<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: March 6, 1998
-----------------
HOUSEHOLD INTERNATIONAL, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-8198 36-3121988
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(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification
incorporation) Number)
2700 Sanders Road, Prospect Heights, Illinois 60070
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 847/564-5000
------------
<PAGE> 2
Item 5. Other Events
(a) Set forth in Exhibit 99 hereto are the audited consolidated
financial statements of Household International, Inc. and its subsidiaries as
of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997; together with an opinion of Arthur Andersen, LLP,
dated January 21, 1998, with respect thereto.
(b) On February 16, 1998, Beneficial Corporation ("Beneficial"), one
of the Registrant's competitors in the consumer finance industry, announced
that it is considering strategic options to enhance shareholder value, which
may include a merger or sale of Beneficial. Subsequently, the Registrant
announced its interest in exploring such possibilities with Beneficial. It is
expected that a number of the Registrant's competitors are also interested in a
transaction with Beneficial. At this time, it is impossible to predict whether
a transaction between Beneficial and the Registrant will occur.
Item 7. Financial Statements and Exhibits
(a) Financial statements of business acquired.
Not applicable.
(b) Pro forma financial information.
Not applicable.
(c) Exhibits.
<TABLE>
<CAPTION>
No. Exhibit
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<S> <C>
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Charges and Preferred Stock
Dividends.
99 Audited consolidated financial statements of Household
International, Inc. and its subsidiaries as of December 31,
1997 and 1996 and for each of the three years in the period
ended December 31, 1997; together with an opinion of Arthur
Andersen LLP, dated January 21, 1998, with respect thereto.
</TABLE>
<PAGE> 3
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HOUSEHOLD INTERNATIONAL, INC.
(Registrant)
By: /s/ David A. Schoenholz
-----------------------------
David A. Schoenholz
Executive Vice President-
Chief Financial Officer,
Dated: March 6, 1998
<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 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income $ 686.6 $ 538.6 $ 453.2 $ 367.6 $ 298.7
Income taxes 342.6 283.7 300.5 160.7 152.0
- -------------------------------------------------------------------------------------------
Income before income taxes 1,029.2 822.3 753.7 528.3 450.7
- -------------------------------------------------------------------------------------------
Fixed charges:
Interest expense (1) 1,512.9 1,524.6 1,562.5 1,250.3 1,155.5
Interest portion of rentals (2) 26.9 32.1 33.5 35.5 33.6
- -------------------------------------------------------------------------------------------
Total fixed charges 1,539.8 1,556.7 1,596.0 1,285.8 1,189.1
- -------------------------------------------------------------------------------------------
Total earnings as defined $2,569.0 $2,379.0 $2,349.7 $1,814.1 $1,639.8
===========================================================================================
Ratio of earnings to fixed charges 1.67 1.53 1.47 1.41 1.38
===========================================================================================
Preferred stock dividends (3) $ 17.7 $ 25.5 $ 44.1 $ 40.9 $ 46.9
===========================================================================================
Ratio of earnings to combined fixed
charges and preferred stock dividends 1.65 1.50 1.43 1.37 1.33
===========================================================================================
</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 commerical paper issuances.
(2) Represents one-third of rental which approximates the portion representing
interest.
(3) Preferred stock dividends are grossed up to their pre-tax equivalents based
on effective tax rates of 33.3, 34.5, 39.9, 30.4 and 33.7 percent for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
<PAGE> 1
Exhibit 99
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Income
<TABLE>
<CAPTION>
In millions, except per share data.
Year ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance income $ 3,057.2 $ 2,949.9 $ 2,878.8
Other interest income 36.8 80.6 123.4
Interest expense 1,503.4 1,520.6 1,557.1
- -------------------------------------------------------------------------------------------------
Net interest margin 1,590.6 1,509.9 1,445.1
Provision for credit losses on owned receivables 1,042.0 759.6 761.3
- -------------------------------------------------------------------------------------------------
Net interest margin after provision for credit losses 548.6 750.3 683.8
- -------------------------------------------------------------------------------------------------
Securitization income 1,400.6 1,149.0 873.6
Insurance revenues 276.4 253.4 322.1
Investment income 129.5 153.2 470.2
Fee income 413.3 240.3 196.4
Other income 189.3 232.4 279.9
- -------------------------------------------------------------------------------------------------
Total other revenues 2,409.1 2,028.3 2,142.2
- -------------------------------------------------------------------------------------------------
Salaries and fringe benefits 639.5 564.3 555.3
Occupancy and equipment expense 207.9 209.8 222.1
Other marketing expenses 337.7 354.4 249.7
Other servicing and administrative expenses 400.2 455.0 460.9
Amortization of acquired intangibles and goodwill 158.4 143.7 109.8
Policyholders' benefits 184.8 229.1 474.5
- -------------------------------------------------------------------------------------------------
Total costs and expenses 1,928.5 1,956.3 2,072.3
- -------------------------------------------------------------------------------------------------
Income before income taxes 1,029.2 822.3 753.7
Income taxes 342.6 283.7 300.5
- -------------------------------------------------------------------------------------------------
Net income $ 686.6 $ 538.6 $ 453.2
=================================================================================================
Earnings Per Common Share
Net income $ 686.6 $ 538.6 $ 453.2
Preferred dividends (11.8) (16.7) (26.4)
- -------------------------------------------------------------------------------------------------
Earnings available to common shareholders $ 674.8 $ 521.9 $ 426.8
=================================================================================================
Average common and common equivalent shares 103.8 98.3 99.1
- -------------------------------------------------------------------------------------------------
Basic earnings per common share $ 6.59 $ 5.37 $ 4.38
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Diluted earnings per common share $ 6.50 $ 5.31 $ 4.31
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 2
Household International, Inc. and Subsidiaries
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Consolidated Balance Sheets
<TABLE>
<CAPTION>
In millions, except share data.
At December 31 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 280.4 $ 239.2
Investment securities 2,285.6 2,282.0
Receivables, net 23,862.7 24,244.8
Acquired intangibles and goodwill, net 1,754.7 969.4
Properties and equipment, net 309.4 353.1
Real estate owned 127.3 136.6
Other assets 1,682.5 1,369.4
---------------------------------------------------------------------------------------------------------------
Total assets $ 30,302.6 $ 29,594.5
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Deposits $ 1,788.9 $ 2,365.1
Commercial paper, bank and other borrowings 6,081.0 6,428.1
Senior and senior subordinated debt (with original maturities over one year) 14,849.0 14,802.0
---------------------------------------------------------------------------------------------------------------
Total debt 22,718.9 23,595.2
Insurance policy and claim reserves 1,257.2 1,205.3
Other liabilities 1,485.3 1,472.8
---------------------------------------------------------------------------------------------------------------
Total liabilities 25,461.4 26,273.3
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts (Note 9)* 175.0 175.0
Preferred stock (Note 10) 150.0 205.0
Common shareholders' equity:
Common stock, $1.00 par value, 250,000,000 and 150,000,000
shares authorized, 124,331,175 and 115,231,175 shares issued
at December 31, 1997 and 1996, respectively 124.3 115.2
Additional paid-in capital 1,531.8 397.3
Retained earnings 3,582.1 3,076.8
Foreign currency translation adjustments (128.3) (126.7)
Unrealized gain (loss) on investments, net 3.6 (12.9)
Less common stock in treasury, 17,173,143 and 18,165,921 shares
at December 31, 1997 and 1996, respectively, at cost (597.3) (508.5)
---------------------------------------------------------------------------------------------------------------
Total common shareholders' equity 4,516.2 2,941.2
---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 30,302.6 $ 29,594.5
===============================================================================================================
</TABLE>
*The sole assets of the two trusts are Junior Subordinated Deferrable Interest
Notes issued by Household International, Inc. in June 1996 and June 1995,
bearing interest at 8.70 and 8.25 percent, respectively, with principal balances
of $103.1 and $77.3 million, respectively, and due June 30, 2036 and June 30,
2025, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 3
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income $ 686.6 $ 538.6 $ 453.2
Adjustments to reconcile net income to net cash provided by operations:
Provision for credit losses on owned receivables 1,042.0 759.6 761.3
Insurance policy and claim reserves 107.7 44.3 404.7
Depreciation and amortization 256.7 240.5 263.7
Net realized gains from sales of assets (102.5) (137.3) (188.7)
Deferred income tax provision 147.4 (83.6) (2.5)
Other, net (337.3) 263.7 (319.2)
----------------------------------------------------------------------------------------------------------------------
Cash provided by operations 1,800.6 1,625.8 1,372.5
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN OPERATIONS
Investment securities available-for-sale:
Purchased (1,557.3) (2,206.5) (4,299.3)
Matured 322.1 851.0 902.1
Sold 1,373.5 2,647.0 3,081.1
Investment securities held-to-maturity:
Purchased -- -- (558.7)
Matured -- -- 465.1
Sold -- -- 34.2
Short-term investment securities, net change (49.0) 117.2 348.5
Receivables:
Originations, net (27,510.7) (28,308.6) (24,311.7)
Purchased (1,189.6) (5,087.6) (2,279.1)
Sold 31,013.2 29,995.9 24,385.8
Purchase of Transamerica Financial Services Holding Company capital stock (1,065.0) -- --
Disposition of consumer banking operations:
Assets sold, net -- 472.3 975.6
Deposits and other liabilities sold, net -- (2,809.8) (4,061.9)
Disposition of product lines of life insurance business -- -- 575.0
(Acquisition) disposition of portfolios, net -- (640.7) (58.7)
Properties and equipment purchased (65.1) (97.1) (76.4)
Properties and equipment sold 8.6 14.9 35.9
----------------------------------------------------------------------------------------------------------------------
Cash increase (decrease) from investments in operations 1,280.7 (5,052.0) (4,842.5)
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt and demand deposits, net change (494.3) (176.8) 1,956.7
Time certificates, net change (438.2) 395.0 728.8
Senior and senior subordinated debt issued 4,900.5 7,596.3 3,258.0
Senior and senior subordinated debt retired (4,832.9) (4,068.8) (2,414.4)
Repayment of Transamerica Financial Services Holding Company debt (2,795.0) -- --
Policyholders' benefits paid (123.5) (512.4) (805.3)
Cash received from policyholders 98.0 258.5 669.0
Shareholders' dividends (181.3) (158.4) (154.0)
Issuance of company obligated mandatorily redeemable
preferred securities of subsidiary trusts -- 100.0 75.0
Redemption of preferred stock (55.0) -- (115.0)
Purchase of treasury stock (155.7) (56.7) (59.7)
Issuance of common stock 1,022.3 15.2 24.7
----------------------------------------------------------------------------------------------------------------------
Cash increase (decrease) from financing and capital transactions (3,055.1) 3,391.9 3,163.8
----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 15.0 3.1 35.4
----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 41.2 (31.2) (270.8)
Cash at January 1 239.2 270.4 541.2
----------------------------------------------------------------------------------------------------------------------
Cash at December 31 $ 280.4 $ 239.2 $ 270.4
======================================================================================================================
Supplemental Cash Flow Information:
Interest paid $ 1,501.1 $ 1,555.4 $ 1,508.2
Income taxes paid 127.2 321.9 171.0
----------------------------------------------------------------------------------------------------------------------
Supplemental Non-Cash Investing and Financing Activities:
Common stock issued for acquisition $ 157.3 -- --
----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
Household International, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
Consolidated Statements of Changes in Preferred
Stock and Common Shareholders' Equity
<TABLE>
<CAPTION>
Common Shareholders' Equity
--------------------------------------------------------
Additional Total Common
Preferred Common Paid-in Retained Shareholders'
All amounts except per share data are stated in millions. Stock Stock Capital Earnings Other(1) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ 320.0 $115.0 $ 362.1 $2,397.4 $(674.1) $2,200.4
Net income 453.2 453.2
Cash dividends-preferred at stated rates (26.5) (26.5)
Cash dividends-common, $1.31 per share (127.5) (127.5)
Foreign currency translation adjustments (3.5) (3.5)
Conversion of preferred stock .2 3.4 3.6
Exercise of stock options 6.6 21.7 28.3
Issuance of common stock 11.3 13.4 24.7
Purchase of treasury stock (59.7) (59.7)
Redemption of preferred stock (115.0)
Unrealized gain on investments, net 197.9 197.9
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 205.0 115.2 383.4 2,696.6 (504.3) 2,690.9
Net income 538.6 538.6
Cash dividends-preferred at stated rates (16.7) (16.7)
Cash dividends-common, $1.46 per share (141.7) (141.7)
Foreign currency translation adjustments .4 .4
Exercise of stock options 6.5 11.9 18.4
Issuance of common stock 7.4 7.8 15.2
Purchase of treasury stock (56.7) (56.7)
Unrealized loss on investments, net (107.2) (107.2)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 205.0 115.2 397.3 3,076.8 (648.1) 2,941.2
Net income 686.6 686.6
Cash dividends-preferred at stated rates (11.8) (11.8)
Cash dividends-common, $1.62 per share (169.5) (169.5)
Foreign currency translation adjustments (1.6) (1.6)
Exercise of stock options 14.7 16.2 30.9
Issuance of common stock 9.1 1,000.8 12.4 1,022.3
Purchase of treasury stock, net 119.0 (117.4) 1.6
Redemption of preferred stock (55.0)
Unrealized gain on investments, net 16.5 16.5
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 150.0 $124.3 $1,531.8 $3,582.1 $(722.0) $4,516.2
====================================================================================================================================
</TABLE>
(1) At December 31, 1997, 1996, 1995 and 1994 items in the other column include
cumulative adjustments for: foreign currency translation adjustments of
$(128.3), $(126.7), $(127.1) and $(123.6) million, respectively; common stock in
treasury of $(597.3), $(508.5), $(471.5) and $(446.9) million, respectively; and
unrealized gains (losses) on marketable equity securities and available-for-sale
investments of $3.6, $(12.9), $94.3 and $(103.6) million, respectively. The
gross unrealized gain (loss) on available-for-sale investments at December 31,
1997, 1996 and 1995 of $5.1, $(19.8) and $142.6 million, respectively, is
recorded net of income taxes (benefit) of $1.5, $(6.9) and $48.3 million,
respectively.
