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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 60070
PROSPECT HEIGHTS, ILLINOIS (Zip Code)
(Address of principal executive offices)
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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-FORTIETH SHARE NEW YORK STOCK EXCHANGE
OF 8 1/4% CUMULATIVE PREFERRED STOCK, SERIES 1992-A,
NO PAR, $1,000 STATED VALUE)
DEPOSITARY SHARES (EACH REPRESENTING ONE-FORTIETH SHARE NEW YORK STOCK EXCHANGE
OF 7.35% CUMULATIVE PREFERRED STOCK, SERIES 1993-A,
NO PAR, $1,000 STATED VALUE)
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Securities registered pursuant to Section 12(g) of the Act:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. Yes/ X / No/ /
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. / X /
AT MARCH 19, 1997, THERE WERE 97,282,007 SHARES OF REGISTRANT'S COMMON
STOCK OUTSTANDING, AND THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $9.096 BILLION.
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN PORTIONS OF THE REGISTRANT'S 1996 ANNUAL REPORT TO SHAREHOLDERS FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1996: PARTS I, II AND IV.
CERTAIN PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS
1997 ANNUAL MEETING SCHEDULED TO BE HELD MAY 14, 1997: PART III.
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PART I.
ITEM 1. BUSINESS.
GENERAL
Household International, Inc., through its subsidiaries ("Household
International" or the "Company"), is a provider of consumer financial services,
primarily offering consumer lending products to "middle market consumers" in the
United States, Canada and the United Kingdom. At December 31, 1996, the Company
employed approximately 14,700 people and served approximately 22 million
customer accounts with $42.6 billion in managed receivables and $24.1 billion in
owned receivables. Information reported in this Form 10-K on a managed basis
assumes that, on a pro forma basis, receivables which have been sold and are
serviced with limited recourse ("securitized") are combined with receivables in
the Company's owned portfolio.
Household International was created in 1981 as a result of a shareholder
approved restructuring of Household Finance Corporation ("HFC"). Household
International acts as a holding company for various subsidiaries, including HFC.
At the time it was formed, 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.
In late 1994 the Company initiated additional actions to further narrow its
focus on higher return consumer finance businesses. Initiatives were also
undertaken to improve the Company's operating efficiency and productivity. A
major component of this effort was to discontinue operations in the mortgage
banking and consumer banking industries. Consequently, in late 1994 the Company
terminated origination of first mortgage loans and in 1995 sold its domestic and
Canadian first mortgage servicing portfolio. In 1995 the Company also narrowed
its focus in the insurance industry by selling its individual life and annuity
product lines. In 1995 the Company sold all consumer bank branches located
outside metropolitan Chicago, including approximately $3.4 billion of customer
deposits. The Company completed its exit from consumer banking in 1996 by
selling its Chicago area branch offices, including approximately $2.8 billion of
customer deposits. In the fourth quarter of 1996, approximately $1.7 billion of
lower-margin loans were sold, primarily from the former first mortgage and
consumer banking businesses. These assets had been retained in order to satisfy
certain regulatory requirements applicable to the Company's savings bank
subsidiary but were no longer required following changes in banking laws.
Summary financial information for Household International is set forth in
its Annual Report to Shareholders (the "1996 Annual Report"), portions of which
are incorporated herein by reference. See pages 18 through 65 and 67 through 69
of the 1996 Annual Report. The products offered, the operating markets and the
marketing methods employed by each of the Company's principal business units are
described under OPERATIONS in this Form 10-K.
1996 DEVELOPMENTS AND RESULTS. In recent years unsecured products have
grown to represent a greater percentage of the Company's receivable portfolio.
Unsecured products generally experience higher delinquency and chargeoff rates
but also carry higher interest rates. At December 31, 1996, 1995 and 1994,
unsecured loans comprised 79, 69 and 64 percent, respectively, of the Company's
managed consumer loan portfolio.
The delinquency and chargeoff ratios increased in 1996 due to a number of
factors. The continued shift in product mix toward unsecured products, higher
consumer bankruptcies (particularly in the unsecured portfolios) and continued
aging of receivables contributed to the increase in chargeoffs. In anticipation
of higher delinquency and chargeoffs, in recent years, the Company hired
additional employees to collect delinquent loans and increased its credit loss
reserves. At December 31, 1996, 1995 and 1994 the Company's managed loss
reserves as a percentage of managed receivables were 3.75, 3.22 and 2.67
percent, respectively.
The Company's managed assets increased to $48.1 billion at year-end 1996
from $44.1 billion at year-end 1995. Owned assets at year-end 1996 and 1995
totaled $29.6 and $29.2 billion, respectively.
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Domestic consumer finance earnings increased in 1996 due to retail
receivables growth, particularly in the unsecured product lines. The receivables
growth and higher product pricing led to a higher net interest margin for this
business, partially offset by higher credit losses.
In 1996 the Company also had significant receivables growth in its credit
card operations, primarily through the acquisition of the AFL-CIO's $3.4 billion
Union Privilege affinity card portfolio ("Union Privilege"). Union Privilege was
created by the AFL-CIO to market benefits to union members. The Company also
purchased approximately $725 million of receivables from Barnett Banks, Inc.
Domestic GM Card receivables increased to approximately $8.8 billion at
year-end, an increase of 11 percent compared to $7.9 billion at year-end 1995
and 29 percent from $6.8 billion at year-end 1994. As a result of the
receivables growth, earnings for the Visa*/MasterCard* business were up but were
partially offset by higher credit losses sustained primarily as a result of the
significant increase in personal bankruptcy filings.
In 1996 the Company had 26 percent receivables growth in the private-label
credit card portfolio, largely from originations under newer merchant
relationships. At December 31, 1996, the Company's managed private-label
portfolio was approximately $5.6 billion.
The Company's United Kingdom operating profits increased due to improved
efficiency and significant receivables growth. Higher levels of unsecured loan
origination and the establishment of new co-branding credit card relationships
contributed to the receivables growth. In particular, there was significant
growth in credit card receivables originated under the GM Card in association
with Vauxhall Motors Limited and the new Goldfish Card issued under an alliance
with British Gas Trading Limited.
The Canadian operation reported increased profits, primarily due to
improved efficiency. Net interest margin improved as a result of a shift to
higher margin consumer finance products.
In June 1996, a subsidiary of the Company issued $100 million of 8.70
percent Company obligated mandatorily redeemable preferred securities of a
subsidiary trust.
In July 1996, the Company issued preferred share purchase rights for its
common stock which may be exercised in the event of the expressed intent to
acquire or actual acquisition of 15 percent of the Company's common stock by a
party or an associated group.
OPERATIONS
The Company offers the following types of consumer loans: home equity
loans, Visa/MasterCard credit cards, private-label credit cards, student loans
and other unsecured products. 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. At December 31, 1996, approximately 85 and 90 percent of the
Company's owned and managed consumer receivables, respectively, were located in
the United States.
Total managed receivables at December 31, classified by type, consisted of
the following (in millions):
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1996 1995 1994
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First mortgage (1)............ $ 725.6 $ 2,066.9 $ 3,364.2
Home equity................... 7,985.4 8,810.1 7,940.2
Visa/MasterCard............... 18,737.4 13,343.1 11,100.2
Private label................. 5,587.0 4,446.2 3,433.1
Other unsecured............... 8,620.2 6,660.8 5,378.2
Commercial.................... 937.8 1,289.6 1,834.8
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Total managed receivables..... $42,593.4 $36,616.7 $33,050.7
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(1) In late 1994 the Company terminated origination of traditional first
mortgages.
* VISA and MasterCard are registered trademarks of VISA USA, Inc. and
MasterCard International, Incorporated, respectively.
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Total owned receivables at December 31, classified by type, consisted of
the following (in millions):
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1996 1995 1994
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First mortgage (1)............ $ 725.6 $ 2,066.9 $ 3,364.2
Home equity................... 3,647.9 4,148.2 2,865.6
Visa/MasterCard............... 8,587.7 5,512.0 4,788.9
Private label................. 5,070.0 3,696.2 2,564.9
Other unsecured............... 5,098.0 5,019.2 5,137.2
Commercial.................... 937.8 1,289.6 1,834.8
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Total owned receivables....... $24,067.0 $21,732.1 $20,555.6
========= ========= =========
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(1) In late 1994 the Company terminated origination of traditional first
mortgages.
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. 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. These functions are
supported by automated systems which analyze the applicant's ability to repay
the loan and assess the likelihood of 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 individual has the ability to support the loan.
The Company is one of the largest issuers of asset-backed securities with
approximately $18.5 billion outstanding at year-end 1996. In 1996, including
replenishment of certificate holders interests, the Company securitized and sold
approximately $28.1 billion of receivables.
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 primarily through a network of 526 branch
lending offices throughout the United States. This business is conducted
primarily through state-licensed companies.
HFC's operations primarily focus on revolving and closed-end home equity
and unsecured lines of credit, which are offered on both a fixed rate and
floating rate basis. Home equity loans and unsecured consumer credit products in
the HFC network represented approximately 31 percent of the Company's managed
consumer receivables at December 31, 1996. Historically, home equity loans have
lower chargeoff rates than unsecured product lines. HFC also offers reverse
mortgage home equity loans and credit insurance products. HFC offers its
products in 41 states through branch office, direct mail and telemarketing
solicitations and also purchases loans and credit lines under a wholesale
program.
Household Retail Services
Household Retail Services ("HRS") operates a revolving private-label credit
card business in all 50 states and in Puerto Rico. HRS purchases and services
revolving charge accounts originated by merchants. These accounts result from
consumer purchases of electronics, furniture, appliances, home improvement
products and other durable merchandise, and generally are without credit
recourse to the originating merchant. HRS also originates closed end sales
contracts and offers credit insurance products. Products are
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marketed through dealer networks and retail stores, as well as direct mail
solicitations. Loans are underwritten by HRS based on its credit standards. The
private-label business is an important source of new customers for the Company's
consumer finance business. HRS 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 (Nevada), National
Association, which originates accounts directly with consumers.
Household Credit Services
Household Credit Services is the tradename used for the marketing of
Visa/MasterCard credit cards throughout the United States and Puerto Rico by the
Company's national credit card banks and Household Bank, f.s.b. Corporate and
small business credit cards, revolving lines of credit and credit insurance
products are also offered. Household Credit Services had $18.1 billion of
Visa/MasterCard managed receivables at December 31, 1996, an increase of $5.2
billion from December 31, 1995. The Company has been ranked as the sixth 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, in 1996 the Company acquired the AFL-CIO and Barnett Banks, Inc.
portfolios while establishing new alliances with those organizations. In prior
years the Company established programs with other organizations, most notably,
General Motors Corporation. The Company continues to explore affinity
relationships with various other entities.
The Visa/MasterCard business is a highly competitive and fragmented
industry. The Company believes its size provides substantial competitive
advantages over smaller 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 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.
The Company solicits applications through direct mail, telemarketing and
event marketing efforts, as well as on-counter displays. In an effort to further
expand the credit card portfolio, in 1996 the Company increased its marketing
expenditures with respect to the credit card operations.
International Operations
International operations in Canada and the United Kingdom accounted for
approximately 14 percent of owned receivables and 10 percent of total managed
receivables at December 31, 1996.
In the United Kingdom, the Company owns HFC Bank plc, a fully licensed
United Kingdom bank. HFC Bank plc had 141 branches at December 31, 1996 and
offers secured and unsecured lines of credit, secured and unsecured closed-end
loans, credit cards (including The GM Card from Vauxhall and the Goldfish Card
under an alliance with British Gas) and credit insurance products. It operates
in England, Scotland, Wales and Northern Ireland and solicits loans through the
branch network, merchants and direct mail marketing. The Company's United
Kingdom operation reported a 36 percent increase in net income in 1996, earning
$61.1 million compared to $44.9 million in 1995. This increase was also
primarily attributable to improved efficiency.
Due to the similarities of operations and in order to lower operating
costs, the Company integrated certain operations previously conducted in Canada
with operations in the United States. The Canadian consumer finance business
operates under the HFC tradename through 57 branch offices in 10 provinces. The
Canadian operation had higher profits in 1996 compared to 1995. The increase was
primarily attributable to improved efficiency. Home equity and unsecured lines
of credit, secured and unsecured closed-end loans, private-label credit cards
and credit insurance products are offered through branch office, direct mail and
telemarketing sales.
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Information concerning foreign owned receivables, and comparative revenues,
operating profits/losses and identifiable assets for the years ended December
31, 1996, 1995 and 1994 are incorporated by reference to pages 46 and 65 of
Household International's 1996 Annual Report.
Credit Insurance
Through its consumer lending operations and where applicable laws permit,
the Company makes credit life, credit accident, health and disability, term and
specialty insurance products available to its customers. Such products are
currently offered in 46 states, Canada and the United Kingdom. Insurance is
generally directly written by or reinsured with Household Life Insurance Company
or its affiliates.
Other Businesses
Since the Company's exit from the consumer banking business, Household
Bank, f.s.b. (the "Bank"), a federally chartered savings bank, has operated
primarily as a vehicle for managing consumer, credit card, student loan and
other unsecured loan receivables. At December 31, 1996, the Bank's assets
totaled $5.1 billion, while its total deposits were approximately $1.8 billion.
At year-end 1995 the Bank had assets of $8.1 billion and deposits of
approximately $4.4 billion. The Bank offers its products through telemarketing
and direct mail solicitations throughout the United States.
During 1995 the Company began developing its auto finance business,
initially focusing in the Midwest. The Company principally offers this product
through a dealer network.
The Company's remaining commercial operations have continued to decline in
size. Commercial receivables declined by $352 million in 1996 after declining by
$545 million in 1995. Approximately 2 percent of total managed receivables
portfolio at December 31, 1996 consisted of commercial receivables, down from 4
percent at December 31, 1995.
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, 1996 was approximately $2.3 billion, of which approximately $1.6
billion of such investment securities were held by the Company's insurance
subsidiaries. The composition of these portfolios is set forth on pages 45 and
46 of the 1996 Annual Report. Approximately 4 percent of the Company's
investment securities are also held 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 securitizations, 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, 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. For a detailed listing of the ratings assigned to Household
International and its significant subsidiaries, see Exhibit 99(b) to this Form
10-K. A portion of the Company's funding base also consists of brokered deposits
in the Bank. At December 31, 1996 the Company's total deposits were $2.4
billion. Deposits decreased from $4.7 billion at December 31, 1995 and $8.4
billion at December 31, 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 other debt instruments.
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The securitization and sale of consumer receivables continues to be an
important source of liquidity for the Company. During 1996 the Company's
subsidiaries initially securitized and sold approximately $6.9 billion of
securities backed by home equity, private-label, Visa/MasterCard and other
unsecured receivables compared to $5.4 billion in 1995 and $4.5 billion in 1994.
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, fixed rate
assets to a floating rate, or floating rate debt to fixed rate. The Company also
has entered into currency swaps to convert both principal and interest payments
on issued debt from one currency to the appropriate functional currency of the
issuer. Interest rate swaps are also used to synthetically alter interest rate
characteristics on certain receivables that are sold 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 30, 31 and 52 through 55 of the 1996 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, interest rate and ability to alter the terms 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, 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 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.
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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 operation of the Company's credit insurance business is subject to
regulatory supervision under the laws of the states in which it operates.
Regulations vary from state to state but generally cover licensing of insurance
companies, premium 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.
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 46 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; Pomona, California; Prospect Heights,
Illinois; Salinas, California; Wood Dale, Illinois; North York, Ontario, Canada;
Birmingham, United Kingdom and Windsor, Berkshire, United Kingdom.
Substantially all branch offices, divisional offices, corporate offices,
regional processing and regional servicing center space is operated under lease
with the exception of the headquarters building for HFC Bank plc in the United
Kingdom and a credit card processing 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.
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Household International has invested in property and technological
improvements to achieve greater efficiencies in the marketing, servicing and
production of its loan products. During 1996 the Company invested $97 million in
capital expenditures, compared to $76 million in 1995 and $197 million in 1994.
In 1994 the Company incurred expenditures to construct a new credit card
processing facility and to develop a comprehensive customer service computer
system for the consumer finance business in the United States. Automobiles,
office equipment, corporate aircraft 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. There are a number of
lawsuits pending against subsidiaries of the Company in Alabama, most of which
relate to the financing of satellite television broadcast receiver dishes, a
business the subsidiaries of the Company discontinued in 1995. 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. The judicial climate in Alabama is such that the outcome of
all of these cases is unpredictable and, although the Company's subsidiaries
believe they have substantive legal defenses to these claims and are prepared to
defend each case vigorously, a number of these cases have been settled or
otherwise resolved for amounts that in the aggregate are not material to the
Company. Appropriate insurance carriers have been notified of each claim, and
reservations of rights letters have been received.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
8
<PAGE> 10
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 19, 1997, was 10,900. Household International common stock is
listed on the New York and Chicago Stock Exchanges. Household International
common stock quarterly results for 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------- -----------------------------------
DIVIDENDS DIVIDENDS
QUARTER HIGH LOW DECLARED HIGH LOW DECLARED
- ------- ---- ---- --------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
1st $71 1/2 $52 $.340 $45 $35 7/8 $.315
2nd 76 1/2 63 .340 51 1/2 43 1/8 .315
3rd 83 7/8 68 1/2 .390 62 48 7/8 .340
4th 98 1/8 82 1/2 .390 68 3/8 35 7/8 .340
</TABLE>
Additional information required by this Item is incorporated by reference
to pages 68 and 69 of Household International's 1996 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
Information required by this Item is incorporated by reference to page 18
of Household International's 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Information required by this Item is incorporated by reference to pages 20
through 36 of Household International's 1996 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 page
32, pages 37 through 65 and page 67 of Household International's 1996 Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The following information on executive officers of Household International
is included pursuant to Item 401(b) of Regulation S-K. 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.
William F. Aldinger, age 49, joined the Company in September 1994, as
President and Chief Executive Officer. In May 1996 he was appointed Chairman and
Chief Executive Officer. Mr. Aldinger served as Vice Chairman of Wells Fargo
Bank and a Director of several Wells Fargo subsidiaries from 1986 until joining
the Company. Mr. Aldinger is also a director of Household Finance Corporation (a
subsidiary of the Company), SunAmerica Inc., and Stone Container Corporation.
9
<PAGE> 11
Lawrence N. Bangs, age 60, was appointed Group Executive-Private Label,
United Kingdom, Canada, Insurance, U.S. Consumer Banking and Auto Finance in
1995. Mr. Bangs joined Household in 1959 and has served in various capacities in
the Company's U.S. consumer finance and United Kingdom operations, most recently
as Managing Director and Chief Executive Officer of HFC Bank plc.
Robert F. Elliott, age 56, was appointed Group Executive-U.S. Consumer
Finance 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 51, joined Household in 1985. He was appointed
Group Executive-U.S. BankCard 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 45, 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.
David B. Barany, age 53, 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 54, 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 during his career with Household.
Kenneth H. Robin, age 50, 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 54, 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 44, 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 41, 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 48, 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 44, was appointed Vice President-Management Reporting
and Analysis in 1996. He joined Household in 1995 as Vice President-Controller.
Prior to joining Household, Mr. Kolb held a variety of financial positions with
Wells Fargo Bank, most recently serving as Vice President and Group Finance
Officer.
Steven L. McDonald, age 36, joined Household in 1996 as Vice
President-Corporate Controller. From 1991 until joining Household, he was Senior
Vice President-Accounting and Finance of First USA, Inc.
Randall L. Raup, age 43, 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.
10
<PAGE> 12
Paul R. Shay, age 43, 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 held various positions in Citicorp's legal
department from 1978 to 1993.
Craig A. Streem, age 47, joined Household in 1996 as Vice
President-Investor Relations. Prior to joining Household, he was Corporate Vice
President and Director of Investor Relations of PaineWebber Group, Inc., from
1995 to 1996, Vice President of Investor Relations and Corporate Secretary of
National Media Corporation from 1992 to 1994, and held various positions in the
investor relations, corporate treasury and corporate accounting and reporting
areas of American Express Company from 1979 to 1992.
There are no family relationships among the executive officers of the
Company. The term of office of each executive officer is at the discretion of
the Board of Directors.
Additional information required by this Item is incorporated by reference
to "Nominees For Director" and "Shares of Household Stock Beneficially Owned by
Directors and Executive Officers" in Household International's definitive Proxy
Statement for its 1997 Annual Meeting of Stockholders scheduled to be held May
14, 1997 (the "1997 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item is incorporated by reference to
"Executive Compensation", "Report of the Compensation Committee on Executive
Compensation", "Performance of Household", "Stock Options", "Employment
Agreements", "Savings -- Stock Ownership and Pension Plans", "Incentive and
Stock Option Plans", and "Directors' Compensation" in Household International's
1997 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
1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item is incorporated by reference to
"Transactions with Management and Others" in Household International's 1997
Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS.
The consolidated financial statements listed below, together with an
opinion of Arthur Andersen LLP, dated January 23, 1997, with respect thereto,
are incorporated by reference herein pursuant to Item 8. Financial Statements
and Supplementary Data of this Form 10-K. An opinion of Arthur Andersen LLP is
also included in this Annual Report on Form 10-K.
Household International, Inc. and Subsidiaries:
Consolidated Statements of Income for the Three Years Ended December 31,
1996.
Consolidated Balance Sheets, December 31, 1996 and 1995.
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1996.
Consolidated Statements of Changes in Preferred Stock and Common
Shareholders' Equity for the Three Years Ended December 31, 1996.
Notes to Consolidated Financial Statements.
11
<PAGE> 13
Independent Auditors' Report.
Selected Quarterly Financial Data (Unaudited).
(B) REPORTS ON FORM 8-K.
No Current Report on Form 8-K was filed by the Company during the three
months ended December 31, 1996.
(C) EXHIBITS.
<TABLE>
<S> <C>
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, 1996).
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) Rights Agreement dated as of July 9, 1996, between the
Company and Harris Trust and Savings Bank, as Rights Agent
(incorporated by reference to Exhibit 99.1 of the Company's
Current Report on Form 8-K dated July 9, 1996).
4(b) Standard Multiple-Series Indenture Provisions for Senior
Debt Securities of Household Finance Corporation dated as of
June 1, 1992 (incorporated by reference to Exhibit 4(b) to
the Registration Statement on Form S-3 of Household Finance
Corporation, No. 33-48854).
4(c) Indenture dated as of December 1, 1993 for Senior Debt
Securities between Household Finance Corporation and The
Chase Manhattan Bank (National Association), as Trustee
(incorporated by reference to Exhibit 4(b) to the
Registration Statement on Form S-3 of Household Finance
Corporation, No. 33-55561).
4(d) The principal amount of debt outstanding under each other
instrument defining the rights of holders of 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 (incorporated by reference to
Exhibit 10.3 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
10.4 Forms of stock option, restricted stock rights and
performance share award agreements under the Household
International Long-Term Executive Incentive Compensation
Plan (incorporated by reference to Exhibit 10.4 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995).
10.5 Household International 1996 Long-Term Executive Incentive
Compensation Plan (incorporated by reference to Exhibit A of
the Company's Proxy Statement dated March 26, 1996).
10.6 Forms of stock option and restricted stock rights agreements
under the Household International 1996 Long-Term Executive
Incentive Compensation Plan.
</TABLE>
12
<PAGE> 14
<TABLE>
<S> <C>
10.7 Household International Deferred Fee Plan for Directors
(incorporated by reference to Exhibit 10.6 of the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).
10.8 Household International Deferred Phantom Stock Plan for
Directors.
10.9 Executive Employment Agreement between the Company and W. F.
Aldinger (incorporated by reference to Exhibit 10.9 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996).
10.10 Executive Employment Agreement between the Company and R. F.
Elliott (incorporated by reference to Exhibit 10.12 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996).
10.11 Executive Employment Agreement between the Company and J. W.
Saunders (incorporated by reference to Exhibit 10.11 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996).
10.12 Executive Employment Agreement between the Company and D. A.
Schoenholz (incorporated by reference to Exhibit 10.13 of
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996).
10.13 Executive Employment Agreement between the Company and L. N.
Bangs.
11 Statement of Computation of Earnings per Share.
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
13 Material incorporated by reference to the Company's 1996
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 14 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).
99(b) Ratings of Household International and its significant
subsidiaries.
</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.
I--Condensed Financial Information of Registrant.
II--Valuation and Qualifying Accounts.
13
<PAGE> 15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, HOUSEHOLD INTERNATIONAL, INC. HAS DULY CAUSED THIS REPORT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
HOUSEHOLD INTERNATIONAL, INC.
Dated: March 20, 1997
By /s/ W. F. ALDINGER
-------------------------------------
W. F. Aldinger, Chairman
and Chief Executive Officer
EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS J. W.
BLENKE, L. S. MATTENSON AND P. D. SCHWARTZ AND EACH OR ANY OF THEM (WITH FULL
POWER TO ACT ALONE), AS HIS/HER TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH
FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM/HER IN HIS/HER NAME,
PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN THIS FORM 10-K AND ANY AND
ALL AMENDMENTS TO THIS FORM 10-K AND TO FILE THE SAME, WITH ALL EXHIBITS
THERETO, AND ALL OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES
AND EXCHANGE COMMISSION, GRANTING UNTO EACH SUCH ATTORNEYS-IN-FACT AND AGENT
FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING
REQUISITE AND NECESSARY TO BE DONE, AS FULLY TO ALL INTENTS AND PURPOSES AS
HE/SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT
SUCH ATTORNEYS-IN-FACT AND AGENTS OR THEIR SUBSTITUTES MAY LAWFULLY DO OR CAUSE
TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF HOUSEHOLD
INTERNATIONAL, INC. AND IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ W. F. ALDINGER Chairman and Chief Executive
- --------------------------------------------------- Officer and Director (as
(W. F. Aldinger) principal executive officer)
/s/ R. J. DARNALL Director
- ---------------------------------------------------
(R. J. Darnall)
/s/ G. G. DILLON Director
- ---------------------------------------------------
(G. G. Dillon)
/s/ J. A. EDWARDSON Director
- ---------------------------------------------------
(J. A. Edwardson)
/s/ M. J. EVANS Director
- ---------------------------------------------------
(M. J. Evans)
/s/ J. D. FISHBURN, M.P. Director
- ---------------------------------------------------
(J. D. Fishburn, M.P.)
/s/ C. F. FREIDHEIM, JR. Director
- ---------------------------------------------------
(C. F. Freidheim, Jr.)
</TABLE>
March 20, 1997
14
<PAGE> 16
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <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 20, 1997
- ---------------------------------------------------
(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 --
- --------------------------------------------------- Chief Financial Officer (also
(D. A. Schoenholz) the principal financial and
accounting officer)
</TABLE>
15
<PAGE> 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Household International, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements included in Household International, Inc.'s 1996 annual
report to shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated January 23, 1997. 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 23, 1997
F-1
<PAGE> 18
SCHEDULE I
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
================================================================================
CONDENSED STATEMENTS OF INCOME
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS.)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Equity in earnings of subsidiaries.......................... $596.1 $489.2 $382.5
Finance and other income.................................... 24.4 36.5 38.5
------ ------ ------
Total income........................................... 620.5 525.7 421.0
------ ------ ------
Expenses:
Administrative......................................... 99.1 66.6 72.2
Provision for credit losses on owned receivables....... -- 2.4 (20.5)
Interest............................................... 28.9 27.3 21.2
------ ------ ------
Total expenses......................................... 128.0 96.3 72.9
------ ------ ------
Income before income tax benefit............................ 492.5 429.4 348.1
Income tax benefit.......................................... 46.1 23.8 19.5
------ ------ ------
Net income............................................. $538.6 $453.2 $367.6
====== ====== ======
</TABLE>
See accompanying note to condensed financial statements.
================================================================================
F-2
<PAGE> 19
SCHEDULE I (CONTINUED)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
================================================================================
CONDENSED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Assets:
Cash................................................... $ 1.7 $ .3
Investments in and advances to (from) subsidiaries..... 3,639.7 3,130.9
Other assets........................................... 396.5 479.6
-------- --------
Total assets........................................... $4,037.9 $3,610.8
======== ========
Liabilities and shareholders' equity:
Commercial paper....................................... $ 203.3 $ 286.5
Senior debt (with original maturities over one year)... 189.7 249.8
-------- --------
Total debt............................................. 393.0 536.3
Other liabilities...................................... 323.7 103.6
-------- --------
Total liabilities...................................... 716.7 639.9
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts*...................... 175.0 75.0
Preferred stock........................................ 205.0 205.0
Common shareholders' equity............................ 2,941.2 2,690.9
-------- --------
Total liabilities and shareholders' equity............. $4,037.9 $3,610.8
======== ========
</TABLE>
* The sole asset of the two trusts are Junior Subordinated Deferrable Interest
Notes issued by Household International, Inc. in June 1996 and June 1995,
bearing interest at 8.70 and 8.25 percent, respectively, and with principal
balances of $103.1 and $77.3 million, respectively.
See accompanying note to condensed financial statements.
