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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8198
Household International, Inc.
(Exact name of registrant as specified in its charter)
36-3121988
Delaware (I.R.S. Employer Identification
(State of incorporation) No.)
2700 Sanders Road Prospect Heights, 60070
Illinois (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (847) 564-5000
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
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Common Stock, $1 par value New York Stock Exchange and Chicago Stock Exchange
Series A Junior Participating Preferred
Stock Purchase Rights (attached to and
transferable only with the Common Stock) New York Stock Exchange
Depositary Shares (each representing one-
fortieth share of 8 1/4% Cumulative
Preferred Stock, Series 1992-A, no par,
$1,000 stated value) New York Stock Exchange
5% Cumulative Preferred Stock New York Stock Exchange
$4.50 Cumulative Preferred Stock New York Stock Exchange
$4.30 Cumulative Preferred Stock New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting common stock held by nonaffiliates
of the registrant at March 16, 2000 was approximately $17.4 billion. The
number of shares of the registrant's common stock outstanding at March 16,
2000 was 472,704,921.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's 1999 Annual Report to Shareholders for
the fiscal year ended December 31, 1999: Parts I, II and IV.
Certain portions of the registrant's definitive Proxy Statement for its
2000 Annual Meeting scheduled to be held May 9, 2000: Part III.
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TABLE OF CONTENTS
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PART/Item No. Page
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PART I.
Item 1. Business.............................................................................. 3
General............................................................................... 3
Operations............................................................................ 4
Funding............................................................................... 5
Regulation and Competition............................................................ 6
Cautionary Statement on Forward-Looking Statements.................................... 7
Item 2. Properties............................................................................ 8
Item 3. Legal Proceedings..................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders................................... 8
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 8
Item 6. Selected Financial Data............................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 9
Item 8. Financial Statements and Supplementary Data........................................... 9
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 9
PART III.
Item 10. Directors and Executive Officers of the Registrant.................................... 9
Executive Officers of the Registrant.................................................. 9
Item 11. Executive Compensation................................................................ 11
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 11
Item 13. Certain Relationships and Related Transactions........................................ 11
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 11
Financial Statements.................................................................. 11
Reports on Form 8-K................................................................... 12
Exhibits.............................................................................. 12
Schedules............................................................................. 13
Signatures...................................................................................... 14
Report of Independent Public Accountants........................................................ F-1
Schedule I...................................................................................... F-2
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PART I.
Item 1. Business.
General
Household International, Inc. ("Household"), through its subsidiaries
primarily provides middle-market consumers with several types of loan products
in the United States, the United Kingdom and Canada. Household and its
subsidiaries (including the operations of Beneficial Corporation
("Beneficial") which we acquired in 1998) may also be referred to in this Form
10-K as "we," "us" or "our." We offer home equity loans, auto finance loans,
MasterCard* and Visa* credit cards, private label credit cards, tax refund
anticipation loans and other types of unsecured loans. We also offer credit
and specialty insurance in the United States, the United Kingdom and Canada.
At December 31, 1999, we had approximately 23,600 employees and served over 45
million customers with $71.7 billion in managed receivables and $52.3 billion
in owned receivables. Information that is reported on a managed basis relates
to receivables that have been sold and which we service with limited recourse
("securitize"), together with receivables that appear on our balance sheet.
Information that is reported on an owned basis relates to the assets and
liabilities we have on our balance sheet. Owned assets may vary from period to
period depending on the timing and size of securitizations.
Household was created as a holding company in 1981 as a result of a
shareholder approved restructuring of Household Finance Corporation ("HFC"),
which was established in 1878. In the last five years, we have been
restructuring our operations to focus on the financial services business,
specifically on those areas of the consumer finance business that we believe
offer us the best opportunity to achieve the highest returns on our capital.
From late 1994 through 1996 we exited from several businesses that were
providing insufficient returns on our investment, such as our first mortgage
origination and servicing business in the United States and Canada, our
individual life and annuity business and our consumer branch banking business,
including the sale of our consumer deposits. In June 1997 we purchased
Transamerica Financial Services Holding Company ("TFS"), the branch-based
consumer finance subsidiary of Transamerica Corporation for $1.1 billion and
repaid $2.8 billion of TFS debt. In connection with this acquisition, we
completed a $1.0 billion public offering of Household common stock. In October
1997, we purchased all of the outstanding capital stock of ACC Consumer
Finance Corporation ("ACC"), an automobile finance company for 4.2 million
shares of Household common stock and cash. In December 1997, we decided to
exit from the business of originating and acquiring student loans. In 1998, we
merged with Beneficial, a consumer finance holding company, and took steps to
reposition our United States MasterCard and Visa business to de-emphasize
undifferentiated credit card programs.
1999 Developments and Results. The following results and developments
occurred during 1999:
. In August 1999 we purchased for approximately $60 million all of the
outstanding capital stock of Decision One Holding Company LLC, a
privately-held originator of non-prime first and second mortgage loans
that packages such loans for sale to investors.
. In November 1999 we entered into an Agreement and Plan of Merger with
Renaissance Holdings, Inc., a privately-held issuer of secured and
unsecured credit cards to non-prime customers, to acquire all of their
outstanding capital stock for approximately 5 million shares of Household
common stock and cash. This transaction closed in February 2000.
. Our managed assets increased to $80.2 billion at year-end 1999 from $72.6
billion at year-end 1998 and $71.3 billion at year-end 1997. Our owned
assets increased to $60.7 billion at year-end 1999 from $52.9 billion at
year-end 1998 and $46.8 billion at year-end 1997.
. Since adopting our $2 billion share repurchase program in March, we
repurchased 16.8 million shares of Household common stock for $712.9
million. We also repurchased 5.0 million shares of such stock prior to
the initiation of our share repurchase program to fund various employee
benefit programs.
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* MasterCard is a registered trademark of MasterCard International,
Incorporated and VISA is a registered trademark of VISA USA, Inc.
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. Our net income was $1,486.4 million in 1999, compared to $524.1 million
in 1998 and $940.3 million in 1997. Excluding merger and integration
related costs of $751.0 million after-tax and the $118.5 million after-
tax gain on sale of Beneficial's Canadian operations, operating net
income in 1998 was $1,156.6 million.
. Diluted earnings per share was $3.07 in 1999, compared to $1.03 in 1998
and $1.93 in 1997. Excluding merger and integration related costs of
$751.0 million after-tax and the $118.5 million after-tax gain on sale of
Beneficial's Canadian operations, diluted operating earnings per share
was $2.30 in 1998.
The state of California accounts for 17 percent of our managed consumer
portfolio in the United States. California is the only state with more than
ten percent of this portfolio.
Our summary financial information is set forth in our Annual Report to
Shareholders (the "1999 Annual Report"), portions of which are incorporated
herein by reference. See pages 26 through 85 of our 1999 Annual Report. Our
products, operating markets and marketing methods are described under
OPERATIONS in this Form 10-K.
Operations
Our operations are divided into three reportable segments: Consumer, which
includes our branch-based and correspondent consumer finance, private label
credit card and auto finance businesses in the United States; Credit Card,
which includes our MasterCard and Visa business in the United States; and
International, which comprises our foreign operations which include the United
Kingdom and Canada. Information about operating segments that are not
individually reportable includes our insurance, tax refund anticipation loans
and commercial operations, as well as our corporate and treasury activities
which are included in the "All Other" caption within our segment disclosure.
Consumer
Our consumer finance business has been ranked by Inside B & C Lending as
the second largest subprime home equity lender in the United States based upon
their estimates and 1999 receivables volume as reported to them by such
lenders. Collectively, this business has 1,378 branches located in 46 states
and 3 million open customer accounts. It is marketed under both the HFC and
Beneficial brand names, each of which caters to a slightly different type of
customer in the middle-market population. Both brands offer secured and
unsecured products. These products are marketed through our retail branch
network, correspondents, direct mail, telemarketing and Internet applications.
According to The Nilson Report, we are the second largest provider of third
party private label credit cards in the United States at December 31, 1999
based upon managed receivables outstanding. The private label business of our
consumer segment has over 100 merchant relationships with approximately $9.2
billion in managed receivables and 8 million active customer accounts.
Approximately 31 percent of our private label receivables are in the
electronics industry while approximately 33 percent are in the furniture
industry. Approximately 13 percent of our private label receivables are in the
home products industry and approximately 11 percent are in the recreational
vehicle industry. These products are generated through merchant promotions,
application displays, direct mail, telemarketing and Internet applications.
Based on volume, we are one of the largest non-captive non-prime automobile
lenders in the United States. Our managed auto finance receivables increased
$1.3 billion to $3 billion during 1999. This business benefited from continued
industry consolidation and an expanded sales force which increased our dealer
relationships by over 50 percent to over 8,400 dealer relationships
nationwide. Over one-third of the growth in this segment in 1999 came from our
new Millennium product which targets slightly higher credit quality customers
at competitive rates. Our auto finance business generates loan volume
primarily through dealer relationships from which installment contracts are
purchased. Loans are also generated from alliance partner referrals, direct
mail and Internet applications.
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Credit Cards
Our Mastercard and Visa operations in the United States reported higher
earnings in 1999 primarily due to the repositioning of this segment which
began in 1998. As part of such repositioning, we actively repriced portions of
our Mastercard and Visa portfolios, expanded certain marketing programs, and
reduced credit lines. We also repositioned the undifferentiated Mastercard and
Visa portfolios in the United States to target customers and prospects of our
other businesses. Managed receivables declined in 1999 reflecting attrition
resulting from such repositioning. This attrition was partially offset by
growth in the second half of 1999 in both the number of accounts and
receivables associated with our affinity and co-branding relationships,
including our alliance with General Motors Corporation ("GM") to issue the GM
Card, a co-branded credit card, and our alliance with Union Privilege to issue
the Union Privilege affinity card ("Union Privilege"). Our MasterCard and Visa
business is generated primarily through direct mail, telemarketing, Internet
applications, application displays and promotional activity associated with
our affinity and co-branding relationships. Our largest account base for
MasterCard and VISA credit cards is in California. Approximately 52 percent of
managed receivables for this segment were originated under the GM Card program
while approximately 29 percent were originated under the Union Privilege
program. We also cross sell our credit cards to our existing home equity,
private label and tax refund anticipation loan customers.
International
Our United Kingdom operations offer secured and unsecured lines of credit,
secured and unsecured closed-end loans, insurance products and credit cards
(including the GM Card from Vauxhall, the Goldfish Card issued under an
alliance with the Centrica Group--the United Kingdom's major natural gas
supplier and marbles(TM), an Internet enabled credit card developed in
connection with Freeserve, the United Kingdom's largest Internet service
provider). Such operations are conducted in England, Scotland, Wales, Ireland
and Northern Ireland. Loans are marketed through a branch network consisting
of 176 branches, merchants and direct mail. Our Canadian consumer finance
business offers consumer loans, mortgages, revolving credit and retail finance
and accepts deposits. Their products include home equity and unsecured lines
of credit, secured and unsecured closed-end loans and private label credit
cards. These products are marketed through 85 branch offices in 10 provinces,
direct mail and telemarketing. Information concerning foreign owned
receivables, revenues, income before income taxes, identifiable assets and
long-lived assets as of or for the years ended December 31, 1999, 1998 and
1997 are incorporated by reference to pages 64 and 82 of our 1999 Annual
Report.
All Other
Where applicable laws permit, we offer credit life, credit accident, health
and disability, term and specialty insurance products to our customers. Such
products currently are offered throughout the United States and Canada.
Insurance is directly written by or reinsured with one or more of our
subsidiaries. Our tax refund anticipation loan ("RAL") business is a
cooperative program with H&R Block Tax Services, Inc. ("H&R Block") and
certain of its franchises, along with other independent tax preparers, to
provide loans to customers who are entitled to tax refunds and who
electronically file their income tax returns with the Internal Revenue
Service. Our remaining commercial operations have continued to decline in
size.
Funding
As a financial services organization, we must have access to funds at
competitive rates, terms and conditions to be successful. We fund our
operations in the global capital markets, primarily through the use of
securitizations, commercial paper, Federal funds borrowing, certificates of
deposit, bank lines, thrift notes, medium-term notes and long-term debt. We
also use derivative financial instruments to hedge our currency and interest
rate exposure. A description of our use of derivative financial instruments,
including interest rate swaps, foreign exchange contracts, and other
quantitative and qualitative information about our market risk is set forth on
pages 39-41, 43 and 68 through 72 of our 1999 Annual Report. We also maintain
an investment portfolio which at year-end 1999 was approximately $3.1 billion.
Approximately $2.5 billion of such investment securities were held by our
insurance subsidiaries. At year-end 1999, Household's long-term debt, together
with that of
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HFC, Beneficial and Household Bank, f.s.b. (the "Bank") and the preferred
stock of Household, have been assigned investment grade ratings by four
nationally recognized statistical rating organizations. These organizations
have also rated the commercial paper of HFC in their highest rating category.
Three of these organizations have rated Household's commercial paper in their
highest rating category. For a detailed listing of the ratings that have been
assigned to Household and our significant subsidiaries, see Exhibit 99(b) to
this Form 10-K.
Securitizations of consumer receivables are an important source of our
liquidity. During 1999 we securitized approximately $5.2 billion of
receivables compared to $3.6 billion in 1998 and $8.3 billion in 1997.
Additional information on our sources and availability of funding are
incorporated by reference to pages 39 through 42 of our 1999 Annual Report.
Regulation and Competition
Regulation. Our consumer finance businesses operate in a highly regulated
environment. Those businesses are subject to laws relating to discrimination
in extending credit, use of credit reports, privacy matters, disclosure of
credit terms and correction of billing errors. Our consumer branch lending
offices are also subject to certain regulations and legislation that limit
their operations in certain jurisdictions. For example, limitations may be
placed on the amount of interest or fees that a loan may bear, the amount that
may be borrowed, the types of actions that may be taken to collect or
foreclose upon delinquent loans or the information about a customer that may
be shared. Our consumer branch lending offices are generally licensed in those
jurisdictions in which they operate. Such licenses have limited terms but are
renewable, and are revocable for cause. Our private label operations are
conducted through state-licensed companies and our credit card banks.
The Bank is chartered by the Office of Thrift Supervision ("OTS") and is a
member of the Federal Home Loan Bank System. It is subject to examination and
supervision by the OTS and the Federal Deposit Insurance Corporation ("FDIC").
It is also subject to federal regulations concerning its general investment
authority as well as its ability to acquire financial institutions, enter into
transactions with affiliates and pay dividends. Such regulations also govern
the permissible activities and investments of its subsidiaries. It is also
subject to regulatory requirements setting forth minimum capital and liquidity
levels. Because of our ownership of the Bank, Household is a savings and loan
holding company subject to reporting and other regulations of the OTS.
Household and HFC have agreed with the OTS to maintain the regulatory capital
of the Bank at certain specified levels. Our national credit card banks are
chartered by the Office of the Comptroller of the Currency and are members of
the Federal Reserve System. National banks are generally subject to the same
type of regulatory supervision and restrictions as the Bank, but our national
banks only engage in credit card operations. The deposit accounts of the Bank
and our credit card banks are insured up to $100,000 by the FDIC.
The Bank and our credit card banks are also subject to the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") and the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). Among
other things, FDICIA creates a five-tiered system of capital measurement for
regulatory purposes, places limits on the ability of depository institutions
to acquire brokered deposits, and gives broad powers to federal banking
regulators, in particular the FDIC, to require undercapitalized institutions
to adopt and implement a capital restoration plan and to restrict or prohibit
a number of activities, including the payment of cash dividends, which may
impair or threaten the capital adequacy of the insured depository institution.
Federal banking regulators may apply corrective measures to an insured
depository institution, even if it is adequately capitalized, if such
institution is determined to be operating in an unsafe or unsound condition or
engaging in an unsafe or unsound activity. In addition, federal banking
regulatory agencies have adopted safety and soundness standards governing
operational and managerial activities of insured depository institutions and
their holding companies regarding internal controls, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation.
Under FIRREA, the FDIC may assess an affiliated insured depository institution
for the estimated losses incurred by the FDIC upon the default of any
affiliated insured institution.
On February 10, 1999, the four federal bank regulatory agencies revised
their joint "retail credit classification policy" which establishes guidelines
for classification of credit based on delinquency status and
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mandates specified timeframes for recognizing losses in consumer loan
portfolios. This policy applies to any consumer loan held in our credit card
banks or the Bank and is effective in stages that began April 1, 1999.
Substantially all of the policy changes impacting our credit card banks or the
Bank will become effective October 1, 2000. We expect to adopt such changes to
be effective on October 1, 2000. The application of the new rules will not
have an impact on our financial statements.
Our credit insurance business is subject to regulatory supervision under
the laws of the states in which it operates. Regulations vary from state to
state but generally cover licensing of insurance companies, premium and loss
rates, dividend restrictions, types of insurance that may be sold, permissible
investments, policy reserve requirements, and insurance marketing practices.
Competition. The consumer financial services industry in which we operate
is highly fragmented and intensely competitive. We generally compete with
banks, thrifts and other financial institutions in the United States, Canada
and the United Kingdom. One of the industry challenges and opportunities we
face is the recent consolidation in the financial services industry. We can
use our centralized underwriting, collection and processing functions to adapt
our credit standards and collection efforts to market conditions. This
capability was leveraged to the Beneficial branch network as the Beneficial
branches were integrated with HFC's in 1998. Our use of highly automated
systems and processing facilities to support our underwriting, loan
administration and collection functions across all of our consumer businesses
assists us in this regard. A centralized collection system for past due
accounts is augmented by early collection efforts in the consumer finance
branch network for products other than credit cards. Maximizing our technology
and otherwise streamlining our operations and reducing our costs has allowed
us to improve our efficiency through specialization and economies of scale and
allows us to operate more efficiently than some of our competitors. We also
compete with other finance companies, banks, savings and loan companies,
credit unions and retailers, by offering a variety of consumer products,
maintaining a strong service orientation and developing innovative marketing
programs.
Cautionary Statement on Forward-Looking Statements
Certain matters discussed throughout this Form 10-K or in the information
incorporated herein by reference may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
as such may involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Forward-looking
statements are based on our current views and assumptions, and involve risks
and uncertainties that could cause our results to be materially different than
those anticipated. The following important factors could affect our actual
results and could cause such results to vary materially from those expressed
herein or in any other document filed with the Securities and Exchange
Commission:
. changes in laws and regulations, including changes in accounting
standards;
. changes in overall economic conditions, including the interest rate
environment in which we operate, the capital markets in which we fund our
operations, recession, employment and currency fluctuations;
. consumer perception of the availability of credit, including price
competition in the market segments we target and the ramifications or
ease of filing for personal bankruptcy;
. the effectiveness of models or programs to predict loan delinquency or
loss and initiatives to improve collections in all business areas;
. continued consumer acceptance of our distribution systems and demand for
our loan products;
. changes associated with, as well as the difficulty in integrating
systems, operational functions and cultures of any organization acquired
by Household;
. the continued repositioning of our MasterCard/Visa business to further
penetrate selected consumer segments; and
. the ability to attract and retain qualified branch personnel to expand
the sales operations of our consumer finance business.
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Item 2. Properties.
Our operations are located throughout the United States, in 10 provinces in
Canada and in the United Kingdom with principal facilities located in Anaheim,
California; New Castle, Delaware; Jacksonville, Florida; Tampa, Florida;
Chesapeake, Virginia; Virginia Beach, Virginia; Elmhurst, Illinois; Hanover,
Maryland; Bridgewater, New Jersey; Las Vegas, Nevada; Charlotte, North
Carolina; Portland, Oregon; Pomona, California; Prospect Heights, Illinois;
Salinas, California; San Diego, California; Wood Dale, Illinois; London,
Kentucky; North York, Ontario, Canada; Birmingham, United Kingdom and Windsor,
Berkshire, United Kingdom.
Substantially all branch offices, divisional offices, corporate offices,
regional processing and regional servicing center space is operated under
lease with the exception of the headquarters building for our United Kingdom
operations, our processing facility in Tampa, Florida, a credit card
processing facility in Las Vegas, Nevada and a facility in London, Kentucky.
We believe that such properties are in good condition and meet our current and
reasonably anticipated needs.
Item 3. Legal Proceedings.
We have developed and implemented compliance functions to monitor our
operations to ensure that we comply with all applicable laws. However, we are
parties to various legal proceedings, including product liability related
claims, resulting from ordinary business activities relating to our current
and/or former operations. Certain of these actions are or purport to be class
actions seeking damages in very large amounts. Due to the uncertainties in
litigation and other factors, we cannot assure you that we will ultimately
prevail in each instance. We believe that we have meritorious defenses to
these actions and any adverse decision should not materially affect our
consolidated financial condition.
During the past several years, the press has widely reported certain
industry related concerns which may impact us. Some of these involve the
amount of litigation instituted against finance and insurance companies
operating in the states of Alabama and Mississippi and the large punitive
awards obtained from juries in those states. Like other companies in this
industry, some of our subsidiaries are involved in a number of lawsuits
pending against them in Alabama and Mississippi, many of which relate to the
financing of satellite television broadcast receivers. We discontinued
financing such receivers in 1995. The Alabama and Mississippi cases generally
allege inadequate disclosure or misrepresentation of financing terms. In many
suits, other parties are also named as defendants. Unspecified compensatory
and punitive damages are sought. Several of these suits purport to be class
actions. The judicial climate in Alabama and Mississippi is such that the
outcome of all of these cases is unpredictable. Although our subsidiaries
believe they have substantive legal defenses to these claims and are prepared
to defend each case vigorously, a number of such cases have been settled or
otherwise resolved for amounts that in the aggregate are not material to our
operations. Appropriate insurance carriers have been notified of each claim,
and a number of reservations of rights letters have been received. Certain of
these claims have been partially covered by insurance.
Prior to our merger with Beneficial, Beneficial was involved in litigation
with the Internal Revenue Service ("IRS") over matters relating to a former
insurance subsidiary that occurred in the mid- to late 1980's. In 1999, a
settlement with the IRS was reached and filed with the U.S. Tax Court. This
settlement did not result in any loss to us in excess of the amounts accrued
for this matter by Beneficial.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
As of March 16, 2000 there were 19,878 record shareholders of Household's
common stock.
Additional information required by this Item is incorporated by reference
to pages 51 and 85 of our 1999 Annual Report.
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Item 6. Selected Financial Data.
Information required by this Item is incorporated by reference to pages 26
and 27 of our 1999 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Information required by this Item is incorporated by reference to pages 28
through 50 of our 1999 Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information required by this Item is incorporated by reference to pages 39
through 41 and 43 of our 1999 Annual Report.
Item 8. Financial Statements and Supplementary Data.
Our Financial Statements meet the requirements of Regulation S-X. Such
Financial Statements and supplementary financial information specified by Item
302 of Regulation S-K, are incorporated by reference to pages 51 through 83 of
our 1999 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
Executive Officers of the Registrant.
The following information on our executive officers is included pursuant to
Item 401(b) of Regulation S-K.
William F. Aldinger, age 52, joined Household in September 1994 as
President and Chief Executive Officer. In May 1996 he was appointed our
Chairman and Chief Executive Officer. Mr. Aldinger served as Vice Chairman of
Wells Fargo Bank and a Director of several Wells Fargo subsidiaries from 1986
until joining us. Mr. Aldinger is also a director of Household Finance
Corporation (one of our subsidiaries), Illinois Tool Works Inc. and MasterCard
International, Incorporated.
Lawrence N. Bangs, age 63, was appointed Vice Chairman effective January
2000, having previously served as Group Executive--Private Label, United
Kingdom, Canada, Insurance, Auto Finance and U.S. Consumer Banking since 1995.
Since joining Household Finance Corporation in 1959, Mr. Bangs has served in
various capacities in our U.S. consumer finance and United Kingdom operations,
most recently as Managing Director and Chief Executive Officer of our United
Kingdom operations.
Rocco J. Fabiano, age 43, was appointed Group Executive--Auto Finance,
Income Tax Refund Anticipation Lending and Private Label in January 2000,
having joined us in 1997 as a result of our acquisition of ACC Consumer
Finance Corporation where he served as Chairman and Chief Executive Officer
since 1993.
Gary D. Gilmer, age 50, was appointed Group Executive--U.S. Consumer
Finance in 1998. Since joining Household Finance Corporation in 1972, Mr.
Gilmer has served in various capacities in our consumer banking, private label
and life insurance businesses, most recently as Managing Director and Chief
Executive Officer of our United Kingdom operations.
Siddharth N. Mehta, age 41, joined Household in June 1998 as Group
Executive--U.S. BankCard. Prior to joining Household, Mr. Mehta was Senior
Vice President of Boston Consulting Group in Los Angeles and co-leader of
Boston Consulting Group Financial Services Practice in the United States.
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David A. Schoenholz, age 48, was appointed Group Executive--Chief Financial
Officer, effective January 2000, having previously served as Executive Vice
President--Chief Financial Officer since 1996, Senior Vice President--Chief
Financial Officer since 1994, Vice President--Chief Accounting Officer since
1993, Vice President since 1989 and Controller since 1987. He joined Household
in 1985 as Director--Internal Audit.
Colin P. Kelly, age 57, was appointed Senior Vice President--Administration
effective January 2000, having previously served as Senior Vice President--
Human Resources since 1996, and Vice President--Human Resources since 1988.
Mr. Kelly joined Household Finance Corporation in 1965 and has served in
various management positions.
Kenneth H. Robin, age 53, was appointed Corporate Secretary in 1998 and
Senior Vice President--General Counsel in 1996, having previously served as
Vice President--General Counsel since 1993. He joined Household in 1989 as
Assistant General Counsel--Financial Services. Prior to joining Household, Mr.
Robin held various positions in the legal departments of Citicorp and
Citibank, N.A. from 1977 to 1989.
Edgar D. Ancona, age 47, was appointed Managing Director--Treasurer in
1996, having previously served as Vice President--Treasurer since joining
Household in 1994. For the previous 17 years he held a variety of treasury and
operational positions with Citicorp.