<TABLE>
<CAPTION>
Common Stock
--------------------------------------------------
Shares Outstanding Preferred Stock Issued In Treasury Net Outstanding
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 1,850,000 115,008,739 (18,406,141) 96,602,598
Exercise of common stock options 812,576 812,576
Conversion of $6.25 preferred stock 222,436 222,436
Issuance of common stock 523,919 523,919
Purchase of treasury stock (1,000,000) (1,000,000)
Redemption of preferred stock (1,150,000)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 700,000 115,231,175 (18,069,646) 97,161,529
Exercise of common stock options 463,212 463,212
Issuance of common stock 281,513 281,513
Purchase of treasury stock (841,000) (841,000)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 700,000 115,231,175 (18,165,921) 97,065,254
Exercise of common stock options 539,557 539,557
Issuance of common stock 9,100,000 453,246 9,553,246
Issuance of common stock-ACC 1,367,275 1,367,275
Purchase of treasury stock (1,367,300) (1,367,300)
Redemption of preferred stock (550,000)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 150,000 124,331,175 (17,173,143) 107,158,032
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 5
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Household International, Inc. and subsidiaries (the "company") is a leading
provider of consumer lending products to middle-market customers in the United
States, United Kingdom and Canada, with $45.4 billion of managed receivables at
December 31, 1997. The company's lending products include: home equity loans,
auto finance loans, MasterCard* and Visa* and private label credit cards, and
other unsecured loans. The company also offers credit and specialty insurance in
the United States, United Kingdom and Canada. The company also has traditional
first mortgages, commercial loans and leases, periodic payment annuities, and
corporate owned life insurance products which it no longer offers.
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial statements include the accounts
of Household International, Inc. and all subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Certain prior year
amounts have been reclassified to conform with the current year's presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVESTMENT SECURITIES The company maintains investment portfolios in both its
noninsurance and insurance operations. These portfolios are comprised primarily
of debt securities. The company's entire investment securities portfolio was
classified as available-for-sale at December 31, 1997 and 1996.
Available-for-sale investments are intended to be invested for an indefinite
period but may be sold in response to events reasonably expected in the
foreseeable future. These investments are carried at fair value. Unrealized
holding gains and losses on available-for-sale investments are recorded as
adjustments to common shareholders' equity, net of income taxes. Any decline in
the fair value of investments which is deemed to be other than temporary is
charged against current earnings.
Cost of investment securities sold is determined using the specific
identification method. Interest income earned on the noninsurance investment
portfolio is classified in the statements of income in net interest margin.
Realized gains and losses from the investment portfolio and investment income
from the insurance portfolio are recorded in investment income. Accrued
investment income is classified with investment securities.
RECEIVABLES Receivables are carried at amortized cost. The company periodically
sells receivables from its home equity, auto finance, MasterCard and Visa,
private label and other unsecured portfolios. Because these receivables were
originated with variable rates of interest or rates comparable to those
currently offered by the company, carrying value approximates fair value.
Finance income is recognized using the effective yield method. Origination
fees are deferred and amortized to finance income over the estimated life of the
related receivables, except to the extent they offset directly related lending
costs. Annual fees are netted with direct lending costs associated with the
issuance of MasterCard and Visa receivables and are deferred and amortized on a
straight-line basis over one year. Net deferred lending costs (fees) related to
these receivables totaled $7.8 and $(5.7) million at December 31, 1997 and 1996,
respectively. Premiums and discounts on purchased receivables are recognized as
adjustments of the yield of the related receivables.
Insurance reserves applicable to credit risks on consumer receivables are
treated as a reduction of receivables in the balance sheets, since payments on
such policies generally are used to reduce outstanding receivables.
PROVISION AND CREDIT LOSS RESERVES Provision for credit losses on owned
receivables is made in an amount sufficient to maintain credit loss reserves at
a level considered adequate to cover probable losses of principal and interest
in the existing owned portfolio. Probable losses are estimated for consumer
receivables based on contractual delinquency status and historical loss
experience. For commercial loans, probable losses are calculated using estimates
of amounts and timing of future cash flows expected to be received on loans. In
addition, general loss reserves on consumer and commercial receivables are
maintained to reflect management's judgment of portfolio risk factors. Loss
reserve estimates are reviewed periodically and adjustments are reported in
earnings when they become known. As these estimates are influenced by factors
outside the company's control, such as consumer payment patterns and economic
conditions, there is uncertainty inherent in these estimates, making it
reasonably possible that they could change.
The company's chargeoff policy for consumer receivables varies by product.
Receivables are written off, or for
*MasterCard and Visa are registered trademarks of MasterCard International,
Incorporated and VISA USA, Inc., respectively.
<PAGE> 6
- --------------------------------------------------------------------------------
secured products written down to net realizable value, at the following stages
of contractual delinquency: auto finance-5 months; first mortgage, home equity
and MasterCard and Visa-6 months; private label-9 months; and other unsecured-9
months and no payment received in 6 months. Commercial receivables are written
off when it becomes apparent that an account is uncollectible.
NONACCRUAL LOANS Nonaccrual loans are loans on which accrual of interest has
been suspended. Interest income is suspended on all loans when principal or
interest payments are more than three months contractually past due, except for
MasterCard and Visa and private label credit cards and auto finance receivables.
On credit card receivables, interest continues to accrue until the receivable is
charged off. On auto finance receivables, accrual of interest income is
discontinued when payments are more than two months contractually past due.
There were no commercial loans at December 31, 1997 which were 90 days or more
past due which remained on accrual status. Accrual of income on nonaccrual
consumer receivables is not resumed until such receivables become less than
three months contractually past due (two months for auto finance receivables).
Accrual of income on nonaccrual commercial loans is not resumed until such loans
become contractually current. Cash payments received on nonaccrual commercial
loans are either applied against principal or reported as interest income,
according to management's judgment as to the collectibility of principal.
RECEIVABLES SOLD AND SERVICED WITH LIMITED RECOURSE AND SECURITIZATION INCOME
Certain home equity, auto finance, MasterCard and Visa, private label and other
unsecured receivables have been securitized and sold to investors with limited
recourse. The servicing rights to these receivables have been retained by the
company. Upon sale, the receivables are removed from the balance sheet, and a
gain on sale is recognized for the difference between the carrying value of the
receivables and the adjusted sales proceeds. The adjusted sales proceeds are
based on a present value estimate of future cash flows to be received over the
lives of the receivables. Future cash flows are based on estimates of
prepayments, the impact of interest rate movements on yields of receivables sold
and securities issued, delinquency of receivables sold, servicing fees,
operating expenses and other factors. The resulting gain is adjusted by
establishing a reserve for estimated probable losses under the recourse
provisions. Gains on sale, recourse provisions and servicing cash flows on
receivables sold are reported in the accompanying consolidated statements of
income as securitization income. Unamortized securitization assets are reviewed
for impairment whenever events indicate that the carrying value may not be
recovered.
Effective January 1, 1997, the company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FAS No. 125"), which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on a derecognition
approach that focuses on control of the assets and extinguishment of the
liabilities. The statement was effective for securitization transactions
occurring subsequent to December 31, 1996. The adoption of FAS No. 125 did not
have a material impact on the company's consolidated financial statements.
PROPERTIES AND EQUIPMENT Properties and equipment, which include leasehold
improvements, are recorded at cost, net of accumulated depreciation and
amortization of $412.3 and $432.6 million at December 31, 1997 and 1996,
respectively. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets for financial reporting purposes. Leasehold
improvements are amortized over the lesser of the economic useful life of the
improvement or the term of the lease.
REPOSSESSED COLLATERAL Real estate owned is valued at the lower of cost or fair
value less estimated costs to sell. These values are periodically reviewed and
reduced, if appropriate. Costs of holding real estate, and related gains and
losses on disposition, are credited or charged to operations as incurred.
Vehicles acquired for nonpayment of indebtedness are recorded at the lower
of the estimated fair market value or the outstanding receivable balance. Such
assets are generally sold within 60 days of repossession and any difference
between the sales price, net of expenses, and the carrying value is credited or
charged to operations as incurred.
INSURANCE Insurance revenues on revolving credit insurance policies are
recognized when billed. Insurance revenues on the remaining insurance contracts
are recorded as unearned premiums and recognized into income based on the nature
and term of the underlying contracts. Liabilities for credit insurance policies
are based upon estimated settlement amounts for both reported and incurred but
not yet reported losses. Liabilities for future benefits on annuity contracts
and specialty and corporate owned life insurance products are based on actuarial
assumptions as to investment yields, mortality and withdrawals.
