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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, 1995
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.)
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: (847) 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
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)
</TABLE>
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 13, 1996, THERE WERE 97,351,868 SHARES OF REGISTRANT'S COMMON
STOCK OUTSTANDING, AND THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $6.425 BILLION.
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN PORTIONS OF THE REGISTRANT'S 1995 ANNUAL REPORT TO SHAREHOLDERS FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1995: PARTS I, II AND IV.
CERTAIN PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS
1996 ANNUAL MEETING SCHEDULED TO BE HELD MAY 8, 1996: PART III.
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PART I.
ITEM 1. BUSINESS.
GENERAL
Household International, Inc. is a publicly owned corporation which,
through its subsidiaries ("Household International" or the "Company"), is
primarily engaged in the business of consumer lending in the United States,
Canada and the United Kingdom. The Company employs approximately 13,000 people
and serves approximately 19.6 million customer accounts.
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 interests 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.
The products offered by Household International, a description of the
geographic markets in which the Company operates and summary financial
information for the Company is set forth in the Company's Annual Report to
Shareholders (the "1995 Annual Report"), portions of which are incorporated
herein by reference. See pages 1, 16 through 67 of the 1995 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, retail merchants, direct mail and telemarketing.
1995 DEVELOPMENTS. During 1995 the Company completed several initiatives
begun in late 1994 to focus its emphasis on certain businesses and improve its
operating efficiency and competitiveness in the marketplace. In the second and
third quarters of 1995, the Company sold 119 consumer bank branches, including
approximately $3.4 billion of customer deposits in California, Maryland,
Virginia, Ohio and Indiana. The Company also completed its exit from its
traditional first mortgage business in 1995 by selling its domestic first
mortgage servicing business and its Canadian first mortgage servicing business,
the latter including substantially all of the owned first mortgage portfolio.
In October 1995, the Company sold the individual life and annuity product
lines of the business segment formerly reported as the "Individual Life
Insurance" business segment, and retained the credit life insurance business.
Remaining insurance lines also include periodic payment annuities and corporate
life insurance products, which the Company is no longer offering. Therefore, the
Company will now report results for the formerly reported "Finance and Banking"
business segment and the remaining insurance product lines on a combined basis.
As a result of the sale of the individual life and annuity product lines of
its individual life insurance business and the disposition of the other
businesses described above, the Company recorded an after-tax gain of $69
million in 1995 and after-tax nonrecurring costs of $10 million in connection
with staff reductions and consolidation of certain operations pertaining to
these initiatives.
In 1995 the Company's credit card operations in the United States continued
to grow, principally through the continuing success of the GM Cardsm. The GM
Card is a general-purpose credit card which allows the users thereof to earn
credit toward the purchase or lease of new General Motors vehicles. The GM Card
was publicly introduced in the United States in September 1992 and as of
December 31, 1995, there were approximately 7.8 million accounts in the United
States which had generated approximately $7.9 billion of credit card
receivables. The Company also acquired in the fourth quarter of 1995 two
Visa/MasterCard* portfolios totaling approximately $570 million.
During 1995 the Company's Canadian operation reported a profit, compared to
losses in 1994 and 1993, benefitting from improved efficiencies and from the
sale in the fourth quarter of its first mortgage business, including
approximately $825 million of owned and $614 million of serviced first mortgages
and approximately $725 million in deposits.
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* VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International, Incorporated, respectively.
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During 1995 the Company redeemed for cash or common stock all shares of the
$6.25 cumulative convertible preferred stock subject to mandatory redemption
provisions and also redeemed $115 million of preferred stock consisting of all
of the outstanding shares of each of the 9.50 percent cumulative preferred
stock, Series 1989-A, and the 9.50 percent Flexible Rate Auction Preferred
Stock, Series B. In addition, a subsidiary of the Company issued $75 million of
8.25 percent company obligated mandatorily redeemable preferred securities of
subsidiary trust during 1995.
RESULTS OF OPERATIONS
Total receivables at December 31, classified by type, consisted of the
following (in millions):
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1995 1994 1993
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First mortgage (1)............ $ 2,066.9 $ 3,364.2 $ 3,534.1
Home equity................... 4,148.2 2,865.6 2,850.9
Visa/MasterCard............... 5,512.0 4,788.9 4,356.9
Merchant participation........ 3,696.2 2,564.9 2,636.5
Other unsecured............... 5,019.2 5,137.2 4,320.8
Commercial (2)................ 1,289.6 1,834.8 2,831.2
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Total owned receivables....... $21,732.1 $20,555.6 $20,530.4
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(1) In late 1994 the Company exited the traditional first mortgage business.
(2) In connection with the Company's decision to discontinue originating
receivables previously reported as "Other Secured" and to manage the
liquidation of such portfolio as part of the discontinued commercial
business, and due to the nature of such receivables, the Company has
combined "Other Secured" with commercial loans. To better analyze trends,
selected balance sheet data prior to December 31, 1995 have been restated to
reflect this combination.
Household International is primarily engaged in the business of consumer
lending in the United States, the United Kingdom and Canada, with consumer
receivables of $20.4 billion, representing approximately 70 percent of total
assets at December 31, 1995. The Company offers the following types of consumer
loans: home equity, Visa/MasterCard, merchant participation and other unsecured.
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 87 percent of the Company's consumer receivables are located in
the United States.
In its consumer lending businesses, the Company competes with banks,
thrifts, finance companies and other financial institutions by offering a
variety of consumer products, maintaining a strong service orientation and
developing innovative marketing programs. The Company has focused on being a
low-cost producer in its financial services businesses. Highly automated
processing facilities have been developed to support underwriting, loan
administration and collection functions across consumer business lines. By
supporting its multiple-distribution networks with centralized processing
centers, the Company has improved efficiency through specialization and
economies of scale. A centralized collection system for past due accounts is
augmented by early collection efforts in the consumer finance branch network for
products other than credit cards.
Underwriting and collection of consumer credit products have been
segregated and centralized over the last several years, which functions are
supported by automated systems which analyze the likelihood of delinquency or
bankruptcy. The Company considers factors such as the applicant's income,
expenses, 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.
Since 1988 the Company has significantly increased its portfolio of
receivables sold and serviced with limited recourse. This portfolio has grown
from zero in the beginning of 1988 to approximately $14.9 billion at year-end
1995. 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 1995, including replenishment of certificate holders
interests, the Company securitized and sold approximately $23.5 billion of
receivables.
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The Company's net income in 1995 was 23 percent higher than in 1994. The
Company has continued to invest in the development of its Visa/MasterCard,
merchant participation credit card and consumer finance services which have been
important contributors to the Company's growth. Major business units within the
Company are described below.
Household Finance Corporation
Household Finance Corporation 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 483 branch lending
offices throughout the United States. This business is conducted primarily
through state-licensed companies.
HFC's operations primarily focus on home equity loans and unsecured credit
products, which are offered on both a fixed rate and floating rate basis, 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. Home equity loans and unsecured
consumer credit products in the HFC network represented approximately 33 percent
of total consumer managed receivables (those receivables that are owned and
serviced with limited recourse) at December 31, 1995. Home equity loans,
representing approximately 21 percent of total consumer managed receivables at
December 31, 1995, historically have lower chargeoff rates than unsecured credit
products.
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 electronics,
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 the Company's consumer finance business. HRS believes
it is 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 and may be conducted by other
affiliates of the Company.
Household Credit Services
Household Credit Services is the tradename used for the marketing
throughout the United States of Visa/MasterCard credit cards issued by one of
the Company's subsidiary national credit card banks, Household Bank, f.s.b., or
one of the other financial institutions affiliated with Household International.
Household Credit Services had $12.9 billion of Visa/MasterCard receivables owned
and serviced with limited recourse at December 31, 1995, an increase of $2.1
billion from December 31, 1994. The Company has been ranked as the seventh
largest issuer of VISA and MasterCard credit cards in the United States.
The Company strives to build its Visa/MasterCard 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, the Company established a program with Ameritech Corporation in
1991, General Motors Corporation in 1992 (expanding the relationship with
General Motors in 1993 to issue the GM Card from Vauxhall in the United
Kingdom), Charles Schwab & Co. in 1993, Pacific Bell in 1994 and U.S. West in
1995. The Company continues to explore similar relationships with various other
entities.
The Company evaluates Visa/MasterCard 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 Visa/MasterCard business is a highly competitive and fragmented
industry currently in the process of consolidation. The Company believes its
size provides substantial competitive advantages over smaller
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credit card issuers through operating efficiencies. Currently, the Company's
largest account base is in California supplemented by significant hubs in the
Midwestern and Eastern United States. The Company's focus is to develop a
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 over-dependence on a
single geographic area that would potentially expose the Company to regional
credit risk and usage patterns.
Household Bank, f.s.b.
Household Bank, f.s.b. (the "Bank"), a federally chartered savings bank, is
engaged in the consumer banking business. At December 31, 1995, the Bank's
assets totaled $8.1 billion, while its total deposits were approximately $4.3
billion. The Company views deposits as a stable and relatively low-cost source
of funding if gathered efficiently. 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.
During 1995 the Bank continued to realign the geographic presence of its
banking activities by focusing its activities in Illinois by selling its banking
operations, including the related deposits, in California, Maryland, Virginia,
Ohio and Indiana.
International Operations
International operations in Canada and the United Kingdom accounted for
approximately 13 percent of owned receivables at December 31, 1995. Due to the
similarities of operations and in order to provide the lowest cost services
possible, the Company integrated certain consumer finance and private-label
credit card operations previously conducted in Canada with such business
operations in the United States such that processing capacity can be utilized as
needed in both Canada and the United States. The Canadian consumer finance
business has operated under the HFC tradename. In the fourth quarter, the
Company sold the Canadian first mortgage servicing business, including
substantially all of the owned first mortgage portfolio. At December 31, 1995,
the Canadian operation had $1.1 billion of receivables. In the United Kingdom,
the Company owns HFC Bank plc, a fully licensed United Kingdom bank. HFC Bank
plc had 140 branches at December 31, 1995 and approximately $1.7 billion of
owned receivables. The Company's United Kingdom operation reported an increase
in net income in 1995, earning $44.9 million compared to $27.7 million in 1994.
This was primarily attributable to improved efficiency, higher net interest
margin and increased insurance revenues.
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 Household Life Insurance
Company or its affiliates.
Other Businesses
During 1995 the Company began developing its auto finance business,
initially focusing in the Midwest. In addition to working with a dealer network,
the Company also began offering this product through certain of its branch
operations.
The Company's remaining commercial operations have continued to decline in
size. Commercial receivables declined by $545 million in 1995 after declining by
$996 million in 1994. Approximately 4 percent of total managed receivables
portfolio at December 31, 1995 consisted of commercial receivables.
INVESTMENT SECURITIES
The Company maintains investment portfolios in both its non-insurance and
insurance operations. After the sale by the Company of its individual life and
annuity product lines of the life insurance business, including approximately
$5.7 billion of investment securities, the Company's total investment portfolio
at December 31, 1995 was approximately $4.6 billion, of which approximately $2.9
billion of such investment securities were held by the Company's insurance
subsidiaries. The composition of these portfolios is set forth on pages 39 and
40 of the 1995 Annual Report. Approximately 22 percent of the Company's
investment securities are also held
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by the Bank, with the remaining portion of the Company's investment portfolio
being held by its other subsidiaries.
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, thrift notes,
medium-term notes and long-term debt, and have used derivative 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, HFC and the Bank. In addition, these organizations rated the
commercial paper of HFC in their highest rating category and three of these
organizations rated the commercial paper of Household International in their
highest rating category. A portion of the Company's funding base also consists
of deposits obtained through its consumer banking business. At December 31, 1995
the Company's total deposits were $4.7 billion. Deposits decreased from $8.4
billion in 1994 primarily due to the previously mentioned sales of deposits in
the United States and Canada. This source of funding was substantially replaced
by the issuance of debt instruments in the money and capital markets.
The securitization and sale of consumer receivables continues to be an
important source of liquidity for the Company. During 1995 the Company's
subsidiaries initially securitized and sold approximately $5.4 billion of home
equity, merchant participation, Visa/MasterCard and other unsecured receivables.
In the normal course of its business, the Company enters into a variety of
derivative and other off-balance sheet transactions primarily to manage and
reduce its exposure to certain risks, including interest rate and foreign
exchange risks. Interest rate swaps are the principal arrangements used by the
Company to manage interest rate risk. These swaps synthetically alter the
interest rate risk inherent in the various products offered by the Company. The
majority of the Company's interest rate swaps are used to synthetically convert
floating rate assets to fixed rate, fixed rate debt to floating rate, or
floating rate assets or debt from one floating rate index to another.
Occasionally, interest rate swaps are used to convert fixed rate assets to a
floating rate, or floating rate debt to fixed rate. Interest rate swaps are also
used to synthetically alter interest rate characteristics on certain receivables
that are securitized and serviced with limited recourse. Since each of the
Company's foreign operations does business in its local currency, the Company
also enters into foreign exchange contracts primarily to hedge its investment in
such foreign operations. A description of the Company's use of interest rate
swaps and foreign exchange contracts is set forth on pages 31 and 32 and 46
through 50 of the 1995 Annual Report.
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 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 account 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. Because of its
ownership of the Bank, Household International is a savings and loan
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holding company subject to reporting and other regulations of the OTS. Household
International and HFC have agreed with the OTS to maintain the regulatory
capital of the Bank at certain specified levels.
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 adopted new safety and
soundness standards governing operational and managerial activities of insured
depository institutions and their holding companies regarding internal controls,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation.
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.
The Budget Reconciliation legislation currently being considered by the
Congress of the United States contains a provision for a special assessment to
be levied against thrift institutions to adequately capitalize the Savings
Association Insurance Fund ("SAIF") of the FDIC. In the current form, which is
subject to change, the Bank would pay a one-time premium to SAIF based upon
qualifying deposits as of a certain date. Currently, the date to determine the
amount of deposits on which this premium would be assessed has not yet been
finalized but could precede the dates of deposits sold by the Bank during 1995.
Thus the Bank could be assessed a premium on deposit balances it sold during
1995. In addition, the rate at which the premium would be assessed has also not
been finalized.
The operation of the Company's insurance business is subject to regulatory
supervision under the laws of the states in which it operates. Regulations vary
from state to state but generally cover licensing of insurance companies,
premium 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 streamlined operations, centralized distribution, processing and
marketing capabilities, and advanced technology to support these activities.
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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. The Company's
insurance business competes with many other insurance companies offering similar
products.
ITEM 2. PROPERTIES.
Household International has operations in 40 states in the United States,
10 provinces in Canada and in the United Kingdom with principal facilities
located in Anaheim, California; Chesapeake, Virginia; Elmhurst, Illinois;
Hanover, Maryland; Las Vegas, Nevada; North York, Ontario, Canada; Pomona,
California; Prospect Heights, Illinois; Salinas, California; Windsor, Berkshire,
United Kingdom and Wood Dale, Illinois.
Substantially all branch offices, bank branches, divisional offices,
corporate offices, regional processing and regional servicing center space is
operated under lease with the exception of the headquarters building for HFC
Bank plc in the United Kingdom and an administrative facility in Las Vegas,
Nevada. The Company believes that such properties are in good condition and are
adequate to meet its current and reasonably anticipated needs.
Household International has invested in property and technological
improvements to achieve greater efficiencies in the marketing, servicing and
production of its loan products. During 1995 the Company invested $76 million in
capital expenditures, compared to $197 million in 1994 and $110 million in 1993.
In 1994 the Company had incurred expenditures to construct a new credit card
facility and to develop a comprehensive customer service computer system for the
consumer finance business in the United States. 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 has developed and maintains dedicated compliance functions to
monitor its business operations with a focus to ensure compliance with all
applicable laws. Notwithstanding, 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. The Company believes that
it possesses meritorious defenses to these actions and any adverse decision
should not materially affect the financial condition of the Company.
During the past several years, the press has widely reported certain
industry related concerns which may impact the Company and its subsidiaries. One
such industry condition has been the litigation activities by the Alabama
plaintiff bar against finance and insurance companies operating in that state,
the large punitive awards obtained from juries in that state, and the failure of
the state Supreme Court to reverse many of those awards. Like other companies in
this industry, the Company has litigation in Alabama. As of March 1, 1996, there
were 28 lawsuits pending against subsidiaries of the Company in Alabama. These
cases generally allege inadequate disclosure of financing terms. In each suit,
other parties are also named as defendants. Unspecified compensatory and
punitive damages are sought. Appropriate insurance carriers have been notified
of each claim, and reservations of rights letters have been received. Recently,
a subsidiary of the Company obtained its dismissal from an Alabama action
through the summary judgment process, and the plaintiff has filed a notice of
appeal. The Company's subsidiaries believe they have substantive legal defenses
to these claims and are prepared to defend each case vigorously. However, the
judicial climate in Alabama is such that the outcome of all of these cases is
unpredictable.
Another industry issue relates to the exportation of fees by banks which
issue credit cards. Since October 1991, a number of lawsuits and administrative
actions have been filed in several states against national banks that issue
credit cards which challenge various fees and charges (such as late fees,
over-the-limit fees, returned check charges and annual membership fees) assessed
by the banks claiming that restrictions or prohibitions under state law are
applicable to credit card issuing banks located in other states. Two state
supreme courts (California and Colorado) and two federal appeals courts have
affirmed dismissal of these
7
<PAGE> 9
cases on the ground that individual state prohibitions on assessing these fees
or charges are preempted by federal laws. However, in late 1995, the New Jersey
Supreme Court ruled (in an action in which neither the Company nor its
subsidiaries were named) that state prohibitions on late fees are not preempted.
The issue is now before the United States Supreme Court which has agreed to
review the California late fee case to resolve the conflict. Household Bank
(Nevada), N.A., the Company's primary issuer of bank credit cards, and Household
Bank, f.s.b., are involved in similar cases in California, Wisconsin and
Pennsylvania, and in one of the federal appeals court decisions referred to
above.
The Company believes that credit card issuing banks throughout the country
have a strong case for federal preemption which is supported by interpretations
of the Office of the Comptroller of the Currency. If the United States Supreme
Court resolves the case before it adversely to the card issuing banks, the
decision could have the effect of limiting certain fees and charges that could
be assessed on credit card accounts and potentially could require other courts
to order virtually all card issuing banks, including Household International's
credit card issuing banks, to pay refunds and/or civil penalties. It is not
possible to predict the effect of any adverse ruling by the United States
Supreme Court to the credit card industry as it is not possible to determine the
amount of any refunds and/or penalties that might be required to be paid. An
adverse ruling that requires any such payment potentially could have an adverse
impact on the members of the credit card industry in the United States,
including Household International. The Company believes the ultimate resolution
of this matter would not affect its relative position in the credit card
industry.
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. William F. Aldinger, the President and Chief Executive Officer of the
Company, is incorporated herein by reference to "Election of Household Directors
- -- Information Regarding Nominees" in Household International's definitive Proxy
Statement for its 1996 Annual Meeting of Stockholders scheduled to be held May
8, 1996 (the "1996 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.
Donald C. Clark, age 64, is Chairman of the Board. Mr. Clark has been
employed with Household since 1955. He was elected Chairman of the Board in
1984, and served as Chief Executive Officer of Household from 1982 through 1994,
and President from 1977 through 1987.
Lawrence N. Bangs, age 59, was appointed Group Executive-Insurance, U.S.
Consumer Banking, Auto Finance and the United Kingdom in 1995. Mr. Bangs joined
Household in 1959 and has served in various capacities in the Company's U.S.
consumer finance operations and United Kingdom operations, most recently as
Managing Director and Chief Executive Officer of HFC Bank plc.
Robert F. Elliott, age 55, was appointed Group Executive-U.S. Consumer
Finance and Canada in 1994. Prior thereto, from April 1993 to September 1994, he
was Group Executive-Office of the President and from 1988 to 1993 he was Group
Executive-U.S. Consumer Finance and Australia. Mr. Elliott joined Household in
1964 and has served in various capacities in the Company's consumer finance
business during his career with Household.
Joseph W. Saunders, age 50, joined Household in 1985. He was appointed
Group Executive-U.S. BankCard and Household Retail Services, Inc. in 1994,
having previously served, from April 1993 to September 1994, as Group
Executive-Office of the President and prior thereto as Group Executive-U.S.
BankCard and Canada.
David A. Schoenholz, age 44, was appointed Executive Vice President-Chief
Financial Officer of Household in 1996, having previously served as Senior Vice
President-Chief Financial Officer since 1994, Vice President-Chief Accounting
Officer since 1993, Vice President since 1989 and Controller since 1987. He
joined Household in 1985 as Director-Internal Audit.
8
<PAGE> 10
Glen O. Fick, age 49, was appointed Group Executive-Commercial Finance 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.
David B. Barany, age 52, was appointed Senior Vice President-Chief
Information Officer of Household in 1996, having previously served as Vice
President-Chief Information Officer since 1988. Mr. Barany joined Household in
1985 as Vice President/Controller of Household's financial services business.
Colin P. Kelly, age 53, was appointed Senior Vice President-Human Resources
of Household in 1996, having previously served as Vice President-Human Resources
since 1988. 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.
Kenneth H. Robin, age 49, was appointed Senior Vice President-General
Counsel of Household in 1996, having previously served as Vice President-General
Counsel of Household since 1993. He joined Household in 1989 as Assistant
General Counsel-Financial Services.
Charles A. Albright, age 53, was appointed Vice President-Chief Credit
Officer in 1995, having previously served as Vice President-Credit Cycle
Management since joining Household in 1987.
Edgar D. Ancona, age 43, was appointed Managing Director-Treasurer of
Household in 1996, having previously served as Vice President-Treasurer since
joining Household in 1994. For the previous 17 years he held a variety of
treasury and operational positions with Citicorp.
John W. Blenke, age 40, was appointed Vice President-Corporate Law and
Assistant Secretary of Household in 1996, having previously served as Assistant
General Counsel and Secretary since 1993, and Assistant General
Counsel-Securities and Corporate Law and Assistant Secretary since 1991. Mr.
Blenke joined Household in 1989 as Corporate Finance Counsel.
Michael A. DeLuca, age 47, was appointed Managing Director-Taxes of
Household in 1996, having previously served as Vice President-Taxes from 1988 to
1996. Mr. DeLuca joined Household in 1985 as Director of Tax Planning and Tax
Counsel.
Richard J. Kolb, age 43, joined Household in 1995 as Vice
President-Controller. Prior to joining Household, Mr. Kolb held a variety of
financial positions with Wells Fargo Bank since 1982, most recently serving as
Vice President and Group Finance Officer.
Randall L. Raup, age 42, was appointed Managing Director-Strategy and
Development in 1996, having previously served as Vice President-Strategy and
Development since 1995. Since joining Household in 1984, Mr. Raup has held
positions in the planning, treasury control, corporate reporting and internal
audit areas.
Paul R. Shay, age 42, was appointed Assistant General Counsel and Secretary
of Household in 1996, having previously served as Executive Director/General
Counsel and Secretary for Household's insurance subsidiary. Prior to joining
Household in 1993, Mr. Shay served in various capacities within the legal
function during his tenure with Citicorp/Citibank between 1978 and 1993.
Craig A. Streem, age 46, joined Household in 1996 as Vice
President-Investor Relations. Prior to joining Household, he was Corporate Vice
President and Director of Investor Relations of PaineWebber Group, Inc., from
1995 to 1996, Vice President of Investor Relations and Corporate Secretary of
National Media Corporation from 1992 to 1994, and has held various positions in
the investor relations, corporate treasury and corporate accounting and
reporting areas of American Express Company from 1979 to 1992.
There are no family relationships among the executive officers of the
Company. The term of office of each executive officer is at the discretion of
the Board of Directors.
9
<PAGE> 11
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The number of shareholders of record of Household International's Common
Stock, as of March 13, 1996, was 11,674. Household International common stock is
listed on the New York and Chicago Stock Exchanges. During 1995 Household
International common stock quarterly results were as follows:
<TABLE>
<CAPTION>
MARKET PRICE
(MARKET PRICES ARE STATED IN DOLLARS)
DIVIDENDS
QUARTER HIGH LOW DECLARED
------- ---- --- ---------
<S> <C> <C> <C>
1st 45 35 7/8 $.315
2nd 51 1/2 43 1/8 .315
3rd 62 48 7/8 .340
4th 68 3/8 54 1/4 .340
</TABLE>
Additional information required by this Item is incorporated by reference
to page 66 of Household International's 1995 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
Information required by this Item is incorporated by reference to page 18
of Household International's 1995 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 22
through 32 of Household International's 1995 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, are incorporated by reference to pages
19 through 21 and pages 33 through 65 of Household International's 1995 Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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 1996 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 1996 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
1996 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 1996 Proxy
Statement.
10
<PAGE> 12
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 LLP, dated January 24, 1996, appearing on pages 19 through 21,
pages 33 through 59 and pages 61 and 65 of Household International's 1995 Annual
Report are incorporated herein by reference. An opinion of Arthur Andersen LLP
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, 1995.
Balance Sheets, December 31, 1995 and 1994.
Statements of Cash Flows for the Three Years Ended December 31, 1995.
Statements of Changes in Preferred Stock and Common Shareholders' Equity
for the Three Years Ended December 31, 1995.
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, 1995, the Company filed a
Current Report on Form 8-K with the Securities and Exchange Commission
disclosing supplementary financial information for Household International for
the nine months ended September 30, 1995, as a result of the sale as of October
1, 1995 by Household Group, Inc., a wholly-owned subsidiary of Household
International, of Alexander Hamilton Life Insurance Company of America to
Jefferson-Pilot Corporation.
(C) EXHIBITS.
<TABLE>
<S> <C>
2 Stock Purchase Agreement by and among Household Group, Inc., the Company,
Alexander Hamilton Life Insurance Company of America and Jefferson-Pilot
Corporation dated August 9, 1995 (incorporated by reference to Exhibit 2
of the Company's Current Report on Form 8-K dated August 9, 1995).
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, 1995).
3(ii) Bylaws of Household International, as amended January 10, 1995
(incorporated by reference to Exhibit 3(ii) of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
4(a) Standard Multiple-Series Indenture Provisions for Senior Debt Securities
of Household Finance Corporation dated as of June 1, 1992 (incorporated
by reference to Exhibit 4(b) to the Registration Statement on Form S-3 of
Household Finance Corporation, No. 33-48854).
4(b) Indenture dated as of December 1, 1993 for Senior Debt Securities between
Household Finance Corporation and The Chase Manhattan Bank (National
Association), as Trustee (incorporated by reference to Exhibit 4(b) to
the Registration Statement on Form S-3 of Household Finance Corporation,
No. 33-55561).
4(c) The principal amount of debt outstanding under each other 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.
</TABLE>
11
<PAGE> 13
<TABLE>
<S> <C>
10.1 Household International Key Executive Bonus Plan (incorporated by
reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994).
10.2 Household International Corporate Executive Bonus Plan.
10.3 Household International Long-Term Executive Incentive Compensation Plan,
as amended.
10.4 Forms of stock option, restricted stock rights and performance share
award agreements under the Household International Long-Term Executive
Incentive Compensation Plan.
10.5 Household International Directors' Retirement Income Plan (incorporated
by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993).
10.6 Household International Deferred Fee Plan for Directors.
10.7 Household International Deferred Phantom Stock Plan for Directors.
10.8 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).
10.9 Executive Employment Agreement between the Company and W. F. Aldinger
(incorporated by reference to Exhibit 10.8 of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
10.10 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 March 31, 1995).
10.11 Executive Employment Agreement between the Company and J. W. Saunders
(incorporated by reference to Exhibit 10.10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994).
10.12 Executive Employment Agreement between the Company and R. F. Elliott
(incorporated by reference to Exhibit 10.11 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994).
10.13 Executive Employment Agreement between the Company and D. A. Schoenholz.
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 1995 Annual Report to
Shareholders.
21 List of Household International subsidiaries.
23 Consent of Arthur Andersen LLP, Certified Public Accountants.
24 Power of Attorney, included on page 13 hereof.
27 Financial Data Schedule.
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 Income Statement Information.
12
<PAGE> 14
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 27, 1996
By /s/ W. F. ALDINGER
----------------------------------------
W. F. Aldinger, President
and Chief Executive Officer
EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS J. W.
BLENKE AND L. S. MATTENSON AND EACH OR ANY OF THEM (WITH FULL POWER TO ACT
ALONE), AS HIS/HER TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH FULL POWER
OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM/HER IN HIS/HER NAME, PLACE AND
STEAD, IN ANY AND ALL CAPACITIES, TO SIGN THIS FORM 10-K AND ANY AND ALL
AMENDMENTS TO THIS FORM 10-K AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO,
AND ALL OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND
EXCHANGE COMMISSION, GRANTING UNTO EACH SUCH ATTORNEYS-IN-FACT AND AGENT FULL
POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND
NECESSARY TO BE DONE, AS FULLY TO ALL INTENTS AND PURPOSES AS HE/SHE MIGHT OR
COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SUCH
ATTORNEYS-IN-FACT AND AGENTS OR THEIR SUBSTITUTES MAY LAWFULLY DO OR CAUSE TO BE
DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF HOUSEHOLD
INTERNATIONAL, INC. AND IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------- --------------------
<C> <S> <C>
/s/ W. F. ALDINGER President, Chief
- --------------------------------------------- Executive
(W. F. Aldinger) Officer and Director
/s/ D. C. CLARK Chairman of the Board
- --------------------------------------------- and Director
(D. C. Clark)
/s/ R. J. DARNALL Director
- ---------------------------------------------
(R. J. Darnall)
/s/ G. G. DILLON Director }March 27, 1996
- ---------------------------------------------
(G. G. Dillon)
/s/ J. A. EDWARDSON Director
- ---------------------------------------------
(J. A. Edwardson)
/s/ M. J. EVANS Director
- ---------------------------------------------
(M. J. Evans)
/s/ J. D. FISHBURN, M.P. Director
- ---------------------------------------------
(J. D. Fishburn, M.P.)
/s/ C. F. FREIDHEIM, JR. Director
- ---------------------------------------------
(C. F. Freidheim, Jr.)
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------- --------------------
<C> <S> <C>
/s/ L. E. LEVY Director
- ---------------------------------------------
(L. E. Levy)
/s/ G. A. LORCH Director
- ---------------------------------------------
(G. A. Lorch)
/s/ J. D. NICHOLS Director
- ---------------------------------------------
(J. D. Nichols)
/s/ J. B. PITBLADO Director
- --------------------------------------------- }March 27, 1996
(J. B. Pitblado)
/s/ S. J. STEWART Director
- ---------------------------------------------
(S. J. Stewart)
/s/ L. W. SULLIVAN, M.D. Director
- ---------------------------------------------
(L. W. Sullivan, M.D.)
/s/ R. C. TOWER Director
- ---------------------------------------------
(R. C. Tower)
/s/ D. A. SCHOENHOLZ Executive Vice President
- --------------------------------------------- --
(D. A. Schoenholz) Chief Financial Officer
(also the principal
accounting officer)
</TABLE>
<PAGE> 16
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 1995 annual
report to shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated January 24, 1996. 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 LLP
Chicago, Illinois
January 24, 1996
F-1
<PAGE> 17
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
------------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Equity in income of subsidiaries............................... $489.2 $382.5 $326.7
Finance and other income....................................... 36.5 38.5 36.1
------ ------ ------
Total income.............................................. 525.7 421.0 362.8
------ ------ ------
Expenses:
Administrative............................................ 66.6 72.2 41.8
Provision for credit losses............................... 2.4 (20.5) 19.1
Interest.................................................. 27.3 21.2 25.2
Income tax benefits....................................... (23.8) (19.5) (22.0)
------ ------ ------
Total expenses............................................ 72.5 53.4 64.1
------ ------ ------
Net income..................................................... $453.2 $367.6 $298.7
====== ====== ======
Earnings per common share:
Fully diluted................................................ $ 4.30 $ 3.50 $ 2.85
====== ====== ======
Primary...................................................... $ 4.31 $ 3.52 $ 2.91
====== ====== ======
</TABLE>
See accompanying condensed notes to financial statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-2
<PAGE> 18
SCHEDULE III (CONTINUED)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1995 1994
-------- --------
<S> <C> <C>
Assets:
Investments in and advances from subsidiaries.................... $3,130.9 $2,754.5
Finance receivables.............................................. -- 160.7
Other assets..................................................... 479.9 415.0
-------- --------
Total assets..................................................... $3,610.8 $3,330.2
======== ========
Liabilities and shareholders' equity:
Commercial paper................................................. $ 286.5 --
Bank borrowings.................................................. -- $ 100.0
Senior debt (with original maturities over one year)............. 249.8 349.6
-------- --------
Total debt....................................................... 536.3 449.6
Other liabilities................................................ 103.6 357.6
Company obligated mandatorily redeemable preferred securities of
subsidiary trust................................................ 75.0 --
Convertible preferred stock subject to mandatory redemption...... -- 2.6
Preferred stock.................................................. 205.0 320.0
Common shareholders' equity...................................... 2,690.9 2,200.4
-------- --------
Total liabilities and shareholders' equity....................... $3,610.8 $3,330.2
======== ========
</TABLE>
See accompanying condensed notes to financial statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-3
<PAGE> 19
SCHEDULE III (CONTINUED)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATIONS......................... $(335.7) $ 63.0 $(127.9)
------- ------- -------
INVESTMENT IN OPERATIONS
Dividends from subsidiaries................................... 401.4 240.0 100.0
Investment in and advances to (from) subsidiaries, net........ (90.7) (221.9) (153.3)
Investment securities sold, net............................... -- -- 16.0
Finance receivables originated, net of collections............ (2.4) (41.0) (17.2)
Sale of finance receivables to subsidiary..................... 165.8 -- --
Purchase of property and equipment............................ (.2) (.1) (.2)
------- ------- -------
Cash increase (decrease) from investment in operations........ 473.9 (23.0) (54.7)
------- ------- -------
FINANCING AND CAPITAL TRANSACTIONS
Net increase (decrease) in commercial paper and bank
borrowings.................................................. 186.5 (53.8) 90.7
Retirement of senior debt..................................... (100.0) (100.0) (100.0)
Issuance of senior debt....................................... -- 249.6 --
Dividends to shareholders..................................... (154.0) (146.5) (141.3)
Issuance of company obligated mandatorily redeemable preferred
securities of subsidiary trust.............................. 75.0 -- --
Purchase of treasury stock.................................... (59.7) -- --
Issuance of common stock...................................... 24.7 13.6 313.3
Issuance of preferred stock................................... -- -- 100.0
Redemption of preferred stock................................. (115.0) -- (80.0)
------- ------- -------
Cash increase (decrease) from financing and capital
transactions................................................ (142.5) (37.1) 182.7
------- ------- -------
Increase (decrease) in cash................................... (4.3) 2.9 .1
Cash at January 1............................................. 4.6 1.7 1.6
------- ------- -------
CASH AT DECEMBER 31........................................... $ .3 $ 4.6 $ 1.7
======= ======= =======
</TABLE>
See accompanying condensed notes to financial statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-4
<PAGE> 20
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>
1995 1994
------ ------
<S> <C> <C>
Other unsecured.......................................... -- $165.8
Credit loss reserve...................................... -- (5.1)
------ ------
Total.......................................... -- $160.7
====== ======
</TABLE>
In July 1995 the company sold at net book value approximately $166 million
of receivables to one of its subsidiaries.
2. SENIOR DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR)
Senior debt at December 31 consisted of the following (in millions):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
7.35% notes; due 1995.................................... -- $100.0
Variable interest rate debt; 6.00% to 6.13%; due 1996 and
1997................................................... $250.0 250.0
Unamortized discount..................................... (.2) (.4)
------ ------
Total.......................................... $249.8 $349.6
====== ======
</TABLE>
3. COMMERCIAL PAPER
The company began a commercial paper program during 1995. At December 31,
1995 the company had $400 million in committed back-up lines of credit to
facilitate liquidity for this program. None of the lines of credit contained a
material adverse change clause that could restrict availability.
4. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST
In June 1995 Household Capital Trust I ("the trust"), a wholly-owned
subsidiary of the company, issued 3 million 8.25 percent Trust Originated
Preferred Securities ("preferred securities") at $25 per preferred security. The
sole asset of the trust is Junior Subordinated Deferrable Interest Notes
("junior subordinated notes") issued by the company. The junior subordinated
notes mature on June 30, 2025 and are redeemable by the company in whole or in
part beginning on June 30, 2000, at which time the preferred securities are
callable. The trust may elect to extend the maturity of the preferred securities
to June 30, 2044. The obligations of the company with respect to the junior
subordinated notes, when considered together with certain undertakings of the
company with respect to the trust, constitute a full and unconditional guarantee
by the company of the trust's obligations under the preferred securities. As a
result of this guarantee, the preferred securities are classified in the
company's balance sheet as company obligated mandatorily redeemable preferred
securities of subsidiary trust (representing the minority interest in the trust)
at their face and redemption amount of $75 million. The preferred securities
have a liquidation value of $25 per preferred security. Dividends on the
preferred securities are cumulative, payable quarterly in arrears, and are
deferable at the company's option for up to five years. The company cannot pay
dividends on its preferred and common stocks during such deferments. Dividends
on the preferred securities have been classified as interest expense in the 1995
statement of income. Net proceeds from the issuance were used for general
corporate purposes.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-5
<PAGE> 21
SCHEDULE III (CONTINUED)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT -- (CONTINUED)
5. CONVERTIBLE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
During 1995 the company redeemed all shares of the $6.25 cumulative
convertible preferred stock subject to mandatory redemption provisions (the
"$6.25 stock"). At December 31, 1994 the company had 52,010 shares of the $6.25
stock outstanding. The company redeemed 4,165 and 2,312 shares for $50 per share
in 1995 and 1994, respectively. The remaining shares called, but not redeemed
for cash, were converted into common stock.
6. COMMON STOCK
Common stock at December 31 consisted of the following (millions of
shares):
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Authorized -- $1 par value........................................ 150.0 150.0
===== =====
Issued............................................................ 115.2 115.0
===== =====
Outstanding....................................................... 97.2 96.6
===== =====
</TABLE>
7. PREFERRED STOCK
Preferred stock at December 31 consisted of the following (all dollar
amounts are stated in millions):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Fixed rate preferred stock:
9.50% Preferred Stock, Series 1989-A,
3,000,000 depositary shares(1).............................. -- $ 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).............................. 100.0 100.0
Flexible Rate Auction Preferred Stock:
9.50% Series B, 400,000 shares................................. -- 40.0
------ ------
Total preferred stock..................................... $205.0 $320.0
====== ======
</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.
On July 27, 1995 the company redeemed all outstanding shares of the 9.50
percent preferred stock, Series 1989-A, at $104.75 per share 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. This stock has a liquidation value of $100 per share.
Dividends on the 8.25 percent preferred stock, Series 1992-A, are
cumulative and payable quarterly. The company may, at its option, redeem in
whole or in part the 8.25 percent preferred stock, Series 1992-A, on any
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-6
<PAGE> 22
SCHEDULE III (CONTINUED)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT -- (CONTINUED)
date after October 15, 2002 for $25 per depositary share plus accrued and unpaid
dividends. This stock has a liquidation value of $1,000 per share.
Dividends on the 7.35 percent preferred stock, Series 1993-A, are
cumulative and payable quarterly. The company may, at its option, redeem in
whole or in part the 7.35 percent preferred stock, Series 1993-A, on any date
after October 15, 1998 for $25 per depositary share plus accrued and unpaid
dividends. This stock has a liquidation value of $1,000 per share.
On July 13, 1995 the company redeemed all outstanding shares of the 9.50
percent Flexible Rate Auction Preferred Stock, Series B for $100 per share plus
accrued and unpaid dividends.
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.
8. COMMITMENTS
Under an agreement with the Office of Thrift Supervision, the company will
maintain the net worth of its subsidiary, Household Bank, f.s.b. at a level
consistent with certain minimum net worth requirements.
The company has guaranteed payment of all long-term debt obligations issued
subsequent to 1989 of Household Financial Corporation Limited ("HFCL"), a
Canadian subsidiary. The amount of guaranteed debt outstanding at HFCL on
December 31, 1995 was approximately $778 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, 1995 was approximately
$1,172 million.
The company has guaranteed payment of a $46 million deposit held by one of
its operating subsidiaries on behalf of another operating subsidiary.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-7
<PAGE> 23
SCHEDULE VIII
HOUSEHOLD INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Insurance reserves applicable to receivables:
Policy:
Balance at January 1......................................... $ 64.4 $ 59.2 $ 61.3
Earned premiums.............................................. (64.1) (152.5) (134.2)
Net premiums written and reinsurance assumed................. 68.1 155.0 131.7
Other items.................................................. 32.5 2.7 .4
------ ------- -------
Balance at December 31....................................... 100.9 64.4 59.2
------ ------- -------
Claims:
Balance at January 1......................................... 57.8 58.3 52.4
Provision for claims......................................... 69.9 69.2 74.1
Benefits paid................................................ (66.2) (65.8) (67.9)
Other items.................................................. (2.5) (3.9) (.3)
------ ------- -------
Balance at December 31....................................... 59.0 57.8 58.3
------ ------- -------
Total insurance reserves at December 31...................... $159.9 $ 122.2 $ 117.5
====== ======= =======
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-8
<PAGE> 24
SCHEDULE X
HOUSEHOLD INTERNATIONAL, INC.
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B
- ------------------------------------------------------------------ ----------------------------
CHARGED TO COSTS
AND EXPENSES
----------------------------
ITEM 1995 1994 1993
- ------------------------------------------------------------------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Depreciation and amortization of intangible assets and similar
deferrals:
Amortization of insurance policy acquisition costs.............. $ 53.4 $ 47.8 $ 67.8
Amortization of acquired intangibles............................ 109.8 91.0 81.0
------ ------ ------
Total........................................................ $163.2 $138.8 $148.8
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-9
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ---------------------------------------------------------------------- ------------
<S> <C> <C>
2 Stock Purchase Agreement by and among Household Group, Inc., the
Company, Alexander Hamilton Life Insurance Company of America and
Jefferson-Pilot Corporation dated August 9, 1995 (incorporated by
reference to Exhibit 2 of the Company's Current Report on Form 8-K
dated August 9, 1995).
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,
1995).
3(ii) Bylaws of Household International, as amended January 10, 1995
(incorporated by reference to Exhibit 3(ii) of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
4(a) Standard Multiple-Series Indenture Provisions for Senior Debt
Securities of Household Finance Corporation dated as of June 1, 1992
(incorporated by reference to Exhibit 4(b) to the Registration
Statement on Form S-3 of Household Finance Corporation, No. 33-48854).
4(b) Indenture dated as of December 1, 1993 for Senior Debt Securities
between Household Finance Corporation and The Chase Manhattan Bank
(National Association), as Trustee (incorporated by reference to
Exhibit 4(b) to the Registration Statement on Form S-3 of Household
Finance Corporation, No. 33-55561).
4(c) The principal amount of debt outstanding under each other 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 Key Executive Bonus Plan (incorporated by
reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994).
10.2 Household International Corporate Executive Bonus Plan.
10.3 Household International Long-Term Executive Incentive Compensation
Plan, as amended.
10.4 Forms of stock option, restricted stock rights and performance share
award agreements under the Household International Long-Term Executive
Incentive Compensation Plan.
10.5 Household International Directors' Retirement Income Plan
(incorporated by reference to Exhibit 10.5 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993).
10.6 Household International Deferred Fee Plan for Directors.
10.7 Household International Deferred Phantom Stock Plan for Directors.
10.8 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).
10.9 Executive Employment Agreement between the Company and W. F. Aldinger
(incorporated by reference to Exhibit 10.8 of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ---------------------------------------------------------------------- ------------
<S> <C> <C>
10.10 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 March 31, 1995).
10.11 Executive Employment Agreement between the Company and J. W. Saunders
(incorporated by reference to Exhibit 10.10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994).
10.12 Executive Employment Agreement between the Company and R. F. Elliott
(incorporated by reference to Exhibit 10.11 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994).
10.13 Executive Employment Agreement between the Company and D. A.
Schoenholz.
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 1995 Annual Report
to Shareholders.
21 List of Household International subsidiaries.
23 Consent of Arthur Andersen LLP, Certified Public Accountants.
24 Power of Attorney, included on page 13 hereof.
27 Financial Data Schedule.
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 10.2
HOUSEHOLD INTERNATIONAL
CORPORATE EXECUTIVE BONUS PLAN
JANUARY 1995
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 earnings per share (EPS);
efficiency ratio; equity to managed assets ratio; and/or reserve to charge-off
ratio for managed receivables. Household's performance will be measured
against pre-established minimum, target and maximum levels.
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 financial and individual
performance in a given year. The target award percentage for each group will
approximate the guideline percentage shown below of the executive's base salary
at the end of the plan year. 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>
GROUP TARGET BONUS MAXIMUM BONUS*
<S> <C> <C>
A 65% 100.0%
B 50% 75.0%
C 40% 60.0%
D 35% 52.5%
E 30% 45.0%
F 20% 30.0%
</TABLE>
Detailed information relating to the assignment and weighing of
goals is available by individual and is maintained by the business
unit and/or corporate.
*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
Various financial results, will determine the size of a portion of
each individuals's annual bonus. A portion of the award will be paid
out if achieved results are at the pre-established minimum, target or
maximum financial results levels.
B. INDIVIDUAL PERFORMANCE AWARDS
Early in each plan year, goals for individual performance for that
year will be established for each participant. The goals should
require the level of performance which is expected of a fully
satisfactory incumbent and must be agreed to by the immediate
superior. The Compensation Committee of the Board of Directors must
approve the goals for those executives whose salaries are determined
by the Committee. These goals will be the primary criteria for
measuring individual performance and determining the individual
performance portion of the bonus for that year. 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
2
<PAGE> 3
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 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
3
<PAGE> 4
to discuss areas where goals will be established and agree on their priority
and establish the number of points that will be earned based upon various
levels of achievement during the plan period.
PREPARATION FOR THE GOAL SETTING MEETING
To prepare for the goal setting session with the bonus eligible subordinate,
the manager should have a clear idea of function or department goals and
objectives for the plan year, priorities for the subordinate's unit or area,
and three or four possible objectives to suggest as appropriate. During the
session, the manager's role will be to direct the discussion and ensure that
its results are jointly understood.
The subordinate will prepare for the session by establishing a list of
priorities for the unit or area during the plan year, and developing four to
eight potential goals for discussion. The subordinate's role during the
session will be to actively discuss goals and expected levels of achievement
with the manager in order to ensure that the final agreement is realistic and
achievable and that there is a clear understanding of expected performance and
the amount of bonus associated with various levels of achievement.
GUIDELINES FOR SETTING GOALS
For the purpose of establishing goals for the plan year, the following criteria
should apply:
They should be consistent and supportive of goals reflected in the
Company's strategic business plans.
They should be primarily job or task oriented. They must be realistic
and achievable yet challenging with 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
4
<PAGE> 5
format of the Executive Bonus Plan Goal Setting Form and approved by the
appropriate level of management.
5
<PAGE> 6
Rev. 12/31/95
CORPORATE EXECUTIVE BONUS PLAN POSITIONS
----------------------------------------
GROUP/TITLE
GROUP A - 65%/100%
Group Executive U.S. BankCard & Retail Services
Group Executive U.S. Consumer Finance & Canada
Group Executive Insurance, U.S. Consumer Banking, Auto
Finance & the U.K.
GROUP B - 50%/75%
SVP Chief Financial Officer
GROUP C - 40%/60%
VP Chief Information Officer
VP General Counsel
VP Human Resources
GROUP D - HEADS OF MAJOR BUSINESS UNITS OR STAFF UNITS -
35%/52-1/2%
Group Executive Commercial Finance
GROUP E - HEADS OF MAJOR BUSINESS SEGMENTS OR STAFF UNITS -
30%/45%
Assistant General Counsel & Corporate Secretary
*Director Operations U.K.
Managing Director & CEO USCB
*Managing Director Canada
Managing Director Carlson Joint Venture
*Managing Director/CEO-U.K.
Managing Director/Chief Financial Officer-HCS
Managing Director HRSI
Managing Director Marketing & Risk Management (HCS)
Managing Director Operations, Systems & Human Resources (HCS)
Managing Director-Strategic Initiatives & Partnership
Alliances (HCS)
President & Ceo - HLIC
President Equipment Finance-HCFS
VP Chief Credit Officer
VP Controller HI
VP Governmental Relations
VP Strategy & Development
VP Taxes
VP Treasurer
6
<PAGE> 7
GROUP F - CORPORATE STAFF DEPARTMENTS - 20%/30%
Business Analysis
- -----------------
Director Business Analysis
Director Credit Policy Administration
Controller
- ----------
Deputy Controller-External Reporting
Director Analysis & Projects
Director Asset Backed Financings
Director Business Treasury Services
Director Corporate Financial Information Systems
Director Federal/State Tax Compliance
Director Federal Tax Audit
Director Financial Data Management
Director Internal Audit-Financial Services
Director Internal Management Reporting & Analysis
Director Planning
Director Regulatory Reporting
Director Strategy & Development
Director Tax Planning & Tax Counsel
Treasury Controller
VP Audit
VP Data Administration
VP Finance & Administration
VP Financial Control
VP Insurance & Risk Finance
VP Money & Capital Markets
VP Specialty Finance
General Counsel
- ---------------
Assistant General Counsel Employee Relations
Assistant General Counsel Litigation
General Counsel
Group General Counsel
VP Government Relations & Public Affairs
VP State Governmental Relations
Human Resources
- ---------------
Director Human Resources Development
Director Human Resources HI
VP Compensation
VP Human Resources Administration
7
<PAGE> 8
HOUSEHOLD CREDIT SERVICES:
- -------------------------
Household Credit Services
- -------------------------
Controller HCS
Director Business Planning
Director Business Systems-HCS
Director Business Treasury Services
Director Combined Card
Director Fraud & Operations
Director HBNA Product
Director HCS
Director National Telephone Services
Director Nevada Operations
Director Real Estate, Facilities & Financial Operations
Director Risk Control
Group Director GM Marketing
Group Director Information Systems
Group Director Risk Control
Group Director Risk Management
National Director Human Resources HCS
HRSI
- ----
Director Business Systems
Group Director Administration
VP Chief of Marketing & Sales HRSI
VP Director Marketing
VP Director of Sales HRSI
Mexico
- ------
*Director Operations Mexico
*Executive Director Mexico
U.S. CONSUMER FINANCE & CANADA:
- ------------------------------
HFC Home Office Staff
- ---------------------
Group Business Technology Group Officer
Group Financial Control Officer
VP Credit Risk USCF
VP Strategic Initiatives
HFC National Processing Center
- ------------------------------
Director Auto Finance Policy/Compliance Support
Director Collections HFPCS
Director Customer Service
Director Human Resources HFC
8
<PAGE> 9
Director Operations Support
Director Policy/Compliance/Project Control
Director Risk Control
VP Chief Financial Officer
VP Collections USCF
VP Credit Risk & Affiliate Transactions HFCPS
VP Customer Fulfillment & Servicing
VP Household Recovery Services
VP National Appraisal Director
HFS
- ---
Chief Financial Officer HFS
Group VP Indirect Lending
VP Director of Credit Services
VP ITT Portfolio
VP Non-Performing Assets
Canada
- ------
Director Collections RSC
Director Financial Control
Director Human Resources
Director Law & Compliance
Director Marketing
Director Merchant Sales
Director Risk Management
*Director Technology & Planning-Canada
*Director Wholesale Lending Canada
*Executive Director MRSL Canada
General Manager-Processing
*National Director of Sales-Canada
Treasurer
U.S. CONSUMER BANKING & U.K.:
- ----------------------------
HFC Auto
- --------
VP Adminstration Auto
VP Credit Cycle
VP Servicing
Household Bank
- --------------
Director Student Loan Business
SVP Retail Banking
VP Financial Administration
VP Market Development & Risk Management
9
<PAGE> 10
HLIC
- ----
Director Internal Audit Financial Services
Director Product Development
Director Senior Investment Officer
Executive Director Affiliated Marketing
Executive Director General Counsel & Corporate Secretary AHL
U.K.
- ----
Chief Financial Officer
Director Applications & Acquisitions
Director Business Relationships
Director Collections
Director Credit Card Services
Director Credit Policy
Director Dealer Support
Director Insurance Services
Director Internal Audit
Director Legal
Director Operations Support
Director Personal Banking U.K.
Director Production Personal Banking U.K.
Director Property & Facilities
Division General Manager
Finance Director-Insurance/Compliance Officer
Group Financial Controller
General Manager Bank Marketing
General Manager Business Control
General Manager HDB Marketing
Operations, Compensation & Benefits Manager
Sales Director Central Lending
Sales Director HFC Finance
Sales Director Insurance
Senior Manager Credit Policy
*Special Assistant to Managing Director/CEO U.K.
Training & Development Manager
HTS
- ---
Director Business Systems
Director Cash Operations
Director Corporate Security Management
Director Data Center Operations & Systems Programming
VP Administration HTS
VP Application Systems
VP Chief Financial Officer HTS
VP Data Center Operations
VP Facilities Management
VP Human Resources HTS
VP Item Processing
10
<PAGE> 11
VP Networked Systems
* Position held by expatriate.
11
<PAGE> 1
EXHIBIT 10.3
HOUSEHOLD INTERNATIONAL
LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN
AS AMENDED
1. PURPOSE
The purpose of the Household International Long-Term Executive
Incentive Compensation Plan (the "Plan") is to further the long-term growth of
Household International, Inc. ("Household") and its subsidiaries by
strengthening the ability of Household to attract and retain key employees and
to provide additional motivation and incentives for the performance of key
employees.
2. ADMINISTRATION
The Plan shall be administered by the Compensation Committee of
Household's Board of Directors (the "Committee"). The Committee shall have
such powers to administer the Plan as are delegated to it by the Plan and the
Board of Directors, including the power to interpret the Plan and any
agreements executed thereunder, to prescribe rules and regulations relating to
the Plan, to determine the terms, restrictions, and provisions of any agreement
relating to awards granted pursuant to the Plan, and to make all other
determinations necessary or advisable for administering the Plan. No member of
the Committee shall be eligible to receive any awards under the Plan while a
member of the Committee or at any time within one year prior to becoming a
member of the Committee.
3. GRANT OF AWARDS; SHARES SUBJECT TO PLAN
(a) The Committee may grant any type of award permitted under the
terms of the Plan (all such awards in the aggregate being hereinafter referred
to as "Awards"). Only employees of Household and its subsidiaries may be
selected by the Committee for Awards under the Plan.
(b) The maximum number of shares of Common Stock of Household that
may be issued under the Plan is 6,017,884 (adjusted to reflect the 2-for-1
Common Stock split effected on October 15, 1993), all of which shares may be
made subject to Options. The Stock issued pursuant to the Plan may consist of
authorized and unissued shares of Household's Common Stock, Common Stock held
in Household's treasury or Common Stock purchased on the open market. If any
Award granted under the Plan shall terminate or lapse for any reason, any
shares of Common Stock subject to such Award shall again be available for the
grant of an Award.
-1-
<PAGE> 2
(c) In the event of corporate changes affecting Household's Common
Stock or this Plan or Awards granted thereunder (including, without limiting
the generality of the foregoing, stock dividends, stock splits,
recapitalizations, reorganizations, mergers, consolidations, or other relevant
changes in capitalization), the Board of Directors or the Committee shall make
appropriate adjustments in price, number and kind of shares of Common Stock or
other consideration subject to such Awards or in the terms of such Awards,
which it deems equitable to prevent dilution or enlargement of rights under the
Awards. In addition, the Board of Directors or the Committee may from time to
time equitably change the aggregate number or remaining number or kind of
shares which may be issued under the Plan to reflect any such corporate
changes.
(d) The Committee may, in its discretion and subject to such rules
as it may adopt, permit an employee to satisfy, in whole or in part,
withholding tax obligations incurred in connection with Awards: 1) by electing
to have Household withhold shares of Household Common Stock (otherwise
deliverable to the employee in connection with an Award) in payment for such
withholding tax obligation or 2) by delivering shares of Household Common Stock
owned by such employee in payment for such withholding tax obligation.
4. OPTIONS
(a) The Committee may grant any type of statutory or non-statutory
Option to purchase shares of Household Common Stock as is permitted by law at
the time the Option is granted. The term of the initial grant of each Option
shall not be more than ten years and one day from the date of grant and may be
exercised at the rate set by the Committee or as stated herein; provided,
however, that no Option shall be exercised less than one year from the date of
grant, except as provided herein. The Committee may, in its discretion, extend
the expiration date of certain Options, other than Options which are intended
to qualify as Incentive Stock Options ("ISO") pursuant to Section 422A of the
Internal Revenue Code of 1954, as amended (the "Code"), provided no expiration
date of any Option may exceed 15 years from the date of the grant of that
Option.
(b) The per share purchase price of Household Common Stock which
may be acquired pursuant to an Option shall be at least 100% of the fair market
value of one share of Common Stock of Household on the date on which the Option
is granted. Within this limitation such price shall be determined by the
Committee.
(c) Payment for shares purchased upon the exercise of an Option
shall be made in cash or, in the discretion of the
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<PAGE> 3
Committee, in shares of Common Stock of Household valued at the then fair
market value of such shares or by a combination of cash and shares of Common
Stock.
(d) Each Option granted by the Committee which is intended to
qualify as an ISO pursuant to the Code shall comply with the applicable
provisions of the Code pertaining to ISOs. The aggregate fair market value
(determined as of the time the ISO is granted) of Household Common Stock for
which an employee may be granted an ISO in any calendar year (under all plans
of Household and subsidiaries) shall not exceed $100,000 plus any unused "limit
carryover" for such year, as determined in accordance with Section 422A of the
Code.
(e) The Committee may, in its discretion and subject to such rules
as it may adopt, authorize an extension of credit from Household to an employee
holding an Option granted under this Plan (including an employee who is an
officer or director of Household) to assist the employee in exercising the
Option. Household may extend or guarantee loans under this provision. Loans
extended under the Plan will bear interest at a variable rate that is adjusted
annually to equal the greater of the average annual rate for three-year U.S.
Treasury notes for the calendar year immediately preceding the year in which
the adjustment is to be made and the applicable rate in effect under Section
1274(d) of the Internal Revenue Code at the time the loan is made. Payment
terms will be established by the Committee and may or may not require periodic
payments of interest and/or principal. The term of loans will be established
by the Committee, as well as provisions governing the acceleration of maturity
upon termination of employment or default. Loans financed or guaranteed by
Household will be secured by retention of the issued stock certificates by
Household and execution of an agreement with respect to such shares. To the
extent necessary to satisfy the provisions of Regulation G or another similar
regulatory restriction, other security may be required by the Committee.
5. STOCK APPRECIATION RIGHTS
(a) The Committee may grant Stock Appreciation Rights ("SARs") in
tandem with the grant of an Option under the Plan or with respect to a
previously granted Option under the Plan, except that the Committee may grant
SARs in connection with an Option which is an ISO only to the extent that such
grant is consistent with the treatment of the Option as an ISO. In either case
the number of shares in respect of which SARs are granted by the Committee
shall not be greater than the number of shares subject to the related Option.
In exchange for the surrender in whole or in part of the right to exercise the
related Option, such SAR shall entitle the employee to payment of an amount
equal to the
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<PAGE> 4
appreciation in value of the surrendered Options (the excess of the fair market
value of such Stock subject to Options at the time of surrender over their
aggregate option price). An SAR granted pursuant to this subsection (a) shall
be exercisable to the extent and only to the extent that the related Option is
exercisable, but if an SAR is granted with respect to a previously-granted
Option, the SAR will not be exercisable for a period of twelve months from the
date of grant of such SAR, except as provided herein. No such SAR shall be
exercisable except upon surrender of the related Option, and to the extent such
Option is surrendered, the shares covered by such Option shall again be
available for purposes of the Plan to the extent that payment of such SAR is
not made in shares of Stock of Household. The exercise of any Option shall
result in the cancellation of any related SAR. An SAR issued in tandem with an
ISO may be exercised only when the market price of the Stock subject to the ISO
exceeds the exercise price of the ISO.
(b) The Committee may also grant units of SARs on a stand-alone
basis which are not issued in tandem with Options. The term of each such SAR
shall not be more than ten years from the date of grant and may be exercised at
the rate set by the Committee or as stated herein; provided, however, that no
such SAR shall be exercised less than one year from the date of grant, except
as provided herein. The "base price" of each unit of a "stand-alone" SAR shall
be at least 100% of the fair market value of one share of Common Stock of
Household on the date on which such SAR is granted. Within this limitation the
base price shall be determined by the Committee. Each unit of a "stand-alone"
SAR entitles the holder, upon exercise, to payment of an amount equal to the
difference between the base price of such SAR unit and the fair market value on
the date of exercise of a share of Common Stock of Household.
(c) At the discretion of the Committee, payment for SARs may be
made in cash, in shares of Common Stock of Household valued at their fair
market value as of the date of exercise of the SAR, or partly in cash and
partly in shares of Common Stock of Household.
(d) The Committee may establish a maximum appreciation value
payable under an SAR.
6. TRANSFER OF OPTIONS AND STOCK APPRECIATION RIGHTS;
EXERCISE OF OPTIONS AND STOCK APPRECIATION RIGHTS FOLLOWING
TERMINATION OF EMPLOYMENT
(a) Options and SARs may not be transferred except by will or the
laws of descent and distribution, and during the lifetime of the holder may be
exercised only by him. If the holder of an Option or SAR shall cease to be an
employee of Household or a subsidiary, and unless otherwise provided by the
Committee, all
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<PAGE> 5
rights under such Option or SAR shall immediately terminate, except:
(i) in the event of termination of employment of a holder
that is subject to Section 10(b) hereof or of a holder who is
retirement-eligible under the terms of a pension plan of Household or
a subsidiary, the Option or SAR may be exercised within five(5) years
of the date of termination of employment.
(ii) in the event of termination of employment due to
permanent and total disability of a holder who is not retirement-
eligible under the terms of a pension plan of Household or a
subsidiary, the Option or SAR may be exercised within twelve(12)
months following the date of such termination of employment.
(iii) in the event of death during employment, the Option or
SAR may be exercised by the executor, administrator, or other personal
representative of the holder within five(5) years succeeding death if
such holder was retirement-eligible under the terms of a pension plan
of Household or a subsidiary, or twelve(12) months if such holder was
not retirement-eligible under the terms of a pension plan of Household
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 or SAR
may be exercised within three(3) months following the date of
termination, except for termination for cause.
(v) in the event of death of a holder of an Option or SAR
following termination of employment, the Option or SAR may be
exercised by the executor, administrator, or other personal
representative of the holder, notwithstanding the time period
specified in (i), (ii), (iii) or (iv) above, within a) twelve(12)
months following death or b) the remainder of the period in which the
holder was entitled to exercise the Option or SAR, whichever period is
longer.
If the Committee determines that the termination is for cause,
the Option or SAR will not under any circumstances be exercisable
following termination of employment.
(b) An Option or SAR may not be exercised pursuant to this Section
after the expiration of the term of such Option or SAR and may be exercised
only to the extent that the holder was entitled to exercise such Option or SAR
on the date of termination of employment.
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<PAGE> 6
7. PERFORMANCE UNIT AWARDS AND PERFORMANCE SHARE AWARDS
(a) The Committee may grant Performance Unit Awards and
Performance Share Awards pursuant to this Section 7. The Committee shall
establish, with respect to and at the time of grant of each Performance Unit
Award or Performance Share Award, a performance period over which the
performance of the holder of a Performance Unit Award or Performance Share
Award shall be measured. The Committee shall also establish performance levels
but subject to such later revisions as the Committee, in its sole judgment,
shall deem appropriate to reflect significant, unforeseen events or changes.
The Committee in its discretion may also grant Performance Unit Awards and
Performance Share Awards to employees following the start of any performance
period and may also grant additional Performance Unit Awards and Performance
Share Awards to participants after the start of any performance period.
(b) Each Performance Unit shall have an initial value of $100 per
unit. Each Performance Share shall initially represent one share of Household
Common Stock with a value equal to the fair market value of one share of
Household Common Stock on the date of grant of the Performance Share Award. As
determined by the Committee, the value of Performance Units and the number of
shares of Household Common Stock represented by Performance Shares may increase
or decrease depending upon the extent to which the performance targets set by
the Committee in respect of the holder of the Performance Unit Award or
Performance Share Award are achieved.
(c) The holder of a Performance Unit Award shall be entitled to
receive payment of an amount equal to the value of the Performance Unit Award,
based on the achievement of the performance targets for such performance
period, as determined by the Committee at the time of settlement of the
Performance Unit Award, except that no more than 50% of the Performance Unit
Award may be paid in Household Common Stock.
(d) The holder of a Performance Share Award shall be entitled to
receive a number of shares of Household Common Stock represented by the
Performance Share Award, based on the performance targets for such performance
period, as determined by the Committee. At the discretion of the Committee,
payment for Performance Share Awards may be made in whole or in part in cash,
in which case Household shall pay an amount equal to the fair market value of a
share of Household Common Stock on the date of settlement for each share of
Household Common Stock that would otherwise be delivered to the holder of the
Performance Share Award.
(e) Payment shall be made in a lump sum or in installments as
prescribed by the Committee. If any payment in Household Common
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<PAGE> 7
Stock is to be made on a deferred basis, the recipient may be entitled, in the
discretion of and on terms and conditions established by the Committee, to
receive a payment or credit equivalent to any dividend payable with respect to
the number of shares of Common Stock which, as of the record date for the
dividend, had been awarded or made payable to the recipient but not delivered.
If a payment in cash is to be made on a deferred basis, the recipient may be
entitled, in the discretion of and on terms and conditions established by the
Committee, to be paid interest on the unpaid amount.
(f) In the event of (i) death, permanent and total disability, or
retirement under the terms of a pension plan of Household or a subsidiary and,
unless the Committee in its sole discretion adopts a contrary rule, or (ii)
termination in accordance with Section 10(b) hereof, the holder of a
Performance Unit Award or Performance Share Award shall receive payment of such
Award prorated on the number of elapsed months in the performance period but
based on the extent to which performance targets are achieved for the full
performance period. Such Performance Unit Award or Performance Share Award
shall be payable at the time of payment of all other Performance Unit Awards or
Performance Share Awards granted for the same performance period. A holder of
a Performance Unit Award or Performance Share Award whose employment terminates
for reasons other than those listed in this paragraph will forfeit his rights
to any outstanding Performance Unit Award or Performance Share Award. Such
forfeiture may be waived in whole or in part by the Committee, in its sole
discretion.
(g) The Committee may grant Performance Unit Awards or Performance
Share Awards in tandem with SARs and Options (including ISOs if such grant is
consistent with the treatment of the Option as an ISO). However, to the extent
of an exercise or payout of any such Performance Unit Award, Performance Share
Award, Option, and/or SAR granted in tandem, the exercise or payout of any unit
of such tandem Award shall automatically cancel the corresponding units of such
Award. Awards granted to the same individual, whether or not on the same day,
will not be considered to be issued in tandem pursuant to this Section unless
the Committee designates such Awards as tandem Awards.
8. RESTRICTED STOCK RIGHTS
(a) The Committee from time to time may grant Restricted Stock
Rights ("RSRs") to any employee selected by the Committee, which would entitle
such employee to receive a stated number of shares of Common Stock of
Household, subject to forfeiture of such RSRs if such employee failed to remain
continuously an employee of Household or any subsidiary for the period
stipulated by the Committee (the "Restricted Period").
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<PAGE> 8
(b) RSRs shall be subject to the following restrictions and
limitations:
(i) The RSRs may not be transferred except by will or the
laws of descent and distribution;
(ii) Except as otherwise provided in Paragraphs (d) and (e) of
this Section 8, the RSRs and the shares subject to such RSRs shall be
forfeited and all rights of a grantee of such RSRs and shares shall
terminate without any payment of consideration by Household if the
employee fails to remain continuously as an employee of Household or
any subsidiary for the Restricted Period. A grantee shall not be
deemed to have terminated his period of continuous employment with
Household or any subsidiary if he leaves the employ of Household or
any subsidiary for immediate reemployment with Household or any
subsidiary.
(c) 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. At the Committee's
discretion, during the Restricted Period, for each share subject to an RSR,
Household will pay the holder an amount in cash equal to the cash dividend
declared on a share of Common Stock of Household during the Restricted Period
on or about the date Household pays such dividend to its stockholders of
record.
(d) The Committee in its sole discretion may accelerate the
payment of Household Common Stock under RSRs prior to the termination of the
Restricted Period if the holder of the RSR has achieved certain performance
levels established by the Committee at the time an RSR is granted. The
Committee in its sole judgment may revise such performance levels as it deems
appropriate to reflect significant, unforeseen events or changes.
(e) In the event that the employment of a holder terminates by
reason of death or permanent and total disability or as a result of Section
10(b) hereof, such holder shall be entitled to receive the number of shares
subject to the RSR multiplied by a fraction (x) the numerator of which shall be
the number of full months between the date of grant of 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. A holder of an RSR whose employment
terminates for reasons other than those listed in this paragraph will forfeit
his rights under any outstanding RSRs. This automatic forfeiture may be waived
in whole or in part by the Committee in its sole discretion.
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<PAGE> 9
(f) When a grantee shall be entitled to receive shares pursuant to
an RSR, Household shall issue the appropriate number of shares registered in
the name of the grantee.
9. AMENDMENT AND TERMINATION OF THE PLAN
The Board of Directors or the Committee may amend the Plan or any
Award granted thereunder at any time, except as provided in Section 10(d) and
that the Board of Directors or the Committee may not, without shareholder
approval, and except as permitted by Section 3(c), increase the number of
shares of Common Stock of Household which may be issued pursuant to the Plan,
change the purchase price of an Option or base price of a "stand-alone" SAR, or
make any other amendment to the Plan which is required by law to be approved by
the shareholders of Household. The Board of Directors may terminate the Plan
at any time except as provided in Section 10(d), but such termination shall not
affect Awards previously granted under the Plan.
10. CHANGE IN CONTROL
(a) In order to protect employees of Household and its
subsidiaries who have been granted Awards, if a "Change in Control" occurs,
then the Committee, in its sole discretion, may:
i. accelerate the time periods for exercising or realizing any
Awards, notwithstanding any minimum holding periods set forth
in the Plan or established by the Committee at the time of the
grant of the Award;
ii. provide for the purchase by Household of any Awards in cash
equal to the amount that could have been received upon the
exercise or realization of such Awards had the Awards been
currently exercisable or payable on the day before said cash
payment is made;
iii. make such adjustments, including the granting of additional
Awards, to any outstanding Award as the Committee deems
appropriate to reflect the Change in Control; and
iv. cause outstanding Awards to be assumed, or new rights
substituted therefor, by any corporation that is the
successor to Household.
(b) Any employee whose position with Household or any of its
subsidiaries within twenty-four (24) months after a Change in Control is
materially changed (as defined below), shall be deemed to be involuntary
terminated without cause from Household and be entitled to exercise or receive
the payment of Awards previously
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<PAGE> 10
granted to him that were outstanding immediately prior to the event causing
such termination in accordance with Sections 6(a)(i), 7(f), or 8(e) of the
Plan, without any action by the Committee or Board of Directors.
