement, and any rights to receive payments hereunder, may not be transferred, assigned or alienated by you. 14. All benefits under this Agreement shall be general obligations of the Corporation which shall not require the segregation of any funds or property. Notwithstanding the foregoing, in the discretion of the Corporation, the Corporation may establish a grantor trust or other vehicle to assist it in meeting its obligations hereunder, but any such trust or other vehicle shall not create a funded account or security interest for you. 15. This Agreement may only be amended or terminated by written agreement, signed by both of the parties. 9 EMPLOYMENT AGREEMENT - Mr. Gary D. Gilmer Page 9 July 9, 1996 Our signatures below indicate our mutual agreement and acceptance of the foregoing terms and provisions, all as of the date first above set forth. Sincerely, HOUSEHOLD INTERNATIONAL, INC. By: /s/ William F. Aldinger ----------------------------- William F. Aldinger Chief Executive Officer /s/ Gary D. Gilmer ------------------ Gary D. Gilmer EX-10.15 10 WFA SUPPLEMENTAL EXEC. RETIREMENT PLAN 1 EXHIBIT 10.15 WFA SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN WHEREAS, Household International, Inc., by resolution of its Board of Directors dated November 11, 1997, has authorized its proper officers to adopt the WFA Supplemental Executive Retirement Plan, NOW, THEREFORE, the 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" (hereafter called the "Plan") was adopted to supplement the benefits payable to WFA under both RIP and SRIP. 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. 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. Payment of Benefits. Payment of benefits, if any, under the Plan will not commence until WFA receives benefits under the Household Retirement Income Plan. 5. 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 a monthly single life annuity benefit under the Plan equal to 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%. 6. Form of Payment. WFA may elect, prior to his retirement date, that his single life annuity benefit under the Plan be paid in any form of payment offered under RIP which is actuarially equivalent to the single life annuity benefit, determined in accordance with the factors used under RIP. The form of benefit chosen from the Plan may differ from that elected under RIP or SRIP; provided, however, notwithstanding anything to the contrary in any plan, a lump-sum payment may be made from the Plan only with the specific approval of the Senior Vice President-Human Resources of Household or 2 his successor. In the event that a payment under this paragraph 6 is to be made but 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 a rate equal to the Short-Term U.S. Treasury Bill Rate as outlined in paragraph 8.6 of RIP. 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 after he attains age 60 but before payments commence, then any benefit under the Plan to which he was entitled on the day before his death 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. 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 18th day of November, 1997. HOUSEHOLD INTERNATIONAL, INC. By: /s/ Colin P. Kelly ------------------------------------- Senior Vice President-Human Resources (Corporate Seal) ATTEST: /s/ Paul R. Shay - ---------------------- Secretary EX-11 11 STMT OF COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (In millions, except per share data.)
- ---------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 ----------------------- ------------------------ --------------------- Year ended December 31 Diluted Basic Diluted Basic Diluted Basic - ---------------------------------------------------------------------------------------------------------------------------- Earnings: Net income $ 686.6 $ 686.6 $ 538.6 $ 538.6 $ 453.2 $ 453.2 Preferred dividends (11.8) (11.8) (16.7) (16.7) (26.4) (26.4) - ----------------------------------------------------------------------------------------------------------------------------- Earnings available to common shareholders $ 674.8 $ 674.8 $ 521.9 $ 521.9 $ 426.8 $ 426.8 ============================================================================================================================= Average shares: Common 102.4 102.4 97.1 97.1 97.5 97.5 Common equivalents 1.4 -- 1.2 -- 1.6 -- ============================================================================================================================= Total 103.8 102.4 98.3 97.1 99.1 97.5 ============================================================================================================================= Earnings per common share $ 6.50 $ 6.59 $ 5.31 $ 5.37 $ 4.31 $ 4.38 =============================================================================================================================
EX-12 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 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 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 686.6 $ 538.6 $ 453.2 $ 367.6 $ 298.7 Income taxes 342.6 283.7 300.5 160.7 152.0 - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,029.2 822.3 753.7 528.3 450.7 - -------------------------------------------------------------------------------------------------------------------------------- Fixed charges: Interest expense (1) 1,512.9 1,524.6 1,562.5 1,250.3 1,155.5 Interest portion of rentals (2) 26.9 32.1 33.5 35.5 33.6 - -------------------------------------------------------------------------------------------------------------------------------- Total fixed charges 1,539.8 1,556.7 1,596.0 1,285.8 1,189.1 ================================================================================================================================ Total earnings as defined $ 2,569.0 $ 2,379.0 $ 2,349.7 $ 1,814.1 $ 1,639.8 ================================================================================================================================ Ratio of earnings to fixed charges 1.67 1.53 1.47 1.41 1.38 ================================================================================================================================ Preferred stock dividends (3) $ 17.7 $ 25.5 $ 44.1 $ 40.9 $ 46.9 ================================================================================================================================ Ratio of earnings to combined fixed charges and preferred stock dividends 1.65 1.50 1.43 1.37 1.33 ================================================================================================================================
(1) For financial statement purposes, these amounts are reduced for income earned on temporary investment of excess funds, generally resulting from over-subscriptions of commercial paper issuances. (2) Represents one-third of rental which approximates the portion representing interest. (3) Preferred stock dividends are grossed up to their pre-tax equivalents based on effective tax rates of 33.3, 34.5, 39.9, 30.4 and 33.7 percent for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. EX-13 13 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 Household International, Inc. and Subsidiaries - ------------------------------------------------------------------------------- Selected Financial Data and Statistics
All dollar amounts except per share data are stated in millions. 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Statement of Income Data - Year Ended December 31 Net interest margin and other revenues $ 3,999.7 $ 3,538.2 $ 3,587.3 $ 3,360.6 $ 3,305.0 Provision for credit losses on owned receivables 1,042.0 759.6 761.3 606.8 735.8 Operating expenses 1,743.7 1,727.2 1,597.8 1,761.1 1,579.4 Policyholders' benefits 184.8 229.1 474.5 464.4 539.1 Income taxes 342.6 283.7 300.5 160.7 152.0 ------------------------------------------------------------------------------------------------------------------------------ Net income $ 686.6 $ 538.6 $ 453.2 $ 367.6 $ 298.7 - -----============================================================================================================================== Per Common Share Data Basic earnings per share(1) $ 6.59 $ 5.37 $ 4.38 $ 3.56 $ 2.97 Diluted earnings per share(1) 6.50 5.31 4.31 3.50 2.86 Dividends declared 1.62 1.46 1.31 1.23 1.18 Book value 42.13 30.30 27.70 22.78 22.01 - ----------------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data at December 31 Total assets(2): Owned $ 30,302.6 $ 29,594.5 $ 29,218.8 $ 34,338.4 $ 32,961.5 Managed 51,868.4 48,120.9 44,103.4 46,833.5 42,789.3 ------------------------------------------------------------------------------------------------------------------------------ Managed receivables(3): First mortgage $ 396.6 $ 725.6 $ 2,066.9 $ 3,364.2 $ 3,534.1 Home equity 11,059.1 7,985.4 8,810.1 7,940.2 7,880.4 Auto finance(4) 883.4 - - - - MasterCard/Visa 18,264.3 18,737.4 13,343.1 11,100.2 8,842.6 Private label 5,707.9 5,587.0 4,446.2 3,433.1 2,949.1 Other unsecured 8,291.3 8,620.2 6,660.8 5,378.2 4,320.8 Commercial 774.2 937.8 1,289.6 1,834.8 2,831.2 ------------------------------------------------------------------------------------------------------------------------------ Total managed receivables 45,376.8 42,593.4 36,616.7 33,050.7 30,358.2 Receivables serviced with limited recourse (21,565.8) (18,526.4) (14,884.6) (12,495.1) (9,827.8) ------------------------------------------------------------------------------------------------------------------------------ Owned receivables $ 23,811.0 $ 24,067.0 $ 21,732.1 $ 20,555.6 $ 20,530.4 ============================================================================================================================== Deposits(5) $ 1,788.9 $ 2,365.1 $ 4,708.8 $ 8,439.0 $ 7,516.1 Total other debt 20,930.0 21,230.1 17,887.3 14,646.2 14,755.9 Company obligated mandatorily redeemable preferred securities of subsidiary trusts 175.0 175.0 75.0 - - Convertible preferred stock - - - 2.6 19.3 Preferred stock 150.0 205.0 205.0 320.0 320.0 Common shareholders' equity(6) 4,516.2 2,941.2 2,690.9 2,200.4 2,078.3 - ----------------------------------------------------------------------------------------------------------------------------------- Selected Financial Ratios Return on average owned assets 2.26% 1.82% 1.34% 1.08% .91% Return on average managed assets 1.39 1.17 .98 .83 .73 Return on average common shareholders' equity 18.2 18.9 17.4 16.0 14.2 Total shareholders' equity as a percent of owned assets(7) 15.98 11.22 10.17 7.34 7.28 Total shareholders' equity as a percent of managed assets(7) 9.33 6.90 6.74 5.38 5.60 Managed net interest margin, normalized 7.48 7.07 6.48 6.70 6.92 Managed consumer net chargeoff ratio 4.47 3.35 2.95 2.84 2.91 Managed basis efficiency ratio, normalized 36.0 40.8 46.0 52.7 51.8 Common dividends to net income 24.7 26.3 28.1 32.1 36.9 ------------------------------------------------------------------------------------------------------------------------------
(1) We adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS No. 128). Under FAS No. 128, basic earnings per common share is computed excluding dilution caused by common stock equivalents such as stock options. Diluted earnings per common share includes the effect of dilutive common stock equivalents. Prior years have been restated. (2) In 1995, we sold our first mortgage servicing portfolio and servicing business as well as the individual life and annuity product lines of our life insurance business. In 1994, we sold our Australian subsidiary and retail securities brokerage business. (3) In 1997, we acquired the capital stock of Transamerica Financial Services Holding Company ("TFS"). We paid $1.1 billion for the stock of TFS and repaid about $2.8 billion of TFS debt owed to its affiliates. 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. (4) 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. (5) 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. (6) In 1997, we issued 9.1 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. (7) Total shareholders' equity at December 31, 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. 18 2 Household International, Inc. and Subsidiaries - ------------------------------------------------------------------------------- Credit Quality Statistics
All dollar amounts are stated in millions. At December 31, unless otherwise indicated. 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Managed Consumer Two-Month-and-Over Contractual Delinquency Ratios First mortgage 10.35% 9.49% 3.29% 1.81% 1.33% Home equity 4.17 3.96 3.24 2.83 3.55 Auto finance(1) 2.09 - - - - MasterCard/Visa 3.05 2.71 2.22 2.25 2.41 Private label 6.75 5.50 4.51 4.53 4.74 Other unsecured 8.30 6.13 5.60 5.19 7.14 ------------------------------------------------------------------------------------------------------------------------------ Total 4.82% 4.15% 3.46% 3.11% 3.59% - -----============================================================================================================================== Ratio of Net Chargeoffs to Average Managed Receivables for the Year First mortgage 1.05% .45% .35% .41% .37% Home equity .99 .99 1.00 1.31 1.30 Auto finance(1) 4.60 - - - - MasterCard/Visa 5.71 4.67 4.26 3.92 3.84 Private label 4.97 3.21 4.72 3.57 4.10 Other unsecured 5.65 4.02 3.33 4.36 6.16 ------------------------------------------------------------------------------------------------------------------------------ Total consumer 4.47 3.35 2.95 2.84 2.91 Commercial 1.90 .98 2.21 3.21 4.68 ------------------------------------------------------------------------------------------------------------------------------ Total 4.42% 3.28% 2.91% 2.87% 3.10% - -----============================================================================================================================== Nonaccrual Owned Receivables Domestic: First mortgage $ 31.7 $ 50.0 $ 39.6 $ 38.6 $ 25.6 Home equity 181.3 95.5 87.5 41.1 40.8 Private label(2) 5.5 6.0 42.1 20.3 16.8 Other unsecured 188.4 163.7 164.2 147.2 153.5 Foreign 109.7 106.6 102.6 99.6 128.7 ------------------------------------------------------------------------------------------------------------------------------ Total consumer 516.6 421.8 436.0 346.8 365.4 Commercial 31.0 59.4 145.5 116.3 272.4 ------------------------------------------------------------------------------------------------------------------------------ Total $ 547.6 $ 481.2 $ 581.5 $ 463.1 $ 637.8 - -----============================================================================================================================== Nonaccrual Managed Receivables Domestic: First mortgage $ 31.7 $ 50.0 $ 39.6 $ 38.6 $ 25.6 Home equity 295.0 212.9 192.5 143.0 155.5 Private label(2) 5.5 6.0 64.2 36.8 21.7 Other unsecured 470.0 322.2 214.0 147.2 153.5 Foreign 140.3 128.0 112.7 99.6 128.7 ------------------------------------------------------------------------------------------------------------------------------ Total consumer 942.5 719.1 623.0 465.2 485.0 Commercial 31.0 59.4 145.5 116.3 272.4 ------------------------------------------------------------------------------------------------------------------------------ Total $ 973.5 $ 778.5 $ 768.5 $ 581.5 $ 757.4 - -----============================================================================================================================== Accruing Owned Receivables 90 or More Days Delinquent(3) Domestic $ 332.5 $ 319.4 $ 128.0 $ 128.2 $ 131.8 Foreign 31.3 23.8 12.2 7.5 10.3 ------------------------------------------------------------------------------------------------------------------------------ Total $ 363.8 $ 343.2 $ 140.2 $ 135.7 $ 142.1 - -----============================================================================================================================== Accruing Managed Receivables 90 or More Days Delinquent(3) Domestic $ 640.7 $ 525.2 $ 255.0 $ 220.7 $ 197.0 Foreign 31.3 23.8 12.2 7.5 10.3 ------------------------------------------------------------------------------------------------------------------------------ Total $ 672.0 $ 549.0 $ 267.2 $ 228.2 $ 207.3 - -----============================================================================================================================== Renegotiated Commercial Loans $ 12.4 $ 12.9 $ 21.2 $ 41.8 $ 28.7 - ----------------------------------------------------------------------------------------------------------------------------------- Real Estate Owned Domestic $ 118.3 $ 122.3 $ 111.5 $ 138.7 $ 367.2 Foreign 9.0 14.3 25.0 44.1 58.3 ------------------------------------------------------------------------------------------------------------------------------ Total $ 127.3 $ 136.6 $ 136.5 $ 182.8 $ 425.5 ==============================================================================================================================
(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 subsequent to our acquisition in October 1997. (2) Represents nonaccrual sales contract receivables which are included in private label receivables. (3) 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. 19 3 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations Household International, Inc., through its subsidiaries, provides consumers with several types of loan products. We offer home equity loans, auto finance loans, MasterCard* and Visa* and private label credit cards and other unsecured loans. We serve middle-market customers in the United States, United Kingdom and Canada. At December 31, 1997, we had managed receivables of $45.4 billion. Our managed receivable portfolio includes receivables on our balance sheet and those that we service for investors as part of our asset securitization program. Operations Summary - - Our net income in 1997 was a record $686.6 million, an increase of 27 percent over 1996. Net income in 1996 was $538.6 million, 19 percent higher than 1995 earnings of $453.2 million. Diluted earnings per share were $6.50 in 1997, up 22 percent from $5.31 in 1996, which was up 23 percent from $4.31 in 1995. This was our sixth consecutive year of earnings per share growth of 20 percent or more. The difference between the percentage increases in net income and earnings per share in 1997 was due to issuing over nine million common shares in late June. Our return on average common shareholders' equity ("ROE") was 18.2 percent in 1997, compared to 18.9 percent in 1996, and up from 17.4 percent in 1995. The slight decrease in 1997 was a result of the June common stock offering. Our return on average owned assets ("ROA") was 2.26 percent, up from 1.82 percent in 1996 and 1.34 percent in 1995. Our return on average managed assets ("ROMA") was 1.39 percent, up from 1.17 percent in 1996 and .98 percent in 1995. Our net income, ROA and ROMA increased over the past three years because we focused on our core businesses, which earn higher returns compared to the businesses that we sold or exited beginning in late 1994. - - In June, 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. The integration of TFS into Household Finance Corporation, our wholly-owned subsidiary, is complete. We closed all redundant branches and consolidated back office operations. In connection with this acquisition, in June 1997, we completed a public offering of 9.1 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 1.4 million shares of our common stock and cash. ACC makes loans to non-prime borrowers secured by automobiles, primarily used vehicles sold through franchised dealers. This purchase increased our market share in the non-prime auto finance market and added key managers to grow this business. We accounted for both of these acquisitions as purchases. Thus, we have included the results of operations of TFS and ACC in our statement of income for 1997 from the closing dates of the transactions. These acquisitions were not material to our financial statements. - - In 1996, 1995 and late 1994, we exited several businesses that were providing insufficient returns on our investment. Over the course of 1996 and 1995, we sold our consumer banking branches in Illinois, California, Maryland, Virginia, Ohio and Indiana. This included the sale of about $6.2 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 and $93 million in 1995. In October 1995, we sold the individual life and annuity product lines of our individual life insurance business. However, we retained our credit life insurance business, which complements our consumer lending and provides us additional revenue. We sold $6.1 billion of assets, which were virtually all investment securities. We retained two product lines of the individual life insurance business, but are no longer pursuing new business in this area. From late 1994 through 1995, we also exited our first mortgage origination and servicing businesses in the United States and Canada. Because we no longer originate first mortgage loans, this portfolio continues to decrease as loans pay off or are sold. - - The following summarizes operating results for our key businesses for 1997 compared to 1996 and 1995: * MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of VISA USA, Inc. 20 4 - -------------------------------------------------------------------------------- Our domestic consumer finance business reported higher earnings due mainly to higher levels of average managed receivables, particularly in unsecured loans. These loans typically carry higher rates than secured products because they carry more risk. More receivables, coupled with higher interest rates charged on loans, resulted in higher net interest margin. The increase in margin was partially offset by higher credit losses because more of our borrowers declared personal bankruptcy. Personal bankruptcy filings in the U.S. were at an all-time high in 1997. Our MasterCard and Visa credit card business achieved higher earnings due to higher net interest margin and fee income, and improved efficiency. These factors were offset to some degree by higher credit losses resulting primarily from increased personal bankruptcy filings. In late 1996 we started a program designed to increase the return on our MasterCard and Visa portfolio. We sold certain non-strategic portfolios, increased fees, and systematically eliminated unprofitable accounts. This business continued to benefit from our co-branding and affinity relationship strategies. This includes our alliance with General Motors Corporation ("GM") to issue the GM Card, a co-branded credit card. The GM Card continues to represent a substantial portion of our credit card portfolio. The MasterCard and Visa business also includes the AFL-CIO's Union Privilege affinity relationship which we acquired in June 1996. Union Privilege was created by the AFL-CIO to market benefits to union members. Our private label credit card business reported lower income as a result of higher credit losses in 1997 due to the end of certain special promotions and increased personal bankruptcies. The higher credit losses were partially offset by higher net interest margin. During 1997, we began to implement various initiatives to control the mix and increase the profitability of promotional activity. Our United Kingdom operation's net income increased for a sixth consecutive year because of revenue growth from a larger receivable base. Managed receivables increased to $3.5 billion at year-end 1997, up 16 percent from the end of 1996. The majority of this increase was due to the success of the United Kingdom's co-branded credit card relationships, including the Goldfish Card issued in alliance with the Centrica Group. Profits from our Canadian operation increased over 1996 due to higher net interest margin and improved efficiency. Our commercial operations benefited from gains on the disposition of assets while continuing to minimize credit losses. - - Our managed net interest margin expanded to 7.48 percent in 1997 from 7.07 percent in 1996 and 6.48 percent in 1995. Our margins have increased over the past three years because we have continued to raise the interest rates we charge on most of our products. In addition, our product mix has shifted towards unsecured receivables, which have higher rates than secured products because they carry more risk. - - Our capital ratios improved over the past three years because of our issuance of common stock in 1997, the sale of businesses and assets in 1996 and 1995 and strong earnings growth. - - Our normalized managed basis efficiency ratio was 36.0 percent in 1997, 40.8 percent in 1996 and 46.0 percent in 1995. 