ACQUIRED INTANGIBLES AND GOODWILL Acquired intangibles consist of acquired
credit card relationships which are amortized on a straight-line basis over
their estimated remaining lives, not to exceed 10 years.
Goodwill represents the purchase price over the fair value of identifiable
assets acquired less liabilities assumed
<PAGE> 7
Household International, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
from business combinations and is amortized over 25 years on a straight-line
basis. Goodwill is reviewed for impairment whenever events indicate that the
carrying amount may not be recoverable.
TREASURY STOCK The company accounts for repurchases of common stock using the
cost method with common stock in treasury classified in the balance sheets as a
reduction of common shareholders' equity. Treasury stock reissued is removed
from the accounts at average cost.
INTEREST RATE CONTRACTS The nature and composition of the company's assets and
liabilities and off-balance sheet items expose the company to interest rate
risk. The company enters into a variety of interest rate contracts for managing
its interest rate exposure. Interest rate swaps are the principal vehicle used
to manage interest rate risk; however, interest rate futures, options, caps and
floors, and forward contracts also are utilized. The company also has entered
into currency swaps to convert both principal and interest payments on debt
issued from one currency to the appropriate functional currency.
Interest rate swaps are designated, and effective, as synthetic alterations of
specific assets or liabilities (or specific groups of assets or liabilities) and
off-balance sheet items. The interest rate differential to be paid or received
on these contracts is accrued and included in net interest margin in the
statements of income. Interest rate futures, forwards, options, and caps and
floors used in hedging the company's exposure to interest rate fluctuations are
designated, and effective, as hedges of balance sheet items.
Correlation between all interest rate contracts and the underlying asset,
liability or off-balance sheet item is direct because the company uses interest
rate contracts which mirror the underlying item being hedged/synthetically
altered. If correlation between the hedged/synthetically altered item and
related interest rate contract would cease to exist, the interest rate contract
would be recorded at fair value and the associated unrealized gain or loss would
be included in net interest margin, with any future realized and unrealized
gains or losses recorded in other income.
Interest rate contracts are recorded at amortized cost. If interest rate
contracts are terminated early, the realized gains and losses are deferred and
amortized over the life of the hedged/synthetically altered item as adjustments
to net interest margin. These deferred gains and losses are recorded on the
accompanying consolidated balance sheets as adjustments to the carrying value of
the hedged items. In circumstances where the underlying assets or liabilities
are sold, any remaining carrying value adjustments or cumulative change in value
on any open positions are recognized immediately as a component of the gain or
loss upon disposition. Any remaining interest rate contracts previously
designated to the sold hedged/synthetically altered item are recorded at fair
value with realized and unrealized gains and losses included in other income.
FOREIGN CURRENCY TRANSLATION Foreign subsidiary assets and liabilities are
located in the United Kingdom and Canada. The functional currency for each
subsidiary is its local currency. Assets and liabilities of these subsidiaries
are translated at the rate of exchange in effect on the balance sheet date;
income and expenses are translated at the average rate of exchange prevailing
during the year. Resulting translation adjustments are accumulated as a separate
component of common shareholders' equity.
The company enters into forward exchange contracts to hedge its investment in
foreign subsidiaries. After-tax gains and losses on contracts to hedge foreign
currency fluctuations are included in the foreign currency translation
adjustment in common shareholders' equity. Effects of foreign currency
translation in the statements of cash flows are offset against the cumulative
foreign currency adjustment, except for the impact on cash. Foreign currency
transaction gains and losses are included in income as they occur.
STOCK-BASED COMPENSATION The company accounts for stock option and stock
purchase plans in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). In accordance with APB
25, no compensation expense is recognized for stock options issued or for stock
issued under its employee stock purchase plan.
INCOME TAXES Federal income taxes are accounted for utilizing the liability
method. Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The company and its subsidiaries file a
consolidated federal income tax return. Investment tax credits generated by
leveraged leases are accounted for using the deferral method.
<PAGE> 8
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
2. BUSINESS COMBINATIONS
On June 23, 1997, Household International and a wholly-owned subsidiary of
Household Finance Corporation (a wholly-owned subsidiary of Household
International) acquired the capital stock of Transamerica Financial Services
Holding Company ("TFS"), the branch-based consumer finance subsidiary of
Transamerica Corporation ("TA"). The company paid $1.1 billion for the stock of
TFS and repaid approximately $2.8 billion of TFS debt owed to affiliates of TA.
The acquisition added approximately $3.2 billion of receivables, of which
approximately $3.1 billion were home equity loans secured primarily by home
mortgages. The acquisition of TFS was accounted for as a purchase, and
accordingly, earnings from TFS' operations have been included in the company's
results of operations from June 24, 1997. The acquisition of TFS was not
material to the company's consolidated financial statements.
In June 1997, the company completed a public underwritten offering of 9.1
million shares of its common stock for approximately $1.0 billion. Net proceeds
from the offering were used to repay certain short-term borrowings in connection
with the acquisition of TFS.
On October 21, 1997, Household International and a wholly-owned subsidiary
acquired the capital stock of ACC Consumer Finance Corporation ("ACC"), a
non-prime auto finance company, for approximately 1.4 million shares of common
stock and cash. The acquisition of ACC was accounted for as a purchase, and
accordingly, earnings from ACC's operations have been included in the company's
results of operations from October 22, 1997. The acquisition of ACC was not
material to the company's consolidated financial statements.
- --------------------------------------------------------------------------------
3. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities $ 131.9 $ 213.1
Corporate debt securities 1,251.6 1,070.5
U.S. government and federal agency debt securities 220.4 277.7
Other 653.1 690.5
- --------------------------------------------------------------------------------
Subtotal 2,257.0 2,251.8
- --------------------------------------------------------------------------------
Accrued investment income 28.6 30.2
- --------------------------------------------------------------------------------
Total investment securities $ 2,285.6 $ 2,282.0
================================================================================
</TABLE>
Proceeds from the sale of available-for-sale investments totaled approximately
$1.4, $2.6 and $3.1 billion in 1997, 1996 and 1995, respectively. Gross gains of
$20.6, $23.0 and $18.4 million and gross losses of $2.9, $4.3 and $4.9 million
in 1997, 1996 and 1995, respectively, were realized on those sales.
The gross unrealized gains (losses) of investment securities were as follows:
<TABLE>
<CAPTION>
1997
- ----------------------------------------------------------------------------------------
Gross Gross
In millions. Amortized Unrealized Unrealized Fair
At December 31 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity
securities $ 128.4 $ 3.7 $ (.2) $ 131.9
Corporate debt securities 1,238.3 30.4 (17.1) 1,251.6
U.S. government and federal
agency debt securities 232.1 1.4 (13.1) 220.4
Other 653.1 -- -- 653.1
- ----------------------------------------------------------------------------------------
Total available-for-sale
investments $2,251.9 $ 35.5 $ (30.4) $2,257.0
========================================================================================
<CAPTION>
1996
- ----------------------------------------------------------------------------------------
Gross Gross
In millions. Amortized Unrealized Unrealized Fair
At December 31 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-For-Sale Investments
Marketable equity
securities $ 212.7 $ 1.9 $ (1.5) $ 213.1
Corporate debt securities 1,081.4 17.0 (27.9) 1,070.5
U.S. government and federal
agency debt securities 287.0 1.1 (10.4) 277.7
Other 690.5 -- -- 690.5
- ----------------------------------------------------------------------------------------
Total available-for-sale
investments $2,271.6 $ 20.0 $ (39.8) $2,251.8
========================================================================================
</TABLE>
See Note 12, "Fair Value of Financial Instruments," for further discussion of
the relationship between the fair of the company's assets, liabilities and
off-balance sheet financial instruments.
<PAGE> 9
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Contractual maturities of and yields on 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, 1997 Cost Value Yield* Cost Value Yield*
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due within 1 year $ 173.5 $ 173.2 6.21% $ 19.4 $ 19.4 5.35%
After 1 but within 5 years 78.1 79.0 6.82 29.4 29.9 6.07
After 5 but within 10 years 212.0 214.4 6.76 50.5 50.0 5.72
After 10 years 774.7 785.0 7.65 132.8 121.1 6.49
- -----------------------------------------------------------------------------------------------------------------------
Total $1,238.3 $1,251.6 7.25% $232.1 $220.4 6.17%
======================================================================================================================
</TABLE>
*Computed by dividing annualized interest by the amortized cost of the
respective investment securities.
- --------------------------------------------------------------------------------
4. RECEIVABLES
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage $ 396.6 $ 725.6
Home equity 7,933.2 3,647.9
Auto finance(1) 487.5 --
MasterCard/Visa 5,927.3 8,587.7
Private label 4,682.9 5,070.0
Other unsecured 3,609.3 5,098.0
Commercial 774.2 937.8
- ---------------------------------------------------------------------------------------
Total owned receivables 23,811.0 24,067.0
Accrued finance charges 377.5 397.6
Credit loss reserve for owned receivables (1,082.2) (900.2)
Unearned credit insurance premiums and claims reserves (228.4) (184.6)
Amounts due and deferred from receivables sales 1,847.1 1,561.0
Reserve for receivables serviced with limited recourse (862.3) (696.0)
- ---------------------------------------------------------------------------------------
Total owned receivables, net 23,862.7 24,244.8
Receivables serviced with limited recourse 21,565.8 18,526.4
- ---------------------------------------------------------------------------------------
Total managed receivables, net $ 45,428.5 $ 42,771.2
=======================================================================================
</TABLE>
(1) Prior to the fourth quarter of 1997, auto finance receivables were not
significant and were included in other unsecured receivables.
Foreign receivables included in owned receivables were as follows:
<TABLE>
<CAPTION>
United Kingdom Canada
In millions. ------------------------ ---------------------
At December 31 1997 1996 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First mortgage $ 3.1 $ 3.7 $ 7.8 $ 22.1
Home equity 157.5 159.9 321.7 324.9
MasterCard/Visa 651.6 581.2 -- --
Private label 778.1 691.3 539.5 571.7
Other unsecured 729.5 636.7 387.5 364.8
Commercial -- -- 18.7 43.2
- ------------------------------------------------------------------------------
Total $2,319.8 $2,072.8 $1,275.2 $1,326.7
==============================================================================
</TABLE>
<PAGE> 10
- --------------------------------------------------------------------------------
Foreign managed receivables represented 10 percent of total managed receivables
at December 31, 1997 and 1996.
The company has securitized certain receivables which it services with
limited recourse. Securitizations of receivables, including replenishments of
certificateholder interests, were as follows:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Home equity $ 312.6 $ 1,755.8 $ 1,135.2
MasterCard/Visa 23,439.6 22,828.3 20,181.2
Private label 2,270.2 697.4 644.0
Other unsecured 2,912.2 2,851.2 1,535.3
- ------------------------------------------------------------------------
Total $28,934.6 $28,132.7 $23,495.7
========================================================================
</TABLE>
The outstanding balance of receivables serviced with limited recourse consisted
of the following:
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- -------------------------------------------------------
<S> <C> <C>
Home equity $ 3,125.9 $ 4,337.5
Auto finance(1) 395.9 --
MasterCard/Visa 12,337.0 10,149.7
Private label 1,025.0 517.0
Other unsecured 4,682.0 3,522.2
- -------------------------------------------------------
Total $21,565.8 $18,526.4
=======================================================
</TABLE>
(1) Auto finance receivables were previously securitized by ACC before its
acquisition in October 1997.
