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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, 1993
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)
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DELAWARE 36-3121988
(State of incorporation) (I.R.S. Employer Identification No.)
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2700 SANDERS ROAD,
PROSPECT HEIGHTS, ILLINOIS 60070
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (708) 564-5000
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
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COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE AND
CHICAGO STOCK EXCHANGE
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE NEW YORK STOCK EXCHANGE AND
RIGHTS (ATTACHED TO AND TRANSFERABLE ONLY WITH THE CHICAGO STOCK EXCHANGE
COMMON STOCK)
$6.25 CUMULATIVE CONVERTIBLE VOTING PREFERRED STOCK, NEW YORK STOCK EXCHANGE
NO PAR, $50 STATED VALUE
DEPOSITARY SHARES (EACH REPRESENTING ONE-QUARTER SHARE NEW YORK STOCK EXCHANGE
OF 9 1/2% CUMULATIVE PREFERRED STOCK, SERIES 1989-A,
NO PAR, $100 STATED VALUE)
DEPOSITARY SHARES (EACH REPRESENTING ONE-TENTH SHARE OF NEW YORK STOCK EXCHANGE
9 1/2% CUMULATIVE PREFERRED STOCK, SERIES 1991-A, NO
PAR, $100 STATED VALUE)
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)
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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. / /
AT MARCH 16, 1994, THERE WERE 94,598,901 SHARES OF REGISTRANT'S COMMON
STOCK OUTSTANDING, AND THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $3.2 BILLION.
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN PORTIONS OF THE REGISTRANT'S 1993 ANNUAL REPORT TO SHAREHOLDERS FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1993: PARTS I, II AND IV.
CERTAIN PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS
1994 ANNUAL MEETING SCHEDULED TO BE HELD MAY 11, 1994: PART I AND PART III.
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PART I.
ITEM 1. BUSINESS.
GENERAL
Household International, Inc. ("Household International" or the "Company")
is a publicly owned corporation which, with its subsidiaries, provides a broad
range of diversified financial services for individuals and businesses. The
Company employs approximately 16,900 people and serves approximately 17 million
customers in the United States, Canada, the United Kingdom and Australia. In
1993 Household International was ranked as the 61st largest publicly owned
company, based on total assets by Forbes magazine which annually lists the 500
largest public corporations in the United States. The Company's operations are
divided into three business segments: Finance and Banking, Individual Life
Insurance, and Liquidating Commercial Lines.
Household International was created in 1981 as a result of a shareholder
approved restructuring of Household Finance Corporation ("HFC"), a publicly
owned corporation since 1925, whereby Household International became a holding
company for various subsidiaries, including HFC. At that time Household
International had operations in the financial services, manufacturing,
transportation and merchandising industries.
In 1985 the Company began to restructure its operations away from being a
diversified conglomerate. This action resulted in the disposition of its
merchandising (1985), transportation (1986) and manufacturing (1989-1990)
businesses, including the spin-off to its common stock shareholders of three
manufacturing companies in 1989: Eljer Industries, Inc., Schwitzer, Inc. and
Scotsman Industries, Inc.
The products offered by Household International, a description of the
geographic markets in which the Company operates and summary financial
information for each of the Company's business segments is set forth in the
Company's Annual Report to Shareholders (the "1993 Annual Report"), portions of
which are incorporated herein by reference. See pages 12, 13 and 33 through 80
of the 1993 Annual Report. The Company markets its products to its customers
through a number of different distribution channels, including consumer finance
branch offices, consumer bank branch offices, loan origination offices, retail
merchants, independent insurance agents, direct mail and telemarketing, and
retail securities brokerage offices.
1993 DEVELOPMENTS. In 1993 the Company's bankcard operations continued to
grow, principally through the continuing success of the GM Card(sm). The GM Card
is a general-purpose credit card which allows the users thereof to earn credit
toward the purchase of new General Motors vehicles. The GM Card was publicly
introduced in September 1992 and as of December 31, 1993, there were
approximately 5.9 million accounts which had generated approximately $4.9
billion credit card receivables. As of this date, the GM Card accounts are
generally active and are of high credit quality. In the fourth quarter, the
Company announced expansion of its alliance with General Motors Corporation with
the introduction of a GM Card from Vauxhall in the United Kingdom, permitting
users to earn rebates toward the purchase of a new Vauxhall vehicle. The card
will be issued by HFC Bank plc, the Company's principal operating subsidiary in
the United Kingdom. Also in the fourth quarter, the Company announced an
alliance to issue a new co-branded credit card with Charles Schwab & Co.
In 1993 Household International strengthened its capital base through the
issuance of additional equity securities. In March 1993 the Company raised
additional capital of approximately $269 million (net of issuance costs) through
the sale of 4,025,000 shares of common stock (on a pre-split basis). In
addition, during the year the Company issued approximately $44 million of common
stock through employee benefit and dividend reinvestment plans. The Company also
issued 4,000,000 depositary shares, with each depositary share representing a
one-fortieth interest in a share of the Company's 7.35% Cumulative Preferred
Stock, Series 1993-A. The underwritten public offering raised approximately $97
million (net of issuance costs) for the Company. The issuance of this common and
preferred stock, together with a conservative growth posture, strengthened its
capital ratios.
In October, the Company's common stock was split 2-for-1 through a 100%
stock dividend. The split doubled the number of shares of common stock
outstanding and was affected for the primary purpose of making the common stock
more affordable to a broader base of investors.
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The lowest interest rates in the United States in over twenty years
contributed to high prepayment rates in the first mortgage portfolio, resulting
in write-downs of capitalized servicing rights and lower earnings for the
mortgage banking operation.
In foreign operations, despite continuing weak economic growth in the
United Kingdom, Household International's United Kingdom operation was
profitable for the first time in five years. The improvement was primarily
attributable to actions taken in prior years such as implementing tightened
underwriting standards and improved collections efforts. For the year, the
United Kingdom operation earned $10.3 million compared to a 1992 loss of $45.9
million. The Company's operation in Canada was adversely affected by a
continuing poor economic environment resulting in low receivables origination
volume. The Company's performance in Canada was also impacted by establishment
of higher loss reserves during the fourth quarter as a result of the completion
of the first phase of a strategic assessment of the Canadian market, economic
conditions, products and the Company's Canadian cost structure and policies. The
Company's Australian operation was profitable, comparable with its 1992 results.
FINANCE AND BANKING
Total Finance and Banking receivables at December 31, classified by type,
consisted of the following (in millions):
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1993 1992 1991
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First mortgage................ $ 3,534.1 $ 4,513.8 $ 4,717.7
Home equity................... 2,850.9 2,943.6 3,108.0
Other secured................. 875.4 827.9 942.3
Bankcard...................... 4,356.9 3,416.9 1,549.7
Merchant participation........ 2,636.5 2,063.8 2,389.9
Other unsecured............... 4,320.8 3,850.6 3,884.2
--------- --------- ---------
Subtotal--Consumer............ 18,574.6 17,616.6 16,591.8
Equipment financing and
other....................... 765.9 832.7 966.1
--------- --------- ---------
Finance and Banking
receivables................. $19,340.5 $18,449.3 $17,557.9
========= ========= =========
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CONSUMER OPERATIONS. Household International is primarily a consumer
financial services company, with consumer receivables of $18.6 billion,
representing approximately 96 percent of Finance and Banking owned receivables
and approximately 59 percent of total assets at December 31, 1993, excluding the
discontinued commercial product lines. The Company's primary target customer for
consumer lending is generally between 25 and 50 years of age with a household
income of $15,000 to $50,000. Approximately 82 percent of the Company's Finance
and Banking receivables are located in the United States.
Through its consumer lending businesses, the Company competes with banks,
thrifts, finance companies and other financial institutions through the offering
of a variety of products, a strong service orientation and innovative marketing
programs. The Company believes that the fragmented nature of the consumer
financial services industry provides ample opportunity for the Company to
increase market share, and therefore profitability. The Company has focused on
being a low-cost producer in its consumer financial services businesses. Highly
automated processing facilities have been developed to support underwriting,
loan administration and collection functions across business lines. By
supporting its multiple-distribution networks with centralized processing
centers, the Company has improved efficiency through specialization and
economies of scale. In addition, by removing such functions from branch offices,
the Company is able to concentrate on sales activities in the branch offices.
Underwriting and collection of consumer credit products and internal
controls over these functions have been improved over the last few years through
the segregation of the sales, underwriting and collection functions. For
example, loan approvals are handled by non-sales personnel located in regional
servicing centers ("RSC") whose primary concern is credit quality, not volume.
Underwriting and collections are supported by automated systems which analyze
the likelihood of delinquency or bankruptcy. The Company believes it is an
industry leader in implementing automated underwriting and collection management
systems which improve its ability to manage credit quality. The Company
considers factors such as the applicant's income, expenses,
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paying habits, value of collateral, if any, and length and stability of
employment, in its effort to determine whether the borrower has the ability to
support the loan.
The objective of the Company's program to automate and centralize the back
office processing of U.S. consumer finance accounts has been to transfer the
record keeping and collection tasks necessary to service accounts from its
branch offices to an RSC. The RSCs were created to provide higher quality
customer service and cost savings resulting from greater efficiency through
economies of scale. By doing so, the Company's branch offices have been able to
focus on sales and marketing efforts. The Company's first RSC began operations
in Illinois in 1987. By the first quarter of 1990, all U.S. branch offices of
HFC were served by RSCs. As a result of efficiencies achieved since that time,
the operations of the servicing centers have been further consolidated, and in
1993 the servicing operation for all HFC originated loans was moved to a single
servicing center located in Illinois. The former western region RSC, which began
operations in the first quarter of 1989, now supports HFC's portfolio
acquisition business and services acquired consumer credit receivables. The
former eastern region RSC, which opened in Virginia in the fourth quarter of
1989, now supports the GM Card exclusively. Additional facilities exist to
provide the Company's bankcard and merchant participation business with
centralized automated support. The Company has also established regional
processing centers ("RPC") in California, Illinois, Maryland, Nevada and Ohio to
perform payment processing, check processing, statement billings and other
administrative tasks for all domestic consumer operations. In the United
Kingdom, HFC Bank plc's Birmingham Business Center provides operating and
administrative functions in centers modeled after the RSCs and RPCs used in the
United States. In 1990, the Canadian operation opened two centers similar to the
United Kingdom center and the Australian operation opened one center.
Over the last few years, the Company has invested in the development of its
bankcard, private-label credit card and consumer and mortgage banking services
which have been an important contributor to the Company's growth. Net income on
an operating basis from these newer businesses increased from $7 million in 1988
to $201 million in 1993. At December 31, 1993, the Company had acquired
intangibles associated with acquisitions of thrift institutions and bankcard
portfolios of approximately $473 million. The Company amortizes purchased credit
card intangibles on a straight-line basis, not to exceed 10 years and other
intangibles over their estimated life not exceeding 15 years. The average
amortization period for the acquired intangibles was approximately 7 years in
1993.
Since 1988 the Company has increased significantly its portfolio of
receivables sold and serviced with limited recourse. This portfolio has grown to
$9.8 billion at year-end 1993 from none at the beginning of 1988. The Company
was the first public issuer of home equity loan asset-backed securities in 1988
and continues to be one of the largest issuers of asset-backed securities. In
1993, including replenishments of certificateholders interests, the Company
securitized and sold $9.4 billion of receivables. In addition, the Company sells
first mortgages with no recourse and retains the servicing and also acquires
servicing rights for first mortgages. This portfolio of first mortgage
receivables serviced with no recourse has grown to $13.9 billion at year-end
1993 from $500 million at year-end 1986. In the third quarter of 1993, the
Company began servicing an unsecured consumer portfolio without recourse which
totaled $1.3 billion at December 31, 1993.
Major consumer business units within the Finance and Banking segment are
described below.
Household Finance Corporation
Household Finance Corporation, the Company's principal business, traces its
origins to a loan office established in 1878. HFC offers a variety of secured
and unsecured lending products to middle-income customers through a network of
432 branch lending offices throughout the United States. This business is
conducted primarily through state-licensed companies.
Home equity loans, and to a lesser extent, unsecured credit products have
been HFC's primary focuses over the last several years as these products are
preferred by consumers due to the flexible nature of the credit relationship,
where the timing and amount of borrowing can be tailored to the borrower's
particular circumstances. These products also are advantageous to HFC due to
lower relative administrative costs and typically have variable rate terms which
move with market rates of interest. Home equity loans and unsecured consumer
credit products in the HFC domestic network represented approximately 30 percent
of total Finance and Banking managed receivables at December 31, 1993. Home
equity loans, representing approximately
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27 percent of total Finance and Banking managed receivables at December 31,
1993, have lower chargeoff rates than the unsecured credit products.
In 1992, HFC launched a new portfolio acquisition business focusing on
open-end and closed-end home equity loan products. In 1993, HFC acquired
approximately 3,800 new accounts aggregating $430 million in such receivables.
In addition, in 1993 HFC acquired the right to service without recourse
approximately 1.1 million accounts aggregating approximately $2.0 billion in
unsecured loans. The Company believes that the portfolio acquisition business
provides an additional source for developing new customer relationships.
Household Retail Services
Household Retail Services ("HRS") is a revolving credit merchant
participation business. HRS purchases and services merchants' revolving charge
accounts. These accounts result from consumer purchases of furniture,
appliances, home improvement products and other durable merchandise, and
generally are without credit recourse to the originating merchant. Loans are
underwritten by HRS based on its credit standards. This business is an important
source of new customers to HFC's direct lending business. HRS became a separate
business unit in 1988 and is currently the second largest provider of
private-label credit cards in the United States. This business is conducted
through state-licensed companies and through Household Bank (Illinois), National
Association.
Household Bank, f.s.b.
Household Bank, f.s.b. (the "Bank"), a federally chartered savings bank,
comprises the majority of the Company's consumer banking and mortgage business.
At December 31, 1993, the Bank's assets totaled $9.1 billion, which includes
$2.2 billion of receivables attributable to the GM Card. Although there was a
slight decline in deposits in 1993 from $6.5 billion at December 31, 1992,
deposits have increased to $6.2 billion at December 31, 1993 from $1.6 billion
at year-end 1986. Much of the strategic growth of the Company has been through
its consumer banking operations, where the Company believes the most efficient
use of capital can be achieved. The Company's consumer banking strategy is
intended to diversify its funding base, provide a stable and relatively low-cost
funding source, create a more competitively leveraged entity and market
financial service products to a different customer base.
In 1988, the Company formalized its consumer banking strategy and launched
its consumer bank development program with a geographic focus on California and
the arc of states from Illinois to Maryland. At December 31, 1993 the Bank had
171 branches in 7 states: California (54); Illinois (44); Ohio (26); Maryland
(24); Virginia (15); Indiana (5); and Kansas (3).
The Bank is a full-service consumer bank, marketing itself as "America's
Family Bank"(R). It operates as a single institution in all states where it is
active, with common marketing programs and processing systems. The Company
believes the Bank is one of the few consumer banks of its size to operate in
this manner.
The Bank's acquisition strategy involves identification of institutions
which complement the existing network in target markets. The ideal acquisition
includes only deposits, customer relationships and branches. Acquired
institutions are quickly integrated into the existing network. The integration
process includes new signage, decor, product offerings, pricing and back office
systems. Since the Bank generally does not need acquired administrative and
executive personnel and facilities, operating expenses of the acquired entity
have been reduced in most acquisitions.
First mortgages are originated in branch locations and loan production
offices by Household Mortgage Services, a division of the Bank, or may be
acquired from correspondents and other wholesale sources. In 1993, Household
Mortgage Services originated approximately $4 billion in first mortgages.
However, refinancing resulting from the record low interest rates caused the
first mortgage portfolio to decline by approximately $1 billion in 1993. At
December 31, 1993, $2 billion, or approximately 28 percent, of the Bank's owned
receivables represented first mortgages for single-family residences.
Adjustable-rate mortgage loans represented approximately 43 percent of this
portfolio. This first mortgage portfolio is well-diversified geographically and
the Bank has originated no negative amortization loans. The weighted average
loan-to-value ratio at the origination of the loan for the entire portfolio was
approximately 70 percent. While emphasizing single-family mortgage lending, the
Bank also provides mortgage loans for various multi-family
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and income-producing properties and makes various types of consumer loans,
including savings account secured loans and secured and unsecured lines of
credit.
Household Credit Services
Household Credit Services is the tradename used for the marketing of
bankcards throughout the United States issued by one of the Company's subsidiary
national credit card banks, the Bank, or one of the other financial institutions
affiliated with Household International. The Company had $8.8 billion of
bankcard receivables owned and serviced with limited recourse at December 31,
1993, up from $207 million at year-end 1986. The Company is one of the top 6
issuers of VISA and MasterCard credit cards in the United States.
The Company strives to build its bankcard business by developing strategic
alliances with industry leaders to effectively create and market general purpose
credit cards to targeted consumers. In accordance with this philosophy, in 1991
the Company established a program with Ameritech Corporation, in 1992
established a program with General Motors Corporation and in 1993 expanded the
relationship through an agreement with General Motors to issue the GM Card from
Vauxhall in the United Kingdom. Also in 1993 the Company announced an alliance
with Charles Schwab & Co. See "1993 Developments." The Company intends to
continue to explore other co-branding relationships of this type with various
entities.
The Company also seeks to build its bankcard business by selectively
purchasing portfolios while managing geographic concentrations. The Company
evaluates bankcard acquisitions utilizing criteria related to strategic fit and
economic value. To assess strategic fit, the Company considers the following:
the composition and behavior of the customer franchise; product pricing
compatibility with the Company's pricing strategies; geographic distribution of
the customer base; and opportunities to add value through improved portfolio
management. To assess economic value, the Company evaluates the risk/return
characteristics of the portfolio, particularly with respect to revenue
generating potential and asset quality, and identifies and quantifies legitimate
opportunities to add value through price changes, more efficient servicing,
improved collections, and credit line management. The Company also applies
traditional financial analysis techniques to evaluate financial returns in
relation to the proposed investment.
The bankcard business is a highly competitive and fragmented industry
currently in the process of consolidation. The Company believes that its
relatively large size in the industry provides substantial competitive
advantages over smaller credit card issuers through reduced operating expense
ratios. The Company's focus is to develop a nationally diverse customer
franchise that contains three to four hubs of concentration while employing
value-based pricing. These hubs are expected to promote operating and marketing
efficiencies without creating overdependence on a single geographic area that
would potentially expose the Company to regional credit risk and usage patterns.
Currently, the Company's largest account base is in California supplemented by
significant hubs in the Midwest and on the East coast.
International Operations
International operations in Canada, the United Kingdom and Australia
accounted for approximately 18 percent of the Finance and Banking owned
receivables at December 31, 1993. In Canada, the Company operates consumer
finance, private-label credit card and consumer banking operations similar to
its businesses in the United States. With 30 offices at December 31, 1993, the
Canadian consumer finance business operates under the HFC tradename. The
Canadian consumer banking business, with 12 branches, operates as Household
Trust Company. At December 31, 1993, the Canadian operations had $1.9 billion of
receivables. In the United Kingdom, the Company owns HFC Bank plc, a fully
licensed United Kingdom bank. HFC Bank plc had 150 branches at December 31, 1993
and approximately $1.2 billion of receivables. In Australia, the Company
operates primarily as a consumer finance company under the HFC tradename. The
Company had 22 offices in Australia at December 31, 1993 and approximately $375
million of consumer receivables.
Credit Insurance
In conjunction with its consumer lending operations and where applicable
laws permit, the Company makes credit life, credit accident and health, term and
specialty insurance products available to its customers. This insurance
generally is directly written by or reinsured with Alexander Hamilton Life
Insurance Company
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of America ("Alexander Hamilton"). Financial results for sales of these types of
products through affiliated operations are reported as part of the Finance and
Banking segment.
Hamilton Investments
Hamilton Investments was acquired by Household International during 1989 as
part of the Bank's acquisition of a savings institution. Hamilton Investments is
a retail-oriented investment banking and brokerage firm. It has 24 branch
offices which are located in the following states: Illinois (9); Wisconsin (6);
Minnesota (5); Michigan (2); and one each in Indiana and Nebraska. In addition,
Hamilton operates through 150 Household Bank locations. In 1992 Hamilton
Investments acquired Craig-Hallum, Inc., a Minneapolis-based investment banking
and brokerage firm with 100 registered representatives and 26,000 customer
accounts. Hamilton Investments is registered as a broker-dealer with the
Securities and Exchange Commission and as a futures commission merchant with the
Commodities Futures Trading Commission. It is a member of the National
Association of Securities Dealers, the New York Stock Exchange, the American
Stock Exchange, the Chicago Stock Exchange and the National Futures Association.
A subsidiary of Hamilton Investments acts as the investment adviser to the
Oberweis Emerging Growth Fund, the Household Personal Portfolios and General
Securities, Inc., mutual funds with assets of approximately $101, $26 and $28
million, respectively, at year-end 1993.
COMMERCIAL OPERATIONS. Approximately 3 percent of the Finance and Banking
managed receivables portfolio at December 31, 1993 consisted of leveraged
leases, other equipment financing, and specialized corporate lending. Products
in these areas include loan and lease financing for aircraft, other
transportation equipment, capital equipment and specialized secured corporate
loans. In addition, the Company invests in term preferred stocks. See also
"Liquidating Commercial Lines" below.
The commercial finance business of the Company has been operated under
Household Commercial Financial Services ("Household Commercial") since 1974. The
industry in which Household Commercial operates is highly competitive and the
Company's position in this market is relatively small.
Commercial loans are underwritten based upon specific criteria by product,
which include the following items: borrower's financial strength; underlying
value of any collateral; ability of the property/business to generate cash flow
and pricing considerations. For financing commitments in excess of $1 million,
the loan request must be approved by an investment committee consisting of
senior management. The financial and operating performance of all borrowers is
monitored and reported to management on an ongoing basis. Additionally, the
conclusions of this monitoring process are reported to the senior management of
the Company on a quarterly basis. A description of Household's operational
policy with respect to commercial receivables is set forth on page 41 of the
1993 Annual Report.
INDIVIDUAL LIFE INSURANCE
The Company's individual life insurance operations are conducted by
Alexander Hamilton Life Insurance Company of America. Alexander Hamilton markets
universal life, term life and annuity products to a higher income category
consumer than that targeted by the consumer lending businesses. Alexander
Hamilton also underwrites credit life, credit accident and health, and other
specialty products sold through the Company's consumer businesses. The Alexander
Hamilton products sold by affiliated entities are included in results of the
Finance and Banking segment.
Alexander Hamilton offers universal life insurance, term life insurance and
annuity products through approximately 16,300 independent agents and 1,790
licensed consumer finance and banking employees. These individual products are
sold in all states, with the largest concentration in 10 states (California,
Florida, Illinois, Maryland, Michigan, New Jersey, New York, Ohio, Pennsylvania
and Wisconsin) accounting for 63 percent of premium income in 1993. The Company
also sells credit insurance to customers of banks and retail merchants which are
not affiliated with Household International. Alexander Hamilton has been
assigned a claims-paying ability rating of "AA" from three nationally recognized
statistical rating organizations.
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LIQUIDATING COMMERCIAL LINES
As of December 31, 1991, Household International ceased offering certain
commercial product lines. The decision to withdraw from these product lines was
made to enable Household International to concentrate its resources on
operations it believes offer the opportunity for more consistent financial
returns relative to risks assumed. These liquidating commercial lines are:
speculative real estate secured lending; highly leveraged acquisition finance
transactions; subordinated corporate lending; higher-risk equipment loans and
leases and other commercial assets. These discontinued product lines are managed
by Household Commercial separately from continuing commercial lines. The Company
intends to liquidate this portfolio over time in a manner that will maximize the
value of these assets and believes that, depending on the economic environment,
it should be able to liquidate these portfolios over the next several years.
Liquidating commercial assets at December 31, 1993 consisted of the
following (in millions):
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Receivables:
Commercial real estate................................................... $ 297.1
Highly leveraged acquisition finance and other........................... 892.8
--------
Receivables owned.......................................................... 1,189.9
Accrued finance charges.................................................... 9.2
Reserve for credit losses.................................................. (172.9)
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Total receivables owned, net............................................... 1,026.2
Real estate owned.......................................................... 256.6
Other assets............................................................... 272.9
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Total liquidating commercial assets.............................. $1,555.7
========
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INVESTMENT SECURITIES
Investment securities of the Company are principally held by Alexander
Hamilton. At December 31, 1993, Alexander Hamilton had $6.4 billion or
approximately 73 percent of the Company's $8.8 billion total investment
portfolio. The composition of this portfolio is set forth on pages 59 and 60 of
the 1993 Annual Report.
Investment securities are also held by the Bank, Household Global Funding,
Inc., the United States holding company for Household's operations in Canada and
the United Kingdom, and Household Commercial and represent approximately 14, 6
and 4 percent, respectively, of the Company's total investment portfolio.
FUNDING RESOURCES
As a financial services organization, Household International must have
access to funds at competitive rates, terms and conditions to be successful.
Household International and its subsidiaries fund their operations in the global
capital markets, primarily through the use of commercial paper, medium-term
notes and long-term debt, and have used financial instruments to hedge their
currency and interest-rate exposure. Four nationally recognized statistical
rating organizations currently assign investment grade ratings to the debt and
preferred stock issued by the Company and its subsidiaries. In addition, these
organizations rated the commercial paper of HFC in their highest rating
category.
The securitization and sale of consumer receivables is an important source
of liquidity for HFC and the Bank. During 1993 the Company's subsidiaries
securitized and sold, including replenishments of certificateholder interests,
approximately $9.4 billion of home equity, merchant participation and bankcard
receivables compared to $4.8 billion in 1992.
To diversify its funding base and add more stability to funding costs, the
Company developed a retail deposit base in recent years through its consumer
banking business. Customer deposits have grown from $3.9 billion at year-end
1988 to $7.5 billion at December 31, 1993. The Company intends to continue to
expand this deposit base through selective acquisitions of savings institutions.
See "Finance and Banking-- Household Bank, f.s.b.".
7
<PAGE> 9
REGULATION AND COMPETITION
REGULATION. The Company's businesses are subject to various regulations
covering their conduct. Generally, HFC's consumer branch lending offices are
regulated by legislation and licensed in those jurisdictions where they operate.
Such licenses have limited terms but are renewable, and are revocable for cause.
In addition to licensing provisions, statutes in some jurisdictions may provide
that a loan not exceed a certain period of time, or may place limits on the size
or interest rate of the loan. HFC's sales finance business is also subject to
regulatory legislation in certain jurisdictions which, among other things, may
limit the interest rates or fees which may be charged or which may inhibit HFC's
ability to collect or foreclose upon delinquent loans. All of Household
International's consumer finance operations are subject to federal laws relating
to discrimination in credit extensions, use of credit reports, disclosure of
credit terms, and correction of billing errors.
The Bank is chartered by the Office of Thrift Supervision ("OTS") and is a
member of the Federal Home Loan Bank System. The Bank has its customer deposit
accounts insured for up to $100,000 per insured depositor by the Federal Deposit
Insurance Corporation ("FDIC"), for which the Bank is assessed a fee. The Bank
is subject to examination and supervision by the OTS and FDIC and to federal
regulations governing such matters as general investment authority, acquisitions
of financial institutions, transactions with affiliates, establishment of branch
offices, subsidiaries' investments and activities, and restrictions on dividend
payments to Household International. The Bank is also subject to regulatory
requirements setting forth minimum capital and liquidity levels. In addition,
regulations of the Federal Reserve Board require the Bank to maintain non-
interest bearing reserves against the Bank's transaction accounts (primarily NOW
and money-market checking accounts) and non-personal time deposits. Because of
its ownership of the Bank, Household International is a savings and loan holding
company subject to reporting and other regulations of the OTS. Household
International has agreed with the OTS to maintain the regulatory capital of the
Bank at certain specified levels. This agreement between Household International
and the OTS was amended in 1989 to reflect regulatory changes in the methodology
of calculating the Bank's regulatory capital.
Household Bank, National Association, Household Bank (Illinois), National
Association, Household Bank (Nevada), National Association and Household Bank
(SB), National Association 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 by the FDIC. National banks are generally subject to
the same type of regulatory supervision and restrictions as the Bank, although
these national banks only engage in credit card operations.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), enacted in December 1991, significantly expanded the regulatory and
enforcement powers of federal banking regulators, in particular the FDIC. FDICIA
also created additional reporting, disclosure and independent auditing
requirements, changed FDIC insurance premiums from flat amounts to a new system
of risk-based assessments, and placed limits on the ability of depository
institutions to acquire brokered deposits.
Under FDICIA, there are five tiers of capital measurement for regulatory
purposes ranging from "Well-Capitalized" to "Critically Undercapitalized".
FDICIA directs banking regulators to take increasingly strong corrective steps,
based on the capital tier of any subject insured depository institution, to
cause such bank to achieve and maintain capital adequacy. Even if an insured
depository institution is adequately capitalized, the banking regulators are
authorized to apply corrective measures if the insured depository institution is
determined to be in an unsafe or unsound condition or engaging in an unsafe or
unsound activity. FDICIA grants the banking regulators broad powers 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. FDICIA also expanded the grounds upon which a receiver
or conservator may be appointed for an insured depository institution. Pursuant
to FDICIA, federal banking regulatory agencies have proposed 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.
8
<PAGE> 10
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), among other things, provides generally that, upon the default of any
insured institution, the FDIC may assess an affiliated insured depository
institution for the estimated losses incurred by the FDIC. Specifically, FIRREA
provides that a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default. "In danger of default"
is defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance.
As an insurance company, Alexander Hamilton 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 rates, dividend restrictions, types of insurance that may be sold,
permissible investments, policy reserve requirements, and insurance marketing
practices.
COMPETITION. The consumer credit industry is highly fragmented, with
thousands of banks, thrifts and other financial institutions competing in the
United States alone. The industry has been consolidating in recent years, and
the Company expects this consolidation to continue. The Company believes it has
positioned itself to compete effectively and benefit from this consolidation
because of its centralized distribution, processing and marketing capabilities,
and advanced technology to support these activities.
The financial services industry is highly competitive, and the Company's
financial services businesses compete with a number of institutions that extend
credit to consumers and businesses, some of which are larger than the Company.
The Company competes not only with other finance companies, banks, and savings
and loan companies, but also with credit unions and retailers. Alexander
Hamilton competes with many other life insurance companies offering similar
products.
ITEM 2. PROPERTIES.
Household International has operations in 35 states in the United States,
10 provinces in Canada, 6 states and 2 territories in Australia and in the
United Kingdom with principal facilities located in Anaheim, California;
Chesapeake, Virginia; Chicago, Illinois; Elmhurst, Illinois; Farmington Hills,
Michigan; Hanover, Maryland; Las Vegas, Nevada; North York, Ontario, Canada;
Pomona, California; Prospect Heights, Illinois; St. Leonards, New South Wales,
Australia; Salinas, California; Windsor, Berkshire, United Kingdom; Wood Dale,
Illinois; and Worthington, Ohio.
Substantially all branch offices, bank branches, divisional offices,
corporate offices, RPC and RSC space is operated under lease with the exception
of the principal executive offices of Household International in Prospect
Heights, Illinois, the headquarters building for HFC Bank plc in the United
Kingdom, Alexander Hamilton's headquarters building in Farmington Hills,
Michigan, and administration buildings in Northbrook, Illinois and Salinas,
California. An additional administrative facility is currently under
construction in Las Vegas, Nevada. The Company believes that such properties are
in good condition and are adequate to meet Household International's current and
reasonably anticipated needs.
Household International has, and will continue to, invest in property and
technological improvements to achieve greater efficiencies in the marketing,
servicing and production of its loan products. During 1993 the Company invested
$110 million in capital expenditures, compared to $90 million in 1992.
Automobiles, office equipment and real estate properties owned and in use by the
Company are not significant in relation to the total assets of the Company.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are parties to various legal proceedings,
including product liability and environmental claims, resulting from ordinary
business activities related to its current operations and/or former businesses
which were managed as independent subsidiaries of the Company. 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, no assurance
can be given that the Company or its subsidiaries will ultimately prevail in
each instance. However, for all litigation involving the Company and/or its
subsidiaries, the Company believes that amounts, if any, that may ultimately be
paid by the Company as damages in any such proceedings will not have a material
adverse effect on the consolidated financial position of the Company.
9
<PAGE> 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The following information on executive officers of Household International
is included pursuant to Item 401(b) of Regulation S-K. Information with respect
to Mr. Clark is incorporated herein by reference to "Election of Household
Directors--Information Regarding Nominees" in Household International's
definitive Proxy Statement for its 1994 Annual Meeting of Stockholders scheduled
to be held May 11, 1994 (the "1994 Proxy Statement"). References herein to
"Household" refer to Household International, Inc. for all periods after June
26, 1981 (the date of the corporate restructuring by which Household
International became the holding company of Household Finance Corporation) and
to Household Finance Corporation on and before such date.
Robert F. Elliott, age 53, was appointed Group Executive-Office of the
President in 1993. Prior thereto he was the Group Executive-U.S. Consumer
Finance and Australia. Mr. Elliott joined Household in 1964 and has served in
various capacities in the Company's consumer finance business during his career
with Household.
Joseph W. Saunders, age 48, was appointed Group Executive-Office of the
President in 1993, having previously served as Group Executive-U.S. BankCard and
Canada: He is also President of the Company's subsidiary, Household Bank,
National Association. Prior to joining Household in 1985, Mr. Saunders was Vice
President-Credit Card Operations of Bank of America.
Antonia Shusta, age 44, was appointed to her present position as Group
Executive-Office of the President in 1993. Ms. Shusta joined Household in 1988
as Group Executive-Mortgage Banking and Acquisitions and most recently served as
Group Executive-U.S. Consumer and Mortgage Banking and the United Kingdom. Prior
to joining Household, she was employed with Citicorp for 16 years, most recently
as division executive for its Northern Latin American operation.
Glen O. Fick, age 47, was appointed Group Executive-Commercial Finance and
President of Household Commercial in 1991. Mr. Fick joined Household in 1971 and
has served in various capacities in the Company's treasury, corporate finance
and investor relations departments, as well as the specialty commercial services
division of its commercial finance business.
Gary D. Gilmer, age 43, was appointed President and Chief Executive Officer
of Alexander Hamilton in 1993. Mr. Gilmer joined Household in 1972 and has
served in various capacities within the consumer finance and banking divisions,
most recently as President of Household Retail Services.
Richard H. Headlee, age 63, has been Chairman of the Board of Alexander
Hamilton since 1988. Mr. Headlee joined Alexander Hamilton in 1970 and served as
its Chief Executive Officer from 1972 to 1993.
Gaylen N. Larson, age 54, is Group Vice President of Household. Mr. Larson
has previously served Household as Chief Accounting Officer, Controller and
Group Vice President-Finance. Mr. Larson was a partner of the accounting firm of
Deloitte & Touche prior to joining Household in 1979.
David B. Barany, age 50, was appointed to his present position as Vice
President-Chief Information Officer of Household in 1988. Mr. Barany joined
Household in 1985 as Vice President/Controller of Household's financial services
business. Prior to joining Household, he was employed by Four Phase Systems,
Inc., a subsidiary of Motorola, Inc., as Vice President/Finance.
John W. Blenke, age 38, is Assistant General Counsel and Secretary of
Household. Mr. Blenke joined Household in 1989 as Corporate Finance Counsel, was
promoted to Assistant General Counsel-Securities & Corporate Law and Assistant
Secretary in 1991 and was appointed Secretary in 1993. Prior to joining
Household, Mr. Blenke was employed with a subsidiary of Transamerica
Corporation.
Michael A. DeLuca, age 45, joined Household in 1985 as Director of Tax
Planning and Tax Counsel and was appointed to his present position as Vice
President-Taxes in 1988.
10
<PAGE> 12
Colin P. Kelly, age 51, is Vice President-Human Resources of Household. Mr.
Kelly joined Household in 1965 and has served in various management positions,
most recently as Senior Vice President-Human Resources of Household's financial
services business. Mr. Kelly was appointed to his present position in 1988.
Michael H. Morgan, age 39, was appointed to his present position as Vice
President-Corporate Communications in 1989. Mr. Morgan joined Household in 1984,
and has served in various capacities within the planning and analysis and
investor relations areas. From 1978 until joining Household, Mr. Morgan was
employed with Arthur Andersen & Co.
Randall L. Raup, age 40, was appointed Vice President-Planning in 1992,
having most recently served as Vice President-Financial Control Treasury. Since
joining Household in 1984, Mr. Raup has held positions in the treasury control,
corporate reporting and internal audit areas. Prior to joining Household, he
served as an auditor with Esmark, Inc. and KPMG Peat Marwick.
Kenneth H. Robin, age 47, was appointed Vice President-General Counsel of
Household in 1993, having previously served as Assistant General
Counsel -- Financial Services. Prior to joining Household in 1989, Mr. Robin was
employed with Citicorp from 1977 to 1989, most recently as a vice president
responsible for legal policies for its operations in 23 countries in the
Caribbean, Central America and South America.
David A. Schoenholz, age 42, was appointed Vice President-Chief Accounting
Officer of Household in 1993, Vice President in 1989 and Controller in 1987. He
joined Household in 1985 as Director-Internal Audit. Prior to joining Household,
Mr. Schoenholz was employed with The Commodore Corporation, a manufacturer of
mobile homes, as Vice President/Controller from 1983 to 1985.
Charles R. Wallace, age 45, was appointed Corporate Controller of Household
in 1993, having previously served as Executive Vice President-Chief Operating
Officer of Hamilton Investments since 1989. Prior to joining Household, Mr.
Wallace was employed with Clayton Brown & Associates, Inc. and Ernst & Young.