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. They include gains on the sales of loan portfolios and non-recurring restructuring expenses. The improvement in the 1997 ratio was due to continued cost control in our remaining businesses and to the sales of less-efficient businesses in 1996 and 1995. - -------------------------------------------------------------------------------- Balance Sheet Review - - Managed assets (total assets on our balance sheet plus receivables serviced with limited recourse) increased to $51.9 billion at December 31, 1997 from $48.1 billion at year-end 1996. The increase was due to receivable growth in our core businesses. Owned assets totaled $30.3 billion at December 31, 1997, up slightly from $29.6 billion at year-end 1996. Owned assets may vary from period to period depending on the timing and size of asset securitization transactions. We securitized $6.7 billion of receivables in 1997 and $6.9 billion of receivables during 1996. We refer to the securitized receivables that are serviced for investors and not on our balance sheet as our off-balance sheet portfolio. 21 5 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - - Our core products and total portfolio grew during 1997, as shown in the following table:
INCREASE (DECREASE) Increase (Decrease) All dollar amounts are stated in millions. DECEMBER 31, 1997 in 1997/1996 in 1996/1995 - ---------------------------------------------------------------------------------------------------------------- MANAGED RECEIVABLES: Home equity $11,059.1 38% (9)% Auto finance(1) 883.4 - - MasterCard/Visa 18,264.3 (3) 40 Private label 5,707.9 2 26 Other unsecured 8,291.3 (4) 29 - ---------------------------------------------------------------------------------------------------------------- CORE PRODUCTS 44,206.0 8 23 - ---------------------------------------------------------------------------------------------------------------- First mortgage 396.6 (45) (65) Commercial 774.2 (17) (27) - ---------------------------------------------------------------------------------------------------------------- Total $45,376.8 7% 16% ================================================================================================================
(1)Prior to 1997, auto finance receivables were not significant and were included in other unsecured receivables. Growth in home equity and auto finance receivables benefited from acquisitions during 1997. MasterCard and Visa receivables were down somewhat from 1996 due to the sale and planned runoff of non-strategic and less profitable receivables. Private label credit card receivables were up slightly from last year. The balance of other unsecured receivables at December 31, 1997 reflects the fourth quarter sale of our entire portfolio of student loans totaling about $900 million, as we exited this business due to its lower returns. Excluding the sale of these loans, other unsecured receivables experienced steady growth in both the domestic consumer finance and United Kingdom businesses. - - The managed consumer two-months-and-over contractual delinquency ratio increased to 4.82 percent at December 31, 1997 from 4.15 percent at December 31, 1996. The 1997 managed consumer net chargeoff ratio was 4.47 percent compared to 3.35 percent in 1996 and 2.95 percent in 1995. - - We increased managed credit loss reserves 19 percent in 1997, to $1.9 billion compared to $1.6 billion at December 31, 1996. This compares to an increase of 7 percent in total managed receivables in 1997. The increase in managed reserves was due to continuing uncertainty about consumer payment patterns, the maturing of our unsecured loan portfolios and the increase in our off-balance sheet portfolio. Credit loss reserves as a percent of managed receivables increased to 4.29 percent at year-end 1997 from 3.75 percent a year ago. Reserves as a percent of nonperforming managed receivables were 117.3 percent compared to 119.1 percent at December 31, 1996. - - The ratio of total shareholders' equity to owned assets was 15.98 percent, an increase from 11.22 percent at year-end 1996. The ratio of total shareholders' equity to managed assets was 9.33 percent, up from 6.90 percent at December 31, 1996. The increase in the ratios was primarily due to the issuance of 9.1 million shares of common stock in June 1997. - -------------------------------------------------------------------------------- Pro Forma Managed Statements of Income Securitizations of consumer receivables have been, and will continue to be, an important source of funding. 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. 22 6 - ------------------------------------------------------------------------------- Pro Forma Managed Statements of Income
In millions. Year ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------- Finance income $ 5,935.4 $ 5,273.7 $ 4,601.4 Other interest income 36.8 80.6 123.4 Interest expense 2,691.7 2,489.8 2,365.4 - ------------------------------------------------------------------------------- Net interest margin 3,280.5 2,864.5 2,359.4 Provision for credit losses 2,162.5 1,641.0 1,271.1 - ------------------------------------------------------------------------------- Net interest margin after provision for credit losses 1,118.0 1,223.5 1,088.3 - ------------------------------------------------------------------------------- Insurance revenues 276.4 253.4 322.1 Investment income 129.5 153.2 470.2 Fee income 1,244.5 916.1 665.5 Other income 189.3 232.4 279.9 - ------------------------------------------------------------------------------- Total other revenues 1,839.7 1,555.1 1,737.7 - ------------------------------------------------------------------------------- Salaries and fringe benefits 639.5 564.3 555.3 Occupancy and equipment expense 207.9 209.8 222.1 Other marketing expenses 337.7 354.4 249.7 Other servicing and administrative expenses 400.2 455.0 460.9 Amortization of acquired intangibles and goodwill 158.4 143.7 109.8 Policyholders' benefits 184.8 229.1 474.5 - ------------------------------------------------------------------------------- Total costs and expenses 1,928.5 1,956.3 2,072.3 - ------------------------------------------------------------------------------- Income before income taxes 1,029.2 822.3 753.7 Income taxes 342.6 283.7 300.5 - ------------------------------------------------------------------------------- Net income $ 686.6 $ 538.6 $ 453.2 =============================================================================== Average managed receivables $43,387.1 $39,639.7 $34,502.5 Average noninsurance investments 609.1 1,417.4 2,193.0 - ------------------------------------------------------------------------------- Average managed interest-earning assets $43,996.2 $41,057.1 $36,695.5 ===============================================================================
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 $1,590.6 million for 1997, up from $1,509.9 million in 1996 and $1,445.1 million in 1995. As a percent of average owned interest-earning assets, net interest margin was 6.39 percent in 1997, 6.09 percent in 1996 and 5.97 percent in 1995. The dollar increase over 1996 and 1995 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 34 and 35 for an analysis of our Owned Basis net interest margin. Net interest margin on a Managed Basis increased to $3,280.5 million for 1997 from $2,864.5 million in 1996. The increase was due to receivable growth and higher interest spreads. The net interest margin percentage on a Managed Basis increased to 7.48 percent from 7.07 percent in 1996 and 6.48 percent in 1995. The increase over the prior two years was due to higher interest rates charged on loans and the continued shift in product mix towards unsecured receivables. The managed net interest margin percentages exclude the impact of temporary investments related to acquisitions and divestitures. Including the impact of these temporary investments, the managed net interest margin percentage was 7.46 percent in 1997, 6.98 percent in 1996 and 6.43 percent in 1995. Net interest margin 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. 23 7 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The provision for credit losses on an Owned Basis totaled $1,042.0 million in 1997, compared to $759.6 million in 1996 and $761.3 million in 1995. As a percent of average owned receivables, the provision was 4.29 percent compared to 3.25 percent in 1996 and 3.46 percent in 1995. The increase in 1997 was due to higher chargeoffs on our unsecured portfolios. Over the past three years, we recorded provisions for credit losses in excess of chargeoffs because of continued uncertainty regarding consumer payment patterns, high levels of personal bankruptcies and the maturing of our unsecured products. The maturing or seasoning of a product is the effect of a growing portfolio reaching expected levels of chargeoffs as loans age. Owned provision in excess of owned chargeoffs was $124 million in 1997, $102 million in 1996 and $100 million in 1995. The provision for credit losses on a Managed Basis totaled $2,162.5 million in 1997, $1,641.0 million in 1996 and $1,271.1 million in 1995. The provision as a percent of average managed receivables was 4.98 percent in 1997, 4.14 percent in 1996 and 3.68 percent in 1995. Managed provision in excess of managed chargeoffs was $246 million in 1997, $341 million in 1996 and $218 million in 1995. OTHER REVENUES Securitization income was $1,400.6 million in 1997, $1,149.0 million in 1996 and $873.6 million in 1995. Securitization income increased over the three year period because of 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 $276.4 million in 1997 were up from $253.4 million in 1996 but down from $322.1 million in 1995. The increase in 1997 was due to increased insurance sales on a larger portfolio. The decrease in 1996 from 1995 was due to the sale of the individual life and annuity product lines in the fourth quarter of 1995. Revenues of the retained insurance business were $229.1 million in 1995 on a pro forma basis. Investment income includes interest income on investment securities in the retained insurance business as well as realized gains and losses from the sale of investment securities. Investment income was $129.5 million in 1997 compared to $153.2 million in 1996 and $470.2 million in 1995. The decrease in 1997 from 1996 was due to lower average investment balances and lower yields on the securities in the portfolio. The large decline in 1996 from 1995 was because of the sale of our insurance business. On a pro forma basis, investment income from our retained insurance businesses was $170.7 million in 1995. The decline in 1996 compared to pro forma 1995 was due to lower average investment balances and lower yields. 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 $413.3 million in 1997, up from $240.3 million in 1996 and $196.4 million in 1995. The increase in fee income in 1997 reflected higher credit card fees and interchange income. Fee income on a Managed Basis which, in addition to the items discussed above, includes fees and other income related to the off-balance sheet portfolio. Managed Basis fee income increased to $1,244.5 million in 1997 from $916.1 million in 1996 and $665.5 million in 1995. The increases were primarily due to higher credit card fees and interchange income as a result of increased average managed credit card receivables. In addition, fee income for 1997 included higher securitization gains which were offset by establishing higher over-the-life provisions related to securitizations. Other income was $189.3 million in 1997, $232.4 million in 1996 and $279.9 million in 1995 and includes gains and losses from the disposition of assets and businesses and, in 1995, income from servicing receivable portfolios without recourse. Other income in 1997 reflected the sale of certain non-strategic assets which included the sale of certain non co-branded MasterCard and Visa receivables and student loans. Other income for 1996 included the premium from the sale of our Illinois banking operations. Other income for 1995 included the premium from our non-Illinois banking operations and first mortgage servicing income which we exited in 1995. EXPENSES Operating expenses were $1,743.7 million in 1997, $1,727.2 million in 1996 and $1,597.8 million in 1995. During 1996, we recorded non-recurring charges of $78 million related to settling legal matters with a former subsidiary, closing office space and other matters. In 1995 we incurred charges to combine space and staff totaling $15 million. Salaries and fringe benefits were $639.5 million in 1997, up from $564.3 million in 1996 and $555.3 million in 1995. The increase was mostly due to a higher number of sales people in our consumer finance branch network and a higher number of collectors. The average number of employees during 1997 was 15,000 compared to 13,600 in 1996 and 14,000 in 1995. 24 8 - -------------------------------------------------------------------------------- Occupancy and equipment expense was $207.9 million in 1997, about the same as $209.8 million in 1996 and down from $222.1 million in 1995. Excluding non-recurring costs of $14 million in 1996, these expenses were up 6 percent from 1996 because of the new branches we operated in the last half of 1997. Both 1997 and 1996 expenses were lower than 1995 due to initiatives to reduce office space and sell less efficient businesses. Other marketing expenses include payments for advertising, direct mail programs and other marketing expenditures. These expenses were $337.7 million in 1997, compared to $354.4 million in 1996 and $249.7 million in 1995. Although we increased our marketing spending during the last half of 1997, the full year expense was down from 1996. The decrease in marketing spending reflects the deferral of major mailings during the first six months of 1997 as we worked on individual marketing plans with the participating AFL-CIO unions in the Union Privilege program. The increase in 1996 from 1995 was due to marketing initiatives for our credit card portfolio. Other servicing and administrative expenses were $400.2 million in 1997, $455.0 million in 1996 and $460.9 million in 1995. Excluding non-recurring costs of $64 million in 1996 and $15 million in 1995, these expenses were up slightly compared to 1996 and down 10 percent from 1995. The increase from 1996 was due to higher expenses related to the TFS and ACC acquisitions. The decreases from 1995 were due to our cost reduction efforts. Amortization of acquired intangibles and goodwill was $158.4 million in 1997, $143.7 million in 1996 and $109.8 million in 1995. The increase reflects our acquisitions of TFS in mid-1997 and ACC in late 1997, and the Union Privilege portfolio in mid-1996. Policyholders' benefits were $184.8 million in 1997, $229.1 million in 1996 and $474.5 million in 1995. Expense was lower in 1997 compared to 1996 because we have fewer policies in our retained life insurance business. The decrease in 1996 from 1995 was due to the sale of our insurance business in late 1995. On a pro forma basis, policyholders' benefits of our retained insurance business were $211.4 million in 1995. The increase in 1996 over pro forma 1995 was due to receivables growth. Income taxes. The 1997 effective tax rate was 33.3 percent compared to 34.5 percent in 1996 and 39.9 percent in 1995. The 1995 tax rate was affected by additional taxes on the sale of our insurance business. Excluding this impact, the effective tax rate for 1995 would have been 34.8 percent. - -------------------------------------------------------------------------------- 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 experienced by our industry over the last two years has had a direct effect on the asset quality of our overall portfolio. During 1997 our delinquency and net chargeoff levels were impacted by higher consumer bankruptcies in our unsecured portfolios and the continued maturing of our receivables. We continued to tighten and refine our credit standards throughout the year and increased the number of collectors. During the fourth quarter of 1997, we recognized the first drop in our quarterly chargeoff ratio since the first quarter of 1996, due to a decrease in our MasterCard and Visa portfolio. Until June 1997, when we acquired virtually all secured loans from TFS, the percentage of unsecured loans in our portfolio had been increasing. Unsecured loans were 72 percent of our managed consumer receivables at year-end 1997 compared to 79 percent in 1996 and 69 percent in 1995. Generally, unsecured loans have higher delinquency and chargeoff rates than secured loans. The high proportion of unsecured receivables increases the delinquency and chargeoff statistics of the entire portfolio. We compensate for this by charging higher interest rates and fees on these loans, which benefits our revenue. We track delinquency and chargeoff levels on a managed basis. We include the off-balance sheet portfolio since we apply the same credit and portfolio management procedures as on our owned portfolio. This results in a similar credit loss exposure for us. 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. Receivables are written off, or for secured products written down to net realizable value, at the following stages of contractual delinquency: auto finance - 5 months; first mortgage, home equity and MasterCard and Visa - 6 months; private label - 9 months; and other unsecured - 9 months and no payment received in 6 months. 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. It 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. Our foreign consumer operations, located in the United Kingdom and Canada, accounted for 8 and 3 percent, respectively, of managed consumer receivables at December 31, 1997. 25 9 Household International, Inc. and Subsidiaries - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------------------------- Managed Consumer Two-Month-and-Over Contractual Delinquency Ratios 1997 Quarter End 1996 Quarter End ---------------------------- ------------------------- 4 3 2 1 4 3 2 1 - ------------------------------------------------------------------------------ First mortgage 10.35% 9.27% 10.27% 8.19% 9.49% 3.82% 3.64% 3.28% Home equity 4.17 3.41 3.18 3.85 3.96 3.55 3.35 3.20 Auto finance(1) 2.09 - - - - - - - MasterCard/Visa 3.05 3.17 3.10 3.13 2.71 2.54 2.05 2.42 Private label 6.75 6.54 5.89 5.52 5.50 5.43 5.04 4.74 Other unsecured 8.30 7.28 6.77 6.68 6.13 5.79 5.95 5.71 - --------------------- --------------------------------------------------------- Total 4.82% 4.62% 4.32% 4.45% 4.15% 3.83% 3.49% 3.60% ===============================================================================
(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. Our managed consumer delinquency ratio at year end was 20 basis points higher than the third quarter level. This increase was lower than the third quarter increase of 30 basis points. The increases in these two quarters were due to the expiration of certain special no-interest and no-payment promotions in our private label portfolio, and seasoning of the other unsecured portfolio. Home equity delinquency was up due to the maturing of acquired receivables. MasterCard and Visa delinquency was down in the quarter. Dollars of delinquency in the first mortgage portfolio were down as this portfolio continues to liquidate. The increase in the managed delinquency ratio from a year ago was mainly due to the seasoning of all portfolios and the expiration of certain special no-interest and no-payment promotions in our private label portfolio. The owned consumer delinquency ratio was 5.13 percent at December 31, 1997 and 4.50 percent at December 31, 1996.