(c) For purposes of this Section and to determine the rights of
any employee who has an outstanding Award, the term:
i. "Change in Control" means a change in the beneficial ownership
of Household's common stock or a change in the composition of
Household's Board of Directors as a result of any of the
following occurrences:
(1) any "person" (as such term is used in Sections 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934)
other than
(x) a trustee or other fiduciary of securities
held under an employee benefit plan of
Household, or
(y) the employee or any person acting in concert
with the employee
becomes a beneficial owner, directly or indirectly,
of common stock of Household representing twenty
percent (20%) or more of the total voting power of
Household's then outstanding common stock; or
(2) a tender offer is made for thirty percent (30%) or
more of the common stock of Household, which tender
offer has not been approved by the Board of Directors
of Household.
ii. "Materially changed" means the occurrence of one or more of the
following events:
(1) the termination of the employee, without cause;
(2) the employee was assigned to a position of lesser
rank or status;
(3) the employee's annual target bonus or targeted
performance unit awards were reduced and compensation
equivalent in aggregate value was not substituted;
(4) the employee's annual salary was reduced;
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<PAGE> 11
(5) the employee's benefits under the Household
Retirement Income Plan or any successor tax qualified
defined benefit plan were reduced for reasons other
than to maintain its tax qualified status and such
reductions were not supplemented in the Household
Supplemental Retirement Income Plan ("HSRIP"); or the
employee's benefits under HSRIP, if applicable, were
reduced;
(6) the employee's other benefits or perquisites were
reduced and such reductions were not uniformally
applied with respect to all similarly situated
employees; or
(7) the employee was reassigned to a geographical area
outside of the metropolitan area in which the
employee was assigned at the time of the Change in
Control.
iii. "Cause" means:
(1) willful and deliberate misconduct, which is
detrimental in a significant way to the interests of
Household;
(2) death; or
(3) inability of the employee, for reasons of disability,
to reasonably perform his/her duties for six
consecutive calendar months.
(d) Notwithstanding anything set forth in Section 9 hereof, with
the occurrence of a Change in Control the Plan may not be amended or terminated
by the Committee, the Board of Directors or the stockholders of Household.
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<PAGE> 1
EXHIBIT 10.4
HOUSEHOLD INTERNATIONAL
NOTICE OF STOCK OPTIONS AND GRANT AGREEMENT
(DATE)
(NAME)
(SOCIAL SECURITY NUMBER)
(MAILING ADDRESS)
On (DATE) 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 for your signature are two(2) copies of the Stock Option Agreement
which state the terms and conditions under which these options were granted.
Please retain one copy for your files and return one signed copy of the
Agreement by (DATE) using the attached pre-addressed envelope, to:
HOUSEHOLD INTERNATIONAL, INC.
ATTN: OFFICE OF THE SECRETARY, 3N
2700 SANDERS ROAD
PROSPECT HEIGHTS, IL 60070
U.S.A.
Sincerely,
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, INC.
HOUSEHOLD INTERNATIONAL LONG-TERM
EXECUTIVE INCENTIVE COMPENSATION PLAN
-------------------
NON-TAX QUALIFIED STOCK OPTION AGREEMENT
FOR SENIOR MANAGEMENT TEAM
THIS AGREEMENT, between HOUSEHOLD INTERNATIONAL, INC., a Delaware
corporation (the "Company"), and the employee referenced on the cover sheet to
this Agreement (the "Employee"), is made pursuant to the Household
International 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
<PAGE> 6
during the lifetime of the Employee only by the Employee and only while he or
she is an employee of the Company (or a subsidiary thereof) and shall have been
continuously so employed from the 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 at any time before the expiration date
of the option; (ii) in the event of termination of employment due to permanent
and total disability of the Employee and the Employee is not
retirement-eligible under the terms of a pension plan of the Company or a
subsidiary, the option may be exercised within twelve months following the date
of such termination of employment; (iii) in the event of death during
employment, the option may be exercised by the executor, administrator, or
other personal representative of the Employee within five years succeeding
death if such Employee was retirement-eligible under the terms of a pension
plan of the Company or a subsidiary, or twelve months if such Employee was not
retirement-eligible under the terms of a pension plan of the Company or a
subsidiary; (iv) in the event of termination of employment other than as set
forth in subsections (i), (ii) or (iii) above, the option may be exercised
within three months following the date of termination, except for termination
for cause; (v) in the event of death of the Employee following termination of
employment, the option may be exercised by the executor, administrator, or
other personal representative of the Employee, notwithstanding the time periods
specified in (i), (ii), (iii) or (iv) above, within a) twelve months following
death or b) the remainder of the period in which the Employee was entitled to
exercise the option, whichever period is longer. 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,
<PAGE> 7
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 to the extent
permitted by the Incentive Plan and is subject to the provisions of the
Incentive Plan.
<PAGE> 8
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> 9
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> 10
HOUSEHOLD INTERNATIONAL
NOTICE OF RESTRICTED STOCK RIGHTS AGREEMENT
(DATE)
(NAME)
(SOCIAL SECURITY NUMBER)
(ADDRESS)
On (DATE) the Compensation Committee of Household's Board of Directors granted
you restricted stock rights under the Household International Long-Term
Executive Incentive Compensation Plan as follows:
Date of Grant ##/##/##
# of Shares Granted ###
Enclosed for your signature are two(2) copies of the Restricted Stock Rights
Agreement which state the terms and conditions under which these rights were
granted. Please retain one copy for your files and return one signed copy of
the Agreement by (DATE) using the attached pre-addressed envelope, to:
HOUSEHOLD INTERNATIONAL, INC.
ATTN: OFFICE OF THE SECRETARY, 3N
2700 SANDERS ROAD
PROSPECT HEIGHTS, IL 60070
U.S.A.
Sincerely,
John W. Blenke
Secretary
__________________________________ ___________________
Employee's Signature Date
<PAGE> 11
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 either (1) the number of
shares subject to the RSR multiplied by a fraction (x) the numerator of which
shall be the number of full months between the date of grant of such RSR and
the date of such termination of employment, and (y) the denominator of which
shall be the number of full months in the Restricted Period; provided however,
that any fractional share shall not be awarded; and provided further, the
Compensation Committee, in its sole discretion, may determine that full vesting
is appropriate under the circumstances or (2) 100% of the shares subject to
RSRs on his or her last day of employment if retirement occurs on or after age
65, and (ii) in the event that the employment of a holder of RSRs terminates by
reason of death or permanent and total disability, such holder shall be
entitled to receive the number of shares subject to the RSR multiplied by a
fraction (x) the numerator of which shall be the number of full months between
the date of grant of such RSR and the date of such termination of employment,
and (y) the denominator of which shall be the number of full months in the
Restricted Period; provided however, that any fractional share shall not be
awarded. 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
<PAGE> 12
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.
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 or his or her estate or administrator, as deemed appropriate by
the Company.
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 as additional income, less applicable taxes, an amount in cash equal
to the cash dividend declared on a share of Common Stock of the Company during
the Restricted Period on or about the date the Company pays such dividend to
its stockholders of record.
6. Any and all taxes required to be withheld by the Company as a result
of the issuance of any shares pursuant to the RSRs shall be the sole
responsibility of the Employee.
7. Notice to the Company shall be addressed to the Company in care of its
Secretary at 2700 Sanders Road, Prospect Heights, Illinois 60070 and notice to
the Employee shall be addressed to him or her at the address as set forth on
the cover sheet of this Agreement, or at such other address as either party may
hereafter designate in writing to the other.
8. Anything herein to the contrary notwithstanding, this RSR agreement
shall be subject to amendment by the Company from time to time to the extent
permitted by the Incentive Plan and is subject to the provisions of the
Incentive Plan.
<PAGE> 13
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"), which shall fully vest five (5) years from the date hereof (the
"Restricted Period"), pursuant to the terms and conditions set forth herein and
subject to the provisions set forth in the Incentive Plan. The RSRs entitle
the Employee to receive the number of shares of Common Stock of the Company as
set forth in the cover sheet to this Agreement.
2. No shares may be issued under RSRs for one year from the date hereof.
After said one-year period, shares subject to RSRs will vest one-third on each
of the third, fourth and fifth anniversaries (the "Vesting Dates") from the
grant date. On each Vesting Date an Employee shall be entitled to receive
shares representing the vested RSRs, and the Company shall issue the
appropriate number of vested shares (rounded down to the nearest whole share)
registered in the name of the Employee or his or her estate or administrator,
as deemed appropriate by the Company, provided the Employee has satisfied all
tax obligations with respect to such shares as required herein. The unvested
shares subject to such RSRs shall be forfeited and all rights of a holder of
such RSRs and shares shall terminate without any payment of consideration by
the Company if the Employee fails to remain continuously as an Employee of the
Company or any subsidiary for the Restricted Period, except (i) in the case of
an Employee who is retirement-eligible under the terms of a pension plan of the
Company or a subsidiary, the Employee will receive either (1) the number of
shares subject to the RSR multiplied by a fraction (x) the numerator of which
shall be the number of full months between the date of grant of such RSR and
the date of such termination of employment, and (y) the denominator of which
shall be the number of full months in the Restricted Period; provided however,
that any fractional share shall not be awarded; and provided further, the
Compensation Committee, in its sole discretion, may determine that full vesting
is appropriate under the circumstances or (2) 100% of the shares subject to
RSRs on his or her last day of employment if retirement occurs on or after age
65, and (ii) in the event that the employment of a holder of RSRs terminates by
reason of death or permanent and total disability, such holder shall be
entitled
<PAGE> 14
to receive the number of shares subject to the RSR multiplied by a fraction (x)
the numerator of which shall be the number of full months between the date of
grant of such RSR and the date of such termination of employment, and (y) the
denominator of which shall be the number of full months in the Restricted
Period; provided however, that any fractional share shall not be awarded. Any
shares that the Employee is entitled to receive in accordance with the
preceding sentence will be reduced by any shares that the Employee has already
received because of vesting on the third, fourth and fifth anniversaries of the
grant date. An Employee shall not be deemed to have terminated his or her
period of continuous employment with the Company if he or she leaves the employ
of the Company or any subsidiary for immediate reemployment with the Company or
any subsidiary. A holder of RSRs whose employment terminates for reasons other
than those listed in this paragraph 2 (other than a change-in-control of the
Company) will forfeit his or her unvested rights under any outstanding RSRs.
This automatic forfeiture may be waived in whole or in part by the Committee in
its sole discretion.
3. The RSRs may not be transferred except by will or the laws of descent
and distribution.
4. The holder of RSRs shall not be entitled to any of the rights of a
holder of the Common Stock with respect to the shares subject to such RSRs
prior to the issuance of such shares pursuant to the Plan. However, during the
Restricted Period, for each unvested share subject to an RSR, the Company will
pay the Employee as additional income, less applicable taxes, an amount in cash
equal to the cash dividend declared on a share of Common Stock of the Company
during the Restricted Period on or about the date the Company pays such
dividend to its stockholders of record.
5. Any and all taxes required to be withheld by the Company as a result
of the issuance of any shares pursuant to the RSRs shall be the sole
responsibility of the Employee.
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> 15
HOUSEHOLD INTERNATIONAL
NOTICE OF PERFORMANCE SHARE AWARD AGREEMENT
(DATE)
(NAME)
(SOCIAL SECURITY NUMBER)
(ADDRESS)
On (DATE) the Compensation Committee of Household's Board of Directors granted
you a performance share award under the Household International Long-Term
Executive Incentive Compensation Plan as follows:
Date of Grant ##/##/##
Price Per Share $##.###
# of Shares ###
Enclosed for your signature are two(2) copies of the Performance Share Award
Agreement which state the terms and conditions under which these shares were
awarded. Please retain one copy for your files and return one signed copy of
the Agreement by (DATE) using the attached preaddressed envelope, to:
Sincerely,
John W. Blenke
Secretary
__________________________________ ___________________
Employee's Signature Date
<PAGE> 16
HOUSEHOLD INTERNATIONAL, INC.
HOUSEHOLD INTERNATIONAL LONG-TERM
EXECUTIVE INCENTIVE COMPENSATION PLAN
----------------------
PERFORMANCE SHARE AWARD AGREEMENT
THIS AGREEMENT, dated February 1, 1994, 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 Performance Share Awards
(the PSAs"), for a period of five (5) years from the date hereof (the
"Restricted Period"), and provided the performance condition in the following
paragraph is met, 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. The PSA shares will vest from the date of this Agreement according to
the following schedule: 25% on the third anniversary if a performance unit
award payment is made with respect to the award granted for the three-year
cycle 1994-1996, 25% on the fourth anniversary if a performance unit award
payment is made with respect to the award granted in the three-year cycle
1995-1997, 50% on the fifth anniversary if a performance unit award payment is
made with respect to the award granted for the three-year cycle 1996-1998. A
holder of PSAs who fails to remain continuously as an Employee of the Company
or any subsidiary until some or all of the PSAs become vested in accordance
with the preceding sentence will forfeit all such unvested shares and the
rights of a holder of such shares without any payment of consideration by the
Company, unless otherwise provided in his or her Employment Agreement or unless
the Compensation Committee has waived this condition. 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.
3. The PSAs may not be transferred except by will or the laws of descent
and distribution.
4. As PSA shares vest, an Employee shall be entitled to receive the
shares and the Company shall issue the appropriate number of shares registered
in the name of the Employee or his or her estate or administrator, as deemed
appropriate by the Company.
<PAGE> 17
5. The holder of PSAs shall not be entitled to any of the rights of a
holder of the Common Stock with respect to the shares subject to such PSAs
prior to the issuance of such shares pursuant to the Plan. However, during the
Restricted Period, for each share subject to an PSA, 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, provided,
however, that any such dividends will be held by the Company without interest,
until the Performance Condition has been satisfied or the Performance Condition
has been waived by the Compensation Committee in its sole discretion. At that
time, all past and future amounts attributable to dividends paid or payable to
holders of the Common Stock shall be paid to the Employee by the Company as
additional income, less applicable taxes.
6. Any and all taxes required to be withheld by the Company as a result
of the issuance of any shares pursuant to the PSAs shall be the sole
responsibility of the Employee.
7. Notice to the Company shall be addressed to the Company in care of its
Secretary at 2700 Sanders Road, Prospect Heights, Illinois 60070 and notice to
the Employee shall be addressed to him or her at the address as set forth on
the cover sheet of this Agreement, or at such other address as either party may
hereafter designate in writing to the other.
8. Anything herein to the contrary notwithstanding, this PSA 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 10.6
HOUSEHOLD INTERNATIONAL
DEFERRED FEE PLAN FOR DIRECTORS
SECTION 1. PURPOSE. The purpose of the Household International
Deferred Fee Plan (the "Plan") is to provide non-management directors (the
"Directors") of Household International, Inc. (the "Company") the opportunity
to defer receipt of cash compensation paid by the Company to such person in
their role as a Director. The Plan is designed to aid the Company in
attracting and retaining as members of its Board of Directors persons whose
abilities, experience and judgment can contribute to the well-being of the
Company.
SECTION 2. EFFECTIVE DATE. The effective date of this Plan is
January 10, 1995.
SECTION 3. ELIGIBILITY. Any Director of the Company who is not
deemed to be an employee of the Company or any subsidiary thereof is eligible
to participate in the Plan.
SECTION 4. DEFERRED COMPENSATION ACCOUNT. Except as may be
required in accordance with Section 11 hereof, an unfunded deferred
compensation account (the "Account") shall be established for each Director who
elects to participate in the Plan.
SECTION 5. AMOUNT OF DEFERRAL. A participant may elect to defer
receipt of all or a specified part of the compensation payable to the
participant for serving on the Board of Directors or committees of the Board of
Directors of the Company or any of its subsidiaries. An amount equal to the
compensation deferred, as reflected in the election referred to in Section 6
hereof, will be credited to the participant's Account, in the form of cash (the
"Cash Component") or phantom Company Common Stock units (the "Stock
Component"), on the date such compensation would otherwise be initially
payable.
SECTION 6. TIME OF ELECTION OF DEFERRAL. Except as set forth
herein, an election to defer compensation shall be made on an annual basis on
or before December 15th of each year on forms approved for that purpose and
shall be effective when filed with the Secretary of the Company with respect to
all compensation, or any part thereof so elected to be deferred, that is paid
in the calendar year following the calendar year in which the election is made.
For the year 1995, the election shall be made prior to January 30, 1995, and
shall be effective when made with respect to any compensation to be paid in the
period January 30, 1995 through December 31, 1995. In the case of newly
elected Directors who first become eligible to participate in the Plan
subsequent to January 1 of any calendar year, such newly eligible participant
shall be entitled to make an election to defer
- 1 -
<PAGE> 2
compensation for services to be performed subsequent to the election provided
such election is made within 30 days after the date such Director becomes
eligible. In this case, such election shall be effective when made with
respect to any compensation to be paid during the period beginning with the
date following the date of the election through December 31 of the same initial
year of participation.
SECTION 7. HYPOTHETICAL INVESTMENT. Each Account may have a Cash
Component, a Stock Component or a combination of both and will be credited on
each date compensation is to be paid to Directors with:
(1) if the compensation is to be placed in the Cash Component, the
amount elected to be deferred plus interest from the date on which
the deferred compensation that is credited to the Cash Component
would initially have been payable, until payment, at a rate equal to
the United States five-year treasury rate plus HFC's borrowing
spread over that rate on the first day of each calendar quarter in
which such interest is credited to the participant's Account with
interest compounded quarterly, or
(2) if the compensation is to be placed in the Stock Component, the
amount elected to be deferred will be used to purchase phantom units
of the Company's Common Stock (including fractional shares) using
the fair market value of such Common Stock on the date the
compensation would otherwise be paid. The Stock Component will be
credited on each dividend payment date for the Company's Common
Stock with additional phantom Common Stock units determined by
dividing the aggregate cash dividend which would have been paid if
the existing phantom Common Stock units were actual shares of the
Company's Common Stock by the fair market value of the Company's
Common Stock as of the dividend payment date, computed to four
decimal places. For purposes of the Plan, the "fair market value"
of one share or unit of the Company's Common Stock shall be the
average of the high and low sale prices for a share of such Common
Stock as published in The Wall Street Journal for the respective
determination date.
SECTION 8. VALUE OF DEFERRED COMPENSATION ACCOUNTS. The value of
each participant's Account shall include compensation deferred and interest or
dividends credited thereon, pursuant to Section 7 of the Plan. All deferred
amounts to be paid to a participant pursuant to the Plan are to be paid in cash
as soon as practicable following the payment date, with the value of the
phantom Common Stock units being the fair market value of an equal number of
shares of the Company's Common Stock on the date of payment.
SECTION 9. PAYMENT OF DEFERRED COMPENSATION. No
- 2 -
<PAGE> 3
withdrawal may be made from the participant's Account prior to the date
specified by the participant in his or her election to defer compensation
except as provided in Section 10. At the participant's election, deferral of
compensation may be made to a specific date, to immediately after the end of
the calendar year in which the participant terminates service as a Director, or
to the earlier of either one of such dates. Any deferral must be for a period
of at least two years following the year for which the compensation is earned,
unless service as a Director terminates earlier. Deferred compensation and
interest or dividends (including appreciation or loss) thereon will be payable
in cash either in a lump sum or in such number of quarterly or annual
installments as the participant chooses, subject to the participant's right to
change such method of distribution no later than twelve months prior to the
first date deferred compensation is to be paid. If a participant elects to
receive payment from his or her Account in installments, the participant's
Account will continue to accrue interest or dividends (and appreciation or
loss) during the installment period. Payments made from the Account shall
first be made from the Stock Component of the Account until such Component has
been reduced to zero, and then from the Cash Component. Interest or dividends
credited to a participant's Account during the installment period will be paid
on the next installment payment date.
SECTION 10. HARDSHIP. In the event of a substantial, unforeseen
hardship, a participant may file a notice with the Secretary of the Company to
be presented to the Compensation Committee of the Board of Directors, advising
the Committee of the circumstances of the hardship, and requesting a withdrawal
of previously deferred amounts, or, where a former Director is receiving annual
installment payments, requesting accelerated payment. The Committee, in its
sole discretion, may agree to accelerate distribution of all or a part of
amounts previously deferred. Should the Committee agree, such distribution
shall occur on a date set by the Committee (the "Hardship Distribution Date")
that is at least six (6) months from the date the Committee approves the
hardship withdrawal request. The Committee shall determine, in its sole
discretion, how a current participant's Cash Component and Stock Component
shall be charged for the withdrawal. No member of the Committee may vote on,
or otherwise influence a decision of the Committee concerning his or her
request for a hardship withdrawal. A hardship withdrawal by a participant
shall have no effect on any amounts remaining in the participant Account, and
shall not have any effect on any current or future deferral election after the
hardship withdrawal.
For purposes of this paragraph, a substantial unforeseen hardship is a
severe financial hardship resulting from extraordinary and unforeseeable
circumstances arising as a result of one or more recent events beyond the
participant's control. To the extent such hardship is or may be relieved (i)
through reimbursement or compensation by insurance or otherwise, (ii) by
- 3 -
<PAGE> 4
liquidation of the participant's assets, to the extent the liquidation of such
assets would not itself cause a financial hardship, and (iii) by cessation of
deferrals under the Plan, accelerated payment may not be made. Withdrawals of
amounts because of an unforeseen hardship may only be permitted to the extent
reasonably necessary to satisfy the hardship. Examples of what are not
considered to be unforeseeable hardships include the need to send a
participant's child to college, or the desire to purchase a home.
SECTION 11. CHANGE IN CONTROL. A "Change in Control" means a change
in the beneficial ownership of the Company's Common Stock or a change in the
composition of the Company's Board of Directors as a result of any of the
following occurrences:
(1) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934) other than
(x) a trustee or other fiduciary of securities held under an
employee benefit plan of the Company, or
(y) an employee or any person acting in concert with an employee
becomes a beneficial owner, directly or indirectly, of the Company's
Common Stock representing twenty percent (20%) or more of the total
voting power of the Company's then outstanding Common Stock; or
(2) a tender offer is made for thirty percent (30%) or more of the
Company's Common Stock, which tender offer has not been approved by
the Board of Directors of the Company.
Notwithstanding any other provision of the Plan, if a Change of Control
occurs, then the Company shall create a trust or take such other actions as are
appropriate to protect each participant's Account.
SECTION 12. DESIGNATION OF BENEFICIARY. A participant may designate
a beneficiary or beneficiaries which shall be effective upon filing written
notice with the Secretary of the Company on the form provided for that purpose.
If no beneficiary is designated, the beneficiary will be the participant's
estate. If more than one beneficiary statement has been filed, the beneficiary
or beneficiaries designated in the statement bearing the most recent date will
be deemed the valid beneficiary or beneficiaries.
SECTION 13. DEATH OF PARTICIPANT OR BENEFICIARY. In the event of a
participant's death before he or she has received the full value of his or her
Account, the then current value of the participant's Account shall be
determined as of the day
- 4 -
<PAGE> 5
immediately following death and such amount shall be paid to the beneficiary or
beneficiaries of the deceased participant as soon as practicable thereafter in
cash in a lump sum. If no designated beneficiary has been named or survives
the participant, the beneficiary will be the participant's estate.
SECTION 14. PARTICIPANT'S RIGHTS UNSECURED. The right of any
participant or beneficiary to receive payment under the provisions of the Plan
shall be an unsecured claim against the general assets of the Company, and no
provisions contained in the Plan shall be construed to give any participant or
beneficiary at any time a security interest in the Account or any other assets
of the Company.
SECTION 15. STATEMENT OF ACCOUNT. Statements will be sent to
participants following the end of each year as to the value of their Accounts
as of December 31 of such year.
SECTION 16. ASSIGNABILITY. No right to receive payments hereunder
shall be transferable or assignable by a participant or a beneficiary, except
by will or by the laws of descent and distribution.
SECTION 17. ADMINISTRATION OF THE PLAN. The Plan shall be
administered by the Compensation Committee of the Board of Directors of the
Company. The Committee shall conclusively interpret the provisions of the Plan
and shall make all determinations under the Plan. The Committee shall act by
vote or written consent of a majority of its members.
SECTION 18. AMENDMENT OR TERMINATION OF PLAN. This Plan may at
anytime or from time to time be amended, modified or terminated by the Board of
Directors of the Company. No amendment, modification or termination shall,
without the consent of a participant, adversely affect such participant's
accruals on his or her prior elections.
SECTION 19. GOVERNING LAW. This Plan shall be governed by and
construed in accordance with the laws of the State of Illinois.
- 5 -
<PAGE> 1
EXHIBIT 10.7
HOUSEHOLD INTERNATIONAL
DEFERRED PHANTOM STOCK PLAN FOR DIRECTORS
SECTION 1. PURPOSE. The purpose of the Household International
Deferred Phantom Stock Plan for Directors (the "Plan") is to provide
non-management directors (the "Directors") of Household International, Inc.
(the "Company") with the opportunity to defer receipt of phantom Company Common
Stock units paid by the Company to Directors. The Plan is designed to aid the
Company in attracting and retaining as members of its Board of Directors
persons whose abilities, experience and judgment can contribute to the
well-being of the Company.
SECTION 2. EFFECTIVE DATE. The effective date of this Plan is July
11, 1995. The Plan was subsequently amended on January 9, 1996.
SECTION 3. ELIGIBILITY. Any Director of the Company who is not
deemed to be an employee of the Company or any subsidiary thereof will
participate in the Plan.
SECTION 4. DEFERRED COMPENSATION ACCOUNT. An unfunded deferred
compensation account (the "Account") shall be established for each Director as
of January 30, 1996, or in the case of any newly elected Director following
January 30, 1996, on the date such Director joins Household's Board of
Directors.
SECTION 5. AMOUNT OF DEFERRAL. On the date of each Annual Meeting
of Stockholders of the Company at which a Director is elected to the Company's
Board of Directors, commencing with the Annual Meeting to be held in 1996, each
such Director shall be credited with:
(1) 250 phantom Company Common Stock units until such Director has been
elected to the Company's Board of Directors at ten (10) Annual
Meetings of Stockholders (it being understood that current Directors
standing for re-election at the 1996 Annual Meeting of Stockholders
shall only receive this award for the number of years he/she has
remaining until he/she attains their tenth anniversary of being
elected by the stockholders to the Company's Board of Directors);
and
(2) 200 phantom Company Common Stock units.
SECTION 6. TIME OF ELECTION OF DEFERRAL. Except as set forth
herein, an acknowledgement to defer phantom stock, accompanied by a Designation
of Beneficiary and Account
- 1 -
<PAGE> 2
Distribution Form (the "Forms"), must be completed and received by the
Secretary of the Company on or before July 31, 1995, for each Director serving
on the Company's Board of Directors as of the effective date of this Plan. In
the case of newly elected Directors, the Forms must be completed and received
by the Secretary of the Company within 30 days after the date such Director is
elected to the Board.
SECTION 7. HYPOTHETICAL INVESTMENT. The phantom Company Common
Stock units received by each Director will be credited to each participant's
Account using the fair market value of a share of the Company's Common Stock,
$1.00 par value, on the date of each applicable Annual Meeting of Stockholders.
During the deferred period, the phantom Company Common Stock units will be
credited on each dividend payment date for the Company's Common Stock with
additional phantom Company Common Stock units determined by dividing the
aggregate cash dividend which would have been paid if the existing phantom
Common Stock units were actual shares of the Company's Common Stock by the fair
market value of the Company's Common Stock as of the dividend payment date,
computed to four decimal places. For purposes of the Plan, the "fair market
value" of one share or unit of the Company's Common Stock shall be the average
of the high and low sale prices for a share of such Common Stock as published
in The Wall Street Journal for the respective determination date.
SECTION 8. VALUE OF DEFERRED COMPENSATION ACCOUNTS. The value of
each participant's Account shall include deferred phantom Company Common Stock
units and dividends credited thereon, pursuant to Section 7 of the Plan. All
deferred amounts to be paid to a participant pursuant to the Plan are to be
paid in cash, with the value of the phantom Company Common Stock units being
the fair market value of an equal number of shares of the Company's Common
Stock on the date of payment.
SECTION 9. PAYMENT OF DEFERRED COMPENSATION. All such payments
accumulated under this Plan will be made as soon as practicable following the
date on which a Director leaves the Board of Directors. A participant may
elect to receive the value of his or her deferred compensation at a later date,
but such date may not be prior to the date on which a Director leaves the Board
of Directors. Deferred phantom Company Common Stock units and dividends
(including appreciation or loss) thereon will be payable in cash either in a
lump sum or in such number of quarterly or annual installments as the
participant chooses up to a maximum ten-year period, subject to the
participant's right to change such method of distribution no later than twelve
months prior to the first date deferred phantom Company Common Stock units are
to be paid. If a participant elects to receive payment from his or her Account
in installments, the participant's Account will continue to accrue dividends
(and appreciation or loss) during the installment period. Dividends credited
to a
- 2 -
<PAGE> 3
participant's Account during the installment period will be paid on the next
installment payment date.
SECTION 10. CHANGE IN CONTROL. A "Change in Control" means a change
in the beneficial ownership of the Company's Common Stock or a change in the
composition of the Company's Board of Directors as a result of any of the
following occurrences:
(1) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934) other than
(x) a trustee or other fiduciary of securities held under an
employee benefit plan of the Company, or
(y) an employee or any person acting in concert with an employee
becomes a beneficial owner, directly or indirectly, of the Company's
Common Stock representing twenty percent (20%) or more of the total
voting power of the Company's then outstanding Common Stock; or
(2) a tender offer is made for thirty percent (30%) or more of the
Company's Common Stock, which tender offer has not been approved by
the Board of Directors of the Company.
Notwithstanding any other provision of the Plan, if a Change of Control
occurs, then the Company shall create a trust or take such other actions as are
appropriate to protect each participant's Account.
SECTION 11. DESIGNATION OF BENEFICIARY. A participant may designate
a beneficiary or beneficiaries which shall be effective upon filing written
notice with the Secretary of the Company on the form provided for that purpose.
If no beneficiary is designated, the beneficiary will be the participant's
estate. If more than one beneficiary statement has been filed, the beneficiary
or beneficiaries designated in the statement bearing the most recent date will
be deemed the valid beneficiary or beneficiaries.
SECTION 12. DEATH OF PARTICIPANT OR BENEFICIARY. In the event of a
participant's death before he or she has received the full value of his or her
Account, the then current value of the participant's Account shall be
determined as of the day immediately following death and such amount shall be
paid to the beneficiary or beneficiaries of the deceased participant as soon as
practicable thereafter in cash in a lump sum. If no designated beneficiary has
been named or survives the
- 3 -
<PAGE> 4
participant, the beneficiary will be the participant's estate.
SECTION 13. PARTICIPANT'S RIGHTS UNSECURED. The right of any
participant or beneficiary to receive payment under the provisions of the Plan
shall be an unsecured claim against the general assets of the Company, and no
provisions contained in the Plan shall be construed to give any participant or
beneficiary at any time a security interest in the Account or any other assets
of the Company.
SECTION 14. STATEMENT OF ACCOUNT. Statements will be sent to
participants quarterly as to the value of their Accounts as of the 15th day of
January, April, July and October for each year in which their is Account
activity.
SECTION 15. ASSIGNABILITY. No right to receive payments hereunder
shall be transferable or assignable by a participant or a beneficiary, except
by will or by the laws of descent and distribution.
SECTION 16. ADMINISTRATION OF THE PLAN. The Plan shall be
administered by the Compensation Committee of the Board of Directors of the
Company. The Committee shall conclusively interpret the provisions of the Plan
and shall make all determinations under the Plan. The Committee shall act by
vote or written consent of a majority of its members.
SECTION 17. AMENDMENT OR TERMINATION OF PLAN. This Plan may at
anytime or from time to time be amended, modified or terminated by the Board of
Directors of the Company. No amendment, modification or termination shall,
without the consent of a participant, adversely affect such participant's
accruals.
SECTION 18. GOVERNING LAW. This Plan shall be governed by and
construed in accordance with the laws of the State of Illinois.
- 4 -
<PAGE> 1
EXHIBIT 10.13
July 11, 1994
Mr. David A. Schoenholz
2700 Sanders Road
Prospect Heights, IL 60070
Dear Dave:
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 Senior Vice
President. In that capacity you are entitled to the following:
a. A minimum annual salary of $240,000;
b. An annual bonus having a targeted value equal to
35% 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. David A. Schoenholz
Page 2
July 11, 1994
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 the following two sentences and 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. It is the
intent to revise this Agreement at least every two (2) years to
reflect more accurate lump sum cash payment percentages in
paragraphs 4 and 5 due to changes in projected pension benefits
and compensation. In no event, however, will the percentages be
reduced below 280%.
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:
<PAGE> 3
EMPLOYMENT AGREEMENT - Mr. David A. Schoenholz
Page 3
July 11, 1994
i. willful and deliberate misconduct which is
detrimental in a significant way to the
interests of the Corporation;
ii. death;
iii. inability, for reasons of disability, reasonably
to perform your duties for 6 consecutive calendar
months; or,
b. In the event that during the term of this Agreement 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
<PAGE> 4
EMPLOYMENT AGREEMENT - Mr. David A. Schoenholz
Page 4
July 11, 1994
vii. you received written notice that your employment contract was
not renewed;
Household shall be required, and hereby agrees, to make
promptly a lump sum cash payment to you in an amount equal to
280% 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 280% of your then annual salary (prior to any
reduction).
<PAGE> 5
EMPLOYMENT AGREEMENT - Mr. David A. Schoenholz
Page 5
July 11, 1994
Because of the performance history of Household and your
performance with us, we hereby agree to an irrebuttable
presumption that a reduction in compensation shall be deemed to
have occurred in any year (within five years following a Change
in Control) in which you do not receive at least:
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
<PAGE> 6
EMPLOYMENT AGREEMENT - Mr. David A. Schoenholz
Page 6
July 11, 1994
employment with Household.
7. Except as provided below, it is the intent and desire of
Household that the salary, bonuses and other benefits provided
for herein shall be paid to you without any diminution by reason
of the assessment of any "golden parachute" excise tax pursuant
to the Internal Revenue Code of 1986, as from time to time
amended, (hereinafter the "Code"), or state law. Accordingly, in
the event that any excise tax is assessed against you pursuant to
the provisions of sections 280G and 4999 of the Code (or
successor provisions) or comparable provisions of state law,
whether with respect to any payments made to you pursuant to the
provisions of this Agreement or payments otherwise arising out of
your employment relationship, Household or any successor, upon
notification of such assessment, shall promptly pay to you such
amount as is necessary to provide you with the same after-tax
benefit that you would have received had there been no "golden
parachute" excise tax. For this purpose, Household or its
successor shall assume that you are taxed at the highest
individual federal and state income tax rates (without regard to
Section 1(g) of the Code or successor provisions thereto).
However, if any part or all of the amounts to be paid to you
constitute "parachute payments" within the meaning of section
280G(b)(2)(A) of the Code, and a reduction of the amount by 10%
or less would totally avoid the imposition of any excise tax,
such amounts shall be reduced so that the aggregate present value
of the amounts constituting such parachute payments will be equal
to 299% of your "annualized includible compensation for the base
period," as such term is defined in section 280G(d)(1) of the
Code. For the purpose of this subparagraph, present value shall
be determined in accordance with section 280G(d)(4) of the Code.
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
<PAGE> 7
EMPLOYMENT AGREEMENT - Mr. David A. Schoenholz
Page 7
July 11, 1994
enforce any right or benefit provided for in this Agreement or in
otherwise pursuing your claim will be promptly paid by Household
or its successor with interest thereon at the highest statutory
rate of your state of domicile for interest on judgments against
private parties from the date of payment thereof by you to the
date of reimbursement to you by Household or its successor.
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 January 3, 1994, the Employment Agreement dated May 28,
1993, the Employment Agreement dated December 1, 1989, the Senior
Executive Employment Agreement dated January 1, 1988, and the
Supplemental Employment Agreement dated January 1, 1988, between
you and Household, all in furtherance of the objectives
authorized and deemed by the Board of Directors of
<PAGE> 8
EMPLOYMENT AGREEMENT - Mr. David A. Schoenholz
Page 8
July 11, 1994
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, 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/ David A. Schoenholz
-----------------------
David A. Schoenholz
<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 1995 1994 1993 1992 1991
- ------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income from continuing operations $ 453.2 $ 367.6 $ 298.7 $ 190.9 $ 149.8
Income taxes 300.5 160.7 152.0 87.1 50.0
- ------------------------------------------- -------- -------- -------- -------- --------
Fixed charges:
Interest expense (1) 1,562.5 1,250.3 1,155.5 1,431.5 1,905.4
Interest portion of rentals (2) 33.5 35.5 33.6 35.3 35.1
Capitalized interest - - - - 1.0
- ------------------------------------------- -------- -------- -------- -------- --------
Total fixed charges 1,596.0 1,285.8 1,189.1 1,466.8 1,941.5
=========================================== ======== ======== ======== ======== ========
Capitalized interest - - - - (1.0)
- ------------------------------------------- -------- -------- -------- -------- --------
Total earnings as defined $2,349.7 $1,814.1 $1,639.8 $1,744.8 $2,140.3
=========================================== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges 1.47 1.41 1.38 1.19 1.10
=========================================== ======== ======== ======== ======== ========
Preferred stock dividends (3) $ 44.1 $ 40.9 $ 46.9 $ 44.3 $ 38.3
=========================================== ======== ======== ======== ======== ========
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.43 1.37 1.33 1.15 1.08
=========================================== ======== ======== ======== ======== ========
</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 39.9%, 30.4%, 33.7%, 31.3% and 25.0% for
the years ended December 31, 1995, 1994, 1993, 1992 and 1991.