================================================================================
F-3
<PAGE> 20
SCHEDULE I (CONTINUED)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATIONS
Net income.................................................. $ 538.6 $ 453.2 $ 367.6
Adjustments to reconcile net income to net cash provided by
(used in) operations:
Equity in earnings of subsidiaries........................ (596.1) (489.2) (382.5)
Other operating activities................................ 331.4 (299.7) 77.9
------- ------- -------
Cash provided by (used in) operations....................... 273.9 (335.7) 63.0
------- ------- -------
INVESTMENT IN OPERATIONS
Dividends from subsidiaries................................. 265.0 401.4 240.0
Investment in and advances to (from) subsidiaries, net...... (284.9) (90.7) (221.9)
Sale of finance receivables to subsidiary................... -- 165.8 --
Other investing activities.................................. (9.4) (2.6) (41.1)
------- ------- -------
Cash increase (decrease) from investment in operations...... (29.3) 473.9 (23.0)
------- ------- -------
FINANCING AND CAPITAL TRANSACTIONS
Net increase (decrease) in commercial paper and bank
borrowings................................................ (83.2) 186.5 (53.8)
Retirement of senior debt................................... (150.0) (100.0) (100.0)
Issuance of senior debt..................................... 89.9 -- 249.6
Shareholders' dividends..................................... (158.4) (154.0) (146.5)
Issuance of company obligated mandatorily redeemable
preferred securities of subsidiary trusts................. 100.0 75.0 --
Purchase of treasury stock.................................. (56.7) (59.7) --
Issuance of common stock.................................... 15.2 24.7 13.6
Redemption of preferred stock............................... -- (115.0) --
------- ------- -------
Cash decrease from financing and capital transactions....... (243.2) (142.5) (37.1)
------- ------- -------
Increase (decrease) in cash................................. 1.4 (4.3) 2.9
Cash at January 1........................................... .3 4.6 1.7
------- ------- -------
CASH AT DECEMBER 31......................................... $ 1.7 $ .3 $ 4.6
======= ======= =======
</TABLE>
See accompanying note to condensed financial statements.
================================================================================
F-4
<PAGE> 21
SCHEDULE I (CONTINUED)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
================================================================================
NOTE TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
The condensed financial statements of Household International, Inc. have
been prepared on a parent company unconsolidated basis.
Under an agreement with the Office of Thrift Supervision, the Company will
maintain the capital of its subsidiary, Household Bank, f.s.b., at a level
consistent with certain minimum capital requirements.
The Company has guaranteed payment of all long-term debt obligations of
Household Financial Corporation Limited ("HFCL"), a Canadian subsidiary. The
amount of guaranteed debt outstanding at HFCL on December 31, 1996 was
approximately $856 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, 1996 was approximately
$1,370 million.
================================================================================
F-5
<PAGE> 22
SCHEDULE II
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Unearned credit insurance premiums and claims reserves:
Unearned credit insurance premiums:
Balance at January 1................................... $100.9 $ 64.4 $ 59.2
Earned premiums........................................ (90.4) (64.1) (152.5)
Net premiums written and reinsurance assumed........... 98.4 68.1 155.0
Other items............................................ 9.6 32.5 2.7
------ -------- --------
Balance at December 31................................. 118.5 100.9 64.4
------ -------- --------
Claims reserves:
Balance at January 1................................... 59.0 57.8 58.3
Provision for claims................................... 81.6 69.9 69.2
Benefits paid.......................................... (77.0) (66.2) (65.8)
Other items............................................ 2.5 (2.5) (3.9)
------ -------- --------
Balance at December 31................................. 66.1 59.0 57.8
------ -------- --------
Total at December 31................................... $184.6 $ 159.9 $ 122.2
====== ======== ========
</TABLE>
================================================================================
F-6
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ----------- ------------
<S> <C> <C>
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, 1996).
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) Rights Agreement dated as of July 9, 1996, between the
Company and Harris Trust and Savings Bank, as Rights Agent
(incorporated by reference to Exhibit 99.1 of the company's
Current Report on Form 8-K dated July 9, 1996).
4(b) Standard Multiple-Series Indenture Provisions for Senior
Debt Household Finance Corporation dated as of June 1, 1992
(incorporated by reference to Exhibit 4(b) to the
Registration Statement on Form S-3 of Household Finance
Corporation, No. 33-44854).
4(c) Indenture dated as of December 1, 1993 for Senior Debt
Securities of Household Finance Corporation and the Chase
Manhattan Bank (National Association), as Trustee
(incorporated by reference to Exhibit 4(b) to the
Registration Statement on Form S-3 of Household Finance
Corporation, No. 33-55561).
4(d) The principal amount of debt outstanding under each other
instrument defining the rights of holders of 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 (incorporated by reference to
Exhibit 10.3 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
10.4 Forms of stock option, restricted stock rights and
performance share award agreements under the Household
International Long-Term Executive Incentive Compensation
Plan (incorporated by reference to Exhibit 10.4 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995).
10.5 Household International 1996 Long-Term Executive Incentive
Compensation Plan (incorporated by reference to Exhibit A of
the Company's Proxy Statement dated March 26, 1996).
10.6 Forms of stock option and restricted stock rights agreements
under the Household International 1996 Long-Term Executive
Incentive Compensation Plan.
10.7 Household International Deferred Fee Plan for Directors.
(incorporated by reference to Exhibit 10.6 of the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).
10.8 Household International Deferred Phantom Stock Plan for
Directors.
</TABLE>
<PAGE> 24
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ----------- ------------
<S> <C> <C>
10.9 Executive Employment Agreement between the Company and W. F.
Aldinger (incorporated by reference to Exhibit 10.9 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996).
10.10 Executive Employment Agreement between the Company and R. F.
Elliott (incorporated by reference to Exhibit 10.12 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996).
10.11 Executive Employment Agreement between the Company and J. W.
Saunders (incorporated by reference to Exhibit 10.11 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996).
10.12 Executive Employment Agreement between the Company and D. A.
Schoenholz (incorporated by reference to Exhibit 10.13 of
the Company Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996).
10.13 Executive Employment Agreement between the Company and L. N.
Bangs.
11 Statement of Computation of Earnings per Share.
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
13 Material incorporated by reference to the Company's 1996
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 14 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).
99(b) Ratings of Household International and its significant
subsidiaries.
</TABLE>
<PAGE> 1
EXHIBIT 10.2
HOUSEHOLD INTERNATIONAL
CORPORATE EXECUTIVE BONUS PLAN
January 1996
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);
return on equity (ROE); 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 90% 135%
B 80% 120%
C 60% 90%
D 40% 60%
E 30% 50%
F 20% 50%
G 20% 30%
</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,
<PAGE> 3
excluding himself, whose salaries are determined by the Compensation
Committee of the Board of Directors. The Compensation Committee will then
determine the awards for all such participants, as well as the award for
the Chief Executive Officer.
The Chief Executive Officer, will determine the awards for all participants
whose salaries are not determined by the Compensation Committee. The Group
Executives and Senior Vice Presidents, in consultation with their
appropriate subordinates, will recommend to the Chief Executive Officer the
awards for all other participants.
PAYMENT OF AWARDS
Awards will be paid as soon as practical at the end of the plan period, subject
to all required tax withholdings. Awards may be paid in cash, shares of
Household common stock, or some combination thereof. Neither eligible
participation in the plan, nor award payments thereunder shall guarantee an
employee, any right to continued employment. The plan does not give any
employee right or claim to an award under the program. Management reserves the
right to change or discontinue the plan at any time.
ADMINISTRATIVE MATTERS
A. Promotions
Normally awards will be pro-rated according to the portion
of the plan year that an incumbent is eligible for the bonus.
B. Effect on Benefits
Payments made under this plan shall be included in an employee's
income for purposes of determining pension benefits, life insurance,
long-term disability, and participation in the TRIP plan.
C. Termination of Employment
Normally awards will be pro-rated in the case of death, permanent and
total disability, or retirement under one of the Corporation's
pension plans during a plan year. If a participant terminates
employment for any other reason prior to the last working day of a
plan year, he will normally forfeit any right to an award for the
plan year.
THE GOAL SETTING PROCESS
Before the beginning of the plan year, the manager and subordinate will meet in
a goal setting session. The purpose of the session is to discuss areas where
goals will be established and agree on their
<PAGE> 4
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 format of the
Executive Bonus Plan Goal Setting Form and approved by the appropriate level of
management.
<PAGE> 5
REV. 12/31/96
CORPORATE EXECUTIVE BONUS PLAN POSITIONS
GROUP/TITLE
Group A - 90%/135%
Group Executive
Group B - 80%/120%
EVP Chief Financial Officer
Group C - 60%/90%
Managing Director/CEO U.K. *
SVP Chief Information Officer
SVP General Counsel
SVP Human Resources
VP Chief Credit Officer
Group D - Heads of Major Business Units or Staff Units - 40%/60%
Chief Financial Officer (U.K.)
Chief Operating Officer (U.K.)
Group Executive Commercial Finance
Managing Director/CEO HB
Managing Director HFC Processing
Managing Director HRSI
Managing Director Operations, Systems & HR (HCS)
Managing Director Strategic Initiatives & Partnership Alliances (HCS)
Group E - Heads of Major Business Segments or Staff
Units - 30%/50%
Group Director Business Planning (HCS)
Group Director GM Marketing (HCS)
Group Director Risk Control (HCS)
Group General Counsel
Managing Director Canada *
Managing Director Carlson JV (HCS)
Managing Director/Chief Financial Officer-HCS
President & CEO - HLIC
President Equipment Finance (HCFS)
VP Applications Systems
VP Controller HI
VP Corporate Law & Assistant Secretary
VP Data Administration
VP Governmental Relations
VP Investor Relations
VP Management Reporting & Analysis
<PAGE> 6
VP Strategy & Development
VP Taxes
VP Treasurer
Group F - 20%/50%
Director Business Analysis
Director Credit Anaylsis (HRSI)
Director Risk Administration (HCS)
Director Risk Control (HCS)
Group Director Risk Management (HCS)
VP Credit Risk (HFC)
Group G - 20%/30%
Corporate Staff Departments:
Business Analysis
Director Credit Policy & Administration
Controller
Director ALM
Director Asset Backed Financing
Director Business Treasury Services
Director Business Unit Accounting
Director Corporate Financial Information Systems
Director Data Administration
Director External Reporting & Cost Accounting
Director Federal Tax Audit
Director Federal/State Compliance
Director Financial Data Management
Director Internal Audit-Financial Services
Director Investor Relations
Director Management Reporting & Analysis
Director Regulatory Reporting
Director Strategy & Development
Director Tax Planning & Tax Counsel
Treasury Controller
VP Audit
VP Finance & Administration
VP Financial Control Auto
VP Insurance & Risk Finance
VP Money & Capital Markets
VP Portfolio Management
VP Specialty Finance
General Counsel
Assistant General Counsel & Corporate Secretary
Assistant General Counsel Employee Relations
Assistant General Counsel Litigation
Director Government Relations
<PAGE> 7
General Counsel
VP Government Relations & Public Affairs
Human Resources
Director Human Resources HI
VP Compensation
VP Human Resources Administration
VP Training & Development
HOUSEHOLD CREDIT SERVICES:
Controller HCS
Director Business Planning CWT
Director Business Systems-HCS
Director Combined Card
Director Fraud & Operations
Director GM Marketing
Director HBNA Product
Director HR/CRA Officer HCS
Director Integrated Voice Operations
Director International Market Development
Director Marketing & Product Development CWT
Director Marketing Services HCS B
Director National Marketing B
Director National Telephone Services
Director Nevada Operations
Director Portfolio Management
Director Real Estate, Facilities & Financial Operations
Group Director Information Systems
National Director Correspondence, Interchange, VIP & Credit
National Director Human Resources HCS
Mexico
Director Operations Mexico *
U.S. CONSUMER FINANCE & CANADA:
HFC Home Office Staff
Director Sales Management Reporting & Analysis
Director USCF Customer Data Administration
Group Financial Control Officer
VP Household Recovery Services
VP Human Resources Consumer Finance Sales
VP Strategic Initiatives
HFC National Processing Center
CFO-HFCPS
CFO-HFS
Director Collections HFPCS
Director Customer Relations
<PAGE> 8
Director HFC Wholesale Sales
Director Household Processing
Director Human Resources HFC
Director of Collections CA
Director Policy/Compliance/Project Control
Group VP Indirect Lending
VP Collections USCF
VP Director of CRT Services
VP ITT Portfolio
VP Lending
Canada
Director Financial Control
Director Human Resources
Director Law & Compliance
Director Marketing
Director Merchant Sales
Director MRSL Canada *
Director Technology & Planning-Canada *
Director Wholesale Lending Canada *
General Manager-Processing
National Collections Director *
National Director of Sales-Canada
Treasurer
HTS
Assistant to CIO
Director Business Systems
Director Cash Operations
Director Communication Services
Director Corporate Security Management
Director Data Center Operations & Systems Programming
Director Property Management
VP Administration HTS
VP Chief Financial Officer HTS
VP Data Center Operations
VP Facilities Management
VP Human Resources HTS
VP Item Processing
VP Networked Systems
U.S. CONSUMER BANKING & U.K.:
HFC Auto
VP Adminstration Auto
VP Credit Risk Administration
VP Financial Control Auto
VP Operations Auto
<PAGE> 9
HLIC
Director Financial Control
Director Information Technology
Director Operations
HRSI
Director Customer Service
Director Human Resources HRSI
Director Special Projects HRSI
Group Director Administration
VP Chief Collections Officer
VP Chief of Marketing & Sales
VP Director of Marketing
VP Director of Sales HRSI
HCFS
Controller HCFS
U.K.
Commercial Director HDB
Corporate Finance & Taxation Manger
Director Acquisitions & Mortgages
Director Application Processing
Director Business Relationships
Director Credit Services
Director Credit Policy
Director Direct Marketing & Advertising
Director Hamilton Direct Bank
Director Human Resources
Director Insurance Services
Director Internal Audit
Director Information Technology
Director Legal
Director Marketing Managment & Corporate Communications
Director of Operations U.K. *
Director Operations Services
Director Operations Support
Director Personal Banking U.K. *
Director Property & Facilities
Director Recovery Services U.K. *
Director Telephone Services
Division General Manager
General Manager Business Control
Operations, Compensation & Benefits Manager
Senior Manager Credit Policy
Training & Development Manager
Treasury Manager
*position held by expatriate
<PAGE> 1
EXHIBIT 10.6
HOUSEHOLD INTERNATIONAL
NOTICE OF STOCK OPTIONS AND GRANT AGREEMENT
November 11, 1996
EMPLOYEE'S NAME
SOCIAL SECURITY NUMBER
STREET ADDRESS
CITY, STATE, ZIP CODE
On November 11, 1996, the Compensation Committee of Household's Board of
Directors granted you stock options under the Household International 1996
Long-Term Executive Incentive Compensation Plan as follows:
Date of Grant 11/11/96
Option Price Per Share $91.7500
# of Shares Granted # of shares
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 JANUARY 6, 1997, 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,
Paul R. Shay
Secretary
- ----------------------- ------------------
Employee's Signature Date
<PAGE> 2
HOUSEHOLD INTERNATIONAL, INC.
HOUSEHOLD INTERNATIONAL 1996 LONG-TERM
EXECUTIVE INCENTIVE COMPENSATION PLAN
------------
NON-TAX QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, between HOUSEHOLD INTERNATIONAL, INC., a Delaware
corporation (the "Company"), and the employee referenced on the cover sheet to
this Agreement (the "Employee"), is made pursuant to the Household International
1996 Long-Term Executive Incentive Compensation Plan (the "Incentive Plan"). The
terms of such agreement are as follows:
1. The Company hereby grants to the Employee an option, for a period of 10
years and one day from the 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 Compensation Committee of the Board of Directors (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 Committee or Board of Directors and
which are in effect at the time the option is exercised. The 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> 3
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 within five years of the date of
termination of employment; (ii) in the event of termination of employment due
to permanent and total disability of the Employee and the Employee is not
retirement-eligible under the terms of a pension plan of the Company or a
subsidiary, the option may be exercised within twelve months following the date
of such termination of employment; (iii) in the event of death during
employment, the option may be exercised by the executor, administrator, or
other personal representative of the Employee within five years succeeding
death if such Employee was retirement-eligible under the terms of a pension
plan of the Company or a subsidiary, or twelve months if such Employee was not
retirement-eligible under the terms of a pension plan of the Company or a
subsidiary; (iv) in the event of termination of employment other than as set
forth in subsections (i), (ii) or (iii) above, the option may be exercised
within three months following the date of termination, except for termination
for cause; (v) in the event of death of the Employee following termination of
employment, the option may be exercised by the executor, administrator, or
other personal representative of the Employee, notwithstanding the time periods
specified in (i), (ii), (iii) or (iv) above, within a) twelve months following
death or b) the remainder of the period in which the Employee was entitled to
exercise the option, whichever period is longer. If the Committee determines
that the termination is for cause, the option will not under any circumstances
be 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. If it is determined that the Employee or former Employee, while employed
by the Company or any subsidiary or otherwise associated with the Company or any
subsidiary as a consultant, advisor or in another similar capacity, engaged at
any time in any activity in competition with any activity of the Company or any
subsidiary or inimical, contrary or harmful to the interests of the Company or
any subsidiary including, but not limited to: (i) conduct related to the
Employee's position for which either criminal or civil penalties against the
Employee may be sought, (ii) violation of the Company's policies,
notwithstanding the Company's decision or inability to, or not to, terminate the
Employee for such violation, (iii) accepting employment with or serving as a
consultant, advisor or in any other capacity to an employer that is in
competition with or
<PAGE> 4
acting against the interests of the Company or any subsidiary, including
employing or recruiting any present employee of the Company or any subsidiary
for such competitor, (iv) disclosing or misusing any confidential information
or material concerning the Company or any subsidiary, or (v) participating in a
hostile takeover attempt of the Company, then the Committee, in its sole
discretion, may cancel any outstanding option at any time.
5. The Company shall not be required to issue or deliver any certificate or
certificates for shares of stock purchased upon the exercise of the option
herein granted prior to the listing of such shares on all stock exchanges on
which the Company's stock shall then be listed. Upon any exercise of said
option, the Company shall take the steps required for listing.
6. Neither the Employee nor his personal representative shall have any of
the rights or privileges of a stockholder with respect to any shares subject to
this option unless and until certificates evidencing such shares shall have been
delivered.
7. Notice to the Company shall be addressed to the Company in care of its
Secretary at 2700 Sanders Road, Prospect Heights, Illinois 60070 and notice to
the Employee shall be addressed to him or her at the address as set forth on the
cover sheet of this Agreement, or at such other address as either party may
hereafter designate in writing to the other.
8. Anything herein to the contrary notwithstanding, this option agreement
shall be subject to amendment by the Company from time to time to the extent
permitted by the Incentive Plan and is subject to the provisions of the
Incentive Plan.
<PAGE> 5
HOUSEHOLD INTERNATIONAL, INC.
HOUSEHOLD INTERNATIONAL 1996 LONG-TERM
EXECUTIVE INCENTIVE COMPENSATION PLAN
-----------
NON-TAX QUALIFIED STOCK OPTION AGREEMENT
FOR SENIOR MANAGEMENT TEAM
THIS AGREEMENT, between HOUSEHOLD INTERNATIONAL, INC., a Delaware
corporation (the "Company"), and the employee referenced on the cover sheet to
this Agreement (the "Employee"), is made pursuant to the Household International
1996 Long-Term Executive Incentive Compensation Plan (the "Incentive Plan"). The
terms of such agreement are as follows:
1. The Company hereby grants to the Employee an option, for a period of 10
years and one day from the 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 Compensation Committee of the Board of Directors (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 Committee or Board of Directors and
which are in effect at the time the option is exercised. The 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
<PAGE> 6
laws of descent and distribution. The option may be exercised during the
lifetime of the Employee only by the Employee and only while he or she is an
employee of the Company (or a subsidiary thereof) and shall have been
continuously so employed from the 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 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. If it is determined that the Employee or former Employee, while employed
by the Company or any subsidiary or otherwise associated with the Company or any
subsidiary as a consultant, advisor or in another similar capacity, engaged at
any time in any activity in competition with any activity of the Company or any
subsidiary or inimical, contrary or harmful to the interests of the Company or
any subsidiary including, but not limited to: (i) conduct related to the
Employee's position for which either criminal or civil penalties against the
Employee may be sought, (ii) violation of the Company's policies,
notwithstanding the Company's decision or inability to, or not to, terminate the
Employee for such violation, (iii) accepting employment with or serving as a
consultant, advisor or in any
<PAGE> 7
other capacity to an employer that is in competition with or acting against the
interests of the Company or any subsidiary, including employing or recruiting
any present employee of the Company or any subsidiary for such competitor, (iv)
disclosing or misusing any confidential information or material concerning the
Company or any subsidiary, or (v) participating in a hostile takeover attempt
of the Company, then the Committee, in its sole discretion, may cancel any
outstanding option at any time.
5. The Company shall not be required to issue or deliver any certificate or
certificates for shares of stock purchased upon the exercise of the option
herein granted prior to the listing of such shares on all stock exchanges on
which the Company's stock shall then be listed. Upon any exercise of said
option, the Company shall take the steps required for listing.
6. Neither the Employee nor his personal representative shall have any of
the rights or privileges of a stockholder with respect to any shares subject to
this option unless and until certificates evidencing such shares shall have been
delivered.
7. Notice to the Company shall be addressed to the Company in care of its
Secretary at 2700 Sanders Road, Prospect Heights, Illinois 60070 and notice to
the Employee shall be addressed to him or her at the address as set forth on the
cover sheet of this Agreement, or at such other address as either party may
hereafter designate in writing to the other.
8. Anything herein to the contrary notwithstanding, this option agreement
shall be subject to amendment by the Company from time to time to the extent
permitted by the Incentive Plan and is subject to the provisions of the
Incentive Plan.
<PAGE> 8
HOUSEHOLD INTERNATIONAL, INC.
HOUSEHOLD INTERNATIONAL 1996 LONG-TERM
EXECUTIVE INCENTIVE COMPENSATION PLAN
------------
U.K. NON-TAX QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, between HOUSEHOLD INTERNATIONAL, INC., a Delaware
corporation (the "Company"), and the employee referenced on the cover sheet to
this Agreement (the "Employee"), is made pursuant to the Household International
1996 Long-Term Executive Incentive Compensation Plan (the "Incentive Plan"). The
terms of such agreement are as follows:
1. The Company hereby grants to the Employee an option, for a period of 10
years from the 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 Compensation Committee of the Board of Directors (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 Committee or Board of Directors and
which are in effect at the time the option is exercised. The 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> 9
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 within five years of the date of
termination of employment; (ii) in the event of termination of employment due
to permanent and total disability of the Employee and the Employee is not
retirement-eligible under the terms of a pension plan of the Company or a
subsidiary, the option may be exercised within twelve months following the date
of such termination of employment; (iii) in the event of death during
employment, the option may be exercised by the executor, administrator, or
other personal representative of the Employee within five years succeeding
death if such Employee was retirement-eligible under the terms of a pension
plan of the Company or a subsidiary, or twelve months if such Employee was not
retirement-eligible under the terms of a pension plan of the Company or a
subsidiary; (iv) in the event of termination of employment other than as set
forth in subsections (i), (ii) or (iii) above, the option may be exercised
within three months following the date of termination, except for termination
for cause; (v) in the event of death of the Employee following termination of
employment, the option may be exercised by the executor, administrator, or
other personal representative of the Employee, notwithstanding the time periods
specified in (i), (ii), (iii) or (iv) above, within a) twelve months following
death or b) the remainder of the period in which the Employee was entitled to
exercise the option, whichever period is longer. If the Committee determines
that the termination is for cause, the option will not under any circumstances
be exercisable following termination of employment. Notwithstanding anything
herein to the contrary, the option may not be exercised pursuant to this
Section after the expiration of the term of such option and may be exercised
only to the extent that the holder was entitled to exercise such option on the
date of termination of employment. The option will expire in all events and
for all purposes 10 years from the date hereof.
4. If it is determined that the Employee or former Employee, while employed
by the Company or any subsidiary or otherwise associated with the Company or any
subsidiary as a consultant, advisor or in another similar capacity, engaged at
any time in any activity in competition with any activity of the Company or any
subsidiary or inimical, contrary or harmful to the interests of the Company or
any subsidiary including, but not limited to: (i) conduct related to the
Employee's position for which either criminal or civil penalties against the
Employee may be sought, (ii) violation of the Company's policies,
notwithstanding the Company's decision or inability to, or not to, terminate the
Employee for such violation, (iii) accepting employment with or serving as a
consultant, advisor or in any other capacity to an employer that is in
competition with or
<PAGE> 10
acting against the interests of the Company or any subsidiary, including
employing or recruiting any present employee of the Company or any subsidiary
for such competitor, (iv) disclosing or misusing any confidential information
or material concerning the Company or any subsidiary, or (v) participating in a
hostile takeover attempt of the Company, then the Committee, in its sole
discretion, may cancel any outstanding option at any time.
5. The Company shall not be required to issue or deliver any certificate or
certificates for shares of stock purchased upon the exercise of the option
herein granted prior to the listing of such shares on all stock exchanges on
which the Company's stock shall then be listed. Upon any exercise of said
option, the Company shall take the steps required for listing.
6. Neither the Employee nor his personal representative shall have any of
the rights or privileges of a stockholder with respect to any shares subject to
this option unless and until certificates evidencing such shares shall have been
delivered.
7. Notice to the Company shall be addressed to the Company in care of its
Secretary at 2700 Sanders Road, Prospect Heights, Illinois 60070 and notice to
the Employee shall be addressed to him or her at the address as set forth on the
cover sheet of this Agreement, or at such other address as either party may
hereafter designate in writing to the other.
8. Anything herein to the contrary notwithstanding, this option agreement
shall be subject to amendment by the Company from time to time to the extent
permitted by the Incentive Plan and is subject to the provisions of the
Incentive Plan.
<PAGE> 11
HOUSEHOLD INTERNATIONAL
NOTICE OF RESTRICTED STOCK RIGHTS AGREEMENT
November 11, 1996
EMPLOYEE'S NAME
SOCIAL SECURITY NUMBER
STREET ADDRESS
CITY, STATE, ZIP CODE
On November 11, 1996, the Compensation Committee of Household's Board of
Directors granted you restricted stock rights under the Household International
1996 Long-Term Executive Incentive Compensation Plan as follows:
Date of Grant 11/11/96
# of Shares Granted # of Shares
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 JANUARY 3, 1997, 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,
Paul R. Shay
Secretary
- ---------------------- ------------------
Employee's Signature Date
<PAGE> 12
HOUSEHOLD INTERNATIONAL, INC.
HOUSEHOLD INTERNATIONAL 1996 LONG-TERM
EXECUTIVE INCENTIVE COMPENSATION PLAN
------------
RESTRICTED STOCK RIGHTS AGREEMENT
THIS AGREEMENT, between HOUSEHOLD INTERNATIONAL, INC., a Delaware
corporation (the "Company"), and the employee referenced on the cover sheet to
this Agreement (the "Employee"), is made pursuant to the Household International
1996 Long-Term Executive Incentive Compensation Plan (the "Incentive Plan"). The
terms of such agreement are as follows:
1. The Company hereby grants to the Employee Restricted Stock Rights (the
"RSRs"), which shall fully vest five (5) years from the date hereof (the
"Restricted Period"), pursuant to the terms and conditions set forth herein and
subject to the provisions set forth in the Incentive Plan. The RSRs entitle the
Employee to receive the number of shares of Common Stock of the Company as set
forth in the cover sheet to this Agreement.
2. No shares may be issued under RSRs for one year from the date hereof.
After said one-year period, shares subject to RSRs will vest one-third on each
of the third, fourth and fifth anniversaries (the "Vesting Dates") from the
grant date. On each Vesting Date an Employee shall be entitled to receive
shares representing the vested RSRs, and the Company shall issue the appropriate
number of vested shares (rounded down to the nearest whole share) registered in
the name of the Employee or his or her estate or administrator, as deemed
appropriate by the Company, provided the Employee has satisfied all tax
obligations with respect to such shares as required herein. The unvested shares
subject to such RSRs shall be forfeited and all rights of a holder of such RSRs
and shares shall terminate without any payment of consideration by the Company
if the Employee fails to remain continuously as an Employee of the Company or
any subsidiary for the Restricted Period, except (i) in the case of an Employee
who is retirement-eligible under the terms of a pension plan of the Company or a
subsidiary, the Employee will receive either (1) the number of shares subject to
the RSR multiplied by a fraction (x) the numerator of which shall be the number
of full months between the date of grant of such RSR and the date of such
termination of employment, and (y) the denominator of which shall be the number
of full months in the Restricted Period; provided however, that any fractional
share shall not be awarded; and provided further, the Compensation Committee of
the Board of Directors (the "Committee"), in its sole discretion, may determine
that full vesting is appropriate under the circumstances or (2) 100% of the
shares subject to RSRs on his or her last day of employment if retirement occurs
on or after age 65, and (ii) in the event that the employment of a holder of
RSRs terminates by reason of death or permanent and total disability, such
holder shall be entitled to receive the number of shares subject to the RSR
multiplied by a fraction (x) the numerator of which shall be the number of full
months between
<PAGE> 13
the date of grant of such RSR and the date of such termination of employment,
and (y) the denominator of which shall be the number of full months in the
Restricted Period; provided however, that any fractional share shall not be
awarded. Any shares that the Employee is entitled to receive in accordance
with the preceding sentence will be reduced by any shares that the Employee has
already received because of vesting on the third, fourth and fifth
anniversaries of the grant date. An Employee shall not be deemed to have
terminated his or her period of continuous employment with the Company if he or
she leaves the employ of the Company or any subsidiary for immediate
reemployment with the Company or any subsidiary. A holder of RSRs whose
employment terminates for reasons other than those listed in this paragraph 2
(other than a change-in-control of the Company) will forfeit his or her
unvested rights under any outstanding RSRs. This automatic forfeiture may be
waived in whole or in part by the Committee in its sole discretion.