John W. Blenke, age 44, was appointed Vice President--Corporate Law and
Assistant Secretary in 1996, having previously served as Assistant General
Counsel and Secretary since 1993, and Assistant General Counsel--Securities
and Corporate Law and Assistant Secretary since 1991. Mr. Blenke joined
Household in 1989 as Corporate Finance Counsel.
D. Gordon Cliff, age 40, joined Household in 1999 as Managing Director--
Strategy and Development. In February 2000 he took on responsibility for a new
business unit called Household Direct. Prior to joining Household, Mr. Cliff
was a Financial Services Strategy Partner at Andersen Consulting and a
Principal with McKinsey & Company.
Michael A. DeLuca, age 51, was appointed Managing Director--Taxes in 1996,
having previously served as Vice President--Taxes from 1988 to 1996. Mr.
DeLuca joined Household in 1985 as Director of Tax Planning and Tax Counsel.
Kenneth M. Harvey, age 39, was appointed Managing Director--Chief
Information Officer in 1999, having previously served in various systems and
technology areas since joining Household in 1989.
Paul A. Makowski, age 48, joined Household in June 1999 as Managing
Director--Chief Credit Officer. He previously served as a Principal of Credit
Risk Management Associates from 1992 until joining Household.
Steven L. McDonald, age 39, was appointed Managing Director and Corporate
Controller in 1999, having previously served as Vice President--Controller
since 1996. From 1991 until joining Household in 1996, he was Senior Vice
President--Accounting and Finance of First USA, Inc.
Craig A. Streem, age 50, joined Household in 1996 as Vice President--
Investor Relations. Prior to joining Household, he was Corporate Vice
President and Director of Investor Relations of PaineWebber Group, Inc., from
1995 to 1996, Vice President of Investor Relations and Corporate Secretary of
National Media Corporation from 1992 to 1994, and held various positions in
the investor relations, corporate treasury and corporate accounting and
reporting areas of American Express Company from 1979 to 1992.
There are no family relationships among our executive officers. The term of
office of each executive officer is at the discretion of the Board of
Directors.
Additional information required by this Item is incorporated by reference
to "Nominees For Director" and "Shares of Household Stock Beneficially Owned
by Directors and Executive Officers" in our definitive Proxy Statement for our
2000 Annual Meeting of Stockholders scheduled to be held May 9, 2000 (the
"2000 Proxy Statement").
10
<PAGE>
Item 11. Executive Compensation.
Information required by this Item is incorporated by reference to
"Executive Compensation", "Report of the Compensation Committee on Executive
Compensation", "Performance of Household", "Employment Agreements", "Savings--
Stock Ownership and Pension Plans", "Incentive and Stock Option Plans", and
"Director Compensation" in our 2000 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this Item is incorporated by reference to "Shares
of Household Stock Beneficially Owned by Directors and Executive Officers" and
"Security Ownership of Certain Beneficial Owners" in our 2000 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Information required by this Item is incorporated by reference to
"Incentive and Stock Option Plans" and "Consulting Agreements with Messrs.
Farris and Gilliam" in our 2000 Proxy Statement.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements.
The consolidated financial statements listed below, together with an
opinion of Arthur Andersen LLP dated January 14, 2000 with respect thereto,
are incorporated by reference herein pursuant to Item 8. Financial Statements
and Supplementary Data of this Form 10-K. An opinion of Arthur Andersen LLP is
also included in this Annual Report on Form 10-K.
Household International, Inc. and Subsidiaries:
Consolidated Statements of Income for the Three Years Ended December 31,
1999.
Consolidated Balance Sheets, December 31, 1999 and 1998.
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1999.
Consolidated Statements of Changes in Preferred Stock and Common
Shareholders' Equity for the Three Years Ended December 31, 1999.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
Selected Quarterly Financial Data (Unaudited).
11
<PAGE>
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed on December 2, 1999 by Household
during the three months ended December 31, 1999.
(c) Exhibits.
<TABLE>
<S> <C>
3(i) Restated Certificate of Incorporation of Household
International, Inc. as amended (incorporated by reference to
Exhibit 3(i) of our Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
3(ii) Bylaws of Household International, Inc. as amended June 4, 1998
(incorporated by reference to Exhibit 3(ii) of our Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
4(a) Rights Agreement dated as of July 9, 1996, between Household
International, Inc. and Harris Trust and Savings Bank, as Rights
Agent (incorporated by reference to Exhibit 99.1 of our Current
Report on Form 8-K dated July 9, 1996).
4(b) Standard Multiple-Series Indenture Provisions for Senior Debt
Securities of Household Finance Corporation dated as of June 1,
1992 (incorporated by reference to Exhibit 4(b) to the
Registration Statement on Form S-3 of Household Finance
Corporation, No. 33-48854).
4(c) Indenture dated as of December 1, 1993 for Senior Debt
Securities between Household Finance Corporation and The Chase
Manhattan Bank (National Association), as Trustee (incorporated
by reference to Exhibit 4(b) to the Registration Statement on
Form S-3 of Household Finance Corporation, No. 33-55561 filed on
September 20, 1994).
4(d) The principal amount of debt outstanding under each other
instrument defining the rights of holders of our long-term
senior and senior subordinated debt does not exceed 10 percent
of our total assets. Household agrees to furnish to the
Securities and Exchange Commission, upon request, a copy of each
instrument defining the rights of holders of our long-term
senior and senior subordinated debt.
10.1 Household International, Inc. 1998 Key Executive Bonus Plan
(incorporated by reference to Exhibit 10.1 of our Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
10.2 Household International, Inc. Corporate Executive Bonus Plan.
10.3 Household International, Inc. Long-Term Executive Incentive
Compensation Plan, as amended (incorporated by reference to
Exhibit 10.3 of our Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.4 Forms of stock option and restricted stock rights agreements
under the Household International, Inc. Long-Term Executive
Incentive Compensation Plan (incorporated by reference to
Exhibit 10.4 of our Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.5 Household International, Inc. 1996 Long-Term Executive Incentive
Compensation Plan, as amended.
10.6 Forms of stock option and restricted stock rights agreements
under the Household International, Inc. 1996 Long-Term Executive
Incentive Compensation Plan (incorporated by reference to
Exhibit 10.6 of our Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.7 Household International, Inc. Deferred Fee Plan for Directors.
10.8 Household International, Inc. Deferred Phantom Stock Plan for
Directors.
10.9 Household International, Inc. Non-Qualified Deferred
Compensation Plan for Executives, as amended (incorporated by
reference to Exhibit 10.9 of our Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
10.10 Executive Employment Agreement between Household International,
Inc. and W.F. Aldinger (incorporated by reference to Exhibit
10.10 of our Annual Report on Form 10-K for the fiscal year
ended December 31, 1998).
10.11 Executive Employment Agreement between Household International,
Inc. and L.N. Bangs (incorporated by reference to Exhibit 10.11
of our Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.12 Executive Employment Agreement between Household International,
Inc. and G.D. Gilmer (incorporated by reference to Exhibit 10.12
of our Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.13 Executive Employment Agreement between Household International,
Inc. and D.A. Schoenholz (incorporated by reference to Exhibit
10.13 of our Annual Report on Form 10-K for the fiscal year
ended December 31, 1998).
10.14 Executive Employment Agreement between Household International,
Inc. and S.N. Mehta (incorporated by reference to Exhibit 10.14
of our Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.15 Amended and Restated Supplemental Executive Retirement Plan for
W.F. Aldinger (incorporated by reference to Exhibit 10.15 of our
Annual Report on Form 10-K for the fiscal year ended December
31, 1998).
10.16 Beneficial Corporation 1990 Non-qualified Stock Option Plan
(incorporated by reference to Exhibit 4.4 of Beneficial
Corporation's Form S-8 filed on April 23, 1996, File No. 333-
02737).
10.17 Amendment to Beneficial Corporation 1990 Non-qualified Stock
Option Plan (incorporated by reference to Exhibit 4.2 of
Beneficial Corporation's Form S-8 filed July 1, 1998, File No.
333-58291).
11 Statement of Computation of Earnings per Share.
12 Statement of Computation of Ratio of Earnings to Fixed Charges
and to Combined Fixed Charges and Preferred Stock Dividends.
13 Material incorporated by reference to Household International,
Inc.'s 1999 Annual Report to Shareholders.
21 List of our subsidiaries.
23 Consent of Arthur Andersen LLP, Certified Public Accountants.
24 Power of Attorney, included on page 14 hereof.
27 Financial Data Schedule.
99(a) Annual Report on Form 11-K for the Household International, Inc.
Tax Reduction Investment Plan (to be filed by amendment).
99(b) Ratings of Household International, Inc. and its significant
subsidiaries.
</TABLE>
We will furnish copies of the exhibits referred to above to our stockholders
upon receiving a written request therefor. We charge fifteen cents per page for
providing these copies. Requests should be made to Household International,
Inc., 2700 Sanders Road, Prospect Heights, Illinois 60070, Attention: Corporate
Secretary.
(d) Schedules.
Report of Independent Public Accountants.
I--Condensed Financial Information of Registrant.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Household International, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Household International, Inc.
Dated: March 28, 2000
/s/ W.F. Aldinger
By: _________________________________
W.F. Aldinger, Chairman
and Chief Executive Officer
Each person whose signature appears below constitutes and appoints J.W.
Blenke, L.S. Mattenson and J.S. VanderLinde and each or any of them (with full
power to act alone), as his/her true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him/her in his/her
name, place and stead, in any and all capacities, to sign this Form 10-K and
any and all amendments to this Form 10-K and to file the same, with all
exhibits thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each such attorneys-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he/she might or could do in person, hereby ratifying and confirming all
that such attorneys-in-fact and agents or their substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Household
International, Inc. and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ W.F. Aldinger Chairman and Chief Executive
____________________________________ Officer and Director (as
(W.F. Aldinger) principal executive
officer)
/s/ R.J. Darnall Director
____________________________________
(R.J. Darnall)
/s/ G.G. Dillon Director March 28, 2000
____________________________________
(G.G. Dillon)
/s/ J.A. Edwardson Director
____________________________________
(J.A. Edwardson)
/s/ M.J. Evans Director
____________________________________
(M.J. Evans)
/s/ J.D. Fishburn Director
____________________________________
(J.D. Fishburn)
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C>
/s/ C.F. Freidheim, Jr. Director
____________________________________
(C.F. Freidheim, Jr.)
/s/ J.H. Gilliam, Jr. Director
____________________________________
(J.H. Gilliam, Jr.)
/s/ L.E. Levy Director
____________________________________
(L.E. Levy)
/s/ G.A. Lorch Director
____________________________________
(G.A. Lorch)
/s/ J.D. Nichols Director March 28, 2000
____________________________________
(J.D. Nichols)
/s/ J.B. Pitblado Director
____________________________________
(J.B. Pitblado)
/s/ S.J. Stewart Director
____________________________________
(S.J. Stewart)
/s/ L.W. Sullivan, M.D. Director
____________________________________
(L.W. Sullivan, M.D.)
/s/ D.A. Schoenholz Group Executive--Chief
____________________________________ Financial Officer (also the
(D.A. Schoenholz) principal financial and
accounting officer)
</TABLE>
15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Household International, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements included in Household International, Inc.'s 1999
annual report to shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated January 14, 2000. Our audits were made
for the purpose of forming an opinion on those statements taken as a whole.
The schedule listed in Item 14(d) is the responsibility of the company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Chicago, Illinois
January 14, 2000
F-1
<PAGE>
SCHEDULE I
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
(In millions)
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1999 1998 1997
-------- ------ ------
<S> <C> <C> <C>
Equity in earnings of subsidiaries...................... $1,521.4 $546.3 $970.9
Other income............................................ 32.5 24.6 26.3
-------- ------ ------
Total income........................................ 1,553.9 570.9 997.2
-------- ------ ------
Expenses:
Administrative........................................ 62.8 49.2 59.0
Interest.............................................. 50.6 45.2 37.9
-------- ------ ------
Total expenses...................................... 113.4 94.4 96.9
-------- ------ ------
Income before income tax benefit........................ 1,440.5 476.5 900.3
Income tax benefit...................................... 45.9 47.6 40.0
-------- ------ ------
Net income.......................................... $1,486.4 $524.1 $940.3
======== ====== ======
Total comprehensive income.......................... $1,374.6 $546.7 $955.0
======== ====== ======
</TABLE>
See accompanying note to condensed financial statements.
F-2
<PAGE>
SCHEDULE I (continued)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
December 31
-----------------
1999 1998
-------- --------
<S> <C> <C>
Assets
Cash....................................................... $ 2.2 $ 2.1
Investments in and advances to (from) subsidiaries......... 7,400.7 7,142.2
Other assets............................................... 533.7 473.7
-------- --------
Total assets............................................... $7,936.6 $7,618.0
======== ========
Liabilities and Shareholders' Equity
Commercial paper........................................... $ 397.7 $ 315.6
Senior debt (with original maturities over one year)....... 185.6 189.7
-------- --------
Total debt................................................. 583.3 505.3
Other liabilities.......................................... 363.0 351.9
-------- --------
Total liabilities.......................................... 946.3 857.2
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts*.......................... 375.0 375.0
Preferred stock............................................ 164.4 164.4
Common shareholders' equity................................ 6,450.9 6,221.4
-------- --------
Total liabilities and shareholders' equity................. $7,936.6 $7,618.0
======== ========
</TABLE>
- --------
* The sole assets of the three trusts are Junior Subordinated Deferrable
Interest Notes issued by Household International, Inc. in March 1998, June
1996 and June 1995, bearing interest at 7.25, 8.70 and 8.25 percent,
respectively, with principal balances of $206.2, $103.1 and $77.3 million,
respectively, and due December 31, 2037, June 30, 2036 and June 30, 2025,
respectively.
See accompanying note to condensed financial statements.
F-3
<PAGE>
SCHEDULE I (continued)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Year ended December 31
------------------------------
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Cash provided by (used in) operations
Net income................................... $ 1,486.4 $ 524.1 $ 940.3
Adjustments to reconcile net income to net
cash provided by (used in) operations:
Equity in earnings of subsidiaries......... (1,521.4) (546.3) (970.9)
Other operating activities................. (11.6) 193.8 53.5
--------- -------- ---------
Cash provided by (used in) operations.......... (46.6) 171.6 22.9
--------- -------- ---------
Investment in Operations
Dividends from subsidiaries.................. 1,160.5 1,067.3 313.1
Dividends from pooled affiliate.............. -- 75.4 200.7
Investment in and advances to (from)
subsidiaries, net........................... 8.7 (709.3) (1,047.7)
Other investing activities................... 2.5 1.9 2.1
--------- -------- ---------
Cash increase from investment in operations.... 1,171.7 435.3 (531.8)
--------- -------- ---------
Financing and Capital Transactions
Net increase in commercial paper and bank
borrowings.................................. 82.1 34.1 78.2
Retirement of senior debt.................... (89.7) -- (100.0)
Issuance of senior debt...................... 85.6 -- 100.0
Shareholders' dividends...................... (332.1) (256.5) (186.5)
Shareholders' dividends--pooled affiliate.... -- (61.8) (115.5)
Issuance of company obligated mandatorily
redeemable preferred securities of
subsidiary trusts........................... -- 200.0 --
Purchase of treasury stock................... (915.9) (412.0) (155.7)
Treasury stock activity--pooled affiliate.... -- (11.4) (80.0)
Issuance of common stock..................... 45.0 .8 1,023.8
Redemption of preferred stock................ -- (100.1) (55.0)
--------- -------- ---------
Cash increase (decrease) from financing and
capital transactions.......................... (1,125.0) (606.9) 509.3
--------- -------- ---------
Increase in cash............................... .1 -- .4
Cash at January 1.............................. 2.1 2.1 1.7
--------- -------- ---------
Cash at December 31............................ $ 2.2 $ 2.1 $ 2.1
========= ======== =========
</TABLE>
See accompanying note to condensed financial statements.
F-4
<PAGE>
SCHEDULE I (continued)
HOUSEHOLD INTERNATIONAL, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
The condensed financial statements of Household International, Inc. have
been prepared on a parent company unconsolidated basis.
Under an agreement with the Office of Thrift Supervision, Household will
maintain the capital of the Bank, at a level consistent with certain minimum
capital requirements.
Household received cash dividends from the Bank of $275, $75 and $50
million in 1999, 1998, and 1997, respectively.
Household has guaranteed payment of certain long-term debt obligations of
Household Financial Corporation Limited ("HFCL"), a Canadian subsidiary. The
amount of guaranteed debt outstanding at HFCL on December 31, 1999 and 1998
was $.4 and $.6 billion, respectively.
Household has also guaranteed payment of certain debt obligations
(excluding certain deposits) of Household International (U.K.) Limited
("HIUK"). The amount of guaranteed debt outstanding at HIUK on December 31,
1999 and 1998 was approximately $2.7 and $3.1 billion, respectively.
F-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No Document Description
------- --------------------
<S> <C>
3(i) Restated Certificate of Incorporation of Household
International, Inc. as amended (incorporated by eference to
Exhibit 3(i) of our Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
3(ii) Bylaws of Household International, Inc. as amended June 4,
1998 (incorporated by reference to Exhibit 3(ii) of our
Quarterly Report on Form 10-Q for the quarter year ended June
30, 1998).
4(a) Rights Agreement dated as of July 9, 1996, between Household
International, Inc. and Harris Trust and Savings Bank, as
Rights Agent (incorporated by reference to Exhibit 99.1 of our
Current Report on Form 8-K dated July 9, 1996).
4(b) Standard Multiple-Series Indenture Provisions for Senior Debt
Securities of Household Finance Corporation dated as of June
1, 1992 (incorporated by reference to Exhibit 4(b) to the
Registration Statement on Form S-3 of Household Finance
Corporation, No. 33-48854).
4(c) Indenture dated as of December 1, 1993 for Senior Debt
Securities between Household Finance Corporation and The Chase
Manhattan Bank (National Association), as Trustee
(incorporated by reference to Exhibit 4(b) to the Registration
Statement on Form S-3 of Household Finance Corporation, No.
33-55561 filed on September 20, 1994).
4(d) The principal amount of debt outstanding under each other
instrument defining the rights of holders of our long-term
senior and senior subordinated debt does not exceed 10 percent
of our total assets. Household agrees to furnish to the
Securities and Exchange Commission, upon request, a copy of
each instrument defining the rights of holders of our long-
term senior and senior subordinated debt.
10.1 Household International, Inc. 1998 Key Executive Bonus Plan
(incorporated by reference to Exhibit 10.1 of our Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
10.2 Household International, Inc. Corporate Executive Bonus Plan.
10.3 Household International, Inc. Long-Term Executive Incentive
Compensation Plan, as amended (incorporated by reference to
Exhibit 10.3 of our Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.4 Forms of stock option and restricted stock rights agreements
under the Household International, Inc. Long-Term Executive
Incentive Compensation Plan (incorporated by reference to
Exhibit 10.4 of our Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.5 Household International, Inc. 1996 Long-Term Executive
Incentive Compensation Plan, as amended.
10.6 Forms of stock option and restricted stock rights agreements
under the Household International, Inc. 1996 Long-Term
Executive Incentive Compensation Plan (incorporated by
reference to Exhibit 10.6 of our Annual Report on Form 10-K
for the fiscal year ended December 31, 1998).
10.7 Household International, Inc. Deferred Fee Plan for Directors.
10.8 Household International, Inc. Deferred Phantom Stock Plan for
Directors.
10.9 Household International, Inc. Non-Qualified Deferred
Compensation Plan for Executives, as amended (incorporated by
reference to Exhibit 10.9 of our Annual Report on Form 10-K
for the fiscal year ended December 31, 1998).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document Description
------- --------------------
<S> <C>
10.10 Executive Employment Agreement between Household
International, Inc. and W. F. Aldinger (incorporated by
reference to Exhibit 10.10 of our Annual Report on Form 10-K
for the fiscal year ended December 31, 1998).
10.11 Executive Employment Agreement between Household
International, Inc. and L. N. Bangs (incorporated by reference
to Exhibit 10.11 of our Annual Report on Form 10-K for the
fiscal year ended December 31, 1998).
10.12 Executive Employment Agreement between Household
International, Inc. and G. D. Gilmer (incorporated by
reference to Exhibit 10.12 of our Annual Report on Form 10-K
for the fiscal year ended December 31, 1998).
10.13 Executive Employment Agreement between Household
International, Inc. and D. A. Schoenholz (incorporated by
reference to Exhibit 10.13 of our Annual Report on Form 10-K
for the fiscal year ended December 31, 1998).
10.14 Executive Employment Agreement between Household
International, Inc. and S. N. Mehta (incorporated by reference
to Exhibit 10.14 of our Annual Report on Form 10-K for the
fiscal year ended December 31, 1998).
10.15 Amended and Restated Supplemental Executive Retirement Plan
for W. F. Aldinger (incorporated by reference to Exhibit 10.15
of our Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.16 Beneficial Corporation 1990 Non-qualified Stock Option Plan
(incorporated by reference to Exhibit 4.4 of Beneficial
Corporation's Form S-8 filed on April 23, 1996, File No. 333-
02737).
10.17 Amendment to Beneficial Corporation 1990 Non-qualified Stock
Option Plan (incorporated by reference to Exhibit 4.2 of
Beneficial Corporation's Form S-8 filed July 1, 1998, File No.
333-58291).
11 Statement of Computation of Earnings per Share.
12 Statement of Computation of Ratio of Earnings to Fixed Charges
and to Combined Fixed Charges and Preferred Stock Dividends.
13 Material incorporated by reference to Household International,
Inc.'s 1999 Annual Report to Shareholders.
21 List of our subsidiaries.
23 Consent of Arthur Andersen LLP, Certified Public Accountants.
24 Power of Attorney, included on page 14 hereof.
27 Financial Data Schedule.
99(a) Annual Report on Form 11-K for the Household International,
Inc. Tax Reduction Investment Plan (to be filed by amendment).
99(b) Ratings of Household International, Inc. and its significant
subsidiaries.
</TABLE>
<PAGE>
EXHIBIT 10.2
Household International
Corporate Executive Bonus Plan
1999
Summary
The Household International Executive Bonus Plan is a short-term, annual
incentive plan. The purpose of the annual bonus is to place a significant part
of pay at risk and reward executives for the achievements of individual,
business unit and corporate financial and operational goals. Performance goals
and award opportunities will be communicated to plan participants at the
beginning of each calendar year.
Participation
Participation in the Plan will be restricted to key line and staff executives.
For purposes of the Plan, participants will be divided into groups. (See
attached list).
Any changes in the group of executives participating in the Plan will be made by
the Chief Executive Officer, subject to the approval of the Compensation
Committee in the case of any participant whose base salary must be determined by
the Committee.
Level of Awards
The corporate measurement of performance is company-wide earnings per share,
return on equity, efficiency ratio, loan loss reserve to non-performing loans,
core receivables growth, and equity to managed assets ratio. Household's
performance will be measured against pre-established minimum, target and maximum
levels.
Individual performance is also measured and the percentage attributed to any
particular performance objective varies by executive and may change from year-
to-year as circumstances warrant. Management may reduce bonus awards in light
of overall business conditions or other exceptional circumstances.
<PAGE>
Target/Maximum Awards
Target awards will be paid for fully satisfactory financial and individual
performance in a given year. The target award percentage for each group will
approximate the guideline percentage shown below of the executive's base salary
at the end of the plan year.
Guideline % of Annual Base Salary Determined by
<TABLE>
<CAPTION>
Group Target Bonus Maximum Bonus
------------------------------------------------
<S> <C> <C>
A 100% 200%
B 100% 150%
C 100% 125%
D 75% 125%
E 50% 100%
F 40% 80%
G 40k 80k
H 40% 60%
I 30% 60%
J 30% 50%
K 25% 50%
L 20% 50%
M 20% 40%
N 20% 30%
</TABLE>
Detailed information relating to the assignment and weighing of goals is
available by individual and is maintained by the business unit and/or
corporate.
Determination of Awards
- -----------------------
A. Financial Performance Awards
A portion of each executive's annual bonus will be determined by meeting
specific financial performance objectives. An award will be paid out if
achieved results are at the pre-established minimum, target or maximum
financial results levels.
B. Individual Performance Awards
Early in each plan year, goals for individual performance for that year
will be established for each participant. The goals should require the
level of performance which is expected of a fully satisfactory incumbent
and must be agreed to by the immediate superior. The Compensation
Committee of the Board of Directors must approve the goals for those
executives whose salaries are determined by the Committee. These goals
will be the primary criteria for measuring individual performance and
determining the individual performance portion of the bonus for that year.
2
<PAGE>
The Chief Executive Officer will recommend the awards for participants,
excluding himself, whose salaries are determined by the Compensation
Committee of the Board of Directors. The Compensation Committee will then
determine the awards for all such participants, as well as the award for
the Chief Executive Officer.
The Chief Executive Officer, will determine the awards for all participants
whose salaries are not determined by the Compensation Committee. The CEO's
direct reports, in consultation with their appropriate subordinates, will
recommend to the Chief Executive Officer the awards for all other
participants.
Payment of Awards
Awards will be paid as soon as practical at the end of the plan period, subject
to all required tax withholdings. Awards may be paid in cash, shares of
Household common stock, or some combination thereof. Neither eligible
participation in the plan, nor award payments thereunder shall guarantee an
employee, any right to continued employment. The plan does not give any
employee right or claim to an award under the program. Management reserves the
right to change or discontinue the plan at any time.
Administrative Matters
A. Promotions/New Plan Participants
Normally awards will be pro-rated according to the portion of the plan year
that an incumbent is eligible for the bonus.
B. Effect on Benefits
Payments made under this plan shall be included in an employee's income for
purposes of determining pension benefits, life insurance, long-term
disability, and participation in the TRIP plan.
C. Termination of Employment
Normally awards will be pro-rated in the case of death, permanent and total
disability, or retirement under one of the Corporation's pension plans
during a plan year. If a participant terminates employment for any other
reason prior to the last working day of a plan year, he will normally
forfeit any right to an award for the plan year.
3
<PAGE>
The Goal Setting Process
Before the beginning of the plan year, the manager and subordinate will meet in
a goal setting session. The purpose of the session is to discuss areas where
goals will be established and agree on their priority and establish the number
of points that will be earned based upon various levels of achievement during
the plan period.