- --------------------------------------------------------------------------------------------------------- Managed Consumer Net Chargeoff Ratios Full Year 1997 Quarter Annualized Full Year 1996 Quarter Annualized Full Year ------------------------- ------------------------- 1997 4 3 2 1 1996 4 3 2 1 1995 - --------------------------------------------------------------------------------------------------------- First mortgage 1.05% 1.29% 1.21% .87% .94% .45% .30% .50% .46% .51% .35% Home equity .99 .80 .77 1.17 1.38 .99 1.18 .98 .89 .89 1.00 Auto finance(1) 4.60 5.31 - - - - - - - - - MasterCard/Visa 5.71 5.74 6.42 5.84 4.90 4.67 4.66 4.71 4.86 4.44 4.26 Private label 4.97 5.39 4.99 4.63 4.85 3.21 3.70 3.54 3.82 4.51 4.72 Other unsecured 5.65 6.18 5.93 5.41 4.97 4.02 4.18 4.35 3.58 3.91 3.33 - --------------------------------------------------------------------------------------------------------- Total 4.47% 4.50% 4.63% 4.58% 4.15% 3.35% 3.59% 3.52% 3.33% 3.24% 2.95% =========================================================================================================
(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 4.50 percent, down 13 basis points from the third quarter. Total dollars of chargeoff were down in the quarter. The improvement was driven by a 68 basis point decline in the MasterCard and Visa chargeoff ratio to 5.74 percent. For the MasterCard and Visa portfolio, actual dollars of chargeoffs were down over $25 million in the quarter, reflecting reductions in both bankruptcies and credit chargeoffs. In the private label portfolio, increased chargeoffs reflected the maturing of promotional balances and higher personal bankruptcies. In our other unsecured portfolio, higher chargeoffs resulted from continued seasoning and high levels of personal bankruptcies. The managed consumer net chargeoff ratio for full year 1997 was 4.47 percent, up from 3.35 percent in 1996 and 2.95 percent in 1995. About 40 percent of the increase in 1997 was due to higher bankruptcy chargeoffs in our MasterCard and Visa portfolio. The remaining increase was due to the expiration of certain private label promotional programs and seasoning of other unsecured receivables. The owned consumer net chargeoff ratio was 3.85 percent in 1997, 2.90 percent in 1996 and 3.07 percent in 1995. 26 10
- ------------------------------------------------------------------------------ NONPERFORMING ASSETS All dollar amounts are stated in millions. At December 31 1997 1996 1995 - ------------------------------------------------------------------------------ Nonaccrual managed receivables $ 973.5 $ 778.5 $ 768.5 Accruing managed consumer receivables 90 or more days delinquent 672.0 549.0 267.2 Renegotiated commercial loans 12.4 12.9 21.2 - ------------------------------------------------------------------------------ Total nonperforming managed receivables 1,657.9 1,340.4 1,056.9 Real estate owned 127.3 136.6 136.5 - ------------------------------------------------------------------------------ Total nonperforming managed assets $1,785.2 $1,477.0 $1,193.4 ============================================================================== Managed credit loss reserves as a percent of nonperforming managed receivables 117.3% 119.1% 111.4% - ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------ 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 increased 20 percent to $1,082.2 million from $900.2 million at December 31, 1996. The ratio of credit loss reserves to total owned receivables was 4.54 percent, up from 3.74 percent at December 31, 1996. Total managed credit loss reserves increased 22 percent to $1,944.5 million from $1,596.2 million at December 31, 1996. The ratio of credit loss reserves to total managed receivables was 4.29 percent, up from 3.75 percent at December 31, 1996. We increased credit loss reserves because of seasoning of unsecured products and increased personal bankruptcies. The ratio of total credit loss reserves to total nonperforming managed receivables was 117.3 percent compared to 119.1 percent at December 31, 1996. Over the past five years, we have increased our credit loss reserves for managed receivables to reflect the change in mix to unsecured products and seasoning. Unsecured products historically have higher chargeoff rates than secured products. 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 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------- Managed credit loss reserves $1,944.5 $1,596.2 $1,177.4 $882.5 $844.7 Reserves as a % of managed receivables 4.29% 3.75% 3.22% 2.67% 2.78% ===============================================================================================
- ------------------------------------------------------------------------------ Liquidity and Capital Resources We continued to strengthen our capital ratios in 1997 by issuing additional common stock, increasing our retained earnings and controlling asset growth. 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. Our capital position continues to improve. For example, from 1992 through 1997, total shareholders' equity increased 162 percent, while managed assets increased 33 percent. 27 11 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Consolidated capital ratios were as follows:
At December 31 1997 1996 - -------------------------------------------------------------------------------- Total shareholders' equity(1) as a percent of owned assets 15.98% 11.22% Total shareholders' equity(1) as a percent of managed assets 9.33 6.90 Tangible equity to tangible managed assets 6.15 5.02 - --------------------------------------------------------------------------------
(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 source of funds is cash received from its subsidiaries in the form of dividends and intercompany borrowings. The parent company received dividends from its subsidiaries of $313 million in 1997 and $265 million in 1996. In addition, the parent company receives cash from third parties by issuing debt and common stock. This includes commercial paper that we sell through an in-house sales force totaling $281.5 million at December 31, 1997 and $203.3 million at December 31, 1996. At December 31, 1997, 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, 1997. The lines of credit expire in 1998 and they 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 it has 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 the holders of its common stock. The parent company made capital contributions of $1.2 billion to a subsidiary in 1997 and $200 million in 1996. The parent company paid $181.3 million in dividends to shareholders in 1997 and $158.4 million in 1996. The parent company's double leverage ratio, which is defined as parent company investments in subsidiaries divided by total shareholders' equity, was 1.08 at December 31, 1997 and 1.10 at December 31, 1996. In October 1997, the parent company and a wholly-owned subsidiary purchased all of the outstanding capital stock of ACC for about 1.4 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 9.1 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. In July 1996, the parent company issued junior preferred share purchase rights for its common stock which may be exercised in the event of the expressed intent to acquire or actual acquisition of 15 percent or more of our common stock by a third party or an associated group. SUBSIDIARIES We have three major subsidiaries: HFC, 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 and 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. At December 31, 1997, HFC's outstanding commercial paper totaled $4.6 billion compared to $4.8 billion at December 31, 1996. HFC markets its commercial paper through an in-house sales force, directly reaching more than 275 investors. HFC actively manages the level of commercial paper outstanding to ensure availability to core investors and proper utilization of any excess capacity within internally established targets. HFC also markets domestic medium-term notes through investment banks and its in-house sales force, issuing a total of $2.7 billion in 1997. To obtain a broader investment base, HFC and its subsidiary, Household Bank (Nevada) N.A., periodically issue medium-term notes in European and Asian markets. These markets provide HFC with a broader investor base as compared with domestic markets. During 1997, $1.6 billion in medium-term notes were issued in European and Asian markets compared to $.9 billion in European markets in 1996. These notes were issued in various European and Asian currencies and 28 12 - -------------------------------------------------------------------------------- currency swaps were used to convert the notes to U.S. dollars in order to eliminate future foreign exchange risk. During 1997, HFC also issued $.2 billion of long-term debt with an original maturity of 10 years. In August 1997, HFC redeemed, at par of $100 million, all outstanding shares of its 7.25% 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 $6.2 billion at December 31, 1997, of which $400 million were also available to its parent company. Neither HFC nor its parent used any of these back-up lines at December 31, 1997. 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 1998 through 2002. 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. 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, HFC received a capital contribution of $1.0 billion from the parent company to repay debt. THE BANK The Bank primarily uses wholesale funding for its operations. At December 31, 1997, these sources included securitizations of credit card receivables, domestic and European medium-term notes, deposits, Federal Home Loan Bank advances and Federal funds borrowings. The Bank is subject to the capital adequacy guidelines adopted by the Office of Thrift Supervision. At December 31, 1997, 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, 1997 were 18.4, 20.8 and 31.0 percent, respectively. In the fourth quarter of 1997, the Bank sold its entire portfolio of student loans totaling about $900 million 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 and 1995, we sold all of our consumer banking branch operations. These transactions 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 $4.3 billion at year-end 1997. Consolidated shareholders' equity reflects the increase or decrease from 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 to protect ourselves from fluctuations in foreign currencies that are beyond our control. The potential loss in net income associated with a 10 percent adverse change in the British pound/US dollar or Canadian dollar/US 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, short- and intermediate-term bank lines of credit, long-term debt and securitizations of consumer receivables. Deposits at year-end 1997 were $777 million compared to $815 million a year earlier. Borrowings from bank lines of credit at year-end 1997 were $864 million compared to $838 million a year ago. Long-term debt at year-end 1997 was $592 million compared to $512 million a year earlier. The parent company has guaranteed payment of all debt obligations, except for certain deposits, of its United Kingdom subsidiary. Committed back-up lines of credit for the United Kingdom were approximately $1.8 billion at December 31, 1997. These lines have varying maturities from 1998 through 2004. Our Canadian operation is funded with commercial paper, intermediate- and long-term debt. Intermediate- and long-term debt totaled $749 million at year-end 1997 compared with $856 million a year ago. Committed back-up lines of credit for Canada were approximately $471 million at December 31, 1997. The parent company has guaranteed payment of the debt obligations of its Canadian subsidiary and Global. 29 13 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- ASSET SECURITIZATIONS Securitizations of consumer receivables have been, and will continue to be, an important source of funds 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. These subsidiaries plan to use securitizations in the future. During 1997 these subsidiaries securitized about $6.7 billion of MasterCard and Visa, private label and other unsecured receivables. We have not securitized new auto loan originations subsequent to the acquisition of ACC. This total securitization volume compares to $6.9 billion in sales in 1996 and $5.4 billion in 1995. At December 31, 1997, HFC, the Bank and the United Kingdom had $21.6 billion of receivables sold under securitization transactions. At December 31, 1997, the expected weighted average remaining life of these transactions was 2.3 years. The following table summarizes the expected amortization of our securitizations by type:
In millions. At December 31, 1997 1998 1999 2000 2001 2002 Thereafter - ----------------------------------------------------------------------------------------------------------------------------- Home equity $ 981.7 $ 729.6 $ 397.3 $ 295.5 $ 271.9 $ 449.9 Auto finance(1) 144.8 124.6 79.2 36.7 10.6 - MasterCard/Visa 1,305.8 5,568.0 3,699.0 1,195.8 568.4 - Private label 213.5 161.5 - 650.0 - - Other unsecured 1,001.5 758.7 783.4 661.3 583.4 893.7 - ----------------------------------------------------------------------------------------------------------------------------- Total $3,647.3 $7,342.4 $4,958.9 $2,839.3 $1,434.3 $1,343.6 =============================================================================================================================
(1) Auto finance receivables were previously securitized by ACC before its acquisition in October 1997. 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 payoff event occurred. HFC and the Bank have facilities with commercial banks under which they may securitize up to $6.6 billion of receivables. These facilities are renewable on an annual basis. At December 31, 1997, these facilities were fully utilized. The amount available under these facilities will vary based on the timing and volume of public securitization transactions. At December 31, 1997, the long-term debt and preferred stock of the parent company, HFC and the Bank have been assigned an investment grade rating by four rating agencies. Furthermore, these agencies included 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. CAPITAL EXPENDITURES During 1997 we made $65 million in capital expenditures compared to the prior-year level of $97 million. YEAR 2000 The conversion of certain computer systems to permit continued use in the Year 2000 and beyond began in prior years. 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 Year 2000 may cause systems to process critical financial and operational information incorrectly. We have identified our Year 2000 issues and compliance for significant systems is scheduled to be completed by the end of 1998. The costs for Year 2000 compliance have not been, and are not expected to be, material to our operations. While we are reviewing our third-party vendors' Year 2000 compliance, we cannot assure that the systems of our vendors, 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. 30 14 - -------------------------------------------------------------------------------- RISK MANAGEMENT We have a comprehensive program to address potential financial risks. These risks include 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. We utilize simulation models to measure the impact on net interest margin of changes in interest rates. The key assumptions used in this model include the rate at which we expect our loans to pay off, loan volumes and pricing, cash flows from derivative financial instruments and changes in market conditions. The assumptions we make are based on our best estimates of actual conditions. The model cannot precisely predict the actual impact of changes in interest rates on net income because these assumptions are highly uncertain. At December 31, 1997, we had managed our interest rate risk to levels substantially below those allowed by our 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 terms of our assets or liabilities, or off-balance sheet transactions. We do not use any exotic or leveraged derivatives. At December 31, 1997, we managed about $22 billion of domestic receivables that have variable interest rates, including credit card, home equity and other unsecured products. These receivables have been funded with $5.0 billion of short-term debt, with the remainder funded by 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 while still controlling 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, 1997, about 79 percent of our derivative counterparties were rated AA- or better. (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 change. 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, 1997, we estimate that our earnings would decline by about $40 million following a gradual 200 basis point increase in interest rates over a twelve month period and would increase by about $50 million 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 8, "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 12, "Fair Value of Financial Instruments," provides information regarding the fair value of certain financial instruments. 31 15 Household International, Inc. and Subsidiaries -------------------------------------------------------------- ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - OWNED RECEIVABLES
All dollar amounts are stated in millions. 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------- TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT JANUARY 1 $ 900.2 $ 720.4 $ 546.0 $ 621.9 $ 564.1 - -------------------------------------------------------------------------------------------------------------- PROVISION FOR CREDIT LOSSES--OWNED RECEIVABLES 1,042.0 759.6 761.3 606.8 735.8 OWNED RECEIVABLES CHARGED OFF Domestic: First mortgage (8.2) (8.6) (6.6) (10.3) (13.5) Home equity (32.3) (35.2) (26.9) (37.2) (36.2) Auto finance(1) (6.4) - - - - MasterCard/Visa (397.6) (261.7) (258.7) (204.4) (172.4) Private label (243.1) (122.0) (132.2) (101.9) (88.5) Other unsecured (211.9) (217.1) (211.7) (202.8) (205.7) Foreign (135.1) (117.5) (109.5) (118.0) (151.4) ---------------------------------------------------------------------------------------------- Total consumer (1,034.6) (762.1) (745.6) (674.6) (667.7) Commercial (16.9) (15.4) (41.0) (85.5) (145.1) ---------------------------------------------------------------------------------------------- Total owned receivables charged off (1,051.5) (777.5) (786.6) (760.1) (812.8) - ---------------------------------------------------------------------------------------------------------------- RECOVERIES ON OWNED RECEIVABLES Domestic: First mortgage 2.3 2.5 2.2 2.9 2.6 Home equity 2.3 1.3 1.6 1.5 1.2 Auto finance(1) .3 - - - - MasterCard/Visa 45.9 16.5 19.7 17.6 12.5 Private label 26.2 23.7 24.1 23.6 19.4 Other unsecured 16.6 36.0 45.6 39.5 38.8 Foreign 39.8 35.3 29.6 30.4 26.4 ---------------------------------------------------------------------------------------------- Total consumer 133.4 115.3 122.8 115.5 100.9 Commercial .4 4.4 2.9 1.3 1.7 ---------------------------------------------------------------------------------------------- Total recoveries on owned receivables 133.8 119.7 125.7 116.8 102.6 Portfolio acquisitions, net 57.7 78.0 74.0 (39.4) 32.2 - ---------------------------------------------------------------------------------------------------------------- TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES Domestic: First mortgage 2.4 4.3 4.1 5.1 4.1 Home equity 147.6 38.6 26.3 20.1 16.9 Auto finance(1) 14.6 - - - - MasterCard/Visa 287.6 266.4 131.1 125.6 122.7 Private label 163.2 162.1 147.1 65.0 70.2 Other unsecured 286.1 204.7 196.2 141.7 129.3 Foreign 97.0 88.2 65.0 39.5 45.4 ---------------------------------------------------------------------------------------------- Total consumer 998.5 764.3 569.8 397.0 388.6 Commercial 83.7 135.9 150.6 149.0 208.3 Unallocated corporate - - - - 25.0 - ---------------------------------------------------------------------------------------------------------------- TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT DECEMBER 31 $ 1,082.2 $ 900.2 $ 720.4 $ 546.0 $ 621.9 ================================================================================================================ RATIO OF CREDIT LOSS RESERVES TO OWNED RECEIVABLES Consumer 4.33% 3.30% 2.78% 2.12% 2.20% Commercial 10.81 14.50 11.68 8.12 7.36 ---------------------------------------------------------------------------------------------- Total(2) 4.54% 3.74% 3.31% 2.66% 3.03% ============================================================================================== - ---------------------------------------------------------------------------------------------------------------- RATIO OF CREDIT LOSS RESERVES TO OWNED NONPERFORMING LOANS Consumer 113.4% 99.9% 98.9% 82.5% 76.6% Commercial 192.9 188.0 90.3 94.2 69.2 ---------------------------------------------------------------------------------------------- Total(2) 117.2% 107.5% 97.0% 85.4% 76.9% ==============================================================================================
(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. (2) 1993 amount includes the unallocated corporate reserve. 32 16 Household International, Inc. and Subsidiaries ----------------------------------------------------------------- Analysis of Credit Loss Reserves Activity - Managed Receivables
All dollar amounts are stated in millions. 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Total Credit Loss Reserves for Managed Receivables at January 1 $ 1,596.2 $ 1,177.4 $ 882.5 $ 844.7 $ 724.8 - ----------------------------------------------------------------------------------------------------------------------------- Provision for Credit Losses-Managed Receivables 2,162.5 1,641.0 1,271.1 969.8 1,016.8 - ----------------------------------------------------------------------------------------------------------------------------- Managed Receivables Charged Off Domestic: First mortgage (8.2) (8.6) (6.6) (10.3) (13.5) Home equity (89.2) (73.4) (72.7) (82.6) (75.3) Auto finance(1) (13.6) - - - - MasterCard/Visa (1,088.5) (763.0) (562.4) (401.1) (284.6) Private label (271.2) (153.3) (189.6) (123.0) (113.5) Other unsecured (467.1) (308.1) (216.1) (202.8) (222.3) Foreign (163.3) (131.9) (109.5) (118.0) (151.4) - ----------------------------------------------------------------------------------------------------------------------------- Total consumer (2,101.1) (1,438.3) (1,156.9) (937.8) (860.6) Commercial (16.9) (15.4) (41.0) (85.5) (145.1) - ----------------------------------------------------------------------------------------------------------------------------- Total managed receivables charged off (2,118.0) (1,453.7) (1,197.9) (1,023.3) (1,005.7) - ----------------------------------------------------------------------------------------------------------------------------- Recoveries on Managed Receivables Domestic: First mortgage 2.3 2.5 2.2 2.9 2.6 Home equity 5.1 1.5 1.9 1.5 1.2 Auto finance(1) .6 - - - - MasterCard/Visa 93.8 41.8 33.5 25.7 15.8 Private label 28.8 27.1 29.4 25.4 20.9 Other unsecured 28.9 40.8 45.5 39.5 38.8 Foreign 41.7 35.8 29.6 30.4 26.4 - ----------------------------------------------------------------------------------------------------------------------------- Total consumer 201.2 149.5 142.1 125.4 105.7 Commercial .4 4.4 2.9 1.3 1.7 - ----------------------------------------------------------------------------------------------------------------------------- Total recoveries on managed receivables 201.6 153.9 145.0 126.7 107.4 Portfolio acquisitions, net 102.2 77.6 76.7 (35.4) 1.4 - ----------------------------------------------------------------------------------------------------------------------------- Total Credit Loss Reserves for Managed Receivables Domestic: First mortgage 2.4 4.3 4.1 5.1 4.1 Home equity 192.3 130.6 105.1 97.8 75.5 Auto finance(1) 49.7 - - - - MasterCard/Visa 702.1 566.5 344.1 317.9 274.6 Private label 229.1 182.2 178.4 117.9 82.5 Other unsecured 546.3 455.3 308.9 141.7 129.3 Foreign 138.9 121.4 86.2 53.1 45.4 - ----------------------------------------------------------------------------------------------------------------------------- Total consumer 1,860.8 1,460.3 1,026.8 733.5 611.4 Commercial 83.7 135.9 150.6 149.0 208.3 Unallocated corporate - - - - 25.0 - ----------------------------------------------------------------------------------------------------------------------------- Total Credit Loss Reserves for Managed Receivables at December 31 $ 1,944.5 $ 1,596.2 $ 1,177.4 $ 882.5 $ 844.7 ============================================================================================================================= Ratio of Credit Loss Reserves to Managed Receivables Consumer 4.17% 3.51% 2.90% 2.35% 2.22% Commercial 10.81 14.50 11.68 8.12 7.36 - ----------------------------------------------------------------------------------------------------------------------------- Total(2) 4.29% 3.75% 3.22% 2.67% 2.78% ============================================================================================================================= Ratio of Credit Loss Reserves to Managed Nonperforming Loans Consumer 115.3% 115.2% 115.3% 105.8% 88.3% Commercial 192.9 188.0 90.3 94.2 69.2 - ----------------------------------------------------------------------------------------------------------------------------- Total(2) 117.3% 119.1% 111.4% 103.6% 85.0% =============================================================================================================================