There are no family relationships among the executive officers of the
Company. The term of office of each executive officer is at the discretion of
the Board of Directors.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The number of record holders of Household International's Common Stock, as
of March 16, 1994, was 14,679. Additional information required by this Item is
incorporated by reference to page 32 of Household International's 1993 Annual
Report.
ITEM 6. SELECTED FINANCIAL DATA.
Information required by this Item is incorporated by reference to page 34
of Household International's 1993 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 38
through 51 of Household International's 1993 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements of Household International and subsidiaries meeting
the requirements of Regulation S-X, and supplementary financial information
specified by Item 302 of Regulation S-K, is incorporated by reference to pages
35 through 37 and pages 52 through 80 of Household International's 1993 Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
11
<PAGE> 13
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this Item is incorporated by reference to "Election
of Household Directors-- Information Regarding Nominees" and "Shares of
Household Stock Beneficially Owned by Directors and Executive Officers" in
Household International's 1994 Proxy Statement. Also, information on certain
Executive Officers appears in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item is incorporated by reference to
"Remuneration of Executive Officers", "Savings--Stock Ownership and Pension
Plans", "Incentive and Stock Option Plans", and "Directors' Compensation" in
Household International's 1994 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 Household International's
1994 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item is incorporated by reference to
"Remuneration of Executive Officers" in Household International's 1994 Proxy
Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS.
The following financial statements, together with the opinion thereon of
Arthur Andersen & Co., dated February 1, 1994, appearing on pages 35 through 37
and pages 52 through 80 of Household International's 1993 Annual Report are
incorporated herein by reference. An opinion of Arthur Andersen & Co. is
included in this Annual Report on Form 10-K.
Household International, Inc. and Subsidiaries:
Statements of Income for the Three Years Ended December 31, 1993.
Balance Sheets, December 31, 1993 and 1992.
Statements of Cash Flows for the Three Years Ended December 31, 1993.
Statements of Changes in Preferred Stock and Common Shareholders' Equity
for the Three Years Ended December 31, 1993.
Business Segment Data.
Notes to Financial Statements.
Independent Auditors' Report.
Selected Quarterly Financial Data (Unaudited).
(B) REPORTS ON FORM 8-K.
During the three months ended December 31, 1993, the Company did not file
with the Securities and Exchange Commission any Current Report on Form 8-K.
12
<PAGE> 14
(C) EXHIBITS.
<TABLE>
<S> <C>
2 Reorganization and Distribution Agreement dated as of March 15, 1989 by
and among Household International, Eljer Industries, Inc., Schwitzer,
Inc., and Scotsman Industries, Inc. (incorporated by reference to Exhibit
2 of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989).
3(i) Restated Certificate of Incorporation of Household International, as
amended (incorporated by reference to Exhibit 3(i) of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993).
3(ii) Bylaws of Household International, as amended April 13, 1993
(incorporated by reference to Exhibit 3(ii) of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993).
4(a) Rights Agreement dated as of August 14, 1984, between the Company and
Harris Trust and Savings Bank, as Rights Agent, as supplemented and
amended (incorporated by reference to Exhibit 4 of the Company's Current
Report on Form 8-K dated August 28, 1984, Exhibit 4(a) of the Company's
Current Report on Form 8-K dated January 14, 1986, and Exhibit 4 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1988).
4(b) The principal amount of debt outstanding under each instrument defining
the rights of holders of long-term senior and senior subordinated debt of
Household International and its subsidiaries does not exceed 10 percent
of the total assets of Household International and its subsidiaries on a
consolidated basis. Household International agrees to furnish to the
Securities and Exchange Commission, upon request, a copy of each
instrument defining the rights of holders of long-term senior and senior
subordinated debt of Household International and its subsidiaries.
10.1 Household International Corporate Executive Bonus Plan.
10.2 1976 Employee Stock Option Plan, as amended (incorporated by reference to
Exhibit 10(b) of the Company's Annual Report on Form 10-K for the fiscal
year ended on December 31, 1991).
10.3 Household International Long-Term Executive Incentive Compensation Plan,
as amended (incorporated by reference to Exhibit 10(c) of the Company's
Annual Report on Form 10-K for the fiscal year ended on December 31,
1991).
10.4 Forms of stock option and restricted stock rights agreements under the
Household International Long-Term Executive Incentive Compensation Plan.
10.5 Household International Directors' Retirement Income Plan.
10.6 Form of restricted stock compensation agreement for the Company's
non-management directors (incorporated by reference to Exhibit 10(f) of
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989).
10.7 Executive Employment Agreement between the Company and D. C. Clark
(incorporated by reference to Exhibit 10.7 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993).
10.8 Executive Employment Agreement between the Company and A. Shusta
(incorporated by reference to Exhibit 10.9 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993).
10.9 Executive Employment Agreement between the Company and J. W. Saunders.
10.10 Executive Employment Agreement between the Company and R. F. Elliott.
10.11 Executive Employment Agreement between Alexander Hamilton and R. H.
Headlee (incorporated by reference to Exhibit 10.11 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993).
12 Statement of Computation of Ratio of Earnings to Fixed Charges and to
Combined Fixed Charges and Preferred Stock Dividends.
</TABLE>
13
<PAGE> 15
<TABLE>
<S> <C>
13 Material incorporated by reference to the Company's 1993 Annual Report to
Shareholders.
21 List of Household International subsidiaries.
23 Consent of Arthur Andersen & Co., Certified Public Accountants.
99(a) Annual Report on Form 11-K for the Household International Tax Reduction
Investment Plan (to be filed by amendment).
</TABLE>
Copies of exhibits referred to above will be furnished to stockholders upon
written request at a cost of fifteen cents per page. 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.
III--Condensed Financial Information of Registrant.
VIII--Valuation and Qualifying Accounts.
X--Supplementary Statement of Income Information.
14
<PAGE> 16
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 28, 1994
By /s/ D. C. CLARK
------------------------------------
D. C. Clark, Chairman of the Board
and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF HOUSEHOLD
INTERNATIONAL, INC. AND IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------------------
<S> <C> <C>
/s/ D. C. CLARK Chairman of the Board, }
- --------------------------------------------- Chief Executive Officer }
(D. C. Clark) and Director }
}
/s/ J. C. BIEGLER Director }
- --------------------------------------------- }
(J. C. Biegler) }
}
/s/ R. J. DARNALL Director }
- --------------------------------------------- }
(R. J. Darnall) }
} March 28, 1994
/s/ G. G. DILLON Director }
- --------------------------------------------- }
(G. G. Dillon) }
}
/s/ M. J. EVANS Director }
- --------------------------------------------- }
(M. J. Evans) }
}
/s/ C. F. FREIDHEIM, JR. Director }
- --------------------------------------------- }
(C. F. Freidheim, Jr.) }
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------------------
<S> <C> <C>
/s/ L. E. LEVY Director }
- --------------------------------------------- }
(L. E. Levy) }
}
/s/ J. D. NICHOLS Director }
- --------------------------------------------- }
(J. D. Nichols) }
}
/s/ G. P. OSLER Director }
- --------------------------------------------- }
(G. P. Osler) }
}
/s/ A. E. RASMUSSEN Director }
- --------------------------------------------- } March 28, 1994
(A. E. Rasmussen) }
}
/s/ L. W. SULLIVAN, M.D. Director }
- --------------------------------------------- }
(L. W. Sullivan, M.D.) }
}
/s/ R. C. TOWER Director }
- --------------------------------------------- }
(R. C. Tower) }
}
/s/ D. A. SCHOENHOLZ Vice President-- }
- --------------------------------------------- Chief Accounting Officer }
(D. A. Schoenholz) (A Principal Financial }
Officer) }
</TABLE>
16
<PAGE> 18
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 1993 annual
report to shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated February 1, 1994. 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.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
February 1, 1994
F-1
<PAGE> 19
SCHEDULE III
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
(ALL DOLLAR AMOUNTS EXCEPT PER SHARE DATA ARE STATED IN MILLIONS.)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Equity in income of subsidiaries............................... $326.7 $221.2 $161.9
Finance and other income....................................... 36.1 26.1 41.7
------ ------ ------
Total income.............................................. 362.8 247.3 203.6
------ ------ ------
Costs and expenses:
Administrative............................................ 41.8 20.2 17.5
Provision for credit losses............................... 19.1 26.6 5.4
Interest.................................................. 25.2 35.7 41.5
Income tax benefits....................................... (22.0) (26.1) (10.6)
------ ------ ------
Total expenses............................................ 64.1 56.4 53.8
------ ------ ------
Net income..................................................... $298.7 $190.9 $149.8
====== ====== ======
Earnings per common share*:
Fully diluted................................................ $ 2.85 $ 1.93 $ 1.55
====== ====== ======
Primary...................................................... $ 2.91 $ 1.97 $ 1.57
====== ====== ======
</TABLE>
- ---------------
* Amounts have been restated to reflect the two-for-one stock split in the form
of a 100 percent stock dividend, effective October 15, 1993.
See accompanying notes to condensed financial statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-2
<PAGE> 20
SCHEDULE III (CONTINUED)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1993 1992
-------- --------
<S> <C> <C>
Assets:
Investments in and advances from subsidiaries..................... $2,534.2 $2,207.1
Finance receivables............................................... 98.4 102.7
Other assets...................................................... 356.2 229.7
-------- --------
Total assets...................................................... $2,988.8 $2,539.5
======== ========
Liabilities and shareholders' equity:
Bank borrowings................................................... $ 153.8 $ 63.1
Senior debt (with original maturities over one year).............. 200.0 300.0
-------- --------
Total debt........................................................ 353.8 363.1
Other liabilities................................................. 217.4 294.8
Convertible preferred stock subject to mandatory redemption....... 19.3 36.0
Preferred stock................................................... 320.0 300.0
Common shareholders' equity....................................... 2,078.3 1,545.6
-------- --------
Total liabilities and shareholders' equity........................ $2,988.8 $2,539.5
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-3
<PAGE> 21
SCHEDULE III (CONTINUED)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATIONS......................... $(127.9) $ 28.8 $ 110.2
------- ------- -------
INVESTMENT IN OPERATIONS
Dividends from subsidiaries................................... 100.0 175.3 93.0
Investment in and advances to/from subsidiaries, net.......... (153.3) (229.3) (155.1)
Investment securities sold (purchased), net................... 16.0 (16.0) --
Finance receivables originated, net of collections............ (17.2) 16.3 (18.7)
Purchase of property and equipment............................ (.2) (.6) (14.2)
------- ------- -------
Cash decrease from investment in operations................... (54.7) (54.3) (95.0)
------- ------- -------
FINANCING AND CAPITAL TRANSACTIONS
Net increase (decrease) in bank borrowings.................... 90.7 (133.5) (31.7)
Retirement of debt............................................ (100.0) -- (157.6)
Issuance of debt.............................................. -- 200.0 100.0
Dividends to shareholders..................................... (141.3) (124.6) (115.0)
Common stock issued........................................... 313.3 33.0 134.5
Preferred stock issued........................................ 100.0 50.0 55.0
Preferred stock repurchased................................... (80.0) -- --
------- ------- -------
Cash increase (decrease) from financing and capital
transactions................................................ 182.7 24.9 (14.8)
------- ------- -------
Increase (decrease) in cash................................... .1 (.6) .4
Cash at January 1............................................. 1.6 2.2 1.8
------- ------- -------
CASH AT DECEMBER 31........................................... $ 1.7 $ 1.6 $ 2.2
======= ======= =======
</TABLE>
See accompanying notes to condensed financial statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-4
<PAGE> 22
SCHEDULE III (CONTINUED)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
1. FINANCE RECEIVABLES
Receivables at December 31 consisted of the following (in millions):
<TABLE>
<CAPTION>
1993 1992
------ ------
<S> <C> <C>
Other unsecured........................................ $128.8 $120.4
Credit loss reserve.................................... (30.4) (17.7)
------ ------
Total........................................ $ 98.4 $102.7
====== ======
</TABLE>
2. SENIOR DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR)
Debt at December 31 consisted of the following (in millions):
<TABLE>
<CAPTION>
1993 1992
------ ------
<S> <C> <C>
7.00% notes; due 1993.................................. -- $100.0
5.75% notes; due 1994.................................. $100.0 100.0
7.35% notes; due 1995.................................. 100.0 100.0
------ ------
Total........................................ $200.0 $300.0
====== ======
</TABLE>
3. COMMITMENTS
Under an agreement with the Office of Thrift Supervision, the Company will
maintain the net worth of Household Bank, f.s.b., at a level consistent with
certain minimum net worth requirements.
The Company has guaranteed payment of all debt obligations issued
subsequent to 1989 (excluding deposits) of Household Financial Corporation
Limited ("HFCL"), a Canadian subsidiary. The amount of guaranteed debt
outstanding at HFCL on December 31, 1993 was approximately $853 million.
The Company 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, 1993 was approximately
$936 million.
The Company has guaranteed payment of a $62 million deposit held by one of
its operating subsidiaries on behalf of another operating subsidiary.
4. CONVERTIBLE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
At December 31, 1993 and 1992, the Company had outstanding 385,439 and
720,415 shares, respectively, of the $6.25 cumulative convertible preferred
stock subject to mandatory redemption provisions (the "$6.25 stock"). Each share
of the $6.25 stock is convertible, at the option of its holder, into 4.654
shares of common stock, is entitled to one vote, as are common shares, and has a
liquidation value of $50 per share. Holders of such stock are entitled to
payment before any capital distribution is made to common shareholders. The
Company is required to call for redemption, on an annual basis through 2010, a
minimum of 4 percent to a maximum of 8 percent of the 3.5 million originally
issued shares and is required to redeem all of the remaining unconverted and
unredeemed shares in 2011. The Company called for redemption 8 percent of the
originally issued shares in both 1993 and 1992. The Company redeemed 2,323 and
4,711 shares for $50 per share in 1993
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-5
<PAGE> 23
SCHEDULE III (CONTINUED)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT -- (CONTINUED)
and 1992, respectively. The remaining shares called, but not redeemed for cash,
were converted into common stock. If certain conditions are met, the Company may
redeem the entire $6.25 stock issue at $50 per share plus accrued and unpaid
dividends. At December 31, 1993, 1.8 million shares of common stock were
reserved for conversion of the $6.25 stock.
5. COMMON STOCK
On September 14, 1993 the Board of Directors of the Company declared a
two-for-one stock split in the form of a 100 percent stock dividend effective
October 15, 1993. The stock split resulted in an increase in common stock and a
reduction in additional paid-in capital of $56.6 million. All share and per
share data, except as otherwise indicated, have been restated to give
retroactive effect to the stock split.
On March 8, 1993 the Company sold 4,025,000 shares of common stock at
$68.88 per share, on a pre-split basis. Net proceeds of approximately $269
million were used for general corporate purposes, including investments in the
Company's subsidiaries and reduction of short-term debt. Assuming the additional
shares of common stock had been issued on January 1, 1993 and the proceeds
resulted in after-tax interest savings from reduction of short-term debt since
that date, earnings per share for 1993 would have been $2.82 per share on a
fully diluted basis.
Common stock at December 31 consisted of the following (millions of
shares):
<TABLE>
<CAPTION>
1993 1992
----- ----
<S> <C> <C>
Authorized -- $1 par value........................................... 150.0 67.5
===== ====
Issued............................................................... 113.3 55.5
===== ====
Outstanding.......................................................... 94.4 41.4
===== ====
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-6
<PAGE> 24
SCHEDULE III (CONTINUED)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT -- (CONTINUED)
6. PREFERRED STOCK
Preferred stock at December 31 consisted of the following (in millions):
<TABLE>
<CAPTION>
1993 1992
------ ------
<S> <C> <C>
Fixed rate and enhanced rate preferred stock:
9.50% Preferred stock
Series 1989-A, 3,000,000 depositary shares(1)................. $ 75.0 $ 75.0
9.50% Preferred stock
Series 1991-A, 5,500,000 depositary shares(2)................. 55.0 55.0
8.25% Preferred stock
Series 1992-A, 2,000,000 depositary shares(3)................. 50.0 50.0
7.35% Preferred stock
Series 1993-A, 4,000,000 depositary shares(3)................. 100.0 --
11.25% Enhanced rate preferred stock
4,500,000 depositary shares(2)................................ -- 45.0
Flexible rate auction preferred stock:
Series A, 350,000 shares......................................... -- 35.0
Series B, 400,000 shares......................................... 40.0 40.0
------ ------
Total preferred stock.............................................. $320.0 $300.0
====== ======
</TABLE>
- ---------------
(1) Depositary share represents 1/4 share of preferred stock.
(2) Depositary share represents 1/10 share of preferred stock.
(3) Depositary share represents 1/40 share of preferred stock.
Dividends on the 9.50 percent preferred stock, Series 1989-A, are
cumulative and payable quarterly. The Company may, at its option, redeem in
whole or in part the 9.50 percent preferred stock, Series 1989-A, at $26.19 per
depositary share beginning on November 9, 1994 and at amounts declining to $25
per depositary share thereafter, plus accrued and unpaid dividends.
Dividends on the 9.50 percent preferred stock, Series 1991-A, are
cumulative and payable quarterly. The Company may, at its option, redeem in
whole or in part the 9.50 percent preferred stock, Series 1991-A, on any date
after August 13, 1996 for $10 per depositary share plus accrued and unpaid
dividends.
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.
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.
On October 1, 1993 the Company redeemed 450,000 shares (equivalent to
4,500,000 depositary shares) of the 11.25 percent Enhanced Rate Cumulative
Preferred Stock for $102.50 per share plus accrued and unpaid dividends.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-7
<PAGE> 25
SCHEDULE III (CONTINUED)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT -- (CONTINUED)
On July 13, 1993 the Company redeemed 350,000 shares of the Flexible Rate
Auction Preferred Stock ("Flex APS"), Series A, for $100 per share plus accrued
and unpaid dividends.
Dividends on the Flex APS are cumulative and payable when and as declared
by the Board of Directors of the Company. The initial dividend rate on the Flex
APS, Series B, is 9.50 percent. The initial rate on the Flex APS, Series B,
extends through July 15, 1995, with subsequent dividend rates determined in
accordance with a formula based on orders placed in a dutch auction generally
held every 49 days. The Company may, at its option, redeem in whole or in part
the Flex APS, Series B, for $100 per share plus accrued and unpaid dividends
beginning on July 15, 1995.
Each preferred stock issue ranks equally with the $6.25 stock and has a
liquidation value of $100 per share except for the 8.25 percent preferred stock,
Series 1992-A, and the 7.35 percent preferred stock, Series 1993-A, each of
which have 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 Company is authorized to issue cumulative
nonconvertible preferred stock in one or more series in an amount not to exceed
$620 million, and currently has $320 million of such preferred stock
outstanding.
7. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS No. 109"). As
a result of implementing FAS No. 109, retained earnings for all periods between
1986 and 1992 have been reduced by approximately $63 million from amounts
previously reported. The statements of income for those periods subsequent to
December 31, 1986 have not been restated as the impact of FAS No. 109 on net
income is immaterial to any such year and in total.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-8
<PAGE> 26
SCHEDULE VIII
HOUSEHOLD INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Insurance reserves applicable to receivables:
Policy:
Balance at January 1............................... $ 61.3 $ 83.1 $ 118.2
Earned premiums.................................... (134.2) (138.6) (149.3)
Net premiums written and reinsurance assumed....... 131.7 127.8 122.7
Other items........................................ .4 (11.0) (8.5)
------- ------- -------
Balance at December 31............................. 59.2 61.3 83.1
------- ------- -------
Claims:
Balance at January 1............................... 52.4 50.6 27.5
Provision for claims............................... 74.1 77.3 91.6
Benefits paid...................................... (67.9) (71.7) (69.6)
Other items........................................ (.3) (3.8) 1.1
------- ------- -------
Balance at December 31............................. 58.3 52.4 50.6
------- ------- -------
Total insurance reserves at December 31............ $ 117.5 $ 113.7 $ 133.7
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-9
<PAGE> 27
SCHEDULE X
HOUSEHOLD INTERNATIONAL, INC.
SUPPLEMENTARY STATEMENT OF INCOME INFORMATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN B
---------------------------
CHARGED TO COSTS
COLUMN A AND EXPENSES
- ------------------------------------------------------------------ ---------------------------
ITEM 1993 1992 1991
- ------------------------------------------------------------------ ------ ----- ------
(IN MILLIONS)
<S> <C> <C> <C>
Depreciation and amortization of intangible assets and similar
deferral:
Amortization of insurance policy acquisition costs.............. $ 67.8 $30.3 $ 36.8
Amortization of acquired intangibles............................ 81.0 64.0 64.1
------ ----- ------
Total........................................................ $148.8 $94.3 $100.9
====== ===== ======
Advertising costs................................................. * $13.6 $ 22.2
====== ===== ======
</TABLE>
- ---------------
* Represents less than 1 percent of total revenues as reported in the related
consolidated statements of income.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-10
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ---------------------------------------------------------------------- ------------
<S> <C> <C>
2 Reorganization and Distribution Agreement dated as of March 15, 1989
by and among Household International, Eljer Industries, Inc.,
Schwitzer, Inc., and Scotsman Industries, Inc. (incorporated by
reference to Exhibit 2 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989).
3(i) Restated Certificate of Incorporation of Household International, as
amended (incorporated by reference to Exhibit 3(i) of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993).
3(ii) Bylaws of Household International, as amended April 13, 1993
(incorporated by reference to Exhibit 3(ii) of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993).
4(a) Rights Agreement dated as of August 14, 1984, between the Company and
Harris Trust and Savings Bank, as Rights Agent, as supplemented and
amended (incorporated by reference to Exhibit 4 of the Company's
Current Report on Form 8-K dated August 28, 1984, Exhibit 4(a) of the
Company's Current Report on Form 8-K dated January 14, 1986, and
Exhibit 4 of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1988).
4(b) The principal amount of debt outstanding under each instrument
defining the rights of holders of long-term senior and senior
subordinated debt of Household International and its subsidiaries does
not exceed 10 percent of the total assets of Household International
and its subsidiaries on a consolidated basis. Household International
agrees to furnish to the Securities and Exchange Commission, upon
request, a copy of each instrument defining the rights of holders of
long-term senior and senior subordinated debt of Household
International and its subsidiaries.
10.1 Household International Corporate Executive Bonus Plan.
10.2 1976 Employee Stock Option Plan, as amended (incorporated by reference
to Exhibit 10(b) of the Company's Annual Report on Form 10-K for the
fiscal year ended on December 31, 1991).
10.3 Household International Long-Term Executive Incentive Compensation
Plan, as amended (incorporated by reference to Exhibit 10(c) of the
Company's Annual Report on Form 10-K for the fiscal year ended on
December 31, 1991).
10.4 Forms of stock option and restricted stock rights agreements under the
Household International Long-Term Executive Incentive Compensation
Plan.
10.5 Household International Directors' Retirement Income Plan.
10.6 Form of restricted stock compensation agreement for the Company's
non-management directors (incorporated by reference to Exhibit 10(f)
of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989).
10.7 Executive Employment Agreement between the Company and D. C. Clark
(incorporated by reference to Exhibit 10.7 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993).
10.8 Executive Employment Agreement between the Company and A. Shusta
(incorporated by reference to Exhibit 10.9 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993).
10.9 Executive Employment Agreement between the Company and J. W. Saunders.
10.10 Executive Employment Agreement between the Company and R. F. Elliott.
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ---------------------------------------------------------------------- ------------
<S> <C> <C>
10.11 Executive Employment Agreement between Alexander Hamilton and R. H.
Headlee (incorporated by reference to Exhibit 10.11 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993).
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 the Company's 1993 Annual Report
to Shareholders.
21 List of Household International subsidiaries.
23 Consent of Arthur Andersen & Co., Certified Public Accountants.
99(a) Annual Report on Form 11-K for the Household International Tax
Reduction Investment Plan (to be filed by amendment).
</TABLE>
<PAGE> 1
EXHIBIT 10.1
HOUSEHOLD INTERNATIONAL
EXECUTIVE BONUS PLAN
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 will be return on equity (ROE).
Household's ROE performance will be measured against the ROE performance of a
selected financial comparator group.
In order to reward individual performance, individual awards will vary above
and below target levels in any plan year. Management may reduce bonus awards in
light of overall business conditions or other exceptional circumstances.
Target/Maximum Awards
Target awards will be paid for fully satisfactory ROE 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. The table below shows the portions of the target
bonus that will be determined by corporate, business unit, and individual
performance.
<PAGE> 2
---Guideline % of Annual Base Salary Determined by---
<TABLE>
<CAPTION>
Total
HI Unit Individual Target Maximum
Group Performance Performance Performance Bonus Bonus*
- ----- ----------- ----------- ----------- ------ -------
<S> <C> <C> <C> <C> <C>
A 30% 30% 60% 90%
B 20% 20% 40% 60%
C 5% 10% 20% 35% 52.5%
15% (Staff) -- 20%
D 5% 10% 15% 30% 45%
10% (Staff) -- 20%
E -- 10% 10% 20% 30%
F -- -- 20% 20% 30%
</TABLE>
*The maximum award that may be paid to any executive is 150% of the
target bonus for the position.
DETERMINATION OF AWARDS
A. Financial Performance Awards
With the exception of Group F participants, ROE results will
determine the size of a portion of each individuals's annual bonus.
The ROE portion of the award will be paid out at maximum if the
results are in the 75th percentile of the comparator group; at
target if HI's results are at the 50th percentile; and, at minimum
(threshold) if HI's results are 150 basis points below the 50th
percentile of the comparator group.
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. 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 Group Executives and Senior
<PAGE> 3
Vice Presidents, 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
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.
<PAGE> 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 build 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.
<PAGE> 5
12/31/93
CORPORATE EXECUTIVE BONUS PLAN POSITIONS
Group/Title
GROUP A-60%/90%
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
GROUP B-40%/60%
CHAIRMAN, AHLIC
OFFICE OF PRESIDENT-GROUP EXEC US BANK CARD & CANADA
OFFICE OF PRESIDENT-GROUP EXEC US CONSUMER FINANCE & AUSTRALIA
OFFICE OF PRESIDENT-GROUP EXEC US CONSUMER & MORT BANK & UK
SVP GENERAL COUNSEL & SECRETARY
GROUP C-Heads of Major Business Units or Staff Units-35%/52-1/2%
EVP CHIEF OPERATING OFFICER-HAMILTON INVESTMENTS
GROUP EXECUTIVE COMMERCIAL FINANCE
PRESIDENT & CEO - AHL
VP CHIEF ACCOUNTING OFFICER
VP CHIEF INFORMATION OFFICER
VP GENERAL COUNSEL
GROUP D-Heads of Major Business Segments or Staff Units -
30%/45%
ASSISTANT GENERAL COUNSEL & CORPORATE SECRETARY
CORPORATE CONTROLLER
EVP-AHLIC
EVP-CHIEF OPERATING OFFICER-AHLIC
GROUP VICE PRESIDENT-HI
GROUP VICE PRESIDENT MARKETING SERVICES
MANAGING DIRECTOR AUSTRALIA
MANAGING DIRECTOR/CEO-UK
MANAGING DIRECTOR USCB
PRESIDENT CORPORATE FINANCE-HCFS
PRESIDENT EQUIPMENT FINANCE-HCFS
PRESIDENT CANADA
PRESIDENT HMS
PRESIDENT HRSI
PRESIDENT REAL ESTATE SERVICES DIVN-HCFS
SVP CHIEF FINANCIAL OFFICER AHL
SVP CHIEF MARKETING OFFICER AHL
SVP HFC BRAND MANAGEMENT
SVP MANAGING DIRECTOR HFS PROCESSING SERVICES
SVP MANAGING DIRECTOR HFC PROCESSING SERVICES
SVP OPERATIONS SUPPORT SERVICES
SVP REGIONAL GENERAL MANAGER
SVP TREASURY & ASSET MANAGEMENT AHL
VP GOVERNMENTAL RELATIONS
<PAGE> 6
VP HUMAN RESOURCES
VP MONEY & CAPITAL MARKETS
VP TAXES
VP TREASURER
GROUP E - Head of Operating Divisions - 20%/30%
PRESIDENT HOUSEHOLD BANK
SVP CONSUMER FINANCE-CANADA
SVP TRUST-CANADA
GROUP F - Heads of Major Staff Departments and Other Executives
as Designated by the President - 20%/30%
CORPORATE STAFF DEPARTMENTS:
Chief Accounting Office:
Audit
DIRECTOR INTERNAL AUDIT-COMPUTER SYS
DIRECTOR INTERNAL AUDIT-FINANCIAL SERVICES
VP AUDIT
Controller
DIRECTOR INTERNAL REPORTING
DEPUTY CONTROLLER-EXTERNAL REPORTING
DIRECTOR-SPECIAL PROJECTS
DIRECTOR POLICY & REGULATORY REPORTING
VP DATA ADMINISTRATION
Risk Management
DIRECTOR RISK MANAGEMENT
Tax
DIRECTOR FEDERAL TAX AUDIT
DIRECTOR FEDERAL TAX COMPLIANCE
DIRECTOR STATE & LOCAL TAXES
DIRECTOR TAX PLANNING & TAX COUNSEL
Valuation & Assessment Services
VP VALUATION & ASSESSMENT SERVICES
General Counsel:
General Counsel/Governmental Relations
ASSISTANT GENERAL COUNSEL EMPLOYEE RELATIONS
ASSISTANT GENERAL COUNSEL LITIGATION
<PAGE> 7
GENERAL COUNSEL
GENERAL COUNSEL - HAMILTON INVESTMENTS
VP FEDERAL GOVERNMENTAL RELATIONS
VP STATE GOVERNMENTAL RELATIONS
Human Resources
DIRECTOR EMPLOYEE COMMUNICATIONS
DIRECTOR HUMAN RESOURCES HI
DIRECTOR MANAGEMENT DEVELOPMENT & TRAINING
VP COMPENSATION & ADMINISTRATION
VP BENEFITS & HR POLICY
Treasury:
Corporate Communications
DIRECTOR PUBLIC RELATIONS
VP CORPORATE COMMUNICATIONS
Treasury
DIRECTOR-ASSET BACKED FINANCINGS
DIRECTOR ASSET SECURITIZATION
DIRECTOR PLANNING
VP-FINANCE-HI
VP FINANCIAL CONTROL TREASURY
VP PLANNING
VP SPECIALTY FINANCE
VP TREASURY ADMINISTRATION
U.S. BankCard & Canada
HCS
CHIEF FINANCIAL OFFICER-HCS
CONTROLLER-HCS
DIRECTOR BUSINESS PLANNING & RISK MANAGEMENT
DIRECTOR BUSINESS SYSTEMS
DIRECTOR COLLECTIONS HCS/E
DIRECTOR CUSTOMER SERVICE & CREDIT SERVICES
DIRECTOR FRAUD/BANK SECURITY
DIRECTOR GM CARD HCS
DIRECTOR HBNA PRODUCT
DIRECTOR HUMAN RESOURCES
DIRECTOR INFORMATION SERVICES
DIRECTOR MARKETING HCS
DIRECTOR OPERATIONS & RISK CONTROL
DIRECTOR RISK CONTROL
DIRECTOR STRATEGIC RISK TECHNOLOGIES
DIRECTOR SYSTEMS & FINANCIAL SERVICES
GROUP DIRECTOR INFORMATION SYSTEMS
GROUP DIRECTOR NEVADA OPERATIONS
NATIONAL DIRECTOR COLLECTIONS HCS
<PAGE> 8
VP BUSINESS ANALYSIS
VP CREDIT CYCLE MANAGEMENT
VP DIRECTOR RESEARCH
AHLIC
SVP ACTUARIAL & PLANNING
SVP AFFILIATED MARKETING AHL
SVP GENERAL COUNSEL & SECRETARY AHL
SVP OPERATIONS AHL
SVP VOLUNTARY BENEFITS DIVISION AHL
VP ACTUARY AHL
VP AFFILIATED MARKETING AHL
VP AGENCIES AHL
VP ASSOCIATE GENERAL COUNSEL AHL
VP COMMERCIAL REAL ESTATE AHL
VP CONTROLLER AHL
VP CHIEF OPERATIONS OFFICER AHL
VP CREDIT MANAGEMENT
VP DATA PROCESSING AHL
VP FINANCE AHL
VP HUMAN RESOURCES & RISK MANAGEMENT
VP MANAGING DIRECTOR FAHIC
VP MARKETING RESEARCH & DEVELOPMENT
VP MARKETING SUPPORT-VBD AHL
VP PUBLIC AFFAIRS/INDUSTRY RELATIONS AHL
VP SPECIAL MARKETS AHL
VP TECHNOLOGY DEVELOPMENT AHL
VP TREASURER AHL
VP UNDERWRITING & ISSUE AHL
CANADA
CONTROLLER
DIRECTOR-APPLICATION SYSTEMS DEVELOPMENT*
DIRECTOR-COLLECTIONS-CANADA*
GROUP VP-INFORMATION SYSTEMS CANADA*
GROUP VP-LEGAL & BUSINESS CONTROL
SVP-ADMINISTRATION
SVP-CHIEF FINANCIAL OFFICER-CANADA*
SVP-OPERATIONS-CANADA*
SVP-SALES
VP-CREDIT RISK
VP-DIRECTOR-LENDING RSC E/W
VP-HUMAN RESOURCES
VP-RSC-GENERAL MANAGER
SVP MERCHANT SERVICES*
* Position held by expatriate
<PAGE> 9
U.S. Consumer Finance & Australia
HFC Staff
GROUP FINANCIAL CONTROL OFFICER
GROUP HUMAN RESOURCES OFFICER
VP CONTROLLER CONSUMER FINANCE
STARS/HFC Division
DIRECTOR OPERATIONS SUPPORT
VP OF CUSTOMER SERVICE
VP CHIEF OF STAFF
VP COLLECTIONS USCF
VP CREDIT
VP DIRECTOR POLICY/COMPLIANCE/PROJECT CONTROL
VP DIRECTOR OF SALES
HRSI
CHIEF FINANCIAL OFFICER-HRS
DIRECTOR CREDIT/CUSTOMER SERVICE
VP CHIEF COLLECTIONS OFFICER
VP CHIEF CREDIT OFFICER
VP CHIEF OF MARKETING & SALES HRSI
VP CONTROLLER-HRSI
VP CREDIT RISK
VP DIRECTOR OF SALES HRSI
VP HOUSEHOLD RECOVERY SERVICES
HFS
DIRECTOR OF SYSTEMS-HFS
REGIONAL COLLECTIONS DIRECTOR
REGIONAL CREDIT DIRECTOR
SVP INDIRECT LENDING HFS
VP FINANCE HFS
HCFS
SVP COMMERCIAL FINANCE RISK ASSET MANAGEMENT
SVP FINANCE & ADMINISTRATION
SVP GENERAL COUNSEL HCFS
VP DIRECTOR PORTFOLIO MANAGEMENT
VP REAL ESTATE ADMINISTRATION
Australia
DIVISION MANAGER-COMMERCIAL
DIVISION MANAGER-CONSUMER FINANCE
GROUP FINANCIAL CONTROLLER
GROUP MANAGER-CENTRAL PROCESSING CENTRE
GROUP MANAGER-CORPORATE ATTORNEY
GROUP MANAGER-HUMAN RESOURCES
<PAGE> 10
GROUP MANAGER-MARKETING
GROUP MANAGER-SYSTEMS AND TECHNOLOGY
GROUP MANAGER-TREASURY
U.S. Consumer & Mortgage Banking & U.K.
Household Bank
DIRECTOR SYSTEMS & SPECIAL PROJECTS
HB CREDIT RISK OFFICER
VP BANK MARKETING & DEVELOPMENT
VP BUSINESS DEVELOPMENT
VP FINANCIAL ADMINISTRATION
VP HUMAN RESOURCES USC&MB
VP MARKET DEVELOPMENT & RISK MANAGEMENT
HMS
VP ASSET MANAGEMENT
VP FINANCIAL CONTROL
VP HMS OPERATIONS & STRATEGIC PLANNING
VP LOAN ADMINISTRATION
VP MORTGAGE ORIGINATIONS
OSS
VP ADMINISTRATIVE SERVICES
VP BANK OPERATIONS
VP BANK PROPERTY MANAGEMENT
VP CASH OPERATIONS
VP CHIEF FINANCIAL OFFICER OSS
VP CORPORATE PROPERTY MANAGEMENT
VP FACILITIES
VP OSS MARKETING PRODUCTION
VP PRODUCTION OSS
VP SECURITY MANAGEMENT
Hamilton Investments
SVP BANK SERVICES GROUP
SVP DIRECTOR OPERATIONS
SVP PRODUCT & SERVICES
HFN
AVP ASSISTANT TO CIO
DIRECTOR BUSINESS SYSTEMS
DIRECTOR COMMUNICATIONS SERVICES/OFFICE SYSTEMS
DIRECTOR DATA CENTER OPERATIONS
DIRECTOR DISTRIBUTED INFRASTRUCTURE
DIRECTOR STANDARDS & DATA ADMIN
DIRECTOR SYSTEMS RESEARCH & DEVELOPMENT
VP ADMINISTRATION
VP ENTERPRISE SYSTEMS
<PAGE> 11
VP INFORMATION SERVICES
VP SYSTEMS ASSURANCE
U.K.