<PAGE> 1
EXHIBIT 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries Percent
In millions, except per share data and ratios. 1995 1994 Change
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $ 453.2 $ 367.6 23%
- ------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income:
Primary $ 4.31 $ 3.52 22%
Fully diluted 4.30 3.50 23
Dividends declared 1.31 1.23 7
Book value(1) 27.70 22.78 22
- ------------------------------------------------------------------------------------------------------
KEY PERFORMANCE RATIOS
Return on average owned assets 1.34% 1.08% 24%
Return on average common shareholders' equity(1) 17.4 16.0 9
Total shareholders' equity as a percent of owned assets(1) 10.17 7.35 38
Total shareholders' equity as a percent of managed assets(1) 6.74 5.39 25
Efficiency ratio, normalized(2) 53.9 59.2 (9)
- ------------------------------------------------------------------------------------------------------
AT DECEMBER 31
Total assets(3) $29,218.8 $34,338.4 (15)%
Investment securities(3) $ 4,639.5 $ 9,004.5 (48)
- ------------------------------------------------------------------------------------------------------
Receivables
Owned $21,732.1 $20,555.6 6%
Serviced with limited recourse 14,884.6 12,495.1 19
- ------------------------------------------------------------------------------------------------------
Managed receivables(4) $36,616.7 $33,050.7 11%
======================================================================================================
Deposits(5) $ 4,708.8 $ 8,439.0 (44)%
Total other debt 17,887.3 14,646.2 22
Company obligated mandatorily redeemable preferred
securities of subsidiary trust 75.0 - 100
Convertible preferred stock - 2.6 (100)
Preferred stock 205.0 320.0 (36)
Common shareholders' equity(1) $ 2,690.9 $ 2,200.4 22
Number of common shares outstanding:
Primary 99.1 97.4 2
Fully diluted 99.1 97.5 2
Average common and common equivalent shares:
Primary 99.0 96.3 3
Fully diluted 99.3 97.2 2
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) 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.
In 1994, for certain investments of the life insurance operation, unrealized
holding gains and losses were recorded net of related unrealized deferred
insurance policy acquisition cost adjustments. Before the impact of the
market value adjustment at December 31, 1995 and 1994, book value per common
share was $26.72 and $23.85, respectively; common shareholders' equity was
$2,596.6 and $2,304.0 million, respectively; total shareholders' equity as a
percent of owned assets was 9.85 and 7.64 percent, respectively; total
shareholders' equity as a percent of managed assets was 6.52 and 5.61
percent, respectively; and the return on average common shareholders' equity
was 17.3 and 15.7 percent, respectively.
(2) Ratio of operating expenses to net interest margin and other revenues
less policyholders' benefits. The normalized efficiency ratio excludes
certain nonrecurring items. Including these nonrecurring items, the
efficiency ratio was 51.3 and 60.8 percent for 1995 and 1994, respectively.
(3) In the fourth quarter of 1995 the company sold the individual life and
annuity product lines of the life insurance business, including
approximately $5.7 billion of investment securities.
(4) Excludes reserves, accrued finance charges, and amounts due and
deferred from sales of receivables.
(5) During 1995 the company sold its domestic consumer banking operations
outside of Illinois, including $3.4 billion in deposits. The company's
Canadian subsidiary also sold $725 million in deposits in 1995.
1
<PAGE> 2
OUR PRINCIPAL BUSINESSES
<TABLE>
<CAPTION>
Distribution
As of December 31, 1995 Products Channels
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER HFC
FINANCE $12.0 billion in receivables owned or Home equity and unsecured lines of credit, Branch network,
serviced secured and unsecured closed-end loans, direct mail,
483 branch offices, 2 processing centers Ever Yours(TM) home equity loans for seniors, wholesale,
1.2 million active customer accounts Household Life insurance products, purchased telemarketing
40 states portfolio servicing through Household
Financial Services, HFC's wholesale business
-------------------------------------------------------------------------------------------------------------------
CANADA
$712 million in managed receivables Home equity and unsecured lines of credit, Branch network,
44 branch offices, 1 processing center secured and unsecured closed-end loans, direct mail,
567,000 customer accounts private-label credit cards, Household Life telemarketing
10 provinces in Canada insurance products
- ----------------------------------------------------------------------------------------------------------------------------------
VISA/ HOUSEHOLD CREDIT SERVICES
MASTERCARDS $13.0 billion in managed receivables Standard, gold and corporate VISA and Direct mail,
3 processing centers MasterCard credit cards, corporate and telemarketing,
13.1 million customer accounts small business credit cards, The GM Card, take-one
50 states The Ameritech Complete Card, The Pacific applications,
Bell Savings VISA Card, The US West VISA event marketing
and MasterCard, The Charles Schwab
VISA Card, Household Bank VISA and
MasterCards, revolving lines of credit,
Household Life insurance products
- ----------------------------------------------------------------------------------------------------------------------------------
PRIVATE-LABEL HOUSEHOLD RETAIL SERVICES
CARDS $3.9 billion in managed receivables Private-label credit cards for national-scale Dealer networks
2 processing centers merchants and manufacturers, closed-end and retail
1.8 million active customer accounts sales contracts, marketing services, outlets,
50 states, Puerto Rico Household Life insurance products direct mail
- ----------------------------------------------------------------------------------------------------------------------------------
UNITED HFC BANK PLC
KINGDOM $2.2 billion in managed receivables Secured and unsecured closed-end loans, Branch network,
140 branch offices, 2 processing centers secured and unsecured lines of credit, credit merchants,
950,000 customer accounts cards including The GM Card from Vauxhall, direct mail
England, Scotland, Wales, Northern Ireland The Sun Card, The Toys R Us Card, the
Hamilton Direct Bank Card, Hamilton Life
insurance products
- ----------------------------------------------------------------------------------------------------------------------------------
CONSUMER HOUSEHOLD BANK, F.S.B.
BANKING $3.3 billion in retail deposits Checking, savings and money market Branch network,
$3.9 billion in owned receivables accounts, youth savings accounts, certificates direct mail,
53 branches in Illinois, student loans of deposits, IRAs, real estate secured loans, telemarketing,
nationwide unsecured personal loans, student loans, direct marketing
680,000 customer accounts credit and debit cards, business banking to universities
products and services, Household Life
insurance products
- ----------------------------------------------------------------------------------------------------------------------------------
CREDIT LIFE HOUSEHOLD LIFE INSURANCE
INSURANCE $2.8 billion in managed assets Credit life, disability and specialty Household
1.3 million customer accounts and 1,335 insurance products business units
licensed Household employees
42 states, Canada, the United Kingdom
(Hamilton Life Insurance)
- ----------------------------------------------------------------------------------------------------------------------------------
*HFC Auto Credit, a new business for Household, began operations on October 1, 1995. HFC Auto Credit principally
provides used vehicle financing through auto dealerships and HFC and Household Bank branches.
</TABLE>
16
<PAGE> 3
FINANCIAL SECTION CONTENTS
<TABLE>
<S> <C>
Selected Financial Data & Statistics 18
Analysis of Credit Loss Reserves Activity--
Owned Receivables 19
Analysis of Credit Loss Reserves Activity--
Managed Receivables 20
Other Credit Quality Statistics 21
Management's Discussion & Analysis of
Financial Condition and Results of Operations 22
Statements of Income 33
Balance Sheets 34
Statements of Cash Flows 35
Statements of Changes in Preferred Stock &
Common Shareholders' Equity 36
Notes to Financial Statements 37
Management's Report 60
Independent Auditors' Report 61
Net Interest Margin--1995 Compared to 1994
(Owned Basis) 62
Net Interest Margin--1994 Compared to 1993
(Owned Basis) 63
Net Interest Margin--1995 Compared to 1994 and 1993
(Managed Basis) 64
Selected Quarterly Financial Data (Unaudited) 65
Common and Preferred Stock Information 66
Corporate Information 68
</TABLE>
17
<PAGE> 4
SELECTED FINANCIAL DATA AND STATISTICS
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
All dollar amounts except per share data are stated in millions. 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA--YEAR ENDED DECEMBER 31
Net interest margin and other revenues $ 3,587.3 $ 3,360.6 $ 3,305.0 $ 2,760.4 $ 2,707.0
Provision for credit losses on owned receivables 761.3 606.8 735.8 671.5 843.2
Operating expenses 1,597.8 1,761.1 1,579.4 1,297.0 1,191.8
Policyholders' benefits 474.5 464.4 539.1 513.9 472.2
Income taxes 300.5 160.7 152.0 87.1 50.0
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 453.2 $ 367.6 $ 298.7 $ 190.9 $149.8
=================================================================================================================================
PER SHARE DATA(1)
Earnings per common share:
Primary $ 4.31 $ 3.52 $ 2.91 $ 1.97 $ 1.57
Fully diluted 4.30 3.50 2.85 1.93 1.55
Dividends declared per common share 1.31 1.23 1.18 1.15 1.12
Book value per common share (2,3) 27.70 22.78 22.01 18.65 18.38
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA AT DECEMBER 31
Total assets $29,218.8 $34,338.4 $32,961.5 $31,128.4 $29,982.3
- ---------------------------------------------------------------------------------------------------------------------------------
Receivables:
Owned $21,732.1 $20,555.6 $20,530.4 $20,068.3 $19,404.5
Serviced with limited recourse 14,884.6 12,495.1 9,827.8 7,946.3 7,068.8
- ---------------------------------------------------------------------------------------------------------------------------------
Managed receivables $36,616.7 $33,050.7 $30,358.2 $28,014.6 $26,473.3
=================================================================================================================================
Deposits $ 4,708.8 $ 8,439.0 $ 7,516.1 $ 8,030.3 $ 7,969.6
Total other debt 17,887.3 14,646.2 14,755.9 14,267.7 13,936.9
Company obligated mandatorily redeemable
preferred securities of subsidiary trust 75.0 -- -- -- --
Convertible preferred stock -- 2.6 19.3 36.0 54.4
Preferred stock 205.0 320.0 320.0 300.0 250.0
Common shareholders' equity (2,3) 2,690.9 2,200.4 2,078.3 1,545.6 1,462.1
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS(4)
Total shareholders' equity as a percent of owned assets (2,3,5) 10.17% 7.34% 7.28% 5.93% 5.71%
Total dividends to net income 34.0 39.9 47.3 65.3 76.8
Return on average common shareholders' equity (2,3) 17.4 16.0 14.2 10.7 8.5
Return on average owned assets 1.34 1.08 .91 .62 .49
Efficiency ratio, normalized(6) 53.9 59.2 57.1 57.7 53.3
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1992 and 1991 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.
In 1994 and 1993, for certain investments of the life insurance operation,
unrealized holding gains and losses were recorded net of related unrealized
deferred insurance policy acquisition cost adjustments. Before the impact of
the market value adjustment at December 31, 1995, 1994 and 1993, book value
per common share was $26.72, $23.85 and $21.58, respectively; common
shareholders' equity was $2,596.6, $2,304.0 and $2,037.8 million,
respectively; and total shareholders' equity as a percent of owned assets
was 9.85, 7.64 and 7.15 percent, respectively. The 1995 and 1994 return on
average common shareholders' equity was 17.3 and 15.7 percent, respectively,
before the market value adjustment. 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 a result of implementing FAS No. 109, retained earnings for 1992 and 1991
have been reduced by approximately $63 million from the amounts previously
reported.
(4) See pages 19 through 21 for selected credit quality tables and statistics.
(5) Total shareholders' equity as a percent of owned assets includes company
obligated mandatorily redeemable preferred securities of subsidiary
trust that were issued in 1995. Total shareholders' equity as a percent of
owned assets for 1994 and prior years excludes convertible term preferred
stock that was fully converted or redeemed during 1995. Including this
preferred stock (as well as the impact of FAS No. 115 and, for 1992 and
1991, FAS No. 109), total shareholders' equity as a percent of owned assets
would be 7.35, 7.33, 6.04 and 5.89 percent at December 31, 1994, 1993, 1992
and 1991, respectively.
(6) Ratio of operating expenses to net interest margin and other revenues less
policyholders' benefits. The normalized efficiency ratio excludes certain
nonrecurring items recorded in 1995 and 1994. Including these nonrecurring
items, the efficiency ratio was 51.3 and 60.8 percent for 1995 and 1994,
respectively.
18
<PAGE> 5
ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--OWNED RECEIVABLES
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
All dollar amounts are stated in millions. 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT JANUARY 1 $546.0 $621.9 $564.1 $611.4 $364.7
- ------------------------------------------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES--OWNED RECEIVABLES 761.3 606.8 735.8 671.5 843.2
- ------------------------------------------------------------------------------------------------------------
OWNED RECEIVABLES CHARGED OFF
Domestic:
First mortgage (6.6) (10.3) (13.5) (7.2) (7.5)
Home equity (26.9) (37.2) (36.2) (37.2) (30.1)
Visa/MasterCard(1) (258.7) (204.4) (172.4) (129.5) (103.4)
Merchant participation (132.2) (101.9) (88.5) (95.5) (100.5)
Other unsecured (211.7) (202.8) (205.7) (202.5) (176.1)
Foreign (109.5) (118.0) (151.4) (226.0) (214.7)
-----------------------------------------------------------------------------------------------------
Total consumer (745.6) (674.6) (667.7) (697.9) (632.3)
Commercial(2) (41.0) (85.5) (145.1) (75.4) (78.0)
-----------------------------------------------------------------------------------------------------
Total owned receivables charged off (786.6) (760.1) (812.8) (773.3) (710.3)
- ------------------------------------------------------------------------------------------------------------
RECOVERIES ON OWNED RECEIVABLES
Domestic:
First mortgage 2.2 2.9 2.6 2.2 1.7
Home equity 1.6 1.5 1.2 .6 .4
Visa/MasterCard 19.7 17.6 12.5 10.5 10.2
Merchant participation 24.1 23.6 19.4 15.3 15.1
Other unsecured 45.6 39.5 38.8 35.8 30.1
Foreign 29.6 30.4 26.4 22.0 15.7
-----------------------------------------------------------------------------------------------------
Total consumer 122.8 115.5 100.9 86.4 73.2
Commercial(2) 2.9 1.3 1.7 .4 --
-----------------------------------------------------------------------------------------------------
Total recoveries on owned receivables 125.7 116.8 102.6 86.8 73.2
-----------------------------------------------------------------------------------------------------
Credit loss reserves on receivables purchased, net 64.3 (30.2) 1.6 (19.1) 42.3
Other, net 9.7 (9.2) 30.6 (13.2) (1.7)
- ------------------------------------------------------------------------------------------------------------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES
Domestic:
First mortgage 4.1 5.1 4.1 6.0 7.3
Home equity 26.3 20.1 16.9 12.4 14.2
Visa/MasterCard 131.1 125.6 122.7 60.7 67.4
Merchant participation 147.1 65.0 70.2 65.4 54.0
Other unsecured 196.2 141.7 129.3 111.6 129.1
Foreign 65.0 39.5 45.4 62.0 84.1
-----------------------------------------------------------------------------------------------------
Total consumer 569.8 397.0 388.6 318.1 356.1
Commercial(2) 150.6 149.0 208.3 231.0 255.3
Unallocated corporate -- -- 25.0 15.0 --
- ------------------------------------------------------------------------------------------------------------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT DECEMBER 31 $720.4 $546.0 $621.9 $564.1 $611.4
============================================================================================================
RATIO OF CREDIT LOSS RESERVES TO OWNED RECEIVABLES
Consumer 2.78% 2.12% 2.20% 1.89% 2.28%
Commercial(2) 12.21 8.12 7.36 7.04 6.80
-----------------------------------------------------------------------------------------------------
Total(3) 3.31% 2.66% 3.03% 2.81% 3.15%
============================================================================================================
RATIO OF CREDIT LOSS RESERVES TO OWNED NONPERFORMING LOANS
Consumer 98.9% 82.5% 76.6% 49.2% 47.1%
Commercial(2) 90.3 94.2 69.2 46.5 48.5
-----------------------------------------------------------------------------------------------------
Total(3) 97.0% 85.4% 76.9% 49.4% 47.7%
=====================================================================================================
</TABLE>
(1) VISA and MasterCard are registered trademarks of VISA USA, Inc. and
MasterCard International, Incorporated, respectively.
(2) In connection with the company's decision to discontinue originating other
secured receivables and to manage the liquidation of this portfolio as
part of the discontinued commercial business, and due to the nature of these
receivables, the company has combined other secured receivables with
commercial loans. To better analyze trends, selected balance sheet data
prior to December 31, 1995 have been restated to reflect this combination.
(3) 1993 and 1992 amounts include the unallocated corporate loss reserve.
19
<PAGE> 6
ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--MANAGED RECEIVABLES
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
All dollar amounts are stated in millions. 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT JANUARY 1 $ 882.5 $ 844.7 $ 724.8 $702.3 $ 389.3
- --------------------------------------------------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES--MANAGED RECEIVABLES 1,271.1 969.8 1,016.8 922.6 984.9
- --------------------------------------------------------------------------------------------------------------------
MANAGED RECEIVABLES CHARGED OFF
Domestic:
First mortgage (6.6) (10.3) (13.5) (7.2) (7.5)
Home equity (72.7) (82.6) (75.3) (59.2) (42.0)
Visa/MasterCard (562.4) (401.1) (284.6) (237.6) (147.7)
Merchant participation (189.6) (123.0) (113.5) (109.5) (102.0)
Other unsecured (216.1) (202.8) (222.3) (248.9) (197.7)
Foreign (109.5) (118.0) (151.4) (226.0) (214.7)
-------------------------------------------------------------------------------------------------------------
Total consumer (1,156.9) (937.8) (860.6) (888.4) (711.6)
Commercial(1) (41.0) (85.5) (145.1) (75.4) (78.0)
-------------------------------------------------------------------------------------------------------------
Total managed receivables charged off (1,197.9) (1,023.3) (1,005.7) (963.8) (789.6)
- --------------------------------------------------------------------------------------------------------------------
RECOVERIES ON MANAGED RECEIVABLES
Domestic:
First mortgage 2.2 2.9 2.6 2.2 1.7
Home equity 1.9 1.5 1.2 .6 .4
Visa/MasterCard 33.5 25.7 15.8 13.3 11.0
Merchant participation 29.4 25.4 20.9 15.8 15.1
Other unsecured 45.5 39.5 38.8 35.8 30.1
Foreign 29.6 30.4 26.4 22.0 15.7
-------------------------------------------------------------------------------------------------------------
Total consumer 142.1 125.4 105.7 89.7 74.0
Commercial(1) 2.9 1.3 1.7 .4 --
-------------------------------------------------------------------------------------------------------------
Total recoveries on managed receivables 145.0 126.7 107.4 90.1 74.0
Credit loss reserves on receivables purchased, net 64.3 (30.2) (.5) (19.1) 42.3
Other, net 12.4 (5.2) 1.9 (7.3) 1.4
- --------------------------------------------------------------------------------------------------------------------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES
Domestic:
First mortgage 4.1 5.1 4.1 6.0 7.3
Home equity 105.1 97.8 75.5 54.4 33.9
Visa/MasterCard 344.1 317.9 274.6 126.5 93.6
Merchant participation 178.4 117.9 82.5 87.0 68.1
Other unsecured 308.9 141.7 129.3 142.9 160.0
Foreign 86.2 53.1 45.4 62.0 84.1
-------------------------------------------------------------------------------------------------------------
Total consumer 1,026.8 733.5 611.4 478.8 447.0
Commercial(1) 150.6 149.0 208.3 231.0 255.3
Unallocated corporate -- -- 25.0 15.0 --
- --------------------------------------------------------------------------------------------------------------------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT DECEMBER 31 $1,177.4 $ 882.5 $ 844.7 $724.8 $ 702.3
====================================================================================================================
RATIO OF CREDIT LOSS RESERVES TO MANAGED RECEIVABLES
Consumer 2.90% 2.35% 2.22% 1.94% 1.97%
Commercial(1) 12.21 8.12 7.36 7.04 6.80
-------------------------------------------------------------------------------------------------------------
Total (2) 3.22% 2.67% 2.78% 2.59% 2.65%
====================================================================================================================
RATIO OF CREDIT LOSS RESERVES TO MANAGED NONPERFORMING LOANS
Consumer 115.3% 105.8% 88.3% 56.0% 47.4%
Commercial(1) 90.3 94.2 69.2 46.5 48.5
-------------------------------------------------------------------------------------------------------------
Total(2) 111.4% 103.6% 85.0% 53.6% 47.8%
=============================================================================================================
</TABLE>
(1) In connection with the company's decision to discontinue originating
other secured receivables and to manage the liquidation of this portfolio
as part of the discontinued commercial business, and due to the nature of
these receivables, the company has combined other secured receivables with
commercial loans. To better analyze trends, selected balance sheet data
prior to December 31, 1995 have been restated to reflect this combination.
(2) 1993 and 1992 amounts include the unallocated corporate loss reserve.
20
<PAGE> 7
OTHER CREDIT QUALITY STATISTICS
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
All dollar amounts are stated in millions.
At December 31, unless otherwise indicated. 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NONACCRUAL MANAGED RECEIVABLES(1)
Domestic:
First mortgage $ 39.6 $ 38.6 $ 25.6 $ 26.4 $ 25.1
Home equity 192.5 143.0 155.5 230.2 234.7
Merchant participation 64.2 36.8 21.7 20.8 12.4
Other unsecured 214.0 147.2 153.5 173.7 194.8
Foreign 112.7 99.6 128.7 193.7 268.1
---------------------------------------------------------------------------------------------
Total consumer 623.0 465.2 485.0 644.8 735.1
Commercial(2) 145.5 116.3 272.4 298.3 319.6
---------------------------------------------------------------------------------------------
Total $768.5 $581.5 $757.4 $943.1 $1,054.7
=============================================================================================
RENEGOTIATED COMMERCIAL LOANS $21.2 $41.8 $28.7 $198.4 $ 206.4
- --------------------------------------------------------------------------------------------------
REAL ESTATE OWNED
Domestic $111.5 $138.7 $367.2 $374.1 $ 341.3
Foreign 25.0 44.1 58.3 73.0 83.6
---------------------------------------------------------------------------------------------
Total $136.5 $182.8 $425.5 $447.1 $ 424.9
=============================================================================================
ACCRUING MANAGED RECEIVABLES 90 OR MORE DAYS DELINQUENT(3)
Domestic $255.0 $220.7 $197.0 $196.3 $ 180.0
Foreign 12.2 7.5 10.3 14.1 27.9
---------------------------------------------------------------------------------------------
Total $267.2 $228.2 $207.3 $210.4 $ 207.9
=============================================================================================
DELINQUENCY ON MANAGED CONSUMER RECEIVABLES(4)
First mortgage 3.29% 1.81% 1.33% 1.17% 1.61%
Home equity 3.24 2.83 3.55 4.61 5.52
Visa/MasterCard 2.22 2.25 2.41 2.70 4.39
Merchant participation 4.51 4.53 4.74 6.27 7.41
Other unsecured 5.60 5.19 7.14 9.06 10.11
---------------------------------------------------------------------------------------------
Total 3.46% 3.11% 3.59% 4.45% 5.63%
=============================================================================================
RATIO OF NET CHARGEOFFS TO AVERAGE MANAGED RECEIVABLES(5)
First mortgage .35% .41% .37% .19% .16%
Home equity 1.00 1.31 1.30 1.20 1.08
Visa/MasterCard 4.26 3.92 3.84 5.69 4.87
Merchant participation 4.72 3.57 4.10 5.27 5.70
Other unsecured 3.33 4.36 6.16 7.87 6.24
---------------------------------------------------------------------------------------------
Total consumer 2.95 2.84 2.91 3.45 2.91
Commercial(2) 2.21 3.21 4.68 2.10 1.88
---------------------------------------------------------------------------------------------
Total 2.91% 2.87% 3.10% 3.28% 2.75%
=============================================================================================
</TABLE>
(1) Excludes Visa/MasterCard and private-label credit card receivables,
consistent with industry practice.
(2) In connection with the company's decision to discontinue originating other
secured receivables and to manage the liquidation of this portfolio as
part of the discontinued commercial business, and due to the nature of these
receivables, the company has combined other secured receivables with
commercial loans. To better analyze trends, selected balance sheet and
credit quality data prior to December 31, 1995 have been restated to reflect
this combination.
(3) Includes Visa/MasterCard and private-label credit card receivables. There
were no commercial loans 90 days or more past due which remained on
accrual status.
(4) Delinquency is defined as consumer receivables which are two months or more
contractually past due.
(5) For the year.
21
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Household International, Inc. and Subsidiaries
OPERATIONS SUMMARY
* Net income in 1995 was a record $453.2 million, an increase of 23 percent
over 1994 net income of $367.6 million. Net income in 1994 was 23
percent higher than 1993 earnings. Fully diluted earnings per share were a
record $4.30 in 1995, up 23 percent from $3.50 in 1994, which were up 23
percent from $2.85 in 1993. The company's return on average common
shareholders' equity ("ROE") improved to 17.4 percent from 16.0 percent in
1994 and 14.2 percent in 1993. The return on average owned assets ("ROA") was
1.34 percent, up from 1.08 and .91 percent in 1994 and 1993, respectively.
* During 1995 and late 1994, the company completed several major initiatives to
focus on its higher return businesses and improve efficiency. These
actions were designed to benefit operating results in 1995 and future years
and included the following:
In October 1995, the company sold the individual life and annuity
product lines of its individual life insurance business ("sold life insurance
business"). The company retained the credit life insurance business. Assets
sold, principally investment securities, totaled approximately $6.1 billion.
Through September 30, 1995, the annualized ROE of the sold life insurance
business was 8.2 percent, and the annualized ROA was .73 percent. Remaining
individual life insurance lines include periodic payment annuities and
corporate life insurance products which the company has discontinued. Due to
the insignificance of these remaining insurance product lines, the company has
ceased reporting separate segment results for the former Individual Life
Insurance segment.
In the second and third quarters of 1995, the company sold all of its
consumer banking operations outside of Illinois. The company sold bank branches
in California, Maryland, Virginia, Ohio and Indiana with deposits totaling
approximately $3.4 billion.
The company completed the exit from its traditional first mortgage
business in 1995. In the second quarter, the company sold its domestic first
mortgage servicing portfolio. In the fourth quarter, the company sold its
Canadian first mortgage servicing business, including substantially all of the
owned first mortgage portfolio. These sales followed the company's decision in
late 1994 to discontinue the domestic traditional first mortgage origination
business.
As a result of disposing of these businesses, the company reported an
after-tax gain of $69 million in 1995.
In the fourth quarter of 1994, the company recorded nonrecurring costs of
approximately $14 million after tax in connection with staff reductions in
exited businesses and consolidation of certain other processing operations.
During 1995 the company also recorded after-tax nonrecurring costs totaling $10
million to consolidate space and staff in certain operations.
The company sold its Australian subsidiary in the fourth quarter of 1994
and recorded an after-tax loss of $14 million. Also in 1994, the company sold
its retail securities brokerage business and entered into an agreement to sell
without recourse $398 million of commercial loans to a joint venture. This loan
sale was consummated in the first quarter of 1995.
- - Virtually all of the company's businesses reported improved results in 1995
over 1994 and 1993:
Earnings of the domestic consumer finance business increased primarily due
to improved efficiency and higher net interest margin, which was driven by
wider spreads in the retail business and portfolio growth of 16 percent versus
10 percent in 1994. The 1995 results of this business were impacted somewhat by
lower servicing income from a portfolio of unsecured loans serviced with no
recourse.
The domestic credit card business reported higher earnings in 1995.
Visa*/MasterCard* and private-label credit card receivables grew 21 percent,
which generated higher finance charges and fee income. This growth compared to
20 percent in 1994. Partially offsetting these higher revenues were higher
credit costs. Bankruptcies increased, particularly in the second half of the
year, and were up over the prior year, reflecting the impact of the slowing
economy. The private-label credit card business was impacted by higher credit
costs from discontinued merchant programs. The Visa/MasterCard business
continued to benefit from the company's alliance with General Motors
Corporation ("GM") to issue the GM Card, a co-branded credit card. Domestic GM
Card managed receivables totaled approximately $7.9 billion at December 31,
1995, up 16 percent from $6.8 billion at year-end 1994 and 61 percent from $4.9
billion at year-end 1993.
Net income in the United Kingdom operation increased to $44.9 million from
$27.7 million in 1994 and $10.3 million in 1993. Higher earnings were primarily
due to improved efficiency, as well as higher net interest margin and increased
insurance premiums, resulting from receivable growth, particularly in other
unsecured and Visa/MasterCard products. In January 1994, the company expanded
its alliance with GM by launching the GM Card from Vauxhall in the United
Kingdom.
The Canadian operation reported a profit in 1995, compared to losses in
1994 and 1993. In the fourth quarter of 1995, the Canadian operation sold its
first mortgage business, including approximately $825 million of owned and $614
million of serviced first mortgages, and approximately $725 million in
deposits. The core operating results of this business benefited from improved
efficiency in 1995. Over the past two years, this operation has refocused on
its core consumer finance business and restructured operations to improve
efficiency.
Operating results of the commercial business were better than 1994 and
1993 primarily due to lower credit costs and operating expenses. This operation
also benefited from gains
22
*VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International, Incorporated, respectively.
<PAGE> 9
on the disposition of assets, as it continued to liquidate its remaining
portfolio. Partially offsetting these improvements was lower net interest
margin due to lower asset levels.
* The company's normalized efficiency ratio was 53.9 percent in 1995 compared
to 59.2 percent in 1994 and 57.1 percent in 1993. The efficiency ratio
is the ratio of operating expenses to net interest margin and other revenues
less policyholders' benefits (operating expenses include salaries and fringe
benefits, occupancy and equipment expense, other marketing expenses, and
other servicing and administrative expenses). The normalized efficiency ratio
excludes nonrecurring gains and losses and charges. The improvement in 1995
was primarily due to sales of less efficient businesses. At the end of 1995,
the number of employees was down 16 percent from year-end 1994.
* In July 1995 the company redeemed $115 million of preferred stock. Shares
redeemed consisted of all outstanding shares of 9.5 percent flexible
rate auction preferred stock, Series B, at $100 per share plus accrued and
unpaid dividends and 9.5 percent cumulative preferred stock, Series 1989-A
("Series 1989-A preferred stock"), at $104.75 per share plus accrued and
unpaid dividends. The premium paid on the Series 1989-A preferred stock
resulted in a $.04 per share reduction in earnings per share in 1995 but will
increase earnings per share in the future due to lower preferred dividends.
In June 1995 a subsidiary of the company issued $75 million of 8.25 percent
company obligated mandatorily redeemable preferred securities of subsidiary
trust ("trust preferred securities").
BALANCE SHEET REVIEW
* Owned assets totaled $29.2 billion at December 31, 1995, down 15 percent
from year-end 1994 due to the sale of approximately $6.1 billion of insurance
assets.
* Owned consumer receivables were $20.4 billion at December 31, 1995, up 9
percent from $18.7 billion at December 31, 1994. Changes in owned receivables
from period to period may vary depending on the timing and significance of
securitization transactions. The company securitized and sold with limited
recourse approximately $5.4 and $4.5 billion of receivables during 1995 and
1994, respectively.
* Managed consumer receivables (owned and serviced with limited recourse) grew
13 percent in 1995.
The company experienced higher growth in its core products during 1995,
as shown in the following table:
<TABLE>
<CAPTION>
Managed consumer receivables 1995 GROWTH 1994 Growth
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Home equity 11% 1%
Visa/MasterCard 20 26
Merchant participation 30 16
Other unsecured 24 24
- -------------------------------------------------------------------------------------------------------------
Core products 19% 16%
=============================================================================================================
</TABLE>
Home equity receivable growth resulted largely from wholesale acquisitions.
Visa/MasterCard growth continued primarily in the GM Card portfolio. In the
fourth quarter of 1995, the company acquired two Visa/MasterCard portfolios
totaling approximately $570 million. Merchant participation portfolio growth
benefited from new merchant programs in the United States and Canada. Other
unsecured growth was due to retail originations in the domestic consumer
finance and United Kingdom operations.
* Consumer two-months-and-over contractual delinquency ("delinquency") as a
percent of managed consumer receivables increased to 3.46 percent at December
31, 1995 from 3.11 percent at December 31, 1994. The chargeoff ratio for the
average managed consumer portfolio was 2.95 percent compared to 2.84 percent
in 1994.
* The company continued to increase managed credit loss reserves during 1995
due to economic uncertainty and continued growth in unsecured products.
Credit loss reserves as a percent of managed receivables were 3.22 percent at
year-end 1995 compared to 2.67 percent a year ago. Reserves as a percent of
nonperforming managed receivables increased to 111.4 percent from 103.6
percent at December 31, 1994.
* The ratio of total shareholders' equity to total owned assets was 10.17
percent, an increase from 7.35 percent at December 31, 1994. The ratio of
total shareholders' equity to managed assets was 6.74 percent, up from 5.39
percent at year-end 1994. The significant increase in the 1995 ratios was
primarily due to the sale of the individual life and annuity product lines.
The company used the $525 million of cash proceeds from this sale to repay
debt pending reinvestment of the capital in its core businesses. Accordingly,
the company anticipates that its ratio of total shareholders' equity to
managed assets may decline in the future as this capital is reinvested. See
the Liquidity and Capital Resources section for further discussion of the
company's capital targets and plan.
* In July 1995, Standard & Poor's Ratings Group revised its outlook on the
company and its subsidiary, Household Finance Corporation, from stable to
positive based on stronger reserve coverage and expense control initiatives.
23
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
PRO FORMA MANAGED INCOME STATEMENT
Securitizations and sales of consumer receivables have been, and will continue
to be, 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 and other
income, and provision for credit losses on receivables serviced with limited
recourse are reported as a net amount in securitization income in the company's
statements of income.
Management monitors the company's operations 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
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 a historical owned basis.
Pro Forma Managed Statements of Income
<TABLE>
<CAPTION>
As a Percent As a Percent As a Percent
of Average of Average of Average
All dollar amounts are stated in millions. Managed Interest- Managed Interest- Managed Interest-
Year ended December 31 1995 Earning Assets 1994 Earning Assets 1993 Earning Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Finance income $ 4,601.4 12.54% $ 3,897.2 11.59% $ 3,563.3 11.45%
Interest income from noninsurance
investment securities 123.4 .34 131.9 .39 129.3 .42
Interest expense 2,365.4 6.45 1,775.0 5.28 1,540.6 4.95
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin 2,359.4 6.43 2,254.1 6.70 2,152.0 6.92
Provision for credit losses 1,271.1 3.46 969.8 2.88 1,016.8 3.27
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin after provision
for credit losses 1,088.3 2.97 1,284.3 3.82 1,135.2 3.65
- ------------------------------------------------------------------------------------------------------------------------------------
Insurance premiums and
contract revenues 322.1 282.0 288.3
Investment income 470.2 514.4 574.0
Fee income 665.5 546.4 398.8
Other income 279.9 126.7 172.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total other revenues 1,737.7 1,469.5 1,434.0
- ------------------------------------------------------------------------------------------------------------------------------------
Salaries and fringe benefits 545.6 656.6 615.4
Occupancy and equipment expense 222.1 243.4 225.3
Other marketing expenses 359.5 327.4 228.5
Other servicing and
administrative expenses 470.6 533.7 510.2
Policyholders' benefits 474.5 464.4 539.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 2,072.3 2,225.5 2,118.5
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 753.7 528.3 450.7
Income taxes 300.5 160.7 152.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 453.2 $ 367.6 $ 298.7
====================================================================================================================================
Average managed receivables $34,502.5 $31,211.9 $29,002.0
Average noninsurance investments 2,193.0 2,424.4 2,106.1
- ------------------------------------------------------------------------------------------------------------------------------------
Average managed interest-earning
assets $36,695.5 $33,636.3 $31,108.1
====================================================================================================================================
</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 managed statements of income ("Managed Basis").