(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. (2) 1993 amount includes the unallocated corporate reserve. 33 17 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Net Interest Margin - 1997 Compared to 1996 (Owned Basis)
Finance and Average Interest Income/ Outstanding(2) Average Rate Interest Expense Increase/(Decrease) Due to: --------------- -------------- ----------------- ------------------------------- Volume Rate All dollar amounts are 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 5,861.0 4,363.2 12.5 11.7 731.9 508.5 223.4 186.3 37.1 MasterCard/Visa 6,856.6 7,029.0 11.3 12.8 772.5 897.9 (125.4) (21.7) (103.7) Private label 5,234.9 4,146.1 12.9 12.3 675.2 510.6 164.6 138.8 25.8 Other unsecured 4,897.3 5,017.5 16.2 16.9 794.5 849.3 (54.8) (20.1) (34.7) Commercial 867.1 1,116.9 4.7 4.7 40.5 52.9 (12.4) (12.4) - ==================================================================================================================================== Total receivables $24,282.7 $23,390.5 12.6% 12.6% $3,057.2 $2,949.9 $ 107.3 $107.3 - Noninsurance investments 609.1 1,417.4 6.0 5.7 36.8 80.6 (43.8) (47.9) 4.1 ==================================================================================================================================== Total interest-earning assets (excluding insurance investments) $24,891.8 $24,807.9 12.4% 12.2% $3,094.0 $3,030.5 $ 63.5 $ 10.9 $ 52.6 Insurance investments 1,834.6 2,202.1 Other assets 3,607.9 2,651.8 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $30,334.3 $29,661.8 ==================================================================================================================================== Debt: Deposits $ 2,380.9 $ 3,889.9 5.6% 5.3% $ 132.5 $ 204.6 $ (72.1) $(83.3) $ 11.2 Commercial paper 5,486.2 5,334.2 5.6 5.4 308.3 286.9 21.4 9.3 12.1 Bank and other borrowings 948.7 1,147.4 6.3 7.2 59.8 82.6 (22.8) (13.2) (9.6) Senior and senior subordinated debt (with original maturities over one year) 15,016.3 13,424.7 6.7 7.1 1,002.8 946.5 56.3 111.0 (54.7) ==================================================================================================================================== Total debt $23,832.1 $23,796.2 6.3% 6.4% $1,503.4 $1,520.6 $ (17.2) $ 2.7 $ (19.9) Other liabilities 2,470.1 2,775.3 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 26,302.2 26,571.5 Preferred securities 327.3 334.2 Common shareholders' equity 3,704.8 2,756.1 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity $30,334.3 $29,661.8 ==================================================================================================================================== Net Interest Margin-Owned Basis(1),(5) 6.4% 6.1% $1,590.6 $1,509.9 $ 80.7 $ 8.2 $ 72.5 ==================================================================================================================================== Interest Spread-Owned Basis(4) 6.1% 5.8% ====================================================================================================================================
(1) Represents net interest margin as a percent of average interest-earning assets. See page 36 for net interest margin on a managed basis for 1997, 1996 and 1995. (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:
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Average interest-earning assets $3,701.4 $3,142.8 $3,665.7 Average interest-bearing liabilities 3,100.7 2,833.1 3,444.4 Net interest margin 290.6 251.3 235.9 Net interest margin percentage 7.9% 8.0% 6.4%
34 18 Household International, Inc. and Subsidiaries -------------------------------------------------------------- Net Interest Margin - 1996 Compared to 1995 (Owned Basis)
Finance and All dollar amounts are stated Average Interest Income/ Increase/(Decrease) Due to: in millions. Outstanding(2) Average Rate Interest Expense ---------------------------- ----------------------- --------------- ----------------- Volume Rate 1996 1995 1996 1995 1996 1995 Variance Variance(3) Variance(3) - --------------------------------------------------------------------------------------------------------------------------------- Receivables: First mortgage $ 1,717.8 $ 2,941.1 7.6% 8.1% $ 130.7 $ 237.1 $ (106.4) $ (93.7) $ (12.7) Home equity 4,363.2 3,684.5 11.7 11.5 508.5 423.5 85.0 79.0 6.0 MasterCard/Visa 7,029.0 5,152.7 12.8 14.3 897.9 736.1 161.8 245.9 (84.1) Private label 4,146.1 2,995.7 12.3 14.0 510.6 419.6 91.0 146.3 (55.3) Other unsecured 5,017.5 5,526.0 16.9 17.3 849.3 956.8 (107.5) (86.4) (21.1) Commercial 1,116.9 1,721.7 4.7 6.1 52.9 105.7 (52.8) (32.0) (20.8) ================================================================================================================================= Total receivables $23,390.5 $22,021.7 12.6% 13.1% $2,949.9 $2,878.8 $ 71.1 $ 174.6 $ (103.5) Noninsurance investments 1,417.4 2,193.0 5.7 5.6 80.6 123.4 (42.8) (43.8) 1.0 ================================================================================================================================= Total interest-earning assets (excluding insurance investments) $24,807.9 $24,214.7 12.2% 12.4% $3,030.5 $3,002.2 $ 28.3 $ 72.7 $ (44.4) Insurance investments 2,202.1 6,140.8 Other assets 2,651.8 3,386.7 - --------------------------------------------------------------------------------------------------------------------------------- Total Assets $29,661.8 $33,742.2 ================================================================================================================================= Debt: Deposits $ 3,889.9 $ 7,044.2 5.3% 5.1% $ 204.6 $ 362.7 $ (158.1) $(165.8) $ 7.7 Commercial paper 5,334.2 4,551.1 5.4 6.0 286.9 273.2 13.7 43.9 (30.2) Bank and other borrowings 1,147.4 1,565.1 7.2 7.4 82.6 116.3 (33.7) (30.3) (3.4) Senior and senior subordinated debt (with original maturities over one year) 13,424.7 10,489.1 7.1 7.7 946.5 804.9 141.6 211.1 (69.5) ================================================================================================================================= Total debt $23,796.2 $23,649.5 6.4% 6.6% $1,520.6 $1,557.1 $ (36.5) $ 9.5 $ (46.0) Other liabilities 2,775.3 7,326.1 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 26,571.5 30,975.6 Preferred securities 334.2 309.0 Common shareholders' equity 2,756.1 2,457.6 - --------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $29,661.8 $33,742.2 ================================================================================================================================= Net Interest Margin-Owned Basis(1),(5) 6.1% 6.0% $1,509.9 $1,445.1 $ 64.8 $ 63.2 $ 1.6 ================================================================================================================================= Interest Spread-Owned Basis(4) 5.8% 5.8% =================================================================================================================================
35 19 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Net Interest Margin - 1997 Compared to 1996 and 1995 (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. 1997 1996 1995 1997 1996 1995 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Receivables: First mortgage $ 565.8 $ 1,717.8 $ 2,941.1 7.5% 7.6% 8.1% $ 42.6 $ 130.7 $ 237.1 Home equity 9,576.9 8,616.7 8,483.5 12.6 11.8 12.1 1,203.5 1,020.1 1,024.4 MasterCard/Visa 17,669.1 15,750.7 11,481.4 13.1 13.5 14.4 2,323.3 2,129.8 1,649.2 Private label 5,671.4 4,822.2 3,814.6 13.2 13.4 14.3 751.4 644.5 545.6 Other unsecured 9,036.8 7,615.4 6,060.2 17.4 17.0 17.2 1,574.1 1,295.7 1,039.4 Commercial 867.1 1,116.9 1,721.7 4.7 4.7 6.1 40.5 52.9 105.7 - ------------------------------------------------------------------------------------------------------------------------------------ Total receivables 43,387.1 39,639.7 34,502.5 13.7 13.3 13.3 5,935.4 5,273.7 4,601.4 Noninsurance investments 609.1 1,417.4 2,193.0 6.0 5.7 5.6 36.8 80.6 123.4 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets (excluding insurance investments) 43,996.2 41,057.1 36,695.5 13.6 13.0 12.9 5,972.2 5,354.3 4,724.8 - ------------------------------------------------------------------------------------------------------------------------------------ Total debt $42,936.5 $40,045.4 $36,130.2 6.3 6.2 6.5 2,691.7 2,489.8 2,365.4 - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Margin-Managed Basis(2) 7.5% 7.0% 6.4% $3,280.5 $2,864.5 $2,359.4 ==================================================================================================================================== Interest Spread-Managed Basis(3) 7.3% 6.8% 6.4% ====================================================================================================================================
(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 the cost of the debt used to fund the assets. 36 20 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1997-Three Months Ended ---------------------------------------- All dollar amounts except per share data are stated in millions. Dec. Sept. June March Dec. Sept. - ----------------------------------------------------------------------------------------------------------------------------------- Finance income $785.7 $790.0 $729.9 $751.6 $813.5 $755.6 Other interest income 6.6 6.2 15.7 8.3 9.2 12.1 Interest expense 387.3 389.2 361.8 365.1 398.8 384.7 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest margin 405.0 407.0 383.8 394.8 423.9 383.0 Provision for credit losses on owned receivables 239.2 257.8 251.6 293.4 222.3 169.5 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest margin after provision for credit losses 165.8 149.2 132.2 101.4 201.6 213.5 - ----------------------------------------------------------------------------------------------------------------------------------- Securitization income 359.1 366.5 344.3 330.7 307.1 282.0 Insurance revenues 72.9 69.6 68.5 65.4 67.5 63.6 Investment income 34.5 32.9 28.9 33.2 25.2 34.8 Fee income 149.8 108.7 77.4 77.4 75.0 62.1 Other income 42.8 48.8 28.6 69.1 37.0 31.5 - ----------------------------------------------------------------------------------------------------------------------------------- Total other revenues 659.1 626.5 547.7 575.8 511.8 474.0 - ----------------------------------------------------------------------------------------------------------------------------------- Salaries and fringe benefits 167.0 168.7 156.2 147.6 154.5 138.1 Occupancy and equipment expense 51.4 52.5 50.1 53.9 46.2 48.3 Other marketing expenses 95.9 86.5 73.4 81.9 86.9 96.4 Other servicing and administrative expenses 113.6 92.6 84.6 109.4 94.8 98.0 Amortization of acquired intangibles and goodwill 42.1 42.4 37.1 36.8 36.7 35.9 Policyholders' benefits 41.9 47.6 48.3 47.0 45.5 57.2 - ----------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 511.9 490.3 449.7 476.6 464.6 473.9 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 313.0 285.4 230.2 200.6 248.8 213.6 Income taxes 95.4 98.2 79.9 69.1 85.2 73.7 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $217.6 $187.2 $150.3 $131.5 $163.6 $139.9 =================================================================================================================================== Basic earnings per share (1),(2) $ 2.00 $ 1.73 $ 1.50 $ 1.32 $ 1.64 $ 1.40 =================================================================================================================================== Diluted earnings per share (1),(2) 1.98 1.70 1.48 1.30 1.62 1.38 =================================================================================================================================== Weighted average common and common equivalent shares outstanding 108.7 108.4 99.4 98.6 98.4 98.2 =================================================================================================================================== Dividends declared $ .42 $ .42 $ .39 $ .39 $ .39 $ .39 - -----------------------------------------------------------------------------------------------------------------------------------
1996-Three Months Ended ----------------------- All dollar amounts except per share data are stated in millions. June March - ------------------------------------------------------------------------------------ Finance income $701.3 $679.5 Other interest income 39.0 20.3 Interest expense 383.7 353.4 - ------------------------------------------------------------------------------------ Net interest margin 356.6 346.4 Provision for credit losses on owned receivables 176.5 191.3 - ------------------------------------------------------------------------------------ Net interest margin after provision for credit losses 180.1 155.1 - ------------------------------------------------------------------------------------ Securitization income 280.5 279.4 Insurance revenues 58.4 63.9 Investment income 36.3 56.9 Fee income 53.3 49.9 Other income 138.6 25.3 - ------------------------------------------------------------------------------------ Total other revenues 567.1 475.4 - ------------------------------------------------------------------------------------ Salaries and fringe benefits 135.0 136.7 Occupancy and equipment expense 62.9 52.4 Other marketing expenses 100.3 70.8 Other servicing and administrative expenses 156.4 105.8 Amortization of acquired intangibles and goodwill 41.5 29.6 Policyholders' benefits 53.2 73.2 - ------------------------------------------------------------------------------------ Total costs and expenses 549.3 468.5 - ------------------------------------------------------------------------------------ Income before income taxes 197.9 162.0 Income taxes 73.3 51.5 - ------------------------------------------------------------------------------------ Net income $124.6 $110.5 ==================================================================================== Basic earnings per share (1),(2) $ 1.24 $ 1.09 ==================================================================================== Diluted earnings per share (1),(2) 1.23 1.08 ==================================================================================== Weighted average common and common equivalent shares outstanding 98.3 98.4 ==================================================================================== Dividends declared $ .34 $ .34 - ------------------------------------------------------------------------------------
(1) We adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS No. 128). Under FAS No. 128, basic earnings per common share is computed excluding dilution caused by common stock equivalents such as stock options. Diluted earnings per common share includes the effect of dilutive common stock equivalents. Prior periods have been restated. (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 result in the annual computation differing from the aggregate of the quarterly amounts. 37 21 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
In millions, except per share data. Year ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Finance income $3,057.2 $2,949.9 $2,878.8 Other interest income 36.8 80.6 123.4 Interest expense 1,503.4 1,520.6 1,557.1 -------------------------------------------------------------------------------------------------------------------------- Net interest margin 1,590.6 1,509.9 1,445.1 Provision for credit losses on owned receivables 1,042.0 759.6 761.3 -------------------------------------------------------------------------------------------------------------------------- Net interest margin after provision for credit losses 548.6 750.3 683.8 -------------------------------------------------------------------------------------------------------------------------- Securitization income 1,400.6 1,149.0 873.6 Insurance revenues 276.4 253.4 322.1 Investment income 129.5 153.2 470.2 Fee income 413.3 240.3 196.4 Other income 189.3 232.4 279.9 -------------------------------------------------------------------------------------------------------------------------- Total other revenues 2,409.1 2,028.3 2,142.2 -------------------------------------------------------------------------------------------------------------------------- Salaries and fringe benefits 639.5 564.3 555.3 Occupancy and equipment expense 207.9 209.8 222.1 Other marketing expenses 337.7 354.4 249.7 Other servicing and administrative expenses 400.2 455.0 460.9 Amortization of acquired intangibles and goodwill 158.4 143.7 109.8 Policyholders' benefits 184.8 229.1 474.5 -------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 1,928.5 1,956.3 2,072.3 -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,029.2 822.3 753.7 Income taxes 342.6 283.7 300.5 -------------------------------------------------------------------------------------------------------------------------- Net income $ 686.6 $ 538.6 $ 453.2 - ----------========================================================================================================================== EARNINGS PER COMMON SHARE Net income $ 686.6 $ 538.6 $ 453.2 Preferred dividends (11.8) (16.7) (26.4) -------------------------------------------------------------------------------------------------------------------------- Earnings available to common shareholders $ 674.8 $ 521.9 $ 426.8 ========================================================================================================================== Average common and common equivalent shares 103.8 98.3 99.1 -------------------------------------------------------------------------------------------------------------------------- Basic earnings per common share $ 6.59 $ 5.37 $ 4.38 -------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share $ 6.50 $ 5.31 $ 4.31 --------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 38 22 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
In millions, except share data. At December 31 1997 1996 - ---------------------------------------------------------------------------------------------------------------- ASSETS Cash $ 280.4 $ 239.2 Investment securities 2,285.6 2,282.0 Receivables, net 23,862.7 24,244.8 Acquired intangibles and goodwill, net 1,754.7 969.4 Properties and equipment, net 309.4 353.1 Real estate owned 127.3 136.6 Other assets 1,682.5 1,369.4 - ---------------------------------------------------------------------------------------------------------------- Total assets $30,302.6 $29,594.5 - ------------==================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Debt: Deposits $ 1,788.9 $ 2,365.1 Commercial paper, bank and other borrowings 6,081.0 6,428.1 Senior and senior subordinated debt (with original maturities over one year) 14,849.0 14,802.0 - ---------------------------------------------------------------------------------------------------------------- Total debt 22,718.9 23,595.2 Insurance policy and claim reserves 1,257.2 1,205.3 Other liabilities 1,485.3 1,472.8 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 25,461.4 26,273.3 Company obligated mandatorily redeemable preferred securities of subsidiary trusts (Note 9)* 175.0 175.0 Preferred stock (Note 10) 150.0 205.0 Common shareholders' equity: Common stock, $1.00 par value, 250,000,000 and 150,000,000 shares authorized, 124,331,175 and 115,231,175 shares issued at December 31, 1997 and 1996, respectively 124.3 115.2 Additional paid-in capital 1,531.8 397.3 Retained earnings 3,582.1 3,076.8 Foreign currency translation adjustments (128.3) (126.7) Unrealized gain (loss) on investments, net 3.6 (12.9) Less common stock in treasury, 17,173,143 and 18,165,921 shares at December 31, 1997 and 1996, respectively, at cost (597.3) (508.5) - ---------------------------------------------------------------------------------------------------------------- Total common shareholders' equity 4,516.2 2,941.2 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $30,302.6 $29,594.5 ================================================================================================================
*The sole assets of the two trusts are Junior Subordinated Deferrable Interest Notes issued by Household International, Inc. in June 1996 and June 1995, bearing interest at 8.70 and 8.25 percent, respectively, with principal balances of $103.1 and $77.3 million, respectively, and due June 30, 2036 and June 30, 2025, respectively. The accompanying notes are an integral part of these consolidated financial statements. 39 23 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows
In millions. Year ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Cash Provided by Operations Net income $ 686.6 $ 538.6 $ 453.2 Adjustments to reconcile net income to net cash provided by operations: Provision for credit losses on owned receivables 1,042.0 759.6 761.3 Insurance policy and claim reserves 107.7 44.3 404.7 Depreciation and amortization 256.7 240.5 263.7 Net realized gains from sales of assets (102.5) (137.3) (188.7) Deferred income tax provision 147.4 (83.6) (2.5) Other, net (337.3) 263.7 (319.2) ------------------------------------------------------------------------------------------------------------------------ Cash provided by operations 1,800.6 1,625.8 1,372.5 - ------------------------------------------------------------------------------------------------------------------------------------ Investments in Operations Investment securities available-for-sale: Purchased (1,557.3) (2,206.5) (4,299.3) Matured 322.1 851.0 902.1 Sold 1,373.5 2,647.0 3,081.1 Investment securities held-to-maturity: Purchased - - (558.7) Matured - - 465.1 Sold - - 34.2 Short-term investment securities, net change (49.0) 117.2 348.5 Receivables: Originations, net (27,510.7) (28,308.6) (24,311.7) Purchased (1,189.6) (5,087.6) (2,279.1) Sold 31,013.2 29,995.9 24,385.8 Purchase of Transamerica Financial Services Holding Company capital stock (1,065.0) - - Disposition of consumer banking operations: Assets sold, net - 472.3 975.6 Deposits and other liabilities sold, net - (2,809.8) (4,061.9) Disposition of product lines of life insurance business - - 575.0 (Acquisition) disposition of portfolios, net - (640.7) (58.7) Properties and equipment purchased (65.1) (97.1) (76.4) Properties and equipment sold 8.6 14.9 35.9 ------------------------------------------------------------------------------------------------------------------------ Cash increase (decrease) from investments in operations 1,280.7 (5,052.0) (4,842.5) - ------------------------------------------------------------------------------------------------------------------------------------ Financing and Capital Transactions Short-term debt and demand deposits, net change (494.3) (176.8) 1,956.7 Time certificates, net change (438.2) 395.0 728.8 Senior and senior subordinated debt issued 4,900.5 7,596.3 3,258.0 Senior and senior subordinated debt retired (4,832.9) (4,068.8) (2,414.4) Repayment of Transamerica Financial Services Holding Company debt (2,795.0) - - Policyholders' benefits paid (123.5) (512.4) (805.3) Cash received from policyholders 98.0 258.5 669.0 Shareholders' dividends (181.3) (158.4) (154.0) Issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts - 100.0 75.0 Redemption of preferred stock (55.0) - (115.0) Purchase of treasury stock (155.7) (56.7) (59.7) Issuance of common stock 1,022.3 15.2 24.7 ------------------------------------------------------------------------------------------------------------------------ Cash increase (decrease) from financing and capital transactions (3,055.1) 3,391.9 3,163.8 ------------------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash 15.0 3.1 35.4 ------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash 41.2 (31.2) (270.8) Cash at January 1 239.2 270.4 541.2 ------------------------------------------------------------------------------------------------------------------------ Cash at December 31 $ 280.4 $ 239.2 $ 270.4 ======================================================================================================================== Supplemental Cash Flow Information: Interest paid $ 1,501.1 $ 1,555.4 $ 1,508.2 Income taxes paid 127.2 321.9 171.0 ------------------------------------------------------------------------------------------------------------------------ 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. 40 24 Household International, Inc. and Subsidiaries ----------------------------------------------------------------- Consolidated Statements of Changes in Preferred Stock and Common Shareholders' Equity