Preparation for the Goal Setting Meeting
To prepare for the goal setting session with the bonus eligible subordinate, the
manager should have a clear idea of function or department goals and objectives
for the plan year, priorities for the subordinate's unit or area, and three or
four possible objectives to suggest as appropriate. During the session, the
manager's role will be to direct the discussion and ensure that its results are
jointly understood.
The subordinate will prepare for the session by establishing a list of
priorities for the unit or area during the plan year, and developing four to
eight potential goals for discussion. The subordinate's role during the session
will be to actively discuss goals and expected levels of achievement with the
manager in order to ensure that the final agreement is realistic and achievable
and that there is a clear understanding of expected performance and the amount
of bonus associated with various levels of achievement.
Guidelines for Setting Goals
For the purpose of establishing goals for the plan year, the following criteria
should apply:
. They should be consistent and supportive of goals reflected in the
Company's strategic business plans.
. They should be primarily job or task oriented. They must be realistic and
achievable yet challenging with built in "stretch" to test individual
capabilities. They should clearly specify action, tasks or results to be
accomplished as well as a clear understanding of how the accomplishment
will be evaluated.
. They must be understood and agreed to by both the manager and the
subordinate.
Setting goals for staff positions is somewhat more difficult than for line-type
positions because staff performance is usually not measured numerically and
rarely lends itself to quantitative measurement. Staff responsibilities tend to
be contributory, interpretive and are more easily measured qualitatively.
Frequently, the goals may include completion of specific projects. Non-
quantitative goals should clearly state the criteria that will be used for
evaluating successful achievement.
The results of the goal setting process will be documented in the format of the
Executive Bonus Plan Goal Setting Form and approved by the appropriate level of
management.
4
<PAGE>
GROUP/TITLE
- --------------------------------------------------------
Group A - 100%/200%
- -------------------
Director Personal Banking-Canada
Managing Director-Sales & Consumer Finance
Managing Director-Specialty Finance HFC
Regional General Manager
Group B - 100%/150%
- -------------------
Managing Director CEO HAF
Group C - 100%/125%
- -------------------
Chief Operating Officer-HAF
Group D - 75%/125%
- ------------------
Managing Director-Canada
Group E - 50%/100%
- ------------------
Director-Sales & Credit Administration
Division General Manager
Managing Director-Equipment Finance Division
Managing Director-Household Processing
National Director-Sales Finance
National Director-Tax Masters
National Director of Branch & Retail Operations-Canada
National Director-Sales & Marketing
VP Household Recovery Services
VP-Secondary Marketing & Acquisitions
Group F - 40%/80%
- -----------------
Director HFC Wholesale-Sales
VP-Corporate Finance
Group G - 40K/80K
- -----------------
Director-Decision One
Director-HRSC Collections
VP-External Collections-HRSC
Group H - 40%/60%
- -----------------
Assistant General Counsel-Litigation
Chief Credit Officer
Chief Financial Officer-HFC
Deputy Managing Director-COO (HRS)
Group Director-Collections
Group Director-Customer Service
Group General Counsel
Managing Director - HIG
Managing Director-HTMI
Managing Director-Marketing
Managing Director of Marketing (HCS)
Managing Director-Credit Policy & Risk Control
Managing Director-Controller HI
Managing Director-Operations
Managing Director-Networked Systems
Managing Director-Strategic Initiatives
National Director-Credit Policy, Pricing, Profitability
National Director-Financial Control
National Director-Portfolio Management
5
<PAGE>
Group H - 40%/60% (continued)
- -----------------------------
VP-Applications Systems
VP-Corporate Law & Assistant Secretary
VP-Government Relations
VP-Taxes
VP-Treasurer
Group I - 30%/60%
- -----------------
National Director-Sales MRSL
Regional Director - Sales
VP-Credit Policy
Group J - 30%/50%
- -----------------
Assistant Controller
Director-Sales Support/MIS
Director of Operations UK
Director-Direct Lending
Director-Fraud/Operations
Director-Processing Services-Canada
Director-Retail & Affinity - UK
General Counsel
Group Director-HCS Marketing
Group Director-Information Management
National Director-Customer Service
Special Project Consultant
VP-Audit
VP-Investor Relations
VP-Strategy & Development
Group K - 25%/50%
- -----------------
Director Client Services
Director of Sales - HIG
Director-Credit Policy (#1)
Director-Risk Control
Group L - 20%/50%
- -----------------
Director-Credit Policy Administration
Director-Credit Analysis
Group M - 20%/40%
- -----------------
Assistant General Counsel-Employee Relations
Chief Financial Officer/Direct
Chief Financial Officer-HAF
Director, DB Marketing
Director-Credit Policy (#2)
Director-Customer Management Strategy
Director-Operations
General Counsel
VP-Data Center Operations
VP-Distributed Systems
VP-Human Resources Business Unit
VP-Data Architecture & System
VP-Benefits & Policy
VP-Chief Financial Officer-HTS
VP-Compensation & HR Administration
VP-Facilities Management
VP-Finance-Specialty Finance HFC
VP-Networked Systems
VP-Training & Development & Communications
6
<PAGE>
Group N - 20%/30%
- -----------------
Actuarial Director
Controller-HCS
Controller-HFC
Controller-HRSI
Director-Information & Decision Analysis
Director-Reconciliation & Financial Information Systems
Director-Government Relations & Regulatory Issues
Director-Asset Backed Financing
Director-Business Analysis HCS
Director-Communications & Distributed Services
Director-Compliance & Intercorporate Risk
Director-Cash Operations
Director-ALM
Director-Business Planning
Director-Business Systems
Director-Business Treasury
Director-Commercial Credit
Director-Corporate Security Management
Director-Corporate Purchasing
Director-Credit Risk
Director-Customer Relations
Director-Customer Service
Director-Federal Tax Audit
Director-Financial Control
Director-Government Relations
Director-HCS Marketing
Director-Human Resources
Director-Investor Relations
Director-Item Processing
Director-Law & Compliance
Director-Marketing
Director-Management Reporting & Analysis
Director-Operations Services
Director-Regulatory Reporting
Director-Tax Planning & Tax Counsel
Director-Technology & Planning
Director-Telephone Services
Director-Treasury & Trust
Director-External Reporting & Corporate Accounting
Director-Federal & State Tax Compliance
Director-HFC Policy & Compliance Support
Director-HR Data Management Call Center
Director-Information Technology
Director-Operations Support
Group Director - Marketing
Group Director-Credit Operations
Group Director-Customer Service
Group Director-Profitability
Merchant Funding Manager
Special Project Consultant
Treasury Controller
7
<PAGE>
Group N - 20%/30% (continued)
- -----------------------------
VP-Property Management
VP-Technical Services
VP-Finance & Administration
VP-Government Relations & Public Affairs
VP-HFC Operation Support
VP-Insurance & Risk Finance
VP-Items Processing
VP-Money & Capital Markets
VP-Portfolio Management
VP-Quality Assurance-HTS
VP-Specialty Finance
8
<PAGE>
EXHIBIT 10.5
HOUSEHOLD INTERNATIONAL
1996 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN
(as amended August 31, 1999)
1. Purpose
-------
The purpose of the Household International 1996 Long-Term Executive
Incentive Compensation Plan (the "Plan") is to further the long-term growth of
Household International, Inc. and its subsidiaries ("Household") by
strengthening the ability of Household to attract and retain employees of
outstanding ability, to provide an effective means for employees to acquire and
maintain ownership of Household Common Stock, to motivate such employees to
achieve long-range performance goals and objectives, and to provide incentive
compensation opportunities competitive with those of other major corporations.
Household senior executives, in particular, are charged with enhancing
shareholder value and except under extraordinary circumstances, will only
receive options under this Plan. The options, if granted, to Household senior
executives will comprise a significant portion of their total annual
compensation. In addition, the Plan provides for the issuance of options to
purchase Household Common Stock to non-employee Directors of Household in order
to facilitate ownership of Household Common Stock by Directors and to more fully
align the interests of Household's Directors with that of its Common
stockholders.
2. Administration
--------------
The Plan shall be administered by the Compensation Committee of Household's
Board of Directors (the "Committee"), a committee of the Board appointed from
time to time by the Board consisting solely of two or more non-employee
directors, each of whom shall be an "outside director" as defined in Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations thereunder and a "disinterested person" as defined in Rule 16b-3
under Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act").
The Committee shall have such powers to administer the Plan as are delegated to
it by the Plan and the Board of Directors, including, to the extent permissible
under the terms of the Plan, the power to interpret the Plan and any agreements
executed thereunder, to prescribe rules and regulations relating to the Plan, to
determine the terms, restrictions, and provisions of any agreement relating to
awards granted pursuant to the Plan, and to make all other determinations
necessary or advisable for administering the Plan. Except as required by Rule
16b-3 (or any successor Rule thereto) with respect to grants of awards to
individuals who are subject
-1-
<PAGE>
to Section 16 of the Exchange Act or as otherwise required for compliance with
Rule 16b-3 or other applicable law, the Committee may delegate all or any part
of its authority under the Plan to any officer of Household. All decisions made
by the Committee, or (unless the Committee has specified an appeal process to
the contrary) any other person to whom the Committee has delegated authority
pursuant to the provisions hereof, shall be final and binding on all persons.
3. Grant of Awards; Shares Subject to Plan
---------------------------------------
(a) The Committee may grant any type of award permitted under the terms of
the Plan to employees (all such awards in the aggregate being hereinafter
referred to as "Awards"). Employees of Household and its subsidiaries may be
selected by the Committee for Awards under the Plan. In addition, non-employee
Directors of Household will receive options pursuant to the provisions of
Section 6.
(b) The number of shares of Common Stock of Household that may be issued
under the Plan is equal to the sum of the number of shares remaining available
under the Household International Long-Term Executive Incentive Compensation
Plan (the "1984 Plan") plus 12,000,000, all of which shares may be made subject
to options. The shares issued pursuant to an Award may consist of authorized and
unissued shares of Household's Common Stock, Common Stock held in Household's
treasury or Common Stock purchased on the open market. If any Award granted
under the Plan or the 1984 Plan shall terminate or lapse for any reason, any
shares of Common Stock subject to such Award shall again be available for grant
under the Plan. The maximum number of shares or share equivalents that may be
granted through an Award to any one participant in one year is 1,200,000 shares.
(c) In the event of corporate changes affecting Household's Common Stock,
this Plan or Awards granted to employees and options granted to non-employee
Directors hereunder (including, without limiting the generality of the
foregoing, stock dividends, stock splits, recapitalizations, reorganizations,
mergers, consolidations, or other relevant changes in capitalization),
appropriate adjustments in price, number and kind of shares of Common Stock or
other consideration subject to such Awards or in the terms of such Awards, shall
be made so as to prevent dilution or enlargement of rights under the Awards. In
addition, the aggregate number or remaining number or kind of shares which may
be issued under the Plan will be adjusted to equitably reflect any such
corporate changes.
(d) The Committee may, in its discretion and subject to such rules as it
may adopt, permit an employee to satisfy, in whole or in part, withholding tax
obligations incurred in
-2-
<PAGE>
connection with Awards: (i) by electing to have Household withhold shares of
Household Common Stock (otherwise deliverable to the employee in connection with
an Award) in payment for such withholding tax obligation or (ii) by delivering
shares of Household Common Stock owned by such employee in payment for such
withholding tax obligation, or (iii) obtaining an extension of credit from
Household in payment for such withholding tax obligation. Any shares of Common
Stock surrendered by an employee in full or partial payment of withholding tax
obligations must have been held by such employee at least six months prior to
the date such shares are surrendered in payment.
(e) The Committee may provide that any Award to employees under the Plan
earn dividend equivalents. Such dividend equivalents may be paid currently or
may be credited to a participant's account, including during any deferral
period. Any crediting of dividend equivalents may be subject to such
restrictions and conditions as the Committee may establish, including
reinvestment in additional shares or share equivalents. However, the payment of
dividend equivalents will not be conditioned upon the employee exercising an
option.
(f) Except as may be provided in the agreement for any specific employee
Award or otherwise limited in this Plan, the Committee may, in its sole
discretion, in whole or in part, waive any restrictions or conditions applicable
to, or accelerate the vesting of, any Award to an employee.
(g) To the extent the Committee deems it necessary, appropriate or
desirable to comply with foreign law or practice and to further the purpose of
this Plan, the Committee may, without amending this Plan, (i) establish special
rules applicable to Awards granted to employees who are foreign nationals, are
employed outside the United States, or both, including rules that differ from
those set forth in this Plan and (ii) grant Awards to such employees in
accordance with those rules.
(h) The Committee may, in its discretion and subject to such rules as it
may adopt, authorize an extension of credit from Household to an employee
holding an award granted under this Plan (including an employee who is an
officer or director of Household) to assist the employee in exercising an option
or settling withholding tax obligations on Awards. Household may extend or
guarantee loans under this provision. Loans extended under the Plan will bear
interest at a variable rate that is adjusted annually to equal the greater of
the average annual rate for three-year U.S. Treasury notes for the calendar year
immediately preceding the year in which the adjustment is to be made and the
applicable rate in effect under Section 1274(d) of the Internal Revenue Code on
the day the loan is made. Payment terms will be established by the Committee and
may or may not
-3-
<PAGE>
require periodic payments of interest and/or principal. The term of loans will
be established by the Committee, as well as provisions governing the
acceleration of maturity upon termination of employment or default. Loans
financed or guaranteed by Household will be secured by retention of the issued
stock certificates by Household and execution of an agreement with respect to
such shares. To the extent necessary to satisfy the provisions of Regulation G
or another similar regulatory restriction, other security may be required by the
Committee.
4. Employee Options
----------------
(a) The Committee may grant to employees any type of statutory or non-
statutory option to purchase shares of Household Common Stock as is permitted by
law at the time the option is granted. The term of the initial grant of each
option shall not be more than ten years and one day from the date of grant and
may be exercised at the rate set by the Committee or as stated herein; provided,
however, that no option shall be exercised less than one year from the date of
grant, except as provided herein. The Committee may, in its discretion, extend
the expiration date of certain outstanding employee options, provided no
expiration date of any option may exceed fifteen years from the date of the
grant of that option.
(b) The per share purchase price of Household Common Stock which may be
acquired pursuant to an employee option shall be at least 100% of the fair
market value of one share of Common Stock of Household on the date on which the
option is granted. Within this limitation, such price shall be determined by the
Committee.
(c) Payment for shares purchased upon the exercise of an employee option
shall be made in cash or, in the discretion of the Committee, in shares of
Common Stock of Household valued at the then fair market value of such shares or
by a combination of cash and shares of Common Stock. Any shares of Common Stock
surrendered by an employee in full or partial payment of the exercise price of
an option must have been held by such employee at least six months prior to the
date such shares are surrendered in payment.
5. Transfer of Employee Options; Exercise of Employee Options Following
Termination of Employment
--------------------------------------------------------------------
(a) Options may be exercised only by the employee and shall not be
transferable other than by will or the laws of descent and distribution. These
restrictions on transferability shall not apply to the extent (i) such
restrictions are not at the time required for the Plan to continue to meet the
requirements of
-4-
<PAGE>
Rule 16b-3 of the Exchange Act, or any successor Rule, (ii) the Committee has
established rules concerning the transferability of employee options and (iii)
the agreement relating to an Award so specifies or the holder has received
notice from the Office of the Secretary of Household that such restrictions are
no longer applicable. If the holder of an option shall cease to be an employee
of Household or a subsidiary, and unless otherwise provided by the Committee,
all rights under such option shall immediately terminate, except:
(i) in the event of termination of employment of a holder to which
Section 11(b) hereof applies, or of a holder who is retirement-eligible
under the terms of a pension plan of Household or a subsidiary, the option
may be exercised within five years of the date of termination of employment
or as otherwise provided in the agreement for the Award;
(ii) in the event of termination of employment due to permanent and
total disability, and the holder is not retirement-eligible under the terms
of a pension plan of Household or a subsidiary, the option may be exercised
within twelve months following the date of such termination of employment
or as otherwise provided in the agreement for the Award;
(iii) in the event of death during employment, the option may be
exercised by the executor, administrator, or other personal representative
of the holder within five years succeeding death if such holder was
retirement-eligible under the terms of a pension plan of Household or a
subsidiary, or twelve months if such holder was not retirement-eligible
under the terms of a pension plan of Household or a subsidiary or as
otherwise provided in the agreement for the Award;
(iv) except in the event an employee is terminated for cause,
following termination of employment other than as set forth in subsections
(i), (ii) or (iii) above, the option may be exercised within three months
following the date of termination, or prior to the expiration of the
option, whichever period is shorter; or
(v) in the event of death of a holder of an option following
termination of employment, the option may be exercised by the executor,
administrator, or other personal representative of the holder,
notwithstanding the time period specified in (i), (ii), (iii) or (iv)
above, within a) twelve months following death or b) the remainder of the
period in which the holder was entitled to exercise the option, whichever
period is longer.
If the Committee determines that the termination is for
-5-
<PAGE>
cause, the option will not under any circumstances be exercisable following
termination of employment. Notwithstanding the foregoing, in the case where the
employee is a party to an employment, termination protection or similar
agreement with Household or a subsidiary which is in effect at the time of
termination of employment that defines "cause" (or words of similar import), the
Committee shall not determine such termination of employment to be for "cause"
unless a "cause" termination would be permitted under such agreement at that
time.
(b) An option may not be exercised pursuant to this Section after the
expiration of the term of such option and may be exercised only to the extent
that the holder was entitled to exercise such option on the date of termination
of employment.
6. Non-Employee Director Options
-----------------------------
(a) Each non-employee Director of Household will be granted an option for
8,000 shares of Household Common Stock annually on the same date grants are made
to employees. The Committee will have no discretion to select which non-
employee Directors will be granted options or to determine the number of option
shares, price, vesting schedule or any other term of the options granted to non-
employee Directors. All options granted to non-employee Directors will be non-
qualified stock options.
(b) The per share purchase price of Common Stock which may be acquired
pursuant to a non-employee Director option shall be 100% of the fair market
value of one share of Common Stock on the date the option is granted. For
purposes of establishing the fair market value of Household's Common Stock on
any day under Section 6 of this Plan, such value shall be the average of the
highest and lowest sales prices per share of the Common Stock as reported in the
NYSE-Composite Transactions in The Wall Street Journal for such date. However,
if the NYSE is not open for trading on a given day, the fair market value will
be the average of the highest and lowest sales prices per share on the next
succeeding business day.
(c) Subject to Section 11 of this Plan, each option granted to a non-
employee Director vests and shall be fully exercisable beginning six months from
the date the option was granted. Each such option expires ten years and one day
from the date of the grant. However, if a non-employee Director ceases to be a
Director of Household, outstanding vested options are exercisable as follows:
(i) in the event service on the Board of Directors terminates due to
permanent and total disability, outstanding options may be exercised within
twelve months following the date such service terminates or prior to the
-6-
<PAGE>
expiration of the outstanding options, whichever period is shorter;
(ii) in the event of death of a non-employee Director whether during
service as a Director of Household or after ceasing such service,
outstanding options may be exercised by the executor, administrator, or
other personal representative of such Director within twelve months after
the death of the Director or prior to the expiration of the outstanding
options, whichever period is longer;
(iii) in the event a non-employee Director's service on the Board of
Directors terminates because such Director has reached the mandatory
retirement age of 70 (or age 72 if a Director was serving on the Board as
of January 1, 1989) or if a non-employee Director retires from the Board
prior to reaching the mandatory retirement age but after having served on
the Board of Directors continuously for at least fifteen years, outstanding
options may be exercised at any time prior to the expiration of the
outstanding options; and
(iv) in the event service on the Board of Directors terminates other
than as set forth in subsections (i), (ii) or (iii) above, outstanding
options may be exercised within three months following the date such
service terminates or prior to the expiration of the outstanding options,
whichever period is shorter.
(d) Payment for shares purchased upon exercise of a non-employee Director
option shall be made in cash, in shares of Household Common Stock valued at the
then fair market value of such shares or by a combination of cash and shares of
Common Stock. Any shares of Common Stock surrendered in full or partial payment
of the exercise price of an option must have been held by such Director at least
six months prior to the date such shares are surrendered in payment.
A non-employee Director may also satisfy, in whole or in part, income tax
obligations incurred in connection with the exercise of an option by (i)
electing to have Household withhold shares of Common Stock (otherwise
deliverable to the Director in connection with the exercise of an option) in
payment for such income tax obligation or (ii) by delivering shares of Household
Common Stock owned by such Director in payment for such income tax obligation.
Any shares of Common Stock surrendered in full or partial payment of income tax
obligations must have been held by such Director at least six months prior to
the date such shares are surrendered.
(e) Non-employee Director options are not transferable other than by will
and the laws of descent and distribution.
-7-
<PAGE>
7. Restricted Stock Rights
-----------------------
(a) Upon such terms as it deems appropriate, the Committee from time to
time may grant Restricted Stock Rights ("RSRs") to any employee selected by the
Committee, which entitle such employee to receive a stated number of shares of
Common Stock of Household. The RSRs are subject to forfeiture if the employee
fails to remain continuously employed by Household or any subsidiary for the
period(s) stipulated by the Committee (each, a "Restricted Period").
(b) RSRs shall be subject to the following restrictions and limitations:
(i) the RSRs may not be transferred except by will or the laws of descent and
distribution; and (ii) except as otherwise provided in Paragraphs (d) and (e) of
this Section 7, an RSR and the shares subject to an RSR shall be forfeited and
all rights of a holder of an RSR shall terminate without any payment of
consideration by Household if such employee fails to remain continuously
employed by Household or any subsidiary for the Restricted Period. A holder of
an RSR shall remain continuously employed if such holder leaves the employ of
Household or any subsidiary for immediate reemployment with Household or any
subsidiary.
(c) Other than as may be specified pursuant to Section 3(e), the holder of
an RSR shall not be entitled to any of the rights of a holder of the Common
Stock with respect to the shares subject to such RSR prior to the issuance of
such shares pursuant to the Plan.
(d) The Committee in its sole discretion may accelerate the payment of
Household Common Stock under an RSR prior to the termination of the Restricted
Period if the holder of an RSR has achieved certain performance levels
established by the Committee at the time an RSR is granted. The Committee in its
sole judgment may revise such performance levels as it deems appropriate to
reflect significant, unforeseen events or changes.
(e) In the event that the employment of a holder of an RSR terminates by
reason of death or permanent and total disability or as a result of Section
11(b) hereof, such holder shall be entitled to receive the number of shares
subject to the RSR multiplied by a fraction (x) the numerator of which shall be
the number of full months between the date of grant of each such RSR and the
date of such termination of employment, and (y) the denominator of which shall
be the number of full months in the respective Restricted Period; provided,
however, no fractional share shall be awarded. A holder of an RSR whose
employment terminates for reasons other than those listed in this paragraph will
forfeit all rights under any outstanding RSR. This
-8-
<PAGE>
automatic forfeiture may be waived in whole or in part by the Committee in its
sole discretion.
(f) When a holder shall be entitled to receive shares pursuant to an RSR,
Household shall issue the appropriate number of shares registered in the name of
the holder.
8. Other Stock-Based Awards
------------------------
The Committee may make awards of unrestricted shares of Household Common
Stock to eligible employees in recognition of outstanding achievements.
9. Forfeiture
----------
If it is determined that an employee or former employee, while employed by
Household or any subsidiary or otherwise associated with Household or any
subsidiary as a consultant, advisor or in another similar capacity, engaged at
any time in any activity in competition with any activity of Household or any
subsidiary or inimical, contrary or harmful to the interests of Household or any
subsidiary including, but not limited to: (i) conduct related to the
participant's position for which either criminal or civil penalties against the
participant may be sought, (ii) violation of Household policies, notwithstanding
Household's decision or inability to, or not to, terminate the participant for
such violation, (iii) accepting employment with or serving as a consultant,
advisor or in any other capacity to an employer that is in competition with or
acting against the interests of Household or any subsidiary, including employing
or recruiting any present employee of Household or any subsidiary for such
competitor, (iv) disclosing or misusing any confidential information or material
concerning Household or any subsidiary, or (v) participating in a hostile
takeover attempt of Household, then the Committee, in its sole discretion, may
cancel any unexpired or unpaid Award at any time.
10. Amendment and Termination of the Plan
-------------------------------------
This Plan will expire on May 8, 2006. However, the Board of Directors may
terminate the Plan at any time except as provided in Section 11(d), but such
termination shall not affect Awards previously granted under the Plan. During
the Plan term, the Committee may amend the Plan or any Award granted to an
employee under the Plan at any time, except (i) the Plan may not be amended or
terminated in the circumstances set forth in Section 11(d), (ii) the Committee
may not, without shareholder approval, and except as permitted by Section 3(c),
increase the number of shares of Common Stock of Household which may be issued
-9-
<PAGE>
pursuant to the Plan, change the purchase price of an Option, and (iii) the
Committee may not make any other amendment to the Plan which is required by law
to be approved by the shareholders of Household.
Notwithstanding the preceding paragraph, the provisions of Section 6 of the
Plan relating to non-employee Directors may not be amended more than once every
six months, except to comply with changes to the Code or the rules and
regulations thereunder.
11. Change in Control
-----------------
(a) In order to protect participants in the Plan who have outstanding
Awards in the event there is a "Change in Control" (as defined below), (i) all
outstanding Awards will immediately vest or the Restricted Period with respect
thereto shall lapse and such Awards shall become exercisable or payable in full,
and (ii) the Committee, in its sole discretion (notwithstanding any contrary
provision in Section 3(f)), may:
(i) accelerate the time periods for exercising or realizing any
Awards, notwithstanding any minimum holding or restricted periods set forth
in the Plan or established by the Committee at the time of the grant of the
Award;
(ii) provide for the purchase by Household of any Awards in cash
equal to the amount that could have been received upon the exercise or
realization of such Awards had the Awards been currently exercisable or
payable on the day before said cash payment is made;
(iii) make such adjustments, including the granting of additional
Awards, to any outstanding Award as the Committee deems appropriate to
reflect the Change in Control; and
(iv) cause outstanding Awards to be assumed, or new rights of equal
value to be substituted therefor, by any corporation that is the successor
to Household.