NET INTEREST MARGIN Net interest margin on a Managed Basis increased 5 percent
to $2,359.4 million from $2,254.1 million in 1994, due to receivable growth
offset by a lower net interest margin percentage. The net interest margin
percentage on a Managed Basis decreased from 6.70 percent in 1994 to
24
<PAGE> 11
6.43 percent in 1995 due to increases in interest costs throughout 1994 and
early 1995 that were not recaptured in finance income. The 1995 percentage was
also adversely affected by a portfolio of temporary investments that was used
to build liquidity in anticipation of the sales of the company's banking
operations in the second and early third quarters. The higher cost of replacing
retail deposits sold also reduced margin in 1995. These factors were partially
offset by a change in portfolio mix toward unsecured, variable rate loans which
carry wider spreads.
The Managed Basis net interest margin percentage increased throughout
1995. For the fourth quarter, it was 6.69 percent, up from 6.48 percent in the
third quarter and 6.39 percent in the year-ago quarter. The increase was
primarily due to the continued shift in product mix and lower interest rates
later in the year. Assuming the shift in product mix to unsecured receivables
continues, and market interest rates remain relatively constant or decline, the
company believes the favorable trend in net interest margin will continue in
the near term. See pages 31 and 32 for a discussion of the company's interest
rate risk management policy and pages 62 and 63 for an analysis of the
company's Owned Basis net interest margin.
PROVISION FOR CREDIT LOSSES The provision for credit losses for receivables on
an Owned Basis totaled $761.3 million, up 25 percent from 1994 and up 3 percent
from 1993. The provision for credit losses on a Managed Basis totaled $1,271.1
million in 1995, an increase of 31 percent from $969.8 million in 1994. As a
percent of average managed interest-earning assets, the provision increased
from 2.88 percent in 1994 to 3.46 percent.
Both the Owned and Managed Basis provisions increased in 1995 primarily
due to continued growth and seasoning of unsecured products, which have higher
chargeoff rates than secured products. Total unsecured consumer loans, which
include credit cards and other unsecured receivables, comprised 67 percent of
the managed receivable portfolio at December 31, 1995, up from 60 percent a
year ago. The increase in provisions was also due to increasing levels of
consumer bankruptcies, which adversely impacted the credit card industry over
the last half of 1995. The provision increase was also impacted by concern over
the economy. In consideration of these factors,the company increased Managed
Basis reserve coverage to 3.22 percent at year-end 1995 from 2.67 percent a
year ago.
OTHER REVENUES Securitization income on an Owned Basis consists of income
associated with the securitization and sale of receivables with limited
recourse, including net interest income, fee and other income, and provision
for credit losses related to those receivables. Securitization income on an
Owned Basis increased in 1995 over 1994 and 1993 due to growth in the
securitized portfolio and an increase in fee income from securitized credit
card receivables resulting from greater transaction volume. The components of
securitization income are reclassified to the appropriate line in the
statements of income on a Managed Basis.
Insurance premiums and contract revenues of $322.1 million were up from
$282.0 million in 1994 and $288.3 million in 1993. The 1995 amount included
nine months of revenues from the sold individual life insurance and annuity
business. The 1994 amount reflected the 1994 sale of the whole life line of
business, which resulted in a reduction of contract revenues of $47.8 million,
representing the amount of claim reserves on the policies that were sold.
Insurance premiums and contract revenues for the business that has been
retained, primarily the specialty and credit insurance line, were $229.1
million for 1995, up from $198.7 million in 1994. The increase was due to
higher premiums in the domestic and United Kingdom operations related to growth
in the company's receivable base.
Insurance premiums and contract revenues in 1994 were flat with 1993 due
to the above-mentioned 1994 sale. Excluding the impact of this sale, insurance
premiums and contract revenues were higher than 1993 due to higher life
insurance in-force and increased specialty and credit insurance premiums.
Investment income includes interest income on insurance investment
securities, as well as realized capital gains and losses. Investment income of
$470.2 million in 1995 declined compared to both 1994 and 1993 primarily due to
the sale of the individual life insurance and annuity business. Investment
income from the company's retained business was $170.7 million in 1995 and
$150.1 million in 1994. The increase was primarily due to
higher gains from sales of available-for-sale investments and higher yields.
The decrease in 1994 compared to 1993 primarily was due
to lower gains on sales of available-for-sale investments. These investments
were sold consistent with preestablished interest rate strategies. This
decrease was also the result of lower yields on investments, as higher-yielding
securities were sold, called or matured in 1993 and replaced with
lower-yielding investments prior to the rise in interest rates which commenced
in early 1994, partially offset by a larger investment portfolio.
Fee income on an Owned Basis includes revenues from fee-based products
such as credit cards, consumer banking deposits, and in 1994 and 1993,
commission income from the company's brokerage business. Fee income was $196.4
million, down from $250.5 million in 1994 and $292.6 million in 1993. Owned
Basis interchange and other fees were lower in 1995 as a result of the increase
in the amount of securitizations of receivables. Fee income on securitized
receivables is transferred to securitization income upon sale. Fee income in
1995 was also negatively impacted by lower commission income resulting from the
sale of the company's brokerage business in the third quarter of 1994.
Fee income on a Managed Basis which, in addition to the items discussed
above, includes fees and other income related to receivables serviced with
limited recourse. Managed Basis fee income increased 22 percent to $665.5
million in 1995 primarily due to higher interchange and other fee income
resulting from managed credit card portfolio growth and increased transaction
volume.
Other Income includes gains and losses from the disposition of assets and
businesses, income from servicing receivable
25
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
portfolios without recourse, and in 1994 and 1993, trading gains and
losses. Other income increased in 1995 due to gains on the sales of consumer
banking operations and from the sale of the individual life and annuity lines
of business during 1995. Also benefiting other income in 1995 were gains from
the sales of the domestic and Canadian first mortgage servicing portfolios.
Partially offsetting these increases was lower servicing income from first
mortgages and unsecured loans serviced with no recourse.
Other income in 1994 was below the 1993 level due to losses on the sales
of the company's Australian and retail securities brokerage subsidiaries in
1994; trading losses in 1994 compared to gains in 1993; and lower gains on
asset dispositions.
Excluding the impact of the gains and losses from the sales
of businesses in 1995 and 1994, other income was $92.6 million in 1995 and
$150.6 million in 1994. The decrease was primarily due to lower servicing
income, as previously discussed.
EXPENSES Salaries and fringe benefits were $545.6 million, down 17 percent
from $656.6 million in 1994 and 11 percent from $615.4 million in 1993, due to
a reduction in employees. Initiatives to improve the operating efficiency of
certain businesses and to exit others began in the fourth quarter of
1994 and continued throughout 1995. The number of employees at December 31,
1995 was approximately 13,000, down from 15,500 at year-end 1994.
Occupancy and equipment expense was $222.1 million in 1995, down 9 percent
from 1994 and flat with 1993. The 1995 decline was attributable to the
continuing rationalization of the company's office space, which began in late
1994, and to sales of various businesses.
Other marketing expenses were up 10 and 57 percent compared to 1994 and
1993, respectively. These increases were principally due to marketing
initiatives undertaken in the company's credit card operations.
Other servicing and administrative expenses of $470.6 million were down
from the prior year. Included were nonrecurring costs of approximately $15
million in 1995 and $23 million in 1994, as discussed on page 22. Excluding the
impact of these charges, other servicing and administrative expenses declined
by 11 percent compared to 1994.
Other servicing and administrative expenses include premiums paid by the
company's thrift subsidiary to the Savings Association Insurance Fund ("SAIF")
of the Federal Deposit Insurance Corporation. The Budget Reconciliation
legislation currently being considered by the Congress of the United States
contains a provision for a special assessment to be levied against thrift
institutions to adequately capitalize SAIF. In the current form, which is
subject to change, the company's thrift subsidiary would pay a one-time premium
to SAIF based upon qualifying deposits as of a certain date. Currently, the
date to determine the amount of deposits on which this premium would be
assessed has not yet been finalized but could precede the dates of deposits
sold during 1995. Thus, the thrift subsidiary potentially could be assessed a
premium on deposit balances it sold during 1995. In addition, the rate at which
the premium would be assessed has also not been finalized. The company intends
to attempt to get regulatory relief from this eventuality. Based on a range of
rates under consideration, the company estimates that the amount of this
assessment, if enacted into law, could reduce net income by an amount ranging
from $15 to $35 million.
Policyholders' benefits in 1995 were higher than 1994 but were below 1993
levels. The 1995 amount included nine months of activity for the sold
individual life insurance and annuity business. Policyholders' benefits in 1994
were reduced by $47.8 million due to the sale of the whole life business.
Policyholders' benefits of the retained insurance business, on a pro forma
basis, were $211.4 million in 1995, up from $199.5 million in 1994. The
increase was primarily due to growth in domestic and United Kingdom specialty
and credit insurance.
Excluding the impact of the 1994 sale, policyholders' benefits in 1994
were lower than 1993 primarily due to lower interest credited to individual
life insurance policyholders.
Income taxes. The 1995 effective tax rate was 39.9 percent compared to
30.4 percent in 1994 and 33.7 percent in 1993. The 1995 rate was impacted by
additional taxes on the sale of the insurance business, as well as the
disposition of nondeductible acquired intangible assets related to consumer
banking operations. Excluding the impact of additional taxes related to these
dispositions, the effective tax rate for 1995 would have been 34.8 percent.
The 1994 effective tax rate reflected the favorable resolution of several
prior year state tax issues and the recognition of U.S. tax benefits of
accumulated losses of the Australian subsidiary upon its sale. Excluding the
impact of accumulated losses recognized upon this sale, the effective tax rate
would have been 32.7 percent for 1994.
CREDIT MANAGEMENT POLICIES
The company's receivable 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 on an
individual transaction basis and is also evaluated based on overall risk
factors. See Note 3, "Receivables" in the accompanying financial statements for
receivables by product type.
26
<PAGE> 13
CONSUMER The consumer credit risk management process has the following
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 collection system for past due accounts to make the collection
process more productive and provide the analytical capability to measure the
effectiveness of collection strategies. This centralized collection system is
augmented by early collection efforts in the consumer finance branch network.
- -- 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 statistically based on payment patterns, as
well as delinquency and chargeoff experience. Credit loss reserves are based on
these statistical estimates and additional reserves to reflect management's
judgment of portfolio risk factors. These risk factors include overall economic
conditions, regional considerations and current trends in growth, underwriting
or collection practices and changes in product mix which might not be
appropriately considered in historical statistical experience.
The company suspends accrual of interest on all consumer receivables when
payments are three months contractually past due, except for Visa/MasterCard and
private-label credit cards. On these credit card receivables, consistent with
industry practice, interest continues to accrue until the receivable is charged
off. In the third quarter of 1995, the company changed its procedure regarding
chargeoffs of bankrupt Visa/MasterCard accounts. Prior to the third quarter,
when the company received notification that a Visa/MasterCard customer had filed
bankruptcy, the company established a reserve equal to the full balance of the
customer's receivable. If not paid, the receivable balance would be charged off
in accordance with the company's normal chargeoff policy. Beginning in the third
quarter of 1995, the company implemented a new procedure, to more closely
conform with credit card industry practice, to charge off accounts on a timely
basis after receipt of notification of bankruptcy filing. Accordingly, the
company accelerated the chargeoff of bankrupt Visa/MasterCard accounts that had
not yet been charged off under the prior policy. The chargeoff ratios presented
on page 29 have been normalized to exclude the effect of the nonrecurring
change. Consumer loans, excluding bankrupt Visa/MasterCard accounts, are charged
off when an account is four to nine months contractually delinquent. The period
of time is dependent on applicable regulatory requirements as well as the terms,
collateral and credit loss experience of each consumer product category.
Effective January 1, 1996 the company adopted a policy whereby other
unsecured consumer finance receivables in the United States and Canada will be
charged off if an account is nine months contractually delinquent, and
essentially no payment has been received in six months. No change has been made
for Visa/MasterCard, merchant participation or secured loans. The combined
recency and contractual chargeoff methodology more closely conforms to consumer
finance industry practice and allows for more flexibility in addressing
individual borrower circumstances. Delinquency statistics will continue to be
reported on a contractual basis.
The company's domestic consumer businesses lend funds nationwide, with
California accounting for 20 percent of total managed domestic consumer
receivables. It is the only state with greater than 10 percent of the company's
domestic managed receivables. The company's foreign consumer operations, located
in Canada and the United Kingdom, accounted for 3 and 6 percent, respectively,
of managed consumer receivables at December 31, 1995. Due to its centralized
underwriting, collection and processing functions, the company is able to
quickly revise underwriting standards and intensify collection efforts for
specific geographic locations.
COMMERCIAL The company no longer originates commercial loans. The
company's ongoing credit monitoring process for existing loans evaluates the
financial and operating performance of all borrowers. As part of this process,
the company administers an asset classification policy which requires all
assets to be formally reviewed and assigned a rating on a regular basis. This
policy utilizes a process similar to that used by banking regulatory
authorities and specifically addresses the need for chargeoffs.
The adequacy of the credit loss reserves is evaluated quarterly based upon
the ongoing credit monitoring process and evaluation of the probability of
future losses in the portfolio as a whole given its geographic and industry
diversification, historical loss experience and the potential impact on the
portfolio of existing and future economic conditions.
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, if appropriate,
reduced.
27
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LOSS RESERVES
The level of reserves for credit losses is maintained in accordance with the
previously-mentioned credit risk policy. See Note 1, "Summary of Significant
Accounting Policies" on pages 37 and 38 in the accompanying financial
statements for further description of the basis for establishing such reserves.
An analysis of credit loss reserves by product and other credit quality
statistics are shown on pages 19 through 21. While management allocates
reserves, including those in excess of statistical requirements, among the
company's various products, all credit loss reserves are considered to be
available to cover total loan losses.
As disclosed on page 20, the company's total managed credit loss reserves
increased 33 percent to $1,177.4 million from $882.5 million at December 31,
1994. The ratio of credit loss reserves to total managed receivables was 3.22
percent, up from 2.67 percent at December 31, 1994. The company has continually
increased credit loss reserves over the past year in anticipation of growth and
seasoning of unsecured products, coupled with uncertainty over the strength of
the economy and its impact on consumer behavior. The ratio of total credit loss
reserves to total managed nonperforming loans increased to 111.4 percent from
103.6 percent at December 31, 1994.
Managed consumer credit loss reserves increased 39 percent compared to a
year earlier, while managed consumer receivables grew 13 percent in 1995. The
ratio of managed consumer credit loss reserves to managed consumer delinquency
increased to 83.9 percent from 75.6 percent at December 31, 1994. The company
strengthened credit loss reserves related to credit card and other unsecured
receivables due to growth in, and seasoning of, these products, which
historically have higher chargeoff rates than secured products.
CREDIT QUALITY
During 1995, the company experienced increases in delinquency and chargeoff
levels. Nonperforming assets also increased during the year, due primarily to an
increase in nonaccrual loans. Delinquency and chargeoff statistics continued to
be impacted by the ongoing shift in the company's product mix toward unsecured
receivables. Because other unsecured, merchant participation and Visa/MasterCard
receivables have higher delinquency and chargeoff rates than real estate secured
loans, this shift in product mix has the effect of increasing the overall
delinquency and chargeoff statistics of the portfolio. At December 31, 1995,
unsecured loans accounted for 69 percent of the managed consumer receivable
portfolio compared to 64 percent a year ago. In addition, chargeoff statistics
were impacted by higher consumer bankruptcies in the Visa/MasterCard portfolio
and the continued seasoning of the GM Card portfolio.
Delinquency and chargeoff levels are monitored on a managed basis, which
includes both receivables owned and receivables serviced with limited recourse.
The latter portfolio is included since it 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.
TWO-MONTHS-AND-OVER CONTRACTUAL DELINQUENCY
(as a percent of managed consumer receivables)
<TABLE>
<CAPTION>
1995 QUARTER END 1994 Quarter End
------------------------- -------------------------
4 3 2 1 4 3 2 1
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage 3.29% 2.16% 1.74% 1.79% 1.81% 1.57% 1.52% 1.95%
Home equity 3.24 3.14 2.78 2.75 2.83 2.88 3.04 3.44
Visa/MasterCard 2.22 2.29 2.31 2.33 2.25 2.35 2.29 2.38
Merchant participation 4.51 4.25 4.00 4.42 4.53 4.70 4.35 4.76
Other unsecured 5.60 5.10 5.41 5.07 5.19 5.75 6.39 6.86
- -------------------------------------------------------------------------------
Total 3.46% 3.26% 3.13% 3.10% 3.11% 3.23% 3.30% 3.61%
===============================================================================
</TABLE>
Delinquency as a percent of managed consumer receivables increased from the
prior quarter and from a year ago. The increase was driven by higher first
mortgage delinquency and seasoning of unsecured portfolios.
The increase in first mortgage delinquency contributed approximately 10
basis points of the increase in total delinquency compared to both the prior and
year-ago quarters. This increase was due to a temporary disruption in
collections resulting from shifting to a third party servicer coupled with the
effects of liquidating the portfolio, including the fourth quarter sale of the
Canadian portfolio. Home equity delinquency was higher than a year earlier
primarily due to the seasoning of portfolios acquired through the wholesale
network. Other unsecured delinquency increased, as expected, from both the prior
and year-ago quarters primarily due to seasoning of the portfolio.
28
<PAGE> 15
NET CHARGEOFFS OF CONSUMER RECEIVABLES
(as a percent of average managed consumer receivables)
<TABLE>
<CAPTION>
1995 QUARTER ANNUALIZED 1994 Quarter Annualized
FULL YEAR -------------------------- Full year ---------------------------- Full year
1995 4 3 2 1 1994 4 3 2 1 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage .35% .47% .32% .36% .29% .41% .26% .43% .47% .48% .37%
Home equity 1.00 .95 1.12 1.04 .90 1.31 1.00 1.15 1.59 1.51 1.30
Visa/MasterCard* 4.26 4.67 4.24 4.05 4.04 3.92 3.96 3.73 3.81 4.20 3.84
Merchant participation 4.72 5.14 4.63 4.71 4.29 3.57 3.84 3.52 3.39 3.50 4.10
Other unsecured 3.33 3.46 3.45 3.21 3.25 4.36 3.61 4.23 4.79 4.98 6.16
- ------------------------------------------------------------------------------------------------------------------
Total 2.95% 3.28% 2.97% 2.81% 2.71% 2.84% 2.70% 2.73% 2.93% 3.03% 2.91%
==================================================================================================================
</TABLE>
*Normalized to exclude the acceleration of bankrupt accounts in the third
quarter of 1995. Including these accelerated chargeoffs, Visa/MasterCard and
total chargeoffs were 4.68 and 3.10 percent, respectively, for 1995.
Net chargeoffs as a percent of average consumer managed receivables were 2.95
percent, up from 2.84 percent in 1994. The increase was driven by higher credit
card chargeoffs coupled with the shift in portfolio mix away from traditional
first mortgages.
New bankruptcy filings, which have adversely impacted the credit card
industry over the latter half of 1995, accounted for substantially all of the
increase in the Visa/MasterCard chargeoff ratio in the fourth quarter and in
1995. Visa/MasterCard chargeoffs also increased over the prior year due to
continued maturation of the GM Card portfolio. Merchant participation chargeoffs
increased over the 1994 level primarily due to programs the company has exited.
The increase in total chargeoffs in 1995 and the fourth quarter was within
management's expectations given current economic conditions.
Chargeoffs are a lagging indicator of credit quality and generally reflect
prior delinquency trends. The company anticipates that chargeoff ratios will
increase in the first half of 1996 before stabilizing, given management's
current expectations as to the effectiveness of recently-implemented collection
initiatives. However, chargeoffs in any given quarter may be affected by events
such as changes in national or regional economic conditions and increases in
personal bankruptcies. Future chargeoff levels may also be impacted by the
continuing shift in the company's product mix to credit card and other unsecured
receivables, which have higher chargeoff rates than secured products.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DEC. 31, Sept. 30, Dec. 31, Dec. 31,
All dollar amounts are stated in millions. 1995 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual managed receivables $ 768.5 $ 711.0 $ 581.5 $ 757.4
Accruing managed consumer receivables
90 or more days delinquent 267.2 233.6 228.2 207.3
Renegotiated commercial loans 21.2 22.0 41.8 28.7
- ----------------------------------------------------------------------------------------------------
Total nonperforming managed receivables 1,056.9 966.6 851.5 993.4
Real estate owned 136.5 148.7 182.8 425.5
- ----------------------------------------------------------------------------------------------------
Total nonperforming assets $1,193.4 $1,115.3 $1,034.3 $1,418.9
====================================================================================================
Managed credit loss reserves as a percent of
nonperforming managed receivables 111.4% 105.2% 103.6% 85.0%
- ----------------------------------------------------------------------------------------------------
</TABLE>
Nonperforming managed receivables increased over the prior year primarily
due to increased nonaccrual receivables in the domestic consumer finance
business.
29
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The company continued to strengthen its capital and liquidity position in 1995,
due to both increased retained earnings and lower asset levels. In managing
capital, the company develops targets for each of its key capital ratios based
on discussions with rating agencies, regulatory requirements, competitor
analysis and projected changes in the operating environment. These targets
include both on-balance sheet assets and receivables securitized with limited
recourse. As a result of management's decision to improve capital levels, the
company has set increasingly restrictive targets in each of the last several
years. As a result, from year-end 1991 to year-end 1995, total shareholders'
equity increased 68 percent while managed assets increased 19 percent.
Selected capital ratios for the company at December 31, 1995 and 1994 were
as follows:
<TABLE>
<CAPTION>
At December 31 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Total shareholders' equity(1) as a percent of owned assets 10.17% 7.35%
Total shareholders' equity as a percent of owned assets, excluding FAS No. 115 9.85 7.64
Total shareholders' equity as a percent of managed assets 6.74 5.39
Total shareholders' equity as a percent of managed assets, excluding FAS No. 115 6.52 5.61
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) The 1995 amount includes trust preferred securities issued in 1995. The
1994 amount includes convertible preferred stock, which was fully converted
or redeemed in 1995.
The sharp increase in the 1995 capital ratios was largely due to the sale of
$6.1 billion of assets of its individual life insurance and annuity businesses.
The company used the cash proceeds from this sale of $525 million to repay
debt. As a result of the sale, the 1995 year-end capital ratios exceeded the
company's 1995 targets. Accordingly, the capital ratios may decline in the
future, as the company redeploys the proceeds from the insurance sale.
The ratios for both years were impacted by FAS No. 115, which resulted in
an increase in shareholders' equity of $94.3 million at December 31, 1995 versus
a decrease of $103.6 million at December 31, 1994. Excluding the impact of FAS
No. 115, total shareholders' equity increased 10 percent in 1995. Also during
1995, the company redeemed $115 million of preferred stock, and, through its
subsidiary Household Capital Trust I, issued $75 million of trust preferred
securities. In accordance with the terms of various employee benefit plans, in
1995 the company repurchased one million shares of common stock for employee
stock ownership and dividend reinvestment plans and issued $25 million of common
stock under these plans. The company intends to periodically fund its employee
benefit plans with purchases of the company's common stock in the open market.
The company did not purchase any of its common stock in the open market in 1994
for these plans.
PARENT COMPANY The company's principal source of funds is cash received from
its subsidiaries, primarily in the form of dividends and borrowings under
intercorporate agreements. In addition, the company received cash from external
sources using various equity and debt instruments, including commercial paper
marketed by an in-house sales force, totaling $286.5 million at December 31,
1995. At December 31, 1995 the company had $400 million in committed back-up
lines of credit to facilitate liquidity for its commercial paper program. None
of the lines of credit contained a material adverse change clause that could
restrict availability. The company received dividends, net of capital
contributions, of $400 and $24 million from its subsidiaries in 1995 and 1994,
respectively.
Funds received by the parent company are disbursed to shareholders and
creditors or returned to subsidiaries as capital or advances under
intercorporate agreements. In 1995 and 1994, respectively, the company paid
$154.0 and $146.5 million of dividends to shareholders. The company's double
leverage ratio, which is defined as parent company investments in and advances
to subsidiaries divided by consolidated equity, was 1.08 and 1.10 at December
31, 1995 and 1994, respectively.
SUBSIDIARIES The major use of cash by the company's subsidiaries is the
origination or purchase of receivables or investment securities. 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 provided by
operations; and cash received from policyholders.
The company's subsidiary, Household Finance Corporation ("HFC"), obtains a
majority of its funding through the issuance of commercial paper, medium- and
long-term debt and through securitizations and sales of consumer receivables. At
December 31, 1995 HFC's outstanding commercial paper totaled $4.0 billion
compared to $3.3 billion at December 31, 1994. HFC markets its commercial paper
through an in-house sales force, directly reaching more than 300 investors. HFC
also markets medium-term notes through investment banks and its in-house sales
force and issued a total of $1.3 billion in 1995. During 1995 HFC also issued
$1.2 billion of intermediate- and long-term debt to the public through
investment banks and brokerage houses. To facilitate liquidity, HFC had
committed back-up lines of credit totaling $3.9 billion at December 31, 1995,
$400 million of which was limited by the amount utilized by the parent company.
None of the back-up lines contained a material adverse change clause which could
restrict availability. HFC's debt to equity ratio was 5.5 to 1 at December 31,
1995 compared to 5.9 to 1 at December 31, 1994.
The company's subsidiary, Household Bank, f.s.b. ("Bank"), utilizes both
retail deposits and wholesale funding, including advances from the Federal Home
Loan Bank, Federal funds borrowings, repurchase agreements, brokered deposits,
bank and other capital market borrowings, and securitizations and sales of
30
<PAGE> 17
credit card receivables. The Bank had approximately $4 billion of available
funding capacity at December 31, 1995.
In the second and third quarters of 1995, the company sold 119 consumer
bank branches, including $3.4 billion of customer deposits, in California,
Maryland, Virginia, Ohio and Indiana in order to focus its banking activities in
Illinois. The company views core deposits as a stable and low-cost source of
funding, if gathered efficiently. The company currently intends to grow its
deposit base in Illinois. In the fourth quarter of 1994, the company assumed
from an unaffiliated thrift institution approximately $1.2 billion in customer
deposits through the purchase of 26 consumer bank branch facilities in Illinois.
Deposits represented 60 and 86 percent of the Bank's total borrowings at
December 31, 1995 and 1994, respectively. In 1992 the Office of Thrift
Supervision ("OTS") adopted a rule which classifies savings associations based
on capital ratios. At December 31, 1995 the tangible, core and risk-based
capital ratio levels for a "well capitalized" institution were 1.5, 5.0 and 10.0
percent, respectively. The Bank's ratios for each of these categories at
December 31, 1995 were 6.9, 6.9 and 16.9 percent, 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 1995 these subsidiaries securitized and sold approximately $5.1 billion
of home equity, Visa/MasterCard, merchant participation and other unsecured
receivables compared to $4.3 billion in 1994. HFC and the Bank have committed
agreements with commercial banks to securitize up to $1.5 billion of credit card
receivables, if desired. At December 31, 1995 $1 billion of credit card
receivables were securitized under these programs.
During 1995 Standard & Poor's Ratings Group upgraded the credit rating
outlook for the company and HFC from stable to positive, based on stronger
reserve coverage and expense control initiatives. At December 31, 1995 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 statistical rating organizations. Furthermore, these agencies
included the commercial paper of HFC in their highest rating category. Three of
these four agencies also include the parent company's commercial paper in their
highest rating category. With these ratings, back-up lines of credit and
securitization programs, the company believes it and its subsidiaries have
sufficient capacity to raise capital to refinance maturing obligations and fund
business growth.
The company's remaining credit and individual life insurance subsidiaries
plan for capital needs using targets based on statutory or contractual
requirements. At the end of 1995, the estimated risk-based capital ratios of
these companies, as defined statutorily, were consistent with their targets. The
company believes that the future capital needs of these subsidiaries will be
funded through their own operations.
The company had investments in foreign subsidiaries of $432.2 million at
December 31, 1995. Total assets of foreign subsidiaries were $3.4 billion at
year-end 1995. The company enters into foreign exchange contracts to hedge its
investment in foreign subsidiaries. Foreign currency translation adjustments,
net of gains and losses on contracts used to hedge foreign currency
fluctuations, totaled net losses of $3.5 million in 1995 and net gains of $9.1
million in 1994, and are included as a component of shareholders' equity. The
functional currency for each subsidiary is its local currency. While each
foreign subsidiary primarily borrows funds in local currency, the Canadian
subsidiary borrowed funds directly in the United States capital market in 1995
and 1994. The United Kingdom subsidiary also borrowed funds in the United States
capital market during 1994. These borrowings were converted to their local
currencies using foreign currency swaps, allowing the subsidiaries to achieve a
lower cost of funds than that available in the subsidiaries' local markets. The
company's net realized gains and losses in foreign currency transactions were
not material to results of operations or financial position for each of the
three years presented.
Household Global Funding, Inc. ("Global") was established in 1989 to
consolidate ownership of the company's Canadian and United Kingdom financial
services businesses. During 1994 Global repurchased all of its outstanding
preferred stock. The Canadian operation is funded with commercial paper,
intermediate- and long-term debt and retail deposits. As discussed on page 22,
the Canadian operation sold approximately $725 million of deposits in the fourth
quarter of 1995. Deposits were $117 million and $1.1 billion at December 31,
1995 and 1994, respectively. Intermediate- and long-term debt totaled $778
million at year-end 1995 compared with $616 million a year ago. Committed
back-up lines of credit for Canada were approximately $370 million compared to
approximately $400 million at December 31, 1994. The company has guaranteed
payment of the debt obligations of its Canadian subsidiary and Global.
The United Kingdom operation is funded with wholesale deposits and short-
and intermediate-term bank lines of credit. Deposits at year-end 1995 were $543
million compared to $504 million a year earlier. Borrowings from bank lines of
credit at year-end 1995 were $650 million compared to $631 million a year ago.
The company has guaranteed payment of all debt obligations, except for certain
deposits, of its United Kingdom subsidiary. During 1994 the United Kingdom
operation completed its first securitization and sale of other unsecured
receivables totaling $241 million. In 1995 the United Kingdom subsidiary
securitized $288 million of other unsecured receivables.
RISK MANAGEMENT The company has a comprehensive program which addresses the
management and diversification of financial risk, such as interest rate,
funding, liquidity, counterparty and currency risk, at all of its entities.
Acceptable limits for each of these risks are established by the Finance
Committee of the Board of Directors on an annual basis and reviewed
semi-annually. The company's asset/liability management committee ("ALCO"),
which is composed of senior management, uses these limits to manage these risks
both domestically and internationally. Interest rate risk is the exposure of
earnings to changes in interest rates. The ALCO sets and monitors policy so
that the potential impact
31
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 25 percent of the
company's expected full year earnings per share can be at risk to an immediate
200 basis point increase or decrease in interest rates for 12 months, assuming
no additional interest rate risk management actions are taken. Positions that
create a risk beyond 15 percent of earnings require specific approval of the
chief executive officer of the company. Limits also apply beyond the initial
12-month period. Historically, the company has managed its interest rate risk
to levels substantially below those allowed by this policy.
The company, whenever possible, funds its assets with liability
instruments of similar interest rate sensitivity, thereby reducing structural
interest rate risk. Over time, customer demand for the company's receivable
products shifts from fixed rate to floating rate, and vice versa, based on
market conditions and consumer preferences. These shifts result in different
funding strategies and produce different interest rate risk exposures. To
manage these exposures, as well as its liquidity position, the company may use
derivatives to synthetically alter the terms of assets or liabilities. The
company does not use any exotic or leveraged derivatives. The company does not
serve as a financial intermediary to make markets in any off-balance sheet
financial instruments.
At December 31, 1995 the company managed approximately $25 billion of
domestic receivables with variable interest rates, including floating rate
credit card, home equity and other unsecured products. To manage liquidity to
acceptable levels, these receivables have been funded with $6.7 billion of
short-term debt, with the remainder funded by longer-duration liabilities. This
situation exposes the company to interest rate risk. The company utilizes
derivatives, primarily interest rate swaps, to synthetically alter its exposure
to interest rate risk while still controlling liquidity risk. Interest rate
swaps are also used to synthetically alter the company's exposure to 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).
Synthetic alteration and hedge transactions are specifically designated to
particular assets/liabilities or off-balance sheet items of a similar
characteristic. Specific assets or liabilities synthetically altered/hedged may
consist of groups of individually small dollar homogeneous items.
The economic exposure underlying the company's interest rate swap
portfolio is minimal. 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 primary exposure on its
interest rate swap 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 interest rate differential determined by
reference to the notional amount. Certain interest rate swap agreements entered
into by the company require that payments be made to or received from the
counterparty when the market value of the agreement reaches a predetermined
level. This serves to minimize the company's counterparty risk. Counterparty
limits have been established and are closely monitored as part of the overall
risk management process. These limits ensure that the company does not have
significant exposure to any individual counterparty. Based on estimated peak
exposure at December 31, 1995, approximately 96 percent of the company's
derivative instrument counterparties were rated A- or better, and 76 percent
were rated AA- or better. The company has never suffered a loss due to
counterparty failure.
The company also utilizes exchange traded U.S. dollar interest rate futures
and purchased put and call options to hedge the resets of interest rates on the
company's variable rate assets and liabilities. For example, short-term
borrowings expose the company to interest rate risk. The hedges used reduce that
risk, and at the inception of the contract the company designates these futures
and options as hedges. The contracts are held until the applicable variable rate
asset or liability reset occurs, at which time the contracts are terminated.
These terminations are necessary to close out the contract, as the date the rate
resets usually does not coincide with the exchange's contract expiration date.
During 1994 and 1993 the company utilized forward interest rate contracts
primarily to lock in interest rates on committed but unfunded first mortgage
loans or first mortgage loans held for sale to the secondary market. In late
1994 the company exited the domestic first mortgage origination business.
In late 1994 the company discontinued its trading activities. Income or
loss from trading activities was not material to the company.
See Note 7, "Derivative Financial Instruments and Other Financial
Instruments With Off-Balance Sheet Risk" for additional information related to
interest rate risk management.
In the accompanying financial statements, Note 11, "Fair Value of Financial
Instruments" provides information regarding the fair value of certain financial
instruments.
During 1995 the company invested $76 million in capital expenditures, down
compared to the prior year level of $197 million. In 1994 the company incurred
expenditures to construct a new credit card facility and develop a comprehensive
customer service computer system for the domestic consumer finance business.
32
<PAGE> 19
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
In millions, except per share data.