Common Shareholders' Equity ----------------------------------------------- Additional Total Common Preferred Common Paid-in Retained Shareholders' All amounts except per share data are stated in millions. Stock Stock Capital Earnings Other(1) Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1994 $ 320.0 $115.0 $ 362.1 $2,397.4 $(674.1) $2,200.4 Net income 453.2 453.2 Cash dividends-preferred at stated rates (26.5) (26.5) Cash dividends-common, $1.31 per share (127.5) (127.5) Foreign currency translation adjustments (3.5) (3.5) Conversion of preferred stock .2 3.4 3.6 Exercise of stock options 6.6 21.7 28.3 Issuance of common stock 11.3 13.4 24.7 Purchase of treasury stock (59.7) (59.7) Redemption of preferred stock (115.0) Unrealized gain on investments, net 197.9 197.9 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 205.0 115.2 383.4 2,696.6 (504.3) 2,690.9 Net income 538.6 538.6 Cash dividends-preferred at stated rates (16.7) (16.7) Cash dividends-common, $1.46 per share (141.7) (141.7) Foreign currency translation adjustments .4 .4 Exercise of stock options 6.5 11.9 18.4 Issuance of common stock 7.4 7.8 15.2 Purchase of treasury stock (56.7) (56.7) Unrealized loss on investments, net (107.2) (107.2) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 205.0 115.2 397.3 3,076.8 (648.1) 2,941.2 Net income 686.6 686.6 Cash dividends-preferred at stated rates (11.8) (11.8) Cash dividends-common, $1.62 per share (169.5) (169.5) Foreign currency translation adjustments (1.6) (1.6) Exercise of stock options 14.7 16.2 30.9 Issuance of common stock 9.1 1,000.8 12.4 1,022.3 Purchase of treasury stock, net 119.0 (117.4) 1.6 Redemption of preferred stock (55.0) Unrealized gain on investments, net 16.5 16.5 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 $ 150.0 $124.3 $1,531.8 $3,582.1 $(722.0) $4,516.2 =====================================================================================================================
(1)At December 31, 1997, 1996, 1995 and 1994 items in the other column include cumulative adjustments for: foreign currency translation adjustments of $(128.3), $(126.7), $(127.1) and $(123.6) million, respectively; common stock in treasury of $(597.3), $(508.5), $(471.5) and $(446.9) million, respectively; and unrealized gains (losses) on marketable equity securities and available-for-sale investments of $3.6, $(12.9), $94.3 and $(103.6) million, respectively. The gross unrealized gain (loss) on available- for-sale investments at December 31, 1997, 1996 and 1995 of $5.1, $(19.8) and $142.6 million, respectively, is recorded net of income taxes (benefit) of $1.5, $(6.9) and $48.3 million, respectively.
Common Stock ------------------------------------------------ Shares Outstanding Preferred Stock Issued In Treasury Net Outstanding - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1994 1,850,000 115,008,739 (18,406,141) 96,602,598 Exercise of common stock options 812,576 812,576 Conversion of $6.25 preferred stock 222,436 222,436 Issuance of common stock 523,919 523,919 Purchase of treasury stock (1,000,000) (1,000,000) Redemption of preferred stock (1,150,000) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 700,000 115,231,175 (18,069,646) 97,161,529 Exercise of common stock options 463,212 463,212 Issuance of common stock 281,513 281,513 Purchase of treasury stock (841,000) (841,000) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 700,000 115,231,175 (18,165,921) 97,065,254 Exercise of common stock options 539,557 539,557 Issuance of common stock 9,100,000 453,246 9,553,246 Issuance of common stock-ACC 1,367,275 1,367,275 Purchase of treasury stock (1,367,300) (1,367,300) Redemption of preferred stock (550,000) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 150,000 124,331,175 (17,173,143) 107,158,032 =====================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 41 25 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Household International, Inc. and subsidiaries (the "company") is a leading provider of consumer lending products to middle-market customers in the United States, United Kingdom and Canada, with $45.4 billion of managed receivables at December 31, 1997. The company's lending products include: home equity loans, auto finance loans, MasterCard* and Visa* and private label credit cards, and other unsecured loans. The company also offers credit and specialty insurance in the United States, United Kingdom and Canada. The company also has traditional first mortgages, commercial loans and leases, periodic payment annuities, and corporate owned life insurance products which it no longer offers. - -------------------------------------------------------------------------------- 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. INVESTMENT SECURITIES The company maintains investment portfolios in both its noninsurance and insurance operations. These portfolios are comprised primarily of debt securities. The company's entire investment securities portfolio was classified as available-for-sale at December 31, 1997 and 1996. Available-for-sale investments are intended to be invested for an indefinite period but may be sold in response to events reasonably expected 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. The company periodically sells receivables from its home equity, auto finance, MasterCard and Visa, private label and other unsecured portfolios. Because these receivables were originated with variable rates of interest or rates comparable to those currently offered by the company, 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 (fees) related to these receivables totaled $7.8 and $(5.7) million at December 31, 1997 and 1996, respectively. 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. 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 management's 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 the company's control, such as consumer payment patterns and economic conditions, there is uncertainty inherent in these estimates, making it reasonably possible that they could change. The company's chargeoff policy for consumer receivables varies by product. Receivables are written off, or for *MasterCard and Visa are registered trademarks of MasterCard International, Incorporated and VISA USA, Inc., respectively. 42 26 - -------------------------------------------------------------------------------- secured products written down to net realizable value, at the following stages of contractual delinquency: auto finance-5 months; first mortgage, home equity and MasterCard and Visa-6 months; private label-9 months; and other unsecured-9 months and no payment received in 6 months. 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, 1997 which were 90 days or more past due which 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 management's 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 the company. Upon sale, the receivables are removed from the balance sheet, and a gain on sale 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 receivables. Future cash flows are based on estimates of prepayments, the impact of interest rate movements on yields of receivables sold and securities issued, delinquency of receivables sold, servicing fees, operating expenses and other factors. The resulting gain is adjusted by establishing a 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. Effective January 1, 1997, the company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS No. 125"), which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities based on a derecognition approach that focuses on control of the assets and extinguishment of the liabilities. The statement was effective for securitization transactions occurring subsequent to December 31, 1996. The adoption of FAS No. 125 did not have a material impact on the company's consolidated financial statements. PROPERTIES AND EQUIPMENT Properties and equipment, which include leasehold improvements, are recorded at cost, net of accumulated depreciation and amortization of $412.3 and $432.6 million at December 31, 1997 and 1996, respectively. 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 appropriate. Costs of holding real estate, and related gains and losses on disposition, are credited or charged to operations as incurred. Vehicles acquired 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 and any difference between the sales price, net of expenses, and the carrying value is credited or charged to operations as incurred. 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 their estimated remaining lives, not to exceed 10 years. Goodwill represents the purchase price over the fair value of identifiable assets acquired less liabilities assumed 43 27 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (Continued) from business combinations and is amortized over 25 years on a straight-line basis. Goodwill is reviewed for impairment whenever events indicate that the carrying amount may not be recoverable. TREASURY STOCK The company accounts 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 the company's assets and liabilities and off-balance sheet items expose the company to interest rate risk. The company enters into a variety of interest rate contracts for managing its 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. The company also has 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 the company's 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 the company uses 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. FOREIGN CURRENCY TRANSLATION Foreign subsidiary assets and liabilities are located in the United Kingdom and Canada. The functional currency for each 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. The company enters into forward exchange contracts to hedge its 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 The company accounts 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 or for stock issued under its employee stock purchase plan. INCOME TAXES 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. The company and its subsidiaries file a consolidated federal income tax return. Investment tax credits generated by leveraged leases are accounted for using the deferral method. 44 28 - -------------------------------------------------------------------------------- 2. BUSINESS COMBINATIONS On June 23, 1997, Household International 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"). The company 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 the company's results of operations from June 24, 1997. The acquisition of TFS was not material to the company's consolidated financial statements. In June 1997, the company completed a public underwritten offering of 9.1 million shares of its 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 International and a wholly-owned subsidiary acquired the capital stock of ACC Consumer Finance Corporation ("ACC"), a non-prime auto finance company, for approximately 1.4 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 the company's results of operations from October 22, 1997. The acquisition of ACC was not material to the company's consolidated financial statements. - -------------------------------------------------------------------------------- 3. INVESTMENT SECURITIES
In millions. At December 31 1997 1996 ---------------------------------------------------------------------------- Available-For-Sale Investments Marketable equity securities $ 131.9 $ 213.1 Corporate debt securities 1,251.6 1,070.5 U.S. government and federal agency debt securities 220.4 277.7 Other 653.1 690.5 ---------------------------------------------------------------------------- Subtotal 2,257.0 2,251.8 ---------------------------------------------------------------------------- Accrued investment income 28.6 30.2 ---------------------------------------------------------------------------- Total investment securities $2,285.6 $2,282.0 ============================================================================
Proceeds from the sale of available-for-sale investments totaled approximately $1.4, $2.6 and $3.1 billion in 1997, 1996 and 1995, respectively. Gross gains of $20.6, $23.0 and $18.4 million and gross losses of $2.9, $4.3 and $4.9 million in 1997, 1996 and 1995, respectively, were realized on those sales. The gross unrealized gains (losses) of investment securities were as follows:
1997 1996 ------------------------------------------------------ -------------------------------------------- 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 $ 128.4 $ 3.7 $ (.2) $ 131.9 $ 212.7 $ 1.9 $ (1.5) $ 213.1 Corporate debt securities 1,238.3 30.4 (17.1) 1,251.6 1,081.4 17.0 (27.9) 1,070.5 U.S. government and federal agency debt securities 232.1 1.4 (13.1) 220.4 287.0 1.1 (10.4) 277.7 Other 653.1 - - 653.1 690.5 - - 690.5 - ------------------------------------------------------------------------------------------------------------------------------------ Total available-for-sale investments $2,251.9 $35.5 $(30.4) $2,257.0 $2,271.6 $20.0 $(39.8) $2,251.8 ====================================================================================================================================
See Note 12, "Fair Value of Financial Instruments," for further discussion of the relationship between the fair value of the company's assets, liabilities and off-balance sheet financial instruments. 45 29 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1997 Cost Value Yield* Cost Value Yield* - ------------------------------------------------------------------------------------------------------------------------ Due within 1 year $ 173.5 $ 173.2 6.21% $ 19.4 $ 19.4 5.35% After 1 but within 5 years 78.1 79.0 6.82 29.4 29.9 6.07 After 5 but within 10 years 212.0 214.4 6.76 50.5 50.0 5.72 After 10 years 774.7 785.0 7.65 132.8 121.1 6.49 - ------------------------------------------------------------------------------------------------------------------------ Total $1,238.3 $1,251.6 7.25% $232.1 $220.4 6.17% ========================================================================================================================
* Computed by dividing annualized interest by the amortized cost of the respective investment securities. - -------------------------------------------------------------------------------- 4. RECEIVABLES
In millions. At December 31 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ First mortgage $ 396.6 $ 725.6 Home equity 7,933.2 3,647.9 Auto finance(1) 487.5 -- MasterCard/Visa 5,927.3 8,587.7 Private label 4,682.9 5,070.0 Other unsecured 3,609.3 5,098.0 Commercial 774.2 937.8 - ------------------------------------------------------------------------------------------------------------------------ Total owned receivables 23,811.0 24,067.0 Accrued finance charges 377.5 397.6 Credit loss reserve for owned receivables (1,082.2) (900.2) Unearned credit insurance premiums and claims reserves (228.4) (184.6) Amounts due and deferred from receivables sales 1,847.1 1,561.0 Reserve for receivables serviced with limited recourse (862.3) (696.0) - ------------------------------------------------------------------------------------------------------------------------ Total owned receivables, net 23,862.7 24,244.8 Receivables serviced with limited recourse 21,565.8 18,526.4 - ------------------------------------------------------------------------------------------------------------------------ Total managed receivables, net $45,428.5 $42,771.2 ========================================================================================================================
(1) Prior to the fourth quarter of 1997, auto finance receivables were not significant and were included in other unsecured receivables. Foreign receivables included in owned receivables were as follows:
United Kingdom Canada In millions. ------------------ --------------------- At December 31 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ First mortgage $ 3.1 $ 3.7 $ 7.8 $ 22.1 Home equity 157.5 159.9 321.7 324.9 MasterCard/Visa 651.6 581.2 - - Private label 778.1 691.3 539.5 571.7 Other unsecured 729.5 636.7 387.5 364.8 Commercial - - 18.7 43.2 - ------------------------------------------------------------------------------------------------------------------------ Total $2,319.8 $2,072.8 $1,275.2 $1,326.7 ========================================================================================================================
46 30 - -------------------------------------------------------------------------------- Foreign managed receivables represented 10 percent of total managed receivables at December 31, 1997 and 1996. The company has securitized certain receivables which it services with limited recourse. Securitizations of receivables, including replenishments of certificateholder interests, were as follows:
In millions. Year ended December 31 1997 1996 1995 - --------------------------------------------------------------------------- Home equity $ 312.6 $ 1,755.8 $ 1,135.2 MasterCard/Visa 23,439.6 22,828.3 20,181.2 Private label 2,270.2 697.4 644.0 Other unsecured 2,912.2 2,851.2 1,535.3 - --------------------------------------------------------------------------- Total $28,934.6 $28,132.7 $23,495.7 ===========================================================================
The outstanding balance of receivables serviced with limited recourse consisted of the following:
In millions. At December 31 1997 1996 - --------------------------------------------------------------------------- Home equity $ 3,125.9 $ 4,337.5 Auto finance(1) 395.9 - MasterCard/Visa 12,337.0 10,149.7 Private label 1,025.0 517.0 Other unsecured 4,682.0 3,522.2 - --------------------------------------------------------------------------- Total $21,565.8 $18,526.4 ===========================================================================
(1)Auto finance receivables were previously securitized by ACC before its acquisition in October 1997. At December 31, 1997, the expected weighted average remaining life of these securitization transactions was 2.3 years. The combination of receivables owned and receivables serviced with limited recourse, which the company considers its managed portfolio, is shown below:
In millions. At December 31 1997 1996 - --------------------------------------------------------------------------- First mortgage $ 396.6 $ 725.6 Home equity 11,059.1 7,985.4 Auto finance(1) 883.4 - MasterCard/Visa 18,264.3 18,737.4 Private label 5,707.9 5,587.0 Other unsecured 8,291.3 8,620.2 Commercial 774.2 937.8 - --------------------------------------------------------------------------- Managed receivables $45,376.8 $42,593.4 ===========================================================================
(1) Prior to the fourth quarter of 1997, auto finance receivables were not significant and were included in other unsecured receivables. At December 31, 1997 and 1996, the amounts due and deferred from receivables sales of $1,847.1 and $1,561.0 million, respectively, included unamortized securitization assets and funds established pursuant to the recourse provisions for certain sales totaling $1,716.2 and $1,235.4 million, respectively. The amounts due and deferred also included customer payments not yet remitted by the securitization trustee to the company of $107.2 and $86.6 million at December 31, 1997 and 1996, respectively. The company made guarantees relating to certain securitizations of $90.2 million plus unpaid interest at December 31, 1996. The company made no such guarantees at December 31, 1997. The company has subordinated interests in certain transactions, which were recorded as receivables, of $1,098.1 and $485.0 million at December 31, 1997 and 1996, respectively. The company has agreements with a "AAA"-rated third party who will indemnify the company for up to $21.2 million in losses related to certain securitization transactions. The company maintains credit loss reserves pursuant to the recourse provisions for receivables serviced with limited recourse which are based on estimated probable losses under such provisions. These reserves totaled $862.3 and $696.0 million at December 31, 1997 and 1996, respectively, and represent the company's best estimate of probable losses on receivables serviced with limited recourse. 47 31 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (Continued) The providers of the credit enhancements have no recourse to the company. The company maintains facilities with third parties which provide for the securitization of receivables on a revolving basis totaling $6.6 billion through the issuance of commercial paper. These facilities were fully utilized at December 31, 1997. 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, 1997 1998 1999 2000 2001 2002 Thereafter Total - -------------------------------------------------------------------------------------------------------- First mortgage $ 17.6 $ 3.3 $ 1.0 $ 1.5 $ 1.7 $ 371.5 $ 396.6 Home equity 2,305.9 1,520.2 1,083.9 790.9 586.5 1,645.8 7,933.2 Auto finance 79.8 94.2 106.5 110.0 84.1 12.9 487.5 MasterCard/Visa 701.3 614.5 484.0 421.4 351.9 3,354.2 5,927.3 Private label 1,223.9 587.8 386.6 276.0 224.2 1,984.4 4,682.9 Other unsecured 1,309.6 645.7 448.9 310.0 200.3 694.8 3,609.3 Commercial 175.6 65.1 31.6 53.5 30.1 418.3 774.2 - -------------------------------------------------------------------------------------------------------- Total $5,813.7 $3,530.8 $2,542.5 $1,963.3 $1,478.8 $8,481.9 $23,811.0 ========================================================================================================
A substantial portion of consumer receivables, based on the company's 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 44 and 40 percent in 1997 and 1996, respectively. The following table summarizes contractual maturities of owned receivables due after one year by repricing characteristic:
Over 1 In millions. But Within Over At December 31, 1997 5 years 5 years - ------------------------------------------------------------------------- Receivables at predetermined interest rates $5,870.5 $4,125.9 Receivables at floating or adjustable rates 3,644.9 4,356.0 - ------------------------------------------------------------------------- Total $9,515.4 $8,481.9 =========================================================================