At December 31, 1997, the expected weighted average remaining life of these
securitization transactions was 2.3 years.
The combination of receivables owned and receivables serviced with limited
recourse, which the company considers its managed portfolio, is shown below:
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- ------------------------------------------------------
<S> <C> <C>
First mortgage $ 396.6 $ 725.6
Home equity 11,059.1 7,985.4
Auto finance(1) 883.4 --
MasterCard/Visa 18,264.3 18,737.4
Private label 5,707.9 5,587.0
Other unsecured 8,291.3 8,620.2
Commercial 774.2 937.8
- ------------------------------------------------------
Managed receivables $45,376.8 $42,593.4
======================================================
</TABLE>
(1) Prior to the fourth quarter of 1997, auto finance receivables were not
significant and were included in other unsecured receivables.
At December 31, 1997 and 1996, the amounts due and deferred from receivables
sales of $1,847.1 and $1,561.0 million, respectively, included unamortized
securitization assets and funds established pursuant to the recourse provisions
for certain sales totaling $1,716.2 and $1,235.4 million, respectively. The
amounts due and deferred also included customer payments not yet remitted by the
securitization trustee to the company of $107.2 and $86.6 million at December
31, 1997 and 1996, respectively. The company made guarantees relating to certain
securitizations of $90.2 million plus unpaid interest at December 31, 1996. The
company made no such guarantees at December 31, 1997. The company has
subordinated interests in certain transactions, which were recorded as
receivables, of $1,098.1 and $485.0 million at December 31, 1997 and 1996,
respectively. The company has agreements with a "AAA"-rated third party who will
indemnify the company for up to $21.2 million in losses related to certain
securitization transactions. The company maintains credit loss reserves pursuant
to the recourse provisions for receivables serviced with limited recourse which
are based on estimated probable losses under such provisions. These reserves
totaled $862.3 and $696.0 million at December 31, 1997 and 1996, respectively,
and represent the company's best estimate of probable losses on receivables
serviced with limited recourse.
<PAGE> 11
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
The providers of the credit enhancements have no recourse to the company. The
company maintains facilities with third parties which provide for the
securitization of receivables on a revolving basis totaling $6.6 billion through
the issuance of commercial paper. These facilities were fully utilized at
December 31, 1997. The amount available under these facilities will vary based
on the timing and volume of public securitization transactions.
Contractual maturities of owned receivables were as follows:
<TABLE>
<CAPTION>
In millions.
At December 31, 1997 1998 1999 2000 2001 2002 Thereafter Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage $ 17.6 $ 3.3 $ 1.0 $ 1.5 $ 1.7 $ 371.5 $ 396.6
Home equity 2,305.9 1,520.2 1,083.9 790.9 586.5 1,645.8 7,933.2
Auto finance 79.8 94.2 106.5 110.0 84.1 12.9 487.5
MasterCard/Visa 701.3 614.5 484.0 421.4 351.9 3,354.2 5,927.3
Private label 1,223.9 587.8 386.6 276.0 224.2 1,984.4 4,682.9
Other unsecured 1,309.6 645.7 448.9 310.0 200.3 694.8 3,609.3
Commercial 175.6 65.1 31.6 53.5 30.1 418.3 774.2
- -----------------------------------------------------------------------------------------------------------------------------
Total $5,813.7 $3,530.8 $2,542.5 $1,963.3 $1,478.8 $8,481.9 $23,811.0
=============================================================================================================================
</TABLE>
A substantial portion of consumer receivables, based on the company's
experience, will be renewed or repaid prior to contractual maturity. The above
maturity schedule should not be regarded as a forecast of future cash
collections. The ratio of annual cash collections of principal to average
principal balances, excluding MasterCard and Visa receivables, approximated 44
and 40 percent in 1997 and 1996, respectively.
The following table summarizes contractual maturities of owned receivables
due after one year by repricing characteristic:
<TABLE>
<CAPTION>
Over 1
In millions. But Within Over
At December 31, 1997 5 years 5 years
- --------------------------------------------------------------------------------
<S> <C> <C>
Receivables at predetermined interest rates $5,870.5 $4,125.9
Receivables at floating or adjustable rates 3,644.9 4,356.0
- --------------------------------------------------------------------------------
Total $9,515.4 $8,481.9
================================================================================
</TABLE>
Nonaccrual owned consumer receivables totaled $516.6 and $421.8 million at
December 31, 1997 and 1996, respectively, including $109.7 and $106.6 million,
respectively, relating to foreign operations. Interest income that would have
been recorded in 1997 and 1996 if such nonaccrual receivables had been current
and in accordance with contractual terms was approximately $75.3 and $60.2
million, respectively, including $18.8 and $18.4 million, respectively, relating
to foreign operations. Interest income that was included in net income for 1997
and 1996, prior to these loans being placed on nonaccrual status, was
approximately $41.6 and $32.1 million, respectively, including $8.9 and $8.4
million, respectively, relating to foreign operations.
For an analysis of reserves for credit losses, see pages 32 and 33.
<PAGE> 12
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
All dollar amounts are stated in millions. Weighted Weighted
At December 31 Amount Average Rate Amount Average Rate
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOMESTIC
Time certificates $ 837.8 7.1% $1,257.6 7.0%
Savings accounts 135.9 5.0 165.1 4.7
Demand accounts 22.8 -- 78.5 --
- ---------------------------------------------------------------------------------------------------------
Total domestic deposits 996.5 6.6 1,501.2 6.4
- ---------------------------------------------------------------------------------------------------------
FOREIGN
Time certificates 258.1 7.6 377.6 6.3
Savings accounts 446.4 6.7 389.1 6.2
Demand accounts 87.9 6.3 97.2 5.8
- ---------------------------------------------------------------------------------------------------------
Total foreign deposits 792.4 6.9 863.9 6.2
- ---------------------------------------------------------------------------------------------------------
Total deposits $1,788.9 6.8% $2,365.1 6.3%
=========================================================================================================
</TABLE>
Average deposits and related weighted average interest rates for 1997, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ -----------------------
All dollar amounts are stated in millions. Average Weighted Average Weighted Average Weighted
At December 31 Deposits Average Rate Deposits Average Rate Deposits Average Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC
Time certificates $ 1,096.2 6.9% $ 1,908.2 6.7% $ 3,015.2 6.2%
Savings and demand accounts 470.0 1.6 1,154.6 2.5 2,667.9 3.1
- ----------------------------------------------------------------------------------------------------------------------------------
Total domestic deposits 1,566.2 5.3 3,062.8 5.1 5,683.1 4.7
- ----------------------------------------------------------------------------------------------------------------------------------
FOREIGN
Time certificates 277.3 6.8 381.6 6.2 1,052.3 7.4
Savings and demand accounts 537.4 5.8 445.5 5.2 308.8 6.2
- ----------------------------------------------------------------------------------------------------------------------------------
Total foreign deposits 814.7 6.1 827.1 5.7 1,361.1 7.1
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits $ 2,380.9 5.6% $ 3,889.9 5.3% $ 7,044.2 5.1%
==================================================================================================================================
</TABLE>
Interest expense on deposits was $132.5, $204.6 and $362.7 million for 1997,
1996 and 1995, respectively. Interest expense on domestic deposits was $82.6,
$157.6 and $265.9 million for 1997, 1996 and 1995, respectively.
Maturities of time certificates in amounts of $100,000 or more were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1997 Domestic Foreign Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
3 months or less $2.9 $ .2 $ 3.1
Over 3 months through 6 months -- -- --
Over 6 months through 12 months -- -- --
Over 12 months .5 244.7 245.2
- ------------------------------------------------------------------------------
Total $3.4 $244.9 $248.3
==============================================================================
</TABLE>
<PAGE> 13
Household International, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Contractual maturities of time certificates within each interest rate range were
as follows:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31, 1997 1998 1999 2000 2001 2002 Thereafter Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE
Less than 4.00% $ 3.5 $ .9 -- -- -- -- $ 4.4
4.00% - 5.99% 59.5 56.6 -- $ 6.6 -- -- 122.7
6.00% - 7.99% 96.3 258.7 $168.7 303.9 -- $75.4 903.0
8.00% - 9.99% 4.4 6.5 54.5 -- -- .4 65.8
- ------------------------------------------------------------------------------------------------------------------------------
Total $163.7 $322.7 $223.2 $310.5 -- $75.8 $1,095.9
==============================================================================================================================
</TABLE>
6. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Bank and
All dollar amounts are stated in millions. Commercial Other
At December 31 Paper* Borrowings Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Balance $5,294.2 $ 786.8 $6,081.0
Highest aggregate month-end balance 7,838.6
Average borrowings 5,486.2 948.7 6,434.9
Weighted average interest rate:
At year end 5.7% 7.5% 6.0%
Paid during year 5.6 6.3 5.7
- ------------------------------------------------------------------------------------------------------------------------------
1996
Balance $5,418.7 $1,009.4 $6,428.1
Highest aggregate month-end balance 7,611.1
Average borrowings 5,334.2 1,147.4 6,481.6
Weighted average interest rate:
At year end 5.4% 7.6% 5.7%
Paid during year 5.4 7.2 5.7
- ------------------------------------------------------------------------------------------------------------------------------
1995
Balance $4,598.5 $2,060.9 $6,659.4
Highest aggregate month-end balance 7,350.5
Average borrowings 4,551.1 1,565.1 6,116.2
Weighted average interest rate:
At year end 5.8% 6.9% 6.2%
Paid during year 6.0 7.4 6.4
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Included in outstanding balances at year-end 1997, 1996 and 1995 were
commercial paper obligations of foreign subsidiaries of $435.0, $389.2 and
$269.5 million, respectively.
Interest expense for commercial paper, bank and other borrowings totaled $368.1,
$369.5 and $389.5 million for 1997, 1996 and 1995, respectively.
The company maintains various bank credit agreements primarily to support
commercial paper borrowings. At December 31, 1997 and 1996, the company had
committed back-up lines of $8.4 and $7.4 billion, respectively, of which $7.5
and $6.6 billion, respectively, were unused. Formal credit lines are reviewed
annually, and expire at various dates from 1998 to 2004. Borrowings under these
lines generally are available at a surcharge over LIBOR. Annual commitment fee
requirements to support availability of these lines at December 31, 1997 totaled
$6.2 million.
<PAGE> 14
7. SENIOR AND SENIOR SUBORDINATED DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
All dollar amounts are stated in millions.
At December 31 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SENIOR DEBT
3.50% to 6.49%; due 1998 to 2009 $ 1,611.7 $ 2,086.6
6.50% to 6.99%; due 1998 to 2007 1,941.3 1,450.0
7.00% to 7.49%; due 1998 to 2012 1,477.7 1,281.1
7.50% to 7.99%; due 1998 to 2012 1,286.9 1,459.0
8.00% to 8.99%; due 1998 to 2005 1,178.1 1,195.0
9.00% and greater; due 1998 to 2001 447.8 445.8
Variable interest rate debt; 3.85% to 9.00%;
due 1998 to 2034 6,202.7 6,034.6
SENIOR SUBORDINATED DEBT
9.00% to 9.63%; due 2000 to 2001 685.0 685.0
10.25%; due 2003 20.0 75.0
PREFERRED STOCK OF SUBSIDIARY
Household Finance Corporation
7.25% term cumulative preferred Series 1992-A -- 100.0
Unamortized discount (2.2) (10.1)
- -----------------------------------------------------------------------------------------------------------------------------
Total senior and senior subordinated debt $14,849.0 $14,802.0
=============================================================================================================================
</TABLE>
Weighted average coupon interest rates were 6.8 and 6.6 percent at December 31,
1997 and 1996, respectively. Interest expense for senior and senior subordinated
debt was $1,002.8, $946.5 and $804.9 million for 1997, 1996 and 1995,
respectively. The only financial covenant contained in the terms of the
company's debt agreements is the maintenance of a minimum shareholders' equity
of $2.0 billion for Household International, Inc. and a minimum shareholder's
equity of $1.5 billion for Household Finance Corporation, a wholly-owned
subsidiary of the company.