(b) Any employee whose position with Household or any of its subsidiaries
is "Materially Changed" (as defined below) within twenty-four (24) months after
a Change in Control shall be deemed to be involuntarily terminated without
"cause" (as defined below) from Household and be entitled to exercise or receive
the payment of Awards previously granted to the employee that were outstanding
immediately prior to the event causing such termination or were awarded
subsequent to the event causing such termination, in each case, in accordance
with subsection 5(a)(i) with respect to Options or 7(e) of the Plan with respect
to any RSRs with respect to which the Restricted Period has not lapsed, without
any action by the Committee or Board of Directors.
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(c) For purposes of this Section and to determine the rights of any
participant who has an outstanding Award, the term:
(i) "Change in Control" means:
(1) any "person" (as defined in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")), excluding for this purpose Household or any
subsidiary of Household, or any employee benefit plan of
Household, or any subsidiary of Household, or any person or
entity organized, appointed or established by Household for
or pursuant to the terms of such plan which acquires
beneficial ownership of voting securities of Household, is
or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) directly or indirectly of securities
of Household representing twenty percent (20%) or more of
the combined voting power of Household's then outstanding
securities; provided, however, that no Change in Control
shall be deemed to have occurred as the result of an
acquisition of securities of Household by Household which,
by reducing the number of voting securities outstanding,
increases the direct or indirect beneficial ownership
interest of any person to twenty percent (20%) or more of
the combined voting power of Household's then outstanding
securities, but any subsequent increase in the direct or
indirect beneficial ownership interest of such person in
Household shall be deemed a Change in Control; and provided
further that if the Board of Directors of Household
determines in good faith that a person who has become the
beneficial owner directly or indirectly of securities of
Household representing twenty percent (20%) or more of the
combined voting power of Household's then outstanding
securities has inadvertently reached that level of ownership
interest, and if such person divests as promptly as
practicable a sufficient amount of securities of Household
so that the person no longer has a direct or indirect
beneficial ownership interest in twenty percent (20%) or
more of the combined voting power of Household's then
outstanding
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securities, then no Change in Control shall be deemed to
have occurred;
(2) during any period of two (2) consecutive years (not
including any period prior to November 9, 1998) individuals
who at the beginning of such two-year period constitute the
Board of Directors of Household and any new director or
directors (except for any director designated by a person
who has entered into an agreement with Household to effect a
transaction described in subparagraph (1), above, or
subparagraph (3), below) whose election by the Board or
nomination for election by Household's stockholders was
approved by a vote of at least two-thirds of the directors
then still in office who either were directors at the
beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to
constitute at least a majority of the Board (such
individuals and any such new directors being referred to as
the "Incumbent Board");
(3) consummation of (x) an agreement for the sale or disposition
of Household or all or substantially all of Household's
assets, (y) a plan of merger or consolidation of Household
with any other corporation, or (z) a similar transaction or
series of transactions involving Household (any transaction
described in parts (x) through (z) of this subparagraph (3)
being referred to as a "Business Combination"), in each case
unless after such a Business Combination (I) the
stockholders of Household immediately prior to the Business
Combination continue to own, directly or indirectly, more
than sixty percent (60%) of the combined voting power of the
then outstanding voting securities entitled to vote
generally in the election of directors of the new (or
continued) entity (including, but not by way of limitation,
an entity which as a result of such transaction owns
Household, or all or substantially all of Household's former
assets either directly or through one or more subsidiaries)
immediately after such Business Combination, in
substantially the same proportion as their ownership of
Household immediately
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prior to such Business Combination, (II) no person
(excluding any entity resulting from such Business
Combination or any employee benefit plan (or related trust)
of Household or of such entity resulting from such Business
Combination) beneficially owns, directly or indirectly,
twenty percent (20%) or more of the then combined voting
power of the then outstanding voting securities of such
entity, except to the extent that such ownership existed
prior to the Business Combination, and (III) at least a
majority of the members of the board of directors of the
entity resulting from such Business Combination were members
of the Incumbent Board at the time of the execution of the
initial agreement, or of the action of the Board, providing
for such Business Combination;
(4) approval by the stockholders of Household of a complete
liquidation or dissolution of Household;
(5) a tender offer is made for thirty percent (30%) or more of
the common stock of Household, which tender offer has not
been approved by the Board of Directors of Household; or
(6) a solicitation subject to Rule 14a-11 under the Exchange Act
(or any successor Rule) relating to the election or removal
of 50% or more of the members of the Incumbent Board is made
by any person other than Household.
(ii) "Materially Changed" means the occurrence of one or more of the
following events:
(1) the termination of the employee, without cause, and other
than by reason of death, permanent and total disability or
retirement under the terms of a pension plan of Household or
any subsidiary;
(2) the employee was assigned to a position of lesser rank or
status;
(3) the employee's annual target bonus or targeted performance
unit awards were reduced and compensation equivalent in
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aggregate value was not substituted;
(4) the employee's annual salary was reduced;
(5) the employee's benefits under the Household Retirement
Income Plan or any successor tax qualified defined benefit
plan were reduced for reasons other than to maintain its tax
qualified status and such reductions were not supplemented
in the Household Supplemental Retirement Income Plan
("HSRIP"); or the employee's benefits under HSRIP, if
applicable, were reduced;
(6) the employee's other benefits or perquisites were reduced
and such reductions were not uniformly applied with respect
to all similarly situated employees; or
(7) the employee was reassigned to a geographical area outside
of the metropolitan area in which the employee was assigned
at the time of the Change in Control.
(iii) "cause" (1) in the case of an employee who is a party to an
employment, termination protection or similar agreement that defines
"cause" (or words of similar import), means "cause" (or words of similar
import) as defined in such agreement, and (2) in the case of any other
employee, means willful and deliberate misconduct, which is detrimental in
a significant way to the interests of Household or any subsidiary thereof.
(d) Notwithstanding anything set forth in Section 11 hereof, with the
occurrence of a Change in Control the Plan may not be amended or terminated by
the Committee, the Board of Directors or the stockholders of Household.
12. Miscellaneous
-------------
(a) The Plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payments or deliveries of shares of Household
Common Stock not yet made to a participant by Household, nothing contained
herein shall give any rights to a participant that are greater than those of a
general creditor of Household. The Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver shares of Household Common Stock or payments hereunder consistent with
the foregoing.
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(b) With respect to participants subject to Section 16 of the Exchange
Act, transactions under this Plan are intended to comply with all applicable
provisions of Rule 16b-3 or its successor under the Exchange Act. To the extent
any provision of the Plan or action by the Committee or its designee fails to so
comply, it shall be deemed null and void.
(c) This Plan and each agreement with respect to an Award shall be
construed and administered in accordance with the laws of the State of Delaware
without giving effect to principles relating to conflict of laws.
(d) Neither the adoption of the Plan nor any Award granted hereunder shall
confer upon any participant any right to continued employment or service with
Household or any subsidiary thereof, nor shall the Plan or any Award interfere
in any way with the right of Household or a subsidiary to terminate the
employment or relationship of any of the participants at any time.
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AMENDMENT TO THE
HOUSEHOLD INTERNATIONAL, INC.
1996 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN
NOVEMBER 11, 1997
On November 11, 1997 the Household International Board of Directors, upon the
recommendation of the Board's Compensation Committee, adopted an amendment to
the 1996 Long-Term Executive Incentive Compensation Plan (the "Plan") relating
to the transferability of options granted under the Plan.
Transferability of Options Granted to Nonemployee Directors and Senior Managers
- -------------------------------------------------------------------------------
This amendment only applies to Nonemployee Directors and Senior Managers
(defined under this amendment as the Chief Executive Officer and employees with
a direct reporting relationship to the Chief Executive Officer) who have
received or in the future receive options to purchase Household Common Stock
under the Plan. This section modifies Plan Section 5(a) as regards the
transferability of options granted to Nonemployee Directors and Senior Managers;
all other provisions continue to apply.
Who is Eligible
This provision only applies to Nonemployee Directors and Senior Managers
("Eligible Persons").
Transfer of Options; Minimum Number
Options granted under the Plan may be transferred by will or through the laws of
descent and distribution. In addition, Eligible Persons may transfer their
options only to family members, family trusts, and family partnerships
(collectively, "Transferees"). Transferees may not retransfer any options except
by will or through the laws of descent and distribution. Any option transferred
to a single Transferee must represent the right to purchase a minimum of 100
shares.
Which Options May be Transferred
Eligible Persons may transfer any option, including vested and unvested portions
of any award granted under the Plan. Options granted under previous benefit
plans are not covered by this amendment.
Exercise
Options will vest in accordance with applicable Plan provisions. A Transferee
may only exercise vested options, and only as
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provided in the Plan.
Taxation of Options
The Eligible Person remains liable for any income tax related to the exercise of
transferred options. Income tax will be calculated as of the exercise date. The
Eligible Person is solely responsible for tax liability related to any options
gifted to a Transferee.
Law and Regulation
In addition to laws and regulations that apply to the Plan, the Transfer of
options must be completed in accordance with securities registration and
disclosure regulations applicable at the time of transfer. Eligible Persons and
Transferees may be subject to certain waiting periods limiting transfer or
exercise. Eligible Persons, or their agents agree to notify the Corporation at
least five days before any option they own or control is exercised.
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EXHIBIT 10.7
HOUSEHOLD INTERNATIONAL
DEFERRED FEE PLAN FOR DIRECTORS
Section 1. Purpose. The purpose of the Household International Deferred
Fee Plan (the "Plan") is to provide non-management directors (the "Directors")
of Household International, Inc. (the "Company") the opportunity to defer
receipt of cash compensation paid by the Company to such person in their role as
a Director. The Plan is designed to aid the Company in attracting and retaining
as members of its Board of Directors persons whose abilities, experience and
judgment can contribute to the well-being of the Company.
Section 2. Effective Date. The effective date of this Plan is January 10,
1995. The Plan was subsequently amended on September 8, 1997 and September 1,
1999.
Section 3. Eligibility. Any Director of the Company who is not deemed to
be an employee of the Company or any subsidiary thereof is eligible to
participate in the Plan.
Section 4. Deferred Compensation Account. Except as may be required in
accordance with Section 11 hereof, an unfunded deferred compensation account
(the "Account") shall be established for each Director who elects to participate
in the Plan.
Section 5. Amount of Deferral. A participant may elect to defer receipt
of all or a specified part of the compensation payable to the participant for
serving on the Board of Directors or committees of the Board of Directors of the
Company or any of its subsidiaries. An amount equal to the compensation
deferred, as reflected in the election referred to in Section 6 hereof, will be
credited to the participant's Account, in the form of cash (the "Cash
Component") or phantom Company Common Stock units (the "Stock Component"), on
the date such compensation would otherwise be initially payable.
Section 6. Time of Election of Deferral. Except as set forth herein, an
election to defer compensation shall be made on an annual basis on or before
December 15th of each year on forms approved for that purpose and shall be
effective when filed with the Secretary of the Company with respect to all
compensation, or any part thereof so elected to be deferred, that is paid in the
calendar year following the calendar year in which the election is made. For the
year 1995, the election shall be made prior to January 30, 1995, and shall be
effective when made with respect to any compensation to be paid in the period
January 30, 1995 through December 31, 1995. In the case of newly elected
Directors who first become eligible to participate in the Plan subsequent to
January 1 of any calendar year, such newly
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eligible participant shall be entitled to make an election to defer compensation
for services to be performed subsequent to the election provided such election
is made within 30 days after the date such Director becomes eligible. In this
case, such election shall be effective when made with respect to any
compensation to be paid during the period beginning with the date following the
date of the election through December 31 of the same initial year of
participation.
Section 7. Hypothetical Investment. Each Account may have a Cash
Component, a Stock Component or a combination of both and will be credited on
each date compensation is to be paid to Directors with:
(1) if the compensation is to be placed in the Cash Component, the amount
elected to be deferred plus interest from the date on which the
deferred compensation that is credited to the Cash Component would
initially have been payable, until payment, at a rate equal to the
United States five-year treasury rate plus HFC's borrowing spread over
that rate on the first day of each calendar quarter in which such
interest is credited to the participant's Account with interest
compounded quarterly, or
(2) if the compensation is to be placed in the Stock Component, the amount
elected to be deferred will be used to purchase phantom units of the
Company's Common Stock (including fractional shares) using the fair
market value of such Common Stock on the date the compensation would
otherwise be paid. The Stock Component will be credited on each
dividend payment date for the Company's Common Stock with additional
phantom Common Stock units determined by dividing the aggregate cash
dividend which would have been paid if the existing phantom Common
Stock units were actual shares of the Company's Common Stock by the
fair market value of the Company's Common Stock as of the dividend
payment date, computed to four decimal places. For purposes of the
Plan, the "fair market value" of one share or unit of the Company's
Common Stock shall be the average of the high and low sale prices for
a share of such Common Stock as published in The Wall Street Journal
for the respective determination date.
Section 8. Value of Deferred Compensation Accounts. The value of each
participant's Account shall include compensation deferred and interest or
dividends credited thereon, pursuant to Section 7 of the Plan. All deferred
amounts to be paid to a participant pursuant to the Plan are to be paid as soon
as practicable following the payment date, with the value of the phantom Common
Stock units being the fair
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market value of an equal number of shares of the Company's Common Stock on the
date of payment.
Section 9. Payment of Deferred Compensation. No withdrawal may be made
from the participant's Account prior to the date specified by the participant in
his or her election to defer compensation except as provided in Section 10. At
the participant's election, deferral of compensation may be made to a specific
date, to immediately after the end of the calendar year in which the participant
terminates service as a Director, or to the earlier of either one of such dates.
Any deferral must be for a period of at least two years following the year for
which the compensation is earned, unless service as a Director terminates
earlier. Deferred compensation and interest or dividends (including appreciation
or loss) thereon will be payable in cash from the Cash Component or shares of
Household Common Stock, $1.00 par value, from the Stock Component either in a
lump sum or in such number of quarterly or annual installments as the
participant chooses, subject to the participant's right to change such method of
distribution no later than twelve months prior to the first date deferred
compensation is to be paid. If a participant elects to receive payment from his
or her Account in installments, the participant's Account will continue to
accrue interest or dividends (and appreciation or loss) during the installment
period. Payments made from the Account shall first be made from the Stock
Component of the Account until such Component has been reduced to zero, and then
from the Cash Component. Interest or dividends credited to a participant's
Account during the installment period will be paid on the next installment
payment date.
Section 10. Hardship. In the event of a substantial, unforeseen hardship,
a participant may file a notice with the Secretary of the Company to be
presented to the Compensation Committee of the Board of Directors, advising the
Committee of the circumstances of the hardship, and requesting a withdrawal of
previously deferred amounts, or, where a former Director is receiving annual
installment payments, requesting accelerated payment. The Committee, in its sole
discretion, may agree to accelerate distribution of all or a part of amounts
previously deferred. Should the Committee agree, such distribution shall occur
on a date set by the Committee (the "Hardship Distribution Date") that is at
least six (6) months from the date the Committee approves the hardship
withdrawal request. The Committee shall determine, in its sole discretion, how a
current participant's Cash Component and Stock Component shall be charged for
the withdrawal. No member of the Committee may vote on, or otherwise influence a
decision of the Committee concerning his or her request for a hardship
withdrawal. A hardship withdrawal by a participant shall have no effect on any
amounts remaining in the participant Account, and shall not have any effect on
any current or future deferral election after the
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hardship withdrawal.
For purposes of this paragraph, a substantial unforeseen hardship is a
severe financial hardship resulting from extraordinary and unforeseeable
circumstances arising as a result of one or more recent events beyond the
participant's control. To the extent such hardship is or may be relieved (i)
through reimbursement or compensation by insurance or otherwise, (ii) by
liquidation of the participant's assets, to the extent the liquidation of such
assets would not itself cause a financial hardship, and (iii) by cessation of
deferrals under the Plan, accelerated payment may not be made. Withdrawals of
amounts because of an unforeseen hardship may only be permitted to the extent
reasonably necessary to satisfy the hardship. Examples of what are not
considered to be unforeseeable hardships include the need to send a
participant's child to college, or the desire to purchase a home.
Section 11. Change in Control. A "Change in Control" shall be deemed to
occur when and it:
(a) Any "person" (as defined in Section 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), excluding for
this purpose the Company and any subsidiary of the Company, or any
employee benefit plan of the Company or any subsidiary of the Company,
or any person or entity organized, appointed or established by the
Company for or pursuant to the terms of such plan which acquires
beneficial ownership of voting securities of the Company, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) directly or indirectly of securities of the Company
representing twenty percent (20%) or more of the combined voting power
of the Company's then outstanding securities; provided, however, that
no Change in Control shall be deemed to have occurred as the result of
an acquisition of securities of the Company by the Company which, by
reducing the number of voting securities outstanding, increases the
direct or indirect beneficial ownership interest of any person to
twenty percent (20%) or more of the combined voting power of the
Company's then outstanding securities, but any subsequent increase in
the direct or indirect beneficial ownership interest of such a person
in the Company shall be deemed a Change in Control; and provided
further that if the Board of Directors of the Company determines in
good faith that a person who has become the beneficial owner directly
or indirectly of securities of the Company representing twenty percent
(20%) or more of the combined voting power of the Company's then
outstanding securities has inadvertently reached that level of
ownership interest, and if such person
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divests as promptly as practicable a sufficient amount of securities
of the Company so that the person no longer has a direct or indirect
beneficial ownership interest in twenty percent (20%) or more of the
combined voting power of the Company's then outstanding securities,
then no Change in Control shall be deemed to have occurred; or
(b) During any period of two (2) consecutive years (not including any
period prior to September 1, 1999), individuals who at the beginning
of such two-year period constitute the Board of Directors of the
Company and any new director or directors (except for any director
designated by a person who has entered into an agreement with the
Company to effect a transaction described in subparagraph (a), above,
or subparagraph (c), below) whose election by the Board or nomination
for election by the Company's shareholders was approved by a vote of
at least two-thirds of the directors then still in office who either
were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any
reason to constitute at least a majority of the Board (such
individuals and any such new directors being referred to as the
"Incumbent Board"); or
(c) Consummation of (1) an agreement for the sale or disposition of the
Company or all or substantially all of the Company's assets, (2) a
plan of merger or consolidation of the Company with any other
corporation, or (3) a similar transaction or series of transactions
involving the Company (any transaction described in parts (1) through
(3) of this subparagraph (c) being referred to as a "Business
Combination"), in each case unless after such a Business Combination
(x) the shareholders of the Company immediately prior to the Business
Combination continue to own, directly or indirectly, more than sixty
percent (60%) of the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of
directors of the new (or continued) entity (including, but not by way
of limitation, an entity which as a result of such transaction owns
the Company or all or substantially all of the Company's former assets
either directly or through one or more subsidiaries) immediately after
such Business Combination, in substantially the same proportion as
their ownership of the Company immediately prior to such Business
Combination, (y) no person (excluding any entity resulting from such
Business Combination or any employee benefit plan (or related trust)
of the Company or of such entity resulting from such Business
Combination) beneficially
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owns, directly or indirectly, twenty percent (20%) or more of the then
combined voting power of the then outstanding voting securities of
such entity, except to the extent that such ownership existed prior to
the Business Combination, and (z) at least a majority of the members
of the board of directors of the entity resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) A tender offer is made for thirty percent (30%) or more of the
Company's Common Stock, which tender offer has not been approved by
the Board of Directors of the Company; or
(e) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
Notwithstanding any other provision of the Plan, if a Change of Control
occurs, then the Company shall create a trust or take such other actions as are
appropriate to protect each participant's Account.
Section 12. Designation of Beneficiary. A participant may designate a
beneficiary or beneficiaries which shall be effective upon filing written notice
with the Secretary of the Company on the form provided for that purpose. If no
beneficiary is designated, the beneficiary will be the participant's estate. If
more than one beneficiary statement has been filed, the beneficiary or
beneficiaries designated in the statement bearing the most recent date will be
deemed the valid beneficiary or beneficiaries.
Section 13. Death of Participant or Beneficiary. In the event of a
participant's death before he or she has received the full value of his or her
Account, the then current value of the participant's Account shall be determined
as of the day immediately following death and such amount shall be paid to the
beneficiary or beneficiaries of the deceased participant as soon as practicable
thereafter in cash in a lump sum. If no designated beneficiary has been named or
survives the participant, the beneficiary will be the participant's estate.
Section 14. Participant's Rights Unsecured. The right of any participant
or beneficiary to receive payment under the provisions of the Plan shall be an
unsecured claim against the general assets of the Company, and no provisions
contained in the Plan shall be construed to give any participant or beneficiary
at any time a security interest in the Account or any other assets of the
Company.
Section 15. Statement of Account. Statements will be sent to participants
following the end of each year as to the
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value of their Accounts as of December 31 of such year.
Section 16. Assignability. No right to receive payments hereunder shall
be transferable or assignable by a participant or a beneficiary, except by will
or by the laws of descent and distribution.
Section 17. Administration of the Plan. The Plan shall be administered
by the Compensation Committee of the Board of Directors of the Company. The
Committee shall conclusively interpret the provisions of the Plan and shall make
all determinations under the Plan. The Committee shall act by vote or written
consent of a majority of its members.
Section 18. Amendment or Termination of Plan. This Plan may at anytime or
from time to time be amended, modified or terminated by the Board of Directors
of the Company. No amendment, modification or termination shall, without the
consent of a participant, adversely affect such participant's accruals on his or
her prior elections.
Section 19. Governing Law. This Plan shall be governed by and construed
in accordance with the laws of the State of Illinois.
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EXHIBIT 10.8
HOUSEHOLD INTERNATIONAL
DEFERRED PHANTOM STOCK PLAN FOR DIRECTORS
Section 1. Purpose. The purpose of the Household International Deferred
Phantom Stock Plan for Directors (the "Plan") is to provide non-management
directors (the "Directors") of Household International, Inc. (the "Company")
with the opportunity to defer receipt of phantom Company Common Stock units paid
by the Company to Directors. The Plan is designed to aid the Company in
attracting and retaining as members of its Board of Directors persons whose
abilities, experience and judgment can contribute to the well-being of the
Company.
Section 2. Effective Date. The effective date of this Plan is July 11,
1995. The Plan was subsequently amended on January 9, 1996, July 9, 1996,
January 14, 1997, September 8, 1997, and September 1, 1999.
Section 3. Eligibility. Any Director of the Company serving on the Board
as of January 14, 1997, who is not deemed to be an employee of the Company or
any subsidiary thereof will participate in the Plan.
Section 4. Deferred Compensation Account. An unfunded deferred
compensation account (the "Account") has been established for each Director.
Section 5. Time of Election of Deferral. Except as set forth herein, a
Designation of Beneficiary and Account Distribution Form (the "Forms"), must be
filed with the Secretary of the Company.
Section 6. Hypothetical Investment. During the deferred period, the
phantom Company Common Stock units will be credited on each dividend payment
date for the Company's Common Stock with additional phantom Company Common Stock
units determined by dividing the aggregate cash dividend which would have been
paid if the existing phantom Common Stock units were actual shares of the
Company's Common Stock by the fair market value of the Company's Common Stock as
of the dividend payment date, computed to four decimal places. For purposes of
the Plan, the "fair market value" of one share or unit of the Company's Common
Stock shall be the average of the high and low sale prices for a share of such
Common Stock as published in The Wall Street Journal for the respective
determination date.
Section 7. Value of Deferred Compensation Accounts. The value of each
participant's Account shall include deferred phantom Company Common Stock units
and dividends credited thereon, pursuant to Section 6 of the Plan. All deferred
amounts
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to be paid to a participant pursuant to the Plan are to be paid in shares of
Company Common Stock, $1.00 par value, with the value of the phantom Company
Common Stock units being the fair market value of an equal number of shares of
the Company's Common Stock on the date of payment.
Section 8. Payment of Deferred Compensation. All such payments
accumulated under this Plan will be made as soon as practicable following the
date on which a Director leaves the Board of Directors. A participant may elect
to receive the value of his or her deferred compensation at a later date, but
such date may not be prior to the date on which a Director leaves the Board of
Directors. Deferred phantom Company Common Stock units and dividends (including
appreciation or loss) thereon will be payable in shares of Company Common Stock,
$1.00 par value, either in a lump sum or in such number of quarterly or annual
installments as the participant chooses up to a maximum ten-year period, subject
to the participant's right to change such method of distribution no later than
twelve months prior to the first date deferred phantom Company Common Stock
units are to be paid. If a participant elects to receive payment from his or her
Account in installments, the participant's Account will continue to accrue
dividends (and appreciation or loss) during the installment period. Dividends
credited to a participant's Account during the installment period will be paid
on the next installment payment date.