3. If it is determined that the Employee or former Employee, while employed
by the Company or any subsidiary or otherwise associated with the Company or any
subsidiary as a consultant, advisor or in another similar capacity, engaged at
any time in any activity in competition with any activity of the Company or any
subsidiary or inimical, contrary or harmful to the interests of the Company or
any subsidiary including, but not limited to: (i) conduct related to the
Employee's position for which either criminal or civil penalties against the
Employee may be sought, (ii) violation of the Company's policies,
notwithstanding the Company's decision or inability to, or not to, terminate the
Employee for such violation, (iii) accepting employment with or serving as a
consultant, advisor or in any other capacity to an employer that is in
competition with or acting against the interests of the Company or any
subsidiary, including employing or recruiting any present employee of the
Company or any subsidiary for such competitor, (iv) disclosing or misusing any
confidential information or material concerning the Company or any subsidiary,
or (v) participating in a hostile takeover attempt of the Company, then the
Committee, in its sole discretion, may cancel any unexpired or unpaid RSR at any
time.
4. The RSRs may not be transferred except by will or the laws of descent
and distribution.
5. The holder of RSRs shall not be entitled to any of the rights of a
holder of the Common Stock with respect to the shares subject to such RSRs prior
to the issuance of such shares pursuant to the Plan. However, during the
Restricted Period, for each unvested share subject to an RSR, the Company will
pay the Employee as additional income, less applicable taxes, an amount in cash
equal to the cash dividend declared on a share of Common Stock of the Company
during the Restricted Period on or about the date the Company pays such dividend
to its stockholders of record.
6. Any and all taxes required to be withheld by the Company as a result of
the issuance of any shares pursuant to the RSRs shall be the sole responsibility
of the Employee.
<PAGE> 14
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> 1
EXHIBIT 10.8
7/96
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, and July 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 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).
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 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
- 1 -
<PAGE> 2
7/96
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 participant's
Account during the installment period will be paid
- 2 -
<PAGE> 3
7/96
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
- 3 -
<PAGE> 4
7/96
as practicable thereafter in cash in a lump sum. If no designated beneficiary
has been named or survives the participant, the beneficiary will be the
participant's estate.
SECTION 13. PARTICIPANT'S RIGHTS UNSECURED. The right of any participant
or beneficiary to receive payment under the provisions of the Plan shall be an
unsecured claim against the general assets of the Company, and 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 9, 1996
Mr. Lawrence N. Bangs
2700 Sanders Road
Prospect Heights, IL 60070
Dear Larry:
SUBJECT: AMENDMENT AND RESTATEMENT OF EMPLOYMENT AGREEMENT
DATED JUNE 9, 1995
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 Group Executive. In
that capacity you are entitled to the following:
a. A minimum annual salary of $300,000;
b. An annual bonus having a targeted value equal to
90% of your annualized salary as of the end of the period
in which the bonus is earned. The amount of bonus for any
year that you actually receive, if any, will depend on the
achievement of the corporate goals and your individual
goals established for that year and the terms of the
Household International Corporate Executive Bonus Plan,
and any successor or substitute plan or plans (the "Bonus
Plan"). Your bonus will be prorated based on the number
of elapsed months in the performance period in the case of
death, permanent and total disability, or retirement under
the Household Retirement Income Plan or any successor tax
qualified defined benefit plan;
c. An annual grant of stock options under the Household
International 1996 Long-Term Executive Incentive
Compensation Plan, and any successor or substitute plan or
plans (the "Long-Term Plan"), having a
<PAGE> 2
EMPLOYMENT AGREEMENT - Mr. Lawrence N. Bangs
Page 2
July 9, 1996
targeted value of 25% of your then annual salary at the
time of the grant.
d. Other compensation, benefits and perquisites as described
in, and in accordance with, Household's compensation,
benefit and perquisite plans (the "Plans").
2. Subject to termination as provided herein, the term of this
Agreement shall be for 18 whole calendar months, shall commence
on the date hereof, and shall be "evergreen"; that is shall
continue monthly as an 18 month term, unless the Corporation
gives to you not less than 17 whole calendar months notice that
the term as monthly continued shall not be so continued; provided
further, that in no event shall the term be continued beyond your
sixty-fifth birthday.
3. During your employment with Household you will devote your
reasonably full time and energies to the faithful and diligent
performance of the duties inherent in, and implied by, your
executive position.
4. In consideration of your employment with Household, it is
mutually agreed that:
a. In the event your employment with Household is terminated
during the term of this Agreement by Household for any
reason other than:
i. willful and deliberate misconduct which is
detrimental in a significant way to the
interests of the Corporation;
ii. death;
iii. inability, for reasons of disability,
reasonably to perform your duties for 6
consecutive calendar months; or,
b. In the event that during the term of this Agreement 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
<PAGE> 3
EMPLOYMENT AGREEMENT - Mr. Lawrence N. Bangs
Page 3
July 9, 1996
value of stock options calculated as provided
in paragraph 1c was reduced and compensation
equivalent in aggregate value was not
substituted;
iii. your benefits under the Household Retirement
Income Plan or any successor tax qualified
defined benefit plan were reduced for reasons
other than to maintain its tax qualified
status and such reductions were not
supplemented in the Household Supplemental
Retirement Income Plan ("HSRIP"); or your
benefits under HSRIP were reduced;
iv. your other benefits or perquisites were
reduced and such reductions were not
uniformally applied with respect to all
similarly situated employees;
v. you were reassigned to a geographical area
outside of the Chicago, Illinois metropolitan
area;
vi. any successor to the Corporation by
acquisition of stock or substantially all of
the assets, by merger or otherwise, failed to
expressly adopt or otherwise repudiated this
Employment Agreement; or
vii. you received written notice that your
employment contract was not renewed;
Household shall be required, and hereby agrees, to make promptly
a lump sum cash payment to you in an amount equal to 200% of your
then annual salary (prior to any of the aforesaid reductions)
plus 200% of the average of the last two years' bonuses;
provided, however, if the term of this Agreement is less than 18
months because you are within 18 months of becoming age 65, the
amount shall be multiplied by a fraction the numerator of which
is the number of months left in the term, and the 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.
5. It is further mutually agreed that:
a. should your employment be terminated pursuant to the
<PAGE> 4
EMPLOYMENT AGREEMENT - Mr. Lawrence N. Bangs
Page 4
July 9, 1996
provisions of paragraph 4a, or
b. should you resign your position pursuant to the provisions
of paragraph 4b, or
c. should you resign your position because you are assigned
to a position of lesser rank or status than you had
immediately prior to the Change in Control
at any time within sixty (60) whole calendar months following a
Change in Control of Household, Household or its successor shall
pay to you the amounts (including the lump sum payment) described
in paragraph 4 regardless of whether you are otherwise entitled
to them under paragraph 4. In addition, Household or its
successor shall promptly make a lump sum cash payment to you in
an amount equal to 200% of your then annual salary (prior to any
reduction) plus 200% of the average of the last two years'
bonuses; provided, however, if the term of this Agreement is less
than 18 months because you are within 18 months of becoming age
65, the amount shall be multiplied by a fraction the numerator of
which is the number of months left in the term, and the
denominator of which is 18.
Because of the performance history of Household and your
performance with us, we hereby agree to an irrebuttable
presumption that a reduction in compensation shall be deemed to
have occurred in any year (within five years following a Change
in Control) in which you do not receive at least:
i. a bonus payment under the Bonus Plan, and
ii. an award of stock options under the Long-Term Plan for
years in which awards were payable under the Long-Term
Plan as it existed prior to the Change in Control,
both at corporate and individual target levels as those plans
existed prior to the Change in Control (or compensation, benefits
and perquisites equivalent in aggregate value) and should you
choose to resign, payments shall be made to you as outlined
earlier in this paragraph 5.
For purposes of this Agreement, a Change in Control of Household
shall be deemed to occur when and if:
<PAGE> 5
EMPLOYMENT AGREEMENT - Mr. Lawrence N. Bangs
Page 5
July 9, 1996
A. any "person" (as the term is used in Section 13(d) and
Section 14(d)(2) of the Securities Exchange Act of 1934)
other than a trustee or other fiduciary of securities held
under an employee benefit plan of Household becomes the
beneficial owner, directly or indirectly, of securities of
Household representing 20% or more of the combined voting
power of Household's then outstanding securities; or
B. persons who were directors of Household as of the
effective date hereof, or successor directors nominated by
those directors or by such successor directors cease to
constitute a majority of the Board of Directors of
Household or its successor by merger, consolidation or
sale of assets.
6. You are not required to mitigate the amount of any payments to be
made by Household pursuant to this Agreement by seeking other
employment, or otherwise, nor shall the amount of any payments
provided for in this Agreement be reduced by any compensation
earned by you as the result of self-employment or your employment
by another employer after the date of termination of your
employment with Household.
7. Except as provided below, it is the intent and desire of
Household that the salary, bonuses and other benefits 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).
<PAGE> 6
EMPLOYMENT AGREEMENT - Mr. Lawrence N. Bangs
Page 6
July 9, 1996
However, if any part or all of the amounts to be paid to you
constitute "parachute payments" within the meaning of section
280G(b)(2)(A) of the Code, and a reduction of the amount by 10%
or less would totally avoid the imposition of any excise tax,
such amounts shall be reduced so that the aggregate present value
of the amounts constituting such parachute payments will be equal
to 299% of your "annualized includible compensation for the base
period," as such term is defined in section 280G(d)(1) of the
Code. For the purpose of this subparagraph, present value shall
be determined in accordance with section 280G(d)(4) of the Code.
8. If a dispute arises regarding the termination of your employment
or the interpretation or enforcement of this Agreement and you
obtain a final judgment in your favor from a court of competent
jurisdiction from which no appeal may be taken, whether because
the time to do so has expired or otherwise, or your claim is
settled by Household or its successor prior to the rendering of
such a judgment, all reasonable legal and other professional fees
and expenses incurred by you in contesting or disputing any such
termination or in seeking to obtain or enforce any right or
benefit provided for in this Agreement or in otherwise pursuing
your claim will be promptly paid by Household or its successor
with interest thereon at the highest statutory rate of your state
of 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
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:
<PAGE> 7
EMPLOYMENT AGREEMENT - Mr. Lawrence N. Bangs
Page 7
July 9, 1996
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. The provisions of this Agreement shall be construed, to the
extent possible, so as to guarantee their enforceability. In
case any one or more of the provisions contained in this
Agreement shall, for any reason, be held to be invalid, illegal,
or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this
Agreement, and this Agreement shall be construed as if such
invalid, illegal, or unenforceable provision had never been
contained in it.
11. This Agreement is an Amendment and Restatement of the Employment
Agreement dated June 9, 1995, in furtherance of the objectives
authorized and deemed by the Board of Directors of Household to
serve the best interests of the Corporation.
12. 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.
13. 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
<PAGE> 8
EMPLOYMENT AGREEMENT - Mr. Lawrence N. Bangs
Page 8
July 9, 1996
obligations hereunder, but any such trust or other vehicle shall
not create a funded account or security interest for you.
14. 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: ----------------------------
William F. Aldinger
Chief Executive Officer
----------------------------
Lawrence N. Bangs
<PAGE> 1
EXHIBIT 11
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In millions, except per share data.)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
FULLY Fully Fully
Year ended December 31 PRIMARY DILUTED Primary Diluted Primary Diluted
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Net income $538.6 $538.6 $453.2 $453.2 $367.6 $367.6
Preferred dividends (16.7) (16.7) (26.5) (26.4) (28.5) (27.6)
- -----------------------------------------------------------------------------------------
Net income available to common
shareholders $521.9 $521.9 $426.7 $426.8 $339.1 $340.0
=========================================================================================
Average common and common equivalent
shares:
Common 97.1 97.1 97.5 97.5 95.5 95.5
Common equivalents 1.2 1.4 1.5 1.8 .8 1.7
- -----------------------------------------------------------------------------------------
Total 98.3 98.5 99.0 99.3 96.3 97.2
=========================================================================================
Net income per common share $ 5.31 $ 5.30 $ 4.31 $ 4.30 $ 3.52 $ 3.50
=========================================================================================
</TABLE>
<PAGE> 1
EXHIBIT 12
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(All dollar amounts are stated in millions.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income $ 538.6 $ 453.2 $ 367.6 $ 298.7 $ 190.9
Income taxes 283.7 300.5 160.7 152.0 87.1
- --------------------------------------------------------------------------------------------------------
Income before income taxes 822.3 753.7 528.3 450.7 278.0
- --------------------------------------------------------------------------------------------------------
Fixed charges:
Interest expense (1) 1,524.6 1,562.5 1,250.3 1,155.5 1,431.5
Interest portion of rentals (2) 32.1 33.5 35.5 33.6 35.3
- --------------------------------------------------------------------------------------------------------
Total fixed charges 1,556.7 1,596.0 1,285.8 1,189.1 1,466.8
- --------------------------------------------------------------------------------------------------------
Total earnings as defined $2,379.0 $2,349.7 $1,814.1 $1,639.8 $1,744.8
========================================================================================================
Ratio of earnings to fixed charges 1.53 1.47 1.41 1.38 1.19
========================================================================================================
Preferred stock dividends (3) $ 25.5 $ 44.1 $ 40.9 $ 46.9 $ 44.3
========================================================================================================
Ratio of earnings to combined fixed
charges and preferred stock dividends 1.50 1.43 1.37 1.33 1.15
========================================================================================================
</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 34.5, 39.9, 30.4, 33.7 and 31.3 percent
for the years ended December 31, 1996, 1995, 1994, 1993 and 1992,
respectively.
<PAGE> 1
EXHIBIT 13
FINANCIAL SECTION CONTENTS
<TABLE>
<S> <C>
Selected Financial Data and Statistics 18
Credit Quality Statistics 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 20
Analysis of Credit Loss Reserves Activity--
Owned Receivables 32
Analysis of Credit Loss Reserves Activity--
Managed Receivables 33
Net Interest Margin--1996 Compared to 1995
(Owned Basis) 34
Net Interest Margin--1995 Compared to 1994
(Owned Basis) 35
Net Interest Margin--1996 Compared to 1995
and 1994 (Managed Basis) 36
Selected Quarterly Financial Data (Unaudited) 37
Consolidated Statements of Income 38
Consolidated Balance Sheets 39
Consolidated Statements of Cash Flows 40
Consolidated Statements of Changes in Preferred
Stock and Common Shareholders' Equity 41
Notes to Consolidated Financial Statements 42
Independent Auditors' Report 67
Stock Information 68
</TABLE>
<PAGE> 2
SELECTED FINANCIAL DATA AND STATISTICS
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
All dollar amounts except per share data are stated in millions. 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME Net interest margin and other revenues $ 3,538.2 $ 3,587.3 $ 3,360.6
DATA--YEAR ENDED Provision for credit losses on owned receivables 759.6 761.3 606.8
DECEMBER 31 Operating expenses 1,727.2 1,597.8 1,761.1
Policyholders' benefits 229.1 474.5 464.4
Income taxes 283.7 300.5 160.7
-------------------------------------------------------------------------------------------------------------
Net income $ 538.6 $ 453.2 $ 367.6
- ---------------------=============================================================================================================
PER COMMON SHARE Net income $ 5.30 $ 4.30 $ 3.50
Dividends declared 1.46 1.31 1.23
Book value 30.30 27.70 22.78
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA Total assets(1):
AT DECEMBER 31 Owned $ 29,594.5 $ 29,218.8 $ 34,338.4
Managed 48,120.9 44,103.4 46,833.5
-------------------------------------------------------------------------------------------------------------
Managed receivables(2):
First mortgage $ 725.6 $ 2,066.9 $ 3,364.2
Home equity 7,985.4 8,810.1 7,940.2
Visa/MasterCard 18,737.4 13,343.1 11,100.2
Private label 5,587.0 4,446.2 3,433.1
Other unsecured 8,620.2 6,660.8 5,378.2
Commercial 937.8 1,289.6 1,834.8
-------------------------------------------------------------------------------------------------------------
Total managed receivables 42,593.4 36,616.7 33,050.7
Receivables serviced with limited recourse (18,526.4) (14,884.6) (12,495.1)
-------------------------------------------------------------------------------------------------------------
Owned receivables $ 24,067.0 $ 21,732.1 $ 20,555.6
=============================================================================================================
Deposits(3) $ 2,365.1 $ 4,708.8 $ 8,439.0
Total other debt 21,230.1 17,887.3 14,646.2
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts 175.0 75.0 -
Convertible preferred stock - - 2.6
Preferred stock 205.0 205.0 320.0
Common shareholders' equity 2,941.2 2,690.9 2,200.4
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL Return on average owned assets 1.82% 1.34% 1.08%
RATIOS Return on average common
shareholders' equity 18.9 17.4 16.0
Total shareholders' equity as a percent
of owned assets(4) 11.22 10.17 7.34
Total shareholders' equity as a percent
of managed assets(4) 6.90 6.74 5.38
Managed net interest margin 6.98 6.43 6.70
Managed consumer net chargeoff ratio 3.35 2.95 2.84
Managed basis efficiency ratio, normalized 40.8 46.0 52.7
Total dividends to net income 29.4 34.0 39.9
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Household International, Inc. and Subsidiaries
All dollar amounts except per share data are stated in millions. 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STATEMENT OF INCOME Net interest margin and other revenues $ 3,305.0 $ 2,760.4
DATA--YEAR ENDED Provision for credit losses on owned receivables 735.8 671.5
DECEMBER 31 Operating expenses 1,579.4 1,297.0
Policyholders' benefits 539.1 513.9
Income taxes 152.0 87.1
-------------------------------------------------------------------------------------------------------------
Net income $ 298.7 $ 190.9
- ---------------------=============================================================================================================
PER COMMON SHARE Net income $ 2.85 1.93
Dividends declared 1.18 1.15
Book value 22.01 18.65
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA Total assets(1):
AT DECEMBER 31 Owned $32,961.5 $31,128.4
Managed 42,789.3 39,074.7
-------------------------------------------------------------------------------------------------------------
Managed receivables(2):
First mortgage $ 3,534.1 $ 4,513.8
Home equity 7,880.4 7,742.9
Visa/MasterCard 8,842.6 5,726.6
Private label 2,949.1 2,666.3
Other unsecured 4,320.8 4,085.4
Commercial 2,831.2 3,279.6
-------------------------------------------------------------------------------------------------------------
Total managed receivables 30,358.2 28,014.6
Receivables serviced with limited recourse (9,827.8) (7,946.3)
-------------------------------------------------------------------------------------------------------------
Owned receivables $20,530.4 $20,068.3
=============================================================================================================
Deposits(3) $ 7,516.1 $ 8,030.3
Total other debt 14,755.9 14,267.7
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts - -
Convertible preferred stock 19.3 36.0
Preferred stock 320.0 300.0
Common shareholders' equity 2,078.3 1,545.6
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL Return on average owned assets .91% .62%
RATIOS Return on average common
shareholders' equity 14.2 10.7
Total shareholders' equity as a percent
of owned assets(4) 7.28 5.93
Total shareholders' equity as a percent
of managed assets(4) 5.60 4.72
Managed net interest margin 6.92 6.47
Managed consumer net chargeoff ratio 2.91 3.45
Managed basis efficiency ratio, normalized 51.8 51.9
Total dividends to net income 47.3 65.3
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)In the fourth quarter of 1995 the company sold the
individual life and annuity product lines of its life
insurance business, including approximately $6.1
billion of assets.
(2)In 1996 the company acquired credit card portfolios with
outstandings of $4.1 billion. In addition, the company
sold $1.7 billion of lower-margin loans primarily
from the previously divested mortgage and consumer
banking businesses.
(3)The company sold its domestic consumer banking
operations, including $2.8 and $3.4 billion in deposits
in 1996 and 1995, respectively. The company's Canadian
subsidiary also sold $725 million in deposits in 1995.
(4)Total shareholders' equity at December 31, 1996 and 1995
includes common shareholders' equity, preferred stock
and company obligated mandatorily redeemable preferred
securities of subsidiary trusts. Total shareholders'
equity excludes convertible preferred stock that was
fully converted or redeemed during 1995.
18
<PAGE> 3
CREDIT QUALITY STATISTICS
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
All dollar amounts are stated in millions.
At December 31, unless otherwise indicated. 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MANAGED CONSUMER First mortgage 9.49% 3.29% 1.81% 1.33% 1.17%
TWO-MONTH-AND- Home equity 3.96 3.24 2.83 3.55 4.61
OVER CONTRACTUAL Visa/MasterCard 2.71 2.22 2.25 2.41 2.70
DELINQUENCY RATIOS Private label 5.50 4.51 4.53 4.74 6.27
Other unsecured 6.13 5.60 5.19 7.14 9.06
---------------------------------------------------------------------------------------
Total 4.15% 3.46% 3.11% 3.59% 4.45%
---------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
RATIO OF NET First mortgage .45% .35% .41% .37% .19%
CHARGEOFFS TO Home equity .99 1.00 1.31 1.30 1.20
AVERAGE MANAGED Visa/MasterCard 4.67 4.26 3.92 3.84 5.69
RECEIVABLES(1) Private label 3.21 4.72 3.57 4.10 5.27
Other unsecured 4.02 3.33 4.36 6.16 7.87
---------------------------------------------------------------------------------------
Total consumer 3.35 2.95 2.84 2.91 3.45
Commercial .98 2.21 3.21 4.68 2.10
---------------------------------------------------------------------------------------
Total 3.28% 2.91% 2.87% 3.10% 3.28%
- ------------------------======================================================================================
NONACCRUAL OWNED Domestic:
RECEIVABLES First mortgage $ 50.0 $ 39.6 $ 38.6 $ 25.6 $ 26.4
Home equity 95.5 87.5 41.1 40.8 114.9
Private label(2) 6.0 42.1 20.3 16.8 14.0
Other unsecured 163.7 164.2 147.2 153.5 148.9
Foreign 106.6 102.6 99.6 128.7 193.7
---------------------------------------------------------------------------------------
Total consumer 421.8 436.0 346.8 365.4 497.9
Commercial 59.4 145.5 116.3 272.4 298.3
---------------------------------------------------------------------------------------
Total $481.2 $581.5 $463.1 $637.8 $796.2
- ------------------------======================================================================================
NONACCRUAL MANAGED Domestic:
RECEIVABLES First mortgage $ 50.0 $ 39.6 $ 38.6 $ 25.6 $ 26.4
Home equity 212.9 192.5 143.0 155.5 230.2
Private label(2) 6.0 64.2 36.8 21.7 20.8
Other unsecured 322.2 214.0 147.2 153.5 173.7
Foreign 128.0 112.7 99.6 128.7 193.7
---------------------------------------------------------------------------------------
Total consumer 719.1 623.0 465.2 485.0 644.8
Commercial 59.4 145.5 116.3 272.4 298.3
---------------------------------------------------------------------------------------
Total $778.5 $768.5 $581.5 $757.4 $943.1
- ------------------------======================================================================================
ACCRUING OWNED Domestic $319.4 $128.0 $128.2 $131.8 $135.3
RECEIVABLES 90 OR MORE Foreign 23.8 12.2 7.5 10.3 14.1
DAYS DELINQUENT(3) ---------------------------------------------------------------------------------------
Total $343.2 $140.2 $135.7 $142.1 $149.4
- ------------------------======================================================================================
ACCRUING MANAGED Domestic $525.2 $255.0 $220.7 $197.0 $196.3
RECEIVABLES 90 OR MORE Foreign 23.8 12.2 7.5 10.3 14.1
DAYS DELINQUENT(3) ---------------------------------------------------------------------------------------
Total $549.0 $267.2 $228.2 $207.3 $210.4
- ------------------------======================================================================================
RENEGOTIATED COMMERCIAL LOANS $ 12.9 $ 21.2 $ 41.8 $ 28.7 $198.4
- --------------------------------------------------------------------------------------------------------------
REAL ESTATE OWNED Domestic $122.3 $111.5 $138.7 $367.2 $374.1
Foreign 14.3 25.0 44.1 58.3 73.0
---------------------------------------------------------------------------------------
Total $136.6 $136.5 $182.8 $425.5 $447.1
- ------------------------======================================================================================
</TABLE>
(1)For the year.
(2)Represents nonaccrual sales contract receivables which are
included in private label receivables.
(3)Includes Visa/MasterCard and private-label credit card
receivables, consistent with industry practice. There were no
commercial loans 90 or more days past due which remained on
accrual status.
19
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Household International, Inc. and Subsidiaries
Household International, Inc., through its subsidiaries, is a leading provider
of consumer financial services, primarily consumer lending products to
"middle-market" customers in the United States, United Kingdom and Canada, with
$42.6 billion of managed receivables outstanding at December 31, 1996. The
company's lending products include: home equity loans, Visa/MasterCard and
private-label credit cards and other unsecured loans.
OPERATIONS
SUMMARY
- - Net income in 1996 was a record $538.6 million, an increase of 19 percent
over 1995 net income of $453.2 million. Net income in 1995 was 23 percent
higher than 1994 earnings of $367.6 million. Net income per share was $5.30 in
1996, up 23 percent from $4.30 in 1995, which was up 23 percent from $3.50 in
1994. 1996 represented the fifth consecutive year of earnings per share growth
of 20 percent or more. The company's return on average common shareholders'
equity ("ROE") improved to 18.9 percent from 17.4 percent in 1995 and 16.0
percent in 1994. The return on average owned assets ("ROA") was 1.82
percent, up from 1.34 and 1.08 percent in 1995 and 1994, respectively. The
increases in income, ROE and ROA in 1996 were due to the company's continued
focus on growing its core businesses which provide greater returns compared to
businesses that were sold or exited in 1996, 1995 and late 1994, as described
below.
- - During 1996, 1995 and late 1994, the company completed several major
initiatives designed to benefit future operating results by focusing on higher
return businesses and improving efficiency.
In the second quarter of 1996, the company completed its exit from consumer
banking by selling its consumer branch banking operations in the metropolitan
Chicago market, including approximately $2.8 billion in deposits and $340
million of home equity and other unsecured receivables. In the second quarter
and third quarters of 1995, the company sold its consumer banking operations
outside of Illinois. This included bank branches in California, Maryland,
Virginia, Ohio and Indiana with deposits totaling approximately $3.4 billion.
As a result of these sales, the company reduced acquired intangibles by $110
and $93 million in 1996 and 1995, respectively.
In October 1995, the company sold the individual life and annuity product
lines of its individual life insurance business, retaining the credit life
insurance business. Assets sold, principally investment securities, totaled
approximately $6.1 billion. The company also discontinued its remaining
individual life insurance lines which included periodic payment annuities and
corporate life insurance products.
In 1995, the company also exited from its traditional first mortgage
business, sold its domestic first mortgage servicing portfolio and 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.
- - Virtually all of the company's businesses reported improved earnings in 1996
compared to 1995 and 1994;
Higher earnings of the domestic consumer finance business were due to strong
retail receivables growth, particularly in other unsecured receivables. Growth
in receivables and improved pricing led to higher net interest margin, partially
offset by higher credit losses primarily due to increased bankruptcies.
Increased earnings for the Visa/MasterCard business were due to receivable
growth, partially offset by higher credit losses resulting primarily from
increased personal bankruptcy filings that have been experienced throughout the
industry. In 1996, receivable growth resulted primarily from the acquisition
of the AFL-CIO's $3.4 billion Union Privilege affinity card portfolio ("Union
Privilege"). Union Privilege was created by the AFL-CIO to market benefits to
union members. In addition, the company purchased approximately $725 million
of receivables from Barnett Banks, Inc. Operating results continued to benefit
from the alliance with General Motors Corporation ("GM") to issue the GM Card,
a co-branded credit card. Domestic GM Card managed receivables totaled
approximately $8.8 billion at December 31, 1996, up 11 percent from $7.9
billion at year-end 1995 and 29 percent from $6.8 billion at year-end 1994.
Earnings in the company's private-label credit card business improved over
the prior periods primarily due to receivable growth.
The United Kingdom operation's net income increased 36 percent to $61.1
million compared to $44.9 million in 1995 and $27.7 million in 1994, primarily
due to improved efficiency and receivables growth. Managed receivables totaled
<PAGE> 5
$3.0 billion at year-end 1996, up 37 percent from the end of
1995, as a result of higher levels of unsecured products and
increased co-branding credit card relationships.
The Canadian operation had a higher profit in 1996 due
primarily to improved efficiency. Net interest margin
continued to improve as this business refocused on its core
consumer finance products. This improvement was partially
offset by lower asset levels due to the sale of lower return
assets in the fourth quarter of 1995.
Operating results of the commercial business were better due
to lower credit losses and increased gains from the disposition
of assets.
- The company's managed net interest margin increased 55 basis
points to 6.98 percent in 1996 from 6.43 percent in 1995 and
increased 28 basis points from 6.70 percent in 1994 reflecting
the product mix change towards unsecured receivables, lower
leverage and improved pricing.