Nonaccrual owned consumer receivables totaled $516.6 and $421.8 million at December 31, 1997 and 1996, respectively, including $109.7 and $106.6 million, respectively, relating to foreign operations. Interest income that would have been recorded in 1997 and 1996 if such nonaccrual receivables had been current and in accordance with contractual terms was approximately $75.3 and $60.2 million, respectively, including $18.8 and $18.4 million, respectively, relating to foreign operations. Interest income that was included in net income for 1997 and 1996, prior to these loans being placed on nonaccrual status, was approximately $41.6 and $32.1 million, respectively, including $8.9 and $8.4 million, respectively, relating to foreign operations. For an analysis of reserves for credit losses, see pages 32 and 33. 48 32 - -------------------------------------------------------------------------------- 5. DEPOSITS
1997 1996 ------------------------- ----------------------- All dollar amounts are stated in millions. Weighted Weighted At December 31 Amount Average Rate Amount Average Rate - ---------------------------------------------------------------------------------------------------------------------------------- DOMESTIC Time certificates $ 837.8 7.1% $1,257.6 7.0% Savings accounts 135.9 5.0 165.1 4.7 Demand accounts 22.8 - 78.5 - - ---------------------------------------------------------------------------------------------------------------------------------- Total domestic deposits 996.5 6.6 1,501.2 6.4 - ---------------------------------------------------------------------------------------------------------------------------------- FOREIGN Time certificates 258.1 7.6 377.6 6.3 Savings accounts 446.4 6.7 389.1 6.2 Demand accounts 87.9 6.3 97.2 5.8 - ---------------------------------------------------------------------------------------------------------------------------------- Total foreign deposits 792.4 6.9 863.9 6.2 - ---------------------------------------------------------------------------------------------------------------------------------- Total deposits $1,788.9 6.8% $2,365.1 6.3% ==================================================================================================================================
Average deposits and related weighted average interest rates for 1997, 1996 and 1995 were as follows:
1997 1996 1995 ----------------------- ------------------------- ----------------------- 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 $1,096.2 6.9% $1,908.2 6.7% $3,015.2 6.2% Savings and demand accounts 470.0 1.6 1,154.6 2.5 2,667.9 3.1 - ---------------------------------------------------------------------------------------------------------------------------------- Total domestic deposits 1,566.2 5.3 3,062.8 5.1 5,683.1 4.7 - ---------------------------------------------------------------------------------------------------------------------------------- FOREIGN Time certificates 277.3 6.8 381.6 6.2 1,052.3 7.4 Savings and demand accounts 537.4 5.8 445.5 5.2 308.8 6.2 - ---------------------------------------------------------------------------------------------------------------------------------- Total foreign deposits 814.7 6.1 827.1 5.7 1,361.1 7.1 - ---------------------------------------------------------------------------------------------------------------------------------- Total deposits $2,380.9 5.6% $3,889.9 5.3% $7,044.2 5.1% ==================================================================================================================================
Interest expense on deposits was $132.5, $204.6 and $362.7 million for 1997, 1996 and 1995, respectively. Interest expense on domestic deposits was $82.6, $157.6 and $265.9 million for 1997, 1996 and 1995, respectively. Maturities of time certificates in amounts of $100,000 or more were:
In millions. At December 31, 1997 Domestic Foreign Total - ---------------------------------------------------------------------------------------------------------------------------------- 3 months or less $2.9 $ .2 $ 3.1 Over 3 months through 6 months - - - Over 6 months through 12 months - - - Over 12 months .5 244.7 245.2 - ---------------------------------------------------------------------------------------------------------------------------------- Total $3.4 $244.9 $248.3 ==================================================================================================================================
49 33 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (Continued) Contractual maturities of time certificates within each interest rate range were as follows:
All dollar amounts are stated in millions. At December 31, 1997 1998 1999 2000 2001 2002 Thereafter Total - --------------------------------------------------------------------------------------------------------------------------- INTEREST RATE < 4.00% $ 3.5 $ .9 -- -- -- -- $ 4.4 4.00% - 5.99% 59.5 56.6 -- $ 6.6 -- -- 122.7 6.00% - 7.99% 96.3 258.7 $168.7 303.9 -- $75.4 903.0 8.00% - 9.99% 4.4 6.5 54.5 -- -- .4 65.8 - --------------------------------------------------------------------------------------------------------------------------- Total $163.7 $322.7 $223.2 $310.5 -- $75.8 $1,095.9 ===========================================================================================================================
- -------------------------------------------------------------------------------- 6. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS
Bank and All dollar amounts are stated in millions. Commercial Other At December 31 Paper* Borrowings Total - --------------------------------------------------------------------------------------------------------------------------- 1997 Balance $5,294.2 $ 786.8 $6,081.0 Highest aggregate month-end balance 7,838.6 Average borrowings 5,486.2 948.7 6,434.9 Weighted average interest rate: At year end 5.7% 7.5% 6.0% Paid during year 5.6 6.3 5.7 - --------------------------------------------------------------------------------------------------------------------------- 1996 Balance $5,418.7 $1,009.4 $6,428.1 Highest aggregate month-end balance 7,611.1 Average borrowings 5,334.2 1,147.4 6,481.6 Weighted average interest rate: At year end 5.4% 7.6% 5.7% Paid during year 5.4 7.2 5.7 - --------------------------------------------------------------------------------------------------------------------------- 1995 Balance $4,598.5 $2,060.9 $6,659.4 Highest aggregate month-end balance 7,350.5 Average borrowings 4,551.1 1,565.1 6,116.2 Weighted average interest rate: At year end 5.8% 6.9% 6.2% Paid during year 6.0 7.4 6.4 - ---------------------------------------------------------------------------------------------------------------------------
*Included in outstanding balances at year-end 1997, 1996 and 1995 were commercial paper obligations of foreign subsidiaries of $435.0, $389.2 and $269.5 million, respectively. Interest expense for commercial paper, bank and other borrowings totaled $368.1, $369.5 and $389.5 million for 1997, 1996 and 1995, respectively. The company maintains various bank credit agreements primarily to support commercial paper borrowings. At December 31, 1997 and 1996, the company had committed back-up lines of $8.4 and $7.5 billion, respectively, of which $7.9 and $6.6 billion, respectively, were unused. Formal credit lines are reviewed annually, and expire at various dates from 1998 to 2004. 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, 1997 totaled $6.2 million. 50 34 - -------------------------------------------------------------------------------- 7. Senior and Senior Subordinated Debt (with original maturities over one year)
All dollar amounts are stated in millions. At December 31 1997 1996 --------------------------------------------------------------------------- Senior Debt 3.50% to 6.49%; due 1998 to 2009 $ 1,611.7 $ 2,086.6 6.50% to 6.99%; due 1998 to 2007 1,941.3 1,450.0 7.00% to 7.49%; due 1998 to 2012 1,477.7 1,281.1 7.50% to 7.99%; due 1998 to 2012 1,286.9 1,459.0 8.00% to 8.99%; due 1998 to 2005 1,178.1 1,195.0 9.00% and greater; due 1998 to 2001 447.8 445.8 Variable interest rate debt; 3.85% to 9.00%; due 1998 to 2034 6,202.7 6,034.6 Senior Subordinated Debt 9.00% to 9.63%; due 2000 to 2001 685.0 685.0 10.25%; due 2003 20.0 75.0 Preferred Stock of Subsidiary Household Finance Corporation 7.25% term cumulative preferred Series 1992-A - 100.0 Unamortized discount (2.2) (10.1) --------------------------------------------------------------------------- Total senior and senior subordinated debt $14,849.0 $14,802.0 ===========================================================================
Weighted average coupon interest rates were 6.8 and 6.6 percent at December 31, 1997 and 1996, respectively. Interest expense for senior and senior subordinated debt was $1,002.8, $946.5 and $804.9 million for 1997, 1996 and 1995, respectively. The only financial covenant contained in the terms of the company's debt agreements is the maintenance of a minimum shareholders' equity of $2.0 billion for Household International, Inc. and a minimum shareholder's equity of $1.5 billion for Household Finance Corporation, a wholly-owned subsidiary of the company. Maturities of senior and senior subordinated debt were:
In millions. At December 31, 1997 --------------------------------------------------------------------- 1998 $ 2,381.4 1999 3,051.6 2000 1,795.3 2001 2,146.4 2002 1,161.3 Thereafter 4,313.0 --------------------------------------------------------------------- Total $14,849.0 =====================================================================
On August 15, 1997, the company redeemed at par of $100 million, plus accrued and unpaid dividends, all outstanding shares of the 7.25 percent term cumulative preferred Series 1992-A of Household Finance Corporation. - -------------------------------------------------------------------------------- 8. Derivative Financial Instruments and Other Financial Instruments with Off- Balance Sheet Risk In the normal course of business and in connection with its asset/liability management program, the company enters into various transactions involving derivative and other off-balance sheet financial instruments. These instruments primarily are used to manage the company's exposure to fluctuations in interest rates and foreign exchange rates. The company does not serve as a financial intermediary to make markets in any derivative financial instruments. For further information on the company's strategies for managing interest rate and foreign exchange rate risk, see Risk Management on page 31. The financial instruments used by the company 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. The company's 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. The company controls the credit risk of its off-balance sheet financial instruments through established credit approvals, risk control limits and ongoing monitoring procedures. The company has 51 35 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. The company mitigates this risk by establishing limits for positions and other controls. INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS The following table summarizes the activity in interest rate and foreign exchange contracts for 1997, 1996 and 1995: - -------------------------------------------------------------------------------- HEDGING/SYNTHETIC ALTERATION INSTRUMENTS
Exchange Traded ---------------------------------------- -------------------------------------------- Interest Rate Foreign Exchange Futures Contracts Options Interest Currency Rate Contracts -------------------- ------------------ --------------------- In millions. Purchased Sold Purchased Written Rate Swaps Swaps Purchased Sold - -------------------------------------------------------------------------------------------------------------------------- 1995 Notional amount, 1994 - $ (96.0) - - $17,833.0 $ 998.8 $ 72.7 $ (770.8) New contracts $ 2,003.0 (2,100.0) $ 300.0 $(300.0) 1,424.5 152.6 3,887.3 (4,036.7) Matured or expired contracts - 293.0 - - (6,156.5) (179.0) (36.7) 40.9 Terminated contracts - - - - (4,983.7) - (545.0) 553.1 In-substance maturities(1) (1,653.0) 1,653.0 (300.0) 300.0 - - (3,345.3) 3,477.1 - -------------------------------------------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1995 $ 350.0 $ (250.0) - - $ 8,117.3 $ 972.4 $ 33.0 $ (736.4) ========================================================================================================================== Fair value, 1995(2) $ .1 - - - $ 148.3 $ 63.5 $ .2 $ 1.2 - -------------------------------------------------------------------------------------------------------------------------- 1996 Notional amount, 1995 $ 350.0 $ (250.0) - - $ 8,117.3 $ 972.4 $ 33.0 $ (736.4) New contracts 6,611.9 (4,202.9) $ 440.0 $(440.0) 4,807.1 1,268.5 5,073.9 (5,058.0) Matured or expired contracts (1,471.0) 300.0 - - (2,456.4) (117.0) (18.9) 20.9 Terminated contracts - - - - (1,690.5) - (391.6) 391.6 In-substance maturities(1) (4,152.9) 4,152.9 (440.0) 440.0 - - (4,692.7) 4,692.7 - -------------------------------------------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1996 $ 1,338.0 - - - $ 8,777.5 $2,123.9 $ 3.7 $ (689.2) ========================================================================================================================== Fair value, 1996(2) - - - - $ 62.5 $ (153.9) $ (.1) $ (37.3) - -------------------------------------------------------------------------------------------------------------------------- 1997 Notional amount, 1996 $ 1,338.0 - - - $ 8,777.5 $2,123.9 $ 3.7 $ (689.2) New contracts 8,584.0 $(7,350.0) - - 3,404.6 892.3 3,372.0 (3,604.5) Matured or expired contracts (2,020.0) 120.0 - - (2,397.3) (397.3) (9.7) 111.4 Terminated contracts - - - - (1,175.9) (205.4) (95.6) 95.6 In-substance maturities(1) (7,030.0) 7,030.0 - - - - (3,242.2) 3,242.2 - -------------------------------------------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1997 $ 872.0 $ (200.0) - - $ 8,608.9 $2,413.5 $ 28.2 $ (844.5) ========================================================================================================================== Fair value, 1997(2) - - - - $ 148.7 $ (140.5) $ .1 $ 6.1 - --------------------------------------------------------------------------------------------------------------------------
Non-Exchange Traded --------------------------------------- Interest Rate Other Risk Forward Contracts Management ---------------------- In millions. Purchased Sold Instruments - ----------------------------------------------------------------------------------------- 1995 Notional amount, 1994 $ 936.1 $ (140.8) $ 613.9 New contracts 1,860.2 (173.7) 180.4 Matured or expired contracts (1,840.4) 167.9 (351.4) Terminated contracts (255.9) 53.5 - In-substance maturities(1) - - - - ----------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1995 $ 700.0 $ (93.1) $ 442.9 ========================================================================================= Fair value, 1995(2) $ (1.0) - $ 2.2 - ----------------------------------------------------------------------------------------- 1996 Notional amount, 1995 $ 700.0 $ (93.1) $ 442.9 New contracts 3,641.8 (1,036.0) 2,242.2 Matured or expired contracts (2,609.9) 859.9 (8.9) Terminated contracts - - - In-substance maturities(1) - - - - ----------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1996 $ 1,731.9 $ (269.2) $2,676.2 ========================================================================================= Fair value, 1996(2) $ (1.2) $ .2 $ 24.6 - ----------------------------------------------------------------------------------------- 1997 Notional amount, 1996 $ 1,731.9 $ (269.2) $2,676.2 New contracts 6,055.8 (1,326.3) 372.4 Matured or expired contracts (4,477.7) 1,489.5 (495.9) Terminated contracts - - (85.3) In-substance maturities(1) - - - - ----------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1997 $ 3,310.0 $ (106.0) $2,467.4 ========================================================================================= Fair value, 1997(2) $ 1.7 - $ 11.3 - -----------------------------------------------------------------------------------------
(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 the company 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 12, "Fair Value of Financial Instruments" for further discussion of the relationship between the fair value of the company's assets, liabilities and off-balance sheet financial instruments. 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. The company primarily enters 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, 1997: 52 36 - --------------------------------------------------------------------------------
In millions. - ------------------------------------------------------------ Investment securities $ 70.7 Receivables: Home equity 775.0 MasterCard/Visa 550.0 Private label 20.3 Other unsecured 19.3 - ------------------------------------------------------------ Total owned receivables 1,364.6 Deposits 150.0 Commercial paper, bank and other borrowings 2,163.7 Senior and senior subordinated debt 4,826.5 Receivables serviced with limited recourse 33.4 - ------------------------------------------------------------ Total items synthetically altered with interest rate swaps $8,608.9 ============================================================
Note: In all instances, the notional amount is not greater than the carrying value of the related asset/liability or off-balance sheet item. The company manages its 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 the company's 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 the company to the same interest rate risk as on-balance sheet items. Interest rate swaps are used to synthetically alter the 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). The company also has 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, 1997:
All dollar amounts are stated in millions. 1998 1999 2000 2001 2002 2003 Thereafter Total - ---------------------------------------------------------------------------------------------------------------------------------- Pay a fixed rate/receive a floating rate Notional value $ 602.5 $ 699.0 $416.4 $ 41.1 - - - $1,759.0 Weighted average receive rate 5.80% 6.06 7.06% 7.34% - - - 6.24% Weighted average pay rate 6.39 6.85 7.05 7.69 - - - 6.76 - ---------------------------------------------------------------------------------------------------------------------------------- Pay a floating rate/receive a fixed rate Notional value $ 667.9 $ 280.8 $375.6 $856.8 $287.9 $430.0 $1,827.9 $4,726.9 Weighted average receive rate 6.72% 6.85% 6.47% 6.59% 6.41% 6.68% 6.95% 6.75% Weighted average pay rate 5.92 5.35 5.47 5.69 5.74 5.93 5.91 5.79 - ---------------------------------------------------------------------------------------------------------------------------------- Pay a floating rate/receive a different floating rate Notional value $ 575.0 $1,338.0 $200.0 - $ 10.0 - - $2,123.0 Weighted average receive rate 5.72% 6.05% 5.82% - 6.50% - - 5.94% Weighted average pay rate 5.89 5.97 5.90 - 5.81 - - 5.94 - ---------------------------------------------------------------------------------------------------------------------------------- Total notional value $1,845.4 $2,317.8 $992.0 $897.9 $297.9 $430.0 $1,827.9 $8,608.9 ================================================================================================================================== Total weighted average rates on swaps Receive rate 6.11% 6.15% 6.59% 6.62% 6.41% 6.68% 6.95% 6.45% - ---------------------------------------------------------------------------------------------------------------------------------- Pay rate 6.06 6.16 6.22 5.78 5.74 5.93 5.91 6.03 - ----------------------------------------------------------------------------------------------------------------------------------
53 37 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (Continued) The floating rates paid or received by the company 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 the company 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 13 and 18 basis points in 1997 and 1996, respectively, had these instruments not been utilized. These instruments did not impact owned net interest margin in 1995. 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. The company has both interest rate and foreign exchange rate forward contracts and interest rate futures contracts. Foreign exchange contracts are utilized by the company to reduce its exposure to foreign currency exchange risk. Interest rate forward and futures contracts are used to hedge resets of interest rates on the company's floating rate assets and liabilities. The company's 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 the company 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 $41.8 and $45.8 million and deferred losses of $4.1 and $13.0 million from hedging/synthetic alteration instruments were recorded on the balance sheets at December 31, 1997 and 1996, respectively. The weighted average amortization period associated with the deferred gains was 5.1 and 6.6 years at December 31, 1997 and 1996, respectively. The weighted average amortization period for the deferred losses was 1.3 and 1.5 years at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, 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 $64.6 and $52.8 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 the company primarily lends to consumers, it does not have receivables from any industry group that equal or exceed 10 percent of total managed receivables at December 31, 1997 and 1996. The company lends nationwide, with the following geographic areas comprising more than 10 percent of total managed domestic receivables at December 31, 1997: California -19 percent; Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI) -24 percent; Middle Atlantic (DE, DC, MD, NJ, PA, VA, WV) -14 percent; Northeast (CT, ME, MA, NH, NY, RI, VT) -12 percent; and Southeast (AL, FL, GA, KY, MS, NC, SC, TN) - -16 percent. - -------------------------------------------------------------------------------- 9. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS In June 1996 Household Capital Trust II ("HCT II"), a wholly-owned subsidiary of the company, issued 4 million 8.70 percent Trust Preferred Securities ("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 the company. The junior subordinated notes held by HCT II mature on June 30, 2036 and are redeemable by the company in whole or in part beginning on June 30, 2001, at which time the HCT II preferred securities are callable. Net proceeds from the issuance of preferred securities were used for general corporate purposes. In June 1995 Household Capital Trust I ("HCT I"), a wholly-owned subsidiary of the company, 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 the company. The junior subordinated notes held by HCT I mature on June 30, 2025 and are redeemable by the company in whole or in part beginning 54 38 - -------------------------------------------------------------------------------- on June 30, 2000, at which time the HCT I preferred securities are callable. HCT I may elect to extend the maturity of the preferred securities to June 30, 2044. The obligations of the company with respect to the junior subordinated notes, when considered together with certain undertakings of the company with respect to HCT I and HCT II, constitute full and unconditional guarantees by the company of HCT I's and HCT II's obligations under the respective preferred securities. The preferred securities are classified in the company's 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 $175 million at December 31, 1997 and 1996. 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 the company's option for up to five years from date of issuance. The company 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. - -------------------------------------------------------------------------------- 10. Preferred Stock
All dollar amounts are stated in millions. At December 31 1997 1996 ------------------------------------------------------------------------------------------------- 7.35% Preferred Stock, Series 1993-A, 4,000,000 depositary shares(1) $100.0 $100.0 8.25% Preferred Stock, Series 1992-A, 2,000,000 depositary shares(1) 50.0 50.0 9.50% Preferred Stock, Series 1991-A, 5,500,000 depositary shares(2) - 55.0 ------------------------------------------------------------------------------------------------- Total preferred stock $150.0 $205.0 =================================================================================================