Year ended December 31 1995 1994 1993
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance income $2,878.8 $2,642.3 $2,561.4
Interest income from noninsurance investment securities 123.4 131.9 129.3
Interest expense 1,557.1 1,242.7 1,149.5
-------------------------------------------------------------------------------------
Net interest margin 1,445.1 1,531.5 1,541.2
Provision for credit losses on owned receivables 761.3 606.8 735.8
-------------------------------------------------------------------------------------
Net interest margin after provision for credit losses 683.8 924.7 805.4
-------------------------------------------------------------------------------------
Securitization income 873.6 655.5 436.0
Insurance premiums and contract revenues 322.1 282.0 288.3
Investment income 470.2 514.4 574.0
Fee income 196.4 250.5 292.6
Other income 279.9 126.7 172.9
-------------------------------------------------------------------------------------
Total other revenues 2,142.2 1,829.1 1,763.8
-------------------------------------------------------------------------------------
Salaries and fringe benefits 545.6 656.6 615.4
Occupancy and equipment expense 222.1 243.4 225.3
Other marketing expenses 359.5 327.4 228.5
Other servicing and administrative expenses 470.6 533.7 510.2
Policyholders' benefits 474.5 464.4 539.1
-------------------------------------------------------------------------------------
Total costs and expenses 2,072.3 2,225.5 2,118.5
-------------------------------------------------------------------------------------
Income before income taxes 753.7 528.3 450.7
Income taxes 300.5 160.7 152.0
-------------------------------------------------------------------------------------
Net income $ 453.2 $ 367.6 $ 298.7
=====================================================================================
EARNINGS PER COMMON SHARE
Net income $ 453.2 $ 367.6 $ 298.7
Preferred dividends (26.4) (27.6) (28.2)
-------------------------------------------------------------------------------------
Earnings available to common shareholders $ 426.8 $ 340.0 $ 270.5
=====================================================================================
Average common and common equivalent shares 99.3 97.2 94.8
-------------------------------------------------------------------------------------
Fully diluted earnings per common share $ 4.30 $ 3.50 $ 2.85
-------------------------------------------------------------------------------------
Primary earnings per common share $ 4.31 $ 3.52 $ 2.91
-------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE> 20
BALANCE SHEETS
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
In millions.
At December 31 1995 1994
------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 270.4 $ 541.2
Investment securities (fair value of $4,639.5 and $8,961.2) 4,639.5 9,004.5
Receivables, net 21,844.1 20,778.3
Assets pending sale -- 398.3
Deferred insurance policy acquisition costs 5.6 621.4
Acquired intangibles 578.5 649.9
Properties and equipment 391.7 512.0
Real estate owned 136.5 182.8
Other assets 1,352.5 1,650.0
------------------------------------------------------------------------------------------------
Total assets $29,218.8 $34,338.4
================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Deposits $ 4,708.8 $ 8,439.0
Commercial paper, bank and other borrowings 6,659.4 4,372.1
Senior and senior subordinated debt
(with original maturities over one year) 11,227.9 10,274.1
------------------------------------------------------------------------------------------------
Total debt 22,596.1 23,085.2
Insurance policy and claim reserves 2,229.3 6,715.8
Other liabilities 1,422.5 2,014.4
------------------------------------------------------------------------------------------------
Total liabilities 26,247.9 31,815.4
Company obligated mandatorily redeemable preferred
securities of subsidiary trust* 75.0 --
Convertible preferred stock subject to mandatory redemption -- 2.6
Preferred stock** 205.0 320.0
Common shareholders' equity** 2,690.9 2,200.4
------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $29,218.8 $34,338.4
================================================================================================
</TABLE>
*As described in Note 8 to the financial statements, the sole asset of
the trust is $75 million of 8.25 percent Junior Subordinated Debentures
due June 30, 2025 issued by Household International, Inc.
**See the Statements of Changes in Preferred Stock and Common
Shareholders' Equity on page 36 for number of shares issued and
outstanding.
The accompanying notes are an integral part of these financial
statements.
34
<PAGE> 21
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
In millions.
Year ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income $ 453.2 $ 367.6 $ 298.7
Adjustments to reconcile net income to net cash provided
by operations:
Provision for credit losses on owned receivables 761.3 606.8 735.8
Insurance policy and claim reserves 404.7 240.2 226.7
Depreciation and amortization 263.7 243.3 243.1
Net realized (gains) losses from sales of assets (188.7) 41.3 29.3
Deferred insurance policy acquisition costs (58.5) (94.7) (86.6)
Deferred income tax provision (2.5) (1.2) (6.3)
Other, net (260.7) 356.8 264.1
---------------------------------------------------------------------------------------------------------
Cash provided by operations 1,372.5 1,760.1 1,704.8
- -------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN OPERATIONS
Investment securities available-for-sale:
Purchased (4,299.3) (2,478.0) (561.1)
Matured 902.1 384.1 152.3
Sold 3,081.1 1,963.2 1,157.9
Investment securities held-to-maturity:
Purchased (558.7) (767.1) (3,492.0)
Matured 465.1 534.1 1,118.6
Sold 34.2 -- 834.3
Short-term investment securities, net change 348.5 (320.9) (154.2)
Receivables, excluding Visa*/MasterCard*:
Originated or purchased (13,071.1) (12,186.4) (10,218.4)
Collected 7,426.6 7,517.7 7,784.6
Sold 4,370.3 3,211.4 2,351.8
Visa/MasterCard receivables:
Originated or collected, net (20,542.0) (14,321.3) (8,729.8)
Purchased (570.0) -- --
Sold 20,181.2 13,735.1 7,483.2
Acquisition (disposition) of banking organizations:
Assets (acquired) sold, net 975.6 (101.3) (53.5)
Deposits and other liabilities assumed (sold), net (4,061.9) 1,158.7 362.0
Disposition of product lines of life insurance business 575.0 -- --
Acquisition of other businesses, net (58.7) (145.6) --
Properties and equipment purchased (76.4) (196.9) (110.2)
Properties and equipment sold 35.9 9.8 8.2
---------------------------------------------------------------------------------------------------------
Cash decrease from investments in operations (4,842.5) (2,003.4) (2,066.3)
- -------------------------------------------------------------------------------------------------------------------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt, net change 1,956.7 (1,112.5) 590.0
Time certificates accepted 2,971.8 3,372.6 2,340.9
Time certificates paid (2,243.0) (3,429.9) (3,320.8)
Senior and senior subordinated debt issued 3,258.0 4,511.4 2,765.0
Senior and senior subordinated debt retired (2,414.4) (3,164.8) (2,645.3)
Policyholders' benefits paid (805.3) (559.0) (341.2)
Cash received from policyholders 669.0 966.6 859.7
Shareholders' dividends (154.0) (146.5) (141.3)
Issuance of company obligated mandatorily
redeemable preferred securities of subsidiary trust 75.0 -- --
Issuance of preferred stock -- -- 100.0
Redemption of preferred stock (115.0) -- (80.0)
Purchase of treasury stock (59.7) -- --
Issuance of common stock 24.7 13.6 313.3
---------------------------------------------------------------------------------------------------------
Cash increase from financing and
capital transactions 3,163.8 451.5 440.3
---------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 35.4 15.6 (17.2)
---------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (270.8) 223.8 61.6
Cash at January 1 541.2 317.4 255.8
---------------------------------------------------------------------------------------------------------
Cash at December 31 $ 270.4 $ 541.2 $ 317.4
=========================================================================================================
Supplemental cash flow information:
Interest paid $ 1,508.2 $ 1,249.8 $ 1,188.2
---------------------------------------------------------------------------------------------------------
Income taxes paid 171.0 185.2 128.8
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
*VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International, Incorporated, respectively.
35
<PAGE> 22
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 Other(1) Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 (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 44.5 44.5
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 320.0 113.3 337.3 2,176.3 (548.6) 2,078.3
Net income 367.6 367.6
Cash dividends--preferred, at stated rates (28.5) (28.5)
Cash dividends--common, $1.23 per share (118.0) (118.0)
Foreign currency translation adjustments 9.1 9.1
Conversion of preferred stock 1.5 15.4 16.9
Exercise of stock options .2 5.3 5.5
Issuance of common stock 4.1 9.5 13.6
Unrealized gain on investments, net (144.1) (144.1)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 320.0 115.0 362.1 2,397.4 (674.1) 2,200.4
Net income 453.2 453.2
Cash dividends--preferred, at stated rates (26.5) (26.5)
Cash dividends--common, $1.31 per share (127.5) (127.5)
Foreign currency translation adjustments (3.5) (3.5)
Conversion of preferred stock .2 3.4 3.6
Exercise of stock options 6.6 21.7 28.3
Issuance of common stock 11.3 13.4 24.7
Purchase of treasury stock (59.7) (59.7)
Redemption of nonconvertible preferred stock (115.0)
Unrealized gain on investments, net 197.9 197.9
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $ 205.0 $115.2 $383.4 $2,696.6 $ (504.3) $2,690.9
===================================================================================================================================
(1)At December 31, 1995, 1994, 1993 and 1992 items in the other column include cumulative adjustments for: foreign
currency translation adjustments of $(127.1), $(123.6), $(132.7) and $(118.6) million, respectively; common stock in
treasury of $(471.5), $(446.9), $(456.4) and $(681.9) million, respectively; and unrealized gains (losses) on marketable equity
securities and available-for-sale investments of $94.3, $(103.6), $40.5 and $(4.0) million, respectively. 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 (loss) on
available-for-sale investments at December 31, 1995, 1994 and 1993 of $142.6, $(292.4) and $152.8 million, respectively, is
recorded net of income taxes (benefit) of $48.3, $(57.5) and $22.1 million, respectively. At December 31, 1994 and 1993, the
unrealized gain (loss) on certain available-for-sale investments of the life insurance operation were recorded net of related
unrealized deferred insurance policy acquisition cost adjustments of $(131.3) and $90.2 million, respectively.
</TABLE>
<TABLE>
<CAPTION>
Common Stock(2)
------------------------------------------------------
Nonconvertible
Shares Preferred Stock Issued In Treasury Net Outstanding
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Exercise of common stock options 213,962 213,962
Conversion of $6.25 preferred stock 1,540,756 1,540,756
Issuance of common stock 399,748 399,748
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 1,850,000 115,008,739 (18,406,141) 96,602,598
Exercise of common stock options 812,576 812,576
Conversion of $6.25 preferred stock 222,436 222,436
Issuance of common stock 523,919 523,919
Purchase of treasury stock (1,000,000) (1,000,000)
Redemption of nonconvertible preferred stock (1,150,000)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 700,000 115,231,175 (18,069,646) 97,161,529
=============================================================================================================================
(2)At December 31, 1995 and 1994 the company had authorized 150 million shares of $1 par value common stock.
The accompanying notes are an integral part of these financial statements.
</TABLE>
36
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
Household International, Inc. and Subsidiaries
Household International, Inc. and subsidiaries (the "company") is primarily
engaged in the business of consumer lending in the United States, the United
Kingdom and Canada. The company makes the following types of loans to
"middle-market" customers: home equity, Visa/MasterCard, merchant participation
and other unsecured. The company's receivable portfolio also includes
traditional first mortgages, which the company no longer originates, and
commercial loans and leases, including discontinued commercial product lines.
The company also offers credit and specialty insurance in the United
States, the United Kingdom and Canada. In October 1995 the company sold the
individual life and annuity product lines of the Individual Life Insurance
segment. Remaining insurance lines include periodic payment annuities and
corporate owned life insurance products. These products are no longer being
offered by the company and are being liquidated. Due to the insignificance of
the remaining insurance product lines, the company will now report results for
the former Finance and Banking segment and the remaining insurance product lines
on a combined basis.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The financial statements include the accounts of
Household International, Inc. and all subsidiaries. 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENT SECURITIES The company maintains investment portfolios in both
its noninsurance and insurance operations. These portfolios are comprised
primarily of debt securities. The insurance portfolio also includes policy
loans. In accordance with FAS No. 115, investment securities may be classified
in three separate categories: trading, available-for-sale or held-to-maturity.
Trading investments 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. The
company had no trading investments at December 31, 1995. Investments which the
company has the positive intent and ability to hold to maturity are defined as
held-to-maturity and carried at amortized cost. Available-for-sale investments
are intended to be invested for an indefinite period but may be sold in
response to events reasonably expected in the foreseeable future. These
investments are carried at fair value. As discussed on page 40, the company
reclassified its entire held-to-maturity investment portfolio to
available-for-sale in the fourth quarter of 1995.
Unrealized holding gains and losses on available-for-sale investments are
recorded as adjustments to common shareholders' equity, net of income taxes.
Prior to the sale of the individual life and annuity lines of business of the
insurance operation, unrealized holding gains and losses on certain
available-for-sale investments were also recorded net of related unrealized
deferred insurance policy acquisition cost adjustments. Any decline in the fair
value of investments which is deemed to be other than temporary is charged
against current earnings.
Cost of investment securities sold 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. Accrued investment income
is classified with investment securities.
RECEIVABLES Receivables are carried at amortized cost. The company
periodically sells receivables from its home equity, Visa/MasterCard, merchant
participation and other unsecured 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 fair value.
Finance income is recognized using the effective yield method and is
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 Visa/MasterCard receivables 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 (income) related to Visa/MasterCard receivables
totaled $(3.5) and $9.4 million at December 31, 1995 and 1994, 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. For commercial loans, probable losses are calculated using estimates
of amounts and timing of future cash flows expected to be received on loans for
which the collection of principal and interest is not probable, as well as
management's assessment of general
37
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
reserve requirements. These estimates are reviewed periodically and adjustments
are reported in earnings when they become known. As these estimates are
influenced by factors outside the company's control, such as economic
conditions in the countries where the company operates, there is uncertainty
inherent in these estimates, making it reasonably possible that they could
change. The company's chargeoff policy for all consumer receivables, except
bankrupt Visa/MasterCard accounts, is based on contractual delinquency over
periods ranging from 4 to 9 months. Bankrupt Visa/MasterCard accounts are
charged off on a timely basis after receipt of bankruptcy notification.
Commercial loans are written off when it becomes apparent that an account is
uncollectible.
NONACCRUAL LOANS Nonaccrual loans are loans on which accrual of interest has
been suspended. Interest income is suspended on all loans when principal or
interest payments are more than three months contractually past due, except for
Visa/MasterCard receivables 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, 1995 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. Cash payments received on
nonaccrual commercial loans are either applied against principal or reported as
interest income, according to management's judgment as to the collectibility of
principal.
RECEIVABLES SOLD AND SERVICED WITH LIMITED RECOURSE AND SECURITIZATION
INCOME Certain home equity, Visa/MasterCard, merchant participation and other
unsecured receivables have been securitized and sold to investors with limited
recourse. The servicing rights to these receivables have been retained by the
company. Upon sale, the receivables are removed from the balance sheet, and a
gain on sale is recognized for the difference between the carrying value of the
receivables and the adjusted sales proceeds. The adjusted sales proceeds are
based on a present value estimate of future cash flows to be received over the
lives of the receivables. Future cash flows are based on estimates of
prepayments, the impact of interest rate movements on yields of receivables
sold and securities issued, delinquency of receivables sold, 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 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 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 specialty and credit insurance are recognized over
the period at risk in relationship to anticipated claims. Premiums received on
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 credit
insurance and in relation to gross profits on interest-sensitive policies.
The 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 specialty insurance products 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 and core
deposit relationships. Acquired credit card relationships comprised 80 and 64
percent, respectively, of the total acquired intangibles balance at December 31,
1995 and 1994. 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 1995,
1994 and 1993.
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 were 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 reissued is
removed from the accounts at average cost.
INTEREST RATE CONTRACTS The nature and composition of the company's assets
and liabilities and off-balance sheet items expose the company to interest rate
risk. The company enters into a variety of interest rate contracts in the
management of its interest rate exposure and, prior to December 31, 1994, in
its
38
<PAGE> 25
trading activities. Interest rate swaps are the principal vehicle used to
manage interest rate risk; however, interest rate futures, options, caps and
floors, and forward contracts also are utilized.
Interest rate swaps are designated, and effective, as synthetic
alterations of specific assets or liabilities (or specific groups of assets or
liabilities) and off-balance sheet items. The interest rate differential to be
paid or received on these contracts is accrued and included in net interest
margin in the statements of income. The related accrual is classified as other
liabilities on the accompanying balance sheets.
Interest rate futures, forwards, options, caps and floors used in hedging
the company's exposure to interest rate fluctuations are designated, and
effective, as hedges of balance sheet items. Anticipatory hedges are
designated, and effective, as hedges of identified transactions which are
probable to occur. During 1995, 1994 and 1993 the company's use of anticipatory
hedges was insignificant. If interest rate contracts are terminated early, the
realized gains and losses are deferred and amortized over the life of the
hedged items as adjustments to net interest margin in the statements of income.
These deferred gains and losses are recorded on the accompanying balance sheets
as adjustments to the carrying amount of the hedged items. Interest rate
contracts not used in the company's trading activities are recorded at
amortized cost.
In late 1994, the company discontinued its trading activities. Prior to
that, interest rate contracts used in the company's trading activities were
carried at fair value. Changes in fair value were included in other income.
FOREIGN CURRENCY TRANSLATION Foreign subsidiary assets and liabilities are
located in the United Kingdom and Canada. The functional currency for each
subsidiary is its local currency. 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 using the deferral method.
2. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
1995 1994
-------------------- --------------------
In millions. CARRYING Carrying
At December 31 VALUE FAIR VALUE Value Fair Value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRADING INVESTMENTS
Government securities and other $ 17.3 $ 17.3
---------------------------------------------------------------------------
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities $ 327.1 $ 327.1 60.3 60.3
Corporate debt securities 1,560.0 1,560.0 2,595.9 2,595.9
Government debt securities 142.1 142.1 379.3 379.3
Mortgage-backed securities 1,053.7 1,053.7 1,755.6 1,755.6
Policy loans 821.4 821.4 -- --
Other 690.9 690.9 209.3 209.3
---------------------------------------------------------------------------
Subtotal 4,595.2 4,595.2 5,000.4 5,000.4
---------------------------------------------------------------------------
HELD-TO-MATURITY INVESTMENTS
Corporate debt securities 1,906.1 1,897.2
Government debt securities 34.4 30.9
Mortgage-backed securities 1,136.5 1,116.8
Mortgage loans on real estate 161.9 158.5
Policy loans 72.7 72.7
Other 549.9 542.1
---------------------------------------------------------------------------
Subtotal 3,861.5 3,818.2
---------------------------------------------------------------------------
Accrued investment income 44.3 44.3 125.3 125.3
---------------------------------------------------------------------------
Total investment securities $4,639.5 $4,639.5 $9,004.5 $8,961.2
===========================================================================
</TABLE>
39
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
The company's insurance subsidiaries held $2.9 and $7.0 billion of the
investment securities at December 31, 1995 and 1994, respectively. Policy loans
held by the company's insurance subsidiaries are classified as investment
securities at December 31, 1995, consistent with insurance industry practice.
There were no changes in net unrealized holding gains or losses from
trading investments in 1995. Included in the company's earnings for 1994 and
1993 were changes in net unrealized holding gains (losses) of $(.4) and $1.3
million, respectively, from trading investments.
Proceeds from the sale of available-for-sale investments totaled
approximately $3.1, $2.0 and $1.2 billion in 1995, 1994 and 1993, respectively.
Gross gains of $18.4, $35.5 and $49.7 million and gross losses of $4.9, $25.7
and $7.9 million in 1995, 1994 and 1993, respectively, were realized on those
sales. The sales in 1995 were exclusive of the sale of investment securities in
connection with the disposition of the individual life and annuity lines of
business.
During 1995 the company sold $33.7 million of held-to-maturity investment
securities due to the significant deterioration in the creditworthiness of the
issuers of the securities. Because of the disposition of the individual life
and annuity product lines and the company's decision to discontinue its
remaining life insurance product lines, the company reassessed the
classification of the remaining held-to-maturity portfolio and reclassified the
entire held-to-maturity investment portfolio to available-for-sale in the
fourth quarter of 1995. There were no investments transferred from
held-to-maturity to available-for-sale in 1994. There were no sales of
held-to-maturity investments in 1994. 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 during
1993. 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. Gross gains of $.5 and $48.1
million were realized on sales of held-to-maturity investments in 1995 and
1993, respectively. There were no gross losses on sales of held-to-maturity
investments in 1995. Gross losses of $9.6 million were realized on sales of
held-to-maturity investments in 1993.
The gross unrealized gains (losses) of investment securities were as
follows:
<TABLE>
<CAPTION>
1995 1994
---------------------------------------- ------------------------------------------
GROSS GROSS Gross Gross
In millions. AMORTIZED UNREALIZED UNREALIZED FAIR Amortized Unrealized Unrealized Fair
At December 31, 1995 COST GAINS LOSSES VALUE Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities $ 321.6 $ 7.3 $ (1.8) $ 327.1 $ 63.1 $ 1.7 $ (4.5) $ 60.3
Corporate debt securities 1,433.2 131.0 (4.2) 1,560.0 2,771.6 3.7 (179.4) 2,595.9
Government debt securities 140.2 2.2 (.3) 142.1 394.6 .2 (15.5) 379.3
Mortgage-backed securities 1,046.5 15.1 (7.9) 1,053.7 1,853.9 5.2 (103.5) 1,755.6
Policy loans 821.4 -- -- 821.4 -- -- -- --
Other 689.7 1.2 -- 690.9 209.6 -- (.3) 209.3
- ----------------------------------------------------------------------------------------------------------------------
Total available-for-sale
investments $4,452.6 $156.8 $(14.2) $4,595.2 $5,292.8 $10.8 $(303.2) $5,000.4
======================================================================================================================
HELD-TO-MATURITY INVESTMENTS
Corporate debt securities $1,906.1 $33.8 $ (42.7) $1,897.2
Government debt securities 34.4 .1 (3.6) 30.9
Mortgage-backed securities 1,136.5 15.5 (35.2) 1,116.8
Mortgage loans on real estate 161.9 1.8 (5.2) 158.5
Policy loans 72.7 -- -- 72.7
Other 549.9 .2 (8.0) 542.1
- ----------------------------------------------------------------------------------------------------------------------
Total held-to-maturity
investments -- -- -- -- $3,861.5 $51.4 $ (94.7) $3,818.2
======================================================================================================================
</TABLE>
See Note 11, "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, 1995 the company did not hold any debt or equity
securities from a single issuer that exceeded 10 percent of the company's total
shareholders' equity.
Contractual maturities and yields of investments in debt securities were
as follows:
<TABLE>
<CAPTION>
Corporate Securities Government Securities All Other Debt Securities
------------------------------- ---------------------------- -----------------------------
In millions. Amortized Fair Amortized Fair Amortized Fair
At December 31, 1995 Cost Value Yield* Cost Value Yield* Cost Value Yield*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due within 1 year $ 136.0 $ 136.0 6.34% $ 20.5 $ 20.6 6.52% $ 1.2 $ .2 9.47%
After 1 but within 5 years 134.4 142.7 8.18 31.5 31.7 5.92 47.6 48.9 7.76
After 5 but within 10 years 226.0 241.2 8.20 57.7 58.4 5.78 44.2 45.3 7.23
After 10 years 936.8 1,040.1 8.26 30.5 31.4 6.49 965.7 972.8 7.41
- ------------------------------------------------------------------------------------------------------------------------
Total $1,433.2 $1,560.0 8.06% $140.2 $142.1 6.07% $1,058.7 $1,067.2 7.42%
========================================================================================================================
</TABLE>
*Computed by dividing annualized interest by the amortized cost of the
respective investment securities.
40
<PAGE> 27
3. RECEIVABLES
<TABLE>
<CAPTION>
In millions.
At December 31 1995 1994
----------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage $ 2,066.9 $ 3,364.2
Home equity 4,148.2 2,865.6
Visa/MasterCard 5,512.0 4,788.9
Merchant participation 3,696.2 2,564.9
Other unsecured 5,019.2 5,137.2
Commercial 1,289.6 1,834.8
----------------------------------------------------------------------------------------------
Total owned receivables 21,732.1 20,555.6
Accrued finance charges 381.6 305.0
Credit loss reserve for owned receivables (720.4) (546.0)
Unearned credit insurance premiums and claims reserves (159.9) (122.2)
Amounts due and deferred from receivables sales 1,067.7 922.4
Reserve for receivables serviced with limited recourse (457.0) (336.5)
----------------------------------------------------------------------------------------------
Total receivables owned, net 21,844.1 20,778.3
Receivables serviced with limited recourse 14,884.6 12,495.1
----------------------------------------------------------------------------------------------
Total managed receivables, net $36,728.7 $33,273.4
==============================================================================================
</TABLE>
Foreign receivables included in receivables owned were as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------ ----------------------
In millions. UNITED United
At December 31 CANADA KINGDOM Canada Kingdom
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First mortgage $ 61.4 $ 4.2 $ 996.7 $ 4.4
Home equity 281.7 149.3 303.8 141.3
Visa/MasterCard -- 430.1 -- 330.2
Merchant participation 410.0 532.6 283.6 438.0
Other unsecured 367.5 537.4 406.4 532.1
Commercial 56.1 -- 54.2 --
---------------------------------------------------------------------------------------------
Total $1,176.7 $1,653.6 $2,044.7 $1,446.0
=============================================================================================
</TABLE>
Outstanding advances from the Federal Home Loan Bank and other borrowings of the
company's banking subsidiary were required to be secured by first mortgage and
other unsecured receivables totaling approximately $1 billion at December 31,
1995. Receivables held for trade, which were first mortgage loans that were
originated or purchased with the intent to be resold, totaled $25.1 million at
December 31, 1994. There were no receivables held for trade at December 31, 1995
as a result of the company's exit from the domestic first mortgage origination
business in late 1994.
The company has securitized and sold certain receivables which it services
with limited recourse. Securitizations and sales of receivables, including
replenishments of certificate holder interests, were as follows:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1995 1994 1993
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Home equity $ 1,135.2 $ 1,418.6 $1,667.5
Visa/MasterCard 20,181.2 13,735.1 7,563.2
Merchant participation 644.0 1,093.6 213.6
Other unsecured 1,535.3 241.0 --
---------------------------------------------------------------------------------------------
Total $23,495.7 $16,488.3 $9,444.3
=============================================================================================
</TABLE>
41
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
The outstanding balance of receivables serviced with limited recourse consisted
of the following:
<TABLE>
<CAPTION>
In millions.
At December 31 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 4,661.9 $ 5,074.6
Visa/MasterCard 7,831.1 6,311.3
Merchant participation 750.0 868.2
Other unsecured 1,641.6 241.0
- --------------------------------------------------------------------------
Total $14,884.6 $12,495.1
==========================================================================
</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 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C>
First mortgage $ 2,066.9 $ 3,364.2
Home equity 8,810.1 7,940.2
Visa/MasterCard 13,343.1 11,100.2
Merchant participation 4,446.2 3,433.1
Other unsecured 6,660.8 5,378.2
Commercial 1,289.6 1,834.8
- -------------------------------------------------------------------------
Managed receivables $36,616.7 $33,050.7
=========================================================================
</TABLE>
For certain securitizations, wholly-owned subsidiaries were created (HFC
Revolving Corporation, HRSI Funding, Inc., HFS Funding Corporation, Household
Finance Receivables Corporation II, Household Receivables Funding Corporation,
Household Receivables Funding Corporation II, Household Affinity Funding
Corporation, HFC Funding Corporation, Household Receivables Funding, Inc.,
Household Consumer Loan Corporation and Household Card Funding Corporation) for
the limited purpose of consummating such transactions.
The amount due and deferred from receivables sales of $1,067.7 million at
December 31, 1995 included unamortized excess servicing assets and funds
established pursuant to the recourse provisions and holdback reserves for
certain sales totaling $1,050.4 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 $265.1 million plus unpaid interest and has subordinated
interests in certain transactions, which are recorded as receivables, for $398.5
million at December 31, 1995. The company has an agreement with a "AAA"-rated
third party who will indemnify the company for up to $21.2 million in losses
related to certain securitization transactions. The company maintains credit
loss reserves pursuant to the recourse provisions for receivables serviced with
limited recourse which are based on estimated probable losses under such
provisions. These reserves totaled $457.0 million at December 31, 1995 and
represent the company's best estimate of probable losses on receivables serviced
with limited recourse.
Contractual maturities of owned receivables were as follows:
<TABLE>
<CAPTION>
In millions.
At December 31, 1995 1996 1997 1998 1999 2000 Thereafter Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage $ 41.3 $ 11.5 $ 31.2 $ 6.5 $ 7.4 $ 1,969.0 $ 2,066.9
Home equity 633.3 332.4 268.5 230.6 216.3 2,467.1 4,148.2
Visa/MasterCard 608.1 512.0 441.8 387.4 341.8 3,220.9 5,512.0
Merchant participation 868.3 383.5 335.7 282.7 179.8 1,646.2 3,696.2
Other unsecured 1,436.3 746.1 575.5 455.7 364.1 1,441.5 5,019.2
Commercial 304.8 127.0 129.5 107.7 42.8 577.8 1,289.6
- -----------------------------------------------------------------------------------------------
Total $3,892.1 $2,112.5 $1,782.2 $1,470.6 $1,152.2 $11,322.5 $21,732.1
===============================================================================================
</TABLE>
42
<PAGE> 29
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 Visa/MasterCard receivables,
approximated 44 and 49 percent in 1995 and 1994, 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 Over
At December 31, 1995 5 years 5 Years
- --------------------------------------------------------------------------
<S> <C> <C>
Receivables at predetermined interest rates $2,391.7 $ 3,614.3
Receivables at floating or adjustable rates 4,125.8 7,708.2
- --------------------------------------------------------------------------
Total $6,517.5 $11,322.5
==========================================================================
</TABLE>
Nonaccrual owned consumer receivables totaled $436.1 million at December 31,
1995, including $102.6 million relating to foreign operations. Interest income
that would have been recorded in 1995 if such nonaccrual receivables had been
current and in accordance with contractual terms was approximately $64 million,
including $18 million relating to foreign operations. Interest income that was
included in net income for 1995, prior to these loans being placed on nonaccrual
status, was approximately $34 million, including $8 million relating to foreign
operations.
Effective January 1, 1995, the company adopted Statement of Financial
Accounting Standards ("FAS") No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by FAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures," which requires that a loan be
recognized as impaired when it is probable that all contractual amounts due will
not be repaid. FAS No. 114 specifically excludes groups of small dollar,
homogeneous loans where collectibility is evaluated collectively, such as the
company's consumer loan portfolio. At December 31, 1995 impaired commercial
loans totaled $166.7 million (consisting of $145.5 million nonaccrual and $21.2
million renegotiated commercial loans). Impaired commercial loans of $131.6
million required related credit loss reserves totaling approximately $50 million
at December 31, 1995. The remaining $35.1 million did not require credit loss
reserves. The average recorded investment in impaired commercial loans during
1995 was approximately $180 million. The company recorded $4.2 million of
interest income on impaired commercial loans in 1995. Had the loans been
performing in accordance with their original terms, interest income in 1995
would have been $15.2 million higher. There were no commitments at December 31,
1995 to lend additional funds to borrowers whose loans were renegotiated.
At December 31, 1994 the company had nonaccrual commercial loans of $116.3
million and renegotiated commercial loans of $41.8 million. The company
recorded $2.2 million of interest income on such loans in 1994. Interest income
that would have been recorded in 1994 had these loans been performing
in accordance with their original terms was $18.5 million. At December 31, 1994
there were $.5 million of commitments to lend additional funds to borrowers
whose loans were renegotiated.
For further information on nonperforming assets, see page 29 and Other
Credit Quality Statistics on page 21. For an analysis of reserves for credit
losses, see pages 19 and 20.
43
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
4. DEPOSITS
<TABLE>
<CAPTION>
1995 1994
----------------------- -----------------------
All dollar amounts are stated in millions. Weighted Weighted
At December 31 Amount Average Rate Amount Average Rate
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOMESTIC
Time certificates $2,483.7 6.4% $3,454.6 4.5%
Savings accounts 1,199.4 3.7 2,447.8 3.3
Demand accounts 365.9 1.0 947.0 .9
- --------------------------------------------------------------------------------------------------------------------
Total domestic deposits 4,049.0 5.1 6,849.4 3.6
- --------------------------------------------------------------------------------------------------------------------
FOREIGN
Time certificates 370.9 7.2 1,268.4 7.3
Savings accounts 265.3 6.0 303.6 5.0
Demand accounts 23.6 6.0 17.6 5.8
- --------------------------------------------------------------------------------------------------------------------
Total foreign deposits 659.8 6.7 1,589.6 6.9
- --------------------------------------------------------------------------------------------------------------------
Total deposits $4,708.8 5.3% $8,439.0 4.2%
====================================================================================================================
</TABLE>
Average deposits and related weighted average interest rates for 1995, 1994
and 1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------- ----------------------- ------------------------
All dollar amounts are stated Average Weighted Average Weighted Average Weighted
in millions. Deposits Average Rates Deposits Average Rates Deposits Average Rates
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC
Time certificates $3,015.2 6.2% $3,151.5 4.2% $3,368.3 3.9%
Savings and demand accounts 2,667.9 3.1 3,009.0 2.5 2,875.9 2.5
- ----------------------------------------------------------------------------------------------------------------------
Total domestic deposits 5,683.1 4.7 6,160.5 3.4 6,244.2 3.3
- ----------------------------------------------------------------------------------------------------------------------
FOREIGN
Time certificates 1,052.3 7.4 1,195.6 7.2 1,278.5 8.2
Savings and demand accounts 308.8 6.2 312.0 5.3 212.3 5.8
- ----------------------------------------------------------------------------------------------------------------------
Total foreign deposits 1,361.1 7.1 1,507.6 6.8 1,490.8 7.9
- ----------------------------------------------------------------------------------------------------------------------
Total deposits $7,044.2 5.1% $7,668.1 4.1% $7,735.0 4.2%
======================================================================================================================
</TABLE>
Interest expense on deposits was $362.7, $312.1 and $321.2 million for 1995,
1994 and 1993, respectively. Interest expense on domestic deposits was $265.9,
$209.1 and $203.9 million for 1995, 1994 and 1993, respectively.
Maturities of time certificates in amounts of $100,000 or more were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1995 Domestic Foreign Total
- -------------------------------------------------------------
<S> <C> <C> <C>
3 months or less $102.7 $ 63.3 $166.0
Over 3 months through 6 months 49.3 201.7 251.0
Over 6 months through 12 months 54.4 .1 54.5
Over 12 months 34.9 -- 34.9
- -------------------------------------------------------------
Total $241.3 $265.1 $506.4
=============================================================
</TABLE>
Contractual maturities of time certificates within each interest rate range
were as follows:
<TABLE>
<CAPTION>
In millions.
At December 31, 1995 1996 1997 1998 1999 2000 Thereafter Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE
less than 4.00% $ 20.9 $ 3.8 $ .2 -- -- -- $ 24.9
4.00% -- 5.99% 1,035.2 146.0 45.7 $23.7 $ 5.9 $ 3.0 1,259.5
6.00% -- 7.99% 595.6 288.8 113.7 54.4 93.0 4.6 1,150.1
8.00% -- 9.99% 44.6 294.0 13.6 7.1 54.5 2.5 416.3
10.00%--13.99% 3.4 -- -- .1 .3 -- 3.8
- --------------------------------------------------------------------------------------
TOTAL $1,699.7 $732.6 $173.2 $85.3 $153.7 $10.1 $2,854.6
======================================================================================
</TABLE>
44
<PAGE> 31
5. 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>
1995
Balance $4,598.5 $2,060.9 $6,659.4
Highest aggregate month-end balance -- -- 7,350.5
Average borrowings 4,551.1 1,565.1 6,116.2
Weighted average interest rate:
At year end 5.8% 6.9% 6.2%
Paid during year 6.0 7.4 6.4
- ---------------------------------------------------------------------------------
1994
Balance $3,598.0 $774.1 $4,372.1
Highest aggregate month-end balance -- -- 6,172.0
Average borrowings 4,316.4 1,321.1 5,637.5
Weighted average interest rate:
At year end 6.2% 8.0% 6.5%
Paid during year 4.4 7.6 5.2
- ---------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------
</TABLE>
*Included in outstanding balances at year-end 1995, 1994 and 1993 were
commercial paper obligations of foreign subsidiaries of $269.5, $331.4 and
$583.3 million, respectively.
Interest expense for commercial paper, bank and other borrowings totaled
$389.5, $292.2 and $251.1 million for 1995, 1994 and 1993, respectively.
The company maintains various bank credit agreements primarily to support
commercial paper borrowings. At December 31, 1995 the company had total bank
credit agreements of $5.6 billion, of which $4.7 billion were unused. Formal
credit lines are reviewed annually, and revolving credit agreements expire at
various dates from 1996 to 2002. 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, 1995 totaled $5.0 million.