- The company's normalized managed basis efficiency ratio was
40.8 percent in 1996, 46.0 percent in 1995 and 52.7 percent
in 1994. The efficiency ratio is the ratio of normalized
operating expenses to managed net interest margin and
other revenues less policyholders' benefits. The 1996
improvement was due to the sales of less-efficient
businesses in 1995 and 1994 and continued cost control in
its remaining businesses.
BALANCE SHEET - Managed assets totaled $48.1 billion at December 31, 1996,
REVIEW up 9 percent from $44.1 billion at year-end 1995 due to
receivable growth in the company's core businesses which was
partially offset by reduced levels of investment securities
and non-core receivables. Owned assets totaled $29.6 billion
at December 31, 1996, essentially flat from $29.2 billion at
year-end 1995. Changes in owned assets may vary from period
to period depending on the timing and significance of
securitization transactions. The company securitized
approximately $6.9 and $5.4 billion of receivables during
1996 and 1995, respectively.
- The company experienced higher growth in its core products
and total portfolio during 1996, as shown in the following
table:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
December 31, Increase (Decrease) Increase (Decrease)
All dollar amounts are stated in millions. 1996 in 1996/1995 in 1995/1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANAGED RECEIVABLES
Home equity $ 7,985.4 (9)% 11%
Visa/MasterCard 18,737.4 40 20
Private label 5,587.0 26 30
Other unsecured 8,620.2 29 24
- -----------------------------------------------------------------------------------------------------------
CORE PRODUCTS 40,930.0 23 19
- -----------------------------------------------------------------------------------------------------------
First mortgage 725.6 (65) (39)
Commercial 937.8 (27) (30)
- -----------------------------------------------------------------------------------------------------------
Total $42,593.4 16% 11%
===========================================================================================================
</TABLE>
During the fourth quarter of 1996, the company sold
approximately $1.7 billion of lower-margin loans, primarily
from the previously divested mortgage and consumer banking
businesses. These low return assets were previously held to
meet the qualified thrift lending requirements of the company's
banking subsidiary, but were no longer required as a result of
changes in the banking laws on September 30, 1996. Excluding
the impact of these asset sales, branch-sourced home equity
loans grew 7 percent and total core receivables grew 26 percent
in 1996.
In 1996 Visa/MasterCard receivables increased due to the
acquisitions of the $3.4 billion Union Privilege portfolio and
approximately $725 million of receivables from Barnett Banks,
Inc., as well as continued growth in the GM Card program. The
private label portfolio benefited from merchant programs signed
in 1995 in the United States and Canada. Other unsecured growth
was due to retail originations in the domestic consumer finance
and United Kingdom operations. The company also acquired
approximately $400 million of other unsecured receivables
associated with Union Privilege in the third quarter of 1996.
- The managed consumer two-months-and-over contractual
delinquency ratio increased to 4.15 percent at December 31,
1996 from 3.46 percent at December 31, 1995. The 1996 managed
consumer net chargeoff ratio was 3.35 percent compared to
21
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Household International, Inc. and Subsidiaries
2.95 and 2.84 percent in 1995 and 1994, respectively. The
increases were consistent with the company's outlook given
overall industry conditions.
- The company increased managed credit loss reserves by $418.8
million, or 36 percent, in 1996 to $1,596.2 million compared to
$1,177.4 million at December 31, 1995. This compares to an
increase of 16 percent in total managed receivables in 1996. The
increase in reserves reflected continuing uncertainty about
consumer credit performance and the changing mix in the
portfolio to more unsecured loans. Credit loss reserves as a
percent of managed receivables were 3.75 percent at year-end
1996 compared to 3.22 percent a year ago. Reserves as a percent
of nonperforming managed receivables increased to 119.1 percent
from 111.4 percent at December 31, 1995.
- The ratio of total shareholders' equity to owned assets was
11.22 percent, an increase from 10.17 percent at year-end 1995.
The ratio of total shareholders' equity to managed assets was
6.90 percent, up from 6.74 percent at December 31, 1995.
PRO FORMA Securitizations of consumer receivables have been, and will
MANAGED continue to be, an important source of liquidity for the
STATEMENTS OF company. The company continues to service the securitized
INCOME receivables after such receivables have been sold and retains a
limited recourse obligation. Securitizations impact the
classification of revenues and expenses in the statements of
income. 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 are held in the portfolio. Pro forma
managed statements of income 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 a pro forma managed basis equals net income on an
owned basis.
<TABLE>
<CAPTION>
PRO FORMA MANAGED STATEMENTS OF INCOME
In millions.
Year ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance income $ 5,273.7 $ 4,601.4 $ 3,897.2
Interest income from noninsurance investment securities 80.6 123.4 131.9
Interest expense 2,489.8 2,365.4 1,775.0
----------------------------------------------------------------------------------------
Net interest margin 2,864.5 2,359.4 2,254.1
Provision for credit losses 1,641.0 1,271.1 969.8
----------------------------------------------------------------------------------------
Net interest margin after provision for credit losses 1,223.5 1,088.3 1,284.3
----------------------------------------------------------------------------------------
Insurance revenues 253.4 322.1 282.0
Investment income 153.2 470.2 514.4
Fee income 916.1 665.5 546.4
Other income 232.4 279.9 126.7
----------------------------------------------------------------------------------------
Total other revenues 1,555.1 1,737.7 1,469.5
----------------------------------------------------------------------------------------
Salaries and fringe benefits 534.5 545.6 656.6
Occupancy and equipment expense 209.8 222.1 243.4
Other marketing expenses 498.1 359.5 327.4
Other servicing and administrative expenses 484.8 470.6 533.7
Policyholders' benefits 229.1 474.5 464.4
----------------------------------------------------------------------------------------
Total costs and expenses 1,956.3 2,072.3 2,225.5
----------------------------------------------------------------------------------------
Income before income taxes 822.3 753.7 528.3
Income taxes 283.7 300.5 160.7
----------------------------------------------------------------------------------------
Net income $ 538.6 $ 453.2 $ 367.6
========================================================================================
Average managed receivables $39,639.7 $34,502.5 $31,211.9
Average noninsurance investments 1,417.4 2,193.0 2,424.4
----------------------------------------------------------------------------------------
Average managed interest-earning assets $41,057.1 $36,695.5 $33,636.3
========================================================================================
</TABLE>
22
<PAGE> 7
The following discussion on revenues, where applicable, and
provision for credit losses includes comparisons to amounts
reported on the company's historical owned statements of income
("Owned Basis") as well as on the above pro forma managed
statements of income ("Managed Basis").
NET INTEREST MARGIN Net interest margin on an Owned Basis was
$1,509.9 million for 1996, up from $1,445.1 million in 1995 but
down from $1,531.5 million in 1994. As a percent of average
owned interest-earning assets, net interest margin was 6.09,
5.97 and 6.53 percent in 1996, 1995 and 1994, respectively. The
dollar increase over 1995 was primarily due to growth in average
owned interest-earning assets and higher interest spreads. The
dollar decrease in 1995 from 1994 was primarily due to increases
in interest expense throughout 1994 and early 1995 that were not
recaptured in finance income. See pages 34 and 35 for an
analysis of the company's Owned Basis net interest margin.
Net interest margin on a Managed Basis increased 21 percent
to $2,864.5 million from $2,359.4 million in 1995 due to
receivable growth and an increase in interest spreads. The net
interest margin percentage on a Managed Basis increased to 6.98
percent from 6.43 percent in 1995. Both of these percentages
were adversely affected by portfolios of temporary investments
that were used to build liquidity in anticipation of the sales
of the company's consumer banking operations that took place in
1995 and 1996, as well as the acquisition of the Union Privilege
portfolio in 1996. Excluding the impact of these temporary
investments, net interest margin as a percent of average managed
interest-earning assets was 7.07 and 6.48 percent in 1996 and
1995, respectively. Approximately two-thirds of the increase
over 1995 was due to the continued shift in product mix towards
unsecured receivables, with the remainder primarily due to lower
leverage and improved pricing.
In 1995, the net interest margin percentage on a Managed
Basis decreased to 6.43 percent from 6.70 percent in 1994 due to
increases in interest expense throughout 1994 and early 1995
that were not recaptured in finance income. The higher cost of
replacing deposits sold and the effect of temporary investments,
as described above, also reduced the margin in 1995. These
factors were partially offset by a change in portfolio mix
toward unsecured, variable rate loans which carry wider spreads.
Net interest margin on a Managed Basis is greater than on
an Owned Basis because Visa/MasterCard and other unsecured
receivables, which have wider spreads, are a larger portion of
the portfolio serviced with limited recourse than of the owned
portfolio.
PROVISION FOR CREDIT LOSSES The provision for credit losses
includes current period credit losses and an amount which, in
the judgment of management, is sufficient to maintain reserves
for credit losses at a level that reflects known and inherent
risks in the portfolio. The Managed Basis provision for credit
losses also includes a provision for the company's estimated
recourse liability over the life of the receivables securitized.
The provision for credit losses on receivables on an Owned
Basis totaled $759.6 million in 1996, essentially unchanged from
$761.3 million in 1995 and up 25 percent from $606.8 million in
1994. As a percent of average owned receivables, the provision
was 3.25 percent compared to 3.46 and 2.89 percent in 1995 and
1994, respectively. The provision is impacted by the type and
amount of receivables securitized in a given period.
The provision for credit losses on a Managed Basis totaled
$1,641.0 million in 1996, an increase of 29 percent from
$1,271.1 million in 1995 and up 69 percent from $969.8 million
in 1994. The provision as a percent of average managed
receivables was 4.14, 3.68 and 3.11 percent in 1996, 1995 and
1994, respectively.
Total unsecured consumer loans, which include
Visa/MasterCard and private-label credit cards and other
unsecured receivables, comprised 77 percent of the managed
receivable portfolio at December 31, 1996, up from 67 percent a
year ago. In view of continued uncertainty regarding consumer
loss trends, higher levels of personal bankruptcies and
continuing growth of unsecured products, the company recorded
provisions for credit losses in excess of current period
chargeoffs to increase its credit loss reserves. Provision in
excess of chargeoffs related to owned receivables was $102 and
$100 million in 1996 and 1995, respectively.
OTHER REVENUES Securitization income was $1,149.0, $873.6 and
$655.5 million in 1996, 1995 and 1994, respectively, and
consists of income associated with the securitization and sale
of receivables with limited recourse, including net interest
margin, fee and other income, and provision for credit losses
related to those receivables. Securitization income increased in
1996 due to growth in average securitized receivables. The
components of securitization
23
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Household International, Inc. and Subsidiaries
income are reclassified to the appropriate line in the
statements of income on a Managed Basis.
Insurance revenues of $253.4 million in 1996 were down from
$322.1 and $282.0 million in 1995 and 1994, respectively. The
decrease was primarily due to the sale of the individual life
and annuity product lines of business in the fourth quarter of
1995. On a pro forma basis, revenues of the retained insurance
business were $229.1 and $198.7 million in 1995 and 1994,
respectively. The increase in retained insurance revenues was
due to higher premiums in the domestic and United Kingdom
operations related to growth in the company's receivable
portfolios.
The increase in total insurance revenues from 1994 to 1995
was due to the sale in 1994 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.
Investment income includes interest income on investment
securities in the retained insurance lines of business as well
as realized capital gains and losses. Investment income of
$153.2 million in 1996 declined compared to $470.2 and $514.4
million in 1995 and 1994, respectively, primarily due to the
sale of the individual life and annuity business. On a pro forma
basis, investment income from the company's retained business
was $170.7 million in 1995 and $150.1 million in 1994. The
decrease in 1996 was primarily due to lower average levels of
investments and lower yields. The increase from 1994 to 1995 was
primarily due to higher gains from sales of available-for-sale
investments and higher yields.
Fee income on an Owned Basis includes revenues from
fee-based products such as credit cards, consumer banking
deposits, and in 1994, commission income from the company's
brokerage business. Fee income was $240.3 million in 1996, up
from $196.4 million in 1995 but down from $250.5 million in
1994. Fee income was higher than 1995 due to higher amounts of
owned credit card receivables in 1996. Fee income in 1995 was
lower than 1994 due to 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 38 percent to $916.1 million in 1996 from
$665.5 million in 1995 and increased 68 percent from $546.4
million in 1994. The increases were primarily due to higher
interchange and other fee income resulting from growth in the
managed credit card portfolio and increased transaction volume.
In addition, fee income in 1996 includes higher income
associated with the securitization and sale of a larger amount
of receivables compared to a year ago. Income recorded on these
securitization transactions was substantially offset by the
over-the-life provision for estimated credit losses on the
securitized receivables, as previously discussed.
Other income was $232.4, $279.9 and $126.7 million during
1996, 1995 and 1994, respectively, and includes gains and losses
from the disposition of assets and businesses and income from
servicing receivable portfolios without recourse.
EXPENSES Operating expenses were $1,727.2, $1,597.8 and $1,761.1
million for 1996, 1995 and 1994, respectively. During 1996, the
company recorded non-operating charges of $78 million related to
the settlement of certain legal matters with a former subsidiary
of the company, rationalization of office space and other
matters. The company incurred charges to consolidate space and
staff in certain operations in 1995 and 1994 totaling $15 and
$23 million, respectively.
Salaries and fringe benefits were $534.5 million in 1996,
down slightly from $545.6 million in 1995 and down 19 percent
from $656.6 million in 1994. The improvement was primarily due
to a lower average number of employees compared to the prior
years, which resulted from actions initiated in late 1994 and
continued through mid-1996 to improve the operating efficiency
of certain businesses and to exit others. This improvement was
partially offset in 1996 by an increase in the number of
collectors in the company's lending businesses. The average
number of employees during 1996, 1995 and 1994 was approximately
13,600, 14,000 and 17,200, respectively.
Occupancy and equipment expense was $209.8 million in 1996,
down slightly from $222.1 million in 1995 and down 14 percent
from $243.4 million in 1994. Excluding non-operating costs of
$14 million in 1996, these expenses were down 12 percent from
1995 and 20 percent from 1994 due to initiatives taken
throughout the three year period to rationalize office space and
sell less-efficient businesses.
Other marketing expenses were $498.1 million, up 39 percent
from $359.5 million in 1995 and up 52 percent from $327.4
million in 1994. These increases were principally due to
marketing initiatives taken for the company's credit card
24
<PAGE> 9
portfolio. Other marketing expenses include amortization of
premiums paid on portfolios acquired and reflect the purchase of
the Union Privilege portfolio in June 1996.
Other servicing and administrative expenses of $484.8
million in 1996 were up 3 percent from $470.6 million in 1995
but down 9 percent from $533.7 million in 1994. Excluding
non-operating costs of $64, $15 and $23 million in 1996, 1995
and 1994, respectively, other servicing and administrative
expenses declined 8 percent compared to 1995 and 18 percent from
1994 primarily due to the cost reduction initiatives previously
discussed.
Policyholders' benefits were $229.1, $474.5 and $464.4
million in 1996, 1995 and 1994, respectively. The decrease in
expense in 1996 was due to the sale of the individual life and
annuity business in late 1995. On a pro forma basis,
policyholders' benefits of the retained insurance business were
$211.4 and $199.5 million in 1995 and 1994, respectively. The
increase in 1996 was primarily due to growth in domestic and
United Kingdom specialty and credit insurance.
Income taxes. The 1996 effective tax rate was 34.5 percent
compared to 39.9 percent in 1995 and 30.4 percent in 1994. The
1995 tax rate was affected by additional taxes on the sale of
the insurance business. Excluding this impact, 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 on this sale, the effective tax
rate would have been 32.7 percent in 1994.
CREDIT QUALITY The company's delinquency and net chargeoff ratios reflect,
among other factors, the quality of receivables, average
seasoning, the success of collection efforts and general
economic conditions.
During 1996 delinquency and net chargeoff levels increased,
which were consistent with industry trends. Chargeoff statistics
during the year were impacted by higher consumer bankruptcies in
the unsecured portfolios and the continued seasoning of the
receivables. In light of these conditions, the company continued
to tighten and refine credit underwriting throughout the year
and increased the number of collectors.
Delinquency and chargeoff statistics also continued to be
impacted by the ongoing shift in the company's product mix
toward unsecured receivables. Unsecured loans were 79, 69 and 64
percent of the managed consumer receivable portfolio at December
31, 1996, 1995 and 1994, respectively. Because other unsecured,
private label 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
and benefiting the net interest margin through higher pricing.
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. The company's focus continues to
utilize risk-based pricing for each loan within the context of
acceptable risk characteristics. The company has developed a
credit process through the experience of numerous marketing,
credit and risk management tests which provides a reliable basis
for predicting the asset quality of new accounts. The company
also believes that its frequent and early contact with
delinquent customers, as well as active portfolio management,
has a significant impact on predicting delinquency trends and
managing net chargeoffs.
The company's chargeoff policy for consumer receivables
varies by product. Receivables are generally written off, or for
secured products, written down to net realizable value, at the
following stages of contractual delinquency: first mortgage,
home equity and Visa/MasterCard - 6 months; private-label credit
card - 9 months; and other unsecured - 9 months and no payment
received in 6 months. Commercial receivables are written off
when it becomes apparent that an account is uncollectible.
The 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
more than 10 percent of the company's domestic managed
receivables. The company's foreign consumer operations, located
in the United Kingdom and Canada, accounted for 7 and 3 percent,
respectively, of managed consumer receivables at December 31,
1996. 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.
25
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Household International, Inc. and Subsidiaries
MANAGED CONSUMER TWO-MONTH-AND-
OVER CONTRACTUAL DELINQUENCY RATIOS
<TABLE>
<CAPTION>
1996 Quarter End 1995 Quarter End
---------------------------- -----------------------------
4 3 2 1 4 3 2 1
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage 9.49% 3.82% 3.64% 3.28% 3.29% 2.16% 1.74% 1.79%
Home equity 3.96 3.55 3.35 3.20 3.24 3.14 2.78 2.75
Visa/MasterCard 2.71 2.54 2.05 2.42 2.22 2.29 2.31 2.33
Private label 5.50 5.43 5.04 4.74 4.51 4.25 4.00 4.42
Other unsecured 6.13 5.79 5.95 5.71 5.60 5.10 5.41 5.07
-------------------------------------------------------------------------------------------------
Total 4.15% 3.83% 3.49% 3.60% 3.46% 3.26% 3.13% 3.10%
=================================================================================================
</TABLE>
The managed consumer delinquency ratio increased from the prior
quarter and from a year ago. Approximately one-half of the 32
basis point increase from the prior quarter resulted from the
sale of lower return assets during the fourth quarter of 1996.
The majority of these sold assets were real-estate secured and,
therefore, had lower delinquency levels. Excluding these asset
sales, the company's managed delinquency ratio would have been
3.99 percent at year end. The first mortgage and home equity
delinquency ratios, excluding the sales, would have been 4.37
and 3.63 percent, respectively. The remaining portfolios
experienced delinquency performance in line with the company's
expectations and industry trends.
The increase in the managed delinquency ratio compared to a
year ago was primarily due to seasoning of the portfolios, the
company's continued shift in product mix from traditional first
mortgages and toward unsecured products, and a slower consumer
payment pattern, including higher personal bankruptcies.
The owned consumer two-month-and-over contractual
delinquency ratio was 4.50 and 3.64 percent at December 31, 1996
and 1995, respectively.
MANAGED CONSUMER NET CHARGEOFF RATIOS
<TABLE>
<CAPTION>
1996 Quarter Annualized 1995 Quarter Annualized
Full Year ---------------------------- Full Year ----------------------------- Full Year
1996 4 3 2 1 1995 4 3 2 1 1994
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage .45% .30% .50% .46% .51% .35% .47% .32% .36% .29% .41%
Home equity .99 1.18 .98 .89 .89 1.00 .95 1.12 1.04 .90 1.31
Visa/MasterCard 4.67 4.66 4.71 4.86 4.44 4.26 4.67 4.24 4.05 4.04 3.92
Private label 3.21 3.70 3.54 3.82 4.51 4.72 5.14 4.63 4.71 4.29 3.57
Other unsecured 4.02 4.18 4.35 3.58 3.91 3.33 3.46 3.45 3.21 3.25 4.36
----------------------------------------------------------------------------------------------------------------
Total 3.35% 3.59% 3.52% 3.33% 3.24% 2.95% 3.28% 2.97% 2.81% 2.71% 2.84%
================================================================================================================
</TABLE>
The managed consumer net chargeoff ratio was 3.35 percent, up
from 2.95 percent in 1995 and 2.84 percent in 1994. The increase
was driven by higher bankruptcy chargeoffs in the company's
unsecured portfolios and continued seasoning of those
receivables. This performance is consistent with the company's
expectations and industry trends, as unsecured products
historically have higher chargeoff rates than secured products.
The company expects increases in its managed consumer net
chargeoff ratios in the near future based on changes in
portfolio mix and anticipated consumer payment patterns.
The owned consumer net chargeoff ratio was
2.90, 3.07 and 3.04 percent for 1996, 1995 and 1994,
respectively.
26
<PAGE> 11
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31 1996 1995 1994
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual managed receivables $ 778.5 $ 768.5 $ 581.5
Accruing managed consumer receivables 90 or more days delinquent 549.0 267.2 228.2
Renegotiated commercial loans 12.9 21.2 41.8
-----------------------------------------------------------------------------------------------------------------
Total nonperforming managed receivables 1,340.4 1,056.9 851.5
Real estate owned 136.6 136.5 182.8
-----------------------------------------------------------------------------------------------------------------
Total nonperforming managed assets $1,477.0 $1,193.4 $1,034.3
=================================================================================================================
Managed credit loss reserves as a percent of nonperforming
managed receivables 119.1% 111.4% 103.6%
-----------------------------------------------------------------------------------------------------------------
</TABLE>
Nonperforming managed receivables increased primarily due to an
increase in accruing managed receivables 90 days or more
delinquent in the Visa/MasterCard business.
CREDIT LOSS The provision for credit losses on owned receivables is made in
RESERVES an amount sufficient to maintain credit loss reserves at a level
considered adequate to cover probable losses of principal and
interest in the existing portfolio of owned receivables. Probable
losses are estimated for consumer receivables based on
contractual delinquency status and historical loss experience. In
addition, general loss reserves on consumer receivables are
maintained to reflect management's judgment of portfolio risk
factors. For commercial loans, probable losses are calculated
using estimates of amounts and timing of future cash flows
expected to be received on loans, as well as management's
assessment of general reserve requirements. Loss reserve
estimates are reviewed periodically and adjustments are reported
in earnings when they become known. As these estimates are
influenced by factors outside the company's control, such as
economic conditions and consumer payment patterns, there is
uncertainty inherent in these estimates, making it reasonably
possible that they could change.
Certain home equity, Visa/MasterCard, private label and
other unsecured receivables have been securitized and sold to
investors with limited recourse. 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 resulting gain is adjusted
by establishing a reserve for estimated probable losses under
the recourse provisions.
Owned credit loss reserves increased 25 percent to $900.2
million from $720.4 million at December 31, 1995. The ratio of
credit loss reserves to total owned receivables was 3.74 percent,
up from 3.31 percent at December 31, 1995.
Total managed credit loss reserves increased 36 percent
to $1,596.2 million from $1,177.4 million at December 31, 1995.
The ratio of credit loss reserves to total managed receivables
was 3.75 percent, up from 3.22 percent at December 31, 1995. The
company has continually increased credit loss reserves due to
continued growth and seasoning of unsecured products, coupled
with uncertainty over the strength of the economy and increased
personal bankruptcies. The ratio of total credit loss reserves to
total managed nonperforming loans increased to 119.1 percent from
111.4 percent at December 31, 1995.
In the five years ended December 31, 1996 the company
has continued to increase its credit loss reserves for managed
receivables to reflect the change in mix to unsecured products
and seasoning. These unsecured products historically have higher
chargeoff rates than secured products. During this time, the
company has continued to refine and improve its underwriting
standards and account management techniques.
The company will continue to monitor its credit loss
reserves and make additional provisions to the reserve as it
deems appropriate. The following table sets forth the managed
credit loss reserves for the periods indicated:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31 1996 1995 1994 1993 1992
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managed credit loss reserves $1,596.2 $1,177.4 $882.5 $844.7 $724.8
Reserves as a % of managed receivables 3.75% 3.22% 2.67% 2.78% 2.59%
======================================================================================
</TABLE>
27
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Household International, Inc. and Subsidiaries
LIQUIDITY AND The company continued to strengthen its capital position in
CAPITAL 1996 through increased retained earnings and controlled asset
RESOURCES growth. 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 capital levels against both on-balance sheet assets and
receivables serviced with limited recourse. As a result of
management's decision to improve capital levels, from 1992
through 1996, total shareholders' equity increased 77 percent
while managed assets increased 23 percent.
Selected capital ratios for the company were as follows:
<TABLE>
<CAPTION>
At December 31 1996 1995
-------------------------------------------------------
<S> <C> <C>
Total shareholders' equity(1)
as a percent of owned assets 11.22% 10.17%
Total shareholders' equity(1)
as a percent of managed assets 6.90 6.74
=======================================================
</TABLE>
(1)Includes trust preferred securities.
The company, through its subsidiaries, Household Capital Trust I
and II, issued $100 and $75 million of trust preferred
securities during 1996 and 1995, respectively.
PARENT COMPANY The parent 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 debt instruments, including commercial paper marketed by
an in-house sales force, totaling $203.3 and $286.5 million at
December 31, 1996 and 1995, respectively. At December 31, 1996,
the company had $400 million in committed back-up lines of credit
to facilitate liquidity for its commercial paper program. None of
these back-up lines were utilized at December 31, 1996. The lines
of credit expire in 1998 and none of the lines of credit
contained a material adverse change clause that could restrict
availability. The only financial covenant contained in the terms
of the parent company's debt agreements is the maintenance of
minimum shareholders' equity of $2.0 billion. The company
received dividends of $265 and $400 million from its subsidiaries
in 1996 and 1995, 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 1996 the company
made capital contributions of $200 million to a subsidiary. In
1996 and 1995, the company paid $158.4 and $154.0 million,
respectively, in dividends to shareholders. The company's double
leverage ratio, which is defined as parent company investments
in subsidiaries divided by common and preferred shareholders'
equity, was 1.10 and 1.08 at December 31, 1996 and 1995,
respectively.
In July 1996, the company issued preferred share purchase
rights for its common stock which may be exercised in the event
of the expressed intent to acquire or actual acquisition of 15
percent of the company's common stock by a party or an
associated group.
SUBSIDIARIES The major use of cash by the company's subsidiaries
is the origination or purchase of receivables or purchases of
investment securities. The main sources of cash for the company's
subsidiaries are the collection and securitization of
receivable balances; maturities or sales of investment
securities; proceeds from the issuance of debt and deposits; and
cash provided by operations.
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 of consumer receivables. At December 31, 1996,
HFC's outstanding commercial paper totaled $4.8 billion compared
to $4.0 billion at December 31, 1995. HFC markets its commercial
paper through an in-house sales force, directly reaching more
than 275 investors. HFC also markets domestic medium-term notes
through investment banks and its in-house sales force and issued
a total of $3.2 billion in 1996. HFC and its subsidiary,
Household Bank (Nevada) N.A., issued $897 million in Euro
medium-term notes in 1996. These notes were issued in various
local currencies and currency swaps were utilized to convert the
notes to U.S. dollars. During 1996, HFC also issued $1.1 billion
of long-term debt with average remaining maturities of seven
years. To facilitate liquidity, HFC had committed back-up lines
of credit totaling $5.2 billion at December 31, 1996, $400
million of which was limited by the amount utilized by the parent
company. None of these back-up lines were utilized by HFC at
December 31, 1996. None of these lines contained a
28
<PAGE> 13
material adverse change clause which could restrict
availability. These back-up lines expire on various dates from
1997 through 2001. The only financial covenant contained in the
terms of HFC's debt agreements is the maintenance of minimum
shareholder's equity of $1.5 billion.
The company's subsidiary, Household Bank, f.s.b. ("Bank"),
primarily utilizes wholesale funding, including advances from
the Federal Home Loan Bank, Federal funds borrowings, repurchase
agreements, brokered deposits, medium-term notes, Euro
medium-term notes, bank and other capital market borrowings and
securitizations of credit card receivables.
The Bank is subject to the capital adequacy guidelines
adopted by the Office of Thrift Supervision. At December 31,
1996, the leverage, tier 1 and total risk-based capital ratio
levels for a "well capitalized" institution were 5.0, 6.0 and
10.0 percent, respectively. The Bank's ratios for each of these
categories at December 31, 1996 were 11.4, 15.4 and 24.4
percent, respectively.
During 1996 and 1995, the company sold its consumer
banking operations which included deposits of $2.8 and $3.4
billion, respectively. These transactions did not have a
material impact on the company's funding activities.
During the fourth quarter of 1996, HFC and the Bank sold
approximately $1.7 billion of lower margin loans, primarily
from the previously divested mortgage and consumer banking
businesses. The cash proceeds from the sales were used to repay
debt.
Securitizations of consumer receivables have been, and will
continue to be, an important source of liquidity for both HFC
and the Bank. The market for securities backed by receivables is
a reliable, efficient and cost-effective source of funds, which
HFC and the Bank plan to utilize in the future. During 1996
these subsidiaries securitized approximately $6.5 billion of
home equity, Visa/MasterCard and other unsecured receivables
compared to $5.1 billion in 1995 and $4.3 billion in 1994. At
December 31, 1996, HFC and the Bank had $17.6 billion of
receivables sold under securitization transactions. At December
31, 1996, the expected weighted average remaining life of these
securitization transactions was 2.7 years.