Maturities of senior and senior subordinated debt were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1997
- ------------------------------------------------------------
<S> <C>
1998 $ 2,381.4
1999 3,051.6
2000 1,795.3
2001 2,146.4
2002 1,161.3
Thereafter 4,313.0
- ------------------------------------------------------------
Total $14,849.0
============================================================
</TABLE>
On August 15, 1997, the company redeemed at par of $100 million, plus accrued
and unpaid dividends, all outstanding shares of the 7.25 percent term cumulative
preferred Series 1992-A of Household Finance Corporation.
- -------------------------------------------------------------------------------
8. DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
In the normal course of business and in connection with its asset/liability
management program, the company enters into various transactions involving
derivative and other off-balance sheet financial instruments. These instruments
primarily are used to manage the company's exposure to fluctuations in interest
rates and foreign exchange rates. The company does not serve as a financial
intermediary to make markets in any derivative financial instruments. For
further information on the company's strategies for managing interest rate and
foreign exchange rate risk, see Risk Management on page 31.
The financial instruments used by the company include interest rate contracts
and foreign exchange rate contracts and have varying degrees of credit risk
and/or market risk.
CREDIT RISK Credit risk is the possibility that a loss may occur because the
counterparty to a transaction fails to perform according to the terms of the
contract. The company's exposure to credit loss related to interest rate swaps,
cap and floor transactions, forward and futures contracts and options is the
amount of uncollected interest or premium related to these instruments. These
interest rate related instruments are generally expressed in terms of notional
principal or contract amounts which are much larger than the amounts potentially
at risk for nonpayment by counterparties. The company controls the credit risk
of its off-balance sheet financial instruments through established credit
approvals, risk control limits and ongoing monitoring procedures. The company
has
<PAGE> 15
Household International, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
never experienced nonperformance by any derivative instrument counterparty.
MARKET RISK Market risk is the possibility that a change in interest rates or
foreign exchange rates will cause a financial instrument to decrease in value or
become more costly to settle. The company mitigates this risk by establishing
limits for positions and other controls.
INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS The following table summarizes the
activity in interest rate and foreign exchange contracts for 1997, 1996 and
1995:
HEDGING/SYNTHETIC ALTERATION INSTRUMENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exchange Traded
- ---------------------------------------------------------------------------------------
Interest Rate
Futures Contracts Options
--------------------------- -----------------------
In millions. Purchased Sold Purchased Written
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Notional amount, 1994 -- $ (96.0) -- --
New contracts $ 2,003.0 (2,100.0) $ 300.0 $(300.0)
Matured or expired
contracts -- 293.0 -- --
Terminated contracts -- -- -- --
In-substance maturities(1) (1,653.0) 1,653.0 (300.0) 300.0
- ---------------------------------------------------------------------------------------
NOTIONAL AMOUNT, 1995 $ 350.0 $ (250.0) -- --
=======================================================================================
Fair value, 1995(2) $ .1 -- -- --
- ---------------------------------------------------------------------------------------
1996
Notional amount, 1995 $ 350.0 $ (250.0) -- --
New contracts 6,611.9 (4,202.9) $ 440.0 $(440.0)
Matured or expired
contracts (1,471.0) 300.0 -- --
Terminated contracts -- -- -- --
In-substance maturities(1) (4,152.9) 4,152.9 (440.0) 440.0
- ---------------------------------------------------------------------------------------
NOTIONAL AMOUNT, 1996 $ 1,338.0 -- -- --
- ---------------------------------------------------------------------------------------
Fair value, 1996(2) -- -- -- --
- ---------------------------------------------------------------------------------------
1997
Notional amount, 1996 $ 1,338.0 -- -- --
New contracts 8,584.0 $(7,350.0) -- --
Matured or expired
contracts (2,020.0) 120.0 -- --
Terminated contracts -- -- -- --
In-substance maturities(1) (7,030.0) 7,030.0 -- --
- ---------------------------------------------------------------------------------------
NOTIONAL AMOUNT, 1997 $ 872.0 $ (200.0) -- --
- ---------------------------------------------------------------------------------------
Fair value, 1997(2) -- -- -- --
- ---------------------------------------------------------------------------------------
<CAPTION>
Non-Exchange Traded
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Interest Rate
Rate Contracts Forward Contracts Other Risk
Interest Currency ------------------------ ------------------------- Management
In millions. Rate Swaps Swaps Purchased Sold Purchased Sold Instruments
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995
Notional amount, 1994 $17,833.0 $ 998.8 $ 72.7 $ (770.8) $ 936.1 $ (140.8) $ 613.9
New contracts $ 1,424.5 152.6 3,887.3 (4,036.7) 1,860.2 (173.7) 180.4
Matured or expired
contracts (6,156.5) (179.0) (36.7) 40.9 (1,840.4) 167.9 (351.4)
Terminated contracts (4,983.7) -- (545.0) 553.1 (255.9) 53.5 --
In-substance maturities(1) -- -- (3,345.3) 3,477.1 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NOTIONAL AMOUNT, 1995 $ 8,117.3 $ 972.4 $ 33.0 $ (736.4) $ 700.0 $ (93.1) $ 442.9
=================================================================================================================================
Fair value, 1995(2) $ 148.3 $ 63.5 $ .2 $ 1.2 $ (1.0) -- $ 2.2
- ---------------------------------------------------------------------------------------------------------------------------------
1996
Notional amount, 1995 $ 8,117.3 $ 972.4 $ 33.0 $ (736.4) $ 700.0 $ (93.1) $ 442.9
New contracts 4,807.1 1,268.5 5,073.9 (5,058.0) 3,641.8 (1,036.0) 2,242.2
Matured or expired
contracts (2,456.4) (117.0) (18.9) 20.9 (2,609.9) 859.9 (8.9)
Terminated contracts (1,690.5) -- (391.6) 391.6 -- -- --
In-substance maturities(1) -- -- (4,692.7) 4,692.7 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NOTIONAL AMOUNT, 1996 $ 8,777.5 $2,123.9 $ 3.7 $ (689.2) $ 1,731.9 $ (269.2) $2,676.2
- ---------------------------------------------------------------------------------------------------------------------------------
Fair value, 1996(2) $ 62.5 $ (153.9) $ (.1) $ (37.3) $ (1.2) $ .2 $ 24.6
- ---------------------------------------------------------------------------------------------------------------------------------
1997
Notional amount, 1996 $ 8,777.5 $2,123.9 $ 3.7 $ (689.2) $ 1,731.9 $ (269.2) $2,676.2
New contracts 3,404.6 892.3 3,372.0 (3,604.5) 6,055.8 (1,326.3) 372.4
Matured or expired
contracts (2,397.3) (397.3) (9.7) 111.4 (4,477.7) 1,489.5 (495.9)
Terminated contracts (1,175.9) (205.4) (95.6) 95.6 -- -- (85.3)
In-substance maturities(1) -- -- (3,242.2) 3,242.2 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NOTIONAL AMOUNT, 1997 $ 8,608.9 $2,413.5 $ 28.2 $ (844.5) $ 3,310.0 $ (106.0) $2,467.4
- ---------------------------------------------------------------------------------------------------------------------------------
Fair value, 1997(2) $ 148.7 $ (140.5) $ .1 $ 6.1 $ 1.7 -- $ 11.3
- ---------------------------------------------------------------------------------------------------------------------------------
</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 12, "Fair Value of
Financial Instruments" for further discussion of the relationship between
the fair value of the company's assets, liabilities and off-balance sheet
financial instruments.
Interest rate swaps are contractual agreements between two counterparties for
the exchange of periodic interest payments generally based on a notional
principal amount and agreed-upon fixed or floating rates. The company primarily
enters into interest rate swap transactions to synthetically alter balance sheet
items. These transactions are specifically designated to a particular
asset/liability, off-balance sheet item or anticipated transaction of a similar
characteristic. Specific assets or liabilities may consist of groups of
individually small dollar homogeneous assets or liabilities of similar economic
characteristics. Credit and market risk exists with respect to these
instruments. The following table reflects the items so altered at December 31,
1997:
<PAGE> 16
Household International, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In millions.
- ------------------------------------------------------------
<S> <C>
Investment securities $ 70.7
Receivables:
Home equity 775.0
MasterCard/Visa 550.0
Private label 20.3
Other unsecured 19.3
- ------------------------------------------------------------
Total owned receivables 1,364.6
Deposits 150.0
Commercial paper, bank and
other borrowings 2,163.7
Senior and senior subordinated debt 4,826.5
Receivables serviced with limited recourse 33.4
- ------------------------------------------------------------
Total items synthetically altered
with interest rate swaps $8,608.9
============================================================
</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. Interest rate swaps also are used to
synthetically alter interest rate characteristics on certain receivables that
are sold and serviced with limited recourse. These off-balance sheet items
expose the company to the same interest rate risk as on-balance sheet items.
Interest rate swaps are used to synthetically alter the interest rate provisions
of the securitization transaction whereby the underlying receivables pay a fixed
(floating) rate and the pass-through rate to the investor is floating (fixed).
The company also has entered into currency swaps to convert both principal and
interest payments on debt issued from one currency to the appropriate functional
currency.
The following table summarizes the maturities and related weighted average
receive/pay rates of interest rate swaps outstanding at December 31, 1997:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions. 1998 1999 2000 2001 2002 2003 Thereafter Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PAY A FIXED RATE/RECEIVE A FLOATING RATE
Notional value $ 602.5 $ 699.0 $416.4 $ 41.1 -- -- -- $1,759.0
Weighted average
receive rate 5.80% 6.06% 7.06% 7.34% -- -- -- 6.24%
Weighted average
pay rate 6.39 6.85 7.05 7.69 -- -- -- 6.76
- -----------------------------------------------------------------------------------------------------------------------------------
PAY A FLOATING RATE/RECEIVE A FIXED RATE
Notional value $ 667.9 $ 280.8 $375.6 $856.8 $287.9 $430.0 $1,827.9 $4,726.9
Weighted average
receive rate 6.72% 6.85% 6.47% 6.59% 6.41% 6.68% 6.95% 6.75%
Weighted average
pay rate 5.92 5.35 5.47 5.69 5.74 5.93 5.91 5.79
- -----------------------------------------------------------------------------------------------------------------------------------
PAY A FLOATING RATE/RECEIVE A DIFFERENT
FLOATING RATE
Notional value $ 575.0 $1,338.0 $200.0 -- $ 10.0 -- -- $2,123.0
Weighted average
receive rate 5.72% 6.05% 5.82% -- 6.50% -- -- 5.94%
Weighted average
pay rate 5.89 5.97 5.90 -- 5.81 -- -- 5.94
- -----------------------------------------------------------------------------------------------------------------------------------
Total notional value $1,845.4 $2,317.8 $992.0 $897.9 $297.9 $430.0 $1,827.9 $8,608.9
===================================================================================================================================
TOTAL WEIGHTED AVERAGE RATES ON SWAPS
Receive rate 6.11% 6.15% 6.59% 6.62% 6.41% 6.68% 6.95% 6.45%
- -----------------------------------------------------------------------------------------------------------------------------------
Pay rate 6.06 6.16 6.22 5.78 5.74 5.93 5.91 6.03
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 17
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
The floating rates paid or received by the company are based on spot rates from
independent market sources for the index contained in each interest rate swap
contract, which generally are based on either 1-, 3- or 6-month LIBOR. These
current floating rates are different than the floating rates in effect when the
contracts were initiated. Changes in spot rates impact the variable rate
information disclosed above. However, these changes in spot rates also impact
the interest rate on the underlying assets or liabilities. Hedging/synthetic
alteration instruments are used by the company to manage the volatility of net
interest margin resulting from changes in interest rates on the underlying
hedged/synthetically altered items. Owned net interest margin would have
declined by 13 and 18 basis points in 1997 and 1996, respectively, had these
instruments not been utilized. These instruments did not impact owned net
interest margin in 1995.