45
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
6. SENIOR AND SENIOR SUBORDINATED DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR)
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31 1995 1994
------------------------------------------------------------------------------------
<S> <C> <C>
SENIOR DEBT
4.00% to 7.49%; due 1996 to 2009 $ 2,902.5 $ 1,888.8
7.50% to 7.99%; due 1996 to 2007 1,937.8 1,552.6
8.00% to 8.99%; due 1996 to 2004 1,660.4 1,545.2
9.00% to 9.99%; due 1996 to 2001 587.9 941.3
10.00% and greater; due 1996 to 2001 242.3 293.6
Variable interest rate debt; 3.26% to 7.00%; due 1996 to 2015 2,900.7 3,120.5
SENIOR SUBORDINATED DEBT
6.50% to 9.63%; due 2000 to 2003 685.0 685.0
10.13% to 11.15%; due 1996 to 1998 215.0 215.0
PREFERRED STOCK OF SUBSIDIARY
Household Finance Corporation
7.25% term cumulative preferred, Series 1992-A,
1,000,000 depositary shares* 100.0 100.0
Unamortized discount (3.7) (67.9)
------------------------------------------------------------------------------------
Total senior and senior subordinated debt $11,227.9 $10,274.1
====================================================================================
* Depositary share represents 1/3000 share of preferred stock.
</TABLE>
Weighted average interest rates, excluding the impact of interest rate
swap agreements, were 7.3, 7.4 and 7.5 percent at December 31, 1995, 1994
and 1993, respectively. Interest expense for senior and senior subordinated
debt, including the impact of interest rate swap agreements, was $804.9,
$638.4 and $577.2 million for 1995, 1994 and 1993, respectively.
Maturities of senior and senior subordinated debt were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1995
-------------------------------------------------
<S> <C>
1996 $ 2,859.5
1997 1,920.2
1998 1,224.9
1999 1,290.1
2000 1,092.3
Thereafter 2,840.9
-------------------------------------------------
Total $11,227.9
=================================================
</TABLE>
At December 31, 1995 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. The dividends on the preferred stock of subsidiaries,
including the company obligated mandatorily redeemable preferred securities
of subsidiary trust, have been classified in the statements of income as
interest expense.
7. DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
In connection with its asset/liability management program and in the
normal course of business, the company enters into various transactions
involving derivative and other off-balance sheet financial instruments.
These instruments primarily are used to manage the company's exposure to
fluctuations in interest rates and foreign exchange rates. The company does
not serve as a financial intermediary to make markets in any derivative
financial instruments. For further information on the company's strategies
for managing interest rate and foreign exchange rate risk, see Liquidity and
Capital Resources on pages 31 and 32.
The financial instruments used by the company, which include interest rate
contracts and foreign exchange rate contracts, as well as off-balance sheet
financial instruments such as 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 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
46
<PAGE> 33
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 derivative instrument
counterparty. 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.
MARKET RISK Market risk is the possibility that a change in interest rates
or foreign exchange rates will cause a financial instrument to decrease in
value or become more costly to settle. The company mitigates this risk by
establishing limits for positions and other controls.
INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS The following tables summarize
the activity in interest rate and foreign exchange contracts for the years
ended December 31, 1995, 1994 and 1993:
Household International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Exchange Traded Non Exchange Traded
--------------------------------------------- ------------------------------------------------------------------
Interest Foreign Interest
Rate Exchange Rate
Futures Rate Forward
Contracts Options Contracts Contracts Other Risk
------------------------ ------------------- Interest -------------------- ------------------- Management
In millions. Purchased Sold Purchased Written Rate Swaps Purchased Sold Purchased Sold Instruments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HEDGING/SYNTHETIC
ALTERATION
INSTRUMENTS
1993
Notional
amount, 1992 $ 170.0 $ (5.0) $ 100.0 $ (14.5) $10,418.3 $ 146.4 $ (540.0) $ 227.2 $ (557.9) $ 435.3
New contracts 6,950.7 (4,405.7) 3,019.2 (3,267.5) 8,866.5 6,929.9 (7,098.6) 4,968.2 (3,997.1) 1,203.1
Matured or expired
contracts (2,750.0) -- (1,432.2) 1,605.8 (3,384.5) (956.4) 932.5 (1,994.5) 772.9 (222.1)
Terminated contracts (475.0) 475.0 -- -- (920.5) (944.2) 944.2 (100.1) 103.6 --
In-substance
maturities(1) (3,895.7) 3,895.7 (1,617.4) 1,606.2 -- (5,034.8) 5,036.3 (2,561.0) 2,819.2 --
- ------------------------------------------------------------------------------------------------------------------------------------
NOTIONAL
AMOUNT, 1993 -- $ (40.0) $ 69.6 $ (70.0) $14,979.8 $ 140.9 $ (725.6) $ 539.8 $ (859.3) $ 1,416.3
====================================================================================================================================
Fair value, 1993(2) -- $ .1 -- -- $ 299.8 -- $ .1 $ (.2) $ (.9) $ 49.3
- ------------------------------------------------------------------------------------------------------------------------------------
1994
Notional
amount, 1993 -- $ (40.0) $ 69.6 $ (70.0) $14,979.8 $ 140.9 $ (725.6) $ 539.8 $ (859.3) $ 1,416.3
New contracts $ 11,380.5 (12,132.8) 8,867.9 (5,707.5) 10,013.5 3,702.1 (3,738.6) 5,468.8 (3,818.0) 1,917.0
Matured or expired
contracts -- -- (3,150.0) -- (4,704.6) (31.3) 15.7 (2,524.8) 2,475.6 (1,590.1)
Terminated contracts (63.5) 759.8 -- -- (2,455.7) (582.8) 580.2 (538.1) 51.3 (130.5)
In-substance
maturities(1) (11,317.0) 11,317.0 (5,787.5) 5,777.5 -- (3,156.2) 3,097.5 (2,009.6) 2,009.6 --
- ------------------------------------------------------------------------------------------------------------------------------------
NOTIONAL
AMOUNT, 1994 -- $ (96.0) -- -- $17,833.0 $ 72.7 $ (770.8) $ 936.1 $ (140.8) $ 1,612.7
====================================================================================================================================
Fair value, 1994(2) -- $ .8 -- -- $ (498.7) $ (.4) $ 6.3 $ 1.1 $ (.2) $ 78.5
- ------------------------------------------------------------------------------------------------------------------------------------
1995
Notional
amount, 1994 -- $ (96.0) -- -- $17,833.0 $ 72.7 $ (770.8) $ 936.1 $ (140.8) $ 1,612.7
New contracts $ 2,003.0 (2,100.0) $ 300.0 $ (300.0) 1,424.5 3,887.3 (4,036.7) 1,860.2 (173.7) 333.0
Matured or expired
contracts -- 293.0 -- -- (6,156.5) (36.7) 40.9 (1,840.4) 167.9 (530.4)
Terminated contracts -- -- -- -- (4,983.7) (545.0) 553.1 (255.9) 53.5 --
In-substance
maturities(1) (1,653.0) 1,653.0 (300.0) 300.0 -- (3,345.3) 3,477.1 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
NOTIONAL
AMOUNT, 1995 $ 350.0 $ (250.0) -- -- $ 8,117.3 $ 33.0 $ (736.4) $ 700.0 $ (93.1) $ 1,415.3
====================================================================================================================================
Fair value, 1995(2) $ .1 -- -- -- $ 148.3 $ .2 $ 1.2 $ (1.0) -- $ 65.7
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represent contracts terminated as the market execution technique of closing
the transaction either (a) just prior to maturity to avoid delivery of the
underlying instrument, or (b) at the maturity of the underlying item being
hedged.
(2) (Bracketed) unbracketed amounts represent amounts to be (paid) received by
the company had these positions been closed out at the respective balance
sheet date. Bracketed amounts do not necessarily represent risk of loss for
hedging instruments, as the fair value of the hedging instrument and the
items being hedged must be evaluated together. See Note 11, "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.
47
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Exchange Traded Non Exchange Traded
--------------------------------------------- --------------------------------------------
Interest Interest
Rate Rate
Futures Forward
Contracts Options Contracts Other Risk
------------------------ ------------------- Interest ------------------- Management
In millions. Purchased Sold Purchased Written Rate Swaps Purchased Sold Instruments
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TRADING
INSTRUMENTS(1)
Notional
amount, 1992 $ 2,449.2 $(2,847.0) $ 2,688.1 $(10,605.6) $ 100.0 $ 261.0 $(261.0) $ 800.0
Net change (2,117.2) 1,970.0 7,020.9 (5,840.5) -- (250.5) 203.2 (300.0)
- --------------------------------------------------------------------------------------------------------------
NOTIONAL
AMOUNT, 1993 $ 332.0 $ (877.0) $ 9,709.0 $(16,446.1) $ 100.0 $ 10.5 $ (57.8) $ 500.0
==============================================================================================================
Fair value, 1993(2) $ 45.1 $ (45.8) $ 2.8 $ (2.0) $ .6 -- -- --
- --------------------------------------------------------------------------------------------------------------
Notional
amount, 1993 $ 332.0 $ (877.0) $ 9,709.0 $(16,446.1) $ 100.0 $ 10.5 $ (57.8) $ 500.0
Net change 2,660.0 257.0 (9,709.0) 15,976.1 (100.0) 36.5 10.8 (700.0)
- --------------------------------------------------------------------------------------------------------------
NOTIONAL
AMOUNT, 1994 $ 2,992.0 $ (620.0) -- $ (470.0) -- $ 47.0 $ (47.0) $(200.0)
==============================================================================================================
Fair value, 1994(2) $ (2.2) $ 1.1 -- $ 1.4 -- $ .3 $ (.3) $ (.3)
- --------------------------------------------------------------------------------------------------------------
Average fair
value, 1994 (2.8) 2.7 $ 2.8 (2.5) $ (1.0) -- (.1) (.1)
- --------------------------------------------------------------------------------------------------------------
Notional
amount, 1994 $ 2,992.0 $ (620.0) -- $ (470.0) -- $ 47.0 $ (47.0) $(200.0)
Net change (2,992.0) 620.0 -- 470.0 -- (47.0) 47.0 200.0
- --------------------------------------------------------------------------------------------------------------
NOTIONAL
AMOUNT, 1995 -- -- -- -- -- -- -- --
==============================================================================================================
Fair value, 1995(2) -- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Average fair
value, 1995 -- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The results of trading activities were immaterial to the financial results
of the company for 1995, 1994 and 1993. In late 1994, the company
discontinued its trading activities.
(2) (Bracketed) unbracketed amounts represent amounts to be (paid) received by
the company had these positions been closed out at the respective balance
sheet date. Bracketed amounts do not necessarily represent risk of loss for
hedging instruments, as the fair value of the hedging instrument and the
items being hedged must be evaluated together. See Note 11, "Fair Value of
Financial Instruments" for further discussion of the relationship between
the fair value of the company's assets, liabilities and off-balance sheet
financial instruments.
Interest rate swaps are contractual agreements between two counterparties for
the exchange of periodic interest payments generally based on a notional
principal amount and agreed-upon fixed or floating rates. The company
primarily enters into interest rate swap transactions to synthetically alter
balance sheet items. These transactions are specifically designated to a
particular asset/liability, off-balance sheet item or anticipated transaction
of a similar characteristic. Specific assets or liabilities may consist of
groups of individually small dollar homogeneous assets or liabilities of
similar economic characteristics. Credit and market risk exists with respect
to these instruments. The following table reflects the items so altered at
December 31, 1995:
<TABLE>
<CAPTION>
In millions.
- --------------------------------------------------------------
<S> <C>
Investment securities $ 504.6
Receivables:
Home equity 300.0
Visa/MasterCard 800.0
Merchant participation 250.0
Other unsecured 125.0
- --------------------------------------------------------------
Total owned receivables 1,475.0
Deposits 695.0
Commercial paper, bank and
other borrowings 1,574.3
Senior and senior subordinated debt 3,556.5
Receivables serviced with limited recourse 311.9
- --------------------------------------------------------------
Total items synthetically altered
with interest rate swaps $8,117.3
==============================================================
</TABLE>
Note: In all instances, the notional amount is not greater than the carrying
value of the related asset/liability or off-balance sheet item.
48
<PAGE> 35
The company manages its exposure to interest rate risk primarily through the
use of interest rate swaps. These swaps synthetically alter the interest rate
risk inherent in balance sheet assets, liabilities or off-balance sheet items.
The majority of the company's interest rate swaps are used to convert floating
rate assets to fixed rate, fixed rate debt to floating rate, or floating rate
assets or debt from one floating rate index to another. Occasionally, interest
rate swaps are used to convert fixed rate assets to a floating rate, or
floating rate debt to fixed rate. Interest rate swaps are also used
to synthetically alter interest rate characteristics on certain receivables
that are sold and serviced with limited recourse.
These off-balance sheet items expose the company to the same interest rate risk
as on-balance sheet items. Interest rate swaps are used to synthetically alter
the interest rate provisions of the securitization transaction whereby the
underlying receivables pay a fixed (floating) rate and the pass-through rate to
the investor is floating (fixed). Further, in other transactions the underlying
receivables reprice on one index while the pass-through rate reprices on
another index. See Note 3, "Receivables" for additional information on
securitizations and sales of receivables.
The following table summarizes the maturities and related weighted average
receive/pay rates of interest rate swaps outstanding at December 31, 1995:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions. 1996 1997 1998 1999 2000 2001 Thereafter Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay a fixed rate/receive a floating rate:
Notional value $ 851.7 $ 31.1 $ 55.0 $ 48.3 $113.2 -- -- $1,099.3
Weighted average receive rate 6.18% 6.81% 5.68% 6.21% 6.44% -- -- 6.20%
Weighted average pay rate 7.24 7.15 9.92 7.38 9.20 -- -- 7.58
Pay a floating rate/receive a fixed rate:
Notional value $ 755.2 $ 987.6 $446.2 $1,238.4 $320.9 $245.0 $1,220.0 $5,213.3
Weighted average receive rate 5.83% 6.15% 5.63% 7.03% 6.41% 6.81% 6.86% 6.48%
Weighted average pay rate 5.63 5.79 5.81 5.95 5.83 5.83 5.87 5.83
Pay a floating rate/receive a
different floating rate:
Notional value $ 806.0 $ 348.7 $ 15.0 $ 635.0 -- -- -- $1,804.7
Weighted average receive rate 5.65% 5.63% 5.72% 6.49% -- -- -- 5.94%
Weighted average pay rate 6.14 5.93 6.06 6.19 -- -- -- 6.12
- -----------------------------------------------------------------------------------------------------------------------------------
Total notional value $2,412.9 $1,367.4 $516.2 $1,921.7 $434.1 $245.0 $1,220.0 $8,117.3
===================================================================================================================================
Total weighted average rates on swaps:
Receive rate 5.89% 6.03% 5.64% 6.83% 6.42% 6.81% 6.86% 6.32%
- -----------------------------------------------------------------------------------------------------------------------------------
Pay rate 6.37 5.86 6.25 6.07 6.71 5.83 5.87 6.13
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The floating rates paid or received by the company are based on spot rates from
independent market sources for the index contained in each interest rate swap
contract, which generally are based on either 1-, 3- or 6-month LIBOR. These
current floating rates are different than the floating rates in effect when the
contracts were initiated. Changes in spot rates impact the variable rate
information disclosed above. However, these changes in spot rates also impact
the interest rate on the underlying assets or liabilities. Hedging/synthetic
alteration instruments are used by the company to manage the volatility of net
interest margin resulting from changes in interest rates on the underlying
hedged/synthetically altered items. These instruments did not impact net
interest margin in 1995. Net interest margin would have declined by 54 and 91
basis points in 1994 and 1993, respectively, had these instruments not been
utilized.
Forwards and futures are agreements between two parties, committing one to
sell and the other to buy a specific quantity of an instrument on some future
date. The parties agree to buy or sell at a specified price in the future, and
their profit or loss is determined by the difference between the arranged price
and the level of the spot price when the contract is settled. 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 futures contracts are used to hedge resets of
interest rates on the company's floating rate assets and liabilities. The
company's exposure to credit risk for futures is limited, as these contracts
are traded on organized exchanges. Each day, changes in contract values are
settled in cash. In contrast, forward contracts have credit risk relating to
the performance of the counterparty. These instruments also are subject to
market risk. Cash requirements for forward contracts include the receipt or
payment of cash upon the sale or purchase of the instrument.
49
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Purchased options grant the purchaser the right, but not the obligation, to
either purchase or sell a financial instrument at a specified price within a
specified period. The seller of the option has written a contract which creates
an obligation to either sell or purchase the financial instrument at the
agreed-upon price if, and when, the purchaser exercises the option.
Other risk management instruments consist of caps and floors 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 are limited to the premium paid which is recorded on the balance
sheets in other assets.
Deferred gains of $71.7 and $10.4 million and deferred losses of $43.3 and
$60.5 million from hedging/synthetic alteration instruments were recorded on
the balance sheets at December 31, 1995 and 1994, respectively. The weighted
average amortization period associated with the deferred gains was 7.3 and 2.8
years at December 31, 1995 and 1994, respectively. The weighted average
amortization period for the deferred losses was 1.9 and 3.3 years at December
31, 1995 and 1994, respectively.
At December 31, 1995 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 $50.6 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, and as
a result, the amounts below do not necessarily represent future cash
requirements.
The company's significant commitments and guarantees consisted of the
following:
<TABLE>
<CAPTION>
In millions.
At December 31 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Visa/MasterCard and private-label
credit cards $84,506.7 $74,339.3
Other consumer lines of credit 1,206.5 3,523.0
Other loan commitments
and guarantees 195.4 391.9
- --------------------------------------------------------------------------
</TABLE>
Commitments to extend credit to consumers represent the unused credit limits on
Visa/MasterCard and private-label credit cards and on other lines of credit.
Commitments on Visa/MasterCard 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 fund commercial loans and
letters of credit and guarantees for the payment of principal and interest on
municipal industrial development bonds. Other loan commitments at December 31,
1994 also included commitments to originate and purchase mortgage loans.
Commitments to originate or purchase approved consumer mortgages and
commitments to purchase mortgage-backed securities totaled $161.2 million at
December 31, 1994. The company also had commitments to sell loans and
mortgage-backed securities of $61.4 million at December 31, 1994. The company
had no commitments to originate, purchase or sell consumer mortgages or
mortgage-backed securities at December 31, 1995.
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, 1995 and 1994. The company lends
nationwide; the following geographic areas comprised more than 10 percent of
total managed domestic receivables at December 31, 1995: California -21
percent; Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI) -24 percent;
Middle Atlantic (DE, DC, MD, NJ, PA, VA, WV) -15 percent; Northeast (CT, ME,
MA, NH, NY, RI, VT) -11 percent; and Southeast (AL, FL, GA, KY, MS, NC, SC, TN)
- -14 percent.
50
<PAGE> 37
8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST
In June 1995 Household Capital Trust I ("the trust"), a wholly-owned
subsidiary of the company, issued 3 million 8.25 percent Trust Originated
Preferred Securities ("preferred securities") at $25 per preferred security.
The sole asset of the trust is Junior Subordinated Deferrable Interest Notes
("junior subordinated notes") issued by the company. The obligations of the
company with respect to the junior subordinated notes, when considered
together with certain undertakings of the company with respect to the trust,
constitute a full and unconditional guarantee by the company of the trust's
obligations under the preferred securities. The junior subordinated notes
mature on June 30, 2025 and are redeemable by the company in whole or in
part beginning on June 30, 2000, at which time the preferred securities are
callable. The trust may elect to extend the maturity of the preferred
securities to June 30, 2044. The preferred securities are classified in the
company's balance sheet as company obligated mandatorily redeemable
preferred securities of subsidiary trust (representing the minority interest
in the trust) at their face and redemption amount of $75 million. The
preferred securities have a liquidation value of $25 per preferred security.
Dividends on the preferred securities are cumulative, payable quarterly in
arrears, and are deferable at the company's option for up to five years. The
company cannot pay dividends on its preferred and common stocks during such
deferments. Dividends on the preferred securities have been classified as
interest expense in the statement of income. Net proceeds from the issuance
were used for general corporate purposes.
9. CONVERTIBLE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
During 1995 the company redeemed all shares of the $6.25 cumulative
convertible preferred stock subject to mandatory redemption provisions (the
"$6.25 stock"). At December 31, 1994 the company had 52,010 shares of the
$6.25 stock outstanding. The company redeemed 4,165 and 2,312 shares for $50
per share in 1995 and 1994, respectively. The remaining shares called, but
not redeemed for cash, were converted into common stock.
10. PREFERRED STOCK
<TABLE>
<CAPTION>
ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS.
AT DECEMBER 31 1995 1994
----------------------------------------------------------
<S> <C> <C>
FIXED RATE PREFERRED STOCK
9.50% Preferred Stock, Series 1989-A,
3,000,000 depositary shares1 -- $75.0
9.50% Preferred Stock, Series 1991-A,
5,500,000 depositary shares2 $55.0 55.0
8.25% Preferred Stock, Series 1992-A,
2,000,000 depositary shares3 50.0 50.0
7.35% Preferred Stock, Series 1993-A,
4,000,000 depositary shares3 100.0 100.0
FLEXIBLE RATE AUCTION PREFERRED STOCK
9.50% Series B, 400,000 shares -- 40.0
----------------------------------------------------------
Total preferred stock $205.0 $320.0
==========================================================
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.
</TABLE>
51
<PAGE> 38
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
On July 27, 1995 the company redeemed all outstanding shares of the 9.50
percent preferred stock, Series 1989-A, at $104.75 per depositary share 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. This stock has a liquidation value of $100 per share.
Dividends on the 8.25 percent preferred stock, Series 1992-A, are
cumulative and payable quarterly. The company may, at its option, redeem in
whole or in part the 8.25 percent preferred stock, Series 1992-A, on any date
after October 15, 2002 for $25 per depositary share plus accrued and unpaid
dividends. This stock has a liquidation value of $1,000 per share.
Dividends on the 7.35 percent preferred stock, Series 1993-A, are
cumulative and payable quarterly. The company may, at its option, redeem in
whole or in part the 7.35 percent preferred stock, Series 1993-A, on any date
after October 15, 1998 for $25 per depositary share plus accrued and unpaid
dividends. This stock has a liquidation value of $1,000 per share.
On July 13, 1995 the company redeemed all outstanding shares of the 9.50
percent Flexible Rate Auction Preferred Stock, Series B, for $100 per share
plus accrued and unpaid dividends.
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.
11. 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").
Financial instruments include cash, receivables, investments, debt, insurance
reserves related to periodic payment annuities and off-balance sheet financial
instruments. Financial instruments specifically exclude leases and other
insurance reserves, as required by FAS No. 107. FAS No. 107 also requires that
the fair value of certain deposits be equated to the carrying value.
Additionally, a number of other assets recorded on the balance sheets (such as
core deposit intangibles and acquired credit card relationships) and other
intangible assets not recorded on the balance sheets (such as the value of
consumer lending relationships for originated receivables and the franchise
values of the company's business units) are not considered financial
instruments and, accordingly, are not valued for purposes of this disclosure.
The company believes there is substantial value associated with these assets
based on current market conditions and historical experience. Accordingly, the
estimated fair value of financial instruments, as disclosed, does not fully
represent the entire value, nor the changes in the entire value, of the
company.
Approximately 23 percent in 1995 and 25 percent in 1994 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
collectibility of assets and related interest and with estimates of product
lives and repricing characteristics used in the company's asset/liability
management process. All assumptions are based on historical experience adjusted
for future expectations. Assumptions used to determine fair values for
financial instruments for which no active market exists are inherently
judgmental, and changes in these assumptions could significantly affect fair
value calculations.
52
<PAGE> 39
The following is a summary of the carrying value and estimated fair value
of the company's financial instruments:
<TABLE>
<CAPTION>
1995 1994
-------------------------------- -------------------------------------
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 $ 270 $ 270 -- $ 541 $ 541 --
Investment securities 4,640 4,640 -- 9,005 8,961 $(44)
Receivables 21,844 22,603 $ 759 20,778 21,267 489
Assets pending sale -- -- -- 398 398 --
- ---------------------------------------------------------------------------------------------------------------
Subtotal 26,754 27,513 759 30,722 31,167 445
- ---------------------------------------------------------------------------------------------------------------
Deposits (4,709) (4,747) (38) (8,439) (8,444) (5)
Commercial paper, bank and other borrowings (6,659) (6,659) -- (4,372) (4,372) --
Senior and senior subordinated debt (11,228) (11,847) (619) (10,274) (10,234) 40
Insurance reserves (2,229) (2,363) (134) (6,716) (6,755) (39)
- ---------------------------------------------------------------------------------------------------------------
Subtotal (24,825) (25,616) (791) (29,801) (29,805) (4)
- ---------------------------------------------------------------------------------------------------------------
Interest rate and foreign exchange contracts 28 215 187 65 (413) (478)
Commitments to extend credit and guarantees -- 40 40 -- 35 35
- ---------------------------------------------------------------------------------------------------------------
Subtotal 28 255 227 65 (378) (443)
- ---------------------------------------------------------------------------------------------------------------
Total $ 1,957 $ 2,152 $ 195 $ 986 $ 984 $ (2)
===============================================================================================================
</TABLE>
The fair value in excess of the carrying value (the "Difference") increased from
$(2) million at December 31, 1994 to $195 million at December 31, 1995, an
increase of $197 million. The relationship between the decline in the overall
interest rate environment from year-end 1994 to year-end 1995 and the repricing
characteristics of the company's financial instruments was the most significant
factor in causing the increase in the Difference. The change in the Difference
between 1994 and 1995 was impacted by the reclassification of the portion of the
investment securities portfolio classified as held-to-maturity in 1994 to
available-for-sale in 1995. There is no longer a Difference associated with
investment securities since they are now carried at fair value.
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
value for investment securities.
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 receivables results in a disclosed fair value that is less
than amounts the company believes could be currently realizable on a sale of
these receivables. These receivables are relatively insensitive to changes in
overall market interest rates and therefore have additional value compared to
alternative uses of funds. The fair value of commercial receivables was
determined by discounting estimated future cash flows at estimated market
interest rates.
The fair value of consumer receivables included an estimate, on a present
value basis, of future excess servicing cash flows associated with
securitizations and sales of certain home equity, Visa/MasterCard, merchant
participation and other unsecured receivables.
Assets pending sale: In the fourth quarter of 1994 the company entered into
an agreement to sell these assets at net book value to a third party.
Accordingly, estimated fair value was the carrying value at December 31, 1994.
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.
53
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
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 was estimated by discounting future expected cash flows
at estimated market interest rates at December 31, 1995 and 1994. The fair
value of other insurance reserves is not required to be determined in
accordance with FAS No. 107.
Interest rate and foreign exchange contracts: Where practical, quoted
market prices were used to determine fair value of these instruments. For
non exchange traded contracts, fair value was determined through the use of
accepted and established valuation methods (including input from
independent third parties) which consider the terms of the contracts and
market expectations on the valuation date for forward interest rates (for
interest rate contracts) or forward foreign currency exchange rates (for
foreign exchange contracts). See Note 7, "Derivative Financial Instruments
and Other Financial Instruments with Off-Balance Sheet Risk" for a
discussion of the nature of these items.
Commitments to extend credit and guarantees: These commitments were
valued by considering the company's relationship with the counterparty, the
creditworthiness of the counterparty and the difference between committed
and current interest rates.
12. LEASES
The company leases certain offices, buildings and equipment for periods
of up to 28 years with various renewal options. The majority of such leases
are noncancelable operating leases. Net rental expense under operating
leases was $55.4, $58.1 and $71.1 million for 1995, 1994 and 1993,
respectively.
Future net minimum lease commitments under noncancelable operating lease
arrangements were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1995
--------------------------------------
<S> <C>
1996 $ 50.2
1997 43.1
1998 36.5
1999 27.6
2000 19.4
Thereafter 127.0
--------------------------------------
Net minimum lease commitments $ 303.8
======================================
</TABLE>
13. 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, 1995 there
were 1,600,740 shares exercisable under the plans and 765,750 shares
available for future grants.
Common stock data for the plans is summarized as follows:
<TABLE>
<CAPTION>
Shares Number* Price Per Share*
-----------------------------------------------------------------------------------
<S> <C> <C>
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
Granted 1,155,792 33.19--$38.06
Exercised (215,562) 10.99--$31.88
Expired or canceled (113,074) 11.14--$33.38
----------------------------------------------------------------------------------
Outstanding at December 31, 1994 3,697,758 15.06--$38.06
Granted 1,543,721 40.88--$59.63
Exercised (829,893) 15.06--$33.38
Expired or canceled (283,221) 19.94--$40.88
----------------------------------------------------------------------------------
Outstanding at December 31, 1995 4,128,365 $17.69--$59.63
==================================================================================
*1992 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.
</TABLE>
54
<PAGE> 41
14. 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, 1995
plan assets included an investment in the company's common stock of $75.0
million.
Pension income for defined benefit plans, primarily due to the overfunded
status of the domestic plan, included the following components:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1995 1994 1993
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the period $(16.8) $(19.0) $(15.9)
Interest cost on projected benefit obligation (32.5) (30.5) (29.6)
Actual return on assets 116.4 3.9 93.4
Net amortization and deferral (40.7) 66.6 (24.5)
-----------------------------------------------------------------------------------------
Pension income $ 26.4 $ 21.0 $ 23.4
=========================================================================================
</TABLE>
The funded status of defined benefit pension plans was as follows:
<TABLE>
<CAPTION>
In millions.
At December 31 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of:
Vested benefits obligation $355.0 $320.7
Nonvested benefits obligation 46.1 40.0
----------------------------------------------------------------------------------------
Accumulated benefit obligation 401.1 360.7
Effects of anticipated future compensation levels 25.5 30.4
----------------------------------------------------------------------------------------
Projected benefit obligation 426.6 391.1
Plan assets at fair value 672.7 602.8
----------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation $246.1 $211.7
========================================================================================
</TABLE>
The projected benefit obligation of the foreign benefit plans totaled $44.8 and
$40.2 million at December 31, 1995 and 1994, respectively. Plan assets in excess
of the projected benefit obligation for these plans totaled $7.0 and $12.4
million at December 31, 1995 and 1994, respectively. The 1995 and 1994 projected
benefit obligations for the domestic defined benefit plan were determined using
an assumed weighted average discount rate of 7.25 and 8.25 percent,
respectively; an assumed compensation increase of 3.75 and 4.75 percent,
respectively; and an assumed weighted average long-term rate of return on plan
assets of 10.0 percent.
At December 31 the excess of plan assets over the projected benefit
obligation included the following components:
<TABLE>
<CAPTION>
In millions. 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Unamortized prior service cost $ (3.2) $ (4.0)
Net unrecognized loss from past experience different from assumed
and effects of changes in assumptions (63.6) (89.9)
Unamortized assets 40.4 55.1
Prepaid pension cost 272.5 250.5
- ---------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation $246.1 $211.7
===================================================================================================
</TABLE>
55
<PAGE> 42
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
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 1995, 1994 and 1993 these
costs totaled $17.2, $16.5 and $15.8 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 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 postretirement benefit obligation at that date
over 20 years.
At December 31 the net postretirement benefit cost included the
following:
<TABLE>
<CAPTION>
In millions. 1995 1994 1993
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the period $ (3.1) $ (2.8) $ (2.5)
Interest cost on accumulated postretirement benefit obligation (10.5) (11.4) (11.1)
Net amortization and deferral (5.5) (6.5) (6.5)
-----------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $(19.1) $(20.7) $(20.1)
=========================================================================================
</TABLE>
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 1995 1994
-----------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of postretirement benefit obligation for:
Retirees $ 67.3 $ 85.5
Fully eligible active participants 8.9 11.6
Other active participants 25.9 26.6
-----------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 102.1 123.7
Net unrecognized gain from past experience different from assumed
and effects of changes in assumptions 48.2 26.2
Unamortized liability (106.9) (117.1)
-----------------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ 43.4 $ 32.8
=========================================================================================
</TABLE>
In 1994 the company established a special purpose corporation to hold
certain investments designated as available to satisfy its postretirement
benefit obligations. These assets, with a carrying value of $64.3 and $63.0
million at December 31, 1995 and 1994, respectively, remain general assets
of the company and have not been used to reduce the accumulated
postretirement benefit obligation described above.
The December 31, 1995 and 1994 accumulated postretirement benefit
obligation was determined using an assumed weighted average discount rate of
7.25 and 8.50 percent, respectively, and an assumed annual compensation
increase of 3.75 and 4.75 percent, respectively. A 12.0 and 14.2 percent
annual rate of increase in the gross cost of covered health care benefits
was assumed for 1996 and 1995, respectively. This rate of increase is
assumed to decline by 1 percentage point in each year after 1996.
The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rate
by 1 percent would have increased the 1995 and 1994 net periodic
postretirement benefit cost by $.7 and $1.0 million, respectively, and the
accumulated postretirement benefit obligation at December 31, 1995 and 1994
by $7.3 and $8.5 million, respectively.
56
<PAGE> 43
15. INCOME TAXES
<TABLE>
<CAPTION>
Total income taxes were allocated as follows:
In millions.
Year ended December 31 1995 1994 1993
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes related to operations $300.5 $160.7 $152.0
Income taxes related to adjustments included
in common shareholders' equity:
Unrealized gain (loss) on investments, net 105.8 (79.6) 22.1
Foreign currency translation adjustments (3.8) (4.7) 1.1
Exercise of stock options (6.8) (.9) (2.4)
----------------------------------------------------------------------------------------------------
Total $395.7 $ 75.5 $172.8
====================================================================================================
Provisions for income taxes related to operations were:
<CAPTION>
In millions.
Year ended December 31 1995 1994 1993
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
United States $270.4 $155.8 $170.5
Foreign 32.6 6.1 (12.2)
----------------------------------------------------------------------------------------------------
Total current 303.0 161.9 158.3
----------------------------------------------------------------------------------------------------
Deferred
United States 7.9 8.3 6.7
Foreign (10.4) (9.5) (13.0)
----------------------------------------------------------------------------------------------------
Total deferred (2.5) (1.2) (6.3)
----------------------------------------------------------------------------------------------------
Total income taxes $300.5 $160.7 $152.0
====================================================================================================
The significant components of deferred income tax provisions attributable to income from operations were:
<CAPTION>
In millions.
Year ended December 31 1995 1994 1993
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred income tax provision (exclusive of the
effects of other components listed below) $ 2.6 $ 13.8 $ (2.0)
Adjustment of deferred tax assets and liabilities
for enacted changes in tax rates -- -- 4.9
Adjustment of valuation allowance (6.7) (20.3) 4.8
Change in operating loss carryforwards 1.6 5.3 (14.0)
----------------------------------------------------------------------------------------------------
Deferred income tax provision $(2.5) $ (1.2) $ (6.3)
====================================================================================================
Income (loss) before income taxes from foreign operations was $71.7, $21.7 and
$(19.7) million in 1995, 1994 and 1993, respectively.
Effective tax rates are analyzed as follows:
<CAPTION>
Year ended December 31 1995 1994 1993
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in rate resulting from:
Recapture of life insurance policyholders' surplus account balance 3.9 -- --
State and local taxes, net of federal benefit 2.0 1.1 2.2
Amortization and disposition of intangible assets 1.9 2.2 .1
Nondeductible dividends on term preferred stocks .3 .6 1.0
Leveraged lease tax benefits (1.9) (2.9) (3.1)
Foreign loss carryforwards (.3) (2.3) (2.4)
Sale of foreign subsidiary -- (1.7) --
Noncurrent tax requirement (.3) (1.4) .5
Dividends received deduction applicable to term preferred stocks (.6) (1.0) (1.4)
Other (.1) .8 1.8
-------------------------------------------------------------------------------------------------------
Effective tax rate 39.9% 30.4% 33.7%
=======================================================================================================
</TABLE>
57
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
In accordance with the company's accounting policy, provisions for U.S. income
taxes had not been made at December 31, 1995 on $204.3 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 $55.3 million. The amount of deferred tax liability on
the aforementioned credit loss reserves not recognized totaled $20.7 million at
December 31, 1995. 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 liability has been established for these
items. At December 31, 1995 the company had net operating loss carryforwards
for tax purposes of $62.5 million, of which $4.6 million expire in 1999; $26.6
million expire in 2000; $10.7 million expire in 2001; $13.0 million expire in
2002; and $7.6 million have no expiration date. The company also had foreign
tax credit carryforwards of $5.6 million, of which $5.3 million expire in 1998
and $.3 million expire in 1999.