The following table summarizes the expected amortization of
HFC and the Bank's securitizations by type:
<TABLE>
<CAPTION>
In millions.
At December 31, 1996 1997 1998 1999 2000 2001 Thereafter
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Home equity $ 909.3 $ 804.7 $ 726.1 $ 448.1 $269.4 $1,179.9
Visa/MasterCard 1,189.7 1,280.6 4,727.0 2,687.7 264.7 -
Private label 142.0 213.5 161.5 - - -
Other unsecured 730.9 544.9 409.6 306.3 299.3 320.2
--------------------------------------------------------------------------------
Total $2,971.9 $2,843.7 $6,024.2 $3,442.1 $833.4 $1,500.1
================================================================================
</TABLE>
For Visa/MasterCard and private label securitizations, early
amortization begins if the annualized portfolio yield (defined as
the sum of finance income and applicable fees, less net
chargeoffs) for a certain period drops below a base rate
(generally equal to the sum of the weighted average certificate
and servicing fee rates), or if certain other events occur. For
home equity and other unsecured securitizations, early
amortization begins if the annualized portfolio yield falls below
various specified thresholds, or if certain other events occur.
The company does not presently anticipate the occurrence of any
such early amortization event. If any such event occurred, the
company's funding requirements would increase. These additional
requirements could be met through securitizations, issuance of
various types of debt or drawdowns of existing back-up lines of
credit. The company believes it would continue to have adequate
available liquidity if an early amortization event occurred.
HFC and the Bank have facilities with commercial banks under
which they may securitize up to $4.5 billion of credit card
receivables. These facilities are renewable on an annual basis.
At December 31, 1996, $3.8 billion of credit card receivables
were securitized under these programs.
At December 31, 1996, 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
29
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Household International, Inc. and Subsidiaries
sufficient funding capacity to refinance maturing
obligations and fund business growth.
The company had investments in foreign subsidiaries of
$448.5 million at December 31, 1996. Assets of foreign
subsidiaries were $4.1 billion at year-end 1996. The company
has entered 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, were a net gain of
$.4 million in 1996 and a net loss of $3.5 million in 1995, 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 1996 and 1995,
as did the United Kingdom subsidiary in 1996. These borrowings
were converted to their local currencies using currency swaps,
allowing the subsidiaries to achieve a lower cost of funds than
that available in their 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. The Canadian
operation is funded with commercial paper, intermediate- and
long-term debt, and retail deposits. The Canadian operation
sold approximately $725 million of deposits in the fourth
quarter of 1995. Deposits were $49 and $117 million at
December 31, 1996 and 1995, respectively. Intermediate- and
long-term debt totaled $856 million at year-end 1996 compared
with $778 million a year ago. Committed back-up lines of
credit for Canada were approximately $400 million compared to
approximately $370 million at December 31, 1995. 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 and long-term debt. Deposits at year-end 1996 were $815
million compared to $543 million a year earlier. Committed
back-up lines of credit for the United Kingdom were
approximately $1.8 billion at December 31, 1996. These lines
have varying maturities from 1997 through 2002. Borrowings
from bank lines of credit at year-end 1996 were $838 million
compared to $650 million a year ago. The company has
guaranteed payment of all debt obligations, except for certain
deposits, of its United Kingdom subsidiary. In 1996 the United
Kingdom subsidiary securitized $388 million of other unsecured
receivables compared to $288 million of these receivables in
1995. Other unsecured receivables outstanding under
securitization transactions totaled $911 million at December
31, 1996. These transactions mature through 2003.
CAPITAL EXPENDITURES During 1996 the company invested $97
million in capital expenditures compared to the prior-year
level of $76 million.
RISK MANAGEMENT The company has a comprehensive program
which addresses the management and diversification of
financial risk, such as interest rate, counterparty and
currency risk. 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. Interest rate
risk is the exposure of earnings to changes in interest rates.
The company manages the potential impact on earnings from
future changes in interest rates. Simulation models are
utilized to measure the impact on net interest margin of
changes in interest rates. At December 31, 1996, the company
has managed its interest rate risk to levels substantially
below those allowed by its policy.
The company generally 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 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.
At December 31, 1996, 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 $5.5
billion of short-term debt, with the remainder
30
<PAGE> 15
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.
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 peak exposure
at December 31, 1996, approximately 90 percent of the company's derivative
instrument counterparties 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.
In order to minimize currency risk, the company enters into currency swaps
to convert both principal and interest payments on debt issued from one
currency to the appropriate functional currency.
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 consolidated financial statements, Note 11, "Fair
Value of Financial Instruments," provides information regarding the
fair value of certain financial instruments.
31
<PAGE> 16
ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--OWNED RECEIVABLES
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
All dollar amounts are stated in millions. 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT JANUARY 1 $ 720.4 $ 546.0 $ 621.9 $ 564.1 $ 611.4
- ---------------------------------------------------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES-OWNED RECEIVABLES 759.6 761.3 606.8 735.8 671.5
- ---------------------------------------------------------------------------------------------------------------------
OWNED RECEIVABLES Domestic:
CHARGED OFF First mortgage (8.6) (6.6) (10.3) (13.5) (7.2)
Home equity (35.2) (26.9) (37.2) (36.2) (37.2)
Visa/MasterCard (261.7) (258.7) (204.4) (172.4) (129.5)
Private label (122.0) (132.2) (101.9) (88.5) (95.5)
Other unsecured (217.1) (211.7) (202.8) (205.7) (202.5)
Foreign (117.5) (109.5) (118.0) (151.4) (226.0)
----------------------------------------------------------------------------------------------
Total consumer (762.1) (745.6) (674.6) (667.7) (697.9)
Commercial (15.4) (41.0) (85.5) (145.1) (75.4)
----------------------------------------------------------------------------------------------
Total owned receivables charged off (777.5) (786.6) (760.1) (812.8) (773.3)
- ---------------------------------------------------------------------------------------------------------------------
RECOVERIES ON Domestic:
OWNED RECEIVABLES First mortgage 2.5 2.2 2.9 2.6 2.2
Home equity 1.3 1.6 1.5 1.2 .6
Visa/MasterCard 16.5 19.7 17.6 12.5 10.5
Private label 23.7 24.1 23.6 19.4 15.3
Other unsecured 36.0 45.6 39.5 38.8 35.8
Foreign 35.3 29.6 30.4 26.4 22.0
----------------------------------------------------------------------------------------------
Total consumer 115.3 122.8 115.5 100.9 86.4
Commercial 4.4 2.9 1.3 1.7 .4
----------------------------------------------------------------------------------------------
Total recoveries on owned receivables 119.7 125.7 116.8 102.6 86.8
Portfolio acquisitions, net 78.0 74.0 (39.4) 32.2 (32.3)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CREDIT LOSS Domestic:
RESERVES FOR First mortgage 4.3 4.1 5.1 4.1 6.0
OWNED RECEIVABLES Home equity 38.6 26.3 20.1 16.9 12.4
Visa/MasterCard 266.4 131.1 125.6 122.7 60.7
Private label 162.1 147.1 65.0 70.2 65.4
Other unsecured 204.7 196.2 141.7 129.3 111.6
Foreign 88.2 65.0 39.5 45.4 62.0
----------------------------------------------------------------------------------------------
Total consumer 764.3 569.8 397.0 388.6 318.1
Commercial 135.9 150.6 149.0 208.3 231.0
Unallocated corporate - - - 25.0 15.0
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT DECEMBER 31 $ 900.2 $ 720.4 $ 546.0 $ 621.9 $ 564.1
- ---------------------------------------------------------------------------------------------------------------------
RATIO OF CREDIT LOSS Consumer 3.30% 2.78% 2.12% 2.20% 1.89%
RESERVES TO OWNED Commercial 14.50 11.68 8.12 7.36 7.04
RECEIVABLES ----------------------------------------------------------------------------------------------
Total(1) 3.74% 3.31% 2.66% 3.03% 2.81%
- -----------------------===============================================================================================
RATIO OF CREDIT LOSS Consumer 99.9% 98.9% 82.5% 76.6% 49.2%
RESERVES TO OWNED Commercial 188.0 90.3 94.2 69.2 46.5
NONPERFORMING LOANS ----------------------------------------------------------------------------------------------
Total(1) 107.5% 97.0% 85.4% 76.9% 49.4%
- -----------------------==============================================================================================
</TABLE>
(1)1993 and 1992 amounts include the unallocated corporate reserve.
32
<PAGE> 17
ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--MANAGED RECEIVABLES
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
All dollar amounts are stated in millions. 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT JANUARY 1 $ 1,177.4 $ 882.5 $ 844.7 $ 724.8 $ 702.3
- ----------------------------------------------------------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES-MANAGED RECEIVABLES 1,641.0 1,271.1 969.8 1,016.8 922.6
- ----------------------------------------------------------------------------------------------------------------------------
MANAGED RECEIVABLES Domestic:
CHARGED OFF First mortgage (8.6) (6.6) (10.3) (13.5) (7.2)
Home equity (73.4) (72.7) (82.6) (75.3) (59.2)
Visa/MasterCard (763.0) (562.4) (401.1) (284.6) (237.6)
Private label (153.3) (189.6) (123.0) (113.5) (109.5)
Other unsecured (308.1) (216.1) (202.8) (222.3) (248.9)
Foreign (131.9) (109.5) (118.0) (151.4) (226.0)
------------------------------------------------------------------------------------------------------
Total consumer (1,438.3) (1,156.9) (937.8) (860.6) (888.4)
Commercial (15.4) (41.0) (85.5) (145.1) (75.4)
------------------------------------------------------------------------------------------------------
Total managed receivables charged off (1,453.7) (1,197.9) (1,023.3) (1,005.7) (963.8)
- ----------------------------------------------------------------------------------------------------------------------------
RECOVERIES ON Domestic:
MANAGED RECEIVABLES First mortgage 2.5 2.2 2.9 2.6 2.2
Home equity 1.5 1.9 1.5 1.2 .6
Visa/MasterCard 41.8 33.5 25.7 15.8 13.3
Private label 27.1 29.4 25.4 20.9 15.8
Other unsecured 40.8 45.5 39.5 38.8 35.8
Foreign 35.8 29.6 30.4 26.4 22.0
------------------------------------------------------------------------------------------------------
Total consumer 149.5 142.1 125.4 105.7 89.7
Commercial 4.4 2.9 1.3 1.7 .4
------------------------------------------------------------------------------------------------------
Total recoveries on managed receivables 153.9 145.0 126.7 107.4 90.1
Portfolio acquisitions, net 77.6 76.7 (35.4) 1.4 (26.4)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CREDIT LOSS Domestic:
RESERVES FOR First mortgage 4.3 4.1 5.1 4.1 6.0
MANAGED RECEIVABLES Home equity 130.6 105.1 97.8 75.5 54.4
Visa/MasterCard 566.5 344.1 317.9 274.6 126.5
Private label 182.2 178.4 117.9 82.5 87.0
Other unsecured 455.3 308.9 141.7 129.3 142.9
Foreign 121.4 86.2 53.1 45.4 62.0
------------------------------------------------------------------------------------------------------
Total consumer 1,460.3 1,026.8 733.5 611.4 478.8
Commercial 135.9 150.6 149.0 208.3 231.0
Unallocated corporate - - - 25.0 15.0
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT DECEMBER 31 $ 1,596.2 $ 1,177.4 $ 882.5 $ 844.7 $ 724.8
============================================================================================================================
RATIO OF CREDIT LOSS Consumer 3.51% 2.90% 2.35% 2.22% 1.94%
RESERVES TO MANAGED Commercial 14.50 11.68 8.12 7.36 7.04
RECEIVABLES ------------------------------------------------------------------------------------------------------
Total(1) 3.75% 3.22% 2.67% 2.78% 2.59%
- ----------------------======================================================================================================
RATIO OF CREDIT LOSS Consumer 115.2% 115.3% 105.8% 88.3% 56.0%
RESERVES TO MANAGED Commercial 188.0 90.3 94.2 69.2 46.5
NONPERFORMING LOANS ------------------------------------------------------------------------------------------------------
Total(1) 119.1% 111.4% 103.6% 85.0% 53.6%
- ----------------------======================================================================================================
</TABLE>
(1)1993 and 1992 amounts include the unallocated corporate reserve.
33
<PAGE> 18
NET INTEREST MARGIN--1996 COMPARED TO 1995 (OWNED BASIS)
<TABLE>
<CAPTION>
Finance and
Average Interest Income/
Household International, Inc. Outstanding(2) Average Rate Interest Expense
and Subsidiaries ------------------- ------------ ------------------
All dollar amounts are stated in millions. 1996 1995 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS Receivables:
First mortgage $ 1,717.8 $ 2,941.1 7.6% 8.1% $ 130.7 $ 237.1
Home equity 4,363.2 3,684.5 11.7 11.5 508.5 423.5
Visa/MasterCard 7,029.0 5,152.7 12.8 14.3 897.9 736.1
Private label 4,146.1 2,995.7 12.3 14.0 510.6 419.6
Other unsecured 5,017.5 5,526.0 16.9 17.3 849.3 956.8
Commercial 1,116.9 1,721.7 4.7 6.1 52.9 105.7
==========================================================================================================
Total receivables $23,390.5 $22,021.7 12.6% 13.1% $2,949.9 $2,878.8
Noninsurance investments 1,417.4 2,193.0 5.7 5.6 80.6 123.4
==========================================================================================================
Total interest-earning assets
(excluding insurance investments) $24,807.9 $24,214.7 12.2% 12.4% $3,030.5 $3,002.2
Insurance investments 2,202.1 6,140.8
Other assets 2,651.8 3,386.7
----------------------------------------------------------------------------------------------------------
Total Assets $29,661.8 $33,742.2
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND Debt:
SHAREHOLDERS' Deposits $ 3,889.9 $ 7,044.2 5.3% 5.1% $ 204.6 $ 362.7
EQUITY Commercial paper 5,334.2 4,551.1 5.4 6.0 286.9 273.2
Bank and other borrowings 1,147.4 1,565.1 7.2 7.4 82.6 116.3
Senior and senior
subordinated debt (with
original maturities
over one year) 13,424.7 10,489.1 7.1 7.7 946.5 804.9
==========================================================================================================
Total debt $23,796.2 $23,649.5 6.4% 6.6% $1,520.6 $1,557.1
Other liabilities 2,775.3 7,326.1
----------------------------------------------------------------------------------------------------------
Total liabilities 26,571.5 30,975.6
Preferred securities 334.2 309.0
Common shareholders' equity 2,756.1 2,457.6
----------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $29,661.8 $33,742.2
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN-OWNED BASIS(1) $1,509.9 $1,445.1
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST SPREAD-OWNED BASIS(4),(5) 6.1% 6.0%
============================================================================================================================
<CAPTION>
Increase/(Decrease) Due to:
Household International, Inc. --------------------------------
and Subsidiaries Volume Rate
All dollar amounts are stated in millions. Variance Variance(3) Variance(3)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS Receivables:
First mortgage $(106.4) $ (93.7) $ (12.7)
Home equity 85.0 79.0 6.0
Visa/MasterCard 161.8 245.9 (84.1)
Private label 91.0 146.3 (55.3)
Other unsecured (107.5) (86.4) (21.1)
Commercial (52.8) (32.0) (20.8)
====================================================================================
Total receivables $ 71.1 $ 174.6 $(103.5)
Noninsurance investments (42.8) (43.8) 1.0
====================================================================================
Total interest-earning assets
(excluding insurance investments) $ 28.3 $ 72.7 $ (44.4)
Insurance investments
Other assets
------------------------------------------------------------------------------------
Total Assets
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND Debt:
SHAREHOLDERS' Deposits $(158.1) $(165.8) $ 7.7
EQUITY Commercial paper 13.7 43.9 (30.2)
Bank and other borrowings (33.7) (30.3) (3.4)
Senior and senior
subordinated debt (with
original maturities
over one year) 141.6 211.1 (69.5)
====================================================================================
Total debt $ (36.5) $ 9.5 $ (46.0)
Other liabilities
------------------------------------------------------------------------------------
Total liabilities
Preferred securities
Common shareholders' equity
------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity
- ------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN-OWNED BASIS(1) $ 64.8 $ 63.2 $ 1.6
- ------------------------------------------------------------------------------------------------------
INTEREST SPREAD-OWNED BASIS(4),(5)
======================================================================================================
</TABLE>
(1)See page 36 for the company's net interest margin on a
managed basis for 1996, 1995 and 1994.
(2)Nonaccrual loans are included in average outstanding
balances.
(3)Rate/volume variance is allocated based on the percentage
relationship of changes in volume and changes in rate to
the total interest variance. For total receivables, total
interest-earning assets and total debt, the rate and volume
variances are calculated based on the relative weighting of
the individual components comprising these totals. These
totals do not represent an arithmetic sum of the individual
components.
(4)Represents net interest margin as a percent of average
interest-earning assets.
(5)The net interest margin analysis includes the following for
foreign businesses:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C>
Average interest-earning assets $3,142.8 $3,665.7 $4,044.8
Average interest-bearing liabilities 2,833.1 3,444.4 3,905.7
Net interest margin 251.3 235.9 261.0
Interest spread 8.0% 6.4% 6.5%
-----------------------------------------------------------------
</TABLE>
34
<PAGE> 19
NET INTEREST MARGIN--1995 COMPARED TO 1994 (OWNED BASIS)
<TABLE>
<CAPTION>
Finance and
Average Interest Income/
Household International, Inc. Outstanding(2) Average Rate Interest Expense
and Subsidiaries ------------------- ------------- -------------------
All dollar amounts are stated in millions. 1995 1994 1995 1994 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS Receivables:
First mortgage $ 2,941.1 $ 3,249.0 8.1% 7.7% $ 237.1 $ 250.3
Home equity 3,684.5 3,109.2 11.5 11.8 423.5 365.7
Visa/MasterCard 5,152.7 4,437.7 14.3 13.3 736.1 590.1
Private label 2,995.7 2,803.7 14.0 15.2 419.6 425.8
Other unsecured 5,526.0 4,788.2 17.3 17.2 956.8 821.6
Commercial 1,721.7 2,623.4 6.1 7.2 105.7 188.8
===========================================================================================================
Total receivables $22,021.7 $21,011.2 13.1% 12.6% $2,878.8 $2,642.3
Noninsurance investments 2,193.0 2,424.4 5.6 5.4 123.4 131.9
===========================================================================================================
Total interest-earning assets
(excluding insurance
investments) $24,214.7 $23,435.6 12.4% 11.8% $3,002.2 $2,774.2
Insurance investments 6,140.8 6,793.5
Other assets 3,386.7 3,862.3
-----------------------------------------------------------------------------------------------------------
Total Assets $33,742.2 $34,091.4
-----------------------------------------------------------------------------------------------------------
LIABILITIES AND Debt:
SHAREHOLDERS' Deposits $ 7,044.2 $ 7,668.1 5.1% 4.1% $ 362.7 $ 312.1
EQUITY Commercial paper 4,551.1 4,316.4 6.0 4.4 273.2 191.2
Bank and other borrowings 1,565.1 1,321.1 7.4 7.6 116.3 101.0
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
===========================================================================================================
Total debt $23,649.5 $23,512.2 6.6% 5.3% $1,557.1 $1,242.7
Other liabilities 7,326.1 8,133.5
-----------------------------------------------------------------------------------------------------------
Total liabilities 30,975.6 31,645.7
Preferred securities 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
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST SPREAD-OWNED BASIS (4,5) 6.0% 6.5%
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Increase/(Decrease) Due to:
Household International, Inc. --------------------------------
and Subsidiaries Volume Rate
All dollar amounts are stated in millions. Variance Variance(2) Variance(3)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Receivables:
First mortgage $(13.2) $(24.4) $ 11.2
Home equity 57.8 66.3 (8.5)
Visa/MasterCard 146.0 100.0 46.0
Private label (6.2) 28.1 (34.3)
Other unsecured 135.2 127.7 7.5
Commercial (83.1) (58.2) (24.9)
====================================================================================
Total receivables $236.5 $129.8 $106.7
Noninsurance investments (8.5) (12.9) 4.4
====================================================================================
Total interest-earning assets
(excluding insurance
investments) $228.0 $ 94.0 $134.0
Insurance investments
------------------------------------------------------------------------------------
Other assets
------------------------------------------------------------------------------------
Total Assets
------------------------------------------------------------------------------------
LIABILITIES AND Debt:
SHAREHOLDERS' Deposits $ 50.6 $ (27.0) $ 77.6
EQUITY Commercial paper 82.0 10.9 71.1
Bank and other borrowings 15.3 18.2 (2.9)
Senior and senior
subordinated debt (with
original maturities
over one year) 166.5 18.1 148.4
====================================================================================
Total debt $314.4 $ 7.3 $ 307.1
Other liabilities
------------------------------------------------------------------------------------
Total liabilities
Preferred securities
Common shareholders' equity
------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity
------------------------------------------------------------------------------------
NET INTEREST MARGIN-OWMED BASIS (1) $(86.4) $ 86.7 $(173.1)
- -------------------------------------------------------------------------------------------------------
INTEREST SPREAD-OWNED BASIS (4,5)
=======================================================================================================
</TABLE>
35
<PAGE> 20
NET INTEREST MARGIN--1996 COMPARED TO 1995 AND 1994 (MANAGED BASIS)
Household International, Inc. and Subsidiaries
Net Interest Margin on a Managed Basis-As receivables are securitized 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>
Average Outstanding (1) Average Rate
----------------------------- -------------------
All dollar amounts are stated in millions. 1996 1995 1994 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING Receivables:
ASSETS First mortgage $ 1,717.8 $ 2,941.1 $ 3,295.2 7.6% 8.1% 7.7%
Home equity 8,616.7 8,483.5 7,779.4 11.8 12.1 11.2
Visa/MasterCard 15,750.7 11,481.4 9,608.6 13.5 14.4 13.3
Private label 4,822.2 3,814.6 3,107.1 13.4 14.3 15.4
Other unsecured 7,615.4 6,060.2 4,798.2 17.0 17.2 17.2
Commercial 1,116.9 1,721.7 2,623.4 4.7 6.1 7.2
----------------------------------------------------------------------------------------------------
Total receivables 39,639.7 34,502.5 31,211.9 13.3 13.3 12.5
Noninsurance investments 1,417.4 2,193.0 2,424.4 5.7 5.6 5.4
----------------------------------------------------------------------------------------------------
Total interest-earning assets
(excluding insurance
investments) 41,057.1 36,695.5 33,636.3 13.0 12.9 12.0
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $40,045.4 $36,130.2 $33,712.9 6.2 6.5 5.3
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN-MANAGED BASIS
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST SPREAD-MANAGED BASIS(2) 7.0% 6.4% 6.7%
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Finance and Interest
Income/Interest Expense
----------------------------
All dollar amounts are stated in millions. 1996 1993 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST-EARNING Receivables:
ASSETS First mortgage $ 130.7 $ 237.1 $ 253.9
Home equity 1,020.1 1,024.4 868.2
Visa/MasterCard 2,129.8 1,649.2 1,281.8
Private label 644.5 545.6 479.6
Other unsecured 1,295.7 1,039.4 825.0
Commercial 52.9 105.7 188.7
---------------------------------------------------------------------------
Total receivables 5,273.7 4,601.4 3,897.2
Noninsurance investments 80.6 123.4 131.9
---------------------------------------------------------------------------
Total interest-earning assets
(excluding insurance 5,354.3 4,724.8 4,029.1
investments) 2,489.8 2,365.4 1,775.0
- ---------------------------------------------------------------------------------------------------
Total Debt $2,864.5 $2,359.4 $2,254.1
- ---------------------------------------------------------------------------------------------------
Net Interest Margin-Managed Basis
- ---------------------------------------------------------------------------------------------------
Interest Spread-Managed Basis(2)
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Nonaccrual loans are included in average outstanding balances.
(2) As a percent of average interest-earning assets.
36
<PAGE> 21
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1996-Three Months Ended 1995-Three Months Ended
Household International, Inc. and Subsidiaries --------------------------------------------------------------------
In millions, except per share data. Dec. Sept. June March Dec. Sept. June March
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance income $813.5 $755.6 $701.3 $679.5 $731.3 $752.3 $713.5 $681.7
Interest income from noninsurance
investment securities 9.2 12.1 39.0 20.3 18.5 19.8 48.8 36.3
Interest expense 398.8 384.7 383.7 353.4 375.5 404.1 400.1 377.4
---------------------------------------------------------------------------------------------------------------------
Net interest margin 423.9 383.0 356.6 346.4 374.3 368.0 362.2 340.6
Provision for credit losses on
owned receivables 222.3 169.5 176.5 191.3 191.6 188.2 217.2 164.3
---------------------------------------------------------------------------------------------------------------------
Net interest margin after provision
for credit losses 201.6 213.5 180.1 155.1 182.7 179.8 145.0 176.3
---------------------------------------------------------------------------------------------------------------------
Securitization income 307.1 282.0 280.5 279.4 240.2 201.1 219.5 212.8
Insurance revenues 67.5 63.6 58.4 63.9 59.9 87.8 86.7 87.7
Investment income 25.2 34.8 36.3 56.9 46.9 145.5 138.0 139.8
Fee income 75.0 62.1 53.3 49.9 57.3 48.3 44.0 46.8
Other income 37.0 31.5 138.6 25.3 90.5 58.0 90.5 40.9
---------------------------------------------------------------------------------------------------------------------
Total other revenues 511.8 474.0 567.1 475.4 494.8 540.7 578.7 528.0
---------------------------------------------------------------------------------------------------------------------
Salaries and fringe benefits 142.2 131.4 129.2 131.7 124.7 134.1 141.0 145.8
Occupancy and equipment expense 46.2 48.3 62.9 52.4 52.0 53.5 57.0 59.6
Other marketing expenses 123.6 132.3 141.8 100.4 91.4 86.9 89.4 91.8
Other servicing and
administrative expenses 107.1 104.7 162.2 110.8 99.8 129.8 117.7 123.3
Policyholders' benefits 45.5 57.2 53.2 73.2 57.9 133.7 142.7 140.2
---------------------------------------------------------------------------------------------------------------------
Total costs and expenses 464.6 473.9 549.3 468.5 425.8 538.0 547.8 560.7
---------------------------------------------------------------------------------------------------------------------
Income before income taxes 248.8 213.6 197.9 162.0 251.7 182.5 175.9 143.6
Income taxes 85.2 73.7 73.3 51.5 119.4 63.9 69.6 47.6
---------------------------------------------------------------------------------------------------------------------
Net income $163.6 $139.9 $124.6 $110.5 $132.3 $118.6 $106.3 $ 96.0
=====================================================================================================================
Net income per common share $ 1.62 $ 1.38 $ 1.22 $ 1.08 $ 1.29 $ 1.10 $ 1.00 $ .91
=====================================================================================================================
Weighted average common and common
equivalent shares outstanding 98.4 98.2 98.4 98.5 99.5 99.9 99.2 98.3
=====================================================================================================================
</TABLE>
37
<PAGE> 22
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
In millions, except per share data.
Year ended December 31 1996 1995 1994
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance income $2,949.9 $2,878.8 $2,642.3
Interest income from noninsurance investment securities 80.6 123.4 131.9
Interest expense 1,520.6 1,557.1 1,242.7
--------------------------------------------------------------------------------------------------------------
Net interest margin 1,509.9 1,445.1 1,531.5
Provision for credit losses on owned receivables 759.6 761.3 606.8
--------------------------------------------------------------------------------------------------------------
Net interest margin after provision
for credit losses 750.3 683.8 924.7
--------------------------------------------------------------------------------------------------------------
Securitization income 1,149.0 873.6 655.5
Insurance revenues 253.4 322.1 282.0
Investment income 153.2 470.2 514.4
Fee income 240.3 196.4 250.5
Other income 232.4 279.9 126.7
--------------------------------------------------------------------------------------------------------------
Total other revenues 2,028.3 2,142.2 1,829.1
--------------------------------------------------------------------------------------------------------------
Salaries and fringe benefits 534.5 545.6 656.6
Occupancy and equipment expense 209.8 222.1 243.4
Other marketing expenses 498.1 359.5 327.4
Other servicing and administrative expenses 484.8 470.6 533.7
Policyholders' benefits 229.1 474.5 464.4
--------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,956.3 2,072.3 2,225.5
--------------------------------------------------------------------------------------------------------------
Income before income taxes 822.3 753.7 528.3
Income taxes 283.7 300.5 160.7
--------------------------------------------------------------------------------------------------------------
Net income $ 538.6 $ 453.2 $ 367.6
==============================================================================================================
EARNINGS PER Net income $ 538.6 $ 453.2 $ 367.6
COMMON SHARE Preferred dividends (16.7) (26.4) (27.6)
--------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 521.9 $ 426.8 $ 340.0
==============================================================================================================
Average common and common equivalent shares 98.5 99.3 97.2
Net income per common share $ 5.30 $ 4.30 $ 3.50
--------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE> 23
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
In millions, except share data.