Forwards and futures are agreements between two parties, committing one to
sell and the other to buy a specific quantity of an instrument on some future
date. The parties agree to buy or sell at a specified price in the future, and
their profit or loss is determined by the difference between the arranged price
and the level of the spot price when the contract is settled. The company has
both interest rate and foreign exchange rate forward contracts and interest rate
futures contracts. Foreign exchange contracts are utilized by the company to
reduce its exposure to foreign currency exchange risk. Interest rate forward and
futures contracts are used to hedge resets of interest rates on the company's
floating rate assets and liabilities. The company's exposure to credit risk for
futures is limited, as these contracts are traded on organized exchanges. Each
day, changes in contract values are settled in cash. In contrast, forward
contracts have credit risk relating to the performance of the counterparty.
These instruments also are subject to market risk. Cash requirements for forward
contracts include the receipt or payment of cash upon the sale or purchase of
the instrument.
Purchased options grant the purchaser the right, but not the obligation, to
either purchase or sell a financial instrument at a specified price within a
specified period. The seller of the option has written a contract which creates
an obligation to either sell or purchase the financial instrument at the
agreed-upon price if, and when, the purchaser exercises the option.
Other risk management instruments consist of caps and floors. Caps and
floors written expose the company to market risk but not to credit risk. Market
risk associated with caps and floors purchased is limited to the premium paid
which is recorded on the balance sheets in other assets.
Deferred gains of $41.8 and $45.8 million and deferred losses of $4.1 and
$13.0 million from hedging/synthetic alteration instruments were recorded on the
balance sheets at December 31, 1997 and 1996, respectively. The weighted average
amortization period associated with the deferred gains was 5.1 and 6.6 years at
December 31, 1997 and 1996, respectively. The weighted average amortization
period for the deferred losses was 1.3 and 1.5 years at December 31, 1997 and
1996, respectively.
At December 31, 1997 and 1996, the accrued interest, unamortized premium
and other assets recorded for agreements which would be written off should all
related counterparties fail to meet the terms of their contracts was $64.6 and
$52.8 million, respectively.
CONCENTRATIONS OF CREDIT RISK A concentration of credit risk is defined as a
significant credit exposure with an individual or group engaged in similar
activities or affected similarly by economic conditions. Because the company
primarily lends to consumers, it does not have receivables from any industry
group that equal or exceed 10 percent of total managed receivables at December
31, 1997 and 1996. The company lends nationwide, with the following geographic
areas comprising more than 10 percent of total managed domestic receivables at
December 31, 1997: California -19 percent; Midwest (IL, IN, IA, KS, MI, MN, MO,
NE, ND, OH, SD, WI) -24 percent; Middle Atlantic (DE, DC, MD, NJ, PA, VA, WV)
- -14 percent; Northeast (CT, ME, MA, NH, NY, RI, VT) -12 percent; and Southeast
(AL, FL, GA, KY, MS, NC, SC, TN) -16 percent.
- --------------------------------------------------------------------------------
9. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS
In June 1996 Household Capital Trust II ("HCT II"), a wholly-owned subsidiary of
the company, issued 4 million 8.70 percent Trust Preferred Securities
("preferred securities") at $25 per preferred security. The sole asset of HCT II
is $103.1 million of 8.70 percent Junior Subordinated Deferrable Interest Notes
issued by the company. The junior subordinated notes held by HCT II mature on
June 30, 2036 and are redeemable by the company in whole or in part beginning on
June 30, 2001, at which time the HCT II preferred securities are callable.
Net proceeds from the issuance of preferred securities were used for general
corporate purposes.
In June 1995 Household Capital Trust I ("HCT I"), a wholly-owned subsidiary
of the company, issued 3 million 8.25 percent preferred securities at $25 per
preferred security. The sole asset of HCT I is $77.3 million of 8.25 percent
Junior Subordinated Deferrable Interest Notes issued by the company. The junior
subordinated notes held by HCT I mature on June 30, 2025 and are redeemable by
the company in whole or in part beginning
<PAGE> 18
- --------------------------------------------------------------------------------
on June 30, 2000, at which time the HCT I preferred securities are callable.
HCT I may elect to extend the maturity of the preferred securities to June 30,
2044.
The obligations of the company with respect to the junior subordinated
notes, when considered together with certain undertakings of the company with
respect to HCT I and HCT II, constitute full and unconditional guarantees by the
company of HCT I's and HCT II's obligations under the respective preferred
securities. The preferred securities are classified in the company's balance
sheets as company obligated mandatorily redeemable preferred securities of
subsidiary trusts (representing the minority interest in the trusts) at their
face and redemption amount of $175 million at December 31, 1997 and 1996. The
preferred securities have a liquidation value of $25 per preferred security.
Dividends on the preferred securities are cumulative, payable quarterly in
arrears and are deferrable at the company's option for up to five years from
date of issuance. The company cannot pay dividends on its preferred and common
stocks during such deferments. Dividends on the preferred securities have been
classified as interest expense in the statements of income.
- --------------------------------------------------------------------------------
10. PREFERRED STOCK
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
7.35% Preferred Stock, Series 1993-A, 4,000,000 depositary shares(1) $100.0 $100.0
8.25% Preferred Stock, Series 1992-A, 2,000,000 depositary shares(1) 50.0 50.0
9.50% Preferred Stock, Series 1991-A, 5,500,000 depositary shares(2) -- 55.0
- -----------------------------------------------------------------------------------------------
Total preferred stock $150.0 $205.0
===============================================================================================
</TABLE>
(1) Depositary share represents 1/40 share of preferred stock.
(2) Depositary share represents 1/10 share of preferred stock.
Dividends on the 7.35 percent preferred stock, Series 1993-A, are cumulative and
payable quarterly. The company may, at its option, redeem in whole or in part
the 7.35 percent preferred stock, Series 1993-A, on any date after October 15,
1998 for $25 per depositary share plus accrued and unpaid dividends. This stock
has a liquidation value of $1,000 per share.
Dividends on the 8.25 percent preferred stock, Series 1992-A, are
cumulative and payable quarterly. The company may, at its option, redeem in
whole or in part the 8.25 percent preferred stock, Series 1992-A, on any date
after October 15, 2002 for $25 per depositary share plus accrued and unpaid
dividends. This stock has a liquidation value of $1,000 per share.
Holders of all issues of preferred stock are entitled to payment before any
capital distribution is made to common shareholders. The preferred shares are
nonvoting except that holders will be entitled to vote as a separate class to
elect two directors if the equivalent of six or more quarterly dividends shall
be in arrears, until the dividends in arrears are paid in full.
On January 23, 1997, the company redeemed, at par, all outstanding shares
of its 9.50 percent $55 million preferred stock, Series 1991-A, for $10 per
depositary share, plus accrued and unpaid dividends.
The company's Board of Directors has adopted a resolution creating an
Offering Committee of the Board with the power to authorize the issuance and
sale of one or more series of preferred stock. The Offering Committee has the
authority to determine the particular designations, powers, preferences and
relative, participating, optional or other special rights (other than voting
rights which shall be fixed by the Board of Directors) and qualifications,
limitations or restrictions of such issuance. At December 31, 1997, up to 4.3
million shares of preferred stock were authorized for issuance.
- --------------------------------------------------------------------------------
11. JUNIOR PREFERRED SHARE PURCHASE RIGHTS
In 1996, the company issued one preferred share purchase right (a "Right") for
each outstanding share of common stock of the company. Under certain conditions,
each Right may be exercised to purchase one thousandth of a share of a new
series of junior participating preferred stock at an exercise price of $300,
subject to adjustment. The Rights may be exercised only after the earlier of:
(a) a public announcement that a party or an associated group acquired 15
percent or more of the company's common stock and (b) ten business days (or
later date as determined by the Board of Directors of the company) after a party
or an associated group initiates or announces its intention to make an offer to
acquire 15 percent or more of the company's common stock. The Rights, which
cannot vote or receive dividends, expire on July 31, 2006 and may be redeemed by
the company at a price of $.01 per Right at any time prior to expiration or
acquisition of 15 percent of the company's common stock.
<PAGE> 19
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The company has estimated the fair value of its financial instruments in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments" ("FAS No. 107"). Fair
value estimates, methods and assumptions set forth below for the company's
financial instruments are made solely to comply with the requirements of FAS No.
107 and should be read in conjunction with the financial statements and notes in
this Annual Report.
For a significant portion of the company's financial instruments, fair
values for items lacking a quoted market price were estimated by discounting
estimated future cash flows at estimated current market discount rates.
Assumptions used to estimate future cash flows are consistent with management's
assessments regarding ultimate collectibility of assets and related interest and
with estimates of product lives and repricing characteristics used in the
company's asset/liability management process. All assumptions are based on
historical experience adjusted for future expectations. Assumptions used to
determine fair values for financial instruments for which no active market
exists are inherently judgmental, and changes in these assumptions could
significantly affect fair value calculations.
As required under generally accepted accounting principles, a number of
other assets recorded on the balance sheets (such as acquired credit card
relationships) and other intangible assets not recorded on the balance sheets
(such as the value of consumer lending relationships for originated receivables
and the franchise values of the company's business units) are not considered
financial instruments and, accordingly, are not valued for purposes of this
disclosure. The company believes there is substantial value associated with
these assets based on current market conditions and historical experience.
Accordingly, the estimated fair value of financial instruments, as disclosed,
does not fully represent the entire value, nor the changes in the entire value,
of the company.