Section 9. Change in Control. A `Change in Control' shall be deemed to
occur when and if:
(a) Any "person" (as defined in Section 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), excluding for
this purpose the Company and any subsidiary of the Company, or any
employee benefit plan of the Company or any subsidiary of the Company,
or any person or entity organized, appointed or established by the
Company for or pursuant to the terms of such plan which acquires
beneficial ownership of voting securities of the Company, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) directly or indirectly of securities of the Company
representing twenty percent (20%) or more of the combined voting power
of the Company's then outstanding securities; provided, however, that
no Change in Control shall be deemed to have occurred as the result of
an acquisition of securities of the Company by the Company which, by
reducing the number of voting securities outstanding, increases the
direct or indirect beneficial ownership interest of any person to
twenty percent (20%) or more of the combined voting power of the
Company's then outstanding securities, but any subsequent increase in
the direct or indirect beneficial ownership interest of
-2-
<PAGE>
such a person in the Company shall be deemed a Change in Control; and
provided further that if the Board of Directors of the Company
determines in good faith that a person who has become the beneficial
owner directly or indirectly of securities of the Company representing
twenty percent (20%) or more of the combined voting power of the
Company's then outstanding securities has inadvertently reached that
level of ownership interest, and if such person divests as promptly as
practicable a sufficient amount of securities of the Company so that
the person no longer has a direct or indirect beneficial ownership
interest in twenty percent (20%) or more of the combined voting power
of the Company's then outstanding securities, then no Change in
Control shall be deemed to have occurred; or
(b) During any period of two (2) consecutive years (not including any
period prior to September 1, 1999), individuals who at the beginning
of such two-year period constitute the Board of Directors of the
Company and any new director or directors (except for any director
designated by a person who has entered into an agreement with the
Company to effect a transaction described in subparagraph (a), above,
or subparagraph (c), below) whose election by the Board or nomination
for election by the Company's shareholders was approved by a vote of
at least two-thirds of the directors then still in office who either
were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any
reason to constitute at least a majority of the Board (such
individuals and any such new directors being referred to as the
"Incumbent Board"); or
(c) Consummation of (1) an agreement for the sale or disposition of the
Company or all or substantially all of the Company's assets, (2) a
plan of merger or consolidation of the Company with any other
corporation, or (3) a similar transaction or series of transactions
involving the Company (any transaction described in parts (1) through
(3) of this subparagraph (c) being referred to as a "Business
Combination"), in each case unless after such a Business Combination
(x) the shareholders of the Company immediately prior to the Business
Combination continue to own, directly or indirectly, more than sixty
percent (60%) of the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of
directors of the new (or continued) entity (including, but not by way
of limitation, an entity which as a result of such transaction owns
the Company or all or substantially all of the Company's former assets
either directly or through one or more subsidiaries) immediately after
such Business
-3-
<PAGE>
Combination, in substantially the same proportion as their ownership
of the Company immediately prior to such Business Combination, (y) no
person (excluding any entity resulting from such Business Combination
or any employee benefit plan (or related trust) of the Company or of
such entity resulting from such Business Combination) beneficially
owns, directly or indirectly, twenty percent (20%) or more of the then
combined voting power of the then outstanding voting securities of
such entity, except to the extent that such ownership existed prior to
the Business Combination, and (z) at least a majority of the members
of the board of directors of the entity resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) A tender offer is made for thirty percent (30%) of more of the
Company's Common Stock, which tender offer has not been approved by
the Board of Directors of the Company; or
(e) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
Notwithstanding any other provision of the Plan, if a Change of Control
occurs, then the Company shall create a trust or take such other actions as are
appropriate to protect each participant's Account.
Section 10. Designation of Beneficiary. A participant may designate a
beneficiary or beneficiaries which shall be effective upon filing written notice
with the Secretary of the Company on the form provided for that purpose. If no
beneficiary is designated, the beneficiary will be the participant's estate. If
more than one beneficiary statement has been filed, the beneficiary or
beneficiaries designated in the statement bearing the most recent date will be
deemed the valid beneficiary or beneficiaries.
Section 11. Death of Participant or Beneficiary. In the event of a
participant's death before he or she has received the full value of his or her
Account, the then current value of the participant's Account shall be determined
as of the day immediately following death and such amount shall be paid to the
beneficiary or beneficiaries of the deceased participant as soon as practicable
thereafter in cash in a lump sum. If no designated beneficiary has been named or
survives the participant, the beneficiary will be the participant's estate.
Section 12. Participant's Rights Unsecured. The right of any participant
or beneficiary to receive payment under the
-4-
<PAGE>
provisions of the Plan shall be an unsecured claim against the general assets of
the Company, and no provisions contained in the Plan shall be construed to give
any participant or beneficiary at any time a security interest in the Account or
any other assets of the Company.
Section 13. Statement of Account. Statements will be sent to participants
quarterly as to the value of their Accounts as of the 15th day of January,
April, July and October for each year in which their is Account activity.
Section 14. Assignability. No right to receive payments hereunder shall
be transferable or assignable by a participant or a beneficiary, except by will
or by the laws of descent and distribution.
Section 15. Administration of the Plan. The Plan shall be administered by
the Compensation Committee of the Board of Directors of the Company. The
Committee shall conclusively interpret the provisions of the Plan and shall make
all determinations under the Plan. The Committee shall act by vote or written
consent of a majority of its members.
Section 16. Amendment or Termination of Plan. This Plan may at anytime or
from time to time be amended, modified or terminated by the Board of Directors
of the Company. No amendment, modification or termination shall, without the
consent of a participant, adversely affect such participant's accruals.
Section 17. Governing Law. This Plan shall be governed by and construed
in accordance with the laws of the State of Illinois.
-5-
<PAGE>
EXHIBIT 11
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In millions, except per share data.)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------ ---------------- ----------------
Year ended December 31 Diluted Basic Diluted Basic Diluted Basic
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Net income $1,486.4 $1,486.4 $524.1 $524.1 $940.3 $940.3
Preferred dividends (9.2) (9.2) (15.0) (15.0) (17.0) (17.0)
- ----------------------------------------------------------------------------------------------------------------
Earnings available to common
shareholders $1,477.2 $1,477.2 $509.1 $509.1 $923.3 $923.3
================================================================================================================
Average shares:
Common 477.0 477.0 487.2 487.2 470.2 470.2
Common equivalents 4.8 - 9.2 - 8.9 -
- ----------------------------------------------------------------------------------------------------------------
Total 481.8 477.0 496.4 487.2 479.1 470.2
================================================================================================================
Earnings per common share $ 3.07 $ 3.10 $ 1.03 $ 1.04 $ 1.93 $ 1.97
================================================================================================================
</TABLE>
<PAGE>
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 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income $1,486.4 $ 524.1 $ 940.3 $ 819.6 $ 603.7
Income taxes 734.3 428.6 462.2 461.2 420.4
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 2,220.7 952.7 1,402.5 1,280.8 1,024.1
- ----------------------------------------------------------------------------------------------------------------
Fixed charges:
Interest expense (1) 2,782.2 2,530.8 2,367.9 2,337.4 2,378.7
Interest portion of rentals (2) 45.4 56.8 53.4 55.4 55.8
- ----------------------------------------------------------------------------------------------------------------
Total fixed charges 2,827.6 2,587.6 2,421.3 2,392.8 2,434.5
- ----------------------------------------------------------------------------------------------------------------
Total earnings as defined $5,048.3 $3,540.3 $3,823.8 $3,673.6 $3,458.6
================================================================================================================
Ratio of earnings to fixed charges (4) 1.79 1.37 1.58 1.54 1.42
================================================================================================================
Preferred stock dividends (3) $ 13.8 $ 23.0 $ 25.3 $ 34.0 $ 53.4
================================================================================================================
Ratio of earnings to combined
fixed charges and preferred
stock dividends (4) 1.78 1.36 1.56 1.51 1.39
================================================================================================================
</TABLE>
(1) For financial statement purposes, interest expense includes income earned
on temporary investment of excess funds, generally resulting from over-
subscriptions of commercial paper.
(2) Represents one-third of rentals, which approximates the portion
representing interest.
(3) Preferred stock dividends are grossed up to their pre-tax equivalents.
(4) The 1998 ratios have been negatively impacted by the one-time merger and
integration related costs associated with our merger with Beneficial
Corporation ("Beneficial"). Excluding Beneficial merger and integration
related costs of $751 million after tax, our ratio of earnings to fixed
charges was 1.75 percent and our ratio of earnings to combined fixed
charges and preferred stock dividends was 1.74 percent.
<PAGE>
EXHIBIT 13
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Selected Financial Data and Statistics Pg. 26 - 1999 Annual Report
<TABLE>
<CAPTION>
All dollar amounts except per share data are stated in millions. 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data-Year Ended December 31/1/
Net interest margin and other revenues $6,722.5 $6,380.0 $6,036.2 $5,451.6 $5,131.5
Provision for credit losses on owned receivables 1,716.4 1,516.8 1,493.0 1,144.2 1,025.1
Operating expenses 2,527.3 2,672.3 2,884.8 2,714.7 2,527.4
Policyholders' benefits 258.1 238.2 255.9 311.9 554.9
Merger and integration related costs -- 1,000.0 -- -- --
Income taxes 734.3 428.6 462.2 461.2 420.4
- -----------------------------------------------------------------------------------------------------------------------------
Net income $1,486.4 $ 524.1/2/ 940.3 $ 819.6 $ 603.7
=============================================================================================================================
Per Common Share Data/1/
Basic earnings $ 3.10 $ 1.04 $ 1.97 $ 1.76 $ 1.26
Diluted earnings 3.07 1.03/2/ 1.93 1.73 1.24
Dividends declared .68 .60 .54 .49 .44
Book value 13.79 12.88 12.81 9.96 8.96
- -----------------------------------------------------------------------------------------------------------------------------
Average number of common and common equivalent shares outstanding/8/ 481.8 496.4 479.1 462.3 462.0
- -----------------------------------------------------------------------------------------------------------------------------
Selected Financial Ratios/1/
Return on average owned assets 2.64% 1.04%/2/ 2.03% 1.82% 1.25%
Return on average managed assets 1.99 .72/2/ 1.38 1.30 .98
Return on average common shareholders' equity 23.5 8.1/2/ 17.3 18.7 15.1
Total shareholders' equity as a percent of owned assets/3/ 11.51 12.78 14.13 11.07 10.00
Total shareholders' equity as a percent of managed assets/3/ 8.72 9.31 9.28 7.58 7.37
Tangible equity to tangible managed assets/4/ 6.96 7.11 6.92 6.20 6.26
Managed net interest margin 8.23 7.86 7.72 7.45 7.05
Managed consumer net chargeoff ratio 4.13 4.29 3.84 2.96 2.51
Managed basis efficiency ratio, normalized 33.6 37.6 41.0 45.0 50.7
Common dividend payout ratio 22.1 58.3/2/ 28.0 28.3 35.5
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ On June 30, 1998, Household merged with Beneficial Corporation
("Beneficial"), a consumer finance holding company. In connection with the
merger, Household issued approximately 168.4 million shares of its common stock
and three series of preferred stock. The transaction was accounted for as a
pooling of interests, and accordingly, the consolidated financial statements for
all periods prior to the merger have been restated.
/2/ Excluding merger and integration related costs of $751.0 million after-tax
and the $118.5 million after-tax gain on sale of Beneficial's Canadian
operations, net operating income was $1,156.6 million, diluted operating
earnings per share was $2.30, the return on average owned assets was 2.29
percent, the return on average managed assets was 1.60 percent, the return on
average common shareholders' equity was 18.2 percent, and the dividend payout
ratio was 26.1 percent. See Management's Discussion and Analysis for further
discussion of the merger and integration costs, the gain on sale of Beneficial
Canada, and results excluding these items.
/3/ Total shareholders' equity includes common shareholders' equity, preferred
stock and company obligated mandatorily redeemable preferred securities of
subsidiary trusts.
/4/ Tangible equity consists of total shareholders' equity, excluding unrealized
gains and losses on investments, less acquired intangibles and goodwill.
Tangible managed assets represent total managed assets less acquired intangibles
and goodwill.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Selected Financial Data and Statistics Pg. 27 - 1999 Annual Report
(continued)
<TABLE>
<CAPTION>
All dollar amounts except
per share data are stated in millions. 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data at December 31/1/
Total assets:
Owned $ 60,749.4 $ 52,892.7 $ 46,817.0 $ 45,332.0 $ 44,723.0
Managed 80,188.3 72,594.6 71,295.5 66,183.2 60,721.1
- -----------------------------------------------------------------------------------------------------------------------------
Managed receivables/5/:
Home equity $ 26,935.5 $ 22,330.1 $ 19,824.8 $ 16,197.5 $ 16,506.7
Auto finance/6/ 3,039.8 1,765.3 883.4 - -
MasterCard/Visa 15,793.1 16,610.8 19,211.7 19,528.2 13,894.5
Private label 11,269.7 10,377.5 10,381.9 10,252.5 7,774.3
Other unsecured 13,881.9 11,970.6 11,505.1 11,557.6 9,375.1
Commercial and other 808.3 853.4 1,353.6 1,762.9 3,459.4
- -----------------------------------------------------------------------------------------------------------------------------
Total managed receivables 71,728.3 63,907.7 63,160.5 59,298.7 51,010.0
Receivables serviced with limited recourse (19,438.9) (19,701.8) (24,478.5) (20,851.2) (15,998.1)
- -----------------------------------------------------------------------------------------------------------------------------
Owned receivables $ 52,289.4 $ 44,205.9 $ 38,682.0 $ 38,447.5 $ 35,011.9
=============================================================================================================================
Owned receivables/5/
Domestic:
Home equity $ 23,571.7 $ 17,474.1 $ 12,348.5 $ 8,291.0 $ 9,564.2
Auto finance/6/ 1,233.5 805.0 487.5 - -
MasterCard/Visa 4,146.6 5,327.8 5,523.4 8,277.3 5,308.8
Private label 8,546.7 8,051.0 7,457.0 7,992.6 5,106.7
Other unsecured 7,469.8 5,573.3 5,018.7 6,365.9 6,763.7
Commercial and other 804.5 844.0 1,249.6 1,693.9 3,337.7
- -----------------------------------------------------------------------------------------------------------------------------
Total domestic $ 45,772.8 $ 38,075.2 $ 32,084.7 $ 32,620.7 $ 30,081.1
- -----------------------------------------------------------------------------------------------------------------------------
Foreign:
Home equity $ 1,090.2 $ 1,218.6 $ 1,437.7 $ 1,244.2 $ 1,167.1
MasterCard/Visa 2,167.8 1,852.4 1,351.3 1,101.2 754.6
Private label 1,573.0 1,515.0 1,899.9 1,742.9 1,081.0
Other unsecured 1,681.8 1,535.3 1,804.4 1,669.5 1,806.4
Commercial and other 3.8 9.4 104.0 69.0 121.7
- -----------------------------------------------------------------------------------------------------------------------------
Total foreign $ 6,516.6 $ 6,130.7 $ 6,597.3 $ 5,826.8 $ 4,930.8
- -----------------------------------------------------------------------------------------------------------------------------
Total owned receivables:
Home equity $ 24,661.9 $ 18,692.7 $ 13,786.2 $ 9,535.2 $ 10,731.3
Auto finance/6/ 1,233.5 805.0 487.5 - -
MasterCard/Visa 6,314.4 7,180.2 6,874.7 9,378.5 6,063.4
Private label 10,119.7 9,566.0 9,356.9 9,735.5 6,187.7
Other unsecured 9,151.6 7,108.6 6,823.1 8,035.4 8,570.1
Commercial and other 808.3 853.4 1,353.6 1,762.9 3,459.4
- -----------------------------------------------------------------------------------------------------------------------------
Total owned receivables $ 52,289.4 $ 44,205.9 $ 38,682.0 $ 38,447.5 $ 35,011.9
=============================================================================================================================
Deposits/7/ $ 4,980.0 $ 2,105.0 $ 2,344.2 $ 3,000.1 $ 5,351.3
Commercial paper, bank and other borrowings 10,777.8 9,917.9 10,666.1 10,597.4 10,683.3
Senior and senior subordinated debt 34,887.3 30,438.6 23,736.2 23,433.1 19,020.4
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts 375.0 375.0 175.0 175.0 75.0
Preferred stock 164.4 164.4 264.5 319.5 319.5
Common shareholders' equity/8/ 6,450.9 6,221.4 6,174.0 4,521.5 4,079.4
=============================================================================================================================
</TABLE>
/5/In 1998, we sold $1.9 billion of our non-core MasterCard and Visa
receivables. We also sold Beneficial's German and Canadian operations which
had net receivables of $272 million and $775 million, respectively. In 1997,
we acquired the capital stock of Transamerica Financial Services Holding
Company ("TFS"), which included $3.1 billion of home equity receivables. We
also exited the student loan business and sold our related $900 million
portfolio. In 1996, we acquired $4.1 billion in credit card receivables and
sold $1.7 billion of lower margin loans primarily from the previously
divested mortgage and consumer banking businesses.
/6/In October 1997, we purchased ACC Consumer Finance Corporation, an auto
finance company.
/7/In 1996, we sold our domestic consumer banking operations, including deposits
of $2.8 billion.
/8/During 1999, we repurchased 21.8 million shares of our common stock for a
total of $915.9 million. Of this total, 16.8 million shares were repurchased
pursuant to our share repurchase program and 5.0 million shares were
repurchased to fund various employee benefit programs. In 1998, we
repurchased 10.5 million shares of our common stock for a total of $412
million to fund various employees benefit programs. In 1997, we issued 27.3
million shares of common stock in a public offering, raising about $1.0
billion. The net proceeds were used to repay certain short-term borrowings
incurred in connection with the acquisition of TFS .
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Management's Discussion and Analysis Pg. 28 - 1999 Annual Report
of Financial Condition and
Results of Operations
Household International, Inc. ("Household"), through its subsidiaries,
provides consumers with home equity loans, auto finance loans, MasterCard*
and Visa* credit cards, private label credit cards, tax refund anticipation
loans ("RAL") and other types of unsecured loans. Household may also be
referred to as "we," "us," or "our." We serve primarily middle-market
consumers in the United States, United Kingdom and Canada. Our operations
are divided into three reportable segments: Consumer, which includes our
branch-based and correspondent consumer finance, private label credit card
and auto finance businesses; Credit Card, which includes our domestic
MasterCard and Visa business; and International, which consists of our
foreign operations in the United Kingdom ("U.K.") and Canada. At December
31, 1999, our managed receivables totaled $71.7 billion. Our managed
receivables portfolio includes receivables on our balance sheet and those
that we service for investors as part of our asset securitization program.
- --------------------------------------------------------------------------------
Operations Summary
. Our net income increased 29 percent in 1999 to $1,486.4 million compared
to operating net income (net income excluding merger and integration
related costs of $751.0 million after-tax related to our merger with
Beneficial Corporation ("Beneficial") and the $118.5 million after-tax gain
on the sale of Beneficial's Canadian operations) of $1,156.6 million and
net income of $524.1 million in 1998. Operating net income in 1998 was up
23 percent compared to net income of $940.3 million in 1997. Our improved
results were due to strong growth in our consumer finance business and
significant declines in operating expenses. Net income in 1999 also
benefited from improved results of our domestic MasterCard and Visa
business. Our diluted earnings per share in 1999 increased to $3.07, 33
percent higher than 1998 diluted operating earnings per share of $2.30.
Diluted operating earnings per share in 1998 increased 19 percent compared
to diluted earnings per share of $1.93 in 1997. Diluted earnings per share,
which includes both the merger and integration related costs and the gain
on the sale of Beneficial's Canadian operations, was $1.03 in 1998.
. Core managed receivables grew 12 percent to $70.9 billion in 1999. Growth
was strongest in our consumer finance business, which includes our home
equity and unsecured products, and auto finance business. Excluding
MasterCard and Visa receivables which declined $.8 billion, our managed
portfolio grew 19 percent in 1999. Our MasterCard and Visa portfolio
declined due to attrition associated with the repositioning of our domestic
portfolio which commenced in 1998 and was partially offset by solid growth
in our GM Card and Union Privilege portfolios in the second half of the
year.
. Our return on average common shareholders' equity ("ROE") rose to 23.5
percent in 1999 compared to 18.2 percent in 1998, excluding merger and
integration related costs and the gain on sale of Beneficial Canada, and
17.3 percent in 1997. Our return on average owned assets ("ROA") improved
to 2.64 percent in 1999 compared to 2.29 percent in 1998, excluding the
nonrecurring items, and 2.03 percent in 1997. Our return on average managed
assets ("ROMA") improved to 1.99 percent in 1999 compared to 1.60 percent
in 1998, excluding the nonrecurring items, and 1.38 percent in 1997.
Including the merger and integration related costs and the gain on sale of
Beneficial Canada, ROE was 8.1 percent, ROA was 1.04 percent and ROMA was
.72 percent in 1998. Our operating net income, ROA, ROMA and ROE have
increased steadily over the past three years as a result of our focus on
higher-return core businesses and improved efficiency. We expect this trend
to continue as we focus on growth of these higher return core businesses.
. Our consolidated managed net interest margin expanded to 8.23 percent in
1999 from 7.86 percent in 1998 and 7.72 percent in 1997. Our margins have
increased because we have continued to raise the interest rates we charge
on our MasterCard and Visa and other unsecured products while lowering our
cost of funds. Interest rates decreased during the last half of 1998 and
increased during the last half of 1999, and the timing of the changes
resulted in a lower average rate in 1999 than in 1998. The increase in net
interest margin from repricing and lower cost of funds was partially offset
by a higher mix of secured loans in our portfolio. Secured loans carry a
lower yield than unsecured products because they experience lower credit
losses.
. Our combined normalized managed basis efficiency ratio was 33.6 percent
in 1999, 37.6 percent in 1998, and 41.0 percent in 1997. The efficiency
ratio is the ratio of operating expenses to the sum of our managed net
interest margin and other revenues less policyholders' benefits. We
normalize, or adjust for, items that are not indicative of ongoing
operations. Our improved ratios were due to cost savings and operating
efficiencies achieved from the consolidation of Beneficial's operations and
to continued cost control in our remaining businesses.
*MasterCard is a registered trademark of MasterCard International, Incorporated
and Visa is a registered trademark of VISA USA, Inc.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 29 - 1999 Annual Report
- --------------------------------------------------------------------------------
Acquisitions and Dispositions
. In November 1999, we signed a definitive agreement to purchase all of the
outstanding capital stock of Renaissance Holdings, Inc. ("Renaissance") for
approximately 5 million shares of our common stock and cash. Renaissance is
a privately held issuer of secured and unsecured credit cards to non-prime
customers. The transaction closed in February 2000 and was accounted for as
a purchase. Accordingly, Renaissance's operating results will be included
with our results of operations subsequent to the acquisition date.
. In August 1999, we acquired all of the outstanding capital stock of
Decision One Mortgage Company LLC ("Decision One") for approximately $60
million in common stock and cash. Decision One originates loans through a
30-state broker network and packages them for sale to investors. The
acquisition was accounted for as a purchase and, accordingly, earnings from
Decision One have been included in our results of operations subsequent to
the acquisition date.
. On June 30, 1998, Household merged with Beneficial, a consumer finance
holding company headquartered in Wilmington, Delaware. Each outstanding
share of Beneficial common stock was converted into 3.0666 shares of
Household common stock, resulting in the issuance of approximately 168.4
million shares of common stock. Each share of Beneficial $5.50 Convertible
Preferred Stock (the "Beneficial Convertible Stock") was converted into the
number of shares of Household common stock the holder would have been
entitled to receive in the merger had the Beneficial Convertible Stock been
converted into shares of Beneficial common stock immediately prior to the
merger. Additionally, each other share of Beneficial preferred stock
outstanding was converted into one share of a newly-created series of
Household preferred stock with terms substantially similar to those of
existing Beneficial preferred stock. The merger was accounted for as a
pooling of interests and therefore, the consolidated financial statements
include the results of operations, financial position, and changes in cash
flows of Beneficial for all periods presented.
In connection with the Beneficial merger, we established an integration
plan. The plan was approved by the appropriate levels of management and
identified activities that would not be continued as a result of the merger
and the related costs of exiting those activities. Our plan also identified
the number of employees who would be involuntarily terminated and
established the benefit levels those employees would receive upon
termination. These benefit levels were communicated to employees in April
1998. Pursuant to our plan, we accrued pretax merger and integration
related costs of approximately $1 billion ($751 million after-tax) in 1998
which have been reflected in the statement of income in total costs and
expenses. The merger and integration plan was completed during 1999. The
costs incurred to execute the plan were consistent with our originally
estimated cost of $1 billion.
The merger and integration costs were comprised of the following:
<TABLE>
<CAPTION>
Restructure Restructure
1998 Activity Reserve Reserve
Restructure -------------------- Balance at 1999 Balance at
Reserve at Cash Non-Cash December 31, Cash December 31,
In millions. Inception Payments Items 1998 Payments 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Employee termination costs $ 270 $(240) $ 30 $(30) -
- ----------------------------------------------------------------------------------------------------------------------------
Facility closures:
Lease termination costs:
Beneficial corporate office 100 (100) - -
Branch offices and other
operating facilities 142 (115) 27 (27) -
Fixed asset writedowns 40 $ (40) - -
Vendor contract termination
penalties 37 (14) 23 (23) -
- ----------------------------------------------------------------------------------------------------------------------------
Total facility closure costs 319 (229) (40) 50 (50) -
- ----------------------------------------------------------------------------------------------------------------------------
Asset writedowns to reflect
modified business plans:
Goodwill and other intangibles 183 (183) - -
Real estate interests 68 (68) - -
- ----------------------------------------------------------------------------------------------------------------------------
Total asset writedowns 251 - (251) - -
- ----------------------------------------------------------------------------------------------------------------------------
Investment banking fees 75 (75) - -
Legal and other expenses 25 (25) - -
Debt prepayment premiums 60 (60) - -
- ----------------------------------------------------------------------------------------------------------------------------
$1,000 $(629) $(291) $ 80 $ (80) -
============================================================================================================================
</TABLE>
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Management's Discussion and Analysis Pg. 30 - 1999 Annual Report
of Financial Condition and
Results of Operations (continued)
Employee termination costs of $270 million (of which $86 million related to
key executives with pre-existing severance agreements) were accrued to
cover costs related to approximately 3,000 employees whose functions were
eliminated due to redundancy and consolidation of branches, corporate staff
and back office operations. As of December 31, 1998, substantially all
identified employees had been severed and approximately $240 million of
severance payments had been made to terminated employees. The remaining $30
million was paid in 1999 pursuant to our plan.
Facility closure costs of $319 million were accrued related to planned
costs to be incurred in connection with the exiting of the Beneficial
corporate office lease, early termination of branch offices and other
operating facility leases and the cancellation of contracts with third
party vendors, primarily for technology, whose services would no longer be
required. The accrual for facility closures included lease termination and
other exit costs for closures of 335 duplicative U.S. and U.K. branch
offices and 8 redundant operating centers as well as fixed asset write
downs primarily related to the closed facilities. In November 1998, we
entered into an agreement to sublease the Beneficial corporate offices to a
third party to whom we paid total consideration of approximately $100
million. As of December 31, 1998, $115 million of lease termination and
other costs for closed branch offices and operating centers had been
incurred. The remaining $27 million in lease termination costs were
incurred in 1999. In addition, $14 million of charges were incurred in 1998
due to early termination of third party vendor contracts. During 1999, the
termination of vendor contracts was completed and the remaining $23 million
of charges were incurred.