At December 31 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Cash $ 239.2 $ 270.4
Investment securities 2,282.0 4,639.5
Receivables, net 24,244.8 21,844.1
Acquired intangibles, net 969.4 578.5
Properties and equipment, net 353.1 391.7
Real estate owned 136.6 136.5
Other assets 1,369.4 1,358.1
-----------------------------------------------------------------------------------------------------
Total assets $29,594.5 $29,218.8
- -------------------=====================================================================================================
LIABILITIES AND Debt:
SHAREHOLDERS' Deposits $ 2,365.1 $ 4,708.8
EQUITY Commercial paper, bank and other borrowings 6,428.1 6,659.4
Senior and senior subordinated debt (with original maturities over one year) 14,802.0 11,227.9
-----------------------------------------------------------------------------------------------------
Total debt 23,595.2 22,596.1
Insurance policy and claim reserves 1,205.3 2,229.3
Other liabilities 1,472.8 1,422.5
-----------------------------------------------------------------------------------------------------
Total liabilities 26,273.3 26,247.9
Company obligated mandatorily redeemable preferred securities
of subsidiary trusts (Note 8)* 175.0 75.0
Preferred stock (Note 10) 205.0 205.0
Common shareholders' equity:
Common stock, $1.00 par value, 150,000,000 shares authorized,
115,231,175 shares issued at December 31, 1996 and 1995 115.2 115.2
Additional paid-in capital 397.3 383.4
Retained earnings 3,076.8 2,696.6
Foreign currency translation adjustments (126.7) (127.1)
Unrealized gain (loss) on investments, net (12.9) 94.3
Less common stock in treasury, 18,165,921 and 18,069,646 shares
at December 31, 1996 and 1995, respectively, at cost (508.5) (471.5)
-----------------------------------------------------------------------------------------------------
Total common shareholders' equity 2,941.2 2,690.9
-----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $29,594.5 $29,218.8
- -------------------=====================================================================================================
</TABLE>
*The sole asset of the two trusts are Junior Subordinated
Deferrable Interest Notes issued by Household International,
Inc. in June 1996 and June 1995, bearing interest at 8.70 and
8.25 percent, respectively, and with principal balances of
$103.1 and $77.3 million, respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
39
<PAGE> 24
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Household International, Inc. and Subsidiaries
In millions.
Year ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH PROVIDED Net income $ 538.6 $ 453.2 $ 367.6
BY OPERATIONS Adjustments to reconcile net income to net cash provided by operations:
Provision for credit losses on owned receivables 759.6 761.3 606.8
Insurance policy and claim reserves 44.3 404.7 240.2
Depreciation and amortization 240.5 263.7 243.3
Net realized (gains) losses from sales of assets (137.3) (188.7) 41.3
Deferred income tax provision (83.6) (2.5) (1.2)
Other, net 263.7 (319.2) 262.1
-----------------------------------------------------------------------------------------------------------
Cash provided by operations 1,625.8 1,372.5 1,760.1
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN Investment securities available-for-sale:
OPERATIONS Purchased (2,206.5) (4,299.3) (2,478.0)
Matured 851.0 902.1 384.1
Sold 2,647.0 3,081.1 1,963.2
Investment securities held-to-maturity:
Purchased - (558.7) (767.1)
Matured - 465.1 534.1
Sold - 34.2 -
Short-term investment securities, net change 117.2 348.5 (320.9)
Receivables:
Originations, net (28,308.6) (24,311.7) (17,824.3)
Purchased (5,087.6) (2,279.1) (1,066.2)
Sold 29,995.9 24,385.8 16,847.0
Acquisition (disposition) of consumer banking operations:
Assets (acquired) sold, net 472.3 975.6 (101.3)
Deposits and other liabilities assumed (sold), net (2,809.8) (4,061.9) 1,158.7
Disposition of product lines of life insurance business - 575.0 -
(Acquisition) disposition of portfolios, net (640.7) (58.7) (145.6)
Properties and equipment purchased (97.1) (76.4) (196.9)
Properties and equipment sold 14.9 35.9 9.8
-----------------------------------------------------------------------------------------------------------
Cash decrease from investments in operations (5,052.0) (4,842.5) (2,003.4)
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCING AND Short-term debt and demand deposits, net change (176.8) 1,956.7 (1,112.5)
CAPITAL TRANSACTIONS Time certificates, net change 395.0 728.8 (57.3)
Senior and senior subordinated debt issued 7,596.3 3,258.0 4,511.4
Senior and senior subordinated debt retired (4,068.8) (2,414.4) (3,164.8)
Policyholders' benefits paid (512.4) (805.3) (559.0)
Cash received from policyholders 258.5 669.0 966.6
Shareholders' dividends (158.4) (154.0) (146.5)
Issuance of company obligated mandatorily redeemable preferred
securities of subsidiary trusts 100.0 75.0 -
Redemption of preferred stock - (115.0) -
Purchase of treasury stock (56.7) (59.7) -
Issuance of common stock 15.2 24.7 13.6
-----------------------------------------------------------------------------------------------------------
Cash increase from financing and capital transactions 3,391.9 3,163.8 451.5
-----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 3.1 35.4 15.6
-----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (31.2) (270.8) 223.8
Cash at January 1 270.4 541.2 317.4
-----------------------------------------------------------------------------------------------------------
Cash at December 31 $ 239.2 $ 270.4 $ 541.2
===========================================================================================================
Supplemental cash flow information:
Interest paid $ 1,555.4 $ 1,508.2 $ 1,249.8
-----------------------------------------------------------------------------------------------------------
Income taxes paid 321.9 171.0 185.2
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE> 25
CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED
STOCK AND COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Shareholders' Equity
----------------------------------------------
Additional Total Common
Household International, Inc. and Subsidiaries Preferred Common Paid-in Retained Shareholders'
All amounts except per share data are stated in millions. Stock Stock Capital Earnings Other1 Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 loss 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 preferred stock (115.0)
Unrealized gain on investments, net 197.9 197.9
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 205.0 115.2 383.4 2,696.6 (504.3) 2,690.9
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 538.6 538.6
Cash dividends-preferred at stated rates (16.7) (16.7)
Cash dividends-common, $1.46 per share (141.7) (141.7)
Foreign currency translation adjustments .4 .4
Exercise of stock options 6.5 11.9 18.4
Issuance of common stock 7.4 7.8 15.2
Purchase of treasury stock (56.7) (56.7)
Unrealized loss on investments, net (107.2) (107.2)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $ 205.0 $115.2 $397.3 $3,076.8 $(648.1) $2,941.2
====================================================================================================================================
</TABLE>
(1)At December 31, 1996, 1995, 1994 and 1993 items in the
other column include cumulative adjustments for: foreign
currency translation adjustments of $(126.7), $(127.1),
$(123.6) and $(132.7) million, respectively; common stock
in treasury of $(508.5), $(471.5), $(446.9) and $(456.4)
million, respectively; and unrealized gains (losses) on
available-for-sale investments of $(12.9), $94.3,
$(103.6) and $40.5 million, respectively. The gross
unrealized gain (loss) on available-for-sale investments
at December 31, 1996, 1995, 1994 and 1993 of $(19.8),
$142.6, $(292.4) and $152.8 million, respectively, is
recorded net of income taxes (benefit) of $(6.9), $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>
<CAPTION>
Common Stock
---------------------------------------------------
Shares Outstanding Preferred Stock Issued In Treasury Net Outstanding
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 preferred stock (1,150,000)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 700,000 115,231,175 (18,069,646) 97,161,529
- ------------------------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 463,212 463,212
Issuance of common stock 281,513 281,513
Purchase of treasury stock (841,000) (841,000)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 700,000 115,231,175 (18,165,921) 97,065,254
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
41
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Household International, Inc. and Subsidiaries
Household International, Inc. and subsidiaries (the "company")
is a leading provider of consumer financial services, primarily
consumer lending products to "middle-market" customers in the
United States, United Kingdom and Canada, with $42.6 billion of
managed receivables outstanding at December 31, 1996. The
company's lending products include: home equity loans,
Visa/MasterCard and private-label credit cards and other
unsecured loans. The company's portfolio also includes
traditional first mortgages and commercial loans and leases,
which the company no longer originates.
The company also offers credit and specialty insurance in
the United States, United Kingdom and Canada. In October 1995
the company sold the individual life and annuity product
lines of its individual life insurance business. Remaining
insurance lines include periodic payment annuities and
corporate owned life insurance products which are no longer
being offered by the company. Due to the insignificance of the
remaining insurance product lines, the company reports results
for its consumer lending operations and the remaining insurance
product lines on a combined basis.
1. SUMMARY OF BASIS OF PRESENTATION The consolidated financial statements
SIGNIFICANT include the accounts of Household International, Inc. and all
ACCOUNTING subsidiaries. All significant intercompany accounts and
POLICIES transactions have been eliminated. Certain prior year amounts
have been reclassified to conform with the current year's
presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
INVESTMENT SECURITIES The company maintains investment
portfolios in both its noninsurance and insurance operations.
These portfolios are comprised primarily of debt securities. The
company's entire investment securities portfolio was classified
as available-for-sale at December 31, 1996 and 1995.
Available-for-sale investments are intended to be invested for
an indefinite period but may be sold in response to events
reasonably expected in the foreseeable future. These investments
are carried at fair value. Unrealized holding gains and losses
on available-for-sale investments are recorded as adjustments to
common shareholders' equity, net of income taxes. Any decline in
the fair value of investments which is deemed to be other than
temporary is charged against current earnings.
Cost of investment securities sold is determined using the
specific identification method. Interest income earned on the
noninsurance investment portfolio is classified in the
statements of income in net interest margin. Realized gains and
losses from the 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, private label and other unsecured portfolios.
Because these receivables were originated with variable rates of
interest or rates comparable to those currently offered by the
company, carrying value approximates fair value.
Finance income is recognized using the effective yield
method. Origination fees are deferred and amortized to finance
income over the estimated life of the related receivables,
except to the extent they offset directly related lending costs.
Annual fees are netted with direct lending costs associated with
the issuance of Visa/MasterCard receivables and are deferred and
amortized on a straight-line basis over one year. Net deferred
fees related to these receivables totaled $5.7 and $3.5 million
at December 31, 1996 and 1995, 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.
PROVISION AND CREDIT LOSS RESERVES Provision for credit losses
on owned receivables is made in an amount sufficient to maintain
credit loss reserves at a level considered adequate to cover
probable losses of principal and interest in the existing owned
42
<PAGE> 27
portfolio. Probable losses are estimated for consumer
receivables based on contractual delinquency status and
historical loss experience. In addition, general loss reserves
on consumer receivables are maintained to reflect management's
judgment of portfolio risk factors. For commercial loans,
probable losses are calculated using estimates of amounts and
timing of future cash flows expected to be received on loans, as
well as management's assessment of general reserve requirements.
Loss reserve estimates are reviewed periodically and adjustments
are reported in earnings when they become known. As these
estimates are influenced by factors outside the company's
control, such as economic conditions and consumer payment
patterns, there is uncertainty inherent in these estimates,
making it reasonably possible that they could change.
The company's chargeoff policy for consumer receivables
varies by product. Receivables are generally written off, or for
secured products written down to net realizable value, at the
following stages of contractual delinquency: first mortgage,
home equity and Visa/MasterCard -- 6 months; private-label credit
card -- 9 months; and other unsecured -- 9 months and no
payment received in 6 months. Commercial receivables are written
off when it becomes apparent that an account is uncollectible.
NONACCRUAL LOANS Nonaccrual loans are loans on which accrual of
interest has been suspended. Interest income is suspended on all
loans when principal or interest payments are more than three
months contractually past due, except for Visa/MasterCard
receivables and private-label credit cards. On these credit card
receivables, interest continues to accrue until the receivable
is charged off. There were no commercial loans at December 31,
1996 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,
private label and other unsecured receivables have been
securitized and sold to investors with limited recourse. The
servicing rights to these receivables have been retained by the
company. Upon sale, the receivables are removed from the balance
sheet, and a gain on sale is recognized for the difference
between the carrying value of the receivables and the adjusted
sales proceeds. The adjusted sales proceeds are based on a
present value estimate of future cash flows to be received over
the lives of the receivables. Future cash flows are based on
estimates of prepayments, the impact of interest rate
movements on yields of receivables sold and securities issued,
delinquency of receivables sold, normal servicing fees,
operating expenses and other factors. The resulting gain is
adjusted by establishing a reserve for estimated probable losses
under the recourse provisions. Gains on sale, recourse
provisions and servicing cash flows on receivables sold are
reported in the accompanying consolidated statements of income
as securitization income.
In June 1996 the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("FAS No. 125"), which
provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities
based on an approach that focuses on control of the assets and
extinguishment of the liabilities. The statement is effective
for securitization transactions occurring subsequent to December
31, 1996. The company believes the adoption of FAS No. 125 will
have no material impact on its consolidated financial
statements.
PROPERTIES AND EQUIPMENT Properties and equipment, which include
leasehold improvements, are recorded at cost, net of accumulated
depreciation and amortization of $432.6 and $472.1 million at
December 31, 1996 and 1995, respectively. Depreciation is
provided on a straight-line basis for financial reporting
purposes and accelerated methods for tax purposes. Leasehold
improvements are amortized over the lesser of the economic
useful life of the improvement or the term of the lease.
43
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
REAL ESTATE OWNED Real estate owned is valued at the lower of
cost or fair value less estimated costs to sell. These values
are periodically reviewed and reduced, if appropriate. Costs
of holding this real estate, and related gains and losses on
disposition, are credited or charged to operations as incurred.
INSURANCE Insurance revenues on revolving credit insurance
policies are recognized when billed. Insurance revenues on the
remaining insurance contracts are recorded as unearned premiums
and recognized into income based on the nature and term of the
underlying contracts. Liabilities for credit insurance policies
are based upon estimated settlement amounts for both reported
and incurred but not yet reported losses. Liabilities for future
benefits on annuity contracts and specialty and corporate owned
life insurance products are based on actuarial assumptions as to
investment yields, mortality and withdrawals.
ACQUIRED INTANGIBLES Acquired intangibles consist of acquired
credit card relationships, and at December 31, 1995, also
included core deposit relationships. Acquired credit card
relationships are amortized on a straight-line basis over their
estimated remaining lives, not to exceed 10 years. Core deposit
relationships were amortized using straight-line and other
methods over their estimated useful lives, not to exceed 15
years. The company wrote off its remaining core deposit
relationships in connection with the sale of its remaining
consumer banking operations in 1996.
TREASURY STOCK The company accounts for repurchases of common
stock using the cost method with common stock in treasury
classified in the balance sheets as a reduction of common
shareholders' equity. Treasury stock reissued is removed from
the accounts at average cost.
INTEREST RATE CONTRACTS The nature and composition of the
company's assets and liabilities and off-balance sheet items
expose the company to interest rate risk. The company enters
into a variety of interest rate contracts for managing its
interest rate exposure. Interest rate swaps are the principal
vehicle used to manage interest rate risk; however, interest
rate futures, options, caps and floors, and forward contracts
also are utilized.
Interest rate swaps are designated, and effective, as
synthetic alterations of specific assets or liabilities (or
specific groups of assets or liabilities) and off-balance sheet
items. The interest rate differential to be paid or received on
these contracts is accrued and included in net interest margin
in the statements of income.
Interest rate futures, forwards, options, and caps and
floors used in hedging the company's exposure to interest rate
fluctuations are designated, and effective, as hedges of balance
sheet items. Interest rate contracts are recorded at amortized
cost. If interest rate contracts are terminated early, the
realized gains and losses are deferred and amortized over the
life of the hedged items as adjustments to net interest margin
in the statements of income. These deferred gains and losses
are recorded on the accompanying consolidated balance sheets as
adjustments to the carrying amount of the hedged items.
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.
STOCK-BASED COMPENSATION The company accounts for stock option
and stock purchase plans in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). In accordance with
44
<PAGE> 29
APB 25, no compensation expense is recognized for stock
options issued to employees or for stock issued under its
employee stock purchase plan. In October 1995, the FASB issued
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS No. 123"),
which is effective for fiscal years beginning after December
15, 1995. The company did not elect to recognize stock-based
compensation expense based on the fair value of the awards as
permitted by FAS No. 123.
INCOME TAXES Federal income taxes are accounted for
utilizing the liability method. Deferred tax assets and
liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The
company and its subsidiaries file a consolidated federal income
tax return. Investment tax credits generated by leveraged
leases are accounted for using the deferral method.
2. INVESTMENT
SECURITIES
<TABLE>
<CAPTION>
In millions.
At December 31 1996 1995
-------------------------------------------------------------------------------------
<S> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities $213.1 $327.1
Corporate debt securities 1,070.5 1,560.0
U.S. government and federal agency debt securities 277.7 1,195.8
Other 690.5 1,512.3
-------------------------------------------------------------------------------------
Subtotal 2,251.8 4,595.2
-------------------------------------------------------------------------------------
Accrued investment income 30.2 44.3
-------------------------------------------------------------------------------------
Total investment securities $2,282.0 $4,639.5
=====================================================================================
</TABLE>
Proceeds from the sale of available-for-sale
investments totaled approximately $2.6, $3.1 and $2.0 billion
in 1996, 1995 and 1994, respectively. Gross gains of $23.0,
$18.4 and $35.5 million and gross losses of $4.3, $4.9 and
$25.7 million in 1996, 1995 and 1994, 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. Gross gains of $.5 million were
realized on sales of held-to-maturity investments in 1995.
There were no gross losses on sales of held-to-maturity
investments in 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 gross unrealized gains (losses) of investment
securities were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------ ---------------------------------------------
Gross Gross Gross Gross
In millions. Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
At December 31 Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
INVESTMENTS
Marketable equity securities $ 212.7 $ 1.9 $ (1.5) $ 213.1 $ 321.6 $ 7.3 $(1.8) $ 327.1
Corporate debt securities 1,081.4 17.0 (27.9) 1,070.5 1,433.2 131.0 (4.2) 1,560.0
U.S. government and federal
agency debt securities 287.0 1.1 (10.4) 277.7 1,186.7 17.3 (8.2) 1,195.8
Other 690.5 - - 690.5 1,511.1 1.2 - 1,512.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale
investments $2,271.6 $20.0 $(39.8) $2,251.8 $4,452.6 $156.8 $(14.2) $4,595.2
====================================================================================================================================
</TABLE>
45
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
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.
Contractual maturities and yields of investments in debt
securities were as follows:
<TABLE>
<CAPTION>
U.S. Government and Federal
Corporate Debt Securities Agency Debt Securities
-------------------------------- ----------------------------------------
All dollar amounts are stated in millions. Amortized Fair Amortized Fair
At December 31, 1996 Cost Value Yield* Cost Value Yield*
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due within 1 year $ 86.9 $ 87.0 6.91% $ 29.2 $ 29.2 3.77%
After 1 but within 5 years 106.6 103.1 6.59 39.2 38.1 5.84
After 5 but within 10 years 164.9 166.3 7.49 64.5 62.9 7.94
After 10 years 723.0 714.1 7.45 154.1 147.5 7.31
- ----------------------------------------------------------------------------------------------------------------------------------
Total $1,081.4 $1,070.5 7.33% $287.0 $277.7 6.89%
==================================================================================================================================
</TABLE>
*Computed by dividing annualized interest by the
amortized cost of the respective investment securities.
3. RECEIVABLES
<TABLE>
<CAPTION>
In millions.
At December 31 1996 1995
-------------------------------------------------------------------------------
<S> <C> <C>
First mortgage $ 725.6 $ 2,066.9
Home equity 3,647.9 4,148.2
Visa/MasterCard 8,587.7 5,512.0
Private label 5,070.0 3,696.2
Other unsecured 5,098.0 5,019.2
Commercial 937.8 1,289.6
-------------------------------------------------------------------------------
Total owned receivables 24,067.0 21,732.1
Accrued finance charges 397.6 381.6
Credit loss reserve for owned receivables (900.2) (720.4)
Unearned credit insurance premiums and claims reserves (184.6) (159.9)
Amounts due and deferred from receivables sales 1,561.0 1,067.7
Reserve for receivables serviced with limited recourse (696.0) (457.0)
-------------------------------------------------------------------------------
Total owned receivables, net 24,244.8 21,844.1
Receivables serviced with limited recourse 18,526.4 14,884.6
-------------------------------------------------------------------------------
Total managed receivables, net $42,771.2 $36,728.7
===============================================================================
</TABLE>
Foreign receivables included in owned receivables were as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------ -------------------
In millions. United United
At December 31 Canada Kingdom Canada Kingdom
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First mortgage $ 22.1 $ 3.7 $ 61.4 $ 4.2
Home equity 324.9 159.9 281.7 149.3
Visa/MasterCard - 581.2 - 430.1
Private label 571.7 691.3 410.0 532.6
Other unsecured 364.8 636.7 367.5 537.4
Commercial 43.2 - 56.1 -
-------------------------------------------------------------------------------------------
Total $1,326.7 $2,072.8 $1,176.7 $1,653.6
===========================================================================================
</TABLE>
Foreign managed receivables represented 10 and 9 percent of
total managed receivables at December 31, 1996 and 1995,
respectively.
Outstanding advances from the Federal Home Loan Bank of the
company's banking subsidiary were required to be secured by
first mortgages totaling approximately $583 million at December
31, 1996.
The company has securitized certain receivables which it
services with limited recourse. Securitizations of receivables,
including replenishments of certificate holder interests, were
as follows:
46
<PAGE> 31
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C>
Home equity $ 1,755.8 $ 1,135.2 $ 1,418.6
Visa/MasterCard 22,828.3 20,181.2 13,735.1
Private label 697.4 644.0 1,093.6
Other unsecured 2,851.2 1,535.3 241.0
-------------------------------------------------------
Total $28,132.7 $23,495.7 $16,488.3
=======================================================
</TABLE>
The outstanding balance of receivables serviced with
limited recourse consisted of the following:
<TABLE>
<CAPTION>
In millions.
At December 31 1996 1995
-------------------------------------------------------
<S> <C> <C>
Home equity $ 4,337.5 $ 4,661.9
Visa/MasterCard 10,149.7 7,831.1
Private label 517.0 750.0
Other unsecured 3,522.2 1,641.6
-------------------------------------------------------
Total $18,526.4 $14,884.6
=======================================================
</TABLE>
At December 31, 1996, the expected weighted average remaining
life of these securitization transactions was 2.7 years. 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 1996 1995
-----------------------------------------
<S> <C> <C>
First mortgage $ 725.6 $ 2,066.9
Home equity 7,985.4 8,810.1
Visa/MasterCard 18,737.4 13,343.1
Private label 5,587.0 4,446.2
Other unsecured 8,620.2 6,660.8
Commercial 937.8 1,289.6
-----------------------------------------
Managed receivables $42,593.4 $36,616.7
=========================================
</TABLE>
For certain securitizations, wholly-owned subsidiaries
were created for the limited purpose of consummating such
transactions. At December 31, 1996, these subsidiaries were:
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,
Household Pooling Corporation and Household Card Funding
Corporation.
At December 31, 1996 and 1995, the amounts due and
deferred from receivables sales of $1,561.0 and $1,067.7
million, respectively, included unamortized excess servicing
assets and funds established pursuant to the recourse
provisions for certain sales totaling $1,033.1 and $718.1
million, respectively. The amounts due and deferred also
included customer payments not yet remitted by the
securitization trustee to the company of $512.6 and $332.3
million at December 31, 1996 and 1995, respectively. In
addition, the company has made guarantees relating to certain
securitizations of $90.2 and $265.1 million plus unpaid
interest at December 31, 1996 and 1995, respectively. The
company has subordinated interests in certain transactions,
which are recorded as receivables, of $485.0 and $398.5 million
at December 31, 1996 and 1995, respectively. The company has
agreements with a "AAA"-rated third party who will indemnify
the company for up to $21.2 million in losses related to
certain securitization transactions. The company maintains
credit loss reserves pursuant to the recourse provisions for
receivables serviced with limited recourse which are based on
estimated probable losses under such provisions. These reserves
totaled $696.0 and $457.0 million at
47
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
December 31, 1996 and 1995, respectively, and represent the
company's best estimate of possible losses on receivables
serviced with limited recourse.
The providers of the credit enhancements have no recourse
to the company. The company does not receive collateral from any
party to the securitizations, nor does the company have any risk
of counterparty nonperformance. In addition, the company
maintains facilities which provide for the securitization of
receivables on a revolving basis totaling $4.5 billion through
the issuance of commercial paper, of which $3.8 billion were
securitized at December 31, 1996.
Contractual maturities of owned receivables were as
follows:
<TABLE>
<CAPTION>
In millions.
At December 31, 1996 1997 1998 1999 2000 2001 Thereafter Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage $ 19.1 $ 21.6 $ 3.8 $ 2.0 $ 2.6 $ 676.5 $ 725.6
Home equity 1,081.3 640.5 464.2 344.7 261.2 856.0 3,647.9
Visa/MasterCard 903.9 846.9 677.2 601.6 510.4 5,047.7 8,587.7
Private label 1,316.0 596.3 432.5 303.6 245.0 2,176.6 5,070.0
Other unsecured 1,305.0 735.8 585.2 479.8 429.0 1,563.2 5,098.0
Commercial 164.9 146.0 78.5 35.0 60.6 452.8 937.8
---------------------------------------------------------------------------------------------
Total $4,790.2 $2,987.1 $2,241.4 $1,766.7 $1,508.8 $10,772.8 $24,067.0
=============================================================================================
</TABLE>
First mortgages have maximum terms of up to 30 years, whereas
other consumer receivables have substantially shorter maximum
terms. A substantial portion of consumer receivables, based on
the company's experience, will be renewed or repaid prior to
contractual maturity. The above maturity schedule should not be
regarded as a forecast of future cash collections. The ratio of
annual cash collections of principal to average principal
balances, excluding Visa/MasterCard receivables, approximated 40
and 44 percent in 1996 and 1995, 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, 1996 5 Years 5 Years
------------------------------------------------------------------
<S> <C> <C>
Receivables at predetermined interest rates $3,348.1 $ 3,822.6
Receivables at floating or adjustable rates 5,155.9 6,950.2
------------------------------------------------------------------
Total $8,504.0 $10,772.8
==================================================================
</TABLE>
Nonaccrual owned consumer receivables totaled $421.8 million at
December 31, 1996, including $106.6 million relating to foreign
operations. Interest income that would have been recorded in
1996 if such nonaccrual receivables had been current and in
accordance with contractual terms was approximately $60.2
million, including $18.4 million relating to foreign operations.
Interest income that was included in net income for 1996, prior
to these loans being placed on nonaccrual status, was
approximately $32.1 million, including $8.4 million relating to
foreign operations.
For an analysis of reserves for credit losses, see pages 32
and 33.
48
<PAGE> 33
4. Deposits
<TABLE>
<CAPTION>
1996 1995
Weighted Weighted
All dollar amounts are stated in millions. Average Average
At December 31 Amount Rate Amount Rate
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOMESTIC
Time certificates $1,257.6 7.0% $2,483.7 6.4%
Savings accounts 165.1 4.7 1,199.4 3.7
Demand accounts 78.5 - 365.9 1.0
--------------------------------------------------------------------------------------------------------------
Total domestic deposits 1,501.2 6.4 4,049.0 5.1
--------------------------------------------------------------------------------------------------------------
FOREIGN
Time certificates 377.6 6.3 370.9 7.2
Savings accounts 389.1 6.2 265.3 6.0
Demand accounts 97.2 5.8 23.6 6.0
--------------------------------------------------------------------------------------------------------------
Total foreign deposits 863.9 6.2 659.8 6.7
--------------------------------------------------------------------------------------------------------------
Total deposits $2,365.1 6.3% $4,708.8 5.3%
==============================================================================================================
</TABLE>
Average deposits and related weighted average interest rates
for 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted Weighted Weighted
All dollar amounts are stated in millions. Average Average Average Average Average Average
At December 31 Deposits Rate Deposits Rate Deposits Rate
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC
Time certificates $1,908.2 6.7% $3,015.2 6.2% $3,151.5 4.2%
Savings and demand accounts 1,154.6 2.5 2,667.9 3.1 3,009.0 2.5
------------------------------------------------------------------------------------------------------------------
Total domestic deposits 3,062.8 5.1 5,683.1 4.7 6,160.5 3.4
------------------------------------------------------------------------------------------------------------------
FOREIGN
Time certificates 381.5 6.2 1,052.3 7.4 1,195.6 7.2
Savings and demand accounts 445.5 5.2 308.8 6.2 312.0 5.3
------------------------------------------------------------------------------------------------------------------
Total foreign deposits 827.0 5.7 1,361.1 7.1 1,507.6 6.8
------------------------------------------------------------------------------------------------------------------
Total deposits $3,889.8 5.3% $7,044.2 5.1% $7,668.1 4.1%
==================================================================================================================
</TABLE>
Interest expense on deposits was $204.6, $362.7 and
$312.1 million for 1996, 1995 and 1994, respectively. Interest
expense on domestic deposits was $157.6, $265.9 and $209.1
million for 1996, 1995 and 1994, respectively.
49
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
Maturities of time certificates in amounts of $100,000 or
more were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1996 Domestic Foreign Total
------------------------------------------------------------------------------
<S> <C> <C> <C>
3 months or less - $ .1 $ .1
Over 3 months through 6 months - - -
Over 6 months through 12 months $ .2 .1 .3
Over 12 months 5.8 331.3 337.1
------------------------------------------------------------------------------
Total $6.0 $331.5 $337.5
==============================================================================
</TABLE>
Contractual maturities of time certificates within each
interest rate range were as follows:
<TABLE>
<CAPTION>
In millions.