The following is a summary of the carrying value and estimated fair value
of the company's financial instruments:
<TABLE>
<CAPTION>
1997 1996
------------------------------------- ----------------------------------------
In millions. Carrying Estimated Carrying Estimated
At December 31 Value Fair Value Difference Value Fair Value Difference
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash $ 280 $ 280 -- $ 239 $ 239 --
Investment securities 2,286 2,286 -- 2,282 2,282 --
Receivables 23,863 23,981 $ 118 24,245 24,630 $ 385
- ----------------------------------------------------------------------------------------------------------------------------
Subtotal 26,429 26,547 118 26,766 27,151 385
- ----------------------------------------------------------------------------------------------------------------------------
Deposits (1,789) (1,796) (7) (2,365) (2,381) (16)
Commercial paper, bank
and other borrowings (6,081) (6,081) -- (6,428) (6,428) --
Senior and senior
subordinated debt (14,849) (15,092) (243) (14,802) (15,022) (220)
Insurance reserves (1,257) (1,486) (229) (1,205) (1,422) (217)
- ----------------------------------------------------------------------------------------------------------------------------
Subtotal (23,976) (24,455) (479) (24,800) (25,253) (453)
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate and foreign
exchange contracts 40 27 (13) 37 (105) (142)
Commitments to extend
credit and guarantees -- 50 50 -- 40 40
- ----------------------------------------------------------------------------------------------------------------------------
Subtotal 40 77 37 37 (65) (102)
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 2,493 $ 2,169 $ (324) $ 2,003 $ 1,833 $(170)
============================================================================================================================
</TABLE>
<PAGE> 20
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
the company's financial instruments:
Cash: The carrying value approximates fair value for this instrument due to
its liquid nature.
Investment securities: Investment securities are classified as
available-for-sale and are carried at fair value on the balance sheets.
Receivables: The fair value of adjustable rate consumer receivables was
determined to approximate existing carrying value because interest rates on
these receivables adjust with changing market interest rates. The fair value of
fixed rate consumer receivables was estimated by discounting future expected
cash flows at interest rates approximating those offered by the company on such
products at the respective valuation dates. This approach to estimating fair
value for fixed rate receivables results in a disclosed fair value that is less
than amounts the company believes could be currently realizable on a sale of
these receivables. These receivables are relatively insensitive to changes in
overall market interest rates and, therefore, have additional value compared to
alternative uses of funds. The fair value of commercial receivables was
determined by discounting estimated future cash flows at estimated market
interest rates.
The fair value of consumer receivables also included an estimate, on a
present value basis, of cash flows associated with securitizations of certain
home equity, auto finance, MasterCard and Visa, private label and other
unsecured receivables.
Deposits: The fair value of the company's savings and demand accounts
equaled the carrying amount as stipulated in FAS No. 107. The fair value of
fixed rate time certificates was estimated by discounting future expected cash
flows at interest rates offered by the company on such products at the
respective valuation dates.
Commercial paper, bank and other borrowings: The fair value of these
instruments was determined to approximate existing carrying value because
interest rates on these instruments adjust with changes in market interest rates
due to their short-term maturity or repricing characteristics.
Senior and senior subordinated debt: The estimated fair value of these
instruments was computed by discounting future expected cash flows at interest
rates offered for similar types of debt instruments.
Insurance reserves: The fair value of insurance reserves for periodic
payment annuities was estimated by discounting future expected cash flows at
estimated market interest rates at December 31, 1997 and 1996. The fair value of
other insurance reserves is not required to be determined in accordance with FAS
No. 107.
Interest rate and foreign exchange contracts: Where practical, quoted
market prices were used to determine fair value of these instruments. For
non-exchange traded contracts, fair value was determined through the use of
accepted and established valuation methods (including input from independent
third parties) which consider the terms of the contracts and market expectations
on the valuation date for forward interest rates (for interest rate contracts)
or forward foreign currency exchange rates (for foreign exchange contracts). See
Note 8, "Derivative Financial Instruments and Other Financial Instruments with
Off-Balance Sheet Risk," for a discussion of the nature of these items.
Commitments to extend credit and guarantees: These commitments were valued
by considering the company's relationship with the counterparty, the
creditworthiness of the counterparty and the difference between committed and
current interest rates.
- --------------------------------------------------------------------------------
13. LEASES
The company leases certain offices, buildings and equipment for periods of up to
23 years with various renewal options. The office space leases generally require
the company to pay certain operating expenses. The majority of the company's
leases are noncancelable operating leases. Net rental expense under operating
leases was $54.5, $50.6 and $55.4 million for 1997, 1996 and 1995, respectively.
Future net minimum lease commitments under noncancelable operating lease
arrangements were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1997
- ---------------------------------------------
<S> <C>
1998 $ 53.2
1999 41.2
2000 30.9
2001 22.6
2002 17.9
Thereafter 121.1
- ---------------------------------------------
Net minimum lease commitments $286.9
=============================================
</TABLE>
<PAGE> 21
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
14. INCENTIVE COMPENSATION AND STOCK OPTION PLANS
The company's executive compensation plans provide for issuance of nonqualified
stock options and restricted stock rights (RSRs). At December 31, 1997, of the
total shares authorized, 3,587,401 shares were available for issuance to
employees and directors pursuant to the terms of the plans. Stock options permit
the holder to purchase, under certain limitations, the company's common stock at
a price not less than 100 percent of the market value of the stock on the date
the option is granted. Employee stock options vest equally over four years and
expire 10 years from the date of grant.
Beginning in 1997, non-employee directors annually receive an option to
purchase 2,500 shares of the company's common stock at the stock's fair market
value the day the option is granted. The first option grant was made in November
1997. Prior to this, directors received an annual grant of 2,500 options each
May ending with the May 1997 grant. Director options have a term of ten years
and one day, fully vest six months from the date granted and once vested, are
exercisable at any time during the option term.
Common stock data for the stock option plans is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- ----------------------------
Price per Price Per Price Per
Shares Share Shares Share Shares Share
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,904,453 $ 44.03 3,955,240 $35.85 3,600,916 $28.39
Granted 688,389 115.71 513,500 91.17 1,439,600 47.99
Exercised (563,715) 31.06 (463,212) 27.13 (812,576) 25.04
Expired or canceled (135,350) 70.21 (101,075) 40.81 (272,700) 33.60
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at the end of year 3,893,777 $ 57.09 3,904,453 $44.03 3,955,240 $35.85
===================================================================================================================================
Exercisable at end of year 2,270,970 $ 38.95 2,115,672 $32.17 1,596,135 $26.57
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value
of options granted $ 33.54 $31.50 $16.44
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- -----------------------------------------
Number Number
Range of Outstanding at Weighted Average Weighted Average Outstanding at Weighted Average
Exercise Prices December 31, 1997 Remaining Life Exercise Price December 31, 1997 Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$17.69-$47.44 2,328,877 5.6 years $33.75 1,900,645 $32.53
$50.75-$117.19 1,564,900 9.0 years $91.84 370,325 $71.97
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
RSRs entitle an employee to receive a stated number of shares of the company's
common stock if the employee satisfies the conditions set by the Compensation
Committee for the award. At December 31, 1997 and 1996, employees had
outstanding RSRs representing 410,575 and 250,725 shares, respectively.
The company also maintains an Employee Stock Purchase Plan (the "ESPP").
The ESPP provides a means for employees to purchase shares of the company's
common stock at 85% of the lesser of its market price at the beginning or end of
a one year subscription period. In 1997 and 1996, the company sold 119,002 and
134,876 shares, respectively, to employees under the ESPP.
The company accounts for options and shares issued under the ESPP in
accordance with APB 25, pursuant to which no compensation cost has been
recognized. Had compensation cost been determined consistent with FAS No. 123,
the company's net income and earnings per share, on a pro forma basis, would
have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
In millions, except per share data. ------------------- -------------------- --------------------
Year ended December 31 Diluted Basic Diluted Basic Diluted Basic
- -------------------------------------------------------------------------------------------------------------------------
Earnings available to common shareholders:
<S> <C> <C> <C> <C> <C> <C>
As Reported $674.8 $674.8 $521.9 $521.9 $426.8 $426.8
Pro Forma 666.9 666.9 517.3 517.3 424.3 424.3
Earnings per share:
As Reported $ 6.50 $ 6.59 $ 5.31 $ 5.37 $ 4.31 $ 4.38
Pro Forma 6.43 6.51 5.27 5.33 4.28 4.35
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The compensation expense recognized in pro forma net income for 1997, 1996 and
1995 may not be representative of the effects on pro forma net income for future
years.
The fair value of each option granted was estimated as of the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1996 and 1995 grants:
<PAGE> 22
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.86% 6.03% 6.77%
Expected dividend yield 1.45 1.55 1.59
Expected life 5 years 5 years 5 years
Expected volatility 23.9% 28.2% 27.8%
- --------------------------------------------------------------------------------
</TABLE>
The Black-Scholes model uses different assumptions that can significantly effect
the fair value of the options. As a result, the derived fair value estimates
cannot be substantiated by comparison to independent markets.
- --------------------------------------------------------------------------------
15. EMPLOYEE BENEFIT PLANS
The company has several defined benefit pension plans covering substantially all
of its employees. Plan benefits are based primarily on years of service. Plan
assets primarily consist of common and preferred stocks including those of
foreign issuers and corporate and government obligations. At December 31, 1997,
plan assets included an investment in 1,258,807 shares of the company's common
stock with a fair value of $160.7 million. Dividends declared on these shares in
1997 totaled approximately $2 million.
Pension income for defined benefit plans, primarily due to the overfunded
status of the domestic plan, included the following components:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $(15.6) $(15.1) $(16.8)
Interest cost on projected benefit obligation (30.8) (31.0) (32.5)
Actual return on assets 85.1 99.8 116.4
Net amortization and deferral (7.4) (26.9) (40.7)
- -----------------------------------------------------------------------------------------------------
Pension income $ 31.3 $ 26.8 $ 26.4
=====================================================================================================
</TABLE>
The funded status of defined benefit pension plans was as follows:
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of:
Vested benefits obligation $351.0 $347.7
Nonvested benefits obligation 52.2 44.9
- ----------------------------------------------------------------------------------------------------
Accumulated benefit obligation 403.2 392.6
Effects of anticipated future compensation levels 30.7 27.9
- ----------------------------------------------------------------------------------------------------
Projected benefit obligation 433.9 420.5
Plan assets at fair value 747.8 704.7
- ----------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation $313.9 $284.2
====================================================================================================
</TABLE>
The projected benefit obligation of the foreign benefit plans totaled $51.3 and
$45.8 million at December 31, 1997 and 1996, respectively. Plan assets in excess
of the projected benefit obligation for these plans totaled $4.0 and $5.6
million at December 31, 1997 and 1996, respectively.
The 1997 and 1996 projected benefit obligations for the domestic defined
benefit plan were determined using an assumed weighted average discount rate of
7.50 percent and an assumed compensation increase of 4.0 percent. The assumed
weighted average long-term rate of return on plan assets was 10.0 percent in
1997, 1996 and 1995.
The excess of plan assets over the projected benefit obligation included
the following components:
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Unamortized prior service cost $ (1.9) $ (2.6)
Net unrecognized loss from past experience different
from assumed and effects of changes in assumptions (31.2) (41.8)
Unamortized assets 13.8 27.2
Prepaid pension cost 333.2 301.4
- ------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation $313.9 $ 284.2
================================================================================================
</TABLE>
<PAGE> 23
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
The straight-line method of amortization is used for prior service costs and
unrecognized gains and losses.
The company also sponsors a defined contribution plan where each
participant's contribution is matched by the company up to a maximum of 6
percent of the participant's compensation. For 1997, 1996 and 1995 these costs
totaled $18.5, $17.3 and $17.2 million, respectively.
The company has several plans which provide medical, dental and life
insurance benefits to retirees and eligible dependents. The plans are funded on
a pay-as-you-go basis and cover substantially all employees who meet certain age
and vested service requirements. The company has instituted dollar limits on its
payments under the plans to control the cost of future medical benefits.