In connection with the merger, we re-assessed Beneficial's existing
business plans and assumptions used in evaluating goodwill and other
related intangibles related to various operations, loan product and
acquired receivable portfolios. Our plan identified modifications to these
existing business plans. In connection with these modifications, we
utilized discounted cash flow analysis to value the related goodwill and
other intangible assets using assumptions which reflected our modified
business plans. As a result of our analysis, we wrote off goodwill and
other related intangible assets of $183 million to their estimated fair
values. None of the items included in the goodwill and other intangibles
classification were individually significant to warrant separate
disclosure. In addition, we wrote down real estate interests to reflect
their net realizable values. Assets held for disposal are not material.
We and Beneficial incurred merger-related investment banking fees of $75
million and legal and other expenses of $25 million. In addition, in order
to align the asset liability position of the combined company, we paid $60
million in prepayment premiums to retire outstanding debt.
The merger and integration related costs included approximately $291
million in non-cash charges. Cash payments of $709 million were funded
through our existing operations. In addition, tax benefits of approximately
$249 million were recorded.
. During the first quarter of 1998, we completed the sale of Beneficial's
Canadian operations and recorded an after-tax gain of approximately $118.5
million. In April 1998, the sale of Beneficial's German operations was also
completed. In 1997, Beneficial announced its intent to sell the German
operations and recorded an after-tax loss of approximately $27.8 million
after consideration of a $31.0 million tax benefit.
. In June 1997, we purchased Transamerica Financial Services Holding
Company ("TFS"), the branch-based consumer finance subsidiary of
Transamerica Corporation, for $1.1 billion. We also repaid $2.8 billion of
debt that TFS owed to affiliates of Transamerica Corporation. The
acquisition strengthened our core consumer finance operations by adding new
markets, new customer accounts, seasoned employees and receivables secured
by collateral. In connection with this acquisition, in June 1997, we
completed a public offering of 27.3 million shares of common stock for $1.0
billion. We used the net proceeds from the offering to repay short-term
borrowings related to the acquisition.
. In October 1997, we purchased all of the outstanding capital stock of ACC
Consumer Finance Corporation ("ACC"), an auto finance company, for about
4.2 million shares of our common stock and cash. This purchase expanded our
business of making loans to non-prime borrowers secured by automobiles,
primarily used vehicles sold through franchised dealers, and increased our
market share in the non-prime auto finance market.
. In late December 1997, Beneficial acquired Endeavour Personal Finance
Ltd. ("Endeavour"), including receivables of approximately $250 million for
cash, expanding our United Kingdom presence.
All of the 1997 acquisitions were accounted for as purchases. Thus, our
statement of income for 1997 included the results of operations of TFS, ACC
and Endeavour from the closing dates of the transactions.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 31 - 1999 Annual Report
Segment Results
The following summarizes operating results for our reportable operating
segments for 1999 compared to 1998 and 1997:
. Our Consumer segment reported improved net income and return on average
managed assets in 1999 compared to prior years. Net income increased to
$991.5 million compared to $833.5 million in 1998 and $591.4 million in
1997. Managed receivables grew to $49.9 billion at year-end 1999, up 21
percent from $41.2 billion in 1998 and $36.5 billion in 1997. Our higher
managed receivables were driven by solid growth in home equity, other
unsecured, and auto finance receivables. Return on average owned assets was
2.58 percent in 1999 compared to 2.77 percent in 1998 and 2.39 percent in
1997. This ratio declined in 1999 due to a higher proportion of on-balance
sheet assets. Return on average managed assets increased to 2.11 percent in
1999 from 2.09 percent in 1998 and 1.70 percent in 1997. The improved
results reflect higher net interest margin, partially offset by higher
sales incentive compensation and higher credit loss provision resulting
from portfolio growth. Results for 1999 and 1998 also reflect efficiencies
achieved as Beneficial's branch operations were integrated with
Household's.
. Our Domestic Credit Card segment achieved higher earnings in 1999 as a
result of the repositioning of this segment which began in 1998. We
completed the following repositioning initiatives during 1999:
We modified aspects of the GM Card, our co-branded relationship with
General Motors Corporation, to allow for new and expanded marketing
programs and improved profitability. These initiatives resulted in
increases in both receivables and number of accounts in the second half of
the year.
During the second quarter we repriced the Union Privilege portfolio, our
affinity card relationship with the AFL-CIO labor federation. This
repricing resulted in higher revenues and lower than expected attrition. We
also implemented initiatives to increase receivables such as expanding
risk-based underwriting, improving our capabilities in credit line
assignments and customer retention and testing new products. These
initiatives resulted in approximately 8 percent growth in the portfolio and
more new accounts during the second half of 1999.
We also repositioned our Household Bank branded portfolio to target our
traditional middle-market customer. In early 1999, we entered into a
marketing alliance with Renaissance, a privately held issuer of secured and
unsecured credit cards to non-prime consumers, to facilitate this effort.
The success of this alliance led to our February 2000 acquisition of
Renaissance. Renaissance provides us with an established platform for
growing the non-prime credit card business and will expand our product
offerings to customers and prospects in our other businesses.
These initiatives have resulted in improved profitability and, we
believe, have laid the foundation for future growth. Net income increased
to $152.8 million in 1999 compared to $140.8 million in 1998 and $218.3
million in 1997. Managed receivables totaled $13.9 billion at year-end
1999, compared to $14.8 billion in 1998 and $17.8 billion in 1997. The
decline in managed receivables in 1999 reflect portfolio attrition
resulting from the previously discussed initiatives in the first half of
1999 which was partially offset by solid growth in the second half of 1999.
The decline in managed receivables in 1998 reflect attrition associated
with our repositioning initiatives which included the sale of $1.9 billion
of non-core MasterCard and Visa receivables. Return on average owned assets
was 2.42 percent in 1999 compared to 1.80 percent in 1998 and 2.79 percent
in 1997. Return on average managed assets improved to 1.01 percent,
compared to .75 percent in 1998 and 1.17 percent in 1997. The improved
operating results in 1999 were primarily due to lower operating expenses,
lower loss provision and higher net interest margin. The higher net
interest margin was due to better pricing and was achieved despite lower
average receivables. The improvements were partially offset by lower
securitization and fee income. The decrease in operating results in 1998
was primarily due to lower average receivables and higher credit losses,
partially offset by higher fee income.
. Our International segment reported improved results. Net income increased
to $218.7 million in 1999 compared to $153.7 million in 1998 and $134.6
million in 1997. Managed receivables totaled $7.6 billion at year-end 1999
compared to $7.4 billion in 1998 and $7.8 billion in 1997. Managed
receivable growth in 1999 was primarily attributable to higher MasterCard
and Visa receivables, which were led by continued strong growth in the
Goldfish Card, which we issue as part of our alliance with the Centrica
group. The 1998 receivable decline reflected our sale of Beneficial Canada
and Beneficial Germany. Return on average owned assets increased to 2.97
percent in 1999 compared to 2.16 percent in 1998 and 1.95 percent in 1997.
Return on average managed assets increased to 2.57 percent in 1999 from
1.86 percent in 1998 and 1.73 percent in 1997. The improved operating
results were driven by improved efficiency, as well as higher revenues due
to receivables growth in the U.K. In October 1999, we launched an Internet-
enabled credit card, marbles(TM), which was developed in conjunction with
Freeserve, the U.K.'s largest Internet service provider.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Management's Discussion and Analysis Pg. 32 - 1999 Annual Report
of Financial Condition and
Results of Operations (continued)
Balance Sheet Review
Receivables growth has been a key contributor to our improved results. The
strongest growth came in our consumer finance business, which includes home
equity and unsecured products, and our auto finance business.
. Our managed assets (total assets on our balance sheet plus receivables
serviced with limited recourse) increased $7.6 billion to $80.2 billion at
December 31, 1999. Managed core receivables, which exclude commercial and
other receivables, increased 12 percent in 1999. Our growth was slowed by
attrition associated with the repositioning of our domestic MasterCard and
Visa portfolio which continued into the first half of 1999. Excluding
MasterCard and Visa, managed core receivables grew 19 percent in 1999.
The growth in the managed portfolio is shown in the following table:
<TABLE>
<CAPTION>
Increase (Decrease) Increase (Decrease)
All dollar amounts are stated in millions. December 31, 1999 in 1999/1998 in 1998/1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Managed receivables:
Home equity $26,935.5 21% 15%
Auto finance 3,039.8 72 100
MasterCard/Visa 15,793.1 (5) (14)
Private label 11,269.7 9 4
Other unsecured 13,881.9 16 7
------------------------------------------------------------------------------------------------------------
Core products/1/ 70,920.0 12 4
------------------------------------------------------------------------------------------------------------
Commercial and other 808.3 (5) (37)
Discontinued products/2/ - - (100)
------------------------------------------------------------------------------------------------------------
Total $71,728.3 12% 1%
============================================================================================================
</TABLE>
/1/Excluding MasterCard and Visa, core product growth was 19 percent in
1999 and 12 percent in 1998.
/2/Discontinued products include receivables relating to Beneficial's
disposed Canadian operations in March 1998 and German operations in April
1998.
. Our distribution channels and growth strategies vary across product
lines. The consumer finance business originates real estate and unsecured
products through its retail branch network, correspondents, direct mail,
telemarketing and Internet applications. Private label credit card volume
is generated through merchant promotions, application displays, Internet
applications, direct mail and telemarketing. Auto finance loan volume is
generated primarily through dealer relationships from which installment
contracts are purchased. Additional auto finance volume is generated
through direct lending which includes alliance partner referrals, Internet
applications and direct mail. MasterCard and Visa loan volume is generated
primarily through direct mail, telemarketing, Internet applications,
application displays and promotional activity associated with our co-
branding and affinity relationships. We also supplement internally
generated receivable growth with opportunistic portfolio acquisitions.
The potential for selling more products to existing customers is an
identified growth opportunity and results from our broad product array,
recognized brand names, varied distribution channels, and large, diverse
customer base. During 1999, we expanded these cross-selling initiatives,
including selling credit cards to home equity, private label and RAL
customers. We also believe the Internet will be an increasingly important
distribution channel for our lending products and will enable us to expand
into new customer segments and service current customers in a cost-
effective manner. In the U.K., we launched an Internet enabled credit card,
marbles(TM) and have ongoing e-commerce initiatives in many of our domestic
and foreign businesses.
. Home equity receivables increased 21 percent to $26.9 billion during
1999. Strong growth in our HFC and Beneficial branches and correspondent
business resulted from several factors. First, the productivity of our
branch account executives increased due to installation of our loan system
into Beneficial's branches. Momentum in our branches is strong and we
continue to build our strength by adding branch sales people and increasing
our cross-selling programs. Second, we benefited from the failure of
several of the monoline home equity loan players as lower competition
positively affected pricing, origination and retention. Third, improved
customer service and retention programs resulted in lower attrition.
Finally, we acquired 2 portfolios totaling approximately $1.5 billion.
Our auto finance receivables increased $1.3 billion to $3.0 billion
during 1999. This business benefited from continued industry consolidation
and an expanded sales force which increased our dealer relationships by
over 50 percent. Over one-third of auto receivable growth came from our new
Millennium product. We believe this product enables us to target higher
quality customers at competitive rates and to balance our non-prime and
subprime segments. In addition to its positive impact on receivable growth,
the Millennium product should also positively impact our credit loss
characteristics over time.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 33 - 1999 Annual Report
Private label receivables increased 9 percent to $11.3 billion during
1999 due to growth in new merchants and from our existing merchant base.
During 1999, we signed 16 new merchants, which added approximately $645
million in receivables.
Other unsecured receivables were up 16 percent to $13.9 billion during
1999, due to strong growth in our domestic consumer finance branches. We
realized a full year's benefits of offering products to Beneficial
customers which were not available prior to the merger. New customer growth
also contributed to the higher receivables.
MasterCard and Visa receivables declined 5 percent to $15.8 billion
during 1999. The decrease, principally due to the repositioning of our
domestic MasterCard and Visa portfolio in late 1998 and the first half of
1999, was partially offset by growth in our Union Privilege and non-prime
portfolios and in our U.K. bankcard business. Our alliance with Renaissance
added over half a million accounts and $100 million in receivables in 1999.
. Owned assets totaled $60.7 billion at December 31, 1999 and $52.9 billion
at year-end 1998. Owned receivables may vary from period to period
depending on the timing and size of asset securitization transactions. We
had initial securitizations, excluding replenishments of prior
securitizations, of $5.2 billion of receivables in 1999 and $3.6 billion in
1998. We refer to the securitized receivables that are serviced for
investors and not on our balance sheet as our off-balance sheet portfolio.
. The managed consumer two-months-and-over contractual delinquency ratio
decreased to 4.66 percent at December 31, 1999 from 4.90 percent at
December 31, 1998. The 1999 managed consumer net chargeoff ratio was 4.13
percent compared with 4.29 percent in 1998 and 3.84 percent in 1997.
. The owned consumer two-months-and-over contractual delinquency ratio
decreased to 4.81 percent at December 31, 1999 from 5.12 percent at
December 31, 1998. The 1999 owned consumer net chargeoff ratio was 3.67
percent compared with 3.76 percent in 1998 and 3.39 percent in 1997.
. Our managed credit loss reserves were $2.7 billion at December 31, 1999
compared with $2.5 billion at December 31, 1998. Credit loss reserves as a
percent of managed receivables were 3.72 percent at December 31, 1999
compared with 3.99 percent at year-end 1998.
. Our owned credit loss reserves were $1.8 billion at December 31, 1999
compared with $1.7 billion at December 31, 1998. Credit loss reserves as a
percent of owned receivables were 3.36 percent at December 31, 1999
compared with 3.92 percent at year-end 1998. The decline in this ratio
reflects a growing percentage of real estate secured receivables and the
run-off of our Household Bank branded MasterCard and Visa portfolio which
have higher loss rates.
. In connection with our $2 billion share repurchase program, announced on
March 9, 1999, we repurchased a total of 16.8 million shares of our common
stock. We also repurchased 5.0 million shares prior to March 9, 1999 and
10.5 million shares during 1998 to fund various employee benefit programs.
. Our total shareholders' equity (including company obligated mandatorily
redeemable preferred securities of subsidiary trusts) to managed assets
ratio was 8.72 percent, compared with 9.31 percent at December 31, 1998.
The ratio of tangible equity to tangible managed assets was 6.96 percent
compared with 7.11 percent at year-end 1998.
Pro Forma Managed Statements of Income
Securitizations of consumer receivables have been, and will continue to be,
a source of liquidity for us. We con-tinue to service securitized
receivables after they have been sold and retain a limited recourse
liability for future credit losses. We include revenues and credit-related
expenses related to the off-balance sheet portfolio in one line item in our
owned statements of income. Specifically, we report net interest margin,
provision for credit losses, fee income, and securitization related income
as a net amount in securitization income.
We monitor our operations on a managed basis as well as on the owned
basis shown in our statements of income. The managed basis assumes that the
securitized receivables have not been sold and are still on our balance
sheet. The income and expense items discussed above are reclassified from
securitization income into the appropriate caption. Pro forma managed
statements of income, which reflect these reclassifications, are presented
below. The pro forma managed basis statement of income is not intended
to reflect the differences between our accounting policies for owned
receivables and the off-balance sheet portfolio, but merely to report net
interest margin, fees and provision for loan losses as if the securitized
loans were held in portfolio. Therefore, net income on a pro forma managed
basis equals net income on an owned basis.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Management's Discussion and Analysis Pg. 34 - 1999 Annual Report
of Financial Condition and
Results of Operations (continued)
Pro Forma Managed Statements of Income
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1999 1998 1997
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance and other interest income $ 9,375.7 $ 8,975.4 $ 8,412.5
Interest expense 3,836.5 3,881.3 3,692.2
-------------------------------------------------------------------------------------------
Net interest margin 5,539.2 5,094.1 4,720.3
Provision for credit losses 2,781.8 2,716.0 2,620.6
-------------------------------------------------------------------------------------------
Net interest margin after provision for credit losses 2,757.4 2,378.1 2,099.7
-------------------------------------------------------------------------------------------
Insurance revenues 534.6 492.8 454.2
Investment income 168.8 161.2 173.1
Fee income 1,205.5 1,181.2 1,058.4
Securitization related income 116.0 216.8 402.1
Other income 223.8 243.7 355.7
Gain on sale of Beneficial Canada - 189.4 -
-------------------------------------------------------------------------------------------
Total other revenues 2,248.7 2,485.1 2,443.5
-------------------------------------------------------------------------------------------
Salaries and fringe benefits 1,194.6 1,127.5 1,085.3
Occupancy and equipment expense 270.9 316.1 333.6
Other marketing expenses 370.0 403.2 449.6
Other servicing and administrative expenses 547.9 654.9 857.9
Amortization of acquired intangibles and goodwill 143.9 170.6 158.4
Policyholders' benefits 258.1 238.2 255.9
Merger and integration related costs - 1,000.0 -
-------------------------------------------------------------------------------------------
Total costs and expenses 2,785.4 3,910.5 3,140.7
-------------------------------------------------------------------------------------------
Income before income taxes 2,220.7 952.7 1,402.5
Income taxes 734.3 428.6 462.2
-------------------------------------------------------------------------------------------
Net income $ 1,486.4 $ 524.1 $ 940.3
===========================================================================================
Average managed receivables $66,314.7 $63,677.1 $60,447.2
Average noninsurance investments 558.6 803.7 661.4
Other interest-earning assets 416.4 302.6 -
-------------------------------------------------------------------------------------------
Average managed interest-earning assets $67,289.7 $64,783.4 $61,108.6
===========================================================================================
</TABLE>
Results of Operations
The following discussion on revenues, where applicable, and provision for
credit losses includes comparisons to amounts reported on our historical
owned statements of income ("Owned Basis"), as well as on the above pro
forma managed statements of income ("Managed Basis").
Net Interest Margin Our net interest margin on an Owned Basis expanded
to $3,806.3 million for 1999, up from $3,144.3 million in 1998 and $2,822.4
million in 1997. As a percent of average owned interest-earning assets, net
interest margin was 7.80 percent in 1999, 7.34 percent in 1998, and 7.16
percent in 1997. The dollar increase in 1999 was due to growth in average
owned interest-earning assets and higher interest spreads. The interest
spread represents the difference between the yield earned on interest-
earning assets and the cost of the debt used to fund the assets. Although
interest rates decreased during the last half of 1998 and increased during
the last half of 1999, the timing of these rate changes resulted in a lower
average rate for 1999 than for 1998. See pages 48 and 49 for additional
information regarding our Owned Basis net interest margin.
Our net interest margin on a Managed Basis increased to $5,539.2 million
for 1999, up from $5,094.1 million in 1998 and $4,720.3 million in 1997 due
to receivable growth. The net interest margin percentage on a Managed Basis
increased to 8.23 percent from 7.86 percent in 1998 and 7.72 percent in
1997. During 1999, pricing improvements in our MasterCard and Visa and
other unsecured portfolios were partially offset by an increase in the
percentage of secured loans, which carry a lower yield than unsecured
products. The 1998 increase was also slightly offset by lower margin from a
higher mix of secured loans in the portfolio. Lower cost of funds
contributed to increases in both years.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 35 - 1999 Annual Report
Net interest margin as a percent of receivables on a Managed Basis is
greater than on an Owned Basis because auto finance, MasterCard and Visa,
and other unsecured receivables, which have wider spreads, are a larger
portion of the off-balance sheet portfolio than of the owned portfolio.
Because we are able to reprice our products in response to interest rate
changes, we remain relatively interest rate insensitive. At December 31,
1999 and 1998, we estimated that our after-tax earnings would decline by
about $81 and $43 million, respectively, following a gradual 200 basis
point increase in interest rates over a twelve month period.
Provision for Credit Losses The provision for credit losses includes
current period credit losses and an amount which we believe is sufficient
to maintain reserves for credit losses at a level that reflects known and
inherent losses in the portfolio. The Managed Basis provision for credit
losses also includes the over-the-life reserve requirement established on
the off-balance sheet portfolio when receivables are securitized.
The provision for credit losses on an Owned Basis totaled $1,716.4
million in 1999 compared to $1,516.8 million in 1998 and $1,493.0 million
in 1997. The increases were due to higher chargeoffs in our unsecured and
private label portfolios. The provision for credit losses on an Owned Basis
may vary from year to year, depending on the amount of securitizations in a
particular period. As a percent of average owned receivables, the provision
was 3.59 percent compared to 3.64 percent in 1998 and 3.85 percent in 1997.
The decline in this ratio is due to the increase in secured loans as a
percentage of our total owned portfolio and the run-off of our Household
Bank branded MasterCard and Visa portfolio which has higher loss rates.
The provision for credit losses on a Managed Basis was $2,781.8 million
in 1999, $2,716.0 million in 1998, and $2,620.6 million in 1997. The
provision as a percent of average managed receivables was 4.19 percent in
1999, 4.27 percent in 1998, and 4.34 percent in 1997. The Managed Basis
provision is impacted by the type and amount of receivables securitized
during the year and substantially offsets the income recorded on the
securitization transactions.
Other Revenues Total other revenues on an Owned Basis were $2,916.2 million
in 1999, $3,235.7 million in 1998, and $3,213.8 million in 1997. Total
other revenues on a Managed Basis were $2,248.7 million in 1999, $2,485.1
million in 1998, and $2,443.5 million in 1997. Total other revenues in 1998
included a pretax gain of $189.4 million from the sale of Beneficial's
Canadian operations.
Securitization income declined to $1,393.5 million in 1999, from $1,548.9
million in 1998 and $1,638.4 million in 1997, due to lower average
securitized receivables. The components of securitization income are
reclassified to the appropriate caption in the statements of income on a
Managed Basis.
Insurance revenues of $534.6 million in 1999 were up from $492.8 million
in 1998 and $454.2 million in 1997. The increases reflected increased sales
on a larger loan portfolio and improved retention in our consumer finance
branch systems.
Investment income includes interest income on investment securities in
the insurance business as well as realized gains and losses from the sale
of investment securities. Investment income was $168.8 million in 1999
compared with $161.2 million in 1998 and $173.1 million in 1997. The
increase in 1999 was due to higher average investment balances. The
decrease in 1998 was due to lower average investment balances and yields.
Fee income on an Owned Basis includes revenues from fee-based products
such as credit cards. Fee income was $595.5 million in 1999, $599.7 million
in 1998, and $592.4 million in 1997. The decrease in 1999 reflects the
impact of the repositioning of our Household Bank branded credit card
portfolio and the sale of $1.9 billion of receivables in the second half of
1998. The increase in 1998 reflected higher credit card fees and
interchange income. Owned fee income will also vary from year to year
depending upon the amount of securitizations in a particular period.
Fee income on a Managed Basis was $1,205.5 million in 1999 compared to
$1,181.2 million in 1998 and $1,058.4 million in 1997. The increase in 1999
reflected increases in credit card and interchange fees which were
accomplished despite an 18 percent decrease in average managed credit card
receivables. The increase in 1998 was primarily due to higher interchange
and credit card fees.
Securitization related income on a Managed Basis includes the gross gains
on current period securitization transactions and amortization of current
and prior period gains. Securitization related income was $116.0 million in
1999, $216.8 million in 1998, and $402.1 million in 1997 and will vary from
year to year depending upon the amount and mix of securitizations in a
particular period.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Management's Discussion and Analysis Pg. 36 - 1999 Annual Report
of Financial Condition and
Results of Operations (continued)
Other income, which includes revenue from our RAL business, was $223.8
million in 1999, $243.7 million in 1998, and $355.7 million in 1997. The
decline in 1999 was attributable to lower non-recurring gains on sales of
non-strategic assets and lower commercial income partially offset by higher
RAL income. The 1999 RAL increase was primarily due to a higher number of
electronic filings of tax returns and smooth refund processing with the
Internal Revenue Service ("IRS"). The decrease in 1998 was due to lower RAL
income as measures taken by the IRS delayed payment on the returns of
selected taxpayers claiming an earned income tax credit. Other income in
1997 included non-recurring gains on the sales of MasterCard and Visa
receivables from our non co-branded portfolio and a gain from the sale of a
Beneficial life insurance portfolio.
Expenses Total costs and expenses were $2,785.4 million in 1999,
$3,910.5 million in 1998, and $3,140.7 million in 1997. Expenses in 1998
include merger and integration related costs of $1.0 billion. Expenses in
1997 include $90 million of Beneficial non-operating charges (including a
$59 million provision for the planned disposition of Beneficial's German
operations) and expenses related to Beneficial's Canadian and German
operations which were sold in early 1998.
Operating expenses, excluding the one-time merger related costs of $1.0
billion, were down in 1999 and 1998 while revenues increased for both
periods. Cost savings and operating efficiencies from the Beneficial
integration and continued cost control efforts throughout the company
resulted in lower occupancy and equipment, salaries and fringe benefits and
other costs. Integration-related decreases in salaries and fringe benefits
were offset by growth throughout our businesses. In connection with the
Beneficial merger, we originally estimated annual pre-tax cost savings of
approximately $450 million through the elimination of redundant staff
functions and corporate overhead, consolidation of product lines, key data-
processing and back office functions and the elimination of certain
duplicate or excess office facilities. As of December 31, 1999, we had
achieved savings on a run rate basis which were consistent with our
expectations. Our overall normalized managed efficiency ratio was 33.6
percent in 1999 compared with 37.6 percent in 1998 and 41.0 percent in
1997.
Salaries and fringe benefits were $1,194.6 million in 1999, up from
$1,127.5 million in 1998 and $1,085.3 million in 1997. The increase was
mostly due to higher sales incentives for our consumer finance branch
employees and more employees in our auto finance business, both directly
related to receivables growth. These increases were partially offset by
efficiencies resulting from Beneficial staff reductions.
Occupancy and equipment expense was $270.9 million in 1999 compared with
$316.1 million in 1998 and $333.6 million in 1997. The reductions were
primarily due to the elimination of duplicate branch offices and operating
centers, including the sublease of the Beneficial office complex in
Peapack, New Jersey, as a result of the Beneficial merger.