At December 31, 1996 1997 1998 1999 2000 2001 Thereafter Total
--------------------------------------------------------------------------------------
INTEREST RATE
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
< 4.00% $ 2.0 $ .1 $ .1 - - - $ 2.2
4.00% - 5.99% 45.3 36.0 56.7 $ 16.7 $ 67.4 - 222.1
6.00% - 7.99% 109.0 121.3 259.0 178.1 289.6 $96.9 1,053.9
8.00% - 9.99% 292.2 2.8 6.9 55.1 - - 357.0
--------------------------------------------------------------------------------------
Total $448.5 $160.2 $322.7 $249.9 $357.0 $96.9 $1,635.2
======================================================================================
</TABLE>
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
---------------------------------------------------------------------------------
1996
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance $5,418.7 $1,009.4 $6,428.1
Highest aggregate month-end balance 7,611.1
Average borrowings 5,334.2 1,147.4 6,481.6
Weighted average interest rate:
At year end 5.4% 7.6% 5.7%
Paid during year 5.4 7.2 5.7
---------------------------------------------------------------------------------
1995
---------------------------------------------------------------------------------
Balance $4,598.5 $2,060.9 $6,659.4
Highest aggregate month-end balance 7,350.5
Average borrowings 4,551.1 1,565.1 6,116.2
Weighted average interest rate:
At year end 5.8% 6.9% 6.2%
Paid during year 6.0 7.4 6.4
---------------------------------------------------------------------------------
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
=================================================================================
</TABLE>
*Included in outstanding balances at year-end 1996, 1995
and 1994 were commercial paper obligations of foreign
subsidiaries of $389.2, $269.5 and $331.4 million,
respectively.
50
<PAGE> 35
Interest expense for commercial paper, bank and other
borrowings totaled $369.5, $389.5 and $292.2 million for 1996,
1995 and 1994, respectively.
The company maintains various bank credit agreements
primarily to support commercial paper borrowings. At
December 31, 1996 the company had committed back-up
lines of $7.4 billion, of which $6.6 billion were unused.
Formal credit lines are reviewed annually, and expire at
various dates from 1997 to 2003. Borrowings under these lines
generally are available at a surcharge over the London
Interbank Offered Rate (LIBOR). Annual commitment fee
requirements to support availability of these lines at December
31, 1996 totaled $5.9 million.
6. SENIOR AND SENIOR
SUBORDINATED DEBT
(WITH ORIGINAL
MATURITIES OVER
ONE YEAR)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
All dollar amounts are stated in millions.
At December 31 1996 1995
------------------------------------------------------------------------------------
SENIOR DEBT
<S> <C> <C>
3.50% to 7.49%; due 1997 to 2009 $ 4,817.7 $ 2,902.5
7.50% to 7.99%; due 1997 to 2007 1,459.0 1,937.8
8.00% to 8.99%; due 1997 to 2005 1,195.0 1,660.4
9.00% to 9.99%; due 1997 to 2001 327.8 587.9
10.00% and greater; due 1997 to 2001 118.0 242.3
Variable interest rate debt; 3.26% to 7.00%; due 1997 to 2015 6,034.6 2,900.7
------------------------------------------------------------------------------------
SENIOR SUBORDINATED DEBT
6.50% to 9.63%; due 2000 to 2003 685.0 685.0
10.13% to 11.15%; due 1998 75.0 215.0
------------------------------------------------------------------------------------
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 (10.1) (3.7)
------------------------------------------------------------------------------------
Total senior and senior subordinated debt $14,802.0 $11,227.9
====================================================================================
</TABLE>
*Depositary share represents 1/3000 share of preferred stock.
Weighted average coupon interest rates were 6.6 and 7.3 percent
at December 31, 1996 and 1995, respectively. Interest expense
for senior and senior subordinated debt was $946.5, $804.9 and
$638.4 million for 1996, 1995 and 1994, respectively.
Maturities of senior and senior subordinated
debt were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1996
----------------------------------------------
<S> <C>
1997 $ 3,220.3
1998 2,062.4
1999 2,640.4
2000 1,459.1
2001 2,015.3
Thereafter 3,404.5
----------------------------------------------
Total $14,802.0
==============================================
</TABLE>
At December 31, 1996 and 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, 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.
51
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
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 Risk Management on pages 30 and 31.
The financial instruments used by the company include
interest rate contracts and foreign exchange rate contracts and
have varying degrees of credit risk and/or market risk.
CREDIT RISK Credit risk is the possibility that a loss may occur
because the counterparty to a transaction fails to perform
according to the terms of the contract. The company's exposure to
credit loss related to interest rate swaps, cap and floor
transactions, forward and futures contracts and options is the
amount of uncollected interest or premium related to these
instruments. These interest rate related instruments are
generally expressed in terms of notional principal or contract
amounts which are much larger than the amounts potentially at
risk for nonpayment by counterparties. The company controls the
credit risk of its off-balance sheet financial instruments
through established credit approvals, risk control limits and
ongoing monitoring procedures. The company has never experienced
nonperformance by any derivative instrument counterparty.
MARKET RISK Market risk is the possibility that a change in
interest rates or foreign exchange rates will cause a financial
instrument to decrease in value or become more costly to settle.
The company mitigates this risk by establishing limits for
positions and other controls.
INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS The following table
summarizes the activity in interest rate and foreign exchange
contracts for 1996, 1995 and 1994:
52
<PAGE> 37
HEDGING/SYNTHETIC
ALTERATION
INSTRUMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Exchange Traded Non-Exchange Traded
------------------------------------------- -------------------------------------------------
Interest Rate Foreign Exchange
Futures Contracts Options Rate Contracts
---------------------- ------------------- Interest Currency ------------------------
In millions. Purchased Sold Purchased Written Rate Swaps Swaps Purchased Sold
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994
Notional amount, 1993 - $ (40.0) $ 69.6 $ (70.0) $14,979.8 $ 316.9 $ 140.9 $ (725.6)
New contracts $11,380.5 (12,132.8) 8,867.9 (5,707.5) 10,013.5 681.9 3,702.1 (3,738.6)
Matured or expired contracts - - (3,150.0) - (4,704.6) - (31.3) 15.7
Terminated contracts (63.5) 759.8 - - (2,455.7) - (582.8) 580.2
In-substance maturities(1) (11,317.0) 11,317.0 (5,787.5) 5,777.5 - - (3,156.2) 3,097.5
- -----------------------------------------------------------------------------------------------------------------------------
Notional amount, 1994 - $ (96.0) - - $17,833.0 $ 998.8 $ 72.7 $ (770.8)
=============================================================================================================================
Fair value, 1994(2) - $ .8 - - $ (498.7) $ 72.2 $ (.4) $ 6.3
- -----------------------------------------------------------------------------------------------------------------------------
1995
Notional amount, 1994 - $ (96.0) - - $17,833.0 $ 998.8 $ 72.7 $ (770.8)
New contracts $ 2,003.0 (2,100.0) $ 300.0 $(300.0) 1,424.5 152.6 3,887.3 (4,036.7)
Matured or expired contracts - 293.0 - - (6,156.5) (179.0) (36.7) 40.9
Terminated contracts - - - - (4,983.7) - (545.0) 553.1
In-substance maturities(1) (1,653.0) 1,653.0 (300.0) 300.0 - - (3,345.3) 3,477.1
- -----------------------------------------------------------------------------------------------------------------------------
Notional amount, 1995 $ 350.0 $ (250.0) - - $ 8,117.3 $ 972.4 $ 33.0 $ (736.4)
=============================================================================================================================
Fair value, 1995(2) $ .1 - - - 148.3 $ 63.5 $ .2 $ 1.2
- -----------------------------------------------------------------------------------------------------------------------------
1996
Notional amount, 1995 $ 350.0 $ (250.0) - - $ 8,117.3 $ 972.4 $ 33.0 $ (736.4)
New contracts 6,611.9 (4,202.9) $ 440.0 $ (440.0) 4,807.1 1,268.5 5,073.9 (5,058.0)
Matured or expired contracts (1,471.0) 300.0 - - (2,456.4) (117.0) (18.9) 20.9
Terminated contracts - - - - (1,690.5) - (391.6) 391.6
In-substance maturities(1) (4,152.9) 4,152.9 (440.0) 440.0 - - (4,692.7) 4,692.7
- -----------------------------------------------------------------------------------------------------------------------------
Notional amount, 1996 $ 1,338.0 - - - $ 8,777.5 $2,123.9 $ 3.7 $ (689.2)
=============================================================================================================================
Fair value, 1996(2) - - - - $ 62.5 $ (153.9) $ (.1) $ (37.3)
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------
Non-Exchange Traded
-----------------------------------
Interest Rate
Foward Contracts Other Risk
--------------------- Management
In millions. Purchased Sold Instruments
- ------------------------------------------------------------------
<S> <C> <C> <C>
1994
Notional amount, 1993 $ 539.8 $ (859.3) $ 1,099.4
New contracts 5,468.8 (3,818.0) 1,235.1
Matured or expired contracts (2,524.8) 2,475.6 (1,590.1)
Terminated contracts (538.1) 51.3 (130.5)
In-substance maturities(1) (2,009.6) 2,009.6 -
- ------------------------------------------------------------------
Notional amount, 1994 $ 936.1 $ (140.8) $ 613.9
==================================================================
Fair value, 1994(2) $ 1.1 $ (.2) $ 6.3
- ------------------------------------------------------------------
1995
Notional amount, 1994 $ 936.1 $ (140.8) $ 613.9
New contracts 1,860.2 (173.7) 180.4
Matured or expired contracts (1,840.4) 167.9 (351.4)
Terminated contracts (255.9) 53.5 -
In-substance maturities(1) - - -
- ------------------------------------------------------------------
Notional amount, 1995 $ 700.0 $ (93.1) $ 442.9
==================================================================
Fair value, 1995(2) $ (1.0) - $ 2.2
- ------------------------------------------------------------------
1996
Notional amount, 1995 $ 700.0 $ (93.1) $ 442.9
New contracts 3,641.8 (1,036.0) 2,242.2
Matured or expired contracts (2,609.9) 859.9 (8.9)
Terminated contracts - - -
In-substance maturities(1) - - -
- ------------------------------------------------------------------
Notional amount, 1996 $1,731.9 $ (269.2) $ 2,676.2
==================================================================
Fair value, 1996(2) $ (1.2) $ .2 $ 24.6
- ------------------------------------------------------------------
</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 items being hedged.
(2)(Bracketed) unbracketed amounts represent amounts to be
(paid) received by the company had these positions been closed
out at the respective balance sheet date. Bracketed amounts do
not necessarily represent risk of loss for hedging instruments,
as the fair value of the hedging instrument and the items being
hedged must be evaluated together. See Note 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.
(3)There were no trading activities during 1996 or 1995. The
results of trading activities were immaterial to the financial
results of the company for 1994.
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 table on the following page reflects the
items so altered at December 31, 1996:
53
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
In millions.
<S> <C>
Investment securities $ 28.3
Receivables:
Home equity 324.1
Visa/MasterCard 500.0
Private label 186.5
Other unsecured 25.0
--------------------------------------------------------------------
Total owned receivables 1,035.6
--------------------------------------------------------------------
Deposits 220.0
Commercial paper, bank and other borrowings 1,637.0
Senior and senior subordinated debt 5,738.1
Receivables serviced with limited recourse 118.5
--------------------------------------------------------------------
Total items synthetically altered with interest rate swaps $8,777.5
--------------------------------------------------------------------
</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.
The company manages its exposure to interest rate risk primarily
through the use of interest rate swaps. These swaps synthetically
alter the interest rate risk inherent in balance sheet assets,
liabilities or off-balance sheet items. The majority of the
company's interest rate swaps are used to convert floating rate
assets to fixed rate, fixed rate debt to floating rate, floating
rate assets or debt from one floating rate index to another,
fixed rate assets to a floating rate, or floating rate debt to
fixed rate. The company also has entered into currency swaps to
convert both principal and interest payments on debt issued from
one currency to the appropriate functional currency. Interest
rate swaps also are used to synthetically alter interest rate
characteristics on certain receivables that are sold and serviced
with limited recourse. These off-balance sheet items expose the
company to the same interest rate risk as on-balance sheet items.
Interest rate swaps are used to synthetically alter the interest
rate provisions of the securitization transaction whereby the
underlying receivables pay a fixed (floating) rate and the
pass-through rate to the investor is floating (fixed).
The following table summarizes the maturities and related
weighted average receive/pay rates of interest rate swaps
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions. 1997 1998 1999 2000 2001 2002 Thereafter Total
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay a fixed rate/receive
a floating rate:
Notional value $ 584.3 $ 104.7 $ 175.7 $147.8 - - - $1,012.5
Weighted average receive rate 5.54% 4.41% 5.78% 5.93% - - - 5.52%
Weighted average pay rate 6.03 8.12 8.49 8.73 - - - 7.07
Pay a floating rate/receive
a fixed rate:
Notional value $ 847.7 $390.0 $ 977.7 $357.6 $953.5 $28.3 $1,768.8 $5,323.6
Weighted average receive rate 6.19% 5.18% 6.64% 6.58% 6.61% 6.04% 7.00% 6.57%
Weighted average pay rate 5.29 5.43 5.20 5.07 5.32 5.64 5.62 5.39
Pay a floating rate/receive
a different floating rate:
Notional value $ 837.3 $395.0 $1,209.1 - - - - $2,441.4
Weighted average receive rate 5.50% 5.52% 6.06% - - - - 5.78%
Weighted average pay rate 5.55 5.54 5.63 - - - - 5.59
-------------------------------------------------------------------------------------------------------------------------------
Total notional value $2,269.3 $889.7 $2,362.5 $505.4 $953.5 $28.3 $1,768.8 $8,777.5
===============================================================================================================================
Total weighted average
rates on swaps:
Receive rate 5.77% 5.24% 6.28% 6.39% 6.61% 6.04% 7.00% 6.23%
-------------------------------------------------------------------------------------------------------------------------------
Pay rate 5.57 5.79 5.66 6.14 5.32 5.64 5.62 5.64
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE> 39
The floating rates paid or received by the company are based on
spot rates from independent market sources for the index
contained in each interest rate swap contract, which generally
are based on either 1-, 3- or 6-month LIBOR. These current
floating rates are different than the floating rates in effect
when the contracts were initiated. Changes in spot rates impact
the variable rate information disclosed above. However, these
changes in spot rates also impact the interest rate on the
underlying assets or liabilities. Hedging/synthetic alteration
instruments are used by the company to manage the volatility of
net interest margin resulting from changes in interest rates on
the underlying hedged/synthetically altered items. Owned net
interest margin would have declined by 18 and 54 basis points in
1996 and 1994, respectively, had these instruments not been
utilized. These instruments did not impact owned net interest
margin in 1995.
Forwards and futures are agreements between two parties,
committing one to sell and the other to buy a specific quantity
of an instrument on some future date. The parties agree to buy
or sell at a specified price in the future, and their profit or
loss is determined by the difference between the arranged price
and the level of the spot price when the contract is settled.
The company has both interest rate and foreign exchange rate
forward contracts and interest rate futures contracts. Foreign
exchange contracts are utilized by the company to reduce its
exposure to foreign currency exchange risk. Interest rate
forward and futures contracts are used to hedge resets of
interest rates on the company's floating rate assets and
liabilities. The company's exposure to credit risk for futures
is limited, as these contracts are traded on organized
exchanges. Each day, changes in contract values are settled in
cash. In contrast, forward contracts have credit risk relating
to the performance of the counterparty. These instruments also
are subject to market risk. Cash requirements for forward
contracts include the receipt or payment of cash upon the sale
or purchase of the instrument.
Purchased options grant the purchaser the right, but not
the obligation, to either purchase or sell a financial
instrument at a specified price within a specified period. The
seller of the option has written a contract which creates an
obligation to either sell or purchase the financial instrument
at the agreed-upon price if, and when, the purchaser exercises
the option.
Other risk management instruments consist of caps and
floors. Caps and floors written expose the company to market
risk but not to credit risk. 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 $45.8 and $71.7 million and deferred
losses of $13.0 and $43.3 million from hedging/synthetic
alteration instruments were recorded on the balance sheets at
December 31, 1996 and 1995, respectively. The weighted average
amortization period associated with the deferred gains was 6.6
and 7.3 years at December 31, 1996 and 1995, respectively. The
weighted average amortization period for the deferred losses was
1.5 and 1.9 years at December 31, 1996 and 1995, respectively.
At December 31, 1996 the accrued interest, unamortized
premium and other assets recorded for agreements which would be
written off should all related counterparties fail to meet the
terms of their contracts was $52.8 million.
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,
1996 and 1995. The company lends nationwide, with the following
geographic areas comprising more than 10 percent of total
managed domestic receivables at December 31, 1996: California
-20 percent; Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH,
SD, WI) -24 percent; Middle Atlantic (DE, DC, MD, NJ, PA, VA,
WV) -14 percent; Northeast (CT, ME, MA, NH, NY, RI, VT) -13
percent; and Southeast (AL, FL, GA, KY, MS, NC, SC, TN) -15
percent.
55
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
8. COMPANY
OBLIGATED
MANDATORILY
REDEEMABLE
PREFERRED
SECURITIES OF
SUBSIDIARY TRUSTS
In June 1996 Household Capital Trust II ("HCT II"), a
wholly-owned subsidiary of the company, issued 4 million 8.70
percent Trust Preferred Securities ("preferred securities") at
$25 per preferred security. The sole asset of HCT II is $103.1
million of 8.70 percent Junior Subordinated Deferrable Interest
Notes issued by the company. The junior subordinated notes held
by HCT II mature on June 30, 2036 and are redeemable by the
company in whole or in part beginning on June 30, 2001, at which
time the HCT II preferred securities are callable. Net proceeds
from the issuance of preferred securities were used for general
corporate purposes.
In June 1995 Household Capital Trust I ("HCT I"), a
wholly-owned subsidiary of the company, issued 3 million 8.25
percent preferred securities at $25 per preferred security. The
sole asset of HCT I is $77.3 million of 8.25 percent Junior
Subordinated Deferrable Interest Notes issued by the company. The
junior subordinated notes held by HCT I mature on June 30, 2025
and are redeemable by the company in whole or in part beginning
on June 30, 2000, at which time the HCT I preferred securities
are callable. HCT I may elect to extend the maturity of the
preferred securities to June 30, 2044.
The obligations of the company with respect to the junior
subordinated notes, when considered together with certain
undertakings of the company with respect to HCT I and HCT II,
constitute full and unconditional guarantees by the company of
the HCT I's and HCT II's obligations under the respective
preferred securities. The preferred securities are classified in
the company's balance sheets as company obligated mandatorily
redeemable preferred securities of subsidiary trusts
(representing the minority interest in the trusts) at their face
and redemption amount of $175 million at December 31, 1996. The
preferred securities have a liquidation value of $25 per
preferred security. Dividends on the preferred securities are
cumulative, payable quarterly in arrears and are deferrable at
the company's option for up to five years from date of issuance.
The company cannot pay dividends on its preferred and common
stocks during such deferments. Dividends on the preferred
securities have been classified as interest expense in the
statements of income.
9. PREFERRED SHARE
PURCHASE RIGHTS
In July 1996, the company issued one preferred share purchase
right (a "Right") for each outstanding share of common stock of
the company. Under certain conditions, each Right may be
exercised to purchase one thousandth of a share of a new series
of participating preferred stock at an exercise price of $300,
subject to adjustment. The Rights may be exercised only after the
earlier of: (a) a public announcement that a party or an
associated group acquired 15 percent or more of the company's
common stock and (b) ten business days (or later date as
determined by the Board of Directors of the company) after a
party or an associated group initiates or announces its intention
to make an offer to acquire 15 percent or more of the company's
common stock. The Rights, which cannot vote or receive dividends,
expire on July 31, 2006 and may be redeemed by the company at a
price of $.01 per Right at any time prior to expiration or
acquisition of 15 percent of the company's common stock.
10. PREFERRED STOCK
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31 1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C>
9.50% Preferred Stock, Series 1991-A, 5,500,000 depositary shares(1) $ 55.0 $ 55.0
8.25% Preferred Stock, Series 1992-A, 2,000,000 depositary shares(2) 50.0 50.0
7.35% Preferred Stock, Series 1993-A, 4,000,000 depositary shares(2) 100.0 100.0
-----------------------------------------------------------------------------------
Total preferred stock $205.0 $205.0
===================================================================================
</TABLE>
(1)Depositary share represents 1/10 share of preferred stock.
(2)Depositary share represents 1/40 share of preferred stock.
Dividends on the 9.50 percent preferred stock, Series
1991-A, are cumulative and payable quarterly. In January 1997,
the company redeemed all outstanding shares of this preferred
stock issue for $10 per depositary share plus accrued and unpaid
dividends.
Dividends on the 8.25 percent preferred stock, Series
1992-A, are cumulative and payable quarterly. The company may, at
its option, redeem in whole or in part the 8.25 percent preferred
stock, Series 1992-A, on any date after October 15, 2002 for $25
per depositary share plus accrued and unpaid dividends. This
stock has a liquidation value of $1,000 per share.
56
<PAGE> 41
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.
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
preferred stock in one or more series in an amount not to
exceed $500 million.
11. FAIR VALUE OF The company has estimated the fair value of its financial
FINANCIAL instruments in accordance with Statement of Financial
INSTRUMENTS 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. This statement 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 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.
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.
The following is a summary of the carrying value and
estimated fair value of the company's financial instruments:
<TABLE>
<CAPTION>
1996 1995
----------------------------------- -----------------------------------
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 $ 239 $ 239 - $ 270 $ 270 -
Investment securities 2,282 2,282 - 4,640 4,640 -
Receivables 24,245 25,036 $ 791 21,844 22,603 $ 759
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal 26,766 27,557 791 26,754 27,513 759
- --------------------------------------------------------------------------------------------------------------------------------
Deposits (2,365) (2,381) (16) (4,709) (4,747) (38)
Commercial paper, bank and other borrowings (6,428) (6,428) - (6,659) (6,659) -
Senior and senior subordinated debt (14,802) (15,022) (220) (11,228) (11,847) (619)
Insurance reserves (1,205) (1,422) (217) (2,229) (2,363) (134)
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal (24,800) (25,253) (453) (24,825) (25,616) (791)
- --------------------------------------------------------------------------------------------------------------------------------
Interest rate and foreign exchange contracts 37 (105) (142) 28 215 187
Commitments to extend credit and guarantees - 40 40 - 40 40
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal 37 (65) (102) 28 255 227
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 2,003 $ 2,239 $ 236 $ 1,957 $ 2,152 $ 195
================================================================================================================================
</TABLE>
57
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
The fair value in excess of the carrying value (the
"Difference") increased from $195 million at December 31,
1995 to $236 million at December 31, 1996, an increase of
$41 million. The relationship between the increase in the
overall interest rate environment and the repricing
characteristics of the company's financial instruments was
the most significant factor in causing the increase in the
Difference.
The following methods and assumptions were used to
estimate the fair value of the company's financial
instruments:
Cash: The carrying value approximates fair value for
this instrument due to its liquid nature.
Investment securities: Investment securities are
classified as available-for-sale and are carried at fair
value on the balance sheets.
Receivables: 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 of
certain home equity, Visa/MasterCard, private label and
other unsecured receivables.
Deposits: The fair value of the company's savings and
demand accounts equaled the carrying amount as stipulated in
FAS No. 107. The fair value of fixed rate time certificates
was estimated by discounting future expected cash flows at
interest rates offered by the company on such products at
the respective valuation dates.
Commercial paper, bank and other borrowings: The fair
value of these instruments was determined to approximate
existing carrying value because interest rates on these
instruments adjust with changes in market interest rates due
to their short-term maturity or repricing characteristics.
Senior and senior subordinated debt: 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, 1996 and 1995. 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.
58
<PAGE> 43
12. LEASES The company leases certain offices, buildings and equipment for
periods of up to 23 years with various renewal options. The
office space leases generally require the company to pay certain
operating expenses. The majority of the company's leases are
noncancelable operating leases. Net rental expense under
operating leases was $50.6, $55.4 and $58.1 million for 1996,
1995 and 1994, respectively.
Future net minimum lease commitments under noncancelable
operating lease arrangements were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1996
--------------------------------------------------------
<S> <C>
1997 $ 47.4
1998 39.4
1999 29.3
2000 21.1
2001 14.6
Thereafter 122.8
--------------------------------------------------------
Net minimum lease commitments $274.6
========================================================
</TABLE>
13. INCENTIVE The company's executive compensation plans provide for issuance
COMPENSATION of nonqualified stock options and restricted stock rights (RSRs).
AND STOCK At December 31, 1996, of the total shares authorized, 4,260,451
OPTION PLANS shares were available for issuance to employees pursuant to the
terms of the plans. Stock options permit the holder to purchase,
under certain limitations, the company's common stock at a price
not less than 100 percent of the market value of the stock on the
date the option is granted. Stock options vest equally over four
years and expire 10 years from the date of grant.
Common stock data for the stock option plans is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ --------------------
Price per Price per Price per
Shares Share Shares Share Shares Share
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 3,955,240 $35.85 3,600,916 $28.39 2,850,002 $22.68
Granted 513,500 91.17 1,439,600 47.99 1,078,700 35.62
Exercised (463,212) 27.13 (812,576) 25.04 (213,962) 21.44
Expired or canceled (101,075) 40.81 (272,700) 33.60 (113,824) 22.26
----------------------------------------------------------------------------------------------------
Outstanding at the end
of year 3,904,453 $44.03 3,955,240 $35.85 3,600,916 $28.39
====================================================================================================
Exercisable at end of year 2,115,672 $32.17 1,596,135 $26.57 1,641,711 $24.72
----------------------------------------------------------------------------------------------------
Weighted average fair value
of options granted $31.50 $16.44 N/A
====================================================================================================
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------- -----------------------------------
Number Number
Range of Outstanding at Weighted Average Weighted Average Outstanding at Weighted Average
Exercise Prices December 31, 1996 Remaining Life Exercise Price December 31, 1996 Exercise Price
--------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$15.06-$40.88 2,853,628 6.2 years $32.69 1,981,247 $30.33
$47.44-$91.75 1,050,825 9.3 years $74.85 134,425 $59.26
-----------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
RSRs entitle an employee to receive a stated number of shares of
the company's common stock if the employee satisfies the
conditions set by the Compensation Committee for the award. At
December 31, 1996, employees have outstanding RSRs representing
250,725 shares.
The company also maintains an Employee Stock Purchase Plan
(the "ESPP"). The ESPP provides a means for employees to
purchase shares of the company's common stock at 85% of the
lesser of its market price at the beginning or end of a one year
subscription period. In 1996 the company sold 134,876 shares to
employees under the ESPP.
The company accounts for options and shares issued under
the ESPP in accordance with APB 25, pursuant to which no
compensation cost has been recognized. Had compensation cost
been determined consistent with FAS No. 123, the company's net
income and net income per share would have been as follows:
<TABLE>
<CAPTION>
In millions, except per share data.
Year ended December 31 1996 1995
-----------------------------------------------------
<S> <C> <C>
Net income available to
common shareholders:
As Reported $521.9 $426.8
Pro Forma 517.3 424.3
Net income per share:
As Reported $ 5.30 $ 4.30
Pro Forma 5.26 4.28
=====================================================
</TABLE>
The fair value of each option granted was estimated as of the
date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions for 1996 grants:
risk-free interest rate of 6.03 percent; expected dividend yield
of 1.55 percent; expected life of 5 years; and expected
volatility of 28.2 percent.
Since the calculations required by FAS No. 123 have not
been applied to stock option grants prior to January 1, 1995,
and options vest pro-rata over a four year period, four years
must elapse before the total expense associated with a
particular grant is completely recognized for disclosure
purposes.
14. EMPLOYEE The company has several defined benefit pension plans covering
BENEFIT PLANS 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, 1996
plan assets included an investment in the company's common stock
of $116.6 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 1996 1995 1994
------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $(15.1) $(16.8) $(19.0)
Interest cost on projected benefit obligation (31.0) (32.5) (30.5)
Actual return on assets 99.8 116.4 3.9
Net amortization and deferral (26.9) (40.7) 66.6
------------------------------------------------------------------------------
Pension income $ 26.8 $ 26.4 $ 21.0
==============================================================================
</TABLE>
The funded status of defined benefit pension plans was as
follows:
<TABLE>
<CAPTION>
In millions.
At December 31 1996 1995
----------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of:
Vested benefits obligation $347.7 $355.0
Nonvested benefits obligation 44.9 46.1
----------------------------------------------------------------------------
Accumulated benefit obligation 392.6 401.1
Effects of anticipated future compensation levels 27.9 25.5
----------------------------------------------------------------------------
Projected benefit obligation 420.5 426.6
Plan assets at fair value 704.7 672.7
----------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation $284.2 $246.1
============================================================================
</TABLE>
60
<PAGE> 45
The projected benefit obligation of the foreign benefit plans
totaled $45.8 and $44.8 million at December 31, 1996 and 1995,
respectively. Plan assets in excess of the projected benefit
obligation for these plans totaled $5.6 and $7.0 million at
December 31, 1996 and 1995, respectively.