(1) Depositary share represents 1/40 share of preferred stock. (2) Depositary share represents 1/10 share of preferred stock. Dividends on the 7.35 percent preferred stock, Series 1993-A, are cumulative and payable quarterly. The company may, at its option, redeem in whole or in part the 7.35 percent preferred stock, Series 1993-A, on any date after October 15, 1998 for $25 per depositary share plus accrued and unpaid dividends. This stock has a liquidation value of $1,000 per share. Dividends on the 8.25 percent preferred stock, Series 1992-A, are cumulative and payable quarterly. The company may, at its 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. The preferred shares are nonvoting except that holders will be entitled to vote as a separate class to elect two directors if the equivalent of six or more quarterly dividends shall be in arrears, until the dividends in arrears are paid in full. On January 23, 1997, the company redeemed, at par, all outstanding shares of its 9.50 percent $55 million preferred stock, Series 1991-A, for $10 per depositary share, plus accrued and unpaid dividends. The company'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, 1997, up to 4.3 million shares of preferred stock were authorized for issuance. - -------------------------------------------------------------------------------- 11. Junior Preferred Share Purchase Rights In 1996, the company 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 thousandth of a share of a new series of junior participating preferred stock at an exercise price of $300, subject to 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 the company's common stock and (b) ten business days (or later date as determined by the Board of Directors of the company) after a party or an associated group initiates or announces its intention to make an offer to acquire 15 percent or more of the company's common stock. The Rights, which cannot vote or receive dividends, expire on July 31, 2006 and may be redeemed by the company at a price of $.01 per Right at any time prior to expiration or acquisition of 15 percent of the company's common stock. 55 39 Household International, Inc. and Subsidiaries - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 12. FAIR VALUE The company has estimated the fair value of its financial OF FINANCIAL instruments in accordance with Statement of Financial INSTRUMENTS Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("FAS No. 107"). Fair value estimates, methods and assumptions set forth below for the company's 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 the company's 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 the company's 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 the company's business units) are not considered financial instruments and, accordingly, are not valued for purposes of this disclosure. The company believes 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 the company's financial instruments:
1997 1996 ---------------------------------- ------------------------------------ In millions. Carrying Estimated Carrying Estimated At December 31 Value Fair Value Difference Value Fair Value Difference ---------------------------------------------------------------------------------------------------------- Cash $ 280 $ 280 - $ 239 $ 239 - Investment securities 2,286 2,286 - 2,282 2,282 - Receivables 23,863 23,981 $ 118 24,245 24,630 $ 385 ---------------------------------------------------------------------------------------------------------- Subtotal 26,429 26,547 118 26,766 27,151 385 ---------------------------------------------------------------------------------------------------------- Deposits (1,789) (1,796) (7) (2,365) (2,381) (16) Commercial paper, bank and other borrowings (6,081) (6,081) - (6,428) (6,428) - Senior and senior subordinated debt (14,849) (15,092) ( 243) (14,802) (15,022) (220) Insurance reserves (1,257) (1,486) ( 229) (1,205) (1,422) (217) ---------------------------------------------------------------------------------------------------------- Subtotal (23,976) (24,455) ( 479) (24,800) (25,253) (453) ---------------------------------------------------------------------------------------------------------- Interest rate and foreign exchange contracts 40 27 (13) 37 (105) (142) Commitments to extend credit and guarantees - 50 50 - 40 40 ---------------------------------------------------------------------------------------------------------- Subtotal 40 77 37 37 (65) (102) ---------------------------------------------------------------------------------------------------------- Total $ 2,493 $ 2,169 $ (324) $ 2,003 $ 1,833 $ (170) ===========================================================================================================
56 40 - -------------------------------------------------------------------------------- The following methods and assumptions were used to estimate the fair value of the company's 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 the company 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 the company believes 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. 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 the company's 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 the company 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, 1997 and 1996. 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 8, "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 the company's relationship with the counterparty, the creditworthiness of the counterparty and the difference between committed and current interest rates. - -------------------------------------------------------------------------------- 13. LEASES The company leases certain offices, buildings and equipment for periods of up to 23 years with various renewal options. The office space leases generally require the company to pay certain operating expenses. The majority of the company's leases are noncancelable operating leases. Net rental expense under operating leases was $54.5, $50.6 and $55.4 million for 1997, 1996 and 1995, respectively. Future net minimum lease commitments under noncancelable operating lease arrangements were:
In millions. At December 31, 1997 - -------------------------------------------------------------------------------- 1998 $ 53.2 1999 41.2 2000 30.9 2001 22.6 2002 17.9 Thereafter 121.1 - -------------------------------------------------------------------------------- Net minimum lease commitments $286.9 ================================================================================
57 41 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (Continued) 14. INCENTIVE COMPENSATION AND STOCK OPTION PLANS The company's executive compensation plans provide for issuance of nonqualified stock options and restricted stock rights (RSRs). At December 31, 1997, of the total shares authorized, 3,587,401 shares were available for issuance to employees and directors pursuant to the terms of the plans. Stock options permit the holder to purchase, under certain limitations, the company'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 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 2,500 shares of the company'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 2,500 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. Common stock data for the stock option plans is summarized as follows:
1997 1996 1995 --------------------- ---------------------- ---------------------- Price per Price Per Price Per Shares Share Shares Share Shares Share - ----------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 3,904,453 $44.03 3,955,240 $35.85 3,600,916 $28.39 Granted 688,389 115.71 513,500 91.17 1,439,600 47.99 Exercised (563,715) 31.06 (463,212) 27.13 (812,576) 25.04 Expired or canceled (135,350) 70.21 (101,075) 40.81 (272,700) 33.60 - ----------------------------------------------------------------------------------------------------------------------- Outstanding at the end of year 3,893,777 $57.09 3,904,453 $44.03 3,955,240 $35.85 ======================================================================================================================= Exercisable at end of year 2,270,970 $38.95 2,115,672 $32.17 1,596,135 $26.57 - ----------------------------------------------------------------------------------------------------------------------- Weighted average fair value of options granted $33.54 $31.50 $16.44 - -----------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ----------------------------------------------------- -------------------------------------- Number Number Range of Outstanding at Weighted Average Weighted Average Outstanding at Weighted Average Exercise Prices December 31, 1997 Remaining Life Exercise Price December 31, 1997 Exercise Price - --------------------------------------------------------------------------------------------------------------------- $17.69-$47.44 2,328,877 5.6 years $33.75 1,900,645 $32.53 $50.75-$117.19 1,564,900 9.0 years $91.84 370,325 $71.97 - ---------------------------------------------------------------------------------------------------------------------
RSRs entitle an employee to receive a stated number of shares of the company's common stock if the employee satisfies the conditions set by the Compensation Committee for the award. At December 31, 1997 and 1996, employees had outstanding RSRs representing 410,575 and 250,725 shares, respectively. The company also maintains an Employee Stock Purchase Plan (the "ESPP"). The ESPP provides a means for employees to purchase shares of the company's common stock at 85% of the lesser of its market price at the beginning or end of a one year subscription period. In 1997 and 1996, the company sold 119,002 and 134,876 shares, respectively, to employees under the ESPP. The company accounts for options and shares issued under the ESPP in accordance with APB 25, pursuant to which no compensation cost has been recognized. Had compensation cost been determined consistent with FAS No. 123, the company's net income and earnings per share, on a pro forma basis, would have been as follows:
1997 1996 1995 In millions, except per share data. --------------- --------------- --------------- Year ended December 31 Diluted Basic Diluted Basic Diluted Basic - ------------------------------------------------------------------------------------------------------------------------- Earnings available to common shareholders: As Reported $674.8 $674.8 $521.9 $521.9 $426.8 $426.8 Pro Forma 666.9 666.9 517.3 517.3 424.3 424.3 Earnings per share: As Reported $ 6.50 $ 6.59 $ 5.31 $ 5.37 $ 4.31 $ 4.38 Pro Forma 6.43 6.51 5.27 5.33 4.28 4.35 - -------------------------------------------------------------------------------------------------------------------------
The compensation expense recognized in pro forma net income for 1997, 1996 and 1995 may not be representative of the effects on pro forma net income for future years. 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 1997, 1996 and 1995 grants: 58 42
- -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Risk free interest rate 5.86% 6.03% 6.77% Expected dividend yield 1.45 1.55 1.59 Expected life 5 years 5 years 5 years Expected volatility 23.9% 28.2% 27.8% - --------------------------------------------------------------------------------
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. - -------------------------------------------------------------------------------- 15.EMPLOYEE BENEFIT PLANS The company has several defined benefit pension plans covering substantially all of its employees. Plan benefits are based primarily on years of service. Plan assets primarily consist of common and preferred stocks including those of foreign issuers and corporate and government obligations. At December 31, 1997, plan assets included an investment in 1,258,807 shares of the company's common stock with a fair value of $160.7 million. Dividends declared on these shares in 1997 totaled approximately $2 million. 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 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost - benefits earned during the period $(15.6) $(15.1) $(16.8) Interest cost on projected benefit obligation (30.8) (31.0) (32.5) Actual return on assets 85.1 99.8 116.4 Net amortization and deferral (7.4) (26.9) (40.7) - -------------------------------------------------------------------------------- Pension income $ 31.3 $ 26.8 $ 26.4 ================================================================================
The funded status of defined benefit pension plans was as follows:
In millions. At December 31 1997 1996 - -------------------------------------------------------------------------------- Actuarial present value of: Vested benefits obligation $351.0 $347.7 Nonvested benefits obligation 52.2 44.9 - -------------------------------------------------------------------------------- Accumulated benefit obligation 403.2 392.6 Effects of anticipated future compensation levels 30.7 27.9 - -------------------------------------------------------------------------------- Projected benefit obligation 433.9 420.5 Plan assets at fair value 747.8 704.7 - -------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation $313.9 $284.2 ================================================================================
The projected benefit obligation of the foreign benefit plans totaled $51.3 and $45.8 million at December 31, 1997 and 1996, respectively. Plan assets in excess of the projected benefit obligation for these plans totaled $4.0 and $5.6 million at December 31, 1997 and 1996, respectively. The 1997 and 1996 projected benefit obligations for the domestic defined benefit plan were determined using an assumed weighted average discount rate of 7.50 percent and an assumed compensation increase of 4.0 percent. The assumed weighted average long-term rate of return on plan assets was 10.0 percent in 1997, 1996 and 1995. The excess of plan assets over the projected benefit obligation included the following components:
In millions. At December 31 1997 1996 - -------------------------------------------------------------------------------- Unamortized prior service cost $ (1.9) $ (2.6) Net unrecognized loss from past experience different from assumed and effects of changes in assumptions (31.2) (41.8) Unamortized assets 13.8 27.2 Prepaid pension cost 333.2 301.4 - -------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation $313.9 $284.2 ================================================================================
59 43 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The straight-line method of amortization is used for prior service costs and unrecognized gains and losses. The company also sponsors a defined contribution plan where each participant's contribution is matched by the company up to a maximum of 6 percent of the participant's compensation. For 1997, 1996 and 1995 these costs totaled $18.5, $17.3 and $17.2 million, respectively. The company has several plans which provide medical, dental and life insurance benefits to retirees and eligible dependents. The plans are funded on a pay-as-you-go basis and cover substantially all employees who meet certain age and vested service requirements. The company has instituted dollar limits on its payments under the plans to control the cost of future medical benefits. The company recognizes the expected postretirement costs on an accrual basis, similar to pension accounting. The expected cost of postretirement benefits is required to be recognized over the employees' years of service with the company instead of the period in which the benefits are paid. The company is recognizing the transition obligation over a period of 20 years. The transition obligation represents the unfunded and unrecognized accumulated postretirement benefit obligation. The net postretirement benefit cost included the following:
In millions. Year ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Service cost-benefits earned during the period $ (2.8) $ (2.8) $ (3.1) Interest cost on accumulated postretirement benefit obligation (7.9) (7.4) (10.5) Net amortization and deferral (3.6) (3.3) (5.5) - ---------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost $(14.3) $(13.5) $(19.1) ==========================================================================================================
The cost of plans which cover retirees and eligible dependents outside of the United States is not significant to the company. The actuarial and recorded liabilities for postretirement benefit plans, none of which have been funded, were:
In millions. At December 31 1997 1996 - ---------------------------------------------------------------------------------------------------------- Actuarial present value of postretirement benefit obligation for: Retirees $ 75.6 $ 68.0 Fully eligible active participants 8.6 9.6 Other active participants 27.5 27.3 - ---------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation 111.7 104.9 Net unrecognized gain from past experience different from assumed and effects of changes in assumptions 45.6 49.2 Unamortized liability (94.3) (100.6) - ---------------------------------------------------------------------------------------------------------- Accrued postretirement benefit obligation $ 63.0 $ 53.5 ==========================================================================================================
The December 31, 1997 and 1996 accumulated postretirement benefit obligation was determined using an assumed weighted average discount rate of 7.50 percent and an assumed annual compensation increase of 4.0 percent. A 10.0 and 11.0 percent annual rate of increase in the gross cost of covered health care benefits was assumed for 1998 and 1997, respectively. This rate of increase is assumed to decline by 1 percent in each year after 1998. The health care cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate by 1 percent would have increased the 1997 and 1996 net periodic postretirement benefit cost by $.6 and $.8 million, respectively, and the accumulated postretirement benefit obligation at December 31, 1997 and 1996 by $6.1 and $7.5 million, respectively. 60 44 - -------------------------------------------------------------------------------- 16. INCOME TAXES Total income taxes were allocated as follows:
In millions. Year ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Provision for income taxes related to operations $342.6 $283.7 $300.5 Income taxes related to adjustments included in common shareholders' equity: Unrealized gain (loss) on investments, net 8.4 (55.2) 105.8 Foreign currency translation adjustments 11.6 (18.6) (3.8) Exercise of stock options (15.4) (6.8) (6.8) - ------------------------------------------------------------------------------------------------------------------------- Total $347.2 $203.1 $395.7 =========================================================================================================================
Provisions for income taxes related to operations were:
In millions. Year ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Current United States $152.6 $328.4 $270.4 Foreign 42.6 38.9 32.6 - ------------------------------------------------------------------------------------------------------------------------- Total current 195.2 367.3 303.0 - ------------------------------------------------------------------------------------------------------------------------- Deferred United States 138.1 (81.6) 7.9 Foreign 9.3 (2.0) (10.4) - ------------------------------------------------------------------------------------------------------------------------- Total deferred 147.4 (83.6) (2.5) - ------------------------------------------------------------------------------------------------------------------------- Total income taxes $342.6 $283.7 $300.5 =========================================================================================================================
The significant components of deferred income tax provisions attributable to income from operations were:
In millions. Year ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Deferred income tax provision $134.7 $(65.9) $ 2.6 Adjustment of valuation allowance - (11.4) (6.7) Change in operating loss carryforwards 12.7 (6.3) 1.6 - ------------------------------------------------------------------------------------------------------------------------- Deferred income tax provision $147.4 $(83.6) $(2.5) =========================================================================================================================
Income before income taxes from foreign operations was $163.7, $111.7 and $71.7 million in 1997, 1996 and 1995, respectively. Effective tax rates are analyzed as follows:
Year ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% Increase (decrease) in rate resulting from: State and local taxes, net of federal benefit 2.0 1.8 2.0 Amortization and disposition of intangibles and goodwill .3 1.5 1.9 Leveraged lease tax benefits (2.7) (1.7) (1.9) Recapture of life insurance policyholders' surplus account balance - - 3.9 Other (1.3) (2.1) (1.0) - ------------------------------------------------------------------------------------------------------------------------- Effective tax rate 33.3% 34.5% 39.9% =========================================================================================================================
61 45 Household International, Inc. and Subsidiaries - ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (Continued) Provision for U.S. income taxes had not been made at December 31, 1997 and 1996 on $141.7 and $146.4 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. The company's 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 $20.4 million at December 31, 1997. Because this amount would become taxable only in the event of certain circumstances which the company does not expect to occur within the foreseeable future, no deferred tax liability has been established for this item. At December 31, 1997 the company had net operating loss carryforwards for tax purposes of $45.7 million, of which $8.0 million expire in 2000; $11.3 million expire in 2001; $12.7 million expire in 2002; $6.8 million expire in 2003; and $6.9 million expire in 2004. Temporary differences which gave rise to a significant portion of deferred tax assets and liabilities were as follows:
In millions. At December 31 1997 1996 - ----------------------------------------------------------------------- DEFERRED TAX LIABILITIES Receivables sold $ 454.9 $256.4 Leveraged lease transactions, net 312.7 383.3 Pension plan assets 123.1 111.0 Other 208.9 121.7 - ----------------------------------------------------------------------- Total deferred tax liabilities $1,099.6 $872.4 ======================================================================= DEFERRED TAX ASSETS Credit loss reserves $ 676.8 $536.1 Other 187.4 236.6 - ----------------------------------------------------------------------- Total deferred tax assets 864.2 772.7 - ----------------------------------------------------------------------- Net deferred tax liability at end of year $ 235.4 $ 99.7 =======================================================================
- ------------------------------------------------------------------------------- 17. Earnings Per Common Share In December 1997, the company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS No. 128"), which supersedes APB Opinion No. 15 "Earnings Per Share" and simplifies the standards for computing and presenting earnings per share ("EPS"). Under the new standards, the presentation of primary EPS has been replaced with a presentation of basic EPS. Basic EPS is computed excluding dilution caused by common stock equivalents such as stock options. The presentation of fully diluted EPS has been replaced with a presentation of diluted EPS, which is calculated in a similar fashion to how fully diluted EPS had been computed. Previously reported EPS has been restated to conform to the new rules.