CHIEF FINANCIAL OFFICER
DIRECTOR PERSONAL BANKING UK*
DIRECTOR PRODUCTION PERSONAL BANKING UK*
DIRECTOR-COLLECTIONS
DIRECTOR-CORPORATE COMMUNICATION
DIRECTOR-CREDIT POLICY
DIRECTOR-HUMAN RESOURCES
DIRECTOR-INFORMATION TECHNOLOGY*
DIRECTOR-INSURANCE
DIRECTOR-INTERNAL AUDIT
DIRECTOR-LEGAL
DIRECTOR-MARKETING
DIRECTOR-PROPERTY & FACILITIES
DIRECTOR-RETAIL SALES
DIRECTOR-SERVICE QUALITY
DIVISION GENERAL MANAGER
FINANCE DIRECTOR-INSURANCE/COMPLIANCE OFFICER
GENERAL MANAGER BUSINESS CONTROL
GROUP FINANCIAL CONTROLLER
PERSONNEL OPERATIONS MANAGER
PRODUCTION DIRECTOR-INSURANCE
PRODUCTION DIRECTOR-RETAIL SALES
SALES DIRECTOR-INSURANCE
SALES DIRECTOR-RETAIL SALES
TECHNOLOGY PLANNING MANAGER
TRAINING & DEVELOPMENT MANAGER
TREASURY MANAGER
* Position held by expatriate.
Revised December, 1993
<PAGE> 1
EXHIBIT 10.4
HOUSEHOLD INTERNATIONAL
NOTICE OF STOCK OPTIONS AND GRANT AGREEMENT
, 1993
(Employee Name)
(Employee Social Security Number)
(Employee Home Address)
On , 1993, the Compensation Committee of Household's Board of
Directors granted you stock options under the Household International Long-Term
Executive Incentive Compensation Plan as follows:
Date of Grant ##/##/##
Option Price Per Share $##.####
# of Shares Granted ##
Enclosed are two #(2) copies of the Stock Option Agreement for your signature,
which state the terms and conditions under which these options were granted.
Please return one signed copy of the agreement, retaining the second for your
files, to:
Household International
ATTENTION: Office of the Secretary
2700 Sanders Road, 3 North
Prospect Heights, IL 60070
Sincerely,
/s/ John W. Blenke
------------------
John W. Blenke
Secretary
_____________________________ __________________
Employee's Signature Date
<PAGE> 2
HOUSEHOLD INTERNATIONAL, INC.
HOUSEHOLD INTERNATIONAL 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
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 date hereof, to purchase, on the terms and
conditions set forth herein and subject to the provisions set forth in 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 date
hereof. At the close of said one-year period 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 date
hereof, 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 Committee during the Employee's
employment. If the Employee does not purchase the full number of shares which
he or she is entitled to purchase hereunder in any of said years, then the
Employee may purchase such shares at any subsequent time during the term
thereof. The option shall be exercised by giving to 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, such notice to be
accompanied by payment of the purchase price by cash or check to the order of
the Company. Payment for the option may also 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 rules as have
been established by the Compensation Committee or Board of Directors and which
are in effect at the time the option is exercised. The Compensation Committee
or Board of Directors may rescind at any time 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
<PAGE> 3
while he or she is an employee of the Company (or a subsidiary thereof) and
shall have been continuously so employed from the date hereof, 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 Compensation 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 date
hereof.
4. 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.
5. 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.
6. 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
<PAGE> 4
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.
7. 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.
<PAGE> 5
HOUSEHOLD INTERNATIONAL
NOTICE OF STOCK OPTIONS AND GRANT AGREEMENT
, 1993
(Employee Name)
(Employee Social Security Number)
(Employee Home Address)
On , 1993, the Compensation Committee of Household's Board of
Directors granted you stock options under the Household International Long-Term
Executive Incentive Compensation Plan as follows:
Date of Grant ##/##/##
Option Price Per Share $##.####
# of Shares Granted ##
Enclosed are two #(2) copies of the Stock Option Agreement for your signature,
which state the terms and conditions under which these options were granted.
Please return one signed copy of the agreement, retaining the second for your
files, to:
Household International
ATTENTION: Office of the Secretary
2700 Sanders Road, 3 North
Prospect Heights, IL 60070
Sincerely,
/s/ John W. Blenke
-------------------
John W. Blenke
Secretary
_____________________________ __________________
Employee's Signature Date
<PAGE> 6
HOUSEHOLD INTERNATIONAL, INC.
HOUSEHOLD INTERNATIONAL LONG-TERM
EXECUTIVE INCENTIVE COMPENSATION PLAN
----------------------
U.K. STOCK OPTION PROVISIONS
CERTIFICATE OF OPTION
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
Long-Term Executive Incentive Compensation Plan and the U.K. Stock Option
Provisions issued thereunder (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 date hereof, to purchase, on the terms and conditions set forth
herein and subject to the provisions set forth in 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 date
hereof. At the close of said one-year period 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 date
hereof, provided that 100% of the shares in this option may be exercised if so
determined by the Committee during the Employee's employment. If the Employee
does not purchase the full number of shares which he or she is entitled to
purchase hereunder in any of said years, then the Employee may purchase such
shares at any subsequent time during the term thereof. The option shall be
exercised by giving to 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, such notice to be accompanied by payment of the
purchase price by cash or check to the order of the Company.
3. The option may be exercised during the lifetime of the Employee only by
him or her 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 date
thereof, except that an option may be exercised within: (a) one year from the
date of death if any option holder dies while still holding an option, by the
executor, administrator or other personal representative of the individual, or
(b) five years from the date of termination of employment by reason of the
Employee becoming retirement-eligible, or (c) twelve months from the date of
termination of employment by reason of total disability, or (d) three months
from the date of termination of employment in all other cases.
<PAGE> 7
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 date hereof.
4. 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.
5. 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.
6. 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.
7. Anything herein to the contrary notwithstanding, this option agreement
shall be subject to amendment by the Company from time to time (subject to
prior approval from the Inland Revenue) to the extent permitted by the
Incentive Plan and is subject to the provisions of the Incentive Plan.
<PAGE> 8
HOUSEHOLD INTERNATIONAL
NOTICE OF RESTRICTED STOCK RIGHTS AGREEMENT
, 1993
(Employee Name)
(Employee Social Security Number)
(Employee Home Address)
On , 1993, the Compensation Committee of Household's Board of
Directors granted you restricted stock rights under the Household International
Long-Term Executive Incentive Compensation Plan as follows:
Date of Grant ##/##/##
Option Price Per Share $##.####
# of Shares Granted ##
Enclosed are two #(2) copies of the Restricted Stock Rights Agreement for your
signature, which state the terms and conditions under which these rights were
granted. Please return one signed copy of the agreement, retaining the second
for your files, to:
Household International
ATTENTION: Office of the Secretary
2700 Sanders Road, 3 North
Prospect Heights, IL 60070
Sincerely,
/s/ John W. Blenke
--------------------------
John W. Blenke
Secretary
_____________________________ __________________
Employee's Signature Date
<PAGE> 9
HOUSEHOLD INTERNATIONAL, INC.
HOUSEHOLD INTERNATIONAL 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
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"), for a period of five (5) years from the date hereof (the "Restricted
Period"), to receive on the terms and conditions set forth herein and subject
to the provisions set forth in 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 issued under RSRs for one year from the date hereof. The
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 100% of the shares subject
to RSRs on his or her last day of employment, 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. 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 rights
under any outstanding RSRs. This automatic forfeiture may be waived in whole
or in part by the Committee in its sole discretion.
3. The RSRs may not be transferred except by will or the laws of descent and
distribution.
<PAGE> 10
4. When an Employee shall be entitled to receive shares pursuant to RSRs, the
Company shall issue the appropriate number of shares registered in the name of
the Employee.
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 share subject to an RSR, the Company will pay the
Employee 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. 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.
7. 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.
<PAGE> 1
EXHIBIT 10.5
HOUSEHOLD INTERNATIONAL
DIRECTORS' RETIREMENT INCOME PLAN
I. PURPOSE
The Directors' Retirement Income Plan is created to provide retirement
income to certain non-management members of the Household International
Board of Directors who retire from the Board or do not stand for
re-election.
II. ELIGIBILITY
All non-management members of the Household International Board of
Directors who have completed ten years of service on the Board or
have attained the mandatory retirement age and have completed three years
of service are eligible to participate in this Plan upon their retirement
from or failure to stand for re-election to the Board.
III. BENEFITS
Benefits shall be paid to the director in quarterly installments equal to
1/4 of the annual retainer for service as a Board member in effect
at the time of the last Board meeting attended. Payment of benefits will
begin the quarter following retirement and will continue for the number
of full years of service as a member of the Board up to a maximum of ten
years.
IV. SURVIVING SPOUSE BENEFIT
In the event of the death of a director who is eligible to receive benefits
under this Plan, those benefits that would otherwise have been payable to
the director will be paid to the director's surviving spouse. Such
payments to a surviving spouse will terminate on the earlier of the death
of the surviving spouse or the date that benefit payments to the director
would have terminated had he/she not died.
V. EFFECTIVE DATE
The effective date of this Plan is August 15, 1984. Past service of
members of the Board on the effective date is considered service for
purposes of this Plan.
VI. 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
<PAGE> 2
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 Corporation 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
Corporation 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 Corporation.
<PAGE> 1
EXHIBIT 10.9
May 28, 1993
Mr. Joseph W. Saunders
Household Credit Services, Inc.
1441 Schilling Place
Salinas, CA 93901
Dear Joe:
SUBJECT: Employment Agreement
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 Office of the
President, Group Executive. In that capacity you are entitled
to the following:
a. A minimum annual salary of $358,900;
b. An annual bonus having a targeted value equal to 40% 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 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;
<PAGE> 2
EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders
Page 2
May 28, 1993
c. An annual grant of any combination of performance units
and restricted stock rights under the Household
International 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 are 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.
Performance unit awards will be valued at their targeted
value and restricted stock rights will be valued at the
fair market value of stock 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;
<PAGE> 3
EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders
Page 3
May 28, 1993
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 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 any combination of performance unit
awards and restricted stock rights
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 Chicago, Illinois
metropolitan area or the Salinas, California
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
<PAGE> 4
EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders
Page 4
May 28, 1993
promptly a lump sum cash payment to you in an amount equal to
290% of your then annual salary (prior to any of the aforesaid
reductions) (representing approximately the present value of
what you would have received had your employment, compensation
and participation in benefit plans, other than stock options,
continued for the term of this employment contract); 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. 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 bonus and performance unit awards for
the performance periods 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 290% of your then annual
salary (prior to any reduction).
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
<PAGE> 5
EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders
Page 5
May 28, 1993
following a Change in Control) in which you do not receive at
least:
i. a bonus payment under the Bonus Plan, and
ii. an award of any combination of performance unit awards
and restricted stock rights 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. Except as provided below, it is the intent and desire of
Household that the salary, bonuses and other benefits
<PAGE> 6
EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders
Page 6
May 28, 1993
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.
8. If a dispute arises regarding the termination of your
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
<PAGE> 7
EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders
Page 7
May 28, 1993
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.
9. You agree that you will not, without prior written consent of
the Chairman of the Board and 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 cease to be subject to the
restrictions of this paragraph.
10. This Agreement supersedes and replaces the Employment Agreement
dated May 1, 1991, and the Employment Agreement dated August
16, 1990, 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.
11. 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,
<PAGE> 8
EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders
Page 8
May 28, 1993
assigned or alienated by you.
12. 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.
13. This Agreement may only be amended or terminated by written
agreement, signed by both of the parties.
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/ Donald C. Clark
Donald C. Clark
Chief Executive Officer
/s/ Joseph W. Saunders
Joseph W. Saunders
<PAGE> 1
EXHIBIT 10.10
May 28, 1993
Mr. Robert F. Elliott
2700 Sanders Road
Prospect Heights, IL 60070
Dear Bob:
SUBJECT: Employment Agreement
- ------------------------------
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 Office of the
President, Group Executive. In that capacity you are entitled
to the following:
a. A minimum annual salary of $307,300;
b. An annual bonus having a targeted value equal to 40% 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 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;
<PAGE> 2
EMPLOYMENT AGREEMENT - Mr. Robert E. Elliott
Page 2
May 28, 1993
c. An annual grant of any combination of performance units
and restricted stock rights under the Household
International 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 are 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.
Performance unit awards will be valued at their targeted
value and restricted stock rights will be valued at the
fair market value of stock 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;
<PAGE> 3
EMPLOYMENT AGREEMENT - Mr. Robert F. Elliott
Page 3
May 28, 1993
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 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 any combination of performance unit
awards and restricted stock rights
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 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
<PAGE> 4
EMPLOYMENT AGREEMENT - Mr. Robert F. Elliott
Page 4
May 28, 1993
promptly a lump sum cash payment to you in an amount equal to
290% of your then annual salary (prior to any of the aforesaid
reductions) (representing approximately the present value of
what you would have received had your employment, compensation
and participation in benefit plans, other than stock options,
continued for the term of this employment contract); 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. 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 bonus and performance unit awards for
the performance periods 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 290% of your then annual
salary (prior to any reduction). 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
<PAGE> 5
EMPLOYMENT AGREEMENT - Mr. Robert F. Elliott
Page 5
May 28, 1993
following a Change in Control) in which you do not receive at
least:
i. a bonus payment under the Bonus Plan, and
ii. an award of any combination of performance unit awards
and restricted stock rights 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. Except as provided below, it is the intent and desire of
Household that the salary, bonuses and other benefits
<PAGE> 6
EMPLOYMENT AGREEMENT - Mr. Robert F. Elliott
Page 6
May 28, 1993
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.
8. If a dispute arises regarding the termination of your
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
<PAGE> 7
EMPLOYMENT AGREEMENT - Mr. Robert F. Elliott
Page 7
May 28, 1993
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.
9. You agree that you will not, without prior written consent of
the Chairman of the Board and 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 cease to be subject to the
restrictions of this paragraph.
10. This Agreement supersedes and replaces the Employment Agreement
dated May 1, 1991, and the Employment Agreement dated August
16, 1990, 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.
11. 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,
<PAGE> 8
EMPLOYMENT AGREEMENT - Mr. Robert F. Elliott
Page 8
May 28, 1993
assigned or alienated by you.
12. 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.
13. This Agreement may only be amended or terminated by written
agreement, signed by both of the parties.
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/ Donald C. Clark
Donald C. Clark
Chief Executive Officer
/s/ Robert F. Elliott
Robert F. Elliott
<PAGE> 1
EXHIBIT 12
HOUSEHOLD INTERNATIONAL, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS.)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income from continuing operations............ $ 298.7 $ 190.9 $ 149.8 $ 235.3 $ 218.4
-------- -------- -------- -------- --------
Income taxes................................. 152.0 87.1 50.0 113.4 114.6
-------- -------- -------- -------- --------
Fixed charges:
Interest expense(1)........................ 1,155.5 1,431.5 1,905.4 2,028.4 1,713.8
Interest portion of rentals(2)............. 33.6 35.3 35.1 30.9 26.0
Capitalized interest....................... -- -- 1.0 -- .5
-------- -------- -------- -------- --------
Total fixed charges..................... 1,189.1 1,466.8 1,941.5 2,059.3 1,740.3
-------- -------- -------- -------- --------
Capitalized interest....................... -- -- (1.0) -- (.5)
-------- -------- -------- -------- --------
Total earnings as defined............... $1,639.8 $1,744.8 $2,140.3 $2,408.0 $2,072.8
======== ======== ======== ======== ========
Ratio of earnings to fixed charges........... 1.38 1.19 1.10 1.17 1.19
======== ======== ======== ======== ========
Preferred stock dividends(3)................. $ 46.9 $ 44.3 $ 38.3 $ 29.8 $ 16.9
======== ======== ======== ======== ========
Ratio of earnings to combined fixed charges
and preferred stock dividends.............. 1.33 1.15 1.08 1.15 1.18
======== ======== ======== ======== ========
</TABLE>
- -------------------------
(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 33.7, 31.3, 25.0, 32.5 and 34.4 percent, for the
years ended December 31, 1993, 1992, 1991, 1990 and 1989, respectively.
<PAGE> 1
EXHIBIT 13
ALL PAGE NUMBERS REFERENCED IN EXHIBIT 13 REFER TO PAGE NUMBERS IN THE
HOUSEHOLD INTERNATIONAL 1993 ANNUAL REPORT TO SHAREHOLDERS.
<PAGE> 2
<TABLE>
<CAPTION>
CORPORATE PROFILE MARKETS
- ----------------- -------
<S> <C> <C>
HOUSEHOLD FINANCE Household Finance Corporation
2700 Sanders Road
Prospect Heights, IL 60070-2799
708 564.5000 35 States
HOUSEHOLD RETAIL SERVICES Household Retail Services, Inc.
700 N. Wood Dale Road
Wood Dale, IL 60191-1155
708 350.4000 (Also in Hawaii and Puerto Rico)
HOUSEHOLD BANK Household Bank, f.s.b.
4301 MacArthur Blvd.
Newport Beach, CA 92660-2021
714 955.4600 7 States
HOUSEHOLD MORTGAGE SERVICES Household Mortgage Services, Inc.
2700 Sanders Road
Prospect Heights, IL 60070-2799
708 564.5000 42 States
HOUSEHOLD CREDIT SERVICES Household Bank, N.A.
1441 Schilling Place
Salinas, CA 93901-4543
408 754.1400 (Also in Alaska and Hawaii)
ALEXANDER HAMILTON LIFE Alexander Hamilton Life Insurance Company of
America
33045 Hamilton Blvd.
Farmington Hills, MI 48334-3358
1-800 521.4397 (Also in Alaska, Hawaii, Canada, and the U.K.)
HOUSEHOLD COMMERCIAL Household Commercial Financial Services, Inc.
2700 Sanders Road
Prospect Heights, IL 60070-2799
708 564.6100 (Also Internationally)
International Operations
HOUSEHOLD FINANCIAL Household Financial Corporation Limited
CORPORATION 100 Sheppard Avenue East, Suite 1000
North York, Ontario M2N 6N7
Canada
416 250.3400 10 Provinces in Canada
HFC BANK PLC HFC Bank plc
North Street
Winkfield, Windsor
Berkshire SL4 4TD
United Kingdom
0344 890000 England, Scotland and Wales
HOUSEHOLD FINANCIAL Household Financial Services Limited
SERVICES LIMITED 33 Herbert Street
St. Leonards, Australia NSW 2065
612 901.6666 6 States and 2 Territories in Australia
</TABLE>
A full range of investment services is provided by Hamilton Investments, a
Household International subsidiary. At December 31, 1993, Hamilton Investments,
Inc. managed 100,000 customer accounts with assets of $3.3 billion through a
network of 24 branch offices and 150 Household Bank locations. Hamilton
Investments employees totaled 629.
<PAGE> 3
APPENDIX TO PAGE ONE OF EXHIBIT 13
Under the column heading "Markets" and with respect to each of the companies
listed, maps are depicted, shaded to show the geographic markets in which such
company operates. A description of such maps and the applicable shading is
set out below.
Household Finance - a map of the continental United States is depicted, with 35
states shaded. The states which are not shaded are: Arkansas, Colorado,
Idaho, Iowa, Louisiana, Maine, Mississippi, Montana, North Dakota, South
Dakota, Utah, Vermont and Wyoming.
Household Retail Services - a map of the continental United States is depicted,
and the entire map is shaded.
Household Bank - a map of the continental United States is depicted, with seven
states shaded. The states which are shaded are: California, Illinois,
Indiana, Kansas, Ohio, Maryland and Virginia.
Household Mortgage Services - a map of the continental United States is
depicted, with 42 states shaded. The states which are not shaded are:
Alabama, Louisiana, Mississippi, Oklahoma, North Dakota and South Dakota.
Household Credit Services - a map of the continental United States is depicted,
and the entire map is shaded.
Alexander Hamilton Life - a map of the continental United States is depicted,
and the entire map is shaded.
Household Commercial - a map of the continental United States is depicted, and
the entire map is shaded.
Household Financial Corporation - a map of Canada is depicted and the entire
map is shaded.
HFC Bank plc - a map of England, Scotland and Wales, the Isle of Man, the
Hebrides and Orlsney Islands, Northern Ireland and the Republic of Ireland
are depicted, and the entire map is shaded with the exception of Northern
Ireland and the Republic of Ireland.
Household Financial Services Limited - a map of the Australia and Tasmania is
depicted, and the entire map is shaded.
<PAGE> 4
<TABLE>
<CAPTION>
Products Business Information as of December 31, 1993
------- --------------------------------------------
<S> <C>
Home equity credit lines, unsecured credit lines, $10.5 billion in receivables owned or serviced
secured and unsecured closed-end loans, Alexander 2 regional centers, 432 branch offices
Hamilton insurance products, purchased portfolio 3,600 employees
servicing through Household Financial Services* 1.7 million customer accounts
Private-label revolving credit cards, closed-end $2.3 billion in receivables owned or serviced
sales contracts, Alexander Hamilton insurance 3 regional centers
products, marketing services 825 employees
1.6 million customer accounts
Checking, savings and money market accounts; $6.2 billion in deposits
certificates of deposit; IRA's; Alexander Hamilton $1.5 billion in receivables owned or serviced
insurance products; secured and unsecured personal 171 branches
loans; first and second mortgages; student loans; 1,938 employees
children's "Banker Bear" accounts; investment 1 million customer accounts
planning services through Hamilton Investments, tax
deferred annuities
Fixed, adjustable and balloon first mortgages on $16.3 billion in receivables owned or serviced
residential and income-producing properties 23 offices
899 employees
163,000 customer accounts
Credit card accounts featuring both standard and $9.1 billion in receivables owned or serviced
Gold Visa and MasterCard, the GM Card, the Ameritech 3 regional centers
Complete Card, the Charles Schwab Visa and revolving 3,035 employees
lines of credit 9.5 million customer accounts
Universal life, term, and annuity products through $7 billion in managed assets
independent agents and financial institutions, and 718 employees
credit life, disability and specialty insurance 1.6 million customer accounts through 16,300
products through Household business units independent agents and 1,790 licensed Household
employees
Capital equipment loans and leases, term-preferred $1 billion receivables and investments in continuing
stocks, senior term and revolving debt to middle commercial lines; additionally, manages Liquidating
market and larger companies Commercial Lines
150 employees
Secured and unsecured credit lines, conventional $2.5 billion in receivables owned or serviced
loans, first and second mortgages, deposit 42 offices
products, private-label credit cards, Alexander 1,074 employees
Hamilton insurance products 553,000 customer accounts
Full service bank offering fixed term and $1.2 billion in receivables owned or serviced
revolving unsecured and secured loans, insurance 150 offices
through Alexander Hamilton; the GM Card from 1,503 employees
Vauxhall 424,000 customer accounts
Home equity revolving lines of credit, unsecured $.4 billion in receivables owned or serviced
revolving lines of credit, secured and unsecured 22 offices
personal loans, revolving credit sales contracts 366 employees
and other secured finance products, credit life, 113,000 customer accounts
accident and sickness insurance
</TABLE>
*Household Financial Services establishes relationships with other financial
institutions to acquire and service consumer loans. At December 31, 1993,
HFS' 378 employees managed receivables totaling $2.2 billion, representing
850,000 accounts.
Additionally, Operations Support Services and Corporate personnel accounted
for approximately 1,750 employees.
<PAGE> 5
COMMON AND PREFERRED STOCK INFORMATION
COMMON STOCK Household International, Inc. common stock is listed on the New
York and Chicago stock exchanges. It also has unlisted trading privileges on
the Boston, Pacific and Philadelphia stock exchanges. Call and put options are
traded on the American Stock Exchange. A 2-for-1 stock split effected in the
form of a 100% stock dividend on Household's common stock took place October
15, 1993.
PREFERRED STOCK Household International also has several series of preferred
stocks, all of which, with the exception of the Flexible Rate Auction Preferred
Stock, Series B, are listed on the New York Stock Exchange. During 1993,
Household redeemed its Flexible Rate Auction Preferred Stock, Series A, on July
13, and its 11 1/4% Enhanced Rate Cumulative Preferred Stock on October 1.
<TABLE>
<CAPTION>
Dividends Declared
------------------
Ticker
Stock Symbol 1993 1992 Features Redemption Features
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common HI $1.18 $1.15 Quarterly dividend rate increased N/A
to $.30 effective 10/15/93
$6.25 Preferred HI+PRD $6.25 $6.25 Convertible into Common Stock Mandatory sinking fund
at rate of 4.654 shares of common redemption began in 1991
per share of preferred (See Note 9, Page 68)
9 1/2% Preferred, HI+PRA $2.375 $2.375 Nonconvertible Cannot be redeemed prior to
Series 1989-A 11/9/94: Redeemable at
Depositary Shares company's option after
representing 1/4 11/9/94 in whole or in part:
share of 9 1/2 % $26.1875--11/9/94-11/9/95
Preferred Stock, $25.9500--11/9/95-11/9/96
Series 1989-A $25.7125--11/9/96-11/9/97
$25.4750--11/9/97-11/9/98
$25.2375--11/9/98-11/9/99
$25.0000--11/9/99 & thereafter
9 1/2% Preferred, HI+PRX $.95 $.95 Nonconvertible Cannot be redeemed prior to
Series 1991-A 8/13/96: Redeemable at
Depositary company's option after
Shares representing 8/13/96 in whole or in part at
1/10 share of $10.00
9 1/2% Preferred
Stock, Series
1991-A
8 1/4% Preferred, HI+PRZ $2.0625 $.4125* Nonconvertible Cannot be redeemed prior
Series 1992-A to 10/15/02: Redeemable
representing 1/40 at company's option
share of 8 1/4% after 10/15/02 in whole
Preferred Stock, or in part at $25.00
Series 1992-A
7.35% Preferred, HI+PRJ $.581875* N/A Nonconvertible Cannot be redeemed prior
Series 1993-A to 10/15/98: Redeemable
Depository Shares at company's option
representing 1/40 after 10/15/98 in whole
share of 7.35% or in part at $25.00
Preferred Stock,
Series 1993-A
Flexible Rate N/A $9.50 $9.50 Nonconvertible Redeemable at the option of
Auction Preferred, Dividend rate fixed company at the end of the
Series B at 9 1/2% until dividend period and at
7/15/95; set by certain times thereafter
auction procedures at a price of $100 per share
thereafter plus an amount equal to
accrued and unpaid
dividends to the redemption
date.
</TABLE>
*Partial Payment Period
<TABLE>
<CAPTION>
Shareholders
Shares Outstanding of Record 1993 Market Price 1992 Market Price
------------------ -------------- ----------------- -----------------
Stock 1993 1992 1993 1992 High Low High Low
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common 94,448,132 41,438,133 14,632 14,605 40 3/8 26 7/8 30 1/4 20 3/4
$6.25 Preferred 385,439 720,415 641 842 186 134 1/2 132 1/2 105
9 1/2% Preferred, 3,000,000 3,000,000 591 595 28 1/2 26 1/4 27 7/8 24 1/2
Series 1989-A
(Per Depositary
Share)
11 1/4% Enhanced N/A 4,500,000 N/A 1,055 11 1/8 10 1/4 11 7/8 10 1/8
Rate Preferred
(Per Depositary
Share)
9 1/2% Preferred, 5,500,000 5,500,000 939 889 11 5/8 10 1/2 11 1/8 9 7/8
Series 1991-A
(Per Depositary
Share)
8 1/4% Preferred, 2,000,000 2,000,000 512 409 28 23 7/8 24 3/4 23 1/8
Series 1992-A
(Per Depositary
Share)
7.35% Preferred, 4,000,000 N/A 305 N/A 25 3/4 24 5/8 N/A N/A
Series 1993-A
(Per Depositary
Share)
Flexible Rate N/A 350,000 N/A 1 N/A N/A N/A N/A
Auction Preferred,
Series A
Flexible Rate 400,000 400,000 4 4 N/A N/A N/A N/A
Auction Preferred,
Series B
</TABLE>
<PAGE> 6
FINANCIAL SECTION CONTENTS
SELECTED FINANCIAL DATA & STATISTICS 34
ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--
OWNED RECEIVABLES 35
ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--
MANAGED RECEIVABLES 36
OTHER CREDIT QUALITY STATISTICS 37
MANAGEMENT'S DISCUSSION & ANALYSIS 38
STATEMENTS OF INCOME 52
BALANCE SHEETS 53
STATEMENTS OF CASH FLOWS 54
STATEMENTS OF CHANGES IN PREFERRED STOCK &
COMMON SHAREHOLDERS' EQUITY 55
BUSINESS SEGMENT DATA 56
NOTES TO FINANCIAL STATEMENTS 57
MANAGEMENT'S REPORT 77
INDEPENDENT AUDITORS' REPORT 77
NET INTEREST MARGIN--1993 COMPARED TO 1992 78
NET INTEREST MARGIN--1992 COMPARED TO 1991 79
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) 80
<PAGE> 7
SELECTED FINANCIAL DATA AND STATISTICS
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
All dollar amounts except per share data are stated in millions. 1993 1992 1991 1990 1989
- ---------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA--YEAR ENDED DECEMBER 31
Net interest margin and other revenues $ 3,305.0 $ 2,760.4 $ 2,707.0 $ 2,293.8 $ 1,781.7
Provision for credit losses on owned receivables 735.8 671.5 843.2 463.7 235.0
Total costs and expenses 2,118.5 1,810.9 1,664.0 1,481.4 1,213.7
Income taxes 152.0 87.1 50.0 113.4 114.6
--------- --------- --------- --------- ---------
Income from continuing operations 298.7 190.9 149.8 235.3 218.4
Income from discontinued operations, net of income taxes -- -- -- -- 21.1
--------- --------- --------- --------- ---------
Net income $ 298.7 $ 190.9 $ 149.8 $ 235.3 $ 239.5
========= ========= ========= ========= =========
PER SHARE DATA(1)
Earnings from continuing operations per common share:
Primary $ 2.91 $ 1.97 $ 1.57 $ 3.03 $ 2.94
Fully diluted 2.85 1.93 1.55 2.88 2.80
Earnings per common share:
Primary 2.91 1.97 1.57 3.03 3.24
Fully diluted 2.85 1.93 1.55 2.88 3.07
Dividends declared per common share 1.18 1.15 1.12 1.09 1.07
Book value per common share (2),(3) 22.01 18.65 18.38 17.89 16.02
--------- --------- --------- --------- ---------
BALANCE SHEET DATA AT DECEMBER 31
Total assets $32,961.5 $31,128.4 $29,982.3 $29,454.7 $26,178.7
--------- --------- --------- --------- ---------
Finance and Banking receivables:
Owned $19,340.5 $18,449.3 $17,557.9 $18,512.4 $16,771.8
Serviced with limited recourse 9,827.8 7,946.3 7,068.8 4,635.0 2,550.4
--------- --------- --------- --------- ---------
Managed 29,168.3 26,395.6 24,626.7 23,147.4 19,322.2
Receivables serviced with no recourse 15,229.4 11,406.7 7,820.2 4,201.1 3,517.3
--------- --------- --------- --------- ---------
Receivables owned or serviced $44,397.7 $37,802.3 $32,446.9 $27,348.5 $22,839.5
========= ========= ========= ========= =========
Liquidating commercial assets $ 1,555.7 $ 1,851.2 $ 2,051.9 $ 2,485.1 $ 2,367.2
Deposits 7,516.1 8,030.3 7,969.6 6,938.0 5,062.0
Total other debt 14,755.9 14,267.7 13,936.9 15,442.1 14,980.5
Convertible preferred stock 19.3 36.0 54.4 74.0 74.7
Preferred stock 320.0 300.0 250.0 195.0 75.0
Common shareholders' equity (2),(3) 2,078.3 1,545.6 1,462.1 1,281.1 1,131.2
--------- --------- --------- --------- ---------
SELECTED FINANCIAL RATIOS (5)
Common shareholders' equity as a percent of owned assets (2),(3) 6.31% 4.97% 4.88% 4.35% 4.32%
Total shareholders' equity as a percent of owned assets (2),(3),(6) 7.28 5.93 5.71 5.01 4.61
Total dividends to net income 47.3 65.3 76.8 41.3 35.9
Return on average common shareholders' equity:
Core Business (2),(3) 20.8 13.2 20.9 21.5 22.2
Total (2),(3) 14.2 10.7 8.5 18.0 21.3
Total, as originally reported (4) 14.2 10.2 8.1 17.1 20.0
Return on average owned assets:
Core Business 1.03 .71 1.05 .97 1.10
Total .91 .62 .49 .82 .93
Operating expenses as a percent of average Finance and Banking
receivables owned or serviced (7) 3.49 3.41 3.51 3.83 4.03
--------- --------- --------- --------- ---------
</TABLE>
(1) Amounts have been restated to reflect the two-for-one stock split in the
form of a 100 percent stock dividend, effective October 15, 1993.
(2) Effective December 31, 1993 the company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("FAS No. 115") and has included unrealized holding
gains and losses on available-for-sale investments as a net amount in a
separate component of common shareholders' equity, net of income taxes and,
for certain investments of the life insurance operation, related unrealized
deferred insurance policy acquisition cost adjustments. Before the impact
of the market value adjustment at December 31, 1993, book value per common
share was $21.58, common shareholders' equity was $2,037.8 million, common
shareholders' equity as a percent of owned assets was 6.18 percent and
total shareholders' equity as a percent of owned assets was 7.21 percent.
The 1993 return on average common shareholders' equity was not materially
impacted by the adoption of FAS No. 115.
(3) The company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS No. 109") effective January 1, 1993. As
<PAGE> 8
a result of implementing FAS No. 109, retained earnings for all periods
prior to December 31, 1993 have been reduced by approximately $63 million
from the amounts previously reported.
(4) Excludes the effect of adoption of FAS No. 109 for the periods 1989 through
1992.
(5) See pages 35 through 37 for selected credit quality tables and statistics.
(6) Total shareholders' equity as a percent of owned assets excludes
convertible term preferred stock. Based on conversion ratios the company
believes substantially all of this stock will be converted to common stock.
Including this preferred stock (as well as the impact of the adoption of FAS
No. 109 and FAS No. 115), total shareholders' equity as a percent of owned
assets would be 7.33, 6.04, 5.89, 5.26 and 4.89 percent at December 31,
1993, 1992, 1991, 1990 and 1989, respectively.
(7) Operating expenses include salaries and fringe benefits and other operating
expenses of the Finance and Banking segment.
<PAGE> 9
ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--OWNED RECEIVABLES
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
All dollar amounts are stated in millions. 1993 1992 1991 1990 1989
- ------------------------------------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT JANUARY 1 $564.1 $611.4 $364.7 $299.0 $276.4
------ ------ ------ ------ ------
PROVISION FOR CREDIT LOSSES--OWNED RECEIVABLES
Finance and Banking 635.7 621.2 583.2 373.0 221.6
Liquidating Commercial Lines 90.1 35.3 260.0 90.7 13.4
Corporate 10.0 15.0 -- -- --
------ ------ ------ ------ ------
Total provision for credit losses--owned receivables 735.8 671.5 843.2 463.7 235.0
------ ------ ------ ------ ------
OWNED RECEIVABLES CHARGED OFF
Finance and Banking--
Domestic:
First mortgage (13.5) (7.2) (7.5) (1.6) --
Home equity (36.2) (37.2) (30.1) (12.7) (8.8)
Other secured (10.8) (6.0) (1.8) (2.8) --
Bankcard (172.4) (129.5) (103.4) (82.5) (56.0)
Merchant participation (88.5) (95.5) (100.5) (77.8) (32.8)
Other unsecured (205.7) (202.5) (176.1) (131.4) (117.5)
Equipment financing and other (1.1) -- (.1) -- --
Foreign (162.9) (234.6) (219.5) (99.4) (45.6)
------ ------ ------ ------ ------
Finance and Banking owned receivables charged off (691.1) (712.5) (639.0) (408.2) (260.7)
Liquidating Commercial Lines owned receivables charged off (121.7) (60.8) (71.3) (42.1) (10.4)
------ ------ ------ ------ ------
Total owned receivables charged off (812.8) (773.3) (710.3) (450.3) (271.1)
------ ------ ------ ------ ------
RECOVERIES ON OWNED RECEIVABLES
Finance and Banking--
Domestic:
First mortgage 2.6 2.2 1.7 .1 --
Home equity 1.2 .6 .4 .4 .2
Other secured .4 .2 -- .9 .1
Bankcard 12.5 10.5 10.2 7.4 5.3
Merchant participation 19.4 15.3 15.1 14.1 1.9
Other unsecured 38.8 35.8 30.1 24.1 17.8
Foreign 26.5 22.0 15.7 10.3 7.7
------ ------ ------ ------ ------
Finance and Banking recoveries 101.4 86.6 73.2 57.3 33.0
Liquidating Commercial Lines recoveries 1.2 .2 -- .1 --
------ ------ ------ ------ ------
Total recoveries on owned receivables 102.6 86.8 73.2 57.4 33.0
Credit loss reserves on receivables purchased, net (1) 1.6 (19.1) 42.3 (16.4) 22.0
Other, net (1) 30.6 (13.2) (1.7) 11.3 3.7
------ ------ ------ ------ ------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES
Finance and Banking--
Domestic:
First mortgage 4.1 6.0 7.3 7.2 8.1
Home equity 16.9 12.4 14.2 6.0 6.5
Other secured 8.0 6.5 3.3 -- --
Bankcard 122.7 60.7 67.4 21.6 32.1
Merchant participation 70.2 65.4 54.0 58.1 48.6
Other unsecured 129.3 111.6 129.1 86.6 92.4
Equipment financing and other 16.1 12.7 15.0 20.2 15.6
Foreign 56.7 70.5 92.4 92.0 62.2
------ ------ ------ ------ ------
Finance and Banking 424.0 345.8 382.7 291.7 265.5
Liquidating Commercial Lines 172.9 203.3 228.7 73.0 33.5
Corporate 25.0 15.0 -- -- --
------ ------ ------ ------ ------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT DECEMBER 31 $621.9 $564.1 $611.4 $364.7 $299.0
====== ====== ====== ====== ======
RATIO OF TOTAL CREDIT LOSS RESERVES TO OWNED RECEIVABLES
Finance and Banking 2.19% 1.87% 2.18% 1.58% 1.58%
Liquidating Commercial Lines 14.53 12.56 12.38 3.22 1.53
------ ------ ------ ------ ------
Total owned (2) 3.03% 2.81% 3.15% 1.76% 1.58%
====== ====== ====== ====== ======
</TABLE>
(1) Relates to the Finance and Banking segment.