The 1996 and 1995 projected benefit obligations for the
domestic defined benefit plan were determined using an assumed
weighted average discount rate of 7.50 and 7.25 percent,
respectively; an assumed compensation increase of 4.0 and 3.75
percent, respectively; and an assumed weighted average long-term
rate of return on plan assets of 10.0 percent.
The excess of plan assets over the projected benefit
obligation included the following components:
<TABLE>
<CAPTION>
In millions.
At December 31 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Unamortized prior service cost $ (2.6) $ (3.2)
Net unrecognized loss from past experience different
from assumed and effects of changes in assumptions (41.8) (63.6)
Unamortized assets 27.2 40.4
Prepaid pension cost 301.4 272.5
- ------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation $284.2 $246.1
==============================================================================
</TABLE>
The straight-line method of amortization is used for prior
service costs and unrecognized gains and losses.
The company also sponsors a defined contribution plan where
each participant's contribution is matched by the company up to a
maximum of 6 percent of the participant's compensation. For 1996,
1995 and 1994 these costs totaled $17.3, $17.2 and $16.5 million,
respectively.
The company has several plans which provide medical, dental
and life insurance benefits to retirees and eligible dependents.
The plans are funded on a pay-as-you-go basis and cover
substantially all employees who meet certain age and vested
service requirements. The company has instituted dollar limits on
its payments under the plans to control the cost of future
medical benefits.
The company recognizes the expected postretirement costs on
an accrual basis, similar to pension accounting. The expected
cost of postretirement benefits is required to be recognized over
the employees' years of service with the company instead of the
period in which the benefits are paid. The company is recognizing
the transition obligation, which represents the unfunded and
unrecognized accumulated postretirement benefit obligation at
that date over 20 years.
The net postretirement benefit cost included the following:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ (2.8) $ (3.1) $ (2.8)
Interest cost on accumulated postretirement benefit obligation (7.4) (10.5) (11.4)
Net amortization and deferral (3.3) (5.5) (6.5)
- -----------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $(13.5) $(19.1) $(20.7)
=========================================================================================
</TABLE>
The cost of plans which cover retirees and eligible
dependents outside of the United States is not significant to the
company.
61
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc. and Subsidiaries
The actuarial and recorded liabilities for
postretirement benefit plans, none of which have been
funded, were:
<TABLE>
<CAPTION>
In millions.
At December 31 1996 1995
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of postretirement benefit obligation for:
Retirees $ 68.0 $ 67.3
Fully eligible active participants 9.6 8.9
Other active participants 27.3 25.9
----------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 104.9 102.1
Net unrecognized gain from past experience different
from assumed and effects of changes in assumptions 49.2 48.2
Unamortized liability (100.6) (106.9)
----------------------------------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ 53.5 $ 43.4
==========================================================================================================
</TABLE>
The December 31, 1996 and 1995 accumulated postretirement
benefit obligation was determined using an assumed weighted
average discount rate of 7.50 and 7.25 percent, respectively,
and an assumed annual compensation increase of 4.0 and 3.75
percent, respectively. An 11.0 and 12.0 percent annual rate
of increase in the gross cost of covered health care benefits
was assumed for 1997 and 1996, respectively. This rate of
increase is assumed to decline by 1 percentage point in each
year after 1997.
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 1996 and 1995 net periodic postretirement benefit cost by
$.8 and $.7 million, respectively, and the accumulated
postretirement benefit obligation at December 31, 1996 and
1995 by $7.5 and $7.3 million, respectively.
15. INCOME TAXES
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes related to operations $283.7 $300.5 $ 160.7
Income taxes related to adjustments included in common shareholders' equity:
Unrealized gain (loss) on investments, net (55.2) 105.8 (79.6)
Foreign currency translation adjustments (18.6) (3.8) (4.7)
Exercise of stock options (6.8) (6.8) (.9)
----------------------------------------------------------------------------------------------------------
Total $203.1 $395.7 $ 75.5
==========================================================================================================
</TABLE>
Provisions for income taxes related to operations were:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT
United States $328.4 $270.4 $ 155.8
Foreign 38.9 32.6 6.1
----------------------------------------------------------------------------------------------------------
Total current 367.3 303.0 161.9
----------------------------------------------------------------------------------------------------------
DEFERRED
United States (81.6) 7.9 8.3
Foreign (2.0) (10.4) (9.5)
----------------------------------------------------------------------------------------------------------
Total deferred (83.6) (2.5) (1.2)
----------------------------------------------------------------------------------------------------------
Total income taxes $283.7 $300.5 $ 160.7
==========================================================================================================
</TABLE>
62
<PAGE> 47
The significant components of deferred income tax provisions
attributable to income from operations were:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1996 1995 1994
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred income tax provision (exclusive of the
effects of other components listed below) $(65.9) $ 2.6 $ 13.8
Adjustment of valuation allowance (11.4) (6.7) (20.3)
Change in operating loss carryforwards (6.3) 1.6 5.3
--------------------------------------------------------------------------------------------------------
Deferred income tax provision $(83.6) $(2.5) $ (1.2)
========================================================================================================
</TABLE>
Income before income taxes from foreign operations was $111.7,
$71.7 and $21.7 million in 1996, 1995 and 1994, respectively.
Effective tax rates are analyzed as follows:
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit 1.8 2.0 1.1
Amortization and disposition of intangible assets 1.5 1.9 2.2
Leveraged lease tax benefits (1.7) (1.9) (2.9)
Recapture of life insurance policyholders' surplus account balance - 3.9 -
Foreign loss carryforwards - - (2.3)
Other (2.1) (1.0) (2.7)
--------------------------------------------------------------------------------------------------------
Effective tax rate 34.5% 39.9% 30.4%
========================================================================================================
</TABLE>
Provision for U.S. income taxes had not been made at December
31, 1996 on $146.4 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 $20.4 million at December 31, 1996.
Because this amount would become taxable only in the event of
certain circumstances which the company does not expect to
occur within the foreseeable future, no deferred tax liability
has been established for this item. At December 31, 1996 the
company had net operating loss carryforwards for tax purposes
of $75.1 million, of which $25.2 million expire in 2000; $10.6
million expire in 2001; $12.3 million expire in 2002; $10.7
million expire in 2003; $14.4 million expire in 2007; and $1.9
million expire in 2008.
63
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Household International, Inc., and Subsidiaries
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 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Leveraged lease transactions, net $383.3 $405.6
Receivables sold 256.4 182.7
Pension plan assets 111.0 100.4
Deferred loan origination costs 36.8 48.4
Market value adjustments - 61.1
Other 84.9 52.1
- ---------------------------------------------------------------------
Total deferred tax liabilities 872.4 850.3
=====================================================================
DEFERRED TAX ASSETS
Credit loss reserves 536.1 369.0
Unused tax benefit carryforwards 33.5 32.9
Other 203.1 144.7
- ---------------------------------------------------------------------
Total deferred tax assets 772.7 546.6
Valuation allowance - (11.4)
- ---------------------------------------------------------------------
Total deferred tax assets, net of valuation allowance 772.7 535.2
- ---------------------------------------------------------------------
Net deferred tax liability at end of year $ 99.7 $315.1
=====================================================================
</TABLE>
16. NET INCOME PER
COMMON SHARE
<TABLE>
<CAPTION>
In millions, except per share data.
Year ended December 31 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS
Net income $538.6 $453.2 $367.6
Preferred dividends (16.7) (26.4) (27.6)
-------------------------------------------------------------------
Net income available to common shareholders $521.9 $426.8 $340.0
===================================================================
AVERAGE SHARES
Common 97.1 97.5 95.5
Common equivalents 1.4 1.8 1.7
-------------------------------------------------------------------
Total 98.5 99.3 97.2
===================================================================
Net income per common share $ 5.30 $ 4.30 $ 3.50
===================================================================
</TABLE>
64
<PAGE> 49
17. COMMITMENTS In the ordinary course of business there are various legal
AND CONTINGENT proceedings pending against the company. Management
LIABILITIES 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 12 for discussion of
lease commitments.
18. SALE OF In October 1995 the company sold the individual life
PRODUCT LINES 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.
19. GEOGRAPHIC The following is a summary of assets, revenues and operating
DATA profit of the company by country:
<TABLE>
<CAPTION>
Identifiable Assets Revenues Operating Profit
--------------------- ------------------------------ --------------------------
In millions. 1996 1995 1996 1995 1994 1996 1995 1994
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States $25,482.9 $25,797.7 $4,426.7 $4,466.2 $3,968.9 $714.6 $684.7 $512.5
United Kingdom 2,654.5 2,006.6 434.8 397.7 322.0 92.3 67.6 30.8
Canada 1,457.1 1,414.5 197.3 280.5 239.1 15.4 1.4 (16.9)
Australia - - - - 73.3 - - 1.9
---------------------------------------------------------------------------------------------------------------
Total $29,594.5 $29,218.8 $5,058.8 $5,144.4 $4,603.3 $822.3 $753.7 $528.3
===============================================================================================================
</TABLE>
65
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
Household International, Inc. and Subsidiaries
To the Shareholders of Household International, Inc.
We have audited the accompanying consolidated balance sheets of Household
International, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income, changes
in preferred stock and common shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Household International, Inc. and subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 23, 1997
67
<PAGE> 51
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
<TABLE>
<CAPTION>
Dividends Declared
Ticker -------------------
Stock Symbol 1996 1995 Features Redemption Features
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common HI $ 1.46 $ 1.31 Quarterly dividend rate N/A
increased to $.39 effective
10/15/96
- -----------------------------------------------------------------------------------------------------------------------------------
9 1/2% Preferred, Series 1991-A HI+PRX $ .95 $ .95 Nonconvertible Redeemed on January 23, 1997
Depositary Shares representing
1/10 share of 9 1/2% Preferred
Stock, Series 1991-A
- -----------------------------------------------------------------------------------------------------------------------------------
8 1/4% Preferred, Series 1992-A HI+PRZ $2.0625 $2.0625 Nonconvertible Cannot be redeemed prior to
10/15/02. Redeemable at
Depositary Shares representing company's option after
1/40 share of 8 1/4% Preferred 10/15/02 in whole or in part
Stock, Series 1992-A at $25.00 per depositary
share plus accrued and unpaid
dividends.
- -----------------------------------------------------------------------------------------------------------------------------------
7.35% Preferred, Series 1993-A HI+PRJ $1.8375 $1.8375 Nonconvertible Cannot be redeemed prior to
10/15/98. Redeemable at
Depositary Shares representing company's option after
1/40 share of 7.35% Preferred 10/15/98 in whole or in part
Stock, Series 1993-A at $25.00 per depositary
share plus accrued and unpaid
dividends.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shareholders
Net Shares Outstanding of Record 1996 Market Price 1995 Market Price
------------------------- ----------------- ----------------- -----------------
Stock 1996 1995 1996 1995 High Low High Low
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common 97,065,254 97,161,529 11,147 13,515 98 1/8 52 68 3/8 35 7/8
- -----------------------------------------------------------------------------------------------------------------------------------
9 1/2% Preferred, Series 1991-A
(Per Depositary Share) 5,500,000 5,500,000 690 786 10 1/2 9 7/8 10 3/4 10 1/8
- -----------------------------------------------------------------------------------------------------------------------------------
8 1/4% Preferred, Series 1992-A
(Per Depositary Share) 2,000,000 2,000,000 408 453 28 1/8 24 7/8 27 7/8 23 1/4
- -----------------------------------------------------------------------------------------------------------------------------------
7.35% Preferred, Series 1993-A
(Per Depositary Share) 4,000,000 4,000,000 290 317 26 7/8 24 25 7/8 20 3/8
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE> 52
<TABLE>
<CAPTION>
Year ended December 31, unless otherwise indicated. 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MARKET VALUE First quarter 71 1/2 - 52 45 - 35 7/8
PER SHARE OF ------------------------------------------------------------------------------------------
COMMON STOCK Second quarter 76 1/2 - 63 51 1/2 - 43 1/8
(HIGH-LOW PRICES ------------------------------------------------------------------------------------------
ON NYSE) Third quarter 83 7/8 - 68 1/2 62 - 48 7/8
------------------------------------------------------------------------------------------
Fourth quarter 98 1/8 - 82 1/2 68 3/8 - 54 1/4
------------------------------------------------------------------------------------------
Yearly range 98 1/8 - 52 68 3/8 - 35 7/8
------------------------------------------------------------------------------------------
Composite common shares traded 70,634,500 77,242,300
------------------------------------------------------------------------------------------
Average daily volume 278,089 306,517
------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
PRICE EARNINGS RATIO(1) Yearly range(2) 19.7 - 12.8 17.4 - 11.1
------------------------------------------------------------------------------------------
Yearly average(2) 16.5 13.6
------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
DIVIDEND YIELD Yearly range 2.6% - 1.6% 3.4% - 1.9%
------------------------------------------------------------------------------------------
Yearly average 1.9% 2.6%
------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT Common dividends to net income
RATIO available to common shareholders 27% 30%
------------------------------------------------------------------------------------------
Total dividends to net income 29% 34%
------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING Common 97,065,254 97,161,529
AT DECEMBER 31 ------------------------------------------------------------------------------------------
$6.25 PREFERRED -- --
------------------------------------------------------------------------------------------
9 1/2% Preferred, Series 1989-A(3) -- --
------------------------------------------------------------------------------------------
11 1/4% Enhanced Rate Preferred(3) -- --
------------------------------------------------------------------------------------------
9 1/2% Preferred, Series 1991-A(3) 5,500,000 5,500,000
------------------------------------------------------------------------------------------
8 1/4% Preferred, Series 1992-A(3) 2,000,000 2,000,000
------------------------------------------------------------------------------------------
7.35% Preferred, Series 1993-A(3) 4,000,000 4,000,000
------------------------------------------------------------------------------------------
Flex APS, Series A -- --
------------------------------------------------------------------------------------------
Flex APS, Series B -- --
------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS Common 11,147 13,315
OF RECORD AT ------------------------------------------------------------------------------------------
DECEMBER 31 $6.25 Preferred -- --
------------------------------------------------------------------------------------------
9 1/2% Preferred, Series 1989-A(3) -- --
------------------------------------------------------------------------------------------
11 1/4% Enhanced Rate Preferred(3) -- --
------------------------------------------------------------------------------------------
9 1/2% Preferred, Series 1991-A(3) 690 786
------------------------------------------------------------------------------------------
8 1/4% Preferred, Series 1992-A(3) 408 453
------------------------------------------------------------------------------------------
7.35% Preferred, Series 1993-A(3) 290 317
------------------------------------------------------------------------------------------
Flex APS, Series A -- --
------------------------------------------------------------------------------------------
Flex APS, Series B -- --
------------------------------------------------------------------------------------------
Total 12,535 15,071
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year ended December 31, unless otherwise indicated. 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MARKET VALUE First quarter 35 5/8 - 29 35 3/4 - 26 15/16
PER SHARE OF ------------------------------------------------------------------------------------------
COMMON STOCK Second quarter 36 1/8 - 28 1/2 36 3/8 - 31 5/8
(HIGH-LOW PRICES ------------------------------------------------------------------------------------------
ON NYSE) Third quarter 39 3/4 - 32 7/8 39 15/16 - 34 5/8
------------------------------------------------------------------------------------------
Fourth quarter 39 1/8 - 32 3/4 40 3/8 - 30 5/8
------------------------------------------------------------------------------------------
Yearly range 39 3/4 - 28 1/2 40 5/8 - 26 15/16
------------------------------------------------------------------------------------------
Composite common shares traded 64,880,200 56,945,400
------------------------------------------------------------------------------------------
Average daily volume 257,461 225,081
------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
PRICE EARNINGS RATIO(1) Yearly range(2) 13.0 - 9.9 18.7 - 12.0(2)
------------------------------------------------------------------------------------------
Yearly average(2) 11.5 16.0(2)
------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
DIVIDEND YIELD Yearly range 4.1% - 3.0% 4.3% - 2.9%
------------------------------------------------------------------------------------------
Yearly average 3.5% 3.4%
------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT Common dividends to net income
RATIO available to common shareholders 35% 41%
------------------------------------------------------------------------------------------
Total dividends to net income 40% 47%
------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING Common 96,602,598 94,448,132
AT DECEMBER 31 ------------------------------------------------------------------------------------------
$6.25 PREFERRED 52,010 385,439
------------------------------------------------------------------------------------------
9 1/2% Preferred, Series 1989-A(3) 3,000,000 3,000,000
------------------------------------------------------------------------------------------
11 1/4% Enhanced Rate Preferred(3) -- --
------------------------------------------------------------------------------------------
9 1/2% Preferred, Series 1991-A(3) 5,500,000 5,500,000
------------------------------------------------------------------------------------------
8 1/4 % Preferred, Series 1992-A(3) 2,000,000 2,000,000
------------------------------------------------------------------------------------------
7.35% Preferred, Series 1993-A(3) 4,000,000 4,000,000
------------------------------------------------------------------------------------------
Flex APS, Series A -- --
------------------------------------------------------------------------------------------
Flex APS, Series B 400,000 400,000
------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS Common 14,379 14,632
OF RECORD AT ------------------------------------------------------------------------------------------
DECEMBER 31 $6.25 Preferred 408 641
------------------------------------------------------------------------------------------
9 1/2% Preferred, Series 1989-A(3) 535 591
------------------------------------------------------------------------------------------
11 1/4% Enhanced Rate Preferred(3) -- --
------------------------------------------------------------------------------------------
9 1/2% Preferred, Series 1991-A(3) 895 939
------------------------------------------------------------------------------------------
8 1/4% Preferred, Series 1992-A(3) 518 512
------------------------------------------------------------------------------------------
7.35% Preferred, Series 1993-A(3) 343 305
------------------------------------------------------------------------------------------
Flex APS, Series A -- --
------------------------------------------------------------------------------------------
Flex APS, Series B 4 4
------------------------------------------------------------------------------------------
Total 17,082 17,624
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year ended December 31, unless otherwise indicated. 1992
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
MARKET VALUE First quarter 28 3/8 - 22 1/2
PER SHARE OF ----------------------------------------------------------------------
COMMON STOCK Second quarter 25 3/16 - 20 3/4
(HIGH-LOW PRICES ----------------------------------------------------------------------
ON NYSE) Third quarter 27 1/8 - 25
----------------------------------------------------------------------
Fourth quarter 30 1/4 - 23 5/8
----------------------------------------------------------------------
Yearly range 30 1/4 - 20 3/4
----------------------------------------------------------------------
Composite common shares traded 52,441,000
----------------------------------------------------------------------
Average daily volume 206,460
----------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
PRICE EARNINGS RATIO(1) Yearly range(2) (2)
----------------------------------------------------------------------
Yearly average(2) (2)
----------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
DIVIDEND YIELD Yearly range 5.4% - 3.9%
----------------------------------------------------------------------
Yearly average 4.4%
----------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT Common dividends to net income
RATIO available to common shareholders 59%
----------------------------------------------------------------------
Total dividends to net income 65%
----------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
SHARES OUTSTANDING Common 82,876,266
AT DECEMBER 31 ----------------------------------------------------------------------
$6.25 PREFERRED 720,000
----------------------------------------------------------------------
9 1/2% Preferred, Series 1989-A(3) 3,000,000
----------------------------------------------------------------------
11 1/4% Enhanced Rate Preferred(3) 4,500,000
----------------------------------------------------------------------
9 1/2% Preferred, Series 1991-A(3) 5,500,000
----------------------------------------------------------------------
8 1/4% Preferred, Series 1992-A(3) 2,000,000
----------------------------------------------------------------------
7.35% Preferred, Series 1993-A(3) --
----------------------------------------------------------------------
Flex APS, Series A 350,000
----------------------------------------------------------------------
Flex APS, Series B 400,000
----------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
SHAREHOLDERS Common 14,605
OF RECORD AT ----------------------------------------------------------------------
DECEMBER 31 $6.25 Preferred 842
----------------------------------------------------------------------
9 1/2% Preferred, Series 1989-A(3) 595
----------------------------------------------------------------------
11 1/4% Enhanced Rate Preferred(3) 1,055
----------------------------------------------------------------------
9 1/2% Preferred, Series 1991-A(3) 889
----------------------------------------------------------------------
8 1/4% Preferred, Series 1992-A(3) 409
----------------------------------------------------------------------
7.35% Preferred, Series 1993-A(3) --
----------------------------------------------------------------------
Flex APS, Series A 1
----------------------------------------------------------------------
Flex APS, Series B 4
----------------------------------------------------------------------
Total 18,400
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) The ratio of market price per share to earnings per share is based on a
revolving summation of quarterly results.
(2) 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 yearly range and yearly average are from February 4, 1993 forward.
(3) Per depositary share.
69
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF HOUSEHOLD INTERNATIONAL, INC.
As of December 31, 1996, 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%
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 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 Corporation Delaware 100%
Household Credit Services, Inc. Delaware 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%
Household Insurance Agency, Inc. Michigan 100%
Household Insurance Company Michigan 100%
Household Life Insurance Co. of Arizona Arizona 100%
Household Life Insurance Company Michigan 100%
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%
HCFS Business Equipment Corporation Delaware 100%
HCFS Corporate Finance Venture, Inc. Delaware 100%
HFC Commercial Realty, Inc. Delaware 100%
G.C. Center, Inc. Delaware 100%
Com Realty, Inc. Delaware 100%
Lighthouse Property Corporation Delaware 100%
Household OPEB I, Inc. Illinois 100%
Land of Lincoln Builders, Inc. Illinois 100%
PPSG Corporation Delaware 100%
Steward's Glenn Corporation Delaware 100%
HFC Leasing, Inc. Delaware 100%
First HFC Leasing Corporation Delaware 100%
Second HFC Leasing Corporation Delaware 100%
Valley Properties Corporation Tennessee 100%
Fifth HFC Leasing Corporation Delaware 100%
Sixth HFC Leasing Corporation Delaware 100%
Seventh HFC Leasing Corporation Delaware 100%
Eighth HFC Leasing Corporation Delaware 100%
Tenth HFC Leasing Corporation Delaware 100%
Eleventh HFC Leasing Corporation Delaware 100%
Thirteenth HFC Leasing Corporation Delaware 100%
Fourteenth HFC Leasing Corporation Delaware 100%
Seventeenth HFC Leasing Corporation Delaware 100%
Nineteenth HFC Leasing Corporation Delaware 100%
Twenty-second HFC Leasing Corporation Delaware 100%
Twenty-sixth HFC Leasing Corporation Delaware 100%
</TABLE>
- 2 -
<PAGE> 3
<TABLE>
<CAPTION>
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- -------- ------
<S> <C> <C>
Beaver Valley, Inc. Delaware 100%
Hull 752 Corporation Delaware 100%
Hull 753 Corporation Delaware 100%
Third HFC Leasing Corporation Delaware 100%
Macray Corporation California 100%
Fourth HFC Leasing Corporation Delaware 100%
Pargen Corporation California 100%
Fifteenth HFC Leasing Corporation Delaware 100%
Hull Fifty Corporation Delaware 100%
Household Capital Investment Corporation Delaware 100%
B&K Corporation Michigan 94%
Household Commercial of California, Inc. California 100%
OLC, Inc. Rhode Island 100%
OPI, Inc. Virginia 100%
Household Finance Consumer Discount Company Pennsylvania 100%
Overseas Leasing Two FSC, Ltd. Bermuda 99%
Household Finance Corporation II Delaware 100%
Household Finance Corporation of Alabama Alabama 100%
Household Finance Corporation of California Delaware 100%
Household Finance Corporation of Nevada Delaware 100%
Household Finance Realty Corporation of Delaware 100%
New York
Household Finance Industrial Loan Company Washington 100%
Household Finance Industrial Loan Company Iowa 100%
of Iowa
Household Finance Realty Corporation of Delaware 100%
Nevada
Household Finance Corporation III Delaware 100%
Amstelveen FSC, Ltd. Bermuda 99%
HFC Agency of Connecticut, Inc. Connecticut 100%
HFC Agency of Michigan, Inc. Michigan 100%
Night Watch FSC, Ltd. Bermuda 99%
Household Realty Corporation Delaware 100%
Overseas Leasing One FSC, Ltd. Bermuda 100%
Overseas Leasing Four FSC, Ltd. Bermuda 99%
Overseas Leasing Five FSC, Ltd. Bermuda 99%
Household Retail Services, Inc. Delaware 100%
HRSI Funding, Inc. Nevada 100%
Household Financial Center Inc. Tennessee 100%
Household Industrial Finance Company Minnesota 100%
Household Industrial Loan Co. of Kentucky Kentucky 100%
Household Insurance Agency, Inc. Nevada 100%
Household Recovery Services Corporation Delaware 100%
</TABLE>
- 3 -
<PAGE> 4
<TABLE>
<CAPTION>
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
<S> <C> <C>
Household Relocation Management, Inc. Illinois 100%
Mortgage One Corporation Delaware 100%
Mortgage Two Corporation Delaware 100%
Sixty-First HFC Leasing Corporation Delaware 100%
Household Pooling Corporation Nevada 100%
Household Receivables Acquisition Company Delaware 100%
Household Financial Group, Ltd. Delaware 100%
Household Global Funding, Inc. Delaware 100%
Household International (U.K.) Limited England 100%
D.L.R.S. Limited Cheshire 100%
HFC Bank plc England 100%
Hamilton Financial Planning Services
Limited England 100%
Hamilton Insurance Company Limited England 100%
Hamilton Life Assurance Co. Limited England 100%
HFC Pension Plan Limited England 100%
Household Funding Limited England 100%
Household Investments Limited England/Wales 100%
Household Leasing Limited England 100%
Household Management Corporation Limited England/Wales 100%
Household Overseas Limited England 100%
Household International Netherlands, B.V. Netherlands 100%
Household Financial Corporation Limited Ontario 100%
Household Finance Corporation of Canada Canada 100%
Household Realty Corporation Limited Ontario 100%
Household Trust Company Canada 100%
Merchant Retail Services Limited Ontario 100%
Household Reinsurance Ltd. Bermuda 100%
</TABLE>
- 4 -
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Household International, Inc.:
As independent public accountants, we hereby consent to the incorporation of
our report dated January 23, 1997, included in this annual report on Form 10-K
of Household International, Inc. for the year ended December 31, 1996, into the
Company's previously filed Registration Statements No. 2-86383, No. 33-21343,
No. 2-97495, No. 33-45454, No. 33-45455, No. 33-52211, No. 33-58727, No.
333-00397, No. 33-44066 and No. 333-03673 on Form S-8 and Registration
Statements No. 33-48854, No. 33-56599, No. 33-57249 and No. 333-1025 on Form
S-3.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 20, 1997
<PAGE> 1
EXHIBIT 99(b)
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
DEBT AND PREFERRED STOCK SECURITIES RATINGS OF THE
COMPANY AND ITS SIGNIFICANT SUBSIDIARIES
<TABLE>
<CAPTION>
Duff &
Standard Moody's Fitch Phelps
& Poor's Investors Investors Credit Thomson
Corporation Service Services Rating Co. BankWatch
- ---------------------------------------------------------------------------------------
At December 31, 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Household International, Inc.
Senior A A3 A A A
Commercial paper A-1 P-2 F-1 Duff 1 TBW-1
Preferred stock A- baa1 A- A- BBB+
- ---------------------------------------------------------------------------------------
Household Finance Corporation
Senior A A2 A+ A+ A+
Senior subordinated A- A3 A A A
Commercial paper A-1 P-1 F-1 Duff 1+ TBW-1
Preferred stock A- a3 A A- A-
- ---------------------------------------------------------------------------------------
Household Bank, f.s.b.
Senior A A2 A A NR
Subordinated A- A3 A- A- A
Certificates of deposit
(long/short term) A/A-1 A2/P-1 A/F-1 A/Duff 1 TBW-1
Thrift notes A-1 P-1 F-1 Duff 1 TBW-1
- ---------------------------------------------------------------------------------------
</TABLE>
In October 1996 Moody's Investors Service ("Moody's") revised its outlook for
the long-term debt obligations of the Company and its subsidiaries from neutral
to negative reflecting management's strategic repositioning toward unsecured
receivable origination and the sale of its retail consumer deposit branches.
Moody's outlook for the ratings of commercial paper and short-term obligations
issued by the Company and its subsidiaries was unaffected.
<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 AND EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 239,200
<SECURITIES> 2,282,000
<RECEIVABLES> 24,067,000
<ALLOWANCES> 1,596,200
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 785,700
<DEPRECIATION> 432,600
<TOTAL-ASSETS> 29,594,500
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 14,802,000
0
205,000
<COMMON> 115,200
<OTHER-SE> 3,001,000
<TOTAL-LIABILITY-AND-EQUITY> 29,594,500
<SALES> 0
<TOTAL-REVENUES> 5,058,800
<CGS> 0
<TOTAL-COSTS> 1,956,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 759,600
<INTEREST-EXPENSE> 1,520,600
<INCOME-PRETAX> 822,300
<INCOME-TAX> 283,700
<INCOME-CONTINUING> 538,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 538,600
<EPS-PRIMARY> 5.31
<EPS-DILUTED> 5.30
<FN>
<F1>FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH FINANCIAL
INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S BALANCE SHEETS WERE
NON-CLASSIFIED.
</FN>
</TABLE>