Other marketing expenses include payments for advertising, direct mail
programs and other marketing expenditures. These expenses were $370.0
million in 1999 compared to $403.2 million in 1998 and $449.6 million in
1997. The decrease in 1999 was due to lower spending on marketing programs
on our Household Bank branded MasterCard and Visa portfolio partially
offset by higher marketing spending in the U.K. associated with the launch
of our marbles(TM) card. Amounts for 1997 included marketing initiatives
for several Beneficial private label merchants.
Other servicing and administrative expenses were $547.9 million in 1999,
$654.9 million in 1998, and $857.9 million in 1997. The decreases were
primarily due to the consolidation of Beneficial's operations which
provided cost savings in system and administrative costs. Included in 1997
is Beneficial's nonoperating charge of $90 million and the expenses related
to Beneficial's Canadian and German operations sold in early 1998.
Amortization of acquired intangibles and goodwill was $143.9 million in
1999, $170.6 million in 1998, and $158.4 million in 1997. The decrease in
1999 reflects lower levels of intangible assets resulting from the
Household Bank branded credit card portfolio sales in 1998. The increase in
1998 reflects higher goodwill from our acquisitions of TFS and ACC in 1997.
Policyholders' benefits were $258.1 million in 1999, $238.2 million in
1998, and $255.9 million in 1997. The increase in the 1999 expense is
consistent with the increase in insurance revenues resulting from increased
policy sales. The lower expense in 1998 was due to fewer policies in our
life insurance business.
Income taxes. The effective tax rate was 33.1 percent in 1999, 34.4
percent in 1998 (excluding merger and integration related costs and the
gain on sale of Beneficial Canada) and 33.0 percent in 1997.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 37 - 1999 Annual Report
Credit Quality
Delinquency and Chargeoffs Our delinquency and net chargeoff ratios
reflect, among other factors, the quality of receivables, the average age
of our loans, the success of our collection efforts and general economic
conditions. The levels of personal bankruptcies also have a direct effect
on the asset quality of our overall portfolio and others in our industry.
We track delinquency and chargeoff levels on an owned and a managed
basis. We apply the same credit and portfolio management procedures to both
our owned and off-balance sheet portfolios. Our focus is to use risk-based
pricing and effective collection efforts for each loan. We have a process
which we believe gives us a reasonable basis for predicting the asset
quality of new accounts. This process is based on our experience with
numerous marketing, credit and risk management tests. We also believe that
our frequent and early contact with delinquent customers is helpful in
managing net credit losses. Despite these efforts to manage in the current
credit environment, bankruptcies remain an industry-wide issue and are
harder to predict.
During 1999, our delinquency and net chargeoff levels were positively
affected by lower bankruptcies but were negatively affected by the
continued maturing of our receivables.
When evaluating credit risk, it is important to also consider risk
adjusted revenue because our biggest protection against credit loss is the
ability to price for it. Risk adjusted revenue on a managed basis increased
to 7.37 percent in 1999 from 6.90 percent in 1998 (excluding the gain on
the sale of Beneficial's Canadian operations) and 7.30 percent in 1997. The
increase in 1999 was due to the repricings in our MasterCard and Visa
portfolio, firmer pricing in the private label portfolio, better pricing in
our home equity portfolio as a result of less competition and a lower cost
of funds. The decline in 1998 was primarily due to higher chargeoffs which
were partially offset by higher net interest margin.
Our chargeoff policy for consumer receivables varies by product.
Unsecured receivables are written off at the following stages of
contractual delinquency: MasterCard and Visa-6 months; private label-9
months; and other unsecured-9 months and no payment received in 6 months.
For real estate secured receivables, carrying values are written down to
net realizable value at the time of foreclosure. For loans secured by
automobiles, carrying values are written down to net realizable value when
the loan becomes 5 months contractually delinquent. Commercial receivables
are written off when it becomes apparent that an account is uncollectible.
Consumer Two-Month-and-Over Contractual Delinquency Ratios
<TABLE>
<CAPTION>
1999 Quarter End 1998 Quarter End
------------------------------- ------------------------------
4 3 2 1 4 3 2 1
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Managed:
Home equity 3.27% 3.46% 3.29% 3.54% 3.67% 3.73% 3.55% 3.68%
Auto finance 2.43 2.26 1.87 1.74 2.29 2.05 1.67 1.84
MasterCard/Visa 2.78 3.10 3.11 3.61 3.75 3.73 3.30 3.10
Private label 5.97 6.66 6.62 6.37 6.20 6.55 6.10 6.04
Other unsecured 8.81 8.57 8.17 7.84 7.94 8.03 7.82 7.72
------------------------------------------------------------------------------------------
Total Managed 4.66% 4.89% 4.72% 4.81% 4.90% 4.96% 4.65% 4.65%
==========================================================================================
Total Owned 4.81% 5.24% 4.96% 5.04% 5.12% 5.23% 4.89% 4.70%
==========================================================================================
</TABLE>
Our managed consumer delinquency ratio at year end declined from the third
quarter level, reflecting solid improvement in our home equity, MasterCard
and Visa and private label portfolios. Our lower domestic MasterCard and
Visa delinquency over the past several quarters is the result of run-off
associated with our Household Bank branded portfolio, tightened credit
extension policies and re-engineered collection efforts. Private label
delinquencies benefited from the assimilation of the Beneficial operations.
Our improved home equity delinquency reflects the growing percentage of
loans in our portfolio on which we hold a first lien position. The increase
in our other unsecured delinquency reflects the continued seasoning of our
Beneficial unsecured products.
The decrease in the managed delinquency ratio from a year ago was mainly
due to improvement in the home equity and MasterCard and Visa portfolios,
as discussed above. MasterCard and Visa delinquency has dropped over $190
million from the prior year quarter. This improvement was partially offset
by the continued seasoning of our Beneficial unsecured products.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Management's Discussion and Analysis Pg. 38 - 1999 Annual Report
of Financial Condition and
Results of Operations (continued)
The factors affecting owned delinquency trends are consistent with those
described above for our managed portfolio. Owned delinquency by product is
comparable to managed except for MasterCard and Visa and other unsecured
where owned delinquency is greater due to the retention of receivables on
balance sheet that do not meet the eligibility criteria for securitization.
Consumer Net Chargeoff Ratios
<TABLE>
<CAPTION>
1999 Quarter Annualized 1998 Quarter Annualized
Full Year -------------------------------- Full Year --------------------------------- Full Year
1999 4 3 2 1 1998 4 3 2 1 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Managed:
Home equity .58% .54% .58% .64% .55% .63% .68% .72% .52% .61% .64%
Auto finance 4.96 5.43 4.55 4.41 5.45 5.39 5.63 4.89 5.18 5.94 4.60
MasterCard/Visa 6.66 5.57 6.15 7.30 7.59 5.95 6.61 5.96 5.49 5.78 5.55
Private label 5.65 5.88 5.60 5.57 5.53 5.65 5.47 5.33 6.05 5.73 4.62
Other unsecured 6.52 6.98 7.06 5.61 6.36 6.97 6.94 7.50 7.26 6.22 5.48
--------------------------------------------------------------------------------------------------------------------------
Total Managed 4.13% 3.96% 4.09% 4.10% 4.37% 4.29% 4.39% 4.33% 4.26% 4.17% 3.84%
==========================================================================================================================
Total Owned 3.67% 3.62% 3.63% 3.54% 3.92% 3.76% 3.85% 3.79% 3.69% 3.68% 3.39%
==========================================================================================================================
</TABLE>
Our annualized fourth quarter chargeoff ratio was the lowest level since
1997. During the quarter, we saw continued improvement in our MasterCard
and Visa portfolio as our domestic MasterCard and Visa business posted its
third consecutive quarter of lower chargeoff. This improvement was
partially offset by seasonality in our private label and auto finance
portfolios.
The managed consumer net chargeoff ratio for 1999 improved to 4.13
percent, down from 4.29 percent in 1998, but up from 3.84 percent in 1997.
The decrease in 1999 reflected lower home equity, auto finance and other
unsecured chargeoffs and a lower chargeoff contribution from our domestic
MasterCard and Visa portfolio due to lower average receivables. Our overall
MasterCard and Visa chargeoff ratio was up in 1999, reflecting the impact
of the repositioning of our Household Bank branded portfolio. The increase
in 1998 was the result of higher bankruptcy chargeoffs and the continued
seasoning of the private label and other unsecured portfolios.
The factors affecting owned chargeoff trends are consistent with those
described above for our managed portfolio. Owned chargeoff by product is
comparable to managed except for MasterCard and Visa, other unsecured and
auto finance. Chargeoffs for MasterCard and Visa and other unsecured on an
overall basis are higher due to the difference in credit quality and
seasoning of the receivables which remain on our balance sheet. Chargeoffs
on owned auto finance receivables are lower due to the predominantly
unseasoned nature of the receivables which remain on our balance sheet.
Credit Loss Reserves We maintain credit loss reserves to cover probable
losses of principal and interest in both our owned and off-balance sheet
portfolios. We estimate losses for consumer receivables based on delin-
quency status and past loss experience. For securitized receivables, we
also record a provision for estimated probable losses that we expect to
incur over the life of the transaction. For commercial loans, we calculate
probable losses by using expected amounts and timing of future cash flows
to be received on loans. In addition, we provide for general loss reserves
on both consumer and commercial receivables to reflect our assessment of
portfolio risk factors. Loss reserve estimates are reviewed periodically
and adjustments are reported in earnings when they become known. These
estimates are influenced by factors outside of our control, such as
economic conditions and consumer payment patterns. As a result, there is
uncertainty inherent in these estimates, making it reasonably possible that
they could change.
The following table sets forth credit loss reserves for the periods
indicated:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managed credit loss reserves $2,666.6 $2,548.1 $2,523.0 $2,109.0 $1,591.5
Reserves as a % of managed receivables 3.72% 3.99% 3.99% 3.56% 3.12%
==============================================================================================
Owned credit loss reserves $1,757.0 $1,734.2 $1,642.1 $1,398.4 $1,126.5
Reserves as a % of owned receivables 3.36% 3.92% 4.25% 3.64% 3.22%
==============================================================================================
</TABLE>
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 39 - 1999 Annual Report
The changes in credit loss reserves reflect the impact of a growing
percentage of secured loans, the 1998 sale of credit card receivables,
continued runoff of our Household Bank branded MasterCard and Visa
portfolio and improving delinquency, chargeoff, and bankruptcy trends. Home
equity receivables, which have a significantly lower chargeoff rate than
unsecured receivables, represent 37.5 percent of our total managed
receivables and 47.2 percent of our total owned receivables at December 31,
1999 compared to 34.9 percent and 42.3 percent, respectively, in 1998.
Prior to the 1998 repositioning of our MasterCard and Visa business,
unsecured receivables represented a higher percentage of our portfolio and
drove the increasing reserve ratios. The change in portfolio mix in 1999 is
important because the loss severity for home equity loans is significantly
less than that for unsecured products, such as credit cards.
Geographic Concentrations The state of California accounts for 17
percent of our managed domestic consumer portfolio and is the only state
with more than 10 percent of this portfolio. Because of our centralized
underwriting collections and processing functions, we can quickly change
our credit standards and intensify collection efforts in specific
locations.
Our foreign consumer operations located in the United Kingdom and Canada
accounted for 9 and 2 percent, respectively, of managed consumer
receivables at December 31, 1999.
<TABLE>
<CAPTION>
Nonperforming Assets
<S> <C> <C> <C>
All dollar amounts are stated in millions.
At December 31 1999 1998 1997
----------------------------------------------------------------------------------------------------------------
Nonaccrual managed receivables $1,912.6 $1,439.2 $1,364.9
Accruing managed consumer receivables 90 or more days delinquent 739.9 874.6 807.8
Renegotiated commercial loans 12.3 12.3 12.4
----------------------------------------------------------------------------------------------------------------
Total nonperforming managed receivables 2,664.8 2,326.1 2,185.1
Real estate owned 271.5 253.9 212.8
----------------------------------------------------------------------------------------------------------------
Total nonperforming managed assets $2,936.3 $2,580.0 $2,397.9
================================================================================================================
Managed credit loss reserves as a percent of nonperforming managed receivables 100.1% 109.5% 115.5%
----------------------------------------------------------------------------------------------------------------
</TABLE>
Liquidity and Capital Resources
Our subsidiaries use cash to originate loans, purchase loans or investment
securities and acquire businesses. Their main sources of cash are the
collection of receivable balances, maturities or sales of investment
securities, proceeds from the issuance of debt, deposits, securitization of
consumer receivables, and cash provided by operations. Our liquidity
strategy continues to be conservative.
In managing capital, we develop targets for the ratio of equity to
managed assets based on discussions with rating agencies, reviews of
regulatory requirements and competitor capital positions, credit loss
reserve strength, risks inherent in the projected operating environment and
acquisition objectives. We also specifically consider the level of
intangibles arising from completed acquisitions. To protect debt investors,
targets are set for each legal entity that raises funds. These targets
include capital levels against both on-balance sheet assets and our off-
balance sheet portfolio.
Consolidated capital ratios were consistent with our targets and were as
follows:
<TABLE>
<CAPTION>
At December 31 1999 1998
<S> <C> <C>
---------------------------------------------------------------------------
Tangible equity to tangible managed assets 6.96% 7.11%
Total shareholders' equity/1/ as a percent of owned assets 11.51 12.78
Total shareholders' equity/1/ as a percent of managed assets 8.72 9.31
---------------------------------------------------------------------------
/1/Includes trust preferred securities.
---------------------------------------------------------------------------
</TABLE>
Parent Company Household International, Inc. is the holding or parent
company that owns the outstanding stock of its subsidiaries. The parent
company's main sources of funds are cash received from its subsidiaries in
the form of dividends and intercompany borrowings. The parent company
received dividends from its subsidiaries of $1.2 billion in 1999 and $1.1
billion in 1998. In addition, the parent company receives cash from third
parties
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Management's Discussion and Analysis Pg. 40 - 1999 Annual Report
of Financial Condition and
Results of Operations (continued)
by issuing debt and common stock. This includes commercial paper
totaling $397.7 million at December 31, 1999 and $315.6 million at December
31, 1998 that was sold through an in-house sales force. At December 31,
1999, the parent company had $400 million in committed back-up lines of
credit that it can use on short notice. These lines are available either to
the parent company or its subsidiary, Household Finance Corporation
("HFC"). None of these back-up lines were utilized in 1999. These lines of
credit expire in 2003 and do not contain material adverse change clauses
that could restrict availability. The only financial covenant contained in
the terms of the parent company's credit agreements is that we must
maintain minimum shareholders' equity of $2.0 billion.
The parent company has a number of obligations to meet with its available
cash. It must be able to service its debt and meet the capital needs of its
subsidiaries. It also must pay dividends on its preferred stock and may pay
dividends to its common stockholders. The parent company made capital
contributions of $16 million to subsidiaries in 1999 and $598 million in
1998. The parent company paid $332.1 million in common and preferred
dividends to shareholders in 1999 and $256.5 million in 1998. Beneficial
paid cash dividends of $61.8 million in 1998. The parent company
anticipates its common stock dividend payout ratio in 1999 to be comparable
to prior years.
On March 9, 1999, our Board of Directors authorized the repurchase of up
to $2 billion of our outstanding common shares. Purchases will occur in the
open market from time to time over a 24 month period from the date of the
announcement, depending upon market conditions, other investment
opportunities for growth and capital targets. During 1999, 16.8 million
shares were repurchased under this program for a total of $712.9 million.
We also repurchased 5.0 million shares of our common stock prior to March
9, 1999 and 10.5 million shares during 1998 to fund various employee
benefit programs.
Treasury stock activity during 1999 also included approximately 1.6
million shares withheld to cover taxes associated with the exercise of
stock options by former Beneficial employees.
During 1998, we issued 168.4 million shares of common stock and three
series of preferred stock in connection with the Beneficial merger. We also
repurchased approximately $1.1 billion of senior and senior subordinated
debt in order to better align the asset/liability position of the combined
company. These debt repurchases were funded with senior debt and other
borrowings. Also, cash payments of approximately $709 million for merger
and integration related costs were funded through existing operations.
In October 1998, we redeemed, at par, all outstanding shares of our 7.35%
Preferred Stock, Series 1993-A, for $25 per depositary share plus accrued
and unpaid dividends. In March 1998, a subsidiary trust issued $200 million
of company obligated mandatorily redeemable preferred securities.
Subsidiaries We have three major subsidiaries: HFC, including its
wholly-owned subsidiary, Beneficial; Household Bank, f.s.b. ("the Bank");
and Household Global Funding ("Global"). These subsidiaries use cash to
originate loans, purchase loans or investment securities or acquire
businesses. Their main sources of cash are the collection of receivable
balances, maturities or sales of investment securities, proceeds from the
issuance of debt and deposits and from the securitization of receivables,
capital contributions from the parent company, and cash provided by
operations.
HFC HFC funds its operations by issuing commercial paper, medium-term
debt, and long-term debt primarily to wholesale investors; securitizing
consumer receivables; and receiving capital contributions from its parent.
HFC's outstanding commercial paper totaled $8.1 billion at December 31,
1999 and $7.1 billion at December 31, 1998. HFC markets its commercial
paper through an in-house sales force. HFC actively manages the level of
commercial paper outstanding to ensure availability to core investors and
proper use of any excess capacity within internally established targets.
HFC markets domestic medium-term notes through investment banks and its
in-house sales force. A total of $4.0 billion domestic medium-term notes
was issued in 1999. To obtain a broader investment base, HFC and its
subsidiary, Household Bank (Nevada) N.A., a credit card bank issuing non-GM
cards, periodically issue medium-term notes in foreign markets. During
1999, $203 million in medium-term notes were issued in these foreign
markets compared with $2.1 billion in 1998. In order to eliminate future
foreign exchange risk, currency swaps were used to convert the notes to
U.S. dollars at the time of issuance. During 1999, HFC also issued $5.1
billion of long-term debt with a weighted average original maturity of 7.07
years. These long-term issuances lengthened the term of HFC's funding,
reduced reliance on commercial paper and securitizations, and preserved
liquidity.
HFC had committed back-up lines of credit totaling $9.0 billion at
December 31, 1999, of which $400 million were also available to its parent
company. None of these back-up lines were used in 1999. In addition, none
of these lines contained a material adverse change clause which could
restrict availability. Our back-up lines
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 41 - 1999 Annual Report
expire on various dates from 2000 through 2004. The most restrictive
financial covenant contained in the terms of HFC's credit agreements is the
maintenance of minimum shareholder's equity of $3.0 billion.
The Bank The Bank primarily uses wholesale funding for its operations.
These sources include securitizations of credit card receivables, domestic
and European medium-term notes, certificates of deposit and Federal funds
borrowings. The Bank also receives cash through the collection of
receivable balances. The Bank's major use of cash is the purchase or
origination of receivables. The Bank also temporarily funds the RAL program
under its agreement with an affiliate. RAL loans are sold at par to an
affiliate within two days of origination with no recourse to the Bank.
During 1999, the Bank issued $3.1 billion in time certificates of deposit
obtained through national brokerage firms as this source of funding was
more cost effective than other funding sources. The Bank also issued $574
million of medium-term notes, of which $529 million was Euro-denominated
notes during 1999. In order to eliminate future foreign exchange risk,
currency swaps were used to convert the notes to U.S. dollars at the time
of issuance.
The Bank is subject to the capital adequacy guidelines adopted by the
Office of Thrift Supervision. At December 31, 1999, the leverage, tier 1
and total risk-based capital ratio levels for a "well capitalized"
institution were 5.0, 6.0 and 10.0 percent, respectively. The Bank's ratios
for each of these categories at December 31, 1999 were 7.04, 8.08 and 10.59
percent, respectively.
Global We have foreign subsidiaries located in the United Kingdom and
Canada. Global was formed to combine ownership of these businesses.
Global's assets were $7.9 billion at year-end 1999. Consolidated
shareholders' equity reflects the effect of translating our foreign
subsidiaries' assets, liabilities and operating results from their local
currency into U.S. dollars. We have entered into foreign exchange contracts
to hedge portions of our investment in foreign subsidiaries. We believe
that the potential loss in net income associated with a 10 percent adverse
change in the British pound/US dollar or Canadian dollar/US dollar exchange
rates would not be material to us.
Each foreign subsidiary conducts its operations using its local currency.
While each foreign subsidiary usually borrows funds in its local currency,
both our United Kingdom and Canadian subsidiaries have borrowed funds
directly in the United States capital markets. This allowed the
subsidiaries to achieve a lower cost of funds than that available at that
time in their local markets. These borrowings were converted from U.S.
dollars to their local currencies using currency swaps at the time of
issuance. Net realized gains and losses in foreign currency swap
transactions were not material to our results of operations or financial
position in any of the years presented.
Our United Kingdom operation is funded with wholesale deposits, short and
intermediate-term bank lines of credit, long-term debt and securitizations
of receivables. Deposits at both year-end 1999 and 1998 were $1.2 billion.
Borrowings from bank lines of credit at year-end 1999 were $903.1 million
compared with $1.4 billion a year ago. Long-term debt at year-end 1999 was
$2.5 billion compared with $1.8 billion a year earlier.
At December 31, 1999, $2.7 billion of the United Kingdom's total debt was
guaranteed by the parent company and $1.8 billion was guaranteed by HFC for
a fee. Committed back-up lines of credit for the United Kingdom were
approximately $3.2 billion at December 31, 1999. These lines have varying
maturities from 2000 through 2006.
Our Canadian operation is funded with commercial paper, intermediate and
long-term debt. Intermediate and long-term debt totaled $685.7 million at
year-end 1999 compared with $575.1 million a year ago. Committed back-up
lines of credit for Canada were approximately $444.7 million at December
31, 1999. At December 31, 1999, $.4 billion of the Canadian subsidiary's
total debt was guaranteed by the parent company and $.6 billion was
guaranteed by HFC.
Investment Ratings At December 31, 1999, the long-term debt of the
parent company, HFC, Beneficial, the Bank, and the preferred stock of the
parent company have been assigned an investment grade rating by four
nationally recognized statistical rating agencies. These agencies include
the commercial paper of HFC in their highest rating category. Three of
these agencies also include the parent company's commercial paper in their
highest rating category. With our back-up lines of credit and
securitization programs, we believe we have sufficient funding capacity to
refinance maturing debts and fund our growth.
Capital Expenditures During 1999 we made $140 million in capital
expenditures compared to the prior-year level of $135 million.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Management's Discussion and Analysis Pg. 42 - 1999 Annual Report
of Financial Condition and
Results of Operations (continued)
Asset Securitizations
Securitizations of consumer receivables have been, and will continue to be,
a source of liquidity for HFC, the Bank and the United Kingdom subsidiary.
We believe the market for securities issued by an investment grade issuer
and backed by receivables is a reliable and cost-effective source of funds.
The following table summarizes the composition of receivables securitized
(excluding replenishments of certificate holder interests) during the year:
<TABLE>
<CAPTION>
In billions. 1999 1998 1997
- -------------------------------------------------------------
<S> <C> <C> <C>
MasterCard/Visa $ 1.8 $ 1.3 $ 4.1
Auto finance 1.4 .8 -
Home equity - - 1.6
Private label .5 - .7
Other unsecured 1.5 1.5 1.9
- -------------------------------------------------------------
Total $ 5.2 $ 3.6 $ 8.3
=============================================================
</TABLE>
The following table summarizes the expected amortization of our
securitizations by type:
<TABLE>
<CAPTION>
In millions.
At December 31, 1999 2000 2001 2002 2003 2004 Thereafter Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Home equity $1,004.9 $ 599.9 $ 361.0 $ 307.8 - - $ 2,273.6
Auto finance 713.6 533.3 350.8 208.6 - - 1,806.3
MasterCard/Visa 3,092.8 3,045.4 2,368.9 971.6 - - 9,478.7
Private label 162.5 487.5 208.3 291.7 - - 1,150.0
Other unsecured 1,828.6 1,064.6 706.0 783.2 $227.0 $120.9 4,730.3
- -----------------------------------------------------------------------------------------------------------------------
Total $6,802.4 $5,730.7 $3,995.0 $2,562.9 $227.0 $120.9 $19,438.9
=======================================================================================================================
</TABLE>
At December 31, 1999, the expected weighted average remaining life of these
transactions was 1.7 years.
For MasterCard and Visa and private label securitizations, the issued
securities may pay off sooner than originally scheduled if certain events
occur. One example of such an event is if the annualized portfolio yield
(defined as the sum of finance income and applicable fees, less net
chargeoffs) for a certain period drops below a base rate (generally equal
to the sum of the rate paid to the investors and the servicing fee). For
home equity and other unsecured securitizations, early pay off of the
securities begins if the annualized portfolio yield falls below various
limits, or if certain other events occur. We do not presently believe that
any early payoff will take place. If early payoff occurred, our funding
requirements would increase. These additional requirements could be met
through securitizations, issuance of various types of debt or borrowings
under existing back-up lines of credit. We believe we would continue to
have more than adequate sources of funds if an early payoff event occurred.
At December 31, 1999, HFC and the Bank have facilities with commercial
banks under which they may securitize up to $9.6 billion of receivables.
These facilities are renewable on an annual basis. At December 31, 1999,
$9.4 billion of receivables were securitized under these programs. The
amount available under these facilities will vary based on the timing and
volume of public securitization transactions.
Year 2000
We completed the Year 2000 conversion and testing of our mission-critical
internally developed and non-internally developed systems in the first half
of 1999. We implemented changes and tested these systems over the remainder
of the year. We have not experienced any significant Year 2000 delays or
interruptions in our operations, and will maintain our contingency plans
for the near term in case such a delay or interruption should occur in the
future. The actual cost for Year 2000 compliance through December 31, 1999
did not exceed our estimate of $20 million after-tax.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 43 - 1999 Annual Report
Risk Management
We have a comprehensive program to address potential financial risks, such
as interest rate, counterparty and currency risk. The Finance Committee of
the Board of Directors sets acceptable limits for each of these risks
annually and reviews the limits semi-annually.
Interest rate risk is defined as the impact of changes in market interest
rates on our earnings. We utilize simulation models to measure the impact
on net interest margin of changes in interest rates. The key assumptions
used in this model include the rate at which we expect our loans to pay
off, loan volumes and pricing, cash flows from derivative financial
instruments and changes in market conditions. The assumptions we make are
based on our best estimates of actual conditions. The model cannot
precisely predict the actual impact of changes in interest rates on net
income because these assumptions are highly uncertain. At December 31,
1999, our interest rate risk levels were substantially below those allowed
by our existing policy.