(2) Includes credit loss reserve of the Corporate segment.
<PAGE> 10
ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--MANAGED RECEIVABLES
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
All dollar amounts are stated in millions. 1993 1992 1991 1990 1989
- ------------------------------------------ -------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT JANUARY 1 $ 724.8 $702.3 $389.3 $305.1 $277.9
-------- ------ ------ ------ ------
PROVISION FOR CREDIT LOSSES--MANAGED RECEIVABLES
Finance and Banking 916.7 872.3 724.9 398.6 221.6
Liquidating Commercial Lines 90.1 35.3 260.0 90.7 13.4
Corporate 10.0 15.0 -- -- --
-------- ------ ------ ------ ------
Total provision for credit losses--managed receivables 1,016.8 922.6 984.9 489.3 235.0
-------- ------ ------ ------ ------
MANAGED RECEIVABLES CHARGED OFF
Finance and Banking--
Domestic:
First mortgage (13.5) (7.2) (7.5) (1.6) --
Home equity (75.3) (59.2) (42.0) (14.9) (8.9)
Other secured (10.8) (6.0) (1.8) (2.8) --
Bankcard (284.6) (237.6) (147.7) (82.5) (56.0)
Merchant participation (113.5) (109.5) (102.0) (77.8) (32.8)
Other unsecured (222.3) (248.9) (197.7) (131.4) (117.5)
Equipment financing and other (1.1) -- (.1) -- --
Foreign (162.9) (234.6) (219.5) (99.4) (45.6)
-------- ------ ------ ------ ------
Finance and Banking managed receivables charged off (884.0) (903.0) (718.3) (410.4) (260.8)
Liquidating Commercial Lines managed receivables charged off (121.7) (60.8) (71.3) (42.1) (10.4)
-------- ------ ------ ------ ------
Total managed receivables charged off (1,005.7) (963.8) (789.6) (452.5) (271.2)
-------- ------ ------ ------ ------
RECOVERIES ON MANAGED RECEIVABLES
Finance and Banking--
Domestic:
First mortgage 2.6 2.2 1.7 .1 --
Home equity 1.2 .6 .4 .4 .2
Other secured .4 .2 -- .9 .1
Bankcard 15.8 13.3 11.0 7.4 5.3
Merchant participation 20.9 15.8 15.1 14.1 1.9
Other unsecured 38.8 35.8 30.1 24.1 17.8
Foreign 26.5 22.0 15.7 10.3 7.7
-------- ------ ------ ------ ------
Finance and Banking recoveries 106.2 89.9 74.0 57.3 33.0
Liquidating Commercial Lines recoveries 1.2 .2 -- .1 --
-------- ------ ------ ------ ------
Total recoveries on managed receivables 107.4 90.1 74.0 57.4 33.0
Credit loss reserves on receivables purchased, net (1) (.5) (19.1) 42.3 (16.4) 22.0
Other, net (1) 1.9 (7.3) 1.4 6.4 8.4
-------- ------ ------ ------ ------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES
Finance and Banking--
Domestic:
First mortgage 4.1 6.0 7.3 7.2 8.1
Home equity 75.5 54.4 33.9 13.2 12.6
Other secured 8.0 6.5 3.3 -- --
Bankcard 274.6 126.5 93.6 32.8 32.1
Merchant participation 82.5 87.0 68.1 58.1 48.6
Other unsecured 129.3 142.9 160.0 92.8 92.4
Equipment financing and other 16.1 12.7 15.0 20.2 15.6
Foreign 56.7 70.5 92.4 92.0 62.2
-------- ------ ------ ------ ------
Finance and Banking 646.8 506.5 473.6 316.3 271.6
Liquidating Commercial Lines 172.9 203.3 228.7 73.0 33.5
Corporate 25.0 15.0 -- -- --
-------- ------ ------ ------ ------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT DECEMBER 31 $ 844.7 $724.8 $702.3 $389.3 $305.1
======== ====== ====== ====== ======
RATIO OF TOTAL CREDIT LOSS RESERVES TO MANAGED RECEIVABLES
Finance and Banking 2.22% 1.92% 1.92% 1.37% 1.41%
Liquidating Commercial Lines 14.53 12.56 12.38 3.22 1.53
-------- ------ ------ ------ ------
Total managed (2) 2.78% 2.59% 2.65% 1.53% 1.42%
======== ====== ====== ====== ======
</TABLE>
(1) Relates to the Finance and Banking segment.
(2) Includes credit loss reserve of the Corporate segment.
<PAGE> 11
OTHER CREDIT QUALITY STATISTICS
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
All dollar amounts are stated in millions. 1993 1992 1991 1990 1989
- ------------------------------------------ ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C>
NONACCRUAL MANAGED RECEIVABLES AT DECEMBER 31 (1)
First mortgage $ 25.6 $ 26.4 $ 25.1 $ 40.4 $ 31.2
Home equity 155.5 230.2 234.7 159.5 60.6
Other secured 20.5 12.9 23.2 13.1 --
Merchant participation 21.7 20.8 12.4 17.0 19.5
Other unsecured 153.5 173.7 194.8 156.8 121.2
Equipment financing and other 6.5 -- -- -- --
------ ----- -------- ------ ------
Domestic 383.3 464.0 490.2 386.8 232.5
Foreign 145.4 219.9 306.9 291.3 136.6
------ ----- -------- ------ ------
Finance and Banking nonaccrual managed receivables 528.7 683.9 797.1 678.1 369.1
Liquidating Commercial Lines nonaccrual managed receivables 228.7 259.2 257.6 157.6 145.2
------ ----- -------- ------ ------
Total nonaccrual managed receivables $757.4 $943.1 $1,054.7 $835.7 $514.3
====== ====== ======== ====== ======
RENEGOTIATED COMMERCIAL LOANS AT DECEMBER 31
Finance and Banking--domestic -- $ 1.6 $ 3.8 -- --
Liquidating Commercial Lines $ 28.7 196.8 202.6 $ 27.9 $ 10.2
------ ------ -------- ------ ------
Total renegotiated commercial loans $ 28.7 $198.4 $ 206.4 $ 27.9 $ 10.2
====== ====== ======== ====== ======
REAL ESTATE OWNED AT DECEMBER 31
Domestic $110.6 $124.5 $ 103.8 $ 29.7 $ 21.2
Foreign 58.3 73.0 83.6 28.6 3.7
------ ------ -------- ------ ------
Total Finance and Banking 168.9 197.5 187.4 58.3 24.9
Liquidating Commercial Lines 256.6 249.6 237.5 116.2 77.2
------ ------ -------- ------ ------
Total real estate owned $425.5 $447.1 $ 424.9 $174.5 $102.1
====== ====== ======== ====== ======
OTHER ASSETS ACQUIRED THROUGH FORECLOSURE AT DECEMBER 31
Finance and Banking--domestic $ 82.9 $102.6 $ 21.5 -- --
------ ------ -------- ------ ------
ACCRUING MANAGED RECEIVABLES 90 OR MORE DAYS DELINQUENT
AT DECEMBER 31 (2)
Domestic $197.0 $196.3 $ 180.0 $165.4 $110.4
Foreign 10.3 14.1 27.9 30.1 10.8
------ ------ -------- ------ ------
Total Finance and Banking $207.3 $210.4 $ 207.9 $195.5 $121.2
====== ====== ======== ====== ======
CONSUMER DELINQUENCY ON MANAGED RECEIVABLES AT DECEMBER 31 (3)
First mortgage 1.42% 1.08% 1.16% 1.19% 1.03%
Home equity 3.16 4.05 4.83 3.94 2.41
Other secured 1.38 2.71 5.35 4.77 1.65
Bankcard 2.41 2.70 4.39 3.20 2.27
Merchant participation 5.01 6.34 6.40 6.78 6.23
Other unsecured 6.63 7.77 8.62 8.69 7.71
------ ------ ------- ------ ------
Domestic 3.28 3.89 4.79 4.14 3.39
Foreign 5.82 8.08 10.22 9.09 5.66
------ ------ ------- ------ ------
Total consumer delinquency on managed receivables 3.58% 4.48% 5.72% 5.08% 3.86%
====== ====== ======== ====== ======
RATIO OF NET CHARGEOFFS TO AVERAGE MANAGED RECEIVABLES
First mortgage .35% .12% .15% .08% --
Home equity 1.00 .87 .67 .26 .11%
Other secured 1.79 1.04 .29 .19 --
Bankcard 3.84 5.69 4.87 4.00 3.66
Merchant participation 4.32 4.49 4.11 3.15 1.82
Other unsecured 6.10 7.21 5.78 4.37 5.35
------ ------ ------- ------ ------
Domestic 2.75 2.98 2.35 1.64 1.60
Foreign 3.88 5.51 4.99 2.13 1.14
------ ------ ------- ------ ------
Total consumer 2.90% 3.38% 2.83% 1.77% 1.50%
====== ====== ======= ====== ======
Finance and Banking 2.82% 3.27% 2.69% 1.65% 1.38%
Liquidating Commercial Lines 8.50 3.41 3.51 1.80 .56
------ ------ ------- ------ ------
Total ratio of net chargeoffs to average managed receivables 3.10% 3.28% 2.75% 1.66% 1.30%
====== ====== ======= ====== ======
</TABLE>
<PAGE> 12
(1) Excludes bankcard and private-label credit card receivables, consistent
with industry practice.
(2) Primarily includes bankcard and private-label credit card receivables.
(3) Consumer delinquency is defined as consumer receivables which are two
months or more contractually past due.
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
Household International, Inc. and Subsidiaries
BUSINESS SEGMENT DATA
The combination of the company's consumer and continuing commercial
product lines are referred to as Finance and Banking. Assets of liquidating
commercial product lines, which are separately managed as receivables are
collected or otherwise disposed of, have been disclosed separately in the
consolidated balance sheets and as a separate business segment, referred to as
Liquidating Commercial Lines. To better define and report the results of
operations, the company refers to its Finance and Banking and Individual Life
Insurance segments, net of corporate expenses, as its Core Business.
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1993 1992 1991
- ---------------------- --------- --------- ---------
<S> <C> <C> <C>
NET INCOME
Finance and Banking $ 303.2 $ 200.6 $ 289.4
Individual Life Insurance 45.2 41.7 35.0
Corporate (28.5) (37.4) (25.9)
--------- --------- ---------
Core Business 319.9 204.9 298.5
Liquidating Commercial Lines (21.2) (14.0) (148.7)
--------- --------- ---------
Total $ 298.7 $ 190.9 $ 149.8
========= ========= =========
ASSETS
Finance and Banking $24,362.5 $23,315.3 $22,631.9
Individual Life Insurance 6,959.0 5,926.2 5,273.8
Corporate 84.3 35.7 24.7
--------- --------- ---------
Core Business 31,405.8 29,277.2 27,930.4
Liquidating Commercial Lines 1,555.7 1,851.2 2,051.9
--------- --------- ---------
Total $32,961.5 $31,128.4 $29,982.3
========= ========= =========
RECEIVABLES OWNED
Finance and Banking $19,340.5 $18,449.3 $17,557.9
Liquidating Commercial Lines 1,189.9 1,619.0 1,846.6
--------- --------- ---------
Total $20,530.4 $20,068.3 $19,404.5
========= ========= =========
RECEIVABLES MANAGED
Finance and Banking $29,168.3 $26,395.6 $24,626.7
Liquidating Commercial Lines 1,189.9 1,619.0 1,846.6
--------- --------- ---------
Total $30,358.2 $28,014.6 $26,473.3
========= ========= =========
Receivables serviced with no recourse $15,229.4 $11,406.7 $7,820.2
========= ========= ========
</TABLE>
CONSOLIDATED RESULTS OF OPERATIONS
Net income in 1993 was a record $298.7 million, an increase of 56 percent
over 1992 net income of $190.9 million due to substantially improved earnings
in the Finance and Banking segment. Net income in 1992 was 27 percent higher
than 1991 earnings of $149.8 million when the company reported a large loss
in the Liquidating Commercial Lines segment associated with its decision to
withdraw from the higher-risk portion of its commercial business.
On September 14, 1993 the board of directors of the company declared a
two-for-one stock split in the form of a 100 percent stock dividend effective
October 15, 1993. All share and per share data have been restated to give
retroactive effect to the stock split, except where otherwise indicated. Fully
diluted earnings per share were $2.85 in 1993, up 48 percent from $1.93 in
1992, which were up 25 percent from $1.55 in 1991. During 1993 fully diluted
earnings per share were negatively impacted by the following: The enactment
of new Federal tax legislation which increased the statutory corporate income
tax rate from 34 percent to 35 percent retroactive to January 1, 1993, which
decreased earnings per share by $.09. Implementation of Statement of Financial
Accounting Standards No. 106 on postretirement benefits, which the company
adopted effective January 1, 1993, which reduced earnings per share by $.11.
Dilution created by the issuance of 4,025,000 shares (on a pre-split basis)
of common stock in March 1993, which reduced earnings per share by $.16.
The following summarizes key highlights of the company's operations
during 1993: The domestic Finance and Banking businesses increased earnings
over 1992 with the bankcard and consumer finance businesses showing the
greatest improvement. The bankcard business has grown substantially as a result
of an
<PAGE> 14
alliance with General Motors Corporation ("GM") in September 1992 to
issue a co-branded credit card, the GM Card. GM Card managed receivables
totaled approximately $4.9 billion, and the number of accounts totaled 5.9
million at December 31, 1993 in comparison to $1.8 billion in receivables and
2.7 million accounts a year earlier. The GM Card receivable growth generated
higher interest margins, securitization income and fee income, offset somewhat
by higher operating expenses related to servicing the GM Card and an increased
provision for credit losses. Domestic consumer finance earnings increased
primarily due to wider interest spreads on variable rate products and growth in
the managed portfolio. The low interest rate environment in the U.S. in 1993
resulted in lower earnings in the mortgage banking business due to mortgage
loan prepayments in excess of new originations, which negatively impacted
spreads in the owned portfolio. Additionally, prepayments in the serviced
mortgage portfolio resulted in write-downs of capitalized servicing rights.
Operating results of the foreign businesses improved despite weak economic
growth in the countries where the company operates. Collectively, foreign
operations lost $3.0 million compared to losses of $60.1 and $40.4 million in
1992 and 1991, respectively. The United Kingdom operation earned $10.3 million,
compared to losses of $45.9 and $16.9 million in 1992 and 1991, respectively.
This was the United Kingdom's first profitable year since 1988. The improvement
primarily was due to lower credit losses and improved operations related to
actions taken in prior years, including new management, tighter underwriting
standards, improved collections and reduced expenses. Canadian operations
reported a loss in 1993 comparable to those reported in 1992 and 1991.
Operating results continue to be negatively impacted by the sluggish Canadian
economic environment resulting in lower receivable volume. Additionally, in the
fourth quarter the company concluded the first phase of a strategic assessment
of its Canadian operations, including a review of market and economic
conditions, cost structure, products, policies and legal entity structure. As a
result of this assessment, the company recorded higher loss provision and other
expenses in the fourth quarter, which resulted in a higher loss than originally
anticipated. While the company has not completed its assessment, it currently
believes that 1994 may be impacted as operations are realigned and products
repositioned. The company believes, however, that the loss in the fourth
quarter is not indicative of future Canadian profitability and expects improved
performance in 1994. Australia was profitable in 1993, comparable with its 1992
operating results and currently is expected to remain profitable. Consumer
two-months-and-over contractual delinquency ("delinquency") continued to
decline throughout the year due to tighter credit standards implemented in
prior years and an improving economic environment. Total consumer delinquency
as a percent of managed consumer receivables was 3.58 percent at December 31,
1993, down significantly from 4.48 percent at December 31, 1992 and was at the
lowest level since 1989. The full year chargeoff ratio for the managed consumer
portfolio declined to 2.90 percent from 3.38 percent in 1992. Consumer managed
chargeoff ratios in the fourth quarter were slightly higher, as anticipated,
than the prior quarter level due to the maturing of the GM Card portfolio and
to the previously mentioned actions taken in Canada. Excluding the effect of
these items, the consumer managed chargeoff ratio in the fourth quarter would
have declined. Although 1993 delinquency and chargeoff levels were impacted by
the GM Card portfolio, the credit quality of the GM Card portfolio continued to
exhibit strong performance.
The company increased credit loss reserves for Finance and Banking
managed receivables by $140.3 million, or 28 percent, over 1992, despite a
$128.2 million decrease in delinquency. The increase was due to continued
caution regarding the uncertainty of the economic outlook, the shift in product
mix towards unsecured receivables from secured receivables due to the rapid
growth of the GM Card portfolio, continued relatively high chargeoff levels and
more conservative recognition of recourse obligations for receivables
serviced with limited recourse. Reserves, as a percent of the managed Finance
and Banking receivable portfolio, were at their highest level since the company
adopted the contractual basis of delinquency in 1990. Owned assets totaled
$33.0 billion at December 31, 1993, up 6 percent from year-end 1992. The
increase primarily was due to a 19 percent increase in the investment
securities portfolio, principally in the Individual Life Insurance segment, and
a 5 percent increase in owned Finance and Banking receivables.
Managed Finance and Banking receivables (owned receivables plus those
serviced with limited recourse) of the company's domestic consumer businesses
grew 14 percent in 1993. Excluding the first mortgage portfolio, which
contracted due to customer refinancings, managed receivables grew 21 percent.
The increase related primarily to growth of GM Card receivables, although the
other portfolios grew 6 percent during the year. Domestic growth was limited by
lower market demand than seen in previous years and by additional run-off of
second mortgages from customer loan refinancings. The first mortgage portfolio
declined 20 percent since year-end 1992. First mortgage loan originations,
although slow early in the year, increased sharply in the last three quarters.
However, prepayment activity remained high as mortgage rates reached their
lowest level in over two decades during 1993. The foreign consumer portfolio
declined 6 percent during the year due to weak economic conditions. Despite the
improvement in the domestic economy, all businesses have continued to apply the
stringent underwriting standards adopted in 1990 in anticipation of the
economic downturn. The Liquidating Commercial Lines ("LCL") segment experienced
an increased loss due to the resolution of the company's largest problem loan
<PAGE> 15
in the third quarter. The company reached a cash settlement on a nonaccrual
equipment finance loan which resulted in a higher chargeoff than expected and a
complete disposition of the loan, with no continuing involvement on the part of
the company. The company anticipates that future LCL results will improve. LCL
assets totaled $1.6 billion, down $295.5 and $496.2 million from year-end 1992
and 1991, respectively. This trend is consistent with management's strategy to
dispose of these assets over several years. Nonperforming LCL assets declined
$191.6 million during the year and reached their lowest level since June 1991.
Credit loss reserves at December 31, 1993 as a percent of both LCL receivables
and nonperforming loans increased over the year-ago period. In March 1993 the
company strengthened its capital position through the sale of 4,025,000 shares
of common stock at $67 per share, net of issuance costs (on a pre-split basis).
The ratio of common and preferred shareholders' equity (including convertible
preferred stock) to total assets was 7.33 percent at December 31, 1993, up from
6.04 percent at year-end 1992 and 5.89 percent at December 31, 1991. These
ratios reflect the adoption of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," which reduced total shareholders'
equity at December 31, 1992 and all prior periods by approximately $63 million
from the amounts previously reported. The ratio at December 31, 1993 also
includes the impact of the adoption of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," which increased total shareholders' equity on that date by
$40.5 million. In July 1993 Standard & Poor's Corporation upgraded its credit
rating outlook for the company and two wholly-owned subsidiaries, Household
Finance Corporation and Household Bank, f.s.b. In November 1993 Moody's
Investors Service, Inc. upgraded its credit ratings for the company and all
principally rated subsidiaries. These upgrades were a result of improving
trends in capital levels, asset quality and profitability.
CONSOLIDATED CREDIT LOSS RESERVES
<TABLE>
<CAPTION>
In millions.
At December 31 1993 1992
- -------------- ------ ------
<S> <C> <C>
Finance and Banking:
Owned $424.0 $345.8
Serviced with limited recourse 222.8 160.7
------ ------
Managed 646.8 506.5
Liquidating Commercial Lines 172.9 203.3
Corporate 25.0 15.0
------ ------
Total managed credit loss reserves $844.7 $724.8
====== ======
</TABLE>
The level of reserves for credit losses is based on delinquency and chargeoff
experience by product and management's evaluation of economic conditions,
including regional considerations. See Note 1, "Summary of Significant
Accounting Policies" on pages 57 and 58 in the accompanying financial
statements for further description of the basis for establishing such reserves.
The company serves commercial and several different consumer markets through
its consumer finance, credit card and consumer and mortgage banking operations.
At December 31, 1993 the company had 12 percent of its managed receivables
portfolio in first mortgages, which tend to have lower credit losses than other
types of receivables. Because of these factors, industry reserve comparisons
are less meaningful on an overall basis and reserves should be evaluated by
product. An analysis of credit loss reserves by product and other credit
quality statistics are shown on pages 35 through 37. While management
allocates reserves among the company's various products and segments, all
reserves are considered to be available to cover total loan losses.
During 1993 the company strengthened its managed credit loss reserves for
Finance and Banking receivables as described on page 39. Reserves for
Liquidating Commercial Lines decreased from year-end 1992 levels primarily
due to the continued disposition of LCL receivables, including the resolution
of a large nonaccrual equipment finance loan as described earlier. Despite the
dollar decrease in LCL reserve levels, credit loss reserves at December 31,
1993 as a percent of both LCL receivables and nonperforming loans increased
over December 31, 1992 and 1991.
In the first half of 1993, due to concern about the economic recovery and
its impact on both the consumer and commercial portfolios, the company further
strengthened total credit loss reserves by increasing the corporate credit loss
reserve by $10 million to $25 million.
<PAGE> 16
CONSOLIDATED CREDIT LOSS RESERVES (as a percent of receivables)
<TABLE>
<CAPTION>
At December 31 1993 1992
- -------------- ----- -----
<S> <C> <C>
OWNED
Finance and Banking 2.19% 1.87%
Liquidating Commercial Lines 14.53 12.56
----- -----
Total owned* 3.03% 2.81%
===== =====
MANAGED
Finance and Banking 2.22% 1.92%
Liquidating Commercial Lines 14.53 12.56
----- -----
Total managed* 2.78% 2.59%
===== =====
</TABLE>
*Includes credit loss reserve of the Corporate segment.
CREDIT MANAGEMENT POLICIES
The company's credit portfolios and credit management policies historically
have been divided into two distinct components--consumer and commercial.
For consumer products, credit policies focus on product type and specific
portfolio risk factors. The consumer credit portfolio is diversified by
product and geographic location. The commercial credit portfolio is monitored
by individual transaction as well as being evaluated by overall risk factors.
See Note 3, "Finance and Banking Receivables" and Note 4, "Liquidating
Commercial Assets" in the accompanying financial statements for receivables by
product type.
CONSUMER The consumer credit risk management process has four key elements:
Computerized scoring systems to assess the risk characteristics of new
applicants and monitor the payment behavior of existing customers for early
warning signs of troubled accounts. A centralized credit system for past due
accounts to make the collection process more productive and provide the
analytical capability to measure the effectiveness of collection strategies.
A chargeoff policy intended to eliminate problem loans early and improve the
quality of the remaining portfolio. A senior executive position of credit
risk manager in each consumer lending operation which places credit management
at a high level of priority and provides the means for the credit function to
interact more productively with other business functions.
Based on this credit risk management process, expected credit losses
for each consumer product are estimated on a statistical basis.
The company suspends accrual of interest on all consumer receivables
when payments are three months contractually past due, except for bankcards and
private-label credit cards. On these credit card receivables, consistent with
industry practice, interest continues to accrue until the receivable is charged
off. Consumer loans are charged off when an account is contractually delinquent
for a pre-established period of time. The period of time is dependent on the
terms, collateral and credit loss experience of each consumer product category.
This period ranges from 4 to 9 months.
The company's domestic consumer businesses lend funds nationwide, with
California accounting for 22 percent of total managed domestic consumer
receivables. It is the only state with receivables in excess of 10 percent of
domestic managed receivables. The company's foreign consumer operations,
located in Canada, the United Kingdom and Australia, accounted for 7, 4 and 1
percent, respectively, of managed consumer receivables at December 31, 1993.
Due to its centralized underwriting, collection and processing functions, the
company can quickly revise underwriting standards and intensify collection
efforts for specific geographic locations.
COMMERCIAL Commercial loans, in continued or discontinued product lines,
are underwritten based upon specific criteria by product, which include the
following items: borrower's financial strength, underlying value of collateral,
ability of the property/business to generate cash flow and pricing
considerations. For financing commitments in excess of $1 million, the loan
request must be approved by an investment committee consisting of senior
management. The financial and operating performance of all borrowers is
monitored and reported to management on an ongoing basis. Additionally, the
conclusions of this monitoring process are reported to senior management on a
quarterly basis. Substantially all commercial chargeoffs have related to the
product lines which are being liquidated.
The company administers a classification of assets policy whereby, on a
quarterly basis, all commercial credits are reviewed and assigned a rating
based on a process similar to that used by bank regulatory authorities. The
review process specifically addresses whether any commercial loans need to be
<PAGE> 17
charged off and uses the following criteria: (a) ability of the borrower to
make loan payments; (b) ability of the property or business to generate cash
flow; (c) value of collateral; (d) other debt associated with the property or
business; and (e) passage of title or in-substance possession of collateral.
The quarterly evaluation of the adequacy of credit loss reserves is based on
this review process and management's evaluation of probable future losses in
the portfolio as a whole given its geographic and industry diversification and
historical loss experience. Management also evaluates the potential impact of
existing and anticipated economic conditions on the portfolio in establishing
credit loss reserves.
Commercial loans are placed on nonaccrual when they become 90 days past
due, or sooner if the company believes that the loan has experienced
significant adverse developments that could result in a loss of interest or
principal. There are no commercial loans that are 90 days past due and on full
accrual status. Loans are disclosed as renegotiated loans or troubled debt
restructurings if the rate of interest has been reduced because of the
inability of the borrower to meet the original terms of the loan. Such loans
continue to accrue interest at the renegotiated rate, unless they become 90
days past due, because the company believes the borrowers will be able to meet
their obligations following the restructuring.
Commercial loans that are modified in the normal course of business, for
which additional consideration is received or significant concessions are
not made, are not reported as renegotiated loans or troubled debt
restructurings. Real estate owned is recorded at the lower of cost or fair
value less estimated costs to sell. These values are periodically reviewed
and reduced, if appropriate.
FINANCE AND BANKING
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
Year ended December 31 1993 1992 1991
- ------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Finance income $ 2,448.3 $ 2,436.9 $ 2,814.9
Interest income from noninsurance investment securities 129.2 152.6 179.9
Interest expense 1,066.4 1,269.8 1,680.2
--------- --------- ---------
Net interest margin 1,511.1 1,319.7 1,314.6
--------- --------- ---------
Securitization and servicing fee income 460.0 376.0 398.3
Insurance premiums and contract revenues 160.4 169.9 189.7
Investment income 33.6 42.0 49.6
Fee income 290.6 163.5 103.1
Other income 127.3 94.1 110.3
--------- --------- ---------
Other revenues 1,071.9 845.5 851.0
--------- --------- ---------
Net interest margin and other revenues 2,583.0 2,165.2 2,165.6
Provision for credit losses on owned receivables 635.7 621.2 583.2
Costs and expenses:
Operating expenses 1,415.6 1,163.9 1,055.1
Policyholders' benefits 82.2 86.2 94.4
Income taxes 146.3 93.3 143.5
--------- --------- ---------
Net income $ 303.2 $ 200.6 $ 289.4
========= ========= =========
End-of-period receivables:
Owned $19,340.5 $18,449.3 $17,557.9
Serviced with limited recourse 9,827.8 7,946.3 7,068.8
--------- --------- ---------
Receivables managed 29,168.3 26,395.6 24,626.7
Serviced with no recourse 15,229.4 11,406.7 7,820.2
--------- --------- ---------
Receivables owned or serviced $44,397.7 $37,802.3 $32,446.9
========= ========= =========
Average receivables:
Owned $19,325.8 $18,119.7 $18,750.3
Serviced with limited recourse 8,258.4 6,826.3 5,218.9
--------- --------- ---------
Average receivables managed 27,584.2 24,946.0 23,969.2
Serviced with no recourse 13,021.8 9,208.4 6,097.4
--------- --------- ---------
Average receivables owned or serviced $40,606.0 $34,154.4 $30,066.6
========= ========= =========
End-of-period deposits $ 7,516.1 $ 8,030.3 $ 7,969.6
--------- --------- ---------
Return on average owned assets 1.24% .87% 1.23%
--------- --------- ---------
</TABLE>
<PAGE> 18
OVERVIEW Domestic Finance and Banking earnings increased to $306.2
million from $260.7 million in 1992 primarily due to improved operating results
in the bankcard and consumer finance businesses, partially offset by reduced
earnings in the mortgage banking operations as discussed earlier. Earnings from
continuing commercial activities declined due to reduced margin, lower levels
of earning assets in the company's aircraft portfolio and lower gains on
dispositions of assets. The company anticipates increased profitability from
its continuing commercial activities in 1994, but below results achieved in
previous years. If domestic economic conditions meet the expectations of
economists and continue to improve, the company expects higher earnings in 1994
in its bankcard and consumer finance businesses. The expected increases will be
partially offset by lower earnings in the consumer banking business due to
lower yields on first mortgage receivables.
Foreign operations in total lost $3.0 million, compared to losses of $60.1
and $40.4 million in 1992 and 1991, respectively. The improvement was
attributable to the United Kingdom operation which earned $10.3 million,
compared to net losses of $45.9 million in 1992 and $16.9 million in 1991. In
October 1993 GM announced the expansion of its GM Card alliance with the
company into the United Kingdom. Although the start-up of this venture will
reduce 1994 earnings, the company expects continued improvement in the United
Kingdom's 1994 operating results due to continued improvement in the strength
of its underlying business.
RECEIVABLES Domestic consumer managed receivables, excluding
receivables of the mortgage banking operation, increased 21 percent in 1993.
Foreign receivables declined 6 percent over the same period, from $3.6 billion
at December 31, 1992 to $3.4 billion at December 31, 1993. See Consolidated
Results of Operations on page 39 for further discussion.
Receivables owned were $19.3 billion at December 31, 1993, up 5 percent
from $18.4 billion at December 31, 1992. Changes in owned receivables from
period to period may vary depending on the timing and significance of
securitization transactions in a particular period. The company securitized and
sold with limited recourse approximately $4.5 billion of receivables compared
to $2.2 billion in 1992.
Since 1989, securitizations and sales of consumer receivables have
been an important source of liquidity for the company. The company continues
to service the securitized receivables after such receivables are sold and
retains a limited recourse obligation. Securitizations impact the
classification of revenues and expenses in the income statement. Amounts
related to receivables serviced, including net interest margin, fee income,
such as interchange fees, and provision for credit losses on receivables
serviced with limited recourse are reported as a net amount in securitization
and servicing fee income in the company's statements of income.
The company monitors its Finance and Banking segment on a managed
basis as well as on the historical owned basis reflected in its statements of
income. The managed basis assumes that the receivables securitized and sold are
instead still held in the portfolio. Pro forma statements of income on a
managed basis for the Finance and Banking segment for 1993 and 1992 are
presented below. For purposes of this analysis, the results do not reflect the
differences between the company's accounting policies for owned receivables and
receivables serviced with limited recourse. Accordingly, net income on the pro
forma managed basis equals net income on an historical owned basis.
<PAGE> 19
PRO FORMA MANAGED FINANCE AND BANKING STATEMENTS OF INCOME
<TABLE>
<CAPTION>
AS A PERCENT As a Percent
OF AVERAGE of Average
All dollar amounts are stated in millions. MANAGED INTEREST- Managed Interest-
Year ended December 31 1993 EARNING ASSETS 1992 Earning Assets
- ------------------------------------------ --------- ----------------- --------- -----------------
<S> <C> <C> <C> <C>
Finance income $ 3,450.2 11.6% $ 3,357.5 12.4%
Interest income from noninsurance investment securities 129.2 .4 152.6 .6
Interest expense 1,457.5 4.9 1,654.9 6.1
--------- ---- --------- ----
Net interest margin 2,121.9 7.1 1,855.2 6.9
--------- ---- --------- ----
Servicing fee income 24.0 .1 19.1 .1
Insurance premiums and contract revenues 160.4 .6 169.9 .6
Investment income 33.6 .1 42.0 .1
Fee income 396.8 1.3 236.0 .9
Other income 127.3 .4 94.1 .3
--------- ---- --------- ----
Other revenues 742.1 2.5 561.1 2.0
--------- ---- --------- ----
Net interest margin and other revenues 2,864.0 9.6 2,416.3 8.9
Provision for credit losses 916.7 3.1 872.3 3.2
Costs and expenses:
Operating expenses 1,415.6 4.7 1,163.9 4.3
Policyholders' benefits 82.2 .3 86.2 .3
Income taxes 146.3 .5 93.3 .4
--------- ---- --------- ----
Net income $ 303.2 1.0% $ 200.6 .7%
========= ==== ========= ====
Average receivables managed $27,584.2 $24,946.0
Average noninsurance investments 2,106.1 2,089.0
--------- ---------
Average managed interest-earning assets $29,690.3 $27,035.0
========= =========
</TABLE>
The following discussion on revenues, where applicable, and provision
for credit losses includes comparisons to amounts reported on the company's
historical statements of income ("Owned Basis") as well as on the above pro
forma statements of income ("Managed Basis").
NET INTEREST MARGIN Net interest margin on an Owned Basis was $1.5 billion,
up from $1.3 billion in 1992 due to higher levels of interest-earning assets,
wider spreads on variable rate products and a shift in product mix towards
higher yielding bankcard receivables and away from lower yielding first
mortgages. Spreads on variable rate products in 1993 exceeded those achieved
in the prior year periods. The company does not anticipate that spreads in 1994
will remain at the level reached in 1993. Net interest margin on an Owned
Basis as a percent of average owned interest-earning assets was 7.0 percent,
compared to 6.5 percent in 1992 and 6.2 percent in 1991. See further analysis
in the net interest margin table on pages 78 and 79.
Net interest margin on a Managed Basis increased to $2.1 billion from
$1.9 billion in 1992 and, as a percent of average managed interest-earning
assets, increased to 7.1 percent from 6.9 percent in 1992. Net interest margin
on a Managed Basis is greater than on an Owned Basis because credit card
receivables, which have wider spreads, are a larger portion of the portfolio
serviced with limited recourse than of the owned portfolio.
OTHER REVENUES Securitization and servicing fee income on an Owned Basis
consists of two components: income associated with the securitization and
sale of receivables with limited recourse and servicing fee income related
to the servicing of first mortgage loans which have been sold with no recourse,
and unsecured receivables. Securitization income on an Owned Basis, which
includes net interest income, fee income and provision for credit losses
related to receivables serviced with limited recourse, increased in 1993 as
the total managed receivables portfolio continued to grow. The components of
securitization income are reclassified to the applicable line in the statements
of income on a Managed Basis.
Servicing fee income increased in 1993, consistent with the serviced
receivable portfolio growth. Average receivables serviced with no recourse
increased to $13.0 billion, up from $9.2 billion in 1992 and $6.1 billion in
1991. The portfolio of loans serviced for others continued to grow due to
acquisitions of first mortgage loan servicing rights and sales of originated
first mortgages to investors with servicing rights retained. Portfolio growth,
however, has been impacted by high levels of prepayments on first mortgage
loans associated with the low domestic interest rate environment. In the third
quarter of 1993, the company began servicing an unsecured consumer loan
<PAGE> 20
portfolio without recourse which totaled $1.3 billion at December 31, 1993.
Growth in servicing income in 1993 related to the portfolio growth was
substantially offset by write-downs of $29 million in the value of first
mortgage capitalized servicing rights. The company continually monitors
overall market conditions and their effect on prepayments of first mortgage
loans and on the carrying value of capitalized servicing rights. The carrying
value is adjusted when appropriate. The company currently anticipates
that interest rates and prepayments will stabilize in 1994 and mitigate the
exposure for future write-downs of capitalized servicing rights.
Insurance premiums and contract revenues of $160.4 million were down
from $169.9 million in 1992 and $189.7 million in 1991 due to lower sales
volumes of specialty and credit insurance in the United Kingdom operation.
Investment income of $33.6 million in 1993 declined due to lower
capital gains and lower yields on the insurance investment portfolio in the
United Kingdom.
Fee income on an Owned Basis includes revenues from fee-based
products such as bankcards, consumer banking deposits and private-label credit
cards, as well as commission income from the company's brokerage business. Fee
income was $290.6 million, up substantially from $163.5 million in 1992 and
$103.1 million in 1991 primarily due to interchange and other fees relating to
owned GM Card receivables. The GM Card was introduced in September 1992.
Fee income on a Managed Basis, which in addition to the items discussed
above, includes other fees related to receivables serviced with limited
recourse. Fee income increased from $236.0 million in 1992 to $396.8 million in
1993. This increase reflects the items discussed above as well as a significant
increase in interchange income related to GM Card receivables that have been
securitized and sold with limited recourse.
Other Income is primarily comprised of recurring items in the ordinary
course of business. Other income in 1993 was up due to increased gains on the
sale of held-for-trade first mortgage receivables, increased gains from the
company's proprietary trading activities and higher gains from sales of loan
portfolios.
PROVISION FOR CREDIT LOSSES The provision for credit losses for
receivables on an Owned Basis totaled $635.7 million, up 2 percent from $621.2
million in 1992 and up 9 percent from 1991's level.