The company recognizes the expected postretirement costs on an accrual
basis, similar to pension accounting. The expected cost of postretirement
benefits is required to be recognized over the employees' years of service with
the company instead of the period in which the benefits are paid. The company is
recognizing the transition obligation over a period of 20 years. The transition
obligation represents the unfunded and unrecognized accumulated postretirement
benefit obligation.
The net postretirement benefit cost included the following:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ (2.8) $ (2.8) $ (3.1)
Interest cost on accumulated postretirement benefit obligation (7.9) (7.4) (10.5)
Net amortization and deferral (3.6) (3.3) (5.5)
- -----------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $(14.3) $(13.5) $(19.1)
===========================================================================================================
</TABLE>
The cost of plans which cover retirees and eligible dependents outside of the
United States is not significant to the company.
The actuarial and recorded liabilities for postretirement benefit plans,
none of which have been funded, were:
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of postretirement benefit obligation for:
Retirees $ 75.6 $ 68.0
Fully eligible active participants 8.6 9.6
Other active participants 27.5 27.3
- ------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 111.7 104.9
Net unrecognized gain from past experience different from
assumed and effects of changes in assumptions 45.6 49.2
Unamortized liability (94.3) (100.6)
- ------------------------------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ 63.0 $ 53.5
======================================================================================================
</TABLE>
The December 31, 1997 and 1996 accumulated postretirement benefit obligation was
determined using an assumed weighted average discount rate of 7.50 percent and
an assumed annual compensation increase of 4.0 percent. A 10.0 and 11.0 percent
annual rate of increase in the gross cost of covered health care benefits was
assumed for 1998 and 1997, respectively. This rate of increase is assumed to
decline by 1 percent in each year after 1998.
The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rate by 1
percent would have increased the 1997 and 1996 net periodic postretirement
benefit cost by $.6 and $.8 million, respectively, and the accumulated
postretirement benefit obligation at December 31, 1997 and 1996 by $6.1 and $7.5
million, respectively.
<PAGE> 24
- --------------------------------------------------------------------------------
16. INCOME TAXES
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes related to operations $342.6 $283.7 $300.5
Income taxes related to adjustments included in common shareholders' equity:
Unrealized gain (loss) on investments, net 8.4 (55.2) 105.8
Foreign currency translation adjustments 11.6 (18.6) (3.8)
Exercise of stock options (15.4) (6.8) (6.8)
- ------------------------------------------------------------------------------------------------------------------------
Total $347.2 $203.1 $395.7
========================================================================================================================
</TABLE>
Provisions for income taxes related to operations were:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT
United States $152.6 $328.4 $270.4
Foreign 42.6 38.9 32.6
- -----------------------------------------------------------------------------
Total current 195.2 367.3 303.0
- -----------------------------------------------------------------------------
DEFERRED
United States 138.1 (81.6) 7.9
Foreign 9.3 (2.0) (10.4)
- -----------------------------------------------------------------------------
Total deferred 147.4 (83.6) (2.5)
- -----------------------------------------------------------------------------
Total income taxes $342.6 $283.7 $300.5
=============================================================================
</TABLE>
The significant components of deferred income tax provisions attributable to
income from operations were:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred income tax provision $134.7 $(65.9) $ 2.6
Adjustment of valuation allowance -- (11.4) (6.7)
Change in operating loss carryforwards 12.7 (6.3) 1.6
- -----------------------------------------------------------------------------
Deferred income tax provision $147.4 $(83.6) $(2.5)
=============================================================================
</TABLE>
Income before income taxes from foreign operations was $163.7, $111.7 and $71.7
million in 1997, 1996 and 1995, respectively. Effective tax rates are analyzed
as follows:
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<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 2.0 1.8 2.0
Amortization and disposition of intangibles and goodwill .3 1.5 1.9
Leveraged lease tax benefits (2.7) (1.7) (1.9)
Recapture of life insurance policyholders' surplus account balance -- -- 3.9
Other (1.3) (2.1) (1.0)
- ------------------------------------------------------------------------------------------------------------
Effective tax rate 33.3% 34.5% 39.9%
============================================================================================================
</TABLE>
<PAGE> 25
Household International, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
Provision for U.S. income taxes had not been made at December 31, 1997 and 1996
on $141.7 and $146.4 million, respectively, of undistributed earnings of foreign
subsidiaries. Determination of the amount of unrecognized deferred tax liability
related to investments in foreign subsidiaries is not practicable. The company's
U.S. savings and loan subsidiary has credit loss reserves for tax purposes that
arose in years beginning before December 31, 1987 in the amount of $55.3
million. The amount of deferred tax liability on the aforementioned credit loss
reserves not recognized totaled $20.4 million at December 31, 1997. Because this
amount would become taxable only in the event of certain circumstances which the
company does not expect to occur within the foreseeable future, no deferred tax
liability has been established for this item. At December 31, 1997 the company
had net operating loss carryforwards for tax purposes of $45.7 million, of which
$8.0 million expire in 2000; $11.3 million expire in 2001; $12.7 million expire
in 2002; $6.8 million expire in 2003; and $6.9 million expire in 2004.
Temporary differences which gave rise to a significant portion of deferred
tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
In millions.
At December 31 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Receivables sold $ 454.9 $256.4
Leveraged lease transactions, net 312.7 383.3
Pension plan assets 123.1 111.0
Other 208.9 121.7
- -----------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities $1,099.6 $872.4
=============================================================================================================================
DEFERRED TAX ASSETS
Credit loss reserves $ 676.8 $536.1
Other 187.4 236.6
- -----------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 864.2 772.7
- -----------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability at end of year $ 235.4 $ 99.7
=============================================================================================================================
</TABLE>
- -------------------------------------------------------------------------------
17. EARNINGS PER COMMON SHARE
In December 1997, the company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS No. 128"), which supersedes APB
Opinion No. 15 "Earnings Per Share" and simplifies the standards for computing
and presenting earnings per share ("EPS"). Under the new standards, the
presentation of primary EPS has been replaced with a presentation of basic EPS.
Basic EPS is computed excluding dilution caused by common stock equivalents such
as stock options. The presentation of fully diluted EPS has been replaced with a
presentation of diluted EPS, which is calculated in a similar fashion to how
fully diluted EPS had been computed. Previously reported EPS has been restated
to conform to the new rules.
<TABLE>
<CAPTION>
1997 1996 1995
In millions, except per share data. ------------------- ------------------ -----------------
Year ended December 31 Diluted Basic Diluted Basic Diluted Basic
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Net income $686.6 $686.6 $538.6 $538.6 $453.2 $453.2
Preferred dividends (11.8) (11.8) (16.7) (16.7) (26.4) (26.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings available to common shareholders $674.8 $674.8 $521.9 $521.9 $426.8 $426.8
===================================================================================================================================
AVERAGE SHARES
Common 102.4 102.4 97.1 97.1 97.5 97.5
Common equivalents 1.4 -- 1.2 -- 1.6 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total 103.8 102.4 98.3 97.1 99.1 97.5
===================================================================================================================================
Earnings per common share $ 6.50 $ 6.59 $ 5.31 $ 5.37 $ 4.31 $ 4.38
===================================================================================================================================
</TABLE>
<PAGE> 26
- -------------------------------------------------------------------------------
18. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business there are various legal proceedings pending
against the company. Management believes the aggregate liabilities, if any,
resulting from such actions would not have a material adverse effect on the
consolidated financial position of the company.
However, as the ultimate resolution of these proceedings
is influenced by factors that are outside of the company's control, it is
reasonably possible the company's estimated liability under these proceedings
may change. See Note 13 for discussion of lease commitments.
- -------------------------------------------------------------------------------
19. SALE OF PRODUCT LINES
In October 1995 the company sold the individual life and annuity product lines
of the Individual Life Insurance segment for $525 million in cash and $50
million of preferred stock of the purchaser. For the first nine months of 1995,
these sold product lines generated approximately $400 million of revenues and
earned approximately $35 million of net income.
- -------------------------------------------------------------------------------
20. GEOGRAPHIC DATA
The following is a summary of assets, revenues and operating profit of the
company by country:
<TABLE>
<CAPTION>
Identifiable Assets Revenues Operating Profit
------------------------------------ ------------------------------- ---------------------------
In millions. 1997 1996 1995 1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $26,015.6 $25,482.9 $25,797.7 $4,785.7 $4,426.7 $4,466.2 $ 888.1 $714.6 $684.7
United Kingdom 2,934.2 2,654.5 2,006.6 515.3 434.8 397.7 123.1 92.3 67.6
Canada 1,352.8 1,457.1 1,414.5 202.1 197.3 280.5 18.0 15.4 1.4
- ------------------------------------------------------------------------------------------------------------------------------
Total $30,302.6 $29,594.5 $29,218.8 $5,503.1 $5,058.8 $5,144.4 $1,029.2 $822.3 $753.7
==============================================================================================================================
</TABLE>
<PAGE> 27
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Management's Report
To the Shareholders of Household International, Inc.
Household International's management is responsible for the preparation,
integrity and fair presentation of its published financial statements. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts based on
judgments and estimates made by management. Management also prepared other
information included in the annual report and is responsible for its accuracy
and consistency with the financial statements.
The consolidated financial statements have been audited by an independent
accounting firm, Arthur Andersen LLP, which has been given unrestricted access
to all financial records and related data, including minutes of all meetings of
shareholders, the Board of Directors and committees of the board. Management
believes that representations made to the independent auditors during their
audit were valid and appropriate.
Management maintains a system of internal controls over the preparation of
its published financial statements, which is intended to provide reasonable
assurance to the company's Board of Directors and officers regarding preparation
of financial statements presented fairly in conformity with generally accepted
accounting principles.
Internal auditors monitor the operation of the internal control system, and
actions are taken by management to respond to deficiencies as they are
identified. The board, operating through its audit committee, which is composed
entirely of directors who are not officers or employees of the company, provides
oversight to the financial reporting process.
Even effective internal controls, no matter how well designed, have
inherent limitations, such as the possibility of human error or of circumvention
or overriding of controls, and the consideration of cost in relation to benefit
of a control. Further, the effectiveness of an internal control can change with
circumstances.
Household International's management periodically assesses the internal
controls for adequacy. Based upon these assessments, Household International's
management believes that, in all material respects, its internal controls
relating to preparation of consolidated financial statements as of December 31,
1997 functioned effectively during the year ended December 31, 1997.
Management has long recognized its responsibility for conducting the
company's affairs in a manner which is responsive to the interest of employees,
shareholders, investors and society in general. This responsibility is included
in the statement of policy on ethical standards which provides that the company
will fully comply with laws, rules and regulations of every community in which
it operates and adhere to the highest ethical standards. Officers, employees and
agents of the company are expected and directed to manage the business of the
company with complete honesty, candor and integrity.
/s/ WILLIAM F. ALDINGER /s/ DAVID A. SCHOENHOLZ
William F. Aldinger David A. Schoenholz
Chairman and Executive Vice President-
Chief Executive Officer Chief Financial Officer
January 21, 1998
<PAGE> 28
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
To the Shareholders of Household International, Inc.
We have audited the accompanying consolidated balance sheets of Household
International, Inc.(a Delaware corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
preferred stock and common shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Household
International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
January 21, 1998