Temporary differences which gave rise to a significant portion of deferred tax
assets and liabilities were as follows:
<TABLE>
<CAPTION>
In millions.
At December 31 1995 1994
---------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Leveraged lease transactions, net $405.6 $395.8
Receivables sold 182.7 108.3
Pension plan assets 100.4 92.8
Market value adjustments 61.1 --
Deferred loan origination costs 48.4 56.4
Insurance policy acquisition costs -- 126.9
Other 52.1 98.4
---------------------------------------------------------------------
Total deferred tax liabilities 850.3 878.6
---------------------------------------------------------------------
DEFERRED TAX ASSETS
Credit loss reserves 369.0 325.9
Unused tax benefit carryforwards 32.9 41.3
Insurance reserves -- 164.1
Market value adjustments -- 37.5
Other 144.7 116.3
---------------------------------------------------------------------
Total deferred tax assets 546.6 685.1
Valuation allowance (11.4) (18.1)
---------------------------------------------------------------------
Total deferred tax assets, net of valuation allowance 535.2 667.0
---------------------------------------------------------------------
Net deferred tax liability at end of year $315.1 $211.6
=====================================================================
</TABLE>
58
<PAGE> 45
16. EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
1995 1994 1993
---------------- --------------- -----------------
Fully Fully Fully
In millions, except per share data. Primary Diluted Primary Diluted Primary Diluted
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Net income $453.2 $453.2 $367.6 $367.6 $298.7 $298.7
Preferred dividends (26.5) (26.4) (28.5) (27.6) (31.1) (28.2)
- -------------------------------------------------------------------------------------------------
Net income available to common shareholders $426.7 $426.8 $339.1 $340.0 $267.6 $270.5
=================================================================================================
AVERAGE SHARES
Common 97.5 97.5 95.5 95.5 91.2 91.2
Common equivalents 1.5 1.8 .8 1.7 .8 3.6
- -------------------------------------------------------------------------------------------------
Total 99.0 99.3 96.3 97.2 92.0 94.8
=================================================================================================
Earnings per common share $ 4.31 $ 4.30 $ 3.52 $ 3.50 $ 2.91 $ 2.85
=================================================================================================
</TABLE>
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.
17. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business there are various legal proceedings pending
against the company. Management believes the aggregate liabilities, if any,
resulting from such actions would not have a material adverse effect on the
consolidated financial position of the company. However, as the ultimate
resolution of these proceedings is influenced by factors that are outside of
the company's control, it is reasonably possible the company's estimated
liability under these proceedings may change. See Note 7 for a discussion
regarding commitments and contingent liabilities related to off-balance sheet
financial instruments. See Note 12 for discussion of lease commitments.
18. SALE OF PRODUCT LINES
In October 1995 the company sold the individual life and annuity product lines
of the Individual Life Insurance segment for $525 million in cash and $50
million of preferred stock of the purchaser. Assets sold related to these
product lines totaled approximately $6.1 billion and consisted primarily of
investment securities. For the first nine months of 1995, these sold product
lines generated approximately $400 million of revenues and earned approximately
$35 million of net income. The company estimates that net interest margin would
have increased by approximately $18 million after tax had the company
reinvested the proceeds from the sale to repay debt assuming the sale had
occurred as of the beginning of the year.
19. GEOGRAPHIC DATA
The following is a summary of assets, revenues and operating profit of the
company by country:
<TABLE>
<CAPTION>
Identifiable Assets Revenues Operating Profit
------------------------------- ------------------------- --------------------
In millions. 1995 1994 1993 1995 1994 1993 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $25,797.7 $30,153.7 $28,800.5 $4,466.2 $3,968.9 $3,833.9 $684.7 $512.5 $472.1
United Kingdom 2,006.6 1,835.8 1,494.1 397.7 322.0 273.7 67.6 30.8 13.0
Canada 1,414.5 2,348.9 2,247.3 280.5 239.1 275.4 1.4 (16.9) (33.8)
Australia -- -- 419.6 -- 73.3 71.5 -- 1.9 (.6)
- -----------------------------------------------------------------------------------------------------
Total $29,218.8 $34,338.4 $32,961.5 $5,144.4 $4,603.3 $4,454.5 $753.7 $528.3 $450.7
=====================================================================================================
</TABLE>
59
<PAGE> 46
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 33 to 59, 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 an independent accounting firm,
Arthur Andersen LLP, which has 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 LLP's audit
report is presented on page 61.
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.
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, 1995 functioned
effectively during the year ended December 31, 1995.
<TABLE>
<S> <C> <C> <C>
Donald C. Clark William F. Aldinger David A. Schoenholz
Donald C. Clark William F. Aldinger David A. Schoenholz
Chairman of the Board President and Executive Vice President--
Chief Executive Officer Chief Financial Officer January 25, 1996
</TABLE>
60
<PAGE> 47
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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 24, 1996
61
<PAGE> 48
NET INTEREST MARGIN--1995 COMPARED TO 1994 (OWNED BASIS)
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Finance and Increase/(Decrease)
Household International, Inc. Interest Income/ Due to:
and Subsidiaries Average Outstanding(2) Average Rate Interest Expense ---------------------------------
All dollar amounts are --------------------- ------------- ------------------ Volume Rate
stated in millions. 1995 1994 1995 1994 1995 1994 Variance Variance(3) Variance(3)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables:
First mortgage $ 2,941.1 $ 3,249.0 8.1% 7.7% $ 237.1 $ 250.3 $(13.2) $(24.4) $ 11.2
Home equity 3,684.5 3,109.2 11.5 11.8 423.5 365.7 57.8 66.3 (8.5)
Visa/MasterCard 5,152.7 4,437.7 14.3 13.3 736.1 590.1 146.0 100.0 46.0
Merchant participation 2,995.7 2,803.7 14.0 15.2 419.6 425.8 (6.2) 28.1 (34.3)
Other unsecured 5,526.0 4,788.2 17.3 17.2 956.8 821.6 135.2 127.7 7.5
Commercial 1,721.7 2,623.4 6.1 7.2 105.7 188.8 (83.1) (58.2) (24.9)
=========================================================================================================================
Total receivables $22,021.7 $21,011.2 13.1% 12.6% $2,878.8 $2,642.3 $236.5 $129.8 $ 106.7
Noninsurance investments 2,193.0 2,424.4 5.6 5.4 123.4 131.9 (8.5) (12.9) 4.4
=========================================================================================================================
Total interest-earning assets
(excluding insurance investments) $24,214.7 $23,435.6 12.4% 11.8% $3,002.2 $2,774.2 $228.0 $ 94.0 $ 134.0
Insurance investments 6,140.8 6,793.5
Other assets 3,386.7 3,862.3
-------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $33,742.2 $34,091.4
=========================================================================================================================
Debt:
Commercial paper $ 4,551.1 $ 4,316.4 6.0% 4.4% $ 273.2 $ 191.2 $ 82.0 $ 10.9 $ 71.1
Bank and other borrowings 1,565.1 1,321.1 7.4 7.6 116.3 101.0 15.3 18.2 (2.9)
Deposits 7,044.2 7,668.1 5.1 4.1 362.7 312.1 50.6 (27.0) 77.6
Senior and senior subordinated
debt (with original maturities
over one year) 10,489.1 10,206.6 7.7 6.3 804.9 638.4 166.5 18.1 148.4
=========================================================================================================================
Total debt $23,649.5 $23,512.2 6.6% 5.3% $1,557.1 $1,242.7 $314.4 $ 7.3 $ 307.1
Insurance policy and
claim reserves 5,768.3 6,409.1
Other liabilities 1,557.8 1,724.4
-------------------------------------------------------------------------------------------------------------------------
Total liabilities 30,975.6 31,645.7
Preferred stock 309.0 330.7
Common shareholders' equity 2,457.6 2,115.0
-------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $33,742.2 $34,091.4
=========================================================================================================================
NET INTEREST MARGIN--
OWNED BASIS(1) $1,445.1 $1,531.5 $(86.4) $ 86.7 $(173.1)
=========================================================================================================================
INTEREST SPREAD--OWNED BASIS (4)(5) 6.0% 6.5%
=========================================================================================================================
</TABLE>
(1) See page 64 for the company's net interest margin on a managed basis
for 1995, 1994 and 1993.
(2) Nonaccrual loans are included in average outstanding balances.
(3) Rate/volume variance is allocated based on the percentage relationship
of changes in volume and changes in rate to the total interest
variance. For total receivables, total interest-earning assets and
total debt, the rate and volume variances are calculated based on the
relative weighting of the individual components comprising these
totals. These totals do not represent an arithmetic sum of the
individual components.
(4) As a percent of average interest-earning assets.
(5) The net interest margin analysis includes the following for foreign
businesses:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Average interest-earning assets $3,665.7 $4,044.8 $3,650.4
Average interest-bearing liabilities 3,444.4 3,905.7 3,600.7
Net interest margin 235.9 261.0 255.1
Interest spread 6.4% 6.5% 7.0%
----------------------------------------------------------------------------------
</TABLE>
62
<PAGE> 49
NET INTEREST MARGIN--1994 COMPARED TO 1993 (OWNED BASIS)
<TABLE>
<CAPTION>
Finance and Increase/(Decrease)
Household International, Inc. Interest Income/ Due to:
and Subsidiaries Average Outstanding(2) Average Rate Interest Expense ---------------------------------
All dollar amounts are --------------------- ------------- ------------------ Volume Rate
stated in millions. 1994 1993 1994 1993 1994 1993 Variance Variance(3) Variance(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables:
First mortgage $ 3,249.0 $ 4,037.7 7.7% 8.5% $ 250.3 $ 343.5 $ (93.2) $ (62.8) $ (30.4)
Home equity 3,109.2 3,177.0 11.8 10.6 365.7 336.6 29.1 (7.3) 36.4
Visa/MasterCard 4,437.7 4,200.1 13.3 13.1 590.1 549.0 41.1 31.5 9.6
Merchant participation 2,803.7 2,244.3 15.2 16.6 425.8 372.8 53.0 87.0 (34.0)
Other unsecured 4,788.2 4,022.4 17.2 17.8 821.6 716.5 105.1 132.1 (27.0)
Commercial 2,623.4 3,062.1 7.2 7.9 188.8 243.0 (54.2) (32.8) (21.4)
=================================================================================================================================
Total receivables $21,011.2 $20,743.6 12.6% 12.3% $2,642.3 $2,561.4 $ 80.9 $ 33.2 $ 47.7
Noninsurance investments 2,424.4 2,129.2 5.4 6.1 131.9 129.3 2.6 16.9 (14.3)
=================================================================================================================================
Total interest-earning assets
(excluding insurance investments) $23,435.6 $22,872.8 11.8% 11.8% $2,774.2 $2,690.7 $ 83.5 $ 66.5 $ 17.0
Insurance investments 6,793.5 6,084.0
Other assets 3,862.3 3,783.1
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $34,091.4 $32,739.9
=================================================================================================================================
Debt:
Commercial paper $ 4,316.4 $ 3,826.9 4.4% 3.7% $ 191.2 $ 142.5 $ 48.7 $ 19.6 $ 29.1
Bank and other borrowings 1,321.1 1,978.8 7.6 5.5 101.0 108.6 (7.6) (42.6) 35.0
Deposits 7,668.1 7,735.0 4.1 4.2 312.1 321.2 (9.1) (2.8) (6.3)
Senior and senior subordinated
debt (with original maturities
over one year) 10,206.6 9,493.5 6.3 6.1 638.4 577.2 61.2 41.8 19.4
==================================================================================================================================
Total debt $23,512.2 $23,034.2 5.3% 5.0% $1,242.7 $1,149.5 $ 93.2 $ 24.3 $ 68.9
Insurance policy and
claim reserves 6,409.1 5,684.8
Other liabilities 1,724.4 1,810.0
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 31,645.7 30,529.0
Preferred stock 330.7 330.7
Common shareholders' equity 2,115.0 1,880.2
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $34,091.4 $32,739.9
==================================================================================================================================
NET INTEREST MARGIN--
OWNED BASIS (1) $1,531.5 $1,541.2 $ (9.7) $ 42.2 $ (51.9)
==================================================================================================================================
INTEREST SPREAD--OWNED BASIS(4),(5) 6.5% 6.7%
==================================================================================================================================
</TABLE>
63
<PAGE> 50
NET INTEREST MARGIN--1995 COMPARED TO 1994 AND 1993 (MANAGED BASIS)
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 a summarized net interest margin analysis on a managed
basis.
<TABLE>
<CAPTION>
Finance and
Interest Income/
Household International, Inc. Average Outstanding(1) Average Rate Interest Expense
and Subsidiaries
All dollar amounts are ---------------------------------- ------------------------ ----------------------------
stated in millions. 1995 1994 1993 1995 1994 1993 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables:
First mortgage $ 2,941.1 $ 3,295.2 $ 4,037.7 8.1% 7.7% 8.5% $ 237.1 $ 253.9 $ 343.6
Home equity 8,483.5 7,779.4 8,060.4 12.1 11.2 10.4 1,024.4 868.2 835.0
Visa/MasterCard 11,481.4 9,608.6 6,996.8 14.4 13.3 13.7 1,649.2 1,281.8 961.2
Merchant participation 3,814.6 3,107.1 2,704.5 14.3 15.4 16.7 545.6 479.6 450.8
Other unsecured 6,060.2 4,798.2 4,140.5 17.2 17.2 17.6 1,039.4 825.0 729.8
Commercial 1,721.7 2,623.4 3,062.1 6.1 7.2 7.9 105.7 188.7 242.9
- --------------------------------------------------------------------------------------------------------------------------------
Total receivables $34,502.5 $31,211.9 $29,002.0 13.3% 12.5% 12.3% $4,601.4 $3,897.2 $3,563.3
Noninsurance investments 2,193.0 2,424.4 2,106.1 5.6 5.4 6.1 123.4 131.9 129.3
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets
(excluding insurance
investments) 36,695.5 33,636.3 31,108.1 12.9 12.0 11.9 4,724.8 4,029.1 3,692.6
- --------------------------------------------------------------------------------------------------------------------------------
Total debt 36,130.2 33,712.9 31,292.6 6.5 5.3 4.9 2,365.4 1,775.0 1,540.6
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin--
Managed Basis $2,359.4 $2,254.1 $2,152.0
================================================================================================================================
Interest Spread--Managed Basis(2) 6.4% 6.7% 6.9%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Nonaccrual loans are included in average outstanding balances.
(2)As a percent of average interest-earning assets.
64
<PAGE> 51
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries 1995--Three Months Ended 1994--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 $731.3 $752.3 $713.5 $681.7 $696.7 $677.6 $651.9 $616.1
Interest income from noninsurance
investment securities 18.5 19.8 48.8 36.3 41.2 29.8 29.2 31.7
Interest expense 375.5 404.1 400.1 377.4 364.1 327.0 294.2 257.4
- -----------------------------------------------------------------------------------------------------------------------
Net interest margin 374.3 368.0 362.2 340.6 373.8 380.4 386.9 390.4
Provision for credit losses on
owned receivables 191.6 188.2 217.2 164.3 104.6 173.3 154.8 174.1
- -----------------------------------------------------------------------------------------------------------------------
Net interest margin after provision for
credit losses 182.7 179.8 145.0 176.3 269.2 207.1 232.1 216.3
- -----------------------------------------------------------------------------------------------------------------------
Securitization income 240.2 201.1 219.5 212.8 189.6 163.3 139.7 162.9
Insurance premiums and contract revenues 59.9 87.8 86.7 87.7 85.9 36.1 79.4 80.6
Investment income 46.9 145.5 138.0 139.8 126.3 128.7 120.9 138.5
Fee income 57.3 48.3 44.0 46.8 56.6 65.1 66.0 62.8
Other income 90.5 58.0 90.5 40.9 3.5 42.1 45.1 36.0
- -----------------------------------------------------------------------------------------------------------------------
Total other revenues 494.8 540.7 578.7 528.0 461.9 435.3 451.1 480.8
=======================================================================================================================
Salaries and fringe benefits 124.7 134.1 141.0 145.8 159.6 165.3 167.4 164.3
Occupancy and equipment expense 52.0 53.5 57.0 59.6 63.2 61.6 60.0 58.6
Other marketing expenses 91.4 86.9 89.4 91.8 91.5 76.9 80.9 78.1
Other servicing and administrative expense 99.8 129.8 117.7 123.3 150.1 116.2 121.0 146.4
Policyholders' benefits 57.9 133.7 142.7 140.2 120.5 84.7 129.1 130.1
- -----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 425.8 538.0 547.8 560.7 584.9 504.7 558.4 577.5
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 251.7 182.5 175.9 143.6 146.2 137.7 124.8 119.6
Income taxes 119.4 63.9 69.6 47.6 35.2 43.2 40.3 42.0
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 132.3 $118.6 $106.3 $ 96.0 $111.0 $ 94.5 $ 84.5 $ 77.6
=======================================================================================================================
Earnings per common share:
Primary $ 1.29 $ 1.11 $ 1.00 $ .91 $ 1.07 $ .90 $ .81 $ .74
- -----------------------------------------------------------------------------------------------------------------------
Fully diluted 1.29 1.10 1.00 .91 1.07 .90 .80 .73
=======================================================================================================================
</TABLE>
Fourth Quarter Results Net income for the 1995 fourth quarter was
$132.3 million, up 12 percent from the third quarter and up 19 percent from the
prior year fourth quarter. In the quarter, the company sold the individual life
and annuity product lines of its life insurance business and its Canadian first
mortgage business for a small gain. This gain was essentially offset by the lost
income from these operations. Fourth quarter income benefited from good growth
in the company's credit card operations and continued strong performance in its
United Kingdom operations.
Net interest margin was flat compared to the prior quarter and prior
year quarter, as the effect of lower leverage was offset by lower levels of
owned interest-earning assets. The provision for credit losses on owned
receivables was unchanged in the quarter but increased 83 percent from 1994, as
the company continued to strengthen reserves in light of economic uncertainty,
coupled with the continued shift in product mix toward unsecured receivables.
Credit loss reserves as a percent of owned receivables increased to 3.31
percent at December 31, 1995 compared to 2.94 percent in the previous quarter
and 2.66 percent a year ago.
Securitization income rose 19 and 27 percent from the previous and year
ago quarters, respectively, due to higher amounts of receivables sold and
serviced with limited recourse and increased fee and other income on securitized
Visa/MasterCard receivables. Insurance premiums and contract revenues and
investment income were lower than the third quarter and 1994 fourth quarter
primarily because of the sale of the life insurance business early in the
fourth quarter. Fee income was flat compared to the fourth quarter of 1994 but
was up from the third quarter due to higher fee income on owned Visa/MasterCard
receivables. Other income in the second and third quarters of 1995 included the
gains on the sale of the consumer banking operations outside of Illinois, and
the fourth quarter amount reflected the gain on the sale of the insurance
business and Canadian mortgage portfolio. Other income in the fourth quarter of
1994 was negatively impacted by the loss on sale of the company's Australian
subsidiary. Excluding these one-time items, other income in the fourth
quarter of 1995 was essentially flat with the third quarter but down from the
1994 fourth quarter due to lower servicing fee income on off-balance sheet first
mortgage and other unsecured portfolios that have lower balances or are no
longer being serviced.
All expense categories, with the exception of other marketing expenses,
were down compared to prior periods primarily due to the previously mentioned
sales of businesses that occurred in late 1994 and throughout 1995. The
company's normalized efficiency ratio was 49.8 percent in the fourth quarter
compared to 53.2 percent in the third quarter and 58.6 percent last year. The
effective tax rate for the fourth quarter was 47.4 percent, up from 35.0 percent
in the third quarter due to additional taxes incurred on the sale of the
insurance business. The 1994 fourth quarter effective tax rate of 24.1 percent
reflected the tax benefits associated with the sale of the Australian
subsidiary.
65
<PAGE> 52
COMMON AND PREFERRED STOCK INFORMATION
COMMON STOCK
Household International 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.
PREFERRED STOCK
In 1995, Household fully redeemed its $6.25 Preferred on
June 28, its Flexible Rate Auction Preferred, Series B,
on July 13 and the 9 1/2% Preferred, Series 1989-A,
on July 27.
<TABLE>
<CAPTION>
Dividends Declared
Ticker ------------------
Stock Symbol 1995 1994 Features Redemption Features
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common HI $1.31 $1.23 Quarterly dividend N/A
rate increased to
$.34 effective 10/15/95
---------------------------------------------------------------------------------------------------------------------
9 1/2% Preferred, HI+PRX $ .95 $ .95 Nonconvertible Cannot be redeemed prior
Series 1991-A to 8/13/96. Redeemable
at company's option after
Depositary Shares representing 8/13/96 in whole or in
1/10 share of 9 1/2% Preferred Stock, part at $10.00
Series 1991-A
---------------------------------------------------------------------------------------------------------------------
8 1/4% Preferred, HI+PRZ $2.0625 $2.0625 Nonconvertible Cannot be redeemed prior
Series 1992-A to 10/15/02. Redeemable
at company's option after
10/15/02 in whole or in
Depositary Shares representing part at $25.00
1/40 share of 8 1/4% Preferred Stock,
Series 1992-A
---------------------------------------------------------------------------------------------------------------------
7.35% Preferred, HI+PRJ $1.8375 $1.8375 Nonconvertible Cannot be redeemed prior
Series 1993-A to 10/15/98. Redeemable
at company's option after
10/15/98 in whole or in
Depositary Shares representing part at $25.00
1/40 share of 7.35% Preferred Stock,
Series 1993-A
---------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shareholders
Shares Outstanding of Record 1995 MARKET PRICE 1994 Market Price
---------------------- --------------- ----------------- -----------------
Stock 1995 1994 1995 1994 HIGH LOW High Low
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common 97,161,529 96,602,598 13,515 14,379 68 3/8 35 7/8 39 3/4 28 1/2
9 1/2% Preferred, Series 1991-A
(Per Depositary Share) 5,500,000 5,500,000 786 895 10 3/4 10 1/8 11 3/8 10
8 1/4% Preferred, Series 1992-A
(Per Depositary Share) 2,000,000 2,000,000 453 518 27 7/8 23 1/4 27 1/4 22 1/4
7.35% Preferred, Series 1993-A
(Per Depositary Share) 4,000,000 4,000,000 317 343 25 7/8 20 3/8 25 1/2 20 1/4
---------------------------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE> 53
<TABLE>
<CAPTION>
Year ended December 31, unless
otherwise indicated 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Market Value Per Share of Common Stock(1)
(High-Low Prices On NYSE)
First quarter 45 - 35 7/8 35 5/8 - 29 35 3/4 - 26 15/16 28 3/8 - 22 1/2 25 1/4 - 13 3/4
Second quarter 51 1/2 - 43 1/8 36 1/8 - 28 1/2 36 3/8 - 31 5/8 25 3/16 - 20 3/4 26 3/8 - 21
Third quarter 62 - 48 7/8 39 3/4 - 32 7/8 39 15/16 - 34 5/8 27 1/8 - 25 31 1/2 - 22 1/2
Fourth quarter 68 3/8 - 54 1/4 39 1/8 - 32 3/4 40 3/8 - 30 5/8 30 1/4 - 23 5/8 29 3/4 - 20 5/16
Yearly range 68 3/8 - 35 7/8 39 3/4 - 28 1/2 40 3/8 - 26 15/16 30 1/4 - 20 3/4 31 1/2 - 13 3/4
- ----------------------------------------------------------------------------------------------------------------------------------
Composite common shares
traded 77,242,300 64,880,200 56,945,400 52,441,000 72,516,800
Average daily volume 306,517 257,461 225,081 206,460 287,766
- ----------------------------------------------------------------------------------------------------------------------------------
Price Earnings Ratio(2)
Yearly range-fully diluted(3) 17.4 - 11.1 13.0 - 9.9 18.7 - 12.0(3) (3) 10.7 - 5.0
Yearly average-fully diluted(3) 13.6 11.5 16.0(3) (3) 8.3
- ----------------------------------------------------------------------------------------------------------------------------------
Dividend Yield
Yearly range 3.4% - 1.9 % 4.1% - 3.0% 4.3% - 2.9% 5.4% - 3.9% 7.9% - 3.6%
Yearly average 2.6 % 3.5% 3.4% 4.4% 4.8%
- ----------------------------------------------------------------------------------------------------------------------------------
Dividend Payout Ratio
Common dividends to net income
available to common shareholders 30 % 35% 41% 59% 71%
Total dividends to net income 34 % 40% 47% 65% 77%
- ----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding at December 31
Common(1) 97,161,529 96,602,598 94,448,132 82,876,266 79,553,456
$6.25 Preferred - 52,010 385,439 720,000 1,087,695
9 1/2% Preferred, Series 1989-A(4) - 3,000,000 3,000,000 3,000,000 3,000,000
11 1/4% Enhanced Rate Preferred(4) - - - 4,500,000 4,500,000
9 1/2% Preferred, Series 1991-A(4) 5,500,000 5,500,000 5,500,000 5,500,000 5,500,000
8 1/4% Preferred, Series 1992-A(4) 2,000,000 2,000,000 2,000,000 2,000,000 -
7.35% Preferred, Series 1993-A(4) 4,000,000 4,000,000 4,000,000 - -
Flex APS, Series A - - - 350,000 350,000
Flex APS, Series B - 400,000 400,000 400,000 400,000
- ----------------------------------------------------------------------------------------------------------------------------------
Shareholders of Record at December 31
Common(1) 13,515 14,379 14,632 14,605 15,098
$6.25 Preferred - 408 641 842 1,040
9 1/2% Preferred, Series 1989-A(4) - 535 591 595 541
11 1/4% Enhanced Rate Preferred(4) - - - 1,055 1,019
9 1/2% Preferred, Series 1991-A(4) 786 895 939 889 754
8 1/4% Preferred, Series 1992-A(4) 453 518 512 409 -
7.35% Preferred, Series 1993-A(4) 317 343 305 - -
Flex APS, Series A - - - 1 1
Flex APS, Series B - 4 4 4 3
- ----------------------------------------------------------------------------------------------------------------------------------
Total 15,071 17,082 17,624 18,400 18,456
==================================================================================================================================
</TABLE>
(1) 1992 and 1991 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) The ratio of market price per share to fully diluted earnings per share
is based on revolving summation of quarterly results.
(3) Due to a loss in the fourth quarter of 1991, both the yearly range and
yearly average of the price-earnings ratio are not meaningful in 1992.
In 1993, the year range and yearly average are from February 4, 1993
forward.
(4) Per depositary share.
67
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF HOUSEHOLD INTERNATIONAL, INC.
- ---------------------------------------------
As of December 31, 1995, 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%
Craig-Hallum Corporation Delaware 100%
Craig-Hallum, Inc. Minnesota 100%
Household Bank, f.s.b U.S. 100%
HHTS, Inc. Illinois 100%
Household Home Title Services, Inc. II Maryland 100%
Household Bank (SB), N.A. U.S. 100%
Household Affinity Funding Corporation Delaware 100%
Household Service Corporation
of Illinois, Inc. Illinois 100%
Household Insurance Services, Inc. Illinois 100%
Housekey Financial Corporation Illinois 100%
Associations Service Corporation Indiana 100%
Household Mortgage Services, Inc. Delaware 100%
Security Investment Corporation Maryland 100%
Household Capital Corporation Delaware 100%
Household Commercial Canada Inc. Canada 100%
Household Credit Services, Inc. Delaware 100%
Household Finance Corporation Delaware 100%
HFC Auto Credit Corp. Delaware 100%
HFC Funding Corporation Delaware 100%
HFC Revolving Corporation Delaware 100%
HFS Funding Corporation Delaware 100%
Household Bank (Nevada), N.A. U.S. 100%
Household Card Funding Corporation Delaware 100%
Household Receivables Funding Corporation Nevada 100%
Household Receivables Funding Delaware 100%
Corporation II
Household Receivables Funding, Inc. Delaware 100%
Household Capital Markets, Inc.
Delaware 100%
Household Card Services, Inc. Nevada 100%
Household Bank (Illinois), N.A. U.S. 100%
Household Consumer Loan Corporation Nevada 100%
Household Credit Services of Mexico, Inc. Delaware 100%
</TABLE>
- 1 -
<PAGE> 2
<TABLE>
<CAPTION>
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
<S> <C> <C>
Household Finance Receivables Corporation II Delaware 100%
Household Financial Services, Inc. Delaware 100%
Household Group, Inc. Delaware 100%
AHLIC Investment Holdings Corporation Delaware 100%
Alexander Hamilton Insurance Agency, Inc. Michigan 100%
Alexander Hamilton Insurance Company Michigan 100%
of America
Alexander Hamilton Life Insurance Co. Arizona 100%
of Arizona
Hamilton National Life Insurance Company Michigan 100%
Prospect Life Insurance Company Arizona 100%
Cal-Pacific Services, Inc. California 100%
Household Business Services, Inc. Delaware 100%
Household Commercial Financial Delaware 100%
Services, Inc.
Business Realty Inc. Delaware 100%
Business Lakeview, Inc. Delaware 100%
Capital Graphics, Inc. Delaware 100%
Color Prelude Inc. Delaware 100%
First Source Financial, Inc. Delaware 100%
HCFS Business Equipment Corporation Delaware 100%
HCFS Corporporate Finance Venture, Inc. Delaware 100%
HFC Commercial Realty, Inc. Delaware 100%
G.C. Center, Inc. Delaware 100%
Cast Iron Building Corporation Delaware 100%
Com Realty, Inc. Delaware 100%
Lighthouse Property Corporation Delaware 100%
MRP General, Inc. Delaware 100%
Center Realty, Inc. Delaware 100%
Household OPEB I, Inc. Illinois 100%
Land of Lincoln Builders, Inc. Illinois 100%
PPSG Corporation Delaware 100%
Steward's Glenn Corporation Delaware 100%
HFC Leasing, Inc. Delaware 100%
First HFC Leasing Corporation Delaware 100%
Second HFC Leasing Corporation Delaware 100%
Valley Properties Corporation Tennessee 100%
Fifth HFC Leasing Corporation Delaware 100%
Sixth HFC Leasing Corporation Delaware 100%
Seventh HFC Leasing Corporation Delaware 100%
Eighth HFC Leasing Corporation Delaware 100%
Tenth HFC Leasing Corporation Delaware 100%
Eleventh HFC Leasing Corporation Delaware 100%
</TABLE>
- 2 -
<PAGE> 3
<TABLE>
<CAPTION>
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
<S> <C> <C>
Thirteenth HFC Leasing Corporation Delaware 100%
Fourteenth HFC Leasing Corporation Delaware 100%
Seventeenth HFC Leasing Corporation Delaware 100%
Nineteenth HFC Leasing Corporation Delaware 100%
Twenty-second HFC Leasing Corporation Delaware 100%
Twenty-sixth HFC Leasing Corporation Delaware 100%
Beaver Valley, Inc. Delaware 100%
Hull 752 Corporation Delaware 100%
Hull 753 Corporation Delaware 100%
Third HFC Leasing Corporation Delaware 100%
Macray Corporation California 100%
Fourth HFC Leasing Corporation Delaware 100%
Pargen Corporation California 100%
Fifteenth HFC Leasing Corporation Delaware 100%
Hull Fifty Corporation Delaware 100%
Household Capital Investment Corporation Delaware 100%
B&K Corporation Michigan 94%
Household Commercial of California, Inc. California 100%
Household Real Estate Equities, Inc. Delaware 100%
SPG General, Inc. Delaware 100%
OLC, Inc. Rhode Island 100%
OPI, Inc. Virginia 100%
The Generra Company Delaware 100%
Household Finance Consumer Discount Company Pennsylvania 100%
Overseas Leasing Two FSC, Ltd. Bermuda 99%
Household Finance Corporation II Delaware 100%
Household Finance Corporation of Alabama Alabama 100%
Household Finance Corporation of California Delaware 100%
Household Finance Corporation of Nevada Delaware 100%
Household Finance Realty Corporation of Delaware 100%
New York
Household Finance Industrial Loan Company Iowa 100%
of Iowa
Household Finance Realty Corporation of Delaware 100%
Nevada
Household Finance Corporation III Delaware 100%
Amstelveen FSC, Ltd. Bermuda 99%
HFC Agency of Connecticut, Inc. Connecticut 100%
HFC Agency of Michigan, Inc. Michigan 100%
Night Watch FSC, Ltd. Bermuda 99%
</TABLE>
- 3 -
<PAGE> 4
<TABLE>
<CAPTION>
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
<S> <C> <C>
Household Realty Corporation Delaware 100%
Overseas Leasing One FSC, Ltd. Bermuda 100%
Overseas Leasing Four FSC, Ltd. Bermuda 99%
Overseas Leasing Five FSC, Ltd. Bermuda 99%
Household Retail Services, Inc. Delaware 100%
HRSI Funding, Inc. Nevada 100%
Household Financial Center Inc. Tennessee 100%
Household Industrial Finance Company Minnesota 100%
Household Industrial Loan Co. of Kentucky Kentucky 100%
Household Insurance Agency, Inc. Nevada 100%
Household Recovery Services Corporation Delaware 100%
Household Relocation Management, Inc. Illinois 100%
Mortgage One Corporation Delaware 100%
Mortgage Two Corporation Delaware 100%
Sixty-First HFC Leasing Corporation Delaware 100%
Household Financial Group, Ltd. Delaware 100%
Household Global Funding, Inc. Delaware 78%
Household International (U.K.) Limited England 100%
D.L.R.S. Limited Cheshire 100%
HFC Bank plc England 100%
Hamilton Financial Planning Services
Limited England 100%
Hamilton Insurance Company Limited England 100%
Hamilton Life Assurance Co. Limited England 100%
HFC Pension Plan Limited England 100%
Household Funding Limited England 100%
Household Investments Limited England/Wales 100%
Household Leasing Limited England 100%
Household Management Corporation Limited England/Wales 100%
Household Overseas Limited England 100%
Household International Netherlands, B.V. Netherlands 100%
Household Financial Corporation Limited Ontario 100%
Household Finance Corporation of Canada Canada 100%
Household Realty Corporation Limited Ontario 100%
Household Trust Company Canada 100%
Merchant Retail Services Limited Ontario 100%
Household Mexico, Inc. Delaware 100%
Household Reinsurance Ltd. Bermuda 100%
</TABLE>
- 4 -
<PAGE> 1
[ARTHUR ANDERSEN LLP]
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Household International, Inc.:
As independent public accountants, we hereby consent to the incorporation of
our report dated January 24, 1996, included in this annual report on Form 10-K
of Household International, Inc. for the year ended December 31, 1995, into the
Company's previously filed Registration Statements No. 2-86383, No. 33-21343,
No. 2-97495, No. 33-45454, No. 33-45455, No. 33-52211, No. 33-58727, and No.
333-00397 on Form S-8 and Registration Statements No. 33-50619, No. 33-56599,
No. 33-57249 and No. 333-1025 on Form S-3.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND ITS SUBSIDIARIES
IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL
STATEMENTS PREVIOUSLY FILED WITH THE SECURITIES & EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 270,400
<SECURITIES> 4,639,500
<RECEIVABLES> 21,732,100
<ALLOWANCES> 1,177,400
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 865,700
<DEPRECIATION> 474,000
<TOTAL-ASSETS> 29,218,800
<CURRENT-LIABILITIES> 0
<BONDS> 11,227,900
0
205,000
<COMMON> 115,200
<OTHER-SE> 2,650,700
<TOTAL-LIABILITY-AND-EQUITY> 29,218,800
<SALES> 0
<TOTAL-REVENUES> 5,144,400
<CGS> 0
<TOTAL-COSTS> 2,072,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 761,300
<INTEREST-EXPENSE> 1,557,100
<INCOME-PRETAX> 753,700
<INCOME-TAX> 300,500
<INCOME-CONTINUING> 453,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 453,200
<EPS-PRIMARY> 4.31
<EPS-DILUTED> 4.30
</TABLE>