The provision for credit losses for receivables on a Managed Basis
totaled $916.7 million in 1993, an increase of 5 percent from $872.3 million in
1992. As a percent of managed interest-earning assets, the provision decreased
slightly to 3.1 percent from 3.2 percent in 1992, reflecting the underlying
improvement in the credit quality of the managed portfolio, which experienced
lower delinquency and chargeoffs in 1993. Despite the lower provision expressed
as a percent of managed interest-earning assets, total Finance and Banking
managed reserves as a percent of managed receivables increased from 1.92
percent at December 31, 1992 to 2.22 percent at December 31, 1993. See the
credit quality section beginning on this page for further discussion of factors
affecting the provision for credit losses.
EXPENSES Operating expenses, which the company defines as salaries and
fringe benefits plus other operating expenses, were $1.4 billion, up 22 percent
over 1992. Operating expenses as a percent of average receivables owned or
serviced increased to 3.49 percent compared to 3.41 percent in 1992 and 3.51
percent in 1991. Operating expenses in 1993 increased slightly faster than
growth in the receivable base primarily due to higher costs associated with
servicing the 54 percent increase in bankcard receivables. The company
anticipates that the operating expense ratio will decline in 1994 as costs
associated with the credit card growth stabilize and the receivables base
continues to grow. Headcount for the Finance and Banking segment at December
31, 1993 was approximately 15,800, up 12 percent from the prior year primarily
due to credit card growth.
The effective tax rate was 32.5 percent compared to 31.7 percent in
1992 and 33.1 percent in 1991. The effective tax rate in 1993 included the
impact of the increase in the statutory federal income tax rate from 34 percent
to 35 percent.
CREDIT QUALITY
The company experienced improved credit quality in virtually all
product categories during 1993, both domestically and in foreign operations.
These improvements were a result of better domestic economic conditions and
the higher quality of recently originated receivables. At year-end 1993
delinquency had fallen for seven consecutive quarters. Chargeoffs in 1993 were
below the prior year. Overall portfolio statistics in 1993 were impacted by a
change in product mix as bankcard receivables became a larger portion of the
overall managed portfolio, and first mortgages became a smaller portion.
Because bankcard receivables have higher delinquency and chargeoff rates than
first mortgages, this change in product mix has the result of increasing the
overall delinquency and chargeoff statistics of the portfolio as a whole. In
addition, credit quality statistics also were impacted by the anticipated
higher delinquency and chargeoffs related to the seasoning of the GM Card
portfolio. However, the credit quality of the GM Card portfolio continued to
<PAGE> 21
exhibit strong performance.
DELINQUENCY Delinquency levels are monitored for both receivables
owned and receivables managed. The company looks at delinquency levels which
include receivables serviced with limited recourse because this portfolio is
subjected to underwriting standards comparable to the owned portfolio, is
managed by operating personnel without regard to portfolio ownership and
results in a similar credit loss exposure for the company.
Total delinquent receivables at December 31, 1993 were $128 million
lower than a year earlier despite higher receivable levels. This improvement
consisted of a $35 million decrease in the domestic operations and a $93
million decrease in the foreign operations. Delinquency as a percent of managed
consumer receivables fell 20 percent in 1993 and was the lowest since 1989.
The company currently believes the positive trend in delinquency ratios
will continue but recognizes the trend may moderate in future periods. Further
improvement will depend on the extent and timing of improvement in economic
conditions in the various countries where the company operates, the composition
of the managed receivables base and the maturation of the GM Card portfolio.
TWO-MONTHS-AND-OVER CONTRACTUAL DELINQUENCY
(as a percent of managed consumer receivables)
<TABLE>
<CAPTION>
1993 QUARTER END 1992 Quarter End
---------------------------------- --------------------------------
4 3 2 1 4 3 2 1
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC
First mortgage 1.42% 1.21% 1.15% 1.27% 1.08% 1.02% .95% .99%
Home equity 3.16 3.38 3.20 3.46 4.05 4.34 4.60 5.28
Other secured 1.38 1.83 3.20 2.80 2.71 3.45 5.17 6.23
Bankcard 2.41 2.57 2.47 2.58 2.70 4.16 4.31 4.41
Merchant participation 5.01 5.43 5.73 6.36 6.34 6.80 6.44 6.44
Other unsecured 6.63 7.23 7.46 7.53 7.77 8.09 8.17 8.68
---- ---- ----- ------ ----- ----- ----- -----
Total domestic 3.28 3.50 3.46 3.68 3.89 4.39 4.54 4.90
---- ---- ----- ------ ----- ----- ----- -----
FOREIGN
Canada 4.65 5.11 5.61 6.00 6.17 6.82 6.79 7.52
United Kingdom 6.74 7.34 8.37 9.31 10.13 11.39 12.93 13.77
Australia 8.93 9.59 10.95 12.06 12.48 12.21 12.08 14.14
---- ---- ----- ------ ----- ----- ----- -----
Total foreign 5.82 6.32 7.06 7.68 8.08 8.95 9.51 10.36
---- ---- ----- ------ ----- ----- ----- -----
Total 3.58% 3.85% 3.93% 4.24% 4.48% 5.10% 5.36% 5.79%
==== ==== ===== ====== ===== ===== ===== =====
</TABLE>
DOMESTIC DELINQUENCY First mortgage delinquency increased during the
fourth quarter of 1993 and remained higher than the December 31, 1992 level,
primarily due to the maturation of the portfolio coupled with continued weak
regional economic conditions. Overall, the first mortgage portfolio has had a
relatively stable and low rate of delinquency compared to industry averages and
has not deviated from a reasonable range since the beginning of the economic
downturn in the second half of 1990. The company believes this favorable
delinquency comparison was due to low-risk product offerings and tight
underwriting standards, which are adjusted for region-specific market
conditions. At December 31, 1993 the weighted average loan-to-value ratio was
approximately 70 percent for the first mortgage portfolio.
Home equity delinquency declined during the fourth quarter of 1993 and
remained below the year-end 1992 level. Home equity delinquency was the lowest
since December 1990 and was down approximately 40 percent from the peak in the
first quarter of 1992. The improvement was a result of tighter underwriting
standards instituted at the start of the recent economic downturn and
improvements in the economy. Vintage analysis of home equity loans originated
after June 1991 continued to demonstrate the favorable performance of recently
underwritten receivables.
The delinquency level for other secured receivables at December 31,
1993 decreased from the prior quarter and prior year, but did not impact total
delinquency due to the small size of the portfolio.
Bankcard delinquency declined compared to the prior quarter and was
below the December 1992 level. The improvement was due to growth in the GM
Card, as accounts were added to the receivable base but, due to their newness,
did not contribute significantly to delinquency. As GM Card accounts have
aged, their contribution to delinquency has increased, and is expected to
continue to increase.
Merchant participation delinquency levels continued to decline in the
fourth quarter of 1993 and were below the year-end 1992 level. The steady
decline during 1993 was the result of an improved economy coupled with tighter
underwriting standards and a greater focus on association with low delinquency
<PAGE> 22
merchants.
The delinquency level for other unsecured receivables decreased in the
1993 fourth quarter and has fallen for seven consecutive quarters. This steady
decline was due to the improvement of the quality of receivables recently
underwritten combined with improved economic conditions. The company
anticipates further improvement in this portfolio. Since chargeoff rates on
unsecured receivables are much higher than secured receivables, improvements in
delinquency are significant in evaluating potential future credit losses.
FOREIGN DELINQUENCY Foreign delinquency continued to show improvement
from the prior quarter and from the 1992 fourth quarter. United Kingdom
delinquency, which is based on a portfolio of primarily unsecured products,
continued to decline and was at its lowest level since February 1990. The
improvement was due to tightened underwriting standards implemented in the
early 1990's resulting in better quality of receivables originated. Delinquency
in Canada also continued to improve due to improved underwriting standards
instituted in 1991 and 1990. Delinquency levels in Australia continued to
improve as well; however, due to the relatively small size of the receivable
portfolio, the decrease in delinquency had a small impact on total delinquency
for both the foreign operations and the company. The company expects that
foreign delinquency will continue to show improvement. However, further
improvement will depend on the extent and timing of improvement in economic
conditions in the countries where the company operates.
NONPERFORMING ASSETS The decrease in nonaccrual managed receivables
during 1993 primarily was due to improvements in the domestic consumer finance
and United Kingdom operations. Consumer real estate owned declined due to fewer
properties entering foreclosure, an improved domestic housing market and
stabilizing home values, which have contributed to a quicker liquidation of the
inventory of properties.
As part of continuing commercial activities, the company held at
December 31, 1993 approximately $83 million of aircraft acquired through
foreclosure of loans and leases. The company is actively marketing these
aircraft for sale or lease. However, due to the current economic condition of
the airline industry, the company is uncertain about the timing of the
disposition of these aircraft. These aircraft were recorded at date of
acquisition at the lower of cost or fair value, with such values subsequently
being depreciated over their estimated remaining useful lives.
NONPERFORMING ASSETS--FINANCE AND BANKING SEGMENT
<TABLE>
<CAPTION>
DEC. 31, Sept. 30, Dec. 31, Dec. 31,
All dollar amounts are stated in millions. 1993 1993 1992 1991
- ------------------------------------------ ------- -------- -------- --------
<S> <C> <C> <C> <C>
Nonaccrual managed receivables $528.7 $ 565.4 $ 683.9 $ 797.1
Accruing managed receivables 90 or more days delinquent 207.3 198.5 210.4 207.9
Renegotiated commercial loans -- -- 1.6 3.8
------ -------- -------- --------
Total nonperforming managed receivables 736.0 763.9 895.9 1,008.8
------ -------- -------- --------
Real estate owned 168.9 193.1 197.5 187.4
Other assets acquired through foreclosure 82.9 84.4 102.6 21.5
------ -------- -------- --------
Total nonperforming assets $987.8 $1,041.4 $1,196.0 $1,217.7
====== ======== ======== ========
Credit loss reserves for managed receivables as a percent
of nonperforming managed receivables 87.9% 76.6% 56.5% 46.9%
------ -------- -------- --------
</TABLE>
CHARGEOFFS Chargeoffs decreased in 1993 as a result of improved delinquency
trends and better domestic economic conditions.
The following table presents chargeoffs on a full year and quarterly
basis, by product:
NET CHARGEOFFS OF CONSUMER RECEIVABLES
(as a percent of average consumer receivables managed)
<TABLE>
<CAPTION>
1993 QUARTER ANNUALIZED 1992 Quarter Annualized
FULL YEAR ----------------------------- Full Year ----------------------------- Full Year
1993 4 3 2 1 1992 4 3 2 1 1991
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC
First mortgage .35% .21% .59% .40% .20% .12% .15% .12% .12% .10% .15%
</TABLE>
<PAGE> 23
<TABLE>
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Home equity 1.00 1.17 .87 .98 .98 .87 1.16 .85 .68 .75 .67
Other secured 1.79 .64 3.11 3.51 (.07) 1.04 2.03 .61 .60 .94 .29
Bankcard 3.84 3.99 3.78 3.43 4.20 5.69 5.18 6.64 6.02 5.05 4.87
Merchant participation 4.32 4.26 4.44 4.02 4.57 4.49 4.60 4.30 4.69 4.37 4.11
Other unsecured 6.10 5.41 5.99 6.62 6.42 7.21 6.91 7.27 7.57 6.98 5.78
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total domestic 2.75 2.82 2.78 2.66 2.75 2.98 3.07 3.08 2.98 2.77 2.35
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
FOREIGN
Canada 3.16 3.86 2.83 2.83 3.18 3.84 3.70 3.55 4.26 3.85 3.82
United Kingdom 5.22 4.07 4.62 5.55 6.72 9.13 8.64 9.06 9.30 9.46 8.11
Australia 3.77 3.77 2.61 3.38 5.21 3.33 3.48 3.17 2.64 4.05 2.49
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total foreign 3.88 3.92 3.38 3.73 4.46 5.51 5.18 5.37 5.74 5.72 4.99
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total 2.90% 2.96% 2.86% 2.81% 2.99% 3.38% 3.38% 3.46% 3.43% 3.26% 2.83%
===== ===== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
Net chargeoffs as a percent of average consumer receivables managed were
2.90 percent, down from 3.38 percent in 1992, due to improvements in the foreign
operations, primarily the United Kingdom, and in domestic other unsecured
receivables. The net chargeoff ratio for the full year also benefited from the
growth in GM Card receivables, which due to their recent origination, had
minimal chargeoffs during the year. Excluding the effect of the GM Card program,
the total chargeoff ratio decreased from 3.41 percent in 1992 to 3.12 percent in
1993.
Chargeoffs are a lagging indicator of credit quality and generally
reflect prior delinquency trends. As previously discussed, overall delinquency
levels have continued to decline. However, net chargeoffs in the last two
quarters of 1993 did not follow this trend primarily due to the one-time
chargeoffs in Canada during the fourth quarter and the impact of the GM Card
which contributed 9 and 10 basis points, respectively, to the increase in the
total net chargeoff ratio in the fourth quarter. These increases were offset by
a 9 basis point improvement in other domestic product lines and in the United
Kingdom operations.
Growth associated with the GM Card portfolio has resulted in a shift in
product mix toward bankcard receivables, which have higher chargeoff rates than
secured receivables. Although GM Card chargeoffs remained better than
management's expectations, they increased during the year, offsetting
improvements in other categories. The company anticipates that chargeoffs
associated with the GM Card will continue to increase in the near term as the
portfolio matures. These increases are expected to be offset by further
improvement in other domestic products and in foreign operations. However,
future improvement in net chargeoffs may be impacted by factors such as a shift
in product mix toward bankcard receivables, economic conditions and the impact
of personal bankruptcies. Consequently, the extent and timing of an overall
improved chargeoff trend remains uncertain.
Domestic net chargeoffs were 2.75 percent for the year, down from 2.98
percent in 1992 due to improvements in the unsecured portfolios. Net chargeoffs
for first mortgages increased in 1993 compared to 1992 but declined in the
fourth quarter. The first mortgage chargeoff ratio continued to be affected by
the maturation of the portfolio and weak regional economic conditions. Home
equity chargeoffs increased slightly on both a year-over-year basis and in the
fourth quarter as this portfolio continued to be impacted by weak economic
conditions in the western region. Net chargeoffs for other secured receivables
did not significantly impact total chargeoffs as these receivables represented
approximately 3 percent of total managed receivables at year end.
In the domestic unsecured portfolios, bankcard net chargeoffs declined
in 1993 compared to the prior year. While the bankcard and total domestic
chargeoff ratios benefited from the GM Card program throughout 1993, this
positive contribution decreased in the latter half of the year and resulted in
an overall increase in bankcard chargeoffs in the last two quarters as the GM
Card receivables matured. Net chargeoffs of merchant participation and other
unsecured receivables were below both the 1992 level and the prior quarter.
These improvements were consistent with the downward trend in delinquency in
these portfolios.
Foreign net chargeoffs declined in 1993 but increased in the fourth
quarter of 1993 compared to the third quarter despite continued improvement
in the United Kingdom operations. Chargeoffs in Canada were lower on a
year-to-date basis but higher during the fourth quarter related to one-time
chargeoffs as previously discussed. Excluding these one-time chargeoffs, the
Canadian chargeoff ratio in the fourth quarter would have been 2.92 percent,
and the total foreign chargeoff ratio in the fourth quarter would have been
3.23 percent. Chargeoffs in Australia increased year-over-year and during
the fourth quarter. However, due to the size of the receivable portfolio,
Australia's chargeoffs did not significantly impact the overall chargeoff
level of the company.
<PAGE> 24
INDIVIDUAL LIFE INSURANCE
Individual Life Insurance net income was $45.2 million, up 8 percent from 1992
due to higher investment income resulting from gains on the sale of
available-for-sale investments, a larger investment portfolio and higher
levels of contract revenues from individual life and annuity contracts.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
Year ended December 31 1993 1992 1991
- ------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Investment and other income $ 540.4 $ 481.7 $ 421.9
Contract revenues 127.9 111.3 98.7
--------- --------- ---------
Total revenues 668.3 593.0 520.6
--------- --------- ---------
Costs and expenses:
Policyholders' benefits 456.9 427.7 377.8
Operating expenses 140.2 102.1 95.2
Income taxes 26.0 21.5 12.6
--------- --------- ---------
Net income $ 45.2 $ 41.7 $ 35.0
========= ========= =========
Sales $ 652.2 $ 736.3 $ 655.6
--------- --------- ---------
Life insurance in force $32,371.6 $28,390.4 $25,280.8
--------- --------- ---------
Return on average assets .72% .73% .71%
--------- --------- ---------
</TABLE>
Investment securities for the Individual Life Insurance segment totaled
$6.4 billion, up from $5.3 billion at December 31, 1992. This portfolio
represented 73 percent of the company's total investment portfolio at December
31, 1993. During 1993 the company continued to emphasize conservative
investment strategies. Higher-risk securities, which include non-investment
grade bonds, common and preferred stocks, commercial mortgage loans and real
estate, represented 7 percent of the insurance investment portfolio at December
31, 1993, compared to 9 percent at December 31, 1992. Commercial real estate
loans totaled less than 2 percent of Individual Life Insurance segment
investments at December 31, 1993. At December 31, 1993 there were no
significant nonaccrual or renegotiated loans in this portfolio. Commercial
real estate acquired in foreclosure, which is included in the investment
portfolio, totaled $12.4 million. Underwriting standards and credit monitoring
procedures for these residential and commercial real estate loans are similar
to those described in the credit management policy section on page 41.
At December 31, 1993 the market value of the insurance held-to-maturity
investment portfolio was 108 percent of the amortized cost. Reductions in
market value which are determined to be other than temporary are charged to
income as realized losses. There were no unrealized losses in the insurance
investment portfolio at December 31, 1993 which would materially impact
current or future earnings or the capital position of the company.
Investment and other income was $540.4 million in 1993, a 12 percent
increase over 1992. The improvement was primarily due to higher gains on
sales of available-for-sale investments. These investments were sold
consistent with pre-established interest rate and exchange rate policies. A
substantially larger investment portfolio, partially offset by lower yields
on investments, also contributed to the increase in investment income.
Contract revenues also increased in 1993 due to higher levels of insurance
in force.
Policyholders' benefits were $456.9 million, a 7 percent increase over
1992 due to increased life insurance and annuity contracts.
Operating expenses were $140.2 million compared with $102.1 and $95.2
million in 1992 and 1991, respectively. Both the 1993 and 1992 increases were
due to higher amortization of deferred insurance policy acquisition costs
("DAC"). The higher levels of DAC amortization resulted from increased gross
profits on universal life and deferred annuity products. Amortization rates are
based on estimated lifetime gross profits and are periodically adjusted as
required by generally accepted accounting principles. Unamortized insurance
policy acquisition costs totaled $381.6 million at December 31, 1993. In the
event of policy surrender, the write-off of unamortized insurance policy
acquisition costs would be offset by surrender charges to the policyholder.
Surrender charges on policies for which acquisition costs have been capitalized
approximated $490 million at December 31, 1993.
The effective income tax rate was 36.5 percent compared to 34 and 26.5
percent in 1992 and 1991, respectively. The 1993 effective tax rate included
the impact of the retroactive increase to January 1, 1993 in the statutory
federal income tax rate from 34 percent to 35 percent. The 1991 income tax rate
<PAGE> 25
was favorably impacted as a result of the resolution of prior years' tax
matters.
LIQUIDATING COMMERCIAL LINES
The 1993 net loss for the Liquidating Commercial Lines segment was $21.2
million, compared to a loss of $14.0 million in 1992. The net loss was higher
primarily due to the previously described resolution of the company's largest
problem loan. The company expects future results of operations for this segment
to improve.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1993 1992 1991
- ---------------------- ------ ------ -------
<S> <C> <C> <C>
Interest margin $ 59.3 $ 38.0 $ 65.7
Other revenues 22.9 11.9 (2.6)
------ ------ -------
Interest margin and other revenues 82.2 49.9 63.1
Provision for credit losses 90.1 35.3 260.0
Operating expenses 21.6 37.6 43.9
------ ------ -------
Loss before income taxes (29.5) (23.0) (240.8)
Income tax benefit (8.3) (9.0) (92.1)
------ ------ -------
Net loss $(21.2) $(14.0) $(148.7)
====== ====== =======
</TABLE>
Interest margin increased over 1992 primarily due to wider spreads and
gains on terminating debt and related hedges associated with assets which have
been liquidated. Other revenues increased due to the company's 25 percent
equity investment in a commercial joint venture of liquidating assets made in
1993. See page 41 for a discussion of factors impacting the determination of
provision for credit losses. Operating expenses declined 43 percent due to
lower write-downs and net expenses for real estate owned and other expenses.
Loans decreased 27 percent in 1993 to $1.2 billion. Commercial real
estate loans and acquisition finance and other loans declined during the year.
Acquisition finance receivables at December 31, 1993 totaled $717.3
million and consisted of 27 individual credit extensions. The average credit
extension was $27 million and the largest credit extension was $50 million. The
company defines highly leveraged acquisition finance receivables as corporate
loans to finance the buyout, acquisition or recapitalization of an existing
business, in which the debt and equity subordinated to the company's claims in
a borrower are less than 25 percent of the borrower's total assets. The company
had unfunded secured working capital lines and letters of credit related to
these acquisition finance borrowers of $98 million at December 31, 1993.
Lending for highly leveraged acquisition finance loans was discontinued in
1991.
Nonperforming commercial assets decreased 27 percent during 1993 to
$514.0 million. Nonaccrual loans at December 31, 1993 were down 12 percent
compared to the December 31, 1992 level, while renegotiated loans declined by
$168.1 million during the year. The previously mentioned problem equipment
finance loan was transferred during the year from renegotiated loan status to
nonaccrual loan status prior to being resolved. Despite the resolution of this
credit, the ratio of reserves to nonperforming loans increased to 67.2 percent
at December 31, 1993 from 44.6 percent at December 31, 1992. Real estate owned
was flat with the prior year.
The company expects the longer term downward trend in nonperforming
assets to continue, although it may stabilize in the near future before
decreasing. The future level of nonperforming assets will depend, in part, on
the timing and extent of economic recovery. In addition, comparisons between
periods may be impacted by individual transactions which mask the overall
trend. The company continues to estimate its ultimate loss exposure for
nonperforming assets based upon performance and specific reviews of
individual loans and its outlook for economic conditions. Because the
portfolio consists of a number of loans with relatively large balances,
changes in individual borrower circumstances which currently are
unforeseen have the potential to change the estimate of ultimate loss
exposure in the future. There were no significant potential problem loans not
classified as nonperforming assets at December 31, 1993.
Management believes that commercial real estate markets began to
stabilize in the second half of 1993. The level of future write-downs will
continue to depend heavily on changes in overall market conditions as well as
circumstances surrounding individual properties. To preserve value in
liquidating the real estate portfolio over time, the company has segregated its
portfolio into two categories. Properties in weak markets or with poor cash
flow will be divested in an expeditious, orderly fashion. These properties,
<PAGE> 26
which have been written down an average of 51 percent, represent 19 percent of
the commercial real estate owned portfolio at December 31, 1993. The average
carrying value of a property in this portfolio at December 31 1993 was $2
million. Properties with positive and/or improved cash flows and in markets
which, the company believes, have potential for improvement are being held for
sale at prices which reflect this value and may, therefore, take longer to
divest. Net operating income on all commercial real estate properties in 1993
was $17.7 million, up from $8.5 million in 1992. Commercial real estate
write-downs and carrying costs on all commercial real estate properties were
$30.8 million in 1993, compared to $25.8 million in 1992.
COMMERCIAL NONPERFORMING LOANS AND REAL ESTATE OWNED
<TABLE>
<CAPTION>
DEC. 31, Sept. 30, Dec. 31, Dec. 31,
All dollar amounts are stated in millions. 1993 1993 1992 1991
- ------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Real estate nonaccrual $ 54.8 $ 79.6 $ 80.7 $ 98.6
Other nonaccrual 173.9 164.1 178.5 159.0
------ ------ ------ ------
Total nonaccrual 228.7 243.7 259.2 257.6
Renegotiated 28.7 17.3 196.8 202.6
------ ------ ------ ------
Total nonperforming loans 257.4 261.0 456.0 460.2
Real estate owned 256.6 262.2 249.6 237.5
------ ------ ------ ------
Total $514.0 $523.2 $705.6 $697.7
====== ====== ====== ======
Credit loss reserves as a percent of nonperforming loans 67.2% 71.2% 44.6% 49.7%
------ ------ ------ ------
</TABLE>
CORPORATE
Corporate expenses, net of tax benefits, were $28.5 million compared to
$37.4 million in 1992 and $25.9 million in 1991. Expenses in 1993 decreased
from 1992 primarily due to a lower provision for credit losses and lower
interest expense. In 1993 the company recorded a general provision for credit
losses of $10 million compared to $15 million in 1992.
LIQUIDITY AND CAPITAL RESOURCES
The company continued to strengthen its capital and liquidity position in 1993.
The ratio of common and preferred shareholders' equity, including convertible
preferred stock, to total assets was 7.33 percent, up from 6.04 percent at
December 31, 1992. In 1993 the company issued approximately $313 million of
common stock, including $269 million in a public offering in March 1993 and
approximately $44 million through employee stock ownership and dividend
reinvestment plans. Additionally, the company issued $100 million of preferred
stock in 1993.
The company's principal sources of funds are cash received from its
subsidiaries, primarily in the form of dividends and borrowings under
intercorporate agreements, and cash received from external sources using
various debt and equity instruments.
Funds received by the parent company are disbursed to shareholders and
creditors or returned to subsidiaries as capital or advances under
intercorporate agreements. In 1993 the company paid $141.3 million of dividends
to shareholders and made capital contributions of approximately $135 million to
its subsidiaries.
The company employs an integrated and comprehensive program to manage
liquidity and capital resources. The major usage of cash by the company's
subsidiaries is the origination or purchase of receivables or investment
securities. During 1993 and 1992 the company purchased $430 and $364 million of
home equity loan portfolios, respectively. During 1992 the company purchased
$195 million of bankcard portfolios. The main sources of cash for the
company's subsidiaries are the collection and sales of receivable balances,
maturities or sales of investment securities, proceeds from the issuance of
debt, the acceptance of deposits, cash received from policyholders and cash
provided from operations.
The company's subsidiary, Household Finance Corporation ("HFC") obtains
a majority of its funding through the issuance of commercial paper, long-term
debt and preferred stock as well as through the securitizations and sales of
consumer receivables. At December 31, 1993 outstanding commercial paper of HFC
was $4 billion compared to $3 billion at December 31, 1992. HFC markets its
commercial paper through an in-house sales force, directly reaching more than
165 investors. HFC also markets medium-term notes through its in-house sales
force and investment banks and issued a total of $1.6 billion in 1993. During
1993 HFC also issued $626 million of intermediate and long-term debt to the
public through investment banks and brokerage houses. To facilitate liquidity,
<PAGE> 27
HFC had committed back-up lines of credit totaling $3.5 billion at December 31,
1993, 76 percent of which did not contain a material adverse change clause
which could restrict availability.
The company's subsidiary, Household Bank, f.s.b. ("the Bank") is funded
primarily by customer deposits which are gathered through its multi-state
branch network. Also used are advances from the Federal Home Loan Bank, Federal
funds borrowings, repurchase agreements, brokered deposits, bank and other
capital market borrowings, and the securitizations and sales of credit card
receivables. The Bank had approximately $3 billion of available funding under
advance and borrowing agreements at December 31, 1993.
The company views core deposits as a stable and relatively low-cost
source of funding even in uncertain financial markets. Deposits, including
time certificates and savings and demand accounts, totaled $7.5 and $8.0
billion for the company at December 31, 1993 and 1992, respectively. Deposits
represented 79 and 77 percent of the Bank's total borrowings at December 31,
1993 and 1992, respectively.
Securitizations and sales of consumer receivables have been, and will
continue to be, an important source of liquidity for both HFC and the Bank.
During 1993 the company securitized and sold, including replenishments of
certificate holder interests, approximately $9.4 billion of home equity,
merchant participation and bankcard receivables compared to $4.8 billion in
1992.
The company has a comprehensive program which addresses the management
and diversification of financial risk, such as interest rate, funding,
liquidity and currency risk, at all of its entities. The company manages these
risks both domestically and internationally through an asset/liability
management committee ("ALCO") composed of senior management. Interest rate risk
is the exposure of earnings to changes in interest rates. The ALCO sets and
monitors policy so that the potential impact on earnings from future changes in
interest rates is managed within approved limits. Simulation models are
utilized to measure the impact on net interest margin of changes in interest
rates. By policy, no more than 4 percent of the company's expected full year
net interest margin on a managed basis can be at risk to a gradual 250 basis
point change in interest rates over a twelve month period, assuming no
additional interest rate risk management actions are taken.
The company, whenever possible, funds its assets with liability
instruments of similar interest rate sensitivity, thereby reducing structural
interest rate risk. To manage its liquidity position, the company may
synthetically create liabilities with similar characteristics to its assets.
As a result of changing market conditions over the last few years, the
company's balance sheet composition has changed dramatically. This shift
primarily has been driven by the conversion of fixed rate credit card
receivables to a floating rate and the success of variable rate home equity
loan products. At December 31, 1993 the company owned approximately $9.9
billion of domestic receivables with variable interest rates based on the
prime rate. To manage liquidity to acceptable levels, these receivables have
been funded with $4.5 billion of short-term debt with the remainder funded by
longer duration liabilities creating an asset-sensitive position. Through the
use of derivatives, primarily interest rate swaps, the company has been able to
offset the asset sensitivity of its balance sheet and achieve a cost of funds
based on shorter-term interest rates, thereby reducing interest rate risk while
also preserving liquidity. As a result of this strategy and the change in the
pricing characteristics of the receivable portfolio, the company's portfolio of
off-balance sheet risk instruments increased significantly during the year.
These instruments also are used to manage basis risk or the risk due to the
difference in movement of market rate indices on which assets and liabilities
are priced (primarily prime and LIBOR, respectively). The company does not
serve as a financial intermediary to make markets in any off-balance sheet
financial instruments.
While the notional amount of the company's synthetic portfolio is
large, the economic exposure underlying these instruments is substantially
less. The notional amount is used to determine the fixed or variable rate
interest payment due by each counterparty but does not result in an exchange of
principal payments. The company's exposure on its synthetic portfolio is
counterparty risk, or the risk that a counterparty may default on a contract
when the company is owed money. The potential for economic loss is the present
value of the interest rate differential, determined by reference to the
notional amount, discounted using current interest rates. Counterparty limits
have been established and are closely monitored as part of the overall risk
management process. At December 31, 1993 approximately 96 percent of the
company's derivative instrument counterparties were rated A- or better and 65
percent were rated AA- or better. The company has never suffered a loss due to
counterparty failure.
While attempting to eliminate structural interest rate risk, the
company also strives to take advantage of the profit opportunities available in
short-term interest rate movements principally using exchange-traded options.
Limits have been established for each instrument based on potential daily
changes in market values due to interest rate movements, volatility and market
liquidity. Positions are monitored daily to ensure compliance with established
policies and limits. Income from these trading activities has not been, nor is
anticipated to be, material to the company.
See Note 8, "Financial Instruments With Off-Balance Sheet Risk and
<PAGE> 28
Concentrations of Credit Risk" for additional information related to interest
rate risk management.
During 1993 the company's credit rating was upgraded by one nationally
recognized rating agency and its credit rating outlook was upgraded by another.
At December 31, 1993 the long-term debt and preferred stock of the company and
its subsidiaries, HFC and the Bank, had been assigned an investment grade
rating by four "nationally recognized" rating agencies. Furthermore, these
agencies included the commercial paper of HFC in their highest rating category.
With these ratings the company believes it and its subsidiaries have
substantial capacity to raise capital from wholesale sources to refinance
maturing obligations and fund business growth. In 1992 the Office of Thrift
Supervision ("OTS") adopted a rule which classifies savings associations based
on capital ratios. At December 31, 1993 the Bank was classified as "well
capitalized," the highest category.
The company had investments in foreign subsidiaries of $389 million at
December 31, 1993. Total assets of foreign subsidiaries were $4.2 billion at
year-end 1993. The company enters into foreign exchange contracts to partially
hedge its investment in foreign subsidiaries. Foreign currency translation
adjustments, net of gains and losses on contracts used to hedge foreign
currency fluctuations, totaled $14.1 and $37.5 million in net losses in 1993
and 1992, respectively, and are included as a component of common shareholders'
equity. The functional currency for each subsidiary is its local currency.
While each foreign subsidiary primarily borrows funds in local currency, in
1993, both the United Kingdom and Canadian subsidiaries borrowed funds for the
first time directly in the United States capital market. These borrowings were
converted to their local currencies using foreign currency swaps, and achieved
a lower cost of funds than that available in the subsidiaries' local market.
The company's net realized gains and losses in foreign currency transactions
were not material to results of operations or financial position in 1993 or
1992.
Household Global Funding, Inc. ("Global") was established in 1989 to
consolidate ownership of the company's Canadian and United Kingdom financial
services businesses. During 1993 Global exchanged $44 million of its preferred
stock for an identical amount of fixed rate senior debt. Canadian operations
are funded with retail deposits, commercial paper and intermediate and
long-term debt. Deposits were $1.0 and $1.1 billion at December 31, 1993 and
1992, respectively. Intermediate and long-term debt totaled $574 million at
year-end 1993 compared with $636 million a year ago. Committed back-up lines of
credit for Canada were approximately $420 million compared to approximately
$400 million at December 31, 1992. The company has guaranteed payment of the
debt obligations of its Canadian subsidiary, except for debt obligations
previously guaranteed by HFC. In addition, the Canadian operation sold with no
recourse first mortgage portfolios totaling $419.0 million during 1993. The
United Kingdom operations are funded with deposits and short and
intermediate-term bank lines of credit. Deposits at year-end 1993 were $426
million compared to $463 million a year earlier. Borrowings from bank lines of
credit at year-end 1993 were $621 million compared to $552 million a year ago.
The company has guaranteed payment of all debt obligations, except for certain
deposits, of its United Kingdom subsidiary.
The company's life insurance subsidiary, Alexander Hamilton Life Insurance
Company ("Alexander Hamilton"), plans for capital needs based on target
leverage ratios determined in consultation with key rating agencies. The target
leverage ratios are based on Alexander Hamilton's statutory financial position.
At the end of 1993 Alexander Hamilton's operating leverage ratio, as defined
statutorily, was consistent with its target. Alexander Hamilton has an A+
(Superior) rating from A.M. Best and has an "AA" claims-paying ability rating
from Standard & Poor's Corporation, Duff and Phelps Credit Rating Co. and Fitch
Investors Services, Inc. The company believes that future growth of Alexander
Hamilton can be funded through its own operations.
Household has strengthened its consolidated capital base over the past
four years. From year-end 1989 to year-end 1993, common and preferred equity
increased 89 percent, while owned assets grew only 26 percent. The increase
in common and preferred shareholders' equity reflects the adoption of FAS
No. 109 and FAS No. 115 during 1993. The adoption of FAS No. 109 resulted in
retained earnings being reduced by approximately $63 million from the
amounts previously reported, while the adoption of FAS No. 115 resulted in
retained earnings at December 31, 1993 being increased by $40.5 million.
Excluding the impact of FAS No. 115, common and preferred equity still
increased 26 percent over the prior year. The company's double leverage
ratio, which is defined as parent company investments in and advances to
subsidiaries divided by consolidated equity, was 1.05 and 1.14 at
December 31, 1993 and 1992, respectively. HFC's debt to equity ratio declined
from 6.8 at December 31, 1992 to 6.2 at December 31, 1993, while the Bank's
capital ratios met the highest regulatory classification. Management
anticipates additional strengthening of these ratios through improving
returns on assets and managed balance sheet growth.
During 1993 the company invested $110 million in capital expenditures,
compared to the prior year level of $90 million.
In the accompanying financial statements, Note 13 provides information
regarding the fair value of certain financial instruments.
<PAGE> 29
STATEMENTS OF INCOME
Household International, Inc. and Subsidiaries
All dollar amounts except per share data are stated in millions.
<TABLE>
<CAPTION>
Year ended December 31 1993 1992 1991
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
Finance income $2,561.4 $2,584.4 $3,037.5
Interest income from noninsurance investment securities 129.3 152.8 187.4
Interest expense 1,149.5 1,420.2 1,886.9
-------- -------- --------
Net interest margin 1,541.2 1,317.0 1,338.0
Provision for credit losses on owned receivables 735.8 671.5 843.2
-------- -------- --------
Net interest margin after provision for credit losses 805.4 645.5 494.8
-------- -------- --------
Securitization and servicing fee income 460.0 376.0 398.3
Insurance premiums and contract revenues 288.3 281.2 288.4
Investment income 574.0 523.7 471.5
Fee income 292.6 164.5 104.0
Other income 148.9 98.0 106.8
-------- -------- --------
Total other revenues 1,763.8 1,443.4 1,369.0
-------- -------- --------
Net interest margin after provision for credit losses and other revenues 2,569.2 2,088.9 1,863.8
-------- -------- --------
Salaries and fringe benefits 615.4 535.9 489.7
Other operating expenses 964.0 761.1 702.1
Policyholders' benefits 539.1 513.9 472.2
-------- -------- --------
Total costs and expenses 2,118.5 1,810.9 1,664.0
-------- -------- --------
Income before income taxes 450.7 278.0 199.8
Income taxes 152.0 87.1 50.0
-------- -------- --------
Net income $ 298.7 $ 190.9 $ 149.8
======== ======== ========
EARNINGS PER COMMON SHARE*
Net income $ 298.7 $ 190.9 $ 149.8
Preferred dividends (28.2) (25.3) (21.2)
-------- -------- --------
Earnings available to common shareholders $ 270.5 $ 165.6 $ 128.6
======== ======== ========
Average common and common equivalent shares 94.8 86.0 83.0
-------- -------- --------
Fully diluted earnings per common share $ 2.85 $ 1.93 $ 1.55
-------- -------- --------
Primary earnings per common share $ 2.91 $ 1.97 $ 1.57
-------- -------- --------
Dividends declared per common share $ 1.18 $ 1.15 $ 1.12
-------- -------- --------
</TABLE>
*Amounts have been restated to reflect the two-for-one stock split in the form
of a 100 percent stock dividend, effective October 15, 1993.