1997 1996 1995 In millions, except per share data. ------------------ ------------------ ------------------ Year ended December 31 Diluted Basic Diluted Basic Diluted Basic - --------------------------------------------------------------------------------------------------------------------- EARNINGS Net income $686.6 $686.6 $538.6 $538.6 $453.2 $453.2 Preferred dividends (11.8) (11.8) (16.7) (16.7) (26.4) (26.4) - --------------------------------------------------------------------------------------------------------------------- Earnings available to common shareholders $674.8 $674.8 $521.9 $521.9 $426.8 $426.8 ===================================================================================================================== AVERAGE SHARES Common 102.4 102.4 97.1 97.1 97.5 97.5 Common equivalents 1.4 - 1.2 - 1.6 - - --------------------------------------------------------------------------------------------------------------------- Total 103.8 102.4 98.3 97.1 99.1 97.5 ===================================================================================================================== Earnings per common share $ 6.50 $ 6.59 $ 5.31 $ 5.37 $ 4.31 $ 4.38 =====================================================================================================================
62 46 - ------------------------------------------------------------------------------- 18. 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 the consolidated financial position of the company. However, as the ultimate resolution of these proceedings is influenced by factors that are outside of the company's control, it is reasonably possible the company's estimated liability under these proceedings may change. See Note 13 for discussion of lease commitments. - ------------------------------------------------------------------------------- 19. Sale of Product Lines In October 1995 the company sold the individual life and annuity product lines of the Individual Life Insurance segment for $525 million in cash and $50 million of preferred stock of the purchaser. For the first nine months of 1995, these sold product lines generated approximately $400 million of revenues and earned approximately $35 million of net income. - ------------------------------------------------------------------------------- 20. Geographic Data The following is a summary of assets, revenues and operating profit of the company by country:
Identifiable Assets Revenues Operating Profit ------------------------------- ------------------------------ ------------------------- In millions. 1997 1996 1995 1997 1996 1995 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- United States $26,015.6 $25,482.9 $25,797.7 $4,785.7 $4,426.7 $4,466.2 $ 888.1 $714.6 $684.7 United Kingdom 2,934.2 2,654.5 2,006.6 515.3 434.8 397.7 123.1 92.3 67.6 Canada 1,352.8 1,457.1 1,414.5 202.1 197.3 280.5 18.0 15.4 1.4 - --------------------------------------------------------------------------------------------------------------------- Total $30,302.6 $29,594.5 $29,218.8 $5,503.1 $5,058.8 $5,144.4 $1,029.2 $822.3 $753.7 =====================================================================================================================
63 47 - ------------------------------------------------------------------------------- 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, 1997 and 1996, 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, 1997. These financial statements are the responsibility of the company'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 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Chicago, Illinois January 21, 1998 65 48 Household International, Inc. and Subsidiaries -------------------------------------------------------------------------- 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 Ticker ------------------ Stock Symbol 1997 1996 Features Redemption Features - ------------------------------------------------------------------------------------------------------------------------- COMMON HI $1.62 $1.46 Quarterly dividend rate N/A increased to $.42 effective 10/15/97 - ------------------------------------------------------------------------------------------------------------------------- 8 1/4% PREFERRED, SERIES 1992-A HI+PRZ $2.0625 $2.0625 Nonconvertible Cannot be redeemed prior to 10/15/2002. Depositary Shares representing Redeemable at our 1/40 share of 8 1/4% Preferred Stock, option after 10/15/2002 Series 1992-A in whole or in part at $25.00 per depositary share plus accrued and unpaid dividends. - ------------------------------------------------------------------------------------------------------------------------- 7.35% PREFERRED, SERIES 1993-A HI+PRJ $1.8375 $1.8375 Nonconvertible Cannot be redeemed prior to 10/15/98. Depositary Shares representing Redeemable at our 1/40 share of 7.35% Preferred Stock, option after 10/15/98 Series 1993-A in whole or in part at $25.00 per depositary share plus accrued and unpaid dividends. - -------------------------------------------------------------------------------------------------------------------------
Shareholders Net Shares Outstanding of Record 1997 Market Price 1996 Market Price ------------------------ ----------------- ----------------- ----------------- Stock 1997 1996 1997 1996 High Low High Low - ------------------------------------------------------------------------------------------------------------------------- COMMON 107,158,032 97,065,254 10,239 11,147 130 78 5/8 98 1/8 52 - ------------------------------------------------------------------------------------------------------------------------- 8 1/4% PREFERRED, SERIES 1992-A (Per Depositary Share) 2,000,000 2,000,000 356 408 29 1/2 27 28 1/8 24 7/8 - ------------------------------------------------------------------------------------------------------------------------- 7.35% PREFERRED, SERIES 1993-A (Per Depositary Share) 4,000,000 4,000,000 247 290 26 1/4 25 1/2 26 7/8 24 - -------------------------------------------------------------------------------------------------------------------------
66 49 Household International, Inc. and Subsidiaries --------------------------------------------------------------------------
Year ended December 31, unless otherwise indicated. 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE PER SHARE OF COMMON STOCK (HIGH-LOW PRICES ON NYSE) First quarter 108 1/4 - 85 71 1/2 - 52 45 - 35 7/8 35 5/8 - 29 35 3/4 - 26 15/16 -------------------------------------------------------------------------------------------------------------------------- Second quarter 117 7/16 - 78 5/8 76 1/2 - 63 51 1/2 - 43 1/8 36 1/8 - 28 1/2 36 3/8 - 31 5/8 -------------------------------------------------------------------------------------------------------------------------- Third quarter 130 - 108 7/16 83 7/8 - 68 1/2 62 - 48 7/8 39 3/4 - 32 7/8 39 15/16 - 34 5/8 -------------------------------------------------------------------------------------------------------------------------- Fourth quarter 129 5/8 - 108 3/8 98 1/8 - 82 1/2 68 3/8 - 54 1/4 39 1/8 - 32 3/4 40 3/8 - 30 5/8 -------------------------------------------------------------------------------------------------------------------------- Yearly range 130 - 78 5/8 98 1/8 - 52 68 3/8 - 35 7/8 39 3/4 - 28 1/2 40 3/8 - 26 15/16 -------------------------------------------------------------------------------------------------------------------------- Year-end close 127 5/8 92 1/4 59 1/2 37 1/8 32 5/8 -------------------------------------------------------------------------------------------------------------------------- Composite common shares traded 100,850,400 70,634,500 77,242,300 64,880,200 56,945,400 -------------------------------------------------------------------------------------------------------------------------- Average daily volume 398,618 278,089 306,517 257,461 225,081 -------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- PRICE EARNINGS RATIO(1) Yearly range 22.4 - 14.8 19.7 - 12.8 17.4 - 11.1 13.0 - 9.9 18.7 - 12.0(2) -------------------------------------------------------------------------------------------------------------------------- Yearly average 19.0 16.5 13.6 11.5 16.0(2) -------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- DIVIDEND YIELD Yearly range 1.2% - 2.0% 2.6% - 1.6% 3.4% - 1.9% 4.1% - 3.0% 4.3% - 2.9% -------------------------------------------------------------------------------------------------------------------------- Yearly average 1.5% 1.9% 2.6% 3.5% 3.4% -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT RATIO Common dividends to net income available to common shareholders 25% 27% 30% 35% 41% -------------------------------------------------------------------------------------------------------------------------- Total dividends to net income 26% 29% 34% 40% 47% -------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- SHARES OUTSTANDING AT DECEMBER 31 Common 107,158,032 97,065,254 97,161,529 96,602,598 94,448,132 -------------------------------------------------------------------------------------------------------------------------- $6.25 Preferred - - - 52,010 385,439 -------------------------------------------------------------------------------------------------------------------------- 9 1/2% Preferred, Series 1989-A(3) - - - 3,000,000 3,000,000 -------------------------------------------------------------------------------------------------------------------------- 9 1/2% Preferred, Series 1991-A(3) - 5,500,000 5,500,000 5,500,000 5,500,000 -------------------------------------------------------------------------------------------------------------------------- 8 1/4% Preferred, Series 1992-A(3) 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 -------------------------------------------------------------------------------------------------------------------------- 7.35% Preferred, Series 1993-A(3) 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 -------------------------------------------------------------------------------------------------------------------------- Flex APS, Series B - - - 400,000 400,000 -------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS OF RECORD AT DECEMBER 31 Common 10,239 11,147 13,515 14,379 14,632 -------------------------------------------------------------------------------------------------------------------------- $6.25 Preferred - - - 408 641 -------------------------------------------------------------------------------------------------------------------------- 9 1/2% Preferred, Series 1989-A(3) - - - 535 591 -------------------------------------------------------------------------------------------------------------------------- 9 1/2% Preferred, Series 1991-A(3) - 690 786 895 939 -------------------------------------------------------------------------------------------------------------------------- 8 1/4% Preferred, Series 1992-A(3) 356 408 453 518 512 -------------------------------------------------------------------------------------------------------------------------- 7.35% Preferred, Series 1993-A(3) 247 290 317 343 305 -------------------------------------------------------------------------------------------------------------------------- Flex APS, Series B - - - 4 4 -------------------------------------------------------------------------------------------------------------------------- Total 10,842 12,535 15,071 17,082 17,624 --------------------------------------------------------------------------------------------------------------------------
(1) The ratio of market price per share to earnings per share is based on a revolving summation of quarterly results. (2) In 1993, the yearly range and yearly average are from February 4, 1993 forward. (3) Per depositary share. 67 EX-21 14 LIST OF SUBSIDIARIES 1 Exhibit 21 SUBSIDIARIES OF HOUSEHOLD INTERNATIONAL, INC. - --------------------------------------------- As of December 31, 1997, 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% 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% 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% 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% - 1 - 2 % Voting Stock Organized Owned Other By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ Household Auto Corporation Delaware 100% Household Finance Corporation of Hawaii Hawaii 100% Household Realty Corporation (1997) Limited B.C. 100% Pacific Finance Loans California 100% Household Automotive Finance Corporation Delaware 100% ACC Funding Corp. Delaware 100% ACC Receivables Corp. Delaware 100% Household Automotive Funding Corporation Delaware 100% OFL-A Receivables Corp. Delaware 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 Bank (Illinois), N.A. U.S. 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 Finance Receivables Corporation II Delaware 100% Household Financial Services, Inc. Delaware 100% Household Group, Inc. Delaware 100% AHLIC Investment Holdings Corporation Delaware 100% Arcadia General Insurance Company Arizona 100% Arcadia Insurance Administrators, Inc. Delaware 100% Arcadia National Life Insurance Company Arizona 100% Cal-Pacific Services, Inc. California 100% HFS Investments, Inc. Nevada 100% Household Insurance Agency, Inc. Michigan 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% Household Commercial Financial Delaware 100% Services, Inc. Business Realty Inc. Delaware 100% Business Lakeview, Inc. Delaware 100% Capital Graphics, Inc. Delaware 100% Color Prelude Inc. Delaware 100% HCFS Business Equipment Corporation Delaware 100% - 2 - 3 % Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ 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% Land of Lincoln Builders, Inc. Illinois 100% PPSG Corporation Delaware 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% Household Capital Investment Corporation Delaware 100% B&K Corporation Michigan 94% Household Commercial of California, Inc. California 100% 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% - 3 - 4 % Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- -------- ------ Household Finance Corporation of Nevada Delaware 100% Household Finance Realty Corporation of Delaware 100% New York Household Finance Corporation of West Virginia West Virginia 100% Household Finance Industrial Loan Company Washington 100% Household Finance Industrial Loan Company Iowa 100% of Iowa Household Finance Realty Corporation of Delaware 100% Nevada 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 Insurance Agency, Inc. Nevada 100% Household Recovery Services Corporation Delaware 100% Household Relocation Management, Inc. Illinois 100% Mortgage One Corporation Delaware 100% Mortgage Two Corporation Delaware 100% Pacific Agency Inc. Nevada 100% Sixty-First HFC Leasing Corporation Delaware 100% Household Pooling Corporation Nevada 100% Household Receivables Acquisition Company Delaware 100% Household Financial Group, Ltd. Delaware 100% Household Global Funding, 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 ServicesLimited England 100% Hamilton Insurance Company Limited England 100% Hamilton Life Assurance Co. Limited England 100% - 4 - 5 % Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ 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% - 5 - EX-23 15 CONSENT OF ARTHUR ANDERSEN LLP 1 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 21, 1998, included in this annual report on Form 10-K of Household International, Inc. for the year ended December 31, 1997, 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 and No. 333-36589 on Form S-8, Registration Statements No. 33-48854, No. 33-56599, No. 33-57249, No. 333-1025 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 23, 1998 EX-27 16 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR YEAR DEC-31-1997 DEC-31-1996 DEC-31-1995 DEC-31-1997 DEC-31-1996 DEC-31-1995 280,400 239,200 270,400 2,285,600 2,282,000 4,639,500 23,811,000 24,067,000 21,732,100 1,944,500 1,596,200 1,177,400 0 0 0 0 0 0 721,700 785,700 865,700 412,300 432,600 474,000 30,302,600 29,594,500 29,218,800 0 0 0 14,849,000 14,802,000 11,227,900 0 0 0 150,000 205,000 205,000 124,300 115,200 115,200 4,566,900 3,001,000 2,650,700 30,302,600 29,594,500 29,218,800 0 0 0 5,503,100 5,058,800 5,144,400 0 0 0 1,928,500 1,956,300 2,072,300 0 0 0 1,042,000 759,600 761,300 1,503,400 1,520,600 1,557,100 1,029,200 822,300 753,700 342,600 283,700 300,500 686,600 538,600 453,200 0 0 0 0 0 0 0 0 0 686,600 538,600 453,200 6.59 5.37 4.38 6.50 5.31 4.31 RESTATED FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S BALANCE SHEETS WERE NON-CLASSIFIED. REPRESENTS BASIC EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE." REPRESENTS DILUTED EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
EX-27.1 17 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 345,100 358,100 294,100 2,261,500 2,311,100 2,333,700 24,445,000 24,797,500 22,401,100 1,809,200 1,770,900 1,697,200 0 0 0 0 0 0 730,800 723,200 703,800 409,200 388,400 363,900 30,650,800 31,201,100 28,046,800 0 0 0 15,168,000 15,854,200 14,216,100 0 0 0 150,000 150,000 150,000 124,300 124,300 115,200 4,366,800 4,194,300 3,090,900 30,650,800 31,201,100 28,046,800 0 0 0 4,051,700 2,629,000 1,335,700 0 0 0 1,416,600 926,300 476,600 0 0 0 802,800 545,000 293,400 1,116,100 726,900 365,100 716,200 430,800 200,600 247,200 149,000 69,100 469,000 281,800 131,500 0 0 0 0 0 0 0 0 0 469,000 281,800 131,500 4.57 2.82 1.32 4.50 2.78 1.30 RESTATED FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S BALANCE SHEETS WERE NON-CLASSIFIED. REPRESENTS BASIC EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE." REPRESENTS DILUTED EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
EX-27.2 18 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 9-MOS 6-MOS 3-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 289,600 336,700 274,200 2,312,900 2,998,000 3,898,700 24,137,400 23,588,700 21,073,500 1,527,900 1,451,100 1,290,800 0 0 0 0 0 0 766,600 758,700 871,500 426,700 416,000 490,700 29,896,700 29,827,400 27,892,200 0 0 0 15,285,500 14,522,200 11,619,500 0 0 0 205,000 205,000 205,000 115,200 115,200 115,200 2,844,500 2,759,300 2,660,700 29,896,700 29,827,400 27,892,200 0 0 0 3,724,300 2,482,600 1,175,200 0 0 0 1,491,700 1,017,800 468,500 0 0 0 537,300 367,800 191,300 1,121,800 737,100 353,400 573,500 359,900 162,000 198,500 124,800 51,500 375,000 235,100 110,500 0 0 0 0 0 0 0 0 0 375,000 235,100 110,500 3.73 2.33 1.09 3.69 2.31 1.08 RESTATED FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S BALANCE SHEETS WERE NON-CLASSIFIED. REPRESENTS BASIC EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE." REPRESENTS DILUTED EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
EX-99.(B) 19 RATINGS OF HOUSEHOLD INT'L AND ITS SIG. SUB. 1 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 Fitch Phelps & Poor's Investors Investors Credit Thomson Corporation Service Services Rating Co. BankWatch - -------------------------------------------------------------------------------------------------------------------------------- At December 31, 1997 - -------------------------------------------------------------------------------------------------------------------------------- Household International, Inc. Senior A A3 A A A Commercial paper A-1 P-2 F-1 Duff 1 TBW-1 Preferred stock A- baa1 A- A- BBB+ - -------------------------------------------------------------------------------------------------------------------------------- Household Finance Corporation Senior A A2 A+ A+ A+ Senior subordinated A- A3 A A A Commercial paper A-1 P-1 F-1 Duff 1+ TBW-1 - -------------------------------------------------------------------------------------------------------------------------------- Household Bank, f.s.b. Senior A A2 A A NR Subordinated 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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