The accompanying notes are an integral part of these financial statements.
BALANCE SHEETS
Household International, Inc. and Subsidiaries
In millions.
<TABLE>
<CAPTION>
December 31 1993 1992
- ----------- --------- ---------
<S> <C> <C>
ASSETS
Cash $ 317.4 $ 255.8
Investment securities (fair value of $9,045.5
and $7,633.4) 8,795.1 7,389.8
Finance and banking receivables 19,563.0 18,960.6
Liquidating commercial assets 1,555.7 1,851.2
Deferred insurance policy acquisition costs 381.6 453.4
Acquired intangibles 473.4 491.6
Properties and equipment 434.3 397.4
Assets acquired through foreclosure 251.8 300.1
Other assets 1,189.2 1,028.5
--------- ---------
Total assets $32,961.5 $31,128.4
========= =========
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Debt:
Deposits $ 7,516.1 $ 8,030.3
Commercial paper, bank and other borrowings 5,642.1 5,253.3
Senior and senior surbordinated debt
(with original maturities over one year) 9,113.8 9,014.4
--------- ---------
Total debt 22,272.0 22,298.0
Insurance policy and claim reserves 6,064.2 5,326.5
Other liabilities 2,207.7 1,622.3
--------- ---------
Total liabilities 30,543.9 29,246.8
Convertible preferred stock subject to
mandatory redemption 19.3 36.0
Preferred stock* 320.0 300.0
Common shareholders' equity* 2,078.3 1,545.6
--------- ---------
Total liabilities and shareholders' equity $32,961.5 $31,128.4
========= =========
</TABLE>
*See the Statements of Changes in Preferred Stock and Common Shareholders'
Equity on page 55 for number of shares issued and outstanding.
The accompanying notes are an integral part of these financial statements.
<PAGE> 31
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
In millions.
Year ended December 31 1993 1992 1991
- ---------------------- --------- --------- --------
<S> <C> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income $ 298.7 $ 190.9 $ 149.8
Adjustments to reconcile net income to net cash provided by operations:
Provision for credit losses on owned receivables 735.8 671.5 843.2
Insurance policy and claim reserves 226.7 161.8 202.9
Depreciation and amortization 243.1 176.1 170.3
Net realized (gains) losses from sales of assets 29.3 (15.3) (103.9)
Deferred insurance policy acquisition costs (86.6) (85.2) (81.2)
Deferred income tax provision (6.3) 40.3 (84.1)
Other, net 264.1 (187.2) 115.7
--------- --------- --------
Cash provided by operations 1,704.8 952.9 1,212.7
--------- --------- --------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (4,053.1) (3,633.9) (3,505.4)
Matured 1,270.9 1,382.2 685.8
Sold 1,992.2 2,107.6 2,225.8
Short-term investment securities, net change (154.2) 607.7 (641.9)
Receivables, excluding bankcard:
Originated or purchased (10,218.4) (10,719.8) (9,236.7)
Collected 7,784.6 7,597.7 7,252.2
Sold 2,351.8 2,599.9 3,857.8
Bankcard receivables:
Originated or collected, net (8,729.8) (4,216.5) (1,470.6)
Purchased -- (195.1) (1,587.5)
Sold 7,483.2 2,389.2 1,451.4
Acquisition of banking organizations:
Assets acquired, net (53.5) (64.3) (203.6)
Deposits and other liabilities assumed, net 362.0 525.9 2,662.9
Acquisition of other businesses -- (26.2) --
Properties and equipment purchased (110.2) (90.4) (150.4)
Properties and equipment sold 8.2 4.0 14.9
--------- --------- --------
Cash increase (decrease) from investments in operations (2,066.3) (1,732.0) 1,354.7
--------- --------- --------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change 590.0 1,707.9 (1,572.4)
Time certificates accepted 2,340.9 3,081.5 4,551.1
Time certificates paid (3,320.8) (3,739.3) (6,002.9)
Senior and senior subordinated debt issued 2,765.0 2,862.0 3,680.9
Senior and senior subordinated debt retired (2,645.3) (3,594.8) (3,781.3)
Policyholders' benefits paid (341.2) (349.6) (325.8)
Cash received from policyholders 859.7 895.3 820.0
Shareholders' dividends (141.3) (124.6) (115.0)
Issuance of preferred stock 100.0 50.0 55.0
Repurchase of preferred stock (80.0) -- --
Issuance of common stock 313.3 33.0 134.5
--------- --------- --------
Cash increase (decrease) from financing and capital transactions 440.3 821.4 (2,555.9)
--------- --------- --------
Effect of exchange rate changes on cash (17.2) (14.4) (9.7)
--------- --------- --------
Increase in cash 61.6 27.9 1.8
Cash at January 1 255.8 227.9 226.1
--------- --------- --------
Cash at December 31 $ 317.4 $ 255.8 $ 227.9
Supplemental cash flow information: ========= ========= ========
Interest paid $ 1,188.2 $ 1,493.6 $1,922.1
========= ========= ========
Income taxes paid $ 128.8 $ 100.9 $ 114.8
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 32
STATEMENTS OF CHANGES IN PREFERRED STOCK AND COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Shareholders' Equity
------------------------------------------------------------
Nonconvertible Additional Total Common
Household International, Inc. and Subsidiaries Preferred Common Paid-in Retained Shareholders'
All dollar amounts are stated in millions. Stock Stock Capital Earnings(1) Other(2) Equity
- ------------------------------------------ -------------- ------ ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1990 $195.0 $ 53.6 $234.3 $1,917.8 $(924.6) $1,281.1
Net income 149.8 149.8
Cash dividends-preferred, at stated rates (28.7) (28.7)
Cash dividends-common, $1.12 per share (86.3) (86.3)
Foreign currency translation adjustments (3) (16.5) (16.5)
Conversion of preferred stock .9 5.4 6.3
Exercise of stock options .1 17.0 17.1
Issuance of common stock (1.8) 136.3 134.5
Issuance of nonconvertible preferred stock 55.0 (2.0) (2.0)
Unrealized gain on marketable equity securities 6.8 6.8
------ ------ ------ -------- ------- --------
BALANCE AT DECEMBER 31, 1991 250.0 54.6 252.9 1,952.6 (798.0) 1,462.1
Net income 190.9 190.9
Cash dividends-preferred, at stated rates (30.4) (30.4)
Cash dividends-common, $1.15 per share (94.2) (94.2)
Foreign currency translation adjustments (3) (37.5) (37.5)
Conversion of preferred stock .9 17.3 18.2
Exercise of stock options .1 5.9 6.0
Issuance of common stock 1.1 31.9 33.0
Issuance of nonconvertible preferred stock 50.0 (1.6) (1.6)
Unrealized loss on investments, net (0.9) (0.9)
------ ------ ------ -------- ------- --------
BALANCE AT DECEMBER 31, 1992 300.0 55.6 275.6 2,018.9 (804.5) 1,545.6
Net income 298.7 298.7
Cash dividends-preferred, at stated rates (31.1) (31.1)
Cash dividends-common, $1.18 per share (110.2) (110.2)
Foreign currency translation adjustments (3) (14.1) (14.1)
Conversion of preferred stock .8 16.4 17.2
Exercise of stock options .3 15.5 15.8
Issuance of common stock 87.8 225.5 313.3
Stock split, two-for-one 56.6 (56.6) --
Issuance of nonconvertible preferred stock 100.0 (.1) (.1)
Redemption of nonconvertible preferred stock (80.0) (1.3) (1.3)
Unrealized gain on investments, net (4) 44.5 44.5
------ ------ ------ -------- ------- --------
BALANCE AT DECEMBER 31, 1993 $320.0 $113.3 $337.3 $2,176.3 $(548.6) $2,078.3
====== ====== ====== ======== ======= ========
</TABLE>
(1) The company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS No. 109") effective January 1, 1993.
As a result of implementing FAS No. 109, retained earnings for all periods
presented prior to December 31, 1993 have been reduced by approximately $63
million from the amounts previously reported.
(2) At December 31, 1993, 1992, 1991 and 1990 items in the other column include
cumulative adjustments for: foreign currency translation adjustments of
$(132.7), $(118.6), $(81.1), and $(64.6) million, respectively; unrealized
gains (losses) on marketable equity securities and available-for-sale
investments of $40.5, $(4.0), $(3.1), and $(9.9) million, respectively; and
common stock in treasury of $(456.4), $(681.9), $(713.8), and $(850.1)
million, respectively.
(3) Net of $1.1, $(12.2) and $(6.2) million of income tax expense (benefits) in
1993, 1992 and 1991, respectively.
(4) Effective December 31, 1993 the company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("FAS No. 115"). As a result of implementing FAS No.
115, the gross unrealized gain on available-for-sale investments of $152.8
million is recorded net of income taxes of $22.1 million and, for certain
available-for-sale investments of the life insurance operation, related
unrealized deferred insurance policy acquisition cost adjustments of $90.2
million at December 31, 1993.
<PAGE> 33
<TABLE>
<CAPTION>
Common Stock(5)
Nonconvertible ---------------------------------------------
Shares Preferred Stock Issued In Treasury Net Outstanding
- ------ --------------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1990 1,950,000 53,547,445 (17,749,492) 35,797,953
Exercise of common stock options 107,035 107,035
Conversion of $6.25 preferred stock 901,428 901,428
Repurchase of common stock (16) (16)
Issuance of common stock 2,970,328 2,970,328
Issuance of nonconvertible preferred stock 550,000
--------- ----------- ------------ ----------
BALANCE AT DECEMBER 31, 1991 2,500,000 54,555,908 (14,779,180) 39,776,728
Exercise of common stock options 149,452 149,452
Conversion of $6.25 preferred stock 843,442 843,442
Issuance of common stock 668,511 668,511
Issuance of nonconvertible preferred stock 50,000
--------- ----------- ----------- ----------
BALANCE AT DECEMBER 31, 1992 2,550,000 55,548,802 (14,110,669) 41,438,133
Exercise of common stock options 316,732 316,732
Conversion of $6.25 preferred stock 812,430 812,430
Issuance of common stock 4,902,574 4,902,574
Stock split, two-for-one 56,576,057 (9,597,794) 46,978,263
Issuance of nonconvertible preferred stock 100,000
Redemption of nonconvertible preferred stock (800,000)
--------- ----------- ----------- ----------
BALANCE AT DECEMBER 31, 1993 1,850,000 113,254,021 (18,805,889) 94,448,132
========= =========== =========== ==========
</TABLE>
(5) At December 31, 1993 and 1992 the company had authorized 150.0 and 67.5
million shares, respectively of $1 par value common stock.
The accompanying notes are an integral part of these financial statements.
BUSINESS SEGMENT DATA
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
Revenues Operating Profit Net Income
------------------------------ ------------------------ -------------------------
In millions. 1993 1992 1991 1993 1992 1991 1993 1992 1991
- ------------ -------- -------- -------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Finance and Banking $3,650.2 $3,435.0 $3,845.8 $449.5 $293.9 $432.9 $303.2 $200.6 $289.4
Individual Life Insurance 668.3 593.0 520.6 71.2 63.2 47.6 45.2 41.7 35.0
Corporate:
Administrative expenses (10.6) (13.3) (9.7) (10.6) (13.3) (9.7)
Provision for credit losses (10.0) (15.0) -- (10.0) (15.0) --
Interest expense, net (19.9) (27.8) (30.2) (19.9) (27.8) (30.2)
Income tax benefits -- -- -- 12.0 18.7 14.0
-------- -------- -------- ------ ------- ------ ------ ------ ------
Total Corporate -- -- -- (40.5) (56.1) (39.9) (28.5) (37.4) (25.9)
-------- -------- -------- ------ ------- ------ ------ ------ ------
Core Business 4,318.5 4,028.0 4,366.4 480.2 301.0 440.6 319.9 204.9 298.5
Liquidating Commercial Lines 136.0 152.6 227.5 (29.5) (23.0) (240.8) (21.2) (14.0) (148.7)
-------- -------- -------- ------ ------ ------ ------ ------ ------
Total $4,454.5 $4,180.6 $4,593.9 $450.7 $278.0 $199.8 $298.7 $190.9 $149.8
======== ======== ======== ======= ====== ====== ====== ====== ======
</TABLE>
PRESENTATION OF INCOME DATA The combination of the company's consumer and
continuing commercial product lines are referred to as Finance and Banking.
Assets of the liquidating commercial product lines, which are separately
managed as receivables are collected or otherwise disposed of, have been
disclosed separately in the consolidated balance sheets and as a separate
business segment, referred to as Liquidating Commercial Lines. To better define
and report the results of operations, the company refers to its Finance and
Banking and Individual Life Insurance segments, net of corporate expenses, as
its Core Business.
Operating profits represent income before income taxes but include
interest expense, as financing costs are integral to the company's operations.
Income by segment assumes each business services its own debt. The segments
generally provide for income taxes as if separate tax returns were filed
subject to certain consolidated return limitations and benefits. Equity is
allocated to the business segments based on the underlying regulatory and
business requirements.
<PAGE> 34
<TABLE>
<CAPTION>
Identifiable Assets
---------------------------------------------------
In millions. 1993 1992 1991
- ------------ --------- --------- ---------
<S> <C> <C> <C>
Finance and Banking $24,362.5 $23,315.3 $22,631.9
Individual Life Insurance 6,959.0 5,926.2 5,273.8
Corporate 84.3 35.7 24.7
--------- --------- ---------
Core Business 31,405.8 29,277.2 27,930.4
Liquidating Commercial Lines 1,555.7 1,851.2 2,051.9
--------- --------- ---------
Total $32,961.5 $31,128.4 $29,982.3
========= ========= =========
</TABLE>
PRESENTATION OF BUSINESS SEGMENT DATA The Finance and Banking segment
markets first mortgages, home equity loans, other secured consumer receivables,
bankcards, merchant participation receivables, other unsecured consumer
receivables, equipment and other secured commercial loans and leases, credit
and specialty insurance and retail securities brokerage services. The
Individual Life Insurance segment provides ordinary life, universal life and
annuity insurance products. The Liquidating Commercial Lines segment manages
the discontinued commercial product lines which consist of commercial real
estate, acquisition finance and other loans and other commercial assets being
liquidated. The Corporate segment represents general corporate expenses and
assets which are not allocable to specific business segments.
GEOGRAPHIC AREA
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
Identifiable Assets Revenues Operating Profit
---------------------------------- ------------------------------ -------------------------
In millions. 1993 1992 1991 1993 1992 1991 1993 1992 1991
--------- --------- --------- -------- -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $28,800.5 $26,912.1 $24,997.9 $3,833.9 $3,435.6 $3,663.1 $472.1 $362.1 $251.2
United Kingdom 1,494.1 1,402.7 1,768.4 273.7 346.5 423.4 13.0 (47.7) (16.9)
Canada 2,247.3 2,358.7 2,685.5 275.4 309.5 406.9 (33.8) (38.7) (26.7)
Australia 419.6 454.9 530.5 71.5 89.0 100.5 (.6) 2.3 (7.8)
--------- --------- --------- -------- -------- -------- ------ ------ ------
Total $32,961.5 $31,128.4 $29,982.3 $4,454.5 $4,180.6 $4,593.9 $450.7 $278.0 $199.8
========= ========= ========= ======== ======== ======== ====== ====== ======
</TABLE>
NOTES TO FINANCIAL STATEMENTS
Household International, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The financial statements include the accounts of
Household International, Inc. and all subsidiaries (the "company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform
with the current year's presentation.
INVESTMENT SECURITIES The company maintains investment portfolios in
both its noninsurance and insurance operations. These portfolios are comprised
primarily of debt securities. The insurance portfolio also includes mortgage
and policyholder loans and other real estate investments. Effective December
31, 1993 the company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS
No. 115"). In accordance with FAS No. 115, investment securities in both the
noninsurance and insurance operations are classified in three separate
categories: trading, available-for-sale or held-to-maturity. Trading invest-
ments are bought and held principally for the purpose of selling them in the
near term and are carried at fair value. Adjustments to the carrying value of
trading investments are included in current earnings. Investments which the
company has the positive intent and ability to hold to maturity are classified
as held-to-maturity and carried at amortized cost. Investments not classified
as trading or held-to-maturity are classified as available-for-sale. They 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
<PAGE> 35
shareholders' equity, net of income taxes and, for certain investments of the
insurance operation, related unrealized deferred insurance policy acquisition
cost adjustments (see `Insurance' on the following page). Prior to the adoption
of FAS No. 115, available-for-sale investments were carried at the lower of
aggregate amortized cost or fair value, and any adjustments to carrying value
for the noninsurance operations were included in earnings, while any
adjustments to carrying value for the insurance operations were included in
common shareholders' equity. Any decline in the fair value of
available-for-sale or held-to-maturity investments which is deemed to be other
than temporary are charged against current earnings.
Cost of investment securities sold by the insurance operation generally
is determined using the first-in, first-out ("FIFO") method, and cost of
noninsurance investment securities sold is determined by specific
identification. 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 noninsurance portfolio and investment income from the
insurance portfolio are recorded in investment income. Gains and losses on
trading investments are recorded in other income. Accrued investment income
is classified with investment securities.
RECEIVABLES Receivables, except first mortgages held for trade, are
carried at amortized cost. Receivables held for trade are those originated or
purchased with the intent of current resale. Such receivables, net of related
hedges, are carried at market value with changes in this value recorded in
current earnings. The company periodically sells receivables from its home
equity, bankcard and merchant participation portfolios. Because these
receivables were originated with variable rates of interest or rates comparable
to those currently offered by the company for such receivables, carrying value
approximates market value.
Finance income is earned using the effective yield method and
classified on the balance sheets, to the extent not collected, with the related
receivables. 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 on bankcards are netted with direct
lending costs associated with the issuance of the cards. The net amount is
deferred and amortized on a straight-line basis over one year. Net deferred
direct lending costs related to bankcard receivables totaled $24 and $9 million
at December 31, 1993 and 1992, respectively.
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.
Provisions for credit losses are made in amounts sufficient to maintain
reserves at a level considered adequate to cover probable losses of principal
and earned interest in the existing portfolio of owned receivables. Probable
losses are estimated for consumer receivables based on contractual delinquency
status and historical loss experience and, for commercial loans, based on a
specific loan review process as well as management's assessment of general
reserve requirements. These estimates are reviewed periodically, and
adjustments are reported in earnings in the periods in which they become known.
The company's chargeoff policy for all consumer receivables is based on
contractual delinquency over periods ranging from 4 to 9 months. Commercial
loans are written off when it becomes apparent that an account is
uncollectible.
LIQUIDATING COMMERCIAL ASSETS The company has discontinued selected,
high-risk, commercial product lines. These assets are managed separately from
the continuing core businesses and therefore have been presented separately for
financial reporting purposes. Liquidating commercial assets are recorded in the
accompanying balance sheets at amortized cost net of reserves for credit
losses. The carrying value recorded does not exceed amounts estimated to be
recoverable, which is consistent with the current intent to hold these assets
and collect or otherwise dispose of them in the normal course of business.
These assets are accounted for consistent with accounting policies discussed
herein.
NONACCRUAL LOANS Nonaccrual loans are loans on which accrual of interest has
been suspended. Interest income is suspended on all consumer and commercial
loans when principal or interest payments are more than three months
contractually past due, except for bankcards and private-label credit cards,
which are included in the merchant participation product line. On these credit
card receivables, interest continues to accrue until the receivable is charged
off. There were no commercial loans at December 31, 1993 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. Accrual of income on nonaccrual commercial
loans is not resumed until such loans become contractually current.
RECEIVABLES SOLD AND SERVICED WITH LIMITED RECOURSE AND SECURITIZATION INCOME
Certain home equity, bankcard and merchant participation 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
<PAGE> 36
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 recognized over the life 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, normal servicing fees, operating
expenses and other factors. The resulting gain is reduced 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 statements of income as securitization and
servicing fee income.
RECEIVABLES SOLD AND SERVICED WITH NO RECOURSE Certain first mortgage
receivables are originated and routinely sold to investors with servicing
rights retained by the company. Excess servicing rights of $32 and $21 million
were recorded at December 31, 1993 and 1992, respectively, related to these
sales. These excess servicing rights are amortized over the expected repayment
patterns of the underlying loans, not to exceed 10 years. The average
amortization period was approximately 8 years in 1993, 1992 and 1991. The
company routinely purchases first mortgage receivable servicing rights,
referred to as purchased mortgage servicing rights ("PMSR"). PMSR totaled
$180.4 and $138.2 million at December 31, 1993 and 1992, respectively, and are
amortized in a manner which corresponds to the estimated net servicing revenue
stream over their estimated useful life not to exceed 15 years. The average
amortization period was approximately 8 years in 1993, 1992 and 1991. The
company periodically evaluates the carrying value of its capitalized servicing
rights in light of the actual repayment experience of the underlying loans and
makes adjustments to reduce the carrying value where appropriate. Servicing
income and amortization of excess servicing rights and PMSR are included in
securitization and servicing fee income in the statements of income.
PROPERTIES AND EQUIPMENT Properties and equipment are recorded at cost
and depreciated over their estimated useful lives principally using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes.
REAL ESTATE OWNED Real estate owned, which is included in assets
acquired through foreclosure on the accompanying balance sheets, is valued at
the lower of cost or fair value less estimated costs to sell. Costs of holding
this real estate, and related gains and losses on disposition, are credited or
charged to operations as incurred. These values are periodically reviewed and
reduced, if appropriate.
INSURANCE Premiums for ordinary life policies are recognized when due.
Premiums for credit insurance are recognized over the period at risk in
relationship to anticipated claims. Premiums received on single premium life,
universal life and annuity policies ("interest sensitive policies') are
considered insurance deposits. Revenues on interest sensitive policies consist
of contract charges against policyholders' accounts and are reported in the
period assessed. Costs associated with acquisition of insurance risks are
deferred and generally amortized in relation to premium revenues on ordinary
and credit insurance and in relation to gross profits on interest sensitive
policies. Amortization of deferred insurance policy acquisition costs has been
adjusted for unrealized gains or losses on available-for-sale investments on
the same basis as if the gains or losses were realized. Such amortization
related to unrealized gains or losses has been netted against the unrealized
gains or losses as an adjustment to common shareholders' equity.
Liability for future contract benefits on interest sensitive policies
is computed in accordance with the retrospective deposit method using interest
rates which vary with rates credited to policyholders' accounts. Liabilities
for future policy benefits on other life insurance products generally are
computed using the net level premium method, based upon estimated future
investment yields, mortality and withdrawals appropriate when the policies were
issued. Mortality and withdrawal assumptions principally are based on industry
tables. Policy and contract claim reserves are based on estimated settlement
amounts for both reported and incurred but not reported losses.
ACQUIRED INTANGIBLES Acquired intangibles consist of the cost of
investments in excess of net tangible assets acquired and acquired credit card
relationships. Acquired credit card relationships are amortized on a
straight-line basis over their estimated remaining lives, not to exceed 10
years. Other intangible assets are amortized using straight-line and other
methods over their estimated useful lives, not to exceed 15 years. The average
amortization period for acquired intangibles was approximately 7 years in 1993
and 8 years in both 1992 and 1991.
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. Repurchases of
convertible preferred stock subject to mandatory redemption are accounted for
using the par value method with the excess of cost over stated value of
repurchased preferred stock charged to retained earnings. Treasury stock
<PAGE> 37
reissued is removed from the accounts at average cost.
INTEREST RATE CONTRACTS The company enters into a variety of interest
rate contracts in the management of its interest rate exposure and in its
trading activities. For interest rate swaps that are designated as hedges, the
interest rate differential to be paid or received is accrued and included in
interest expense. For interest rate futures, options, caps and floors and
forward contracts that qualify as hedges, realized and unrealized gains and
losses are deferred and amortized over the lives of the hedged items as
adjustments to interest expense. Realized and unrealized gains and losses on
contracts that do not qualify as hedges are included in other income.
FOREIGN CURRENCY TRANSLATION Foreign subsidiary assets and liabilities
are located in the United Kingdom, Canada and Australia. The functional
currency for each subsidiary is its local currency. Foreign subsidiary
financial data are translated into U.S. dollars at the current exchange rate,
and 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.
INCOME TAXES The company and its eligible subsidiaries file a consolidated
federal income tax return. Investment tax credits generated by leveraged
leases are accounted for by the deferral method.
The company adopted Statement of Financial Accounting Standards No.
109, "Accounting For Income Taxes" ("FAS No. 109") effective January 1, 1993
which requires that deferred tax assets and liabilities, other than those
associated with leveraged leasing transactions, be adjusted to the tax rates
expected to apply in the periods in which the deferred tax assets and
liabilities are expected to be realized or settled.
2. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
1993 1992
---------------------- ----------------------
In millions. CARRYING Carrying
At December 31 VALUE FAIR VALUE Value Fair Value
- -------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
TRADING INVESTMENTS
Government securities and other $ 108.8 $ 108.8 $ 39.8 $ 39.8
-------- -------- -------- --------
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities:
Common stocks 18.5 18.5 10.8 10.8
Preferred stocks 66.3 66.3 85.8 85.8
Corporate securities 2,047.1 2,047.1 323.3 323.3
Government securities 536.3 536.3 82.3 82.3
Mortgage-backed securities 1,983.9 1,983.9 634.7 648.9
Other 347.8 347.8 -- --
-------- -------- -------- --------
Subtotal 4,999.9 4,999.9 1,136.9 1,151.1
-------- -------- -------- --------
HELD-TO-MATURITY INVESTMENTS
Corporate securities 1,852.3 2,049.4 2,956.8 3,104.7
Government securities 34.5 36.7 181.7 186.9
Mortgage-backed securities 882.1 928.1 2,024.5 2,084.8
Mortgage loans on real estate 222.4 226.0 351.0 365.7
Policy loans 81.6 81.6 75.2 75.2
Other 494.6 496.1 508.2 509.5
-------- -------- -------- --------
Subtotal 3,567.5 3,817.9 6,097.4 6,326.8
-------- -------- -------- --------
Accrued investment income 118.9 118.9 115.7 115.7
-------- -------- -------- --------
Total investment securities $8,795.1 $9,045.5 $7,389.8 $7,633.4
======== ======== ======== ========
</TABLE>
The company's insurance subsidiaries held $6.7 and $5.7 billion of the
investment securities at December 31, 1993 and 1992, respectively. Policy loans
and mortgage loans on real estate held by the company's insurance subsidiaries
are classified as investment securities, consistent with insurance industry
<PAGE> 38
practice.
Included in the company's earnings for 1993, 1992 and 1991 were changes in
net unrealized holding gains (losses) of $1.3, $(3.3) and $6.6 million,
respectively, from trading investments.
Proceeds from the sale of available-for-sale investments totaled
approximately $1.2 billion in both 1993 and 1992. Gross gains of $49.7 and
$31.1 million and gross losses of $7.9 and $21.9 million in 1993 and 1992,
respectively, were realized on those sales. There were no investments
classified as available-for-sale in 1991.
The amortized cost of held-to-maturity investments transferred to
available-for-sale in 1993 was $3.7 billion. Proceeds from sales of
held-to-maturity investments were $834.3 million, $871.4 million and $2.2
billion during 1993, 1992 and 1991, respectively. Sales and transfers of
held-to-maturity investments in 1993 were due to restructuring of the
investment security portfolio in anticipation of the adoption of FAS No. 115 on
December 31, 1993. Approximately $400 and $800 million of sales proceeds in
1992 and 1991 were related to a decision made in 1991 to restructure
held-to-maturity investments to significantly reduce exposure in the company's
non-investment grade bond portfolio. Gross gains of $48.1, $35.4 and $59.3
million and gross losses of $9.6, $15.9 and $28.0 million were realized on
sales of held-to-maturity investments in 1993, 1992 and 1991, respectively.
The gross unrealized gains (losses) on investment securities were as follows:
<TABLE>
<CAPTION>
1993 1992
------------------------------------------------ ----------------------------------------------
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
- -------------- --------- ---------- ---------- -------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities:
Common stocks $ 16.9 $ 1.7 $ (.1) $ 18.5 $ 10.1 $ .8 $ (.1) $ 10.8
Preferred stocks 63.8 4.2 (1.7) 66.3 89.6 2.1 (5.9) 85.8
Corporate securities 1,960.4 95.9 (9.2) 2,047.1 324.3 11.0 (12.0) 323.3
Government securities 531.9 6.3 (1.9) 536.3 79.2 3.2 (.1) 82.3
Mortgage-backed securities 1,926.3 63.2 (5.6) 1,983.9 638.6 15.1 (4.8) 648.9
Other 347.8 -- -- 347.8 -- -- -- --
-------- ------ ------ -------- -------- ------ ------ --------
Total available-for-sale
investments $4,847.1 $171.3 $(18.5) $4,999.9 $1,141.8 $ 32.2 $(22.9) $1,151.1
======== ====== ====== ======== ======== ====== ====== ========
HELD-TO-MATURITY INVESTMENTS
Corporate securities $1,852.3 $202.9 $ (5.8) $2,049.4 $2,956.8 $154.5 $ (6.6) $3,104.7
Government securities 34.5 2.2 -- 36.7 181.7 5.6 (.4) 186.9
Mortgage-backed securities 882.1 48.5 (2.5) 928.1 2,024.5 69.9 (9.6) 2,084.8
Mortgage loans on real estate 222.4 6.2 (2.6) 226.0 351.0 18.8 (4.1) 365.7
Policy loans 81.6 -- -- 81.6 75.2 -- -- 75.2
Other 494.6 1.5 -- 496.1 508.2 1.5 (.2) 509.5
-------- ------ ------ -------- -------- ----- ------ --------
Total held-to-maturity
investments $3,567.5 $261.3 $(10.9) $3,817.9 $6,097.4 $250.3 $(20.9) $6,326.8
======== ====== ====== ======== ======== ====== ====== ========
</TABLE>
See Note 13, "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.
As of December 31, 1993 the company did not hold any debt or equity
securities from a single issuer that exceeded 10 percent of the company's
shareholders' equity.
<PAGE> 39
Contractual maturities and yields of investments in debt securities
available-for-sale and held-to-maturity were as follows:
<TABLE>
<CAPTION>
Corporate Securities Government Securities All Other Debt Securities
--------------------------- -------------------------- ----------------------------
In millions. Amortized Fair Amortized Fair Amortized Fair
At December 31, 1993 Cost Value Yield* Cost Value Yield* Cost Value Yield*
- -------------------- --------- ----- ------ --------- ----- ------ --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Due within 1 year $ 7.3 $ 7.5 8.10% $206.6 $206.9 4.35% $ 545.0 $ 543.8 3.76%
After 1 but within 5 years 139.0 145.2 7.51 152.1 153.7 5.06 -- -- --
After 5 but within 10 years 1,151.4 1,194.7 7.43 153.3 153.6 5.88 162.2 171.0 8.08
After 10 years 662.7 699.7 7.70 19.9 22.1 8.04 1,294.8 1,344.8 6.73
-------- -------- ---- ------ ------ ---- -------- -------- ----
Total $1,960.4 $2,047.1 7.53% $531.9 $536.3 5.13% $2,002.0 $2,059.6 6.03%
======== ======== ===== ====== ====== ==== ======== ======== ====
HELD-TO-MATURITY INVESTMENTS
Due within 1 year $ 67.0 $ 68.3 10.61% $ 2.3 $ 2.4 6.44% $ 10.7 $ 10.7 4.62%
After 1 but within 5 years 276.2 304.3 9.57 3.6 3.7 5.88 -- -- --
After 5 but within 10 years 447.2 496.9 8.83 16.2 17.0 6.66 148.8 157.7 6.60
After 10 years 1,061.9 1,179.9 8.78 12.4 13.6 9.69 868.9 907.4 8.59
-------- -------- ---- ------ ------ ---- -------- -------- ----
Total $1,852.3 $2,049.4 8.98% $ 34.5 $ 36.7 7.65% $1,028.4 $1,075.8 8.26%
======== ======== ===== ====== ====== ==== ======== ======== ====
</TABLE>
*Computed by dividing annualized interest by the amortized cost of the
respective investment securities.
3. FINANCE AND BANKING RECEIVABLES
<TABLE>
<CAPTION>
In millions.
At December 31 1993 1992
- -------------- --------- ---------
<S> <C> <C>
First mortgage $ 3,534.1 $ 4,513.8
Home equity 2,850.9 2,943.6
Other secured 875.4 827.9
Bankcard 4,356.9 3,416.9
Merchant participation 2,636.5 2,063.8
Other unsecured 4,320.8 3,850.6
Equipment financing and other 765.9 832.7
--------- ---------
Receivables owned 19,340.5 18,449.3
Accrued finance charges 251.8 257.7
Credit loss reserve for owned receivables (424.0) (345.8)
Unearned credit insurance premiums and claims reserves (117.5) (113.7)
Amounts due and deferred from receivables sales 735.0 873.8
Reserve for receivables serviced with limited recourse (222.8) (160.7)
--------- ---------
Total receivables owned, net 19,563.0 18,960.6
Receivables serviced with limited recourse 9,827.8 7,946.3
Receivables serviced with no recourse 15,229.4 11,406.7
--------- ---------
Total receivables owned or serviced, net $44,620.2 $38,313.6
========= =========
</TABLE>
Foreign receivables included in receivables owned were as follows:
<TABLE>
<CAPTION>
1993 1992
-------------------------------- -------------------------------
In millions. UNITED United
At December 31 CANADA KINGDOM AUSTRALIA Canada Kingdom Australia
- -------------- ------ ------- --------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
First mortgage $ 789.3 $ 54.1 -- $ 861.0 $ 63.1 --
Home equity 384.5 127.0 $ 76.6 508.9 130.7 $ 67.0
Other secured 71.4 -- 161.1 91.4 -- 176.7
Merchant participation 225.9 356.2 30.7 248.0 267.3 34.1
Other unsecured 394.2 613.8 106.6 403.0 622.3 133.3
-------- -------- ------ -------- -------- ------
Total $1,865.3 $1,151.1 $375.0 $2,112.3 $1,083.4 $411.1
======== ======== ====== ======== ======== ======
</TABLE>
<PAGE> 40
Advances from the Federal Home Loan Bank and other borrowings of the
company's banking subsidiary were secured by first mortgage receivables
totaling approximately $1.0 billion at December 31, 1993. Receivables held for
trade which are first mortgage loans that were originated or purchased with the
intent to be resold totaled $661.7 and $246.0 million at December 31, 1993 and
1992, respectively.
The company has securitized and sold certain receivables which it
services with limited recourse. Securitizations and sales of receivables,
including replenishments of certificate holders interests, were as follows:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1993 1992 1991
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
Home equity $1,667.5 $1,986.4 $1,858.3
Bankcard 7,563.2 2,335.6 2,430.2
Merchant participation 213.6 484.9 445.7
Other unsecured -- -- 75.2
-------- -------- --------
Total $9,444.3 $4,806.9 $4,809.4
======== ======== ========
</TABLE>
The outstanding balance of receivables serviced with limited recourse consisted
of the following:
<TABLE>
<CAPTION>
In millions.
At December 31 1993 1992
- -------------- -------- --------
<S> <C> <C>
Home equity $5,029.5 $4,799.3
Bankcard 4,485.7 2,309.7
Merchant participation 312.6 602.5
Other unsecured -- 234.8
-------- --------
Total $9,827.8 $7,946.3
======== ========
</TABLE>
The combination of receivables owned and receivables serviced with limited
recourse, which the company considers its managed portfolio, is shown below:
<TABLE>
<CAPTION>
In millions.
At December 31 1993 1992
- -------------- --------- ---------
<S> <C> <C>
First mortgage $ 3,534.1 $ 4,513.8
Home equity 7,880.4 7,742.9
Other secured 875.4 827.9
Bankcard 8,842.6 5,726.6
Merchant participation 2,949.1 2,666.3
Other unsecured 4,320.8 4,085.4
Equipment financing and other 765.9 832.7
--------- ---------
Receivables managed $29,168.3 $26,395.6
========= =========
</TABLE>
For certain securitizations, wholly-owned subsidiaries were created (HRSI
Funding, Inc., HFS Funding Corporation, Household Finance Receivables
Corporation II, Household Receivables Funding Corporation II, and HFC Funding
Corporation) for the limited purpose of consummating such transactions.
The amount due and deferred from receivables sales of $735.0 million at
December 31, 1993 included unamortized excess servicing assets and funds
established pursuant to the recourse provisions and holdback reserves for
certain sales totaling $608.4 million. The amount due and deferred also
included customer payments not yet remitted by the securitization trustee to
the company. In addition, the company has made guarantees relating to certain
securitizations of $281.3 million plus unpaid interest and has subordinated
interests in certain transactions, which are recorded as receivables, for
$190.8 million at December 31, 1993. 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 $222.8 million at December 31, 1993 and represent the
company's best estimate of probable losses on receivables serviced with limited
recourse.
<PAGE> 41
Contractual maturities of owned receivables were as follows:
<TABLE>
<CAPTION>
In millions. There-
At December 31, 1993 1994 1995 1996 1997 1998 after Total
- -------------------- -------- -------- -------- -------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage $ 360.2 $ 107.3 $ 119.2 $ 179.4 $194.2 $2,573.8 $ 3,534.1
Home equity 851.2 345.4 228.8 178.5 138.2 1,108.8 2,850.9
Other secured 214.0 137.8 94.2 128.3 96.5 204.6 875.4
Bankcard 760.2 763.7 799.3 825.2 156.2 1,052.3 4,356.9
Merchant participation 1,403.9 663.7 370.7 151.2 15.8 31.2 2,636.5
Other unsecured 1,787.6 792.2 498.3 311.4 204.4 726.9 4,320.8
Equipment financing
and other 67.0 32.5 55.2 29.7 79.9 501.6 765.9
-------- -------- -------- -------- ------ -------- ---------
Total $5,444.1 $2,842.6 $2,165.7 $1,803.7 $885.2 $6,199.2 $19,340.5
======== ======== ======== ======== ======= ======== =========
</TABLE>
First mortgages have maximum terms of up to 30 years, whereas other consumer
receivables have substantially shorter maximum terms. A
substantial portion of all consumer receivables, based on the company's
experience, will be paid prior to contractual maturity. This tabulation,
therefore, is not to be regarded as a forecast of future cash collections.
The ratio of annual cash collections of principal to average principal
balances, excluding bankcard receivables, approximated 44 and 41 percent in
1993 and 1992, respectively.
The following table summarizes contractual maturities of owned
receivables due after one year by repricing characteristic:
<TABLE>
<CAPTION>
Over 1
In millions. But Within
At December 31, 1993 5 years 5 Years
- -------------------- -------- --------
<S> <C> <C>
Receivables at predetermined interest rates $3,281.1 $3,775.4
Receivables at floating or adjustable rates 4,416.1 2,423.8
-------- --------
Total $7,697.2 $6,199.2
======== ========
</TABLE>
Finance and Banking nonaccrual owned receivables totaled $409.1 million at
December 31, 1993 including $145.4 million relating to foreign operations.
Interest income that would have been recorded in 1993 if such nonaccrual
receivables had been current and in accordance with contractual terms was
approximately $63 million, including $27 million relating to foreign
operations. Interest income that was included in net income for 1993 on those
receivables was approximately $32 million, including $12 million relating to
foreign operations. For further information on nonperforming assets, see Credit
Quality Statistics on pages 37 and 46.
For an analysis of Finance and Banking reserves for credit losses, see
pages 35 and 36.
4. LIQUIDATING COMMERCIAL ASSETS
<TABLE>
<CAPTION>
In millions.
At December 31 1993 1992
- ---------------- -------- -------
<S> <C> <C>
Receivables
Commercial real estate $ 297.1 $ 349.4
Acquisition finance and other 892.8 1,269.6
-------- --------
Receivables owned 1,189.9 1,619.0
Accrued finance charges 9.2 12.1
Reserve for credit losses (172.9) (203.3)
-------- --------
Total receivables owned, net 1,026.2 1,427.8
Real estate owned 256.6 249.6
Other assets 272.9 173.8
-------- --------
Total liquidating commercial assets $1,555.7 $1,851.2
======== ========
</TABLE>
At December 31, 1993 contractual maturities of receivables were: Within 1
year--$207.3 million; 1-2 years--$99.1 million; 2-3 years--$249.1 million; 3-4
<PAGE> 42
years--$158.9 million; 4-5 years--$129.9 million and over 5 years--$345.6
million. Receivables with predetermined interest rates maturing in over 1 year
but within 5 years were $331.1 million, and those maturing in over 5 years were
$288.2 million. Receivables with floating or adjustable rates maturing in over
1 year but within 5 years were $305.9 million, and those maturing in over 5
years were $57.4 million.
See pages 35 and 36 for an analysis of the liquidating commercial assets
reserve for credit losses.
Liquidating commercial nonaccrual loans totaled $228.7 million at
December 31, 1993. See page 37 for nonaccrual data for prior years. Interest
income that would have been recorded in 1993 if such nonaccrual receivables had
been current and in accordance with contractual terms was approximately $33
million. Interest income that was included in net income in 1993 on those
receivables was approximately $2 million.
Renegotiated loans included in liquidating commercial assets at December
31, 1993 totaled $28.7 million. The company recorded $2.5 million of interest
earned on such loans in 1993. Had the loans been performing in accordance with
their original terms, interest income in 1993 would have been approximately $4
million higher. There were $.7 million of commitments at December 31, 1993 to
lend additional funds to borrowers whose loans were renegotiated. See page 37
and pages 48 and 49 for further information on nonperforming assets.
5. DEPOSITS
<TABLE>
<CAPTION>
1993 1992
------------------ ------------------
WEIGHTED Weighted
All dollar amounts are stated in millions. AVERAGE Average
At December 31 AMOUNT RATE Amount Rate
- ------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
DOMESTIC
Time certificates $3,094.4 3.6% $3,706.9 5.6%
Savings accounts 2,287.9 2.9 2,130.4 3.3
Demand accounts 702.9 1.0 644.9 1.4
-------- --- -------- ----
Total domestic deposits 6,085.2 3.0 6,482.2 4.4
-------- --- -------- ----
FOREIGN
Time certificates 1,157.8 8.2 1,338.7 10.3
Savings accounts 268.5 5.5 188.4 8.5
Demand accounts 4.6 3.7 21.0 5.5
-------- --- -------- ----
Total foreign deposits 1,430.9 7.7 1,548.1 10.1
-------- --- -------- ----
Total deposits $7,516.1 3.9% $8,030.3 5.5%
======== === ======== ====
</TABLE>
Average deposits and related weighted average interest rates were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---------------------- ---------------------- ----------------------
AVERAGE WEIGHTED Average Weighted Average Weighted
All dollar amounts are stated in millions. DEPOSITS AVERAGE RATES Deposits Average Rates Deposits Average Rates
- ------------------------------------------ -------- ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC
Time certificates $3,368.3 3.9% $3,952.1 5.8% $3,996.8 7.4%
Savings and demand accounts 2,875.9 2.5 2,687.9 3.0 1,987.3 4.6
-------- --- -------- ---- -------- ----
Total domestic deposits 6,244.2 3.3 6,640.0 4.7 5,984.1 6.5
-------- --- -------- ---- -------- ----
FOREIGN
Time certificates 1,278.5 8.2 1,122.2 10.7 1,169.2 11.2
Savings and demand accounts 212.3 5.8 224.7 10.1 581.5 12.1
-------- --- -------- ---- -------- ----
Total foreign deposits 1,490.8 7.9 1,346.9 10.6 1,750.7 11.5
-------- --- -------- ---- -------- ----
Total deposits $7,735.0 4.2% $7,986.9 5.8% $7,734.8 7.7%
======== === ======== ==== ======== ====
</TABLE>
Interest expense on deposits was $321.2, $462.9 and $595.1 million for
1993, 1992 and 1991, respectively. Interest expense on domestic deposits was
$203.9, $309.3 and $387.9 million for 1993, 1992 and 1991, respectively.
<PAGE> 43
Maturities of time certificates in amounts of $100,000 or more were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1993 Domestic Foreign Total
- -------------------- -------- ------- ------
<S> <C> <C> <C>
3 months or less $ 61.3 $102.4 $163.7
Over 3 months through 6 months 40.8 75.0 115.8
Over 6 months through 12 months 49.0 7.4 56.4
Over 12 months 104.8 7.9 112.7
------ ------ ------
Total $255.9 $192.7 $448.6
====== ====== ======
</TABLE>
Contractual maturities of time certificates within each interest rate range
were as follows:
<TABLE>
<CAPTION>
In millions.
At December 31, 1993 1994 1995 1996 1997 1998 Thereafter Total
- -------------------- -------- ------ ------ ------ ----- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE
< 4.00% $1,359.4 $129.8 $ 22.3 $ .5 $ .2 $ .2 $1,512.4
4.00% -- 5.99% 613.7 199.6 77.5 37.0 57.9 34.9 1,020.6
6.00% -- 7.99% 329.1 55.7 118.3 22.2 24.2 116.6 666.1
8.00% -- 9.99% 220.6 154.5 108.7 298.7 12.5 61.1 856.1
10.00% -- 13.99% 87.8 85.8 21.6 .2 1.3 .3 197.0
-------- ------ ------ ------ ----- ------ --------
Total $2,610.6 $625.4 $348.4 $358.6 $96.1 $213.1 $4,252.2
======== ====== ====== ====== ===== ====== ========
</TABLE>
6. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS
<TABLE>
<CAPTION>
Bank and
All dollar amounts are stated in millions. Commercial Other
At December 31 Paper* Borrowings Total
- -------------- --------- ---------- --------
<S> <C> <C> <C>
1993
Balance $4,123.5 $1,518.6 $5,642.1
Highest aggregate month-end balance -- -- 6,582.4
Average borrowings 3,826.9 1,978.8 5,805.7
Weighted average interest rate:
At year end 3.7% 5.2% 4.1%
Paid during year 3.7% 5.5% 4.3%
-------- -------- --------
1992
Balance $3,519.9 $1,733.4 $5,253.3
Highest aggregate month-end balance -- -- 5,636.1
Average borrowings 3,721.7 1,377.7 5,099.4
Weighted average interest rate:
At year end 4.3% 5.4% 4.7%
Paid during year 4.1% 8.1% 5.2%
-------- -------- --------
1991
Balance $2,765.8 $1,376.6 $4,142.4
Highest aggregate month-end balance -- -- 6,311.8
Average borrowings 3,778.3 1,759.9 5,538.2
Weighted average interest rate:
At year end 5.9% 8.8% 6.8%
Paid during year 6.4% 8.6% 7.1%
-------- -------- --------
</TABLE>
*Included in outstanding balances at year-end 1993, 1992, and 1991 were
commercial paper obligations of foreign subsidiaries of $583.3, $487.6 and
$522.6 million, respectively.
Interest expense for commercial paper, bank and other borrowings totaled
$251.1, $263.2 and $391.2 million for 1993, 1992 and 1991, respectively.
The company maintains various bank credit agreements primarily to
support commercial paper borrowings. At December 31, 1993 the company had total
bank credit agreements of $5.3 billion, of which $4.3 billion were unused.
<PAGE> 44
Formal credit lines are reviewed annually, and revolving credit agreements
expire at various dates from 1994 to 1997. Borrowings under credit agreements
generally are available at the prime rate or at a surcharge over the London
Interbank Offered Rate (LIBOR). Annual commitment fee requirements to support
availability of credit agreements at December 31, 1993 totaled $9.3 million.
7. SENIOR AND SENIOR SUBORDINATED DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR)
<TABLE>
<CAPTION>
In millions.
At December 31 1993 1992
- -------------- -------- --------
<S> <C> <C>
SENIOR DEBT
3.75% to 7.49%; due 1994 to 2003 $1,706.3 $1,044.7
7.5% to 7.99%; due 1994 to 2003 1,627.9 1,351.2
8.0% to 8.99%; due 1994 to 2002 1,162.3 1,553.8
9.0% to 9.99%; due 1994 to 2001 1,477.7 1,839.6
10.0% to 12.99%; due 1994 to 2001 344.8 587.9
Variable interest rate debt; 2.98% to 8.26%; due 1994 to 2015 1,778.5 1,372.6
SENIOR SUBORDINATED DEBT
6.5% to 9.63%; due 2000 to 2003 685.0 733.7
10.13% to 11.15%; due 1996 to 1998 215.0 314.7
PREFERRED STOCK OF SUBSIDIARIES
Household Finance Corporation
Exchangeable money market cumulative preferred Series A, 100 shares -- 50.0
7.25% term cumulative preferred Series 1992-A, 1,000,000 depositary shares* 100.0 100.0
Household Global Funding
9.85% term cumulative preferred, 18 and 40 shares in 1993 and 1992, respectively 36.0 80.0
Unamortized discount (19.7) (13.8)
-------- --------
Total senior and senior subordinated debt $9,113.8 $9,014.4
======== ========
</TABLE>
*Depositary share represents 1/3000 share of preferred stock.
Weighted average interest rates, excluding the impact of interest rate
swap agreements, were 7.5, 8.1 and 8.8 percent at December 31, 1993, 1992 and
1991, respectively. Including the impact of interest rate swap agreements,
weighted average interest rates were 5.1, 6.4 and 8.2 percent at December 31,
1993, 1992 and 1991, respectively. The dividends on the preferred stock of
subsidiaries have been classified in the statements of income as interest
expense. Interest expense for senior and senior subordinated debt was $577.2,
$694.1 and $900.6 million for 1993, 1992 and 1991, respectively.
Maturities of senior and senior subordinated debt were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1993
- --------------------
<S> <C>
1994 $2,210.5
1995 1,236.8
1996 1,658.8
1997 1,042.7
1998 584.0
Thereafter 2,381.0
--------
Total $9,113.8
========
</TABLE>
At December 31, 1993 the preferred stock of Household Finance Corporation
("HFC"), a wholly-owned subsidiary of the company, represented $100 million
of term cumulative preferred stock. The term cumulative preferred stock is
non-voting and has a dividend rate of 7.25 percent, is not redeemable at the
option of the company prior to the mandatory redemption date of August 15, 1997
and has a liquidation value of $100 per depositary share. On October 1, 1993
HFC's exchangeable money market cumulative preferred stock was redeemed in
whole for $500,000 per share plus accrued and unpaid dividends.
The preferred stock of Household Global Funding, Inc. ("Global")
represented term cumulative preferred stock. The term cumulative preferred
stock has a dividend rate of 9.85 percent, is not redeemable at the option of
the company prior to the mandatory redemption date of October 1, 1996 and has a
liquidation value of $2 million per share. During 1993 Global exchanged $44
million of the 9.85 percent term cumulative preferred stock for an identical
amount of fixed rate senior debt maturing on October 1, 1996. In January 1994
Global exchanged an additional $22 million of the 9.85 percent term cumulative
<PAGE> 45
preferred stock for an identical amount of fixed rate senior debt maturing on
October 1, 1996.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
In connection with its asset/liability management program and in the
normal course of business, the company enters into various transactions
involving off-balance sheet financial instruments. These instruments are used
to reduce the company's exposure to fluctuations in interest rates and foreign
exchange rates, and to a lesser extent for proprietary trading purposes or to
meet the financing needs of its customers. The company does not serve as a
financial intermediary to make markets in any off-balance sheet financial
instruments. These financial instruments, which include interest rate
contracts, foreign exchange rate contracts, commitments to extend credit,
financial guarantees and recourse obligations 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 under commitments to extend
credit, financial guarantees and recourse obligations is represented by the
contract amount. The company's credit quality and collateral policies for
commitments and guarantees are the same as those for receivables that are
recorded on the balance sheet. 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 never experienced
nonperformance by any 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 and by entering into
counterbalancing positions.
OFF-BALANCE SHEET INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS The
following tables summarize the notional amounts of the company's off-balance
sheet interest rate and foreign exchange contracts:
<TABLE>
<CAPTION>
Notional Matured or Notional Fair
In millions. Amount New Expired Terminated Amount Value
At December 31 1992* Contracts Contracts Contracts 1993* 1993
- -------------- --------- --------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
HEDGING INSTRUMENTS
Interest rate swaps $10,418.3 $8,866.5 $(3,384.5) $ (920.5) $14,979.8 $299.8
Forwards and futures, net (559.3) 3,347.4 (3,995.5) 263.2 (944.2) (.9)
Options, net 85.5 (248.3) 173.6 (11.2) (.4) --
Other risk management instruments 435.3 1,203.1 (222.1) -- 1,416.3 49.3
========= ======== ========= ======== ========= ======
<CAPTION>
Notional Notional Fair
In millions. Amount Net Amount Value
At December 31 1992* Change 1993* 1993
- -------------- --------- -------- --------- -----
<S> <C> <C> <C> <C>
TRADING INSTRUMENTS
Interest rate swaps $ 100.0 -- $ 100.0 $.6
Forwards and futures, net (397.8) $ (194.5) (592.3) (.7)
Options, net (7,917.5) 1,180.4 (6,737.1) .8
Other risk management instruments 800.0 (300.0) 500.0 --
========= ======== ========= ===
</TABLE>
*Bracketed amounts at year end represent net short positions.
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 utilizes interest rate swaps to allow it to match fund its receivables,
which are primarily floating rate, with its liabilities, which are primarily
fixed rate. Credit and market risks exist with respect to these instruments.
<PAGE> 46
The following table summarizes the interest rate swaps outstanding:
<TABLE>
<CAPTION>
Weighted Average
Interest Rates Weighted
All dollar amounts are stated in millions. Notional ---------------- Average
At December 31, 1993 Amount Pay Receive Maturity
- -------------------- -------- ---- ------- --------
<S> <C> <C> <C> <C>
TYPE
Pay a fixed rate/receive a floating rate $ 1,121.7 7.72% 3.90% 1.9 years
Pay a floating rate/receive a fixed rate 9,570.9 3.13 5.57 3.6 years
Pay a floating rate/receive a different floating rate 4,387.2 3.38 3.68 1.5 years
--------- ---- ---- ---------
Total $15,079.8
=========
</TABLE>
Forwards and futures are contracts for delivery at a future date in
which the buyer agrees to take delivery of a specified instrument or cash at a
specified price. 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 exposure in its foreign
operations to fluctuations in exchange rates. Interest rate forward and
interest rate futures contracts primarily are used in the company's
proprietary trading activities. Interest rate forward and futures contracts
also are used to mitigate basis risk which arises due to the difference in
movement of market rate indices (prime and LIBOR) on which a large portion of
the company's assets and liabilities are priced. For futures, the company's
exposure to credit risk is limited as these contracts are traded on organized
exchanges and are settled on a daily basis with the exchanges. In contrast,
forward contracts have credit risk relating to the performance of the
counterparty. These instruments also are subject to market risk. For forward
and futures contracts entered into as hedging activities, the company had
commitments to purchase of $680.7 and $543.6 million and commitments to sell
of $1,624.9 and $1,102.9 million at December 31, 1993 and 1992, respectively.
In connection with its trading activities, the company had commitments to
purchase of $342.5 and $2,710.2 million and commitments to sell of $934.8 and
$3,108.0 million at December 31, 1993 and 1992, respectively.
Options grant the purchaser the right to either purchase or sell a
financial instrument at a specified price within a specified period. The
company primarily uses options, both written and purchased, for its
proprietary trading activities. Gains and losses from the company's trading
activities were immaterial to the financial results of the company. For
written options, the company is exposed to market risk but generally not
credit risk. The credit risk and market risk associated with purchased options
is limited to the premium paid which is recorded on the balance sheet. The
company had options purchased for trading activities of $9.7 and $2.7 billion
and options written for trading activities of $16.4 and $10.6 billion at
December 31, 1993 and 1992, respectively. The company also had options
purchased for hedging activities of $69.6 and $100.0 million and options
written for hedging activities of $70.0 and $14.5 million at December 31, 1993
and 1992, respectively.
Other risk management instruments consist of caps and floors and
foreign currency swaps. Caps and floors written expose the company to market
risk but not to credit risk. Credit and market risk associated with caps and
floors purchased is limited to the premium paid which is recorded on the
balance sheet.
Deferred gains of $10.2 and $15.4 million and deferred losses of $22.5
and $16.4 million were recorded on the balance sheet from interest rate risk
management instruments at December 31, 1993 and 1992, respectively. The
weighted average amortization period associated with the deferred gains was
3.8 years at both December 31, 1993 and 1992. The weighted average amortization
period for the deferred losses was 4.0 and 2.2 years at December 31, 1993 and
1992, respectively.
Interest margin was increased by $207.0, $110.8 and $36.1 million in
1993, 1992 and 1991, respectively, through the use of off-balance sheet
interest rate risk management instruments.
At December 31, 1993 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 $78.3
million.
COMMITMENTS AND GUARANTEES The company enters into various commitments
and guarantees to meet the financing needs of its customers. However, the
company expects a substantial portion of these agreements to expire
unexercised.
<PAGE> 47
The company's significant commitments and guarantees consisted of the
following:
<TABLE>
<CAPTION>
In millions.
At December 31 1993 1992
- -------------- --------- ---------
<S> <C> <C>
Bank and private-label credit cards $43,164.0 $29,151.0
Other consumer lines of credit 2,771.8 2,586.1
Other loan commitments and guarantees 3,121.1 2,142.3
</TABLE>
Commitments to extend credit to consumers represent the unused credit limits on
bank and private-label credit cards and on other lines of credit. Commitments
on bank and private-label credit cards are cancelable at any time. The
company does not require collateral to secure credit card agreements. Other
consumer lines of credit include home equity lines of credit, which are secured
by residential real estate, and other unsecured lines of credit. Commitments on
these lines of credit generally are cancelable by the company when a
determination is made that a borrower may not be able to meet the terms of the
credit agreement.
Other loan commitments include commitments to originate and purchase
mortgage loans, commitments to fund commercial loans and letters of credit and
guarantees for the payment of principal and interest on municipal industrial
development bonds.
Commitments to originate or purchase approved consumer mortgages and
commitments to purchase mortgage-backed securities totaled approximately $1.7
and $1.3 billion at December 31, 1993 and 1992, respectively. The company also
had commitments to sell loans and mortgage-backed securities of approximately
$1.0 and $.5 billion at December 31, 1993 and 1992, respectively.
Commercial loan commitments, primarily related to the Liquidating
Commercial Lines segment, including working capital lines and letters of
credit, totaled $153 and $169 million at December 31, 1993 and 1992,
respectively. These commitments are collateralized to varying extents by
inventory, receivables, property and equipment and other assets of the
borrowers. These commitments were entered into prior to the company's decision
to exit these product lines.
The company has issued guarantees of $146 million at both December 31,
1993 and 1992 for the payment of principal and interest on municipal industrial
development bonds. The guarantees expire from 1994 through 1997. The company
has security interests in underlying properties for these guarantees, with an
average collateral value of 112 and 111 percent of the guarantees at December
31, 1993 and 1992, respectively.
OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Certain receivables securitized and serviced with limited recourse
include floating interest rate provisions whereby the underlying receivables
pay a fixed (floating) rate and the pass-through rate to the investor is
floating (fixed). Further, in other transactions the underlying receivables
reprice based on one index while the pass-through rate reprices on another
index. The company manages its exposure to interest rate risk on these
financial instruments primarily through the use of interest rate swaps. See
Note 3, "Finance and Banking Receivables," for additional information on
securitizations and sales of receivables.
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, 1993 and 1992. The company lends
nationwide; the following geographic areas comprised more than 10 percent of
total managed domestic receivables at December 31, 1993: California--22
percent, Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)--25 percent,
Middle Atlantic (DE, DC, MD, NJ, PA, VA, WV)--16 percent, Northeast (CT, ME,
MA, NH, NY, RI, VT)--13 percent and Southeast (AL, FL, GA, KY, MS, NC, SC,
TN)--13 percent.
9. CONVERTIBLE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
At December 31, 1993 and 1992 the company had outstanding 385,439 and
720,415 shares, respectively, of the $6.25 cumulative convertible preferred
stock subject to mandatory redemption provisions (the "$6.25 stock"). Each
share of the $6.25 stock is convertible, at the option of its holder, into
4.654 shares of common stock, is entitled to one vote, as are common shares,
and has a liquidation value of $50 per share. Holders of such stock are
entitled to payment before any capital distribution is made to common
shareholders. The company is required to call for redemption, on an annual
basis through 2010, a minimum of 4 percent to a maximum of 8 percent of the
<PAGE> 48
3.5 million originally issued shares and is required to redeem all of the
remaining unconverted and unredeemed shares in 2011. The company called for
redemption 8 percent of the originally issued shares in both 1993 and 1992.
The company redeemed 2,323 and 4,711 shares for $50 per share in 1993 and 1992,
respectively. The remaining shares called, but not redeemed for cash, were
converted into common stock. If certain conditions are met, the company
may redeem the entire $6.25 stock issue at $50 per share plus accrued and
unpaid dividends. At December 31, 1993 1.8 million shares of common stock
were reserved for conversion of the $6.25 stock.
10. PREFERRED STOCK
<TABLE>
<CAPTION>
In millions.
At December 31 1993 1992
- -------------- ----- ------
<S> <C> <C>
FIXED RATE AND ENHANCED RATE PREFERRED STOCK
9.50% Preferred stock Series 1989-A,
3,000,000 depositary shares (1) $ 75.0 $ 75.0
9.50% Preferred stock Series 1991-A,
5,500,000 depositary shares (2) 55.0 55.0
8.25% Preferred stock Series 1992-A,
2,000,000 depositary shares (3) 50.0 50.0
7.35% Preferred stock Series 1993-A,
4,000,000 depositary shares (3) 100.0 --
11.25% Enhanced rate preferred stock,
4,500,000 depositary shares (2) -- 45.0
FLEXIBLE RATE AUCTION PREFERRED STOCK
Series A, 350,000 shares -- 35.0
Series B, 400,000 shares 40.0 40.0
------ ------
Total preferred stock $320.0 $300.0
====== ======
</TABLE>
(1) Depositary share represents 1/4 share of preferred stock.
(2) Depositary share represents 1/10 share of preferred stock.
(3) Depositary share represents 1/40 share of preferred stock.
Dividends on the 9.50 percent preferred stock, Series 1989-A are cumulative
and payable quarterly. The company may, at its option, redeem in whole or in
part the 9.50 percent preferred stock, Series 1989-A at $26.19 per
depositary share beginning on November 9, 1994 and at amounts declining to $25
per depositary share thereafter, plus accrued and unpaid dividends.
Dividends on the 9.50 percent preferred stock, Series 1991-A, are cumulative
and payable quarterly. The company may, at its option, redeem in whole or in
part the 9.50 percent preferred stock, Series 1991-A on any date after August
13, 1996 for $10 per depositary share plus accrued and unpaid dividends.
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.
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.
On October 1, 1993 the company redeemed 450,000 shares (equivalent to
4,500,000 depositary shares) of the 11.25 percent Enhanced Rate Cumulative
Preferred Stock for $102.50 per share plus accrued and unpaid dividends.
On July 13, 1993 the company redeemed 350,000 shares of the Flexible Rate
Auction Preferred Stock, Series A for $100 per share plus accrued and unpaid
dividends.
Dividends on the flexible rate auction preferred stock ("Flex APS")
are cumulative and payable when and as declared by the Board of Directors of
the company. The initial dividend rate on the Flex APS Series B is 9.50
percent. The initial rate on the Flex APS Series B extends through July 15,
1995 with subsequent dividend rates determined in accordance with a formula
based on orders placed in a dutch auction generally held every 49 days. The
company may, at its option, redeem in whole or in part the Flex APS Series B
for $100 per share plus accrued and unpaid dividends beginning on July 15,
1995.
Each preferred stock issue ranks equally with the $6.25 stock and has a
liquidation value of $100 per share except for the 8.25 percent preferred
stock, Series 1992-A and the 7.35 percent preferred stock, Series 1993-A which
have 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 company is authorized to issue cumulative
nonconvertible preferred stock in one or more series in an amount not to exceed
$500 million.
<PAGE> 49
11. PREFERRED STOCK PURCHASE RIGHTS
The company has issued one preferred stock purchase right for each share of
common stock. Under certain conditions, each right may be exercised to purchase
one one-hundredth of a share of a new series of participating preferred stock
at an exercise price of $100, subject to adjustment. The rights may be
exercised only after a public announcement that a party acquired or obtained
the right to acquire 20 percent or more of the company's common stock or after
commencement or public announcement of an offer for 30 percent or more of the
company's common stock. The rights, which cannot vote, expire on August 31,
1994 and may be redeemed by the company at a price of $.50
per right at any time prior to expiration or acquisition of 20 percent of the
company's common stock. The participating preferred stock purchasable upon
exercise of the rights is nonredeemable and subordinate to the company's
currently outstanding preferred stock.
In the event that the company is acquired in a merger or other business
combination transaction, provision shall be made so that each holder of a right
shall have the right to receive, upon exercise thereof at the then current
exercise price, that number of shares of common stock of the surviving company
which at the time of such transaction would have a market value of two times
the exercise price of the right.
12. COMMON STOCK
On September 14, 1993 the board of directors of the company declared a
two-for-one stock split in the form of a 100 percent stock dividend effective
October 15, 1993. The stock split resulted in an increase in common stock and a
reduction in additional paid-in capital of $56.6 million. All share and per
share data, except as otherwise indicated, have been restated to give
retroactive effect to the stock split.
On March 8, 1993 the company sold 4,025,000 shares of common stock at
$68.88 per share, on a pre-split basis. Net proceeds of approximately $269
million were used for general corporate purposes, including investments in the
company's subsidiaries and reduction of short-term debt. Assuming the
additional shares of common stock had been issued on January 1, 1993 and the
proceeds resulted in after-tax interest savings from reduction of short-term
debt since that date, earnings per share for 1993 would have been $2.82 per
share on a fully diluted basis.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The company has estimated the fair value of its financial instruments in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments" ("FAS No. 107"). The
estimates were made as of December 31, 1993 and 1992 based on relevant market
information. Financial instruments include cash, receivables, investments,
liquidating commercial assets, debt, certain insurance reserves and off-balance
sheet financial instruments. Accordingly, a number of other assets recorded in
the balance sheet (such as core deposit intangibles and acquired credit card
relationships) and other intangible assets not recorded in the balance sheet
(such as the value of consumer lending relationships for originated receivables
and the franchise values of the company's business units) are not required to
be 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. The company has estimated the value of
its core deposits as discussed more fully below.
Approximately 25 percent in 1993 and 30 percent in 1992 of the fair value
of financial instruments disclosed were determined using quoted market prices.
Because no actively traded market exists, however, 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
collectability 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 were 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.
<PAGE> 50
The following is a summary of the carrying value and estimated fair value
of the company's financial instruments:
<TABLE>
<CAPTION>
1993 1992
----------------------------------- -----------------------------------
ESTIMATED ESTIMATED
In millions. CARRYING FAIR CARRYING FAIR
At December 31 VALUE VALUE DIFFERENCE VALUE VALUE DIFFERENCE
- -------------- -------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash $ 317 $ 317 -- $ 256 $ 256 --
Investment securities 8,795 9,046 $ 251 7,390 7,633 $ 243
Finance and banking receivables 19,563 20,202 639 18,960 19,302 342
Liquidating commercial assets 1,556 1,441 (115) 1,851 1,677 (174)
-------- -------- ------ -------- -------- -----
Subtotal 30,231 31,006 775 28,457 28,868 411
-------- -------- ------ -------- -------- -----
Deposits (7,516) (7,638) (122) (8,030) (8,161) (131)
Commercial paper, bank and other borrowings (5,642) (5,642) -- (5,253) (5,253) --
Senior and senior subordinated debt (9,114) (9,574) (460) (9,014) (9,333) (319)
Insurance reserves (6,064) (6,434) (370) (5,326) (5,526) (200)
-------- -------- ------ -------- -------- -----
Subtotal (28,336) (29,288) (952) (27,623) (28,273) (650)
-------- -------- ------ -------- -------- -----
Interest rate and foreign exchange contracts 78 349 271 43 148 105
Commitments to extend credit and guarantees -- 36 36 -- 20 20
-------- -------- ------ -------- -------- -----
Subtotal 78 385 307 43 168 125
-------- -------- ------ -------- -------- -----
Total $ 1,973 $ 2,103 $ 130 $ 877 $ 763 $(114)
======== ======== ===== ======== ======== =====
</TABLE>
The estimated fair value in excess of carrying value of the company's financial
instruments was $130 million at December 31, 1993, an increase of $244 million
from year-end 1992. The relationship between the decline in the overall
interest rate environment from December 31, 1992 to December 31, 1993 and the
repricing characteristics of the company's assets and liabilities was the
most significant factor in causing increases in the excess of fair value over
carrying value (the "Difference"). The adoption of FAS No. 115 on December
31, 1993 reduced the Difference associated with investment securities as
available-for-sale investment securities are now carried at estimated fair
value. Excluding the impact of FAS No. 115, the Difference for investment
securities at December 31, 1993 would have been approximately $403 million. The
excess of carrying value over estimated fair value of liquidating commercial
assets declined in 1993, as discussed more fully below.
Recently adopted generally accepted accounting principles (FAS No. 115)
require recognition of the difference between fair market and carrying values
of certain debt and equity securities. As previously disclosed, the
differential increased shareholders' equity by $40.5 million after partially
offsetting adjustments for the impact of income taxes and deferred insurance
policy acquisition costs. The company believes it is not meaningful to evaluate
the difference between fair market and carrying values for assets without
evaluating similar differences for all liabilities and off-balance sheet
financial instruments utilized in the company's asset/liability management
process. As market interest rates change, application of this new accounting
principle will result in volatility of the reported capital base that is
inconsistent with economic value. The analysis presented on the previous page
presents a more complete view of the differences between fair market and
carrying values of both assets and liabilities. Although the disclosed pretax
excess of fair value over carrying value of $130 million covers a substantial
portion of the elements of the company's financial position, it excludes the
substantial value associated with core deposit and other intangible values
described earlier. Core deposits provide stable, low cost funding compared to
alternative sources of funds. The estimated value associated with the company's
core deposits at December 31, 1993 was $156 million. In addition, the
disclosures presented previously exclude fair market valuation of certain
insurance reserves and leases as prescribed by generally accepted accounting
principles. Both the analysis of the fair value information presented
previously, as well as the adjustments required by FAS No. 115, therefore have
inherent limitations.
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: Quoted market prices were used to determine fair
<PAGE> 51
value for investment securities.
Finance and banking receivables: Quoted market prices were used to
determine fair value for domestic first mortgages. 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 consumer 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 in a
low interest rate environment.
The fair value of consumer receivables included an estimate, on a
present value basis, of future excess servicing cash flows associated with
securitizations and sales of certain home equity, bankcard and merchant
participation receivables.
Liquidating Commercial Assets: The fair value of liquidating commercial
assets was determined by discounting estimated future cash flows at an
estimated market interest rate. The assumptions used in the estimate were
consistent with the company's intention to manage this portfolio of assets
separately from the Core Business and to dispose of the assets in the normal
course of business. The estimated fair value for liquidating commercial assets
was below carrying value due to increases in current market discount rates,
adjusted for changes in overall market rates, from rates in effect when assets
were originated. This change in discount rates impacts all assets regardless of
whether any uncertainty exists over collectability of future principal and
interest payments. The company believes the relative increase in current market
discount rates is due to economic conditions and market perceptions towards the
types of commercial assets which the company decided to discontinue in 1991.
While these market perceptions improved slightly during 1993, they still remain
unfavorable, which has resulted in illiquid and sluggish markets for these
assets. Because of these current market conditions, the company currently
intends to collect or otherwise dispose of its liquidating commercial assets
over several years. The decrease in the difference between estimated fair value
and carrying value in 1993 compared to 1992 reflects the belief that current
market conditions, while depressed, have improved and will continue to improve
over the next several years. Accordingly, the company does not believe that the
differential between estimated fair and carrying values for liquidating
commercial assets represents a permanent impairment of value.
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: Quoted market prices where
available were used to determine fair value. For those instruments for which
quoted market prices were not available, the estimated fair value 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 and guaranteed investment contracts was estimated by
discounting future expected cash flows at interest rates offered by the company
on such products at December 31, 1993 and 1992. The fair value of other
insurance reserves is not required to be determined in accordance with FAS No.
107. The company believes the fair value of such reserves approximates 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.
Interest rate and foreign exchange contracts: Quoted market prices were
used to determine fair value of these instruments. See Note 8, "Financial
Instruments with Off-Balance Sheet Risk and Concentrations of Credit 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 counter-party, the
creditworthiness of the counterparty and the difference between committed and
current interest rates.
<PAGE> 52
14. LEASES AND OTHER SIMILAR ARRANGEMENTS
The company leases certain offices, buildings and equipment for periods of up
to 29 years with various renewal options. The majority of such leases are
noncancelable operating leases. Net rental expense under operating leases was
$71.1, $72.1 and $69.0 million for 1993, 1992 and 1991, respectively.
In the fourth quarter of 1991, the company purchased credit card
receivables of approximately $1 billion from CoreStates Financial Corporation.
An unaffiliated third party acquired the rights to the account relationships
associated with the receivables. The company is entitled to utilize the
account relationships under a licensing agreement with the third party. This
licensing arrangement is noncancelable and has an initial term expiring in
1998. Net expense under this licensing arrangement was $32.9 million in both
1993 and 1992, and $8.3 million in 1991.
Future net minimum lease and other commitments under noncancelable
operating lease and licensing arrangements were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1993
- --------------------
<S> <C>
1994 $ 90.8
1995 83.8
1996 78.0
1997 73.9
1998 49.6
Thereafter 122.8
------
Net minimum lease and other commitments $498.9
======
</TABLE>
15. INCENTIVE COMPENSATION AND STOCK OPTION PLANS
The company's executive compensation plans provide for issuance of
nonqualified stock options and incentive stock options. 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. At December 31, 1993 shares exercisable under the
plans totaled 1,229,002, and shares available for future grants totaled
3,115,992.
Common stock data for the plans is summarized as follows:
<TABLE>
<CAPTION>
Shares Number* Price Per Share*
- ------ --------- ----------------
<S> <C> <C>
Outstanding at December 31, 1990 1,944,086 $ 7.02--$27.69
Granted 840,000 19.94-- 19.94
Exercised (242,382) 7.02-- 25.54
Expired or canceled (94,564) 17.69-- 25.54
--------- --------------
Outstanding at December 31, 1991 2,447,140 8.33-- 27.69
Granted 782,600 25.72-- 25.72
Exercised (298,956) 8.33-- 25.54
Expired or canceled (87,438) 17.69-- 25.72
--------- --------------
Outstanding at December 31, 1992 2,843,346 8.33-- 27.69
Granted 892,305 31.88-- 36.81
Exercised (656,174) 8.33-- 36.81
Expired or canceled (208,875) 19.94-- 31.88
--------- --------------
Outstanding at December 31, 1993 2,870,602 $10.99--$34.38
========= ==============
</TABLE>
*Amounts have been restated to reflect the two-for-one stock split in the form
of a 100 percent stock dividend, effective October 15, 1993.
16. 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, 1993
plan assets included an investment in the company's common stock and $6.25
convertible preferred stock subject to redemption of $28.3 and $14.2 million,
respectively.
<PAGE> 53
Pension income for defined benefit plans, primarily due to the
over-funded status of the domestic plan, included the following components:
<TABLE>
<CAPTION>
In millions. 1993 1992 1991
- ------------ ------ ------ ------
<S> <C> <C> <C>
Service cost--benefits earned during the period $(15.9) $(15.5) $(13.1)
Interest cost on projected benefit obligation (29.6) (29.8) (28.7)
Actual return on assets 93.4 41.1 115.0
Net amortization and deferral (24.5) 29.9 (44.1)
------ ------ ------
Pension income $ 23.4 $ 25.7 $ 29.1
====== ====== ======
</TABLE>
The funded status of defined benefit pension plans was as follows:
<TABLE>
<CAPTION>
In millions.
At December 31 1993 1992
- -------------- ------ ------
<S> <C> <C>
Actuarial present value of:
Vested benefits obligation $344.5 $305.7
Nonvested benefits obligation 45.4 32.6
------ ------
Accumulated benefit obligation 389.9 338.3
Effects of anticipated future compensation levels 28.4 27.3
------ ------
Projected benefit obligation 418.3 365.6
Plan assets at fair value 641.0 586.6
------ ------
Plan assets in excess of projected benefit obligation $222.7 $221.0
====== ======
</TABLE>
The projected benefit obligation of the foreign benefit plans totaled $46.3
and $40.7 million at December 31, 1993 and 1992, respectively. Plan assets in
excess of projected benefit obligation for these plans totaled $10.1 and $12.6
million at December 31, 1993 and 1992, respectively.
The 1993 and 1992 projected benefit obligations for the domestic defined
benefit plan were determined using an assumed weighted average discount rate of
7.25 and 8.00 percent, respectively, an assumed compensation increase of 3.75
and 4.25 percent, respectively, and an assumed weighted average long-term rate
of return on plan assets of 9.50 and 9.75 percent, respectively.
At December 31 the excess of plan assets over the projected benefit
obligation included the following components:
<TABLE>
<CAPTION>
In millions. 1993 1992
- ------------- ------- ------
<S> <C> <C>
Unamortized prior service cost $ (5.1) $ (5.0)
Net unrecognized loss from past experience different from assumed
and effects of changes in assumptions (60.0) (49.3)
Unamortized assets 60.1 72.6
Prepaid pension cost 227.7 202.7
------ ------
Plan assets in excess of projected benefit obligation $222.7 $221.0
====== ======
</TABLE>
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 1993, 1992 and 1991 these costs
totaled $15.8, $14.7 and $12.1 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.
Effective January 1, 1993 the company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("FAS No. 106"). FAS No. 106 requires the recognition of
the expected postretirement costs on an accrual basis, similar to pension
<PAGE> 54
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, which represents the unfunded and unrecognized
accumulated post- retirement benefit obligation at that date over 20 years.
The net postretirement benefit cost in 1993 included the following:
<TABLE>
<CAPTION>
In millions.
- ------------
<S> <C>
Service cost-benefits earned during the period $ (2.5)
Interest cost on accumulated postretirement benefit obligation (11.1)
Net amortization and deferral (6.5)
-------
Net periodic postretirement benefit cost $ (20.1)
=======
</TABLE>
Through 1992, it had been the company's policy to charge the cost of retiree
health care and life insurance benefits to expense when benefits were paid. The
cost of these plans totaled $2.9 and $2.5 million in 1992 and 1991,
respectively. 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:
<TABLE>
<CAPTION>
In millions.
At December 31, 1993
- --------------------
<S> <C>
Actuarial present value of postretirement benefit obligation for:
Retirees $119.8
Fully eligible active participants 9.3
Other active participants 23.4
------
Accumulated postretirement benefit obligation 152.5
Net unrecognized loss from past experience different from assumed
and effects of changes in assumptions (14.4)
Unamortized liability (123.6)
------
Accrued postretirement benefit obligation $ 14.5
======
</TABLE>
The December 31, 1993 accumulated postretirement benefit obligation was
determined using an assumed weighted average discount rate of 7.50 percent and
an assumed annual compensation increase of 3.75 percent. A 15 percent annual
rate of increase in the gross cost of covered health care benefits is assumed
for 1993 and 1994. This rate of increase is assumed to decline by 1 percentage
point in each year after 1994.
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 percentage point would have increased the 1993 net periodic postretirement
benefit cost by $1.0 million and the accumulated postretirement benefit
obligation at December 31, 1993 by $12.3 million.
17. INCOME TAXES
Effective January 1, 1993 the company adopted FAS No. 109. As a result of
implementing FAS No. 109, retained earnings for all periods between 1986 and
1992 have been reduced by approximately $63 million from amounts previously
reported. The statements of income for those periods subsequent to December 31,
1986 have not been restated as the impact of FAS No. 109 on net income was
immaterial to any such year and in total.
<PAGE> 55
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
In millions. 1993 1992 1991
- ------------- ------ ------ -----
<S> <C> <C> <C>
Provision for income taxes related to operations $152.0 $87.1 $50.0
Income taxes related to adjustments included
in common shareholders' equity:
Marketable equity securities and
investments available-for-sale 22.1 .5 3.9
Foreign currency translation adjustments 1.1 (12.2) (6.2)
Stock options (2.4) (1.1) (.7)
------ ----- -----
Total $172.8 $74.3 $47.0
====== ===== =====
</TABLE>
Provisions for income taxes related to operations were:
<TABLE>
<CAPTION>
In millions. 1993 1992 1991
- ------------ ------ ----- ------
<S> <C> <C> <C>
CURRENT
United States $170.5 $ 82.9 $126.6
Foreign (12.2) (36.1) 7.5
------ ------ ------
Total current 158.3 46.8 134.1
------ ------ ------
DEFERRED
United States 6.7 26.5 (61.3)
Foreign (13.0) 13.8 (22.8)
------ ------ ------
Total deferred (6.3) 40.3 (84.1)
------ ------ ------
Total income taxes $152.0 $ 87.1 $ 50.0
====== ====== ======
</TABLE>
The significant components of deferred income tax provisions attributable to
income from operations were:
<TABLE>
<CAPTION>
In millions. 1993 1992 1991
- ------------ ----- ----- ------
<S> <C> <C> <C>
Deferred income tax provision (exclusive of the
effects of other components listed below) $ (2.0) $17.8 $(83.0)
Adjustment of deferred tax assets and liabilities
for enacted changes in tax rates 4.9 -- --
Adjustment of valuation allowance 4.8 2.1 6.2
Change in operating loss carryforwards (14.0) 20.4 (7.3)
------ ----- ------
Deferred income tax provision $ (6.3) $40.3 $(84.1)
====== ===== ======
</TABLE>
Loss before income taxes from foreign operations was $19.7, $72.4 and
$51.6 million in 1993, 1992 and 1991, respectively.
<PAGE> 56
Effective tax rates are analyzed as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 34.0% 34.0%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit 2.2 1.4 (.3)
Nondeductible dividends on term preferred stocks 1.0 2.6 4.9
Noncurrent tax requirement .5 (2.0) (6.4)
Amortization of intangible assets .1 3.2 3.8
Impact of purchase accounting -- (4.5) (5.4)
Leveraged lease tax benefits (3.1) (3.6) (1.8)
Foreign loss carryforwards (2.4) 3.0 3.2
Dividends received deduction applicable to term
preferred stocks (1.4) (2.6) (4.0)
Other 1.8 (.2) (3.0)
---- ---- ----
Effective tax rate 33.7% 31.3% 25.0%
==== ==== ====
</TABLE>
In accordance with the company's accounting policy, provisions for U.S. income
taxes had not been made at December 31, 1993 on $126.1 million 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 $54.8 million, and its U.S. life insurance subsidiary has
a policyholders' surplus account balance of $85.9 million. Because these
amounts 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 liabilities have been established for these items. The amount of deferred
tax liability not recognized totaled $50.6 million at December 31, 1993. At
December 31, 1993 the company had net operating loss carryforwards for tax
purposes of $173.9 million, of which $5 million expire in 1999, $35.2 million
expire in 2000, $28.2 million expire in 2007, $32.6 million expire in 2008 and
$72.9 million have no expiration date. The realization of these carryforwards
will reduce future income tax payments. The company also had foreign tax credit
carryforwards of $11.4 million, of which $2.1 million expire in 1994, $1.7
million expire in 1996, $1.0 million expire in 1997 and $6.6 million expire in
1998 and alternative minimum tax credit carryovers of $6.5 million which have
no expiration date.
Temporary differences which gave rise to a significant portion of deferred tax
assets and liabilities were as follows:
In millions.
<TABLE>
<CAPTION>
At December 31 1993 1992
- -------------- ------ ------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Leveraged lease transactions, net $400.9 $381.6
Insurance policy acquisition costs 132.1 132.6
Pension plan assets 84.9 72.2
Receivables sold 67.2 31.4
Deferred loan origination costs 47.6 36.1
Market value adjustment on investments available-for-sale 23.3 --
Direct financing leases, net 14.4 19.5
Other 45.5 50.4
------ ------
Total deferred tax liabilities 815.9 723.8
------ ------
DEFERRED TAX ASSETS
Credit loss reserves 272.7 213.1
Insurance reserves 144.5 125.2
Unused tax benefit carryforwards 73.4 108.8
Deferred compensation 17.4 13.6
Other 92.8 52.7
------ ------
Total deferred tax assets 600.8 513.4
Valuation allowance (65.1) (60.3)
------ ------
Total deferred tax assets, net of valuation allowance 535.7 453.1
------ ------
Net deferred tax liability at end of year $280.2 $270.7
====== ======
</TABLE>
<PAGE> 57
18. EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
1993 1992 1991
FULLY Fully Fully
All dollar amounts except per share ------------------- ------------------- -------------------
data are stated in millions. PRIMARY DILUTED Primary Diluted Primary Diluted
- ----------------------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Net income $298.7 $298.7 $190.9 $190.9 $149.8 $149.8
Preferred dividends (31.1) (28.2) (30.4) (25.3) (28.7) (21.2)
------ ------ ------ ------ ------ ------
Net income available to common shareholders $267.6 $270.5 $160.5 $165.6 $121.1 $128.6
====== ====== ====== ====== ====== ======
AVERAGE SHARES*
Common 91.2 91.2 81.2 81.2 76.6 76.6
Common equivalents .8 3.6 .4 4.8 .4 6.4
------ ------ ------ ------ ------ ------
Total 92.0 94.8 81.6 86.0 77.0 83.0
====== ====== ====== ====== ====== ======
Earnings per common share* $ 2.91 $ 2.85 $ 1.97 $ 1.93 $ 1.57 $ 1.55
====== ====== ====== ====== ====== ======
</TABLE>
*Amounts have been restated to reflect the two-for-one stock split in the
form of a 100 percent stock dividend, effective October 15, 1993.
Common share equivalents assume exercise of stock options, if dilutive. Fully
diluted earnings per share computations also assume conversion of dilutive
convertible preferred stock into common equivalents. Preferred stock is
considered dilutive if its dividend rate per common share assuming conversion
is less than primary earnings per share.
19. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business there are various legal proceedings pending
against the company. Management considers that the aggregate liabilities, if
any, resulting from such actions would not have a material adverse effect on
the consolidated financial position of the company. See Note 8 for a
discussion regarding commitments and contingent liabilities related to
off-balance sheet financial instruments. See Note 14 for discussion of lease
commitments.
MANAGEMENT'S REPORT
To the Shareholders of
Household International, Inc.:
Household International is responsible for the preparation, integrity and fair
presentation of its published financial statements. The financial
statements, presented on pages 52 to 76, have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts based on
judgments and estimates made by management. The company also prepared other
information included in the annual report and is responsible for its accuracy
and consistency with the financial statements.
The financial statements have been audited by the independent
accounting firm, Arthur Andersen & Co., who have been given unrestricted
access to all financial records and related data, including minutes of all
meetings of shareholders, the board of directors and committees of the board.
The company believes that representations made to the independent auditors
during their audit were valid and appropriate. Arthur Andersen & Co.'s audit
report is presented below.
The company maintains a system of internal controls over the
preparation of its published financial statements, which is intended to
provide reasonable assurance to the company's board of directors and officers
regarding preparation of financial statements presented fairly in conformity
with generally accepted accounting principles.
The company has long recognized its responsibility for conducting the
company's affairs in a manner which is responsive to the interest of
employees, shareholders, investors and society in general. This responsibility
is included in the statement of policy on ethical standards which provides that
the company will fully comply with laws, rules and regulations of every
community in which it operates and adhere to the highest ethical standards.
Officers, employees and agents of the company are expected and directed to
manage the business of the company with complete honesty, candor and integrity.
Internal auditors monitor the operation of the internal control system,
and actions are taken by management to respond to deficiencies as they
are identified. The board, operating through its audit committee, which is
composed entirely of directors who are not officers or employees of the
company, provides oversight to the financial reporting process.
<PAGE> 58
Even effective internal controls, no matter how well designed, have
inherent limitations, such as the possibility of human error or of
circumvention or overriding of controls, and the consideration of cost in
relation to benefit of a control. Further, the effectiveness of an internal
control can change with circumstances.
Household International periodically assesses its internal controls for
adequacy. Based upon these assessments, Household International believes that,
in all material respects, its internal controls relating to preparation of
financial statements as of December 31, 1993 functioned effectively during the
year ended December 31, 1993.
/s/ Donald C. Clark
Donald C. Clark
Chairman of the Board and Chief
Executive Officer
/s/ David A. Schoenholz
David A. Schoenholz
Vice President--Chief Accounting Officer
February 1, 1994
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Household International, Inc.:
We have audited the accompanying balance sheets of Household
International, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1993 and 1992, and the related 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, 1993. 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 financial position of Household
International, Inc. and subsidiaries as of December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1993 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen & Co.
Chicago, Illinois
February 1, 1994
<PAGE> 59
NET INTEREST MARGIN--1993 COMPARED TO 1992 (OWNED BASIS)
Household International, Inc. and Subsidiaries
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
Finance and Increase/(Decrease)
Average Interest Income/ Due to:
Outstanding(2) Average Rate Interest Expense -------------------------------------
------------------- ------------ ------------------- Volume Rate
1993 1992 1993 1992 1993 1992 Variance Variance(3) Variance(3)
-------- -------- ---- ---- -------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Finance and Banking Receivables:
First mortgage $ 4,037.7 $ 4,750.7 8.5% 9.6% $ 343.5 $ 457.5 $(114.0) $ (64.1) $ (49.9)
Home equity 3,177.0 3,584.9 10.6 11.6 336.6 415.1 (78.5) (44.9) (33.6)
Other secured 824.6 876.0 10.0 11.1 82.3 97.4 (15.1) (5.5) (9.6)
Bankcard 4,200.1 1,835.7 13.1 15.2 549.0 279.2 269.8 314.1 (44.3)
Merchant participation 2,244.3 2,261.1 16.6 17.4 372.8 394.2 (21.4) (2.9) (18.5)
Other unsecured 4,022.4 3,897.0 17.8 18.7 716.5 729.8 (13.3) 23.0 (36.3)
Equipment financing and other 819.6 914.3 5.8 7.0 47.6 63.7 (16.1) (6.2) (9.9)
--------- --------- ---- ---- ------- ------- ------- ------- -------
Total finance and banking
receivables 19,325.7 18,119.7 12.7 13.4 2,448.3 2,436.9 11.4 213.5 (202.1)
Liquidating commercial
receivables 1,417.9 1,776.0 8.0 8.3 113.1 147.5 (34.4) (28.7) (5.7)
--------- --------- ---- ---- ------- ------- ------- ------- -------
Total receivables 20,743.6 19,895.7 12.3 13.0 2,561.4 2,584.4 (23.0) 184.8 (207.8)
Noninsurance investments 2,129.2 2,124.8 6.1 7.2 129.3 152.8 (23.5) .3 (23.8)
--------- --------- ---- ---- ------- ------- ------- ------- -------
Total interest--earning assets
(excluding insurance
investments) 22,872.8 22,020.5 11.8% 12.4% $2,690.7 $2,737.2 $ (46.5) $ 185.1 $(231.6)
Insurance investments 6,084.0 5,546.3
Other assets 3,783.1 3,190.9
--------- --------- ---- ---- ------- ------- ------- ------- -------
TOTAL ASSETS $32,739.9 $30,757.7
========= ========= ==== ==== ======== ======== ======= ======= =======
Debt:
Commercial paper $ 3,826.9 $ 3,721.7 3.7% 4.1% $ 142.5 $ 152.3 $ (9.8) $ 4.2 $ (14.0)
Bank and other borrowings 1,978.8 1,377.7 5.5 8.1 108.6 110.9 (2.3) 39.5 (41.8)
Deposits 7,735.0 7,986.9 4.2 5.8 321.2 462.9 (141.7) (14.2) (127.5)
Senior and senior subordinated
debt (with original maturities
over one year) 9,493.5 9,431.5 6.1 7.4 577.2 694.1 (116.9) (8.8) (108.1)
--------- --------- ---- ---- ------- ------- ------- ------- -------
Total debt 23,034.2 22,517.8 5.0% 6.3% $1,149.5 $1,420.2 $(270.7) $ 20.7 $(291.4)
Insurance policy and
claim reserves 5,684.8 5,140.8
Other liabilities 1,810.0 1,225.5
--------- --------- ---- ---- ------- ------- ------- ------- -------
Total liabilities 30,529.0 28,884.1
Preferred stock 330.7 304.7
Common shareholders' equity 1,880.2 1,568.9
--------- --------- ---- ---- ------- ------- ------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $32,739.9 $30,757.7
========= ========= ==== ==== ======= ======= ======= ======= =======
NET INTEREST MARGIN--OWNED
BASIS (1) $1,541.2 $1,317.0 $ 224.2 $ 164.4 $ 59.8
========= ======== ==== ==== ======== ======== ======= ======= =======
INTEREST SPREAD--OWNED
BASIS (4),(5) 6.7% 6.0%
========= ========= ==== ==== ======== ======== ======= ======= =======
</TABLE>
(1) Finance and Banking Net Interest Margin on a Managed Basis--As receivables
are securitized and sold rather than held in portfolio, net interest income
is shifted to securitization income, and the company retains 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
net interest margin on a managed basis.
<PAGE> 60
NET INTEREST MARGIN--1993 COMPARED TO 1992 AND 1991 (MANAGED BASIS)
<TABLE>
<CAPTION>
Finance and
Interest Income/
Average Outstanding Average Rate Interest Expense
------------------------------- ------------------ ----------------------------
1993 1992 1991 1993 1992 1991 1993 1992 1991
--------- --------- --------- ---- ---- ---- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total receivables $27,584.2 $24,946.0 $23,969.2 12.5% 13.5% 14.9% $3,450.2 $3,357.5 $3,578.6
Noninsurance investments 2,106.1 2,089.0 2,517.2 6.1 7.3 7.1 129.2 152.6 179.9
--------- --------- --------- ---- ---- ---- -------- -------- --------
Total interest--earning assets
(excluding insurance investments) $29,690.3 $27,035.0 $26,486.4 12.0% 13.0% 14.2% $3,579.4 $3,510.1 $3,758.5
--------- --------- --------- ---- ---- ---- -------- -------- --------
Total debt $29,392.0 $26,865.5 $25,713.5 5.0% 6.2% 8.0% $1,457.5 $1,654.9 $2,044.4
--------- --------- --------- ---- ---- ---- -------- -------- --------
Net interest margin--managed basis $2,121.9 $1,855.2 $1,714.1
========= ========= ========= ==== ==== ==== ======== ======== ========
Interest spread--managed basis 7.1% 6.9% 6.5%
========= ========= ========= ==== ==== ==== ======== ======== ========
</TABLE>
<PAGE> 61
NET INTEREST MARGIN--1992 COMPARED TO 1991 (OWNED BASIS)
Household International, Inc. and Subsidiaries
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
Finance and Increase/(Decrease)
Average Interest Income/ Due to:
Outstanding(2) Average Rate Interest Expense ------------------------------------
------------------- ------------ ------------------- Volume Rate
1992 1991 1992 1991 1992 1991 Variance Variance(3) Variance(3)
-------- -------- ---- ---- -------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Finance and Banking Receivables:
First mortgage $ 4,750.7 $ 5,097.4 9.6% 10.9% $ 457.5 $ 554.6 $ (97.1) $ (36.1) $ (61.0)
Home equity 3,584.9 3,483.8 11.6 14.1 415.1 492.9 (77.8) 13.9 (91.7)
Other secured 876.0 1,058.6 11.1 11.9 97.4 125.5 (28.1) (20.6) (7.5)
Bankcard 1,835.7 1,714.3 15.2 18.6 279.2 319.7 (40.5) 21.4 (61.9)
Merchant participation 2,261.1 2,675.4 17.4 18.1 394.2 485.5 (91.3) (72.9) (18.4)
Other unsecured 3,897.0 3,705.9 18.7 20.2 729.8 748.9 (19.1) 37.4 (56.5)
Equipment financing and other 914.3 1,014.9 7.0 8.5 63.7 86.2 (22.5) (8.0) (14.5)
--------- --------- ---- ---- -------- -------- ------- ------- -------
Total finance and banking
receivables 18,119.7 18,750.3 13.4 15.0 2,436.9 2,813.3 (376.4) (64.9) (311.5)
Liquidating commercial
receivables 1,776.0 2,094.2 8.3 10.7 147.5 224.2 (76.7) (31.0) (45.7)
--------- --------- ---- ---- -------- -------- ------- ------- -------
Total receivables 19,895.7 20,844.5 13.0 14.6 2,584.4 3,037.5 (453.1) (95.9) (357.2)
Noninsurance investments 2,124.8 2,567.2 7.2 7.3 152.8 187.4 (34.6) (31.8) (2.8)
--------- --------- ---- ---- -------- -------- ------- ------- -------
Total interest--earning assets
(excluding insurance
investments) 22,020.5 23,411.7 12.4% 13.8% $2,737.2 $3,224.9 $(487.7) $(127.7) $(360.0)
Insurance investments 5,546.3 4,567.6
Other assets 3,190.9 2,849.8
--------- --------- ---- ---- -------- -------- ------- ------- -------
TOTAL ASSETS $30,757.7 $30,829.1
========= ========= ==== ==== ======== ======== ======= ======= =======
Debt:
Commercial paper $ 3,721.7 $ 3,778.3 4.1% 6.4% $ 152.3 $ 240.6 $ (88.3) $ (3.5) $ (84.8)
Bank and other borrowings 1,377.7 1,759.9 8.1 8.6 110.9 150.6 (39.7) (31.2) (8.5)
Deposits 7,986.9 7,734.8 5.8 7.7 462.9 595.1 (132.2) 18.8 (151.0)
Senior and senior subordinated
debt (with original
maturities over one year) 9,431.5 10,193.1 7.4 8.8 694.1 900.6 (206.5) (63.8) (142.7)
--------- --------- ---- ---- -------- -------- ------- ------- -------
Total debt 22,517.8 23,466.1 6.3% 8.0% $1,420.2 $1,886.9 $(466.7) $ (79.7) $(387.0)
Insurance policy and
claim reserves 5,140.8 4,333.3
Other liabilities 1,225.5 1,294.5
--------- --------- ---- ---- -------- -------- ------- ------- -------
Total liabilities 28,884.1 29,093.9
Preferred stock 304.7 252.8
Common shareholders' equity 1,568.9 1,482.4
--------- --------- ---- ---- -------- -------- ------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $30,757.7 $30,829.1
========= ========= ==== ==== ======== ======== ======= ======= =======
NET INTEREST MARGIN--OWNED
BASIS (1) $1,317.0 $1,338.0 $ (21.0) $ (48.0) $ 27.0
========= ========= ==== ==== ======== ======== ======= ======= =======
INTEREST SPREAD--OWNED
BASIS (4),(5) 6.0% 5.7%
========= ========= ==== ==== ======== ======== ======= ======= =======
</TABLE>
(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.
(4) As a percent of average interest-earning assets.
(5) The net interest margin analysis includes the following for foreign
businesses:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Average interest-earning assets $3,650.4 $4,079.5 $4,441.8
Average interest-bearing liabilities 3,600.7 3,742.9 4,019.1
Net interest margin 255.1 293.0 338.7
Interest spread 7.0% 7.2% 7.6%
--------- --------- ---------
</TABLE>
<PAGE> 62
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Household International, Inc.
and Subsidiaries 1993--THREE MONTHS ENDED 1992--Three Months Ended
All dollar amounts except per share data -------------------------------------- --------------------------------------
are stated in millions. Dec. Sept. June March Dec. Sept. June March
- ---------------------------------------- ------ ------ ------ ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance income $628.5 $650.4 $646.4 $636.1 $632.7 $651.5 $651.6 $648.6
Interest income from noninsurance
investment securities 27.5 33.8 36.1 31.9 36.9 34.9 37.0 44.0
Interest expense 271.3 279.8 285.9 312.5 325.3 344.2 371.1 379.6
------ ------ ------ ------ ------ ------ ------ ------
Net interest margin 384.7 404.4 396.6 355.5 344.3 342.2 317.5 313.0
Provision for credit losses on owned
receivables 174.7 204.1 183.2 173.8 201.8 159.1 155.4 155.2
------ ------ ------ ------ ------ ------ ------ ------
Net interest margin after provision
for credit losses 210.0 200.3 213.4 181.7 142.5 183.1 162.1 157.8
------ ------ ------ ------ ------ ------ ------ ------
Securitization and servicing fee income 158.7 109.8 94.4 97.1 125.9 82.2 81.3 86.6
Insurance premiums and contract revenues 72.3 78.6 66.3 71.1 68.9 70.9 69.7 71.7
Investment income 132.3 167.8 135.6 138.3 130.7 141.5 126.4 125.1
Fee income 72.8 80.3 70.7 68.8 64.3 37.5 33.4 29.3
Other income 50.4 35.3 30.6 32.6 14.9 27.4 32.3 23.4
------ ------ ------ ------ ------ ------ ------ ------
Total other revenues 486.5 471.8 397.6 407.9 404.7 359.5 343.1 336.1
------ ------ ------ ------ ------ ------ ------ ------
Net interest margin and other revenues 696.5 672.1 611.0 589.6 547.2 542.6 505.2 493.9
------ ------ ------ ------ ------ ------ ------ ------
Salaries and fringe benefits 164.6 151.4 149.8 149.6 136.3 136.4 136.2 127.0
Operating expenses 256.4 264.9 226.2 216.5 199.0 196.6 180.9 184.6
Policyholders' benefits 133.7 139.5 133.3 132.6 129.1 130.7 127.5 126.6
------ ------ ------ ------ ------ ------ ------ ------
Total costs and expenses 554.7 555.8 509.3 498.7 464.4 463.7 444.6 438.2
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes 141.8 116.3 101.7 90.9 82.8 78.9 60.6 55.7
Income taxes 48.8 40.8 32.1 30.3 23.0 26.3 17.3 20.5
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 93.0 $ 75.5 $ 69.6 $ 60.6 $ 59.8 $ 52.6 $ 43.3 $ 35.2
====== ====== ====== ====== ====== ====== ====== ======
Earnings per common share*:
Primary $ .90 $ .72 $ .67 $ .62 $ .63 $ .55 $ .45 $ .34
------ ------ ------ ------ ------ ------ ------ ------
Fully diluted $ .89 $ .71 $ .65 $ .60 $ .61 $ .54 $ .44 $ .34
------ ------ ------ ------ ------ ------ ------ ------
SEGMENT NET INCOME
Finance and Banking $ 91.0 $ 78.8 $ 74.7 $ 58.7 $ 64.8 $ 55.4 $ 46.7 $ 33.7
Individual Life Insurance 10.2 13.5 9.8 11.7 15.4 9.0 7.6 9.7
Corporate (5.7) (6.3) (10.9) (5.6) (16.6) (8.1) (7.6) (5.1)
------ ------ ------ ------ ------ ------ ------ ------
Core Business 95.5 86.0 73.6 64.8 63.6 56.3 46.7 38.3
------ ------ ------ ------ ------ ------ ------ ------
Liquidating Commercial Lines (2.5) (10.5) (4.0) (4.2) (3.8) (3.7) (3.4) (3.1)
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 93.0 $ 75.5 $ 69.6 $ 60.6 $ 59.8 $ 52.6 $ 43.3 $ 35.2
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
*Amounts have been restated to reflect the two-for-one stock split in the form
of a stock dividend, effective October 15, 1993.
FOURTH QUARTER RESULTS Net income for the 1993 fourth quarter was $93 million,
up 23 percent from the third quarter and up 56 percent from the prior year
fourth quarter. The improvement over the third quarter resulted from improved
earnings in the bankcard business, partially offset by lower results in the
Canadian and consumer banking operations. The bankcard business benefited from
higher revenues associated with seasonality and a larger managed portfolio.
Canada was impacted by charges taken in connection with a strategic assessment
of the Canadian operations and additional loss provision reflected in the
fourth quarter. Earnings in the quarter also benefited from lower losses in the
Liquidating Commercial Lines segment due to reduced credit losses. The increase
in the company's earnings over the prior year quarter is attributable to
improvements in the Finance and Banking segment, led by higher earnings in the
bankcard, domestic consumer finance and United Kingdom operations.
Net interest margin declined 5 percent in the quarter primarily due to
lower average balances of owned receivables and lower yields on several
products. The level of earning assets is dependent on the timing of
securitizations and sales of receivables. The company securitized and sold
approximately $1.8 billion of receivables during the quarter, including $1.2
billion of GM Card receivables.
<PAGE> 63
The provision for credit losses on owned receivables declined by $29
million in the fourth quarter of 1993 compared to the third quarter due to
lower loss provision on liquidating commercial receivables. The third quarter
amount reflected the disposition of the company's largest problem loan. The
decrease compared to the prior year quarter was primarily due to a $15 million
general corporate loss reserve recorded in the 1992 period and overall
improvement in the credit quality of the consumer receivables portfolio.
Securitization and servicing fee income rose 45 percent and 26 percent
from 1993 third quarter and 1992 fourth quarter amounts due to higher amounts
of receivables sold and serviced with limited recourse outstanding. Investment
income fell 21 percent primarily due to higher gains resulting from the sale of
investments classified in the available-for-sale portfolios in the third
quarter of 1993 compared to the fourth quarter. The lower level of fee income
in the fourth quarter primarily related to the reclassification of interchange
and other fee income associated with GM Card receivables to securitization and
servicing fee income upon securitizations and sales of the receivables. Other
income increased in the fourth quarter over the previous quarter and the prior
year fourth quarter due to increased income on the company's 25 percent equity
investment in a commercial joint venture and prepayment fees received upon the
payoff of commercial assets.
Total costs and expenses in the 1993 fourth quarter were flat compared
to the prior quarter but up substantially from the 1992 fourth quarter due to
growth in the managed credit card portfolio. Finance and Banking operating
expenses (which include salaries and fringe benefits and other operating
expenses) as a percent of average receivables owned or serviced, annualized,
were 3.40 percent in the 1993 fourth quarter compared to 3.56 percent in the
1993 third quarter and 3.49 percent in the fourth quarter of 1992. The
effective tax rate in the 1993 fourth quarter was essentially flat compared to
the previous quarter and up from 28 percent in the prior year. The lower tax
rate in the prior year was primarily due to the effect of favorable state tax
legislation which was enacted in 1992.
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF HOUSEHOLD INTERNATIONAL, INC.
- ---------------------------------------------
As of December 31, 1993 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.
<TABLE>
<CAPTION>
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
<S> <C> <C>
Hamilton Investments, Inc. Delaware 100%
Alpha Source Asset Management, Inc. Delaware 100%
Craig-Hallum Corporation Delaware 100%
Craig-Hallum, Inc. Minnesota 100%
ProValue Investments, Inc. Delaware 100%
Household Bank, f.s.b U.S. 100%
Household Affinity Funding Corporation Delaware 100%
Household Bank (SB), N.A. U.S. 100%
Household Home Title Services, Inc. California 100%
Household Investment Services, Inc. California 100%
Household Insurance Services, Inc. Illinois 100%
Housekey Financial Corporation California 100%
Associations Service Corporation Indiana 100%
Household Mortgage Services, Inc. Delaware 100%
Security Investment Corporation Maryland 100%
Household Credit Services, Inc. Delaware 100%
Household Finance Corporation Delaware 100%
HFC Funding Corporation Delaware 100%
HFS Funding Corporation Delaware 100%
Household Bank (Nevada), N.A. U.S. 100%
Household Card Services, Inc. Nevada 100%
Household Bank (Illinois), N.A. U.S. 100%
Household Finance Receivables Corporation I Delaware 100%
Household Finance Receivables Corporation II Delaware 100%
Household Financial Services, Inc. Delaware 100%
Household Group, Inc. Delaware 100%
Alexander Hamilton Insurance Company of America Illinois 100%
Alexander Hamilton Life Insurance Company of America Michigan 100%
Alexander Hamilton Capital Management, Inc. Michigan 100%
Alexander Hamilton Insurance Agency, Inc. Michigan 100%
</TABLE>
- 1 -
<PAGE> 2
<TABLE>
<CAPTION>
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
<S> <C> <C>
Alexander Hamilton Life Insurance Co. of America Arizona 100%
First Alexander Hamilton Life Insurance Co. New York 100%
Hamilton National Life Insurance Company Michigan 100%
Cal-Pacific Services, Inc. California 100%
Household Business Services, Inc. Delaware 100%
Household Capital Markets, Inc. Delaware 100%
Household Commercial Financial Services, Inc. Delaware 100%
Business Realty Inc. Delaware 100%
Business Lakeview, Inc. Delaware 100%
Capital Graphics, Inc. Delaware 100%
HCFS Business Equipment Corporation Delaware 100%
HFC Commercial Realty, Inc. Delaware 100%
Center Realty, Inc. Delaware 100%
Com Realty, Inc. Delaware 100%
G.C. Center, Inc. Delaware 100%
Land of Lincoln Builders, Inc. Illinois 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%
</TABLE>
- 2 -
<PAGE> 3
<TABLE>
<CAPTION>
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
<S> <C> <C>
Household Capital Investment Corporation Delaware 100%
B&K Corporation Michigan 94%
Household Commercial of California, Inc. California 100%
Amstelveen FSC Ltd. Bermuda 99%
Night Watch FSC Ltd. Bermuda 100%
Overseas Leasing Two FSC, Ltd. Bermuda 99%
Overseas Leasing Four FSC, Ltd. Bermuda 99%
Overseas Leasing Five FSC, Ltd. Bermuda 99%
Omni Products International, Inc. Rhode Island 100%
Omni World Trading Company H.K. Ltd. Hong Kong 99%
OPI, Inc. Virginia 100%
Household Finance Consumer Discount Company Pennsylvania 100%
Household Finance Corporation II Delaware 100%
Household Finance Corporation of Alabama Alabama 100%
Household Finance Corporation of California Delaware 100%
Household Finance Corporation of Nevada Delaware 100%
Household Finance Realty Corporation of New York Delaware 100%
Household Finance Industrial Loan Company Washington 100%
Household Finance Realty Corporation of Nevada Delaware 100%
Household Finance Corporation III Delaware 100%
Household Realty Corporation Delaware 100%
Overseas Leasing One FSC, Ltd. Bermuda 100%
Household Retail Services, Inc. Delaware 100%
HRSI Funding, Inc. Nevada 100%
Household Financial Center Inc. Tennessee 100%
Household Group Australia, Inc. Delaware 100%
HFC of Australia, Ltd. Victoria 100%
HFC Financial Services, Ltd. NewSouthWales 100%
BFC Finance Limited Victoria 100%
East Rock Finance Corporation Pty. Ltd. Victoria 100%
Heritage General Insurance Ltd. NewSouthWales 100%
Heritage Life Insurance Ltd. NewSouthWales 100%
HFC Leasing Ltd. NewSouthWales 100%
Household Building Society Tasmania 100%
Inter City Lease Management Pty. Ltd. NewSouthWales 100%
KeyJade Pty. Ltd. NewSouthWales 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%
</TABLE>
- 3 -
<PAGE> 4
<TABLE>
<CAPTION>
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
<S> <C> <C>
Sixty-First HFC Leasing Corporation Delaware 100%
Household Bank, N.A. U.S. 100%
Household Receivables Funding Corporation Nevada 100%
Household Receivables Funding Corporation II Delaware 100%
Household Receivables Funding, Inc. Delaware 100%
Household Financial Group, Ltd. Delaware 100%
Household Global Funding, Inc. Delaware 78%
Household International (U.K.) Limited U.K. 100%
D.L.R.S. Limited Cheshire 100%
HFC Bank plc U.K. 100%
Hamilton Life Assurance Co. Limited U.K. 100%
Hamilton Insurance Co. Limited U.K. 100%
Hamilton Financial Planning Services Limited U.K. 100%
HFC Pension Plan Limited England 100%
Household Funding Limited U.K. 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%
Auto League of North America Limited Canada 100%
HFC 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%
Land of Lincoln Real Estate, Ltd. Illinois 100%
</TABLE>
- 4 -
<PAGE> 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 February 1, 1994, included in this annual report on Form 10-K
of Household International, Inc. for the year ended December 31, 1993, into the
Company's previously filed Registration Statements No. 2-56044, No. 2-64260,
No. 2-86383, No. 33-21343, No. 2-97495, No. 33-45454, and No. 33-45455 on Form
S-8 and Registration Statements No. 33-50619, No. 33-58130 and No. 33-62842 on
Form S-3.
/s/ ARTHUR ANDERSEN & CO.
Chicago, Illinois
March 25, 1994