We generally fund our assets with liabilities that have similar interest
rate features. This reduces structural interest rate risk. Over time,
customer demand for our receivable products shifts between fixed rate and
floating rate products, based on market conditions and preferences. These
shifts result in different funding strategies and produce different
interest rate risk exposures. To manage these exposures, as well as our
liquidity position, we may use derivatives to synthetically alter the
repricing terms of our assets or liabilities, or off-balance sheet
transactions. We do not use any exotic or leveraged derivatives.
At December 31, 1999, we managed approximately $30 billion of receivables
that have variable interest rates, including credit card, home equity and
other unsecured products. These receivables have been funded with $10.8
billion of short-term debt, with the remainder funded by intermediate and
long-term liabilities. This position exposes us to interest rate risk. We
primarily use interest rate swaps to alter our exposure to interest rate
risk. These transactions have no impact on liquidity risk. Interest rate
swaps also are used sometimes to synthetically alter our exposure to basis
risk. This type of risk exists because the pricing of some of our assets is
tied to the prime rate, while the funding for these assets is tied to
LIBOR. The prime rate and LIBOR react differently to changes in market
interest rates; that is, the prime rate does not change as quickly as
LIBOR. We assign all of our synthetic alteration and hedge transactions to
specific groups of assets, liabilities or off-balance sheet items.
The economic risk related to our interest rate swap portfolio is minimal.
The face amount of a swap transaction is referred to as the notional
amount. The notional amount is used to determine the interest payment to be
paid by each counterparty, but does not result in an exchange of principal
payments.
Our primary exposure on our interest rate swap portfolio is the risk that
the counterparty does not pay us the money they owe us. We protect
ourselves against counterparty risk in several ways. Counterparty limits
have been set and are closely monitored as part of the overall risk
management process. These limits ensure that we do not have significant
exposure to any individual counterparty. Based on peak exposure at December
31, 1999, about 91 percent of our derivative counterparties were rated AA-
or better. (Substantially all of our derivative counterparties are rated A+
or better.) We have never suffered a loss due to counterparty failure.
Certain swap agreements that we have entered into require that payments be
made to, or received from, the counterparty when the fair value of the
agreement reaches a certain level.
We also use interest rate futures and purchased put and call options to
reduce interest rate risk. We use these instruments to hedge interest rate
changes on our variable rate assets and liabilities. For example, short-
term borrowings expose us to interest rate risk because the interest rate
we must pay to others may change faster than the rate we receive from
borrowers on the asset our borrowings are funding. Futures and options are
used to fix our interest cost on these borrowings at a desired rate and are
held until the interest rate on the variable rate asset or liability
changes. We then terminate, or close out, the contracts. These terminations
are necessary because the date the interest rate changes is usually not the
same as the expiration date of the futures contract or option.
At December 31, 1999 and 1998, we estimated that our after-tax earnings
would decline by about $81 and $43 million, respectively, following a
gradual 200 basis point increase in interest rates over a twelve month
period and would increase by about $80 and $40 million, respectively,
following a gradual 200 basis point decrease in interest rates. These
estimates assume we would not take any corrective action to lessen the
impact and, therefore, exceed what most likely would occur if rates were to
change.
We enter into currency swaps in order to minimize currency risk. Currency
risk results from changes in the value of underlying foreign denominated
assets or liabilities. These swaps convert both principal and interest
payments on debt issued from one currency to another. For example, we may
issue Euro-denominated debt and then execute a currency swap to convert the
obligation to U.S. dollars.
See Note 8 to the accompanying consolidated financial statements,
"Derivative Financial Instruments and Other Financial Instruments With Off-
Balance Sheet Risk," for additional information related to interest rate
risk management and Note 12, "Fair Value of Financial Instruments," for
information regarding the fair value
of certain financial instruments.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Glossary of Terms Pg. 44 - 1999 Annual Report
Acquired Intangibles and Goodwill-Intangible assets reflected on our
consolidated balance sheet resulting from the market value premium attributable
to our credit card accounts in excess of the aggregate outstanding managed
credit card loans acquired. Goodwill represents the purchase price over the fair
value of identifiable assets acquired less liabilities assumed from business
combinations.
Affinity Credit Card-A MasterCard or Visa account jointly sponsored by the
issuer of the card and an organization whose members share a common interest
(e.g., the AFL-CIO Union Privilege Credit Card Program).
Asset Securitization-The process where interests in a pool of financial assets,
such as credit card or home equity receivables, are sold to investors.
Typically, the receivables are sold to a trust that issues interests that are
sold to investors.
Auto Finance Loans-Closed-end loans secured by a first lien on a vehicle.
Co-Branded Credit Card-A MasterCard or Visa account that is jointly sponsored by
the issuer of the card and another corporation. (e.g., the GM Card) The account
holder typically receives some form of added benefit for using the card.
Common Dividend Payout Ratio-Dividends declared per share divided by net income
per share.
Consumer Net Chargeoff Ratio-Net chargeoffs of receivables divided by average
receivables outstanding.
Contractual Delinquency-A method of determining delinquent accounts based on the
contractual terms of the original loan agreement.
Core Receivables-Managed receivables, excluding commercial, first mortgage,
student loan and receivables relating to Beneficial's disposed Canadian and
German operations.
Fee Income-Income associated with interchange on credit cards and annual, late
and other fees and from the origination or acquisition of loans.
Foreign Exchange Contract-A contract used to minimize our exposure to changes in
foreign currency exchange rates.
Futures Contract-An exchange-traded contract to buy or sell a stated amount of a
financial instrument or index at a specified future date and price.
Home Equity Loan-Closed-end loans and revolving lines of credit secured by first
or second liens on residential real estate.
Interchange Fees-Fees received for processing a credit card transaction through
the MasterCard or Visa network.
Interest Rate Swap-Contract between two parties to exchange interest payments on
a stated principal amount (notional principal) for a specified period.
Typically, one party makes fixed rate payments, while the other party makes
payments using a variable rate.
LIBOR-London Interbank Offered Rate. A widely-quoted market rate which is
frequently the index used to determine the rate at which we borrow funds.
Liquidity-A measure of how quickly we can convert assets to cash or raise
additional cash by issuing debt.
Managed Basis-Method of reporting whereby net interest margin, other revenues
and credit losses on securitized receivables are reported as if those
receivables were still held on our balance sheet.
Managed Efficiency Ratio-Ratio of operating expenses to managed net interest
margin and other revenues less policyholders' benefits. The normalized
efficiency ratio excludes nonrecurring gains, losses and charges.
Managed Net Interest Margin-Interest income from managed receivables and
noninsurance investment securities reduced by interest expense.
Managed Receivables-The sum of receivables on our balance sheet and those that
we service for investors as part of our asset securitization program.
MasterCard and Visa Receivables-Receivables generated through customer usage of
MasterCard and Visa credit cards.
Nonaccrual Loans-Loans on which we no longer accrue interest because ultimate
collection is unlikely.
Non-prime Accounts-Accounts held by individuals with low credit ratings caused
by occasional delinquencies, prior charge-offs, or other credit blemishes. These
accounts generally are charged higher interest rates and fees to compensate for
the additional risk.
Options-A contract giving the owner the right, but not the obligation, to buy or
sell a specified item at a fixed price for a specified period.
Other Unsecured Receivables-Unsecured lines of credit or closed-end loans made
to individuals.
Over-the-Life Reserves-Credit loss reserves established for securitized
receivables to cover the estimated probable losses we expect to incur over the
life of the transaction.
Owned Receivables-Receivables held on our balance sheet.
Private Label Credit Card-A line of credit made available to customers of retail
merchants evidenced by a credit card bearing the merchant's name.
Promotional Account-A private label credit card account that allows for limited
or deferred interest and/or principal payments for a certain period.
Refund Anticipation Loan ("RAL") Program-A cooperative program with H&R Block
Tax Services, Inc. and certain of its franchises, along with other independent
tax preparers, to provide loans to customers entitled to tax refunds and who
electronically file their returns with the Internal Revenue Service.
Receivables Serviced with Limited Recourse-Receivables we have securitized and
for which we have some level of potential loss if defaults occur.
Return on Assets-Net income divided by average owned assets.
Return on Average Common Shareholders' Equity-Net income less dividends on
preferred stock divided by average common shareholders' equity.
Return on Managed Assets-Net income divided by average managed assets.
Risk Adjusted Revenue-Managed net interest margin plus other revenues less
securitization income and managed net chargeoffs divided by average managed
interest earning assets.
Synthetic Alteration-Process by which derivative financial instruments are used
to alter the risk characteristics of an asset, liability or off-balance sheet
item.
Total Shareholders' Equity-Includes company obligated mandatorily redeemable
preferred securities of subsidiary trusts, preferred stock and common
shareholders' equity.
<PAGE>
Household International, Inc. and Subsidiaries
---------------------------------------------------------------------------
Credit Quality Statistics Pg. 45 - 1999 Annual Report
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31, unless otherwise indicated. 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managed Two-Month-and-Over Contractual Delinquency Ratios
Home equity 3.27% 3.67% 3.69% 3.04% 2.76%
Auto finance/1/ 2.43 2.29 2.09 - -
MasterCard/Visa 2.78 3.75 3.10 2.73 2.19
Private label 5.97 6.20 5.81 4.60 3.93
Other unsecured 8.81 7.94 7.81 6.21 5.68
-----------------------------------------------------------------------------------------------------------------------
Total consumer 4.66% 4.90% 4.64% 3.92% 3.36%
-----------------------------------------------------------------------------------------------------------------------
Ratio of Net Chargeoffs to Average Managed Receivables for the Year
Home equity .58% .63% .64% .60% .64%
Auto finance/1/ 4.96 5.39 4.60 - -
MasterCard/Visa 6.66 5.95 5.55 4.54 4.12
Private label 5.65 5.65 4.62 3.42 3.75
Other unsecured 6.52 6.97 5.48 4.29 3.60
-----------------------------------------------------------------------------------------------------------------------
Total consumer loan products 4.13 4.29 3.84 2.96 2.51
Commercial .93 .52 1.66 .92 2.10
-----------------------------------------------------------------------------------------------------------------------
Total 4.09% 4.24% 3.80% 2.92% 2.49%
-----------------------------------------------------------------------------------------------------------------------
Nonaccrual Owned Receivables
Domestic:
Home equity $ 532.5 $ 486.5 $ 378.4 $ 198.3 $ 205.8
Auto finance/1/ 24.9 23.3 - - -
Private label 58.1 29.0 25.0 22.5 58.3
Other unsecured 545.8 297.9 283.6 240.6 245.2
Foreign 236.7 178.3 189.1 177.4 169.2
-----------------------------------------------------------------------------------------------------------------------
Total core consumer loan products 1,398.0 1,015.0 876.1 638.8 678.5
Commercial and other 46.6 49.1 62.9 110.0 186.4
-----------------------------------------------------------------------------------------------------------------------
Total $1,444.6 $1,064.1 $ 939.0 $ 748.8 $ 864.9
-----------------------------------------------------------------------------------------------------------------------
Nonaccrual Managed Receivables
Domestic:
Home equity $ 626.9 $ 550.8 $ 492.1 $ 315.7 $ 310.8
Auto finance/1/ 73.9 40.3 - - -
Private label 58.1 29.0 25.0 22.5 80.4
Other unsecured 828.8 559.5 565.2 399.1 295.0
Foreign 278.3 210.5 219.7 198.8 179.3
-----------------------------------------------------------------------------------------------------------------------
Total core consumer loan products 1,866.0 1,390.1 1,302.0 936.1 865.5
Commercial and other 46.6 49.1 62.9 110.0 186.4
-----------------------------------------------------------------------------------------------------------------------
Total $1,912.6 $1,439.2 $1,364.9 $1,046.1 $1,051.9
-----------------------------------------------------------------------------------------------------------------------
Accruing Owned Receivables 90 or More Days Delinquent/2/
Domestic $ 526.9 $ 630.6 $ 468.3 $ 415.9 $ 181.1
Foreign 23.5 21.8 31.3 23.8 12.2
-----------------------------------------------------------------------------------------------------------------------
Total $ 550.4 $ 652.4 $ 499.6 $ 439.7 $ 193.3
-----------------------------------------------------------------------------------------------------------------------
Accruing Managed Receivables 90 or More Days Delinquent/2/
Domestic $ 716.4 $ 852.8 $ 776.5 $ 621.7 $ 308.1
Foreign 23.5 21.8 31.3 23.8 12.2
-----------------------------------------------------------------------------------------------------------------------
Total $ 739.9 $ 874.6 $ 807.8 $ 645.5 $ 320.3
-----------------------------------------------------------------------------------------------------------------------
Renegotiated Commercial Loans $ 12.3 $ 12.3 $ 12.4 $ 12.9 $ 21.2
-----------------------------------------------------------------------------------------------------------------------
Real Estate Owned
Domestic $ 268.1 $ 249.5 $ 200.0 $ 217.2 $ 208.4
Foreign 3.4 4.4 12.8 19.6 29.3
-----------------------------------------------------------------------------------------------------------------------
Total $ 271.5 $ 253.9 $ 212.8 $ 236.8 $ 237.7
=======================================================================================================================
</TABLE>
/1/Prior to the acquisition of ACC in the fourth quarter of 1997, credit
quality statistics for auto finance receivables were not significant and
were included in other unsecured receivables.
/2/Includes MasterCard and Visa and private label credit card receivables,
consistent with industry practice. There were no commercial loans 90 or
more days past due which remained on accrual status.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Analysis of Credit Loss Reserves Activity- Pg. 46 - 1999 Annual Report
Owned Receivables
<TABLE>
<CAPTION>
All dollar amounts are stated in millions. 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Credit Loss Reserves for Owned Receivables
at January 1 $ 1,734.2 $ 1,642.1 $ 1,398.4 $ 1,126.5 $ 877.6
- -------------------------------------------------------------------------------------------------------------------------
Provision for Credit Losses-Owned Receivables 1,716.4 1,516.8 1,493.0 1,144.2 1,025.1
- -------------------------------------------------------------------------------------------------------------------------
Owned Receivables Charged Off
Domestic:
Home equity (103.8) (82.8) (46.3) (47.1) (45.7)
Auto finance/1/ (39.4) (29.7) (6.4) - -
MasterCard/Visa (477.8) (454.1) (415.8) (270.0) (260.0)
Private label (547.7) (471.4) (407.9) (238.6) (175.5)
Other unsecured (534.6) (464.4) (384.6) (374.7) (328.1)
Foreign (233.9) (206.4) (197.6) (172.2) (160.5)
--------------------------------------------------------------------------------------------------------------------
Total core consumer loan products (1,937.2) (1,708.8) (1,458.6) (1,102.6) (969.8)
Commercial and other (10.1) (7.5) (26.8) (24.0) (47.6)
--------------------------------------------------------------------------------------------------------------------
Total owned receivables charged off (1,947.3) (1,716.3) (1,485.4) (1,126.6) (1,017.4)
- -------------------------------------------------------------------------------------------------------------------------
Recoveries on Owned Receivables
Domestic:
Home equity 7.5 2.6 3.0 2.6 3.3
Auto finance/1/ 1.2 .8 .3 - -
MasterCard/Visa 34.7 33.3 46.9 17.2 19.8
Private label 74.3 56.8 47.4 24.8 24.1
Other unsecured 45.3 36.7 38.0 70.7 74.5
Foreign 46.6 43.2 50.9 43.9 36.7
--------------------------------------------------------------------------------------------------------------------
Total core consumer loan products 209.6 173.4 186.5 159.2 158.4
Commercial and other .3 2.2 3.3 6.9 5.1
--------------------------------------------------------------------------------------------------------------------
Total recoveries on owned receivables 209.9 175.6 189.8 166.1 163.5
Portfolio acquisitions, net 43.8 116.0 46.3 88.2 77.7
- -------------------------------------------------------------------------------------------------------------------------
Total Credit Loss Reserves for Owned Receivables
at December 31 $ 1,757.0 $ 1,734.2 $ 1,642.1 $ 1,398.4 $ 1,126.5
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Credit Loss Reserves to Owned Receivables
Consumer 3.30% 3.85% 4.12% 3.37% 2.89%
Commercial 7.70 8.34 9.14 13.44 11.07
--------------------------------------------------------------------------------------------------------------------
Total 3.36% 3.92% 4.25% 3.64% 3.22%
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Credit Loss Reserves to Owned
Nonperforming Loans
Consumer 86.9% 99.3% 110.5% 111.6% 106.7%
Commercial 116.8 139.0 200.7 191.2 91.8
--------------------------------------------------------------------------------------------------------------------
Total 87.5% 100.3% 113.2% 116.4% 104.4%
====================================================================================================================
</TABLE>
/1/Includes ACC subsequent to our acquisition in October 1997. Prior to the
fourth quarter of 1997, auto finance receivables were not significant
and were included in other unsecured receivables.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Analysis of Credit Loss Reserves Activity- Pg. 47 - 1999 Annual Report
Managed Receivables
<TABLE>
<CAPTION>
All dollar amounts are stated in millions. 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Credit Loss Reserves for Managed Receivables
at January 1 $ 2,548.1 $ 2,523.0 $ 2,109.0 $ 1,591.5 $ 1,219.2
- ----------------------------------------------------------------------------------------------------------------------------
Provision for Credit Losses-Managed Receivables 2,781.8 2,716.0 2,620.6 2,033.3 1,538.7
- ----------------------------------------------------------------------------------------------------------------------------
Managed Receivables Charged Off
Domestic:
Home equity (134.1) (118.8) (106.3) (86.4) (92.4)
Auto finance/1/ (120.4) (70.0) (13.6) - -
MasterCard/Visa (1,020.8) (1,166.2) (1,106.7) (771.3) (563.7)
Private label (598.3) (544.3) (436.0) (269.9) (232.9)
Other unsecured (821.6) (797.9) (639.8) (465.7) (332.5)
Foreign (281.4) (250.0) (225.8) (186.6) (160.5)
-----------------------------------------------------------------------------------------------------------------------
Total core consumer loan products (2,976.6) (2,947.2) (2,528.2) (1,779.9) (1,382.0)
Commercial and other (10.0) (7.5) (26.8) (24.0) (47.6)
-----------------------------------------------------------------------------------------------------------------------
Total managed receivables charged off (2,986.6) (2,954.7) (2,555.0) (1,803.9) (1,429.6)
- ----------------------------------------------------------------------------------------------------------------------------
Recoveries on Managed Receivables
Domestic:
Home equity 7.5 4.4 5.8 2.8 3.6
Auto finance/1/ 2.8 2.1 .6 - -
MasterCard/Visa 68.4 82.0 94.8 42.5 33.6
Private label 77.0 65.0 50.0 28.2 29.4
Other unsecured 61.2 51.6 50.3 75.5 74.4
Foreign 54.1 47.2 52.8 44.4 36.7
-----------------------------------------------------------------------------------------------------------------------
Total core consumer loan products 271.0 252.3 254.3 193.4 177.7
Commercial and other .3 2.2 3.3 6.9 5.1
-----------------------------------------------------------------------------------------------------------------------
Total recoveries on managed receivables 271.3 254.5 257.6 200.3 182.8
Portfolio acquisitions, net 52.0 9.3 90.8 87.8 80.4
- ----------------------------------------------------------------------------------------------------------------------------
Total Credit Loss Reserves for Managed Receivables
at December 31 $ 2,666.6 $ 2,548.1 $ 2,523.0 $ 2,109.0 $ 1,591.5
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of Credit Loss Reserves to Managed Receivables
Consumer 3.68% 3.94% 3.92% 3.38% 2.90%
Commercial 7.70 8.34 9.14 13.44 11.07
-----------------------------------------------------------------------------------------------------------------------
Total 3.72% 3.99% 3.99% 3.56% 3.12%
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of Credit Loss Reserves to Managed
Nonperforming Loans
Consumer 98.8% 109.0% 113.7% 120.7% 117.3%
Commercial 116.8 139.0 200.7 191.2 91.8
-----------------------------------------------------------------------------------------------------------------------
Total 100.1% 109.5% 115.5% 123.7% 114.2%
============================================================================================================================
</TABLE>
/1/Includes ACC subsequent to our acquisition in October 1997. Prior to the
fourth quarter of 1997, auto finance receivables were not significant
and were included in other unsecured receivables.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Net Interest Margin-1999 Compared to 1998 Pg. 48 - 1999 Annual Report
(Owned Basis)
<TABLE>
<CAPTION>
Finance and
Interest Income/ Increase/(Decrease) Due to:
Average Outstanding/2/ Average Rate Interest Expense -------------------------------------
All dollar amounts are ---------------------- ------------- -------------------- Volume Rate
stated in millions. 1999 1998 1999 1998 1999 1998 Variance Variance/3/ Variance/3/
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables:
Home equity $21,679.1 $16,233.4 11.6% 11.8% $2,513.1 $1,909.8 $603.3 $ 631.7 $(28.4)
Auto finance 1,119.8 702.8 18.6 19.6 207.8 137.5 70.3 77.7 (7.4)
MasterCard/Visa 6,270.8 7,473.4 12.3 10.7 768.3 796.4 (28.1) (138.1) 110.0
Private label 9,486.2 8,783.3 13.6 14.0 1,289.8 1,226.0 63.8 96.2 (32.7)
Other unsecured 8,434.9 7,411.3 20.0 19.9 1,705.4 1,476.5 228.9 210.2 19.6
Commercial and other 809.6 1,101.0 8.0 5.3 65.1 58.0 7.1 (20.2) 27.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total receivables $47,800.4 $41,705.2 13.6% 13.4% $6,549.5 $5,604.2 $945.3 $ 841.8 $104.2
Noninsurance investments 975.0 1,106.3 5.2 33.4 57.1 (23.7) (15.6) (8.1)
===================================================================================================================================
Total interest-earning
assets
(excluding insurance
investments) $48,775.4 $42,811.5 13.5% 13.2% $6,582.9 $5,661.3 $921.6 $ 802.8 $118.8
Insurance investments 2,596.9 2,459.1
Other assets 4,938.1 5,203.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $56,310.4 $50,473.7
===================================================================================================================================
Debt:
Deposits $ 3,037.3 $ 2,695.9 5.5% 5.7% $ 168.4 $ 152.7 $ 15.7 $ 20.0 $ (4.3)
Commercial paper 8,620.3 9,495.6 5.2 5.5 451.7 525.0 (73.3) (44.6) (28.7)
Bank and other borrowings 1,426.7 2,640.8 5.0 5.6 70.8 147.1 (76.3) (62.4) (13.9)
Senior and senior
subordinated
debt (with original
maturities
over one year) 32,954.1 26,365.4 6.3 6.4 2,085.7 1,692.2 393.5 417.3 (23.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt $46,038.4 $41,197.7 6.0% 6.1% $2,776.6 $2,517.0 $259.6 $ 292.3 $(32.7)
Other liabilities 3,453.3 2,426.8
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 49,491.7 43,624.5
Preferred securities 539.4 577.1
Common shareholders' equity 6,279.3 6,272.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $56,310.4 $50,473.7
===================================================================================================================================
Net Interest Margin-
Owned Basis/1, 5/ 7.8% 7.3% $3,806.3 $3,144.3 $662.0 $ 510.5 $151.5
===================================================================================================================================
Interest Spread-Owned
Basis/4/ 7.5% 7.1%
===================================================================================================================================
</TABLE>
/1/Represents net interest margin as a percent of average interest-earning
assets. See page 50 for net interest margin on a managed basis for 1999, 1998
and 1997.
/2/Nonaccrual loans are included in average outstanding balances.
/3/Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the total interest variance. For
total receivables, total interest-earning assets and total debt, the rate and
volume variances are calculated based on the relative weighting of the
individual components comprising these totals. These totals do not represent
an arithmetic sum of the individual components.
/4/Represents the difference between the yield earned on interest-earning assets
and the cost of the debt used to fund the assets.
/5/The net interest margin analysis includes the following for foreign
businesses:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average interest-earning assets $6,433.3 $6,339.5 $6,274.2
Average interest-bearing liabilities 5,138.5 5,431.8 5,274.8
Net interest margin 494.9 473.8 513.1
Net interest margin percentage 7.7% 7.5% 8.2%
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Net Interest Margin-1998 Compared to 1997 Pg. 49 - 1999 Annual Report
(Owned Basis)
<TABLE>
<CAPTION>
Finance and
Interest Income/ Increase/(Decrease) Due to:
Average Outstanding/2/ Average Rate Interest Expense -------------------------------------
All dollar amounts are ---------------------- ------------- -------------------- Volume Rate
stated in millions. 1998 1997 1998 1997 1998 1997 Variance Variance/3/ Variance/3/
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables:
Home equity $16,233.4 $11,695.2 11.8% 11.6% $1,909.8 $1,361.9 $ 547.9 $ 524.6 $ 23.3
Auto finance 702.8 203.0 19.6 18.0 137.5 36.5 101.0 97.5 3.5
MasterCard/Visa 7,473.4 7,693.7 10.7 11.4 796.4 880.3 (83.9) (26.7) (57.2)
Private label 8,783.3 9,743.9 14.0 13.7 1,226.0 1,337.3 (111.3) (138.9) 27.6
Other unsecured 7,411.3 7,783.5 19.9 18.2 1,476.5 1,413.6 62.9 (68.3) 131.2
Commercial and other 1,101.0 1,623.0 5.3 6.2 58.0 101.4 (43.4) (34.4) (9.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Total receivables $41,705.2 $38,742.3 13.4% 13.2% $5,604.2 $5,131.0 $ 473.2 $ 395.0 $ 78.2
Noninsurance investments 1,106.3 661.4 5.2 7.5 57.1 49.8 7.3 25.9 (18.6)
====================================================================================================================================
Total interest-earning
assets
(excluding insurance
investments) $42,811.5 $39,403.7 13.2% 13.1% $5,661.3 $5,180.8 $ 480.5 $ 441.5 $ 39.0
Insurance investments 2,459.1 2,555.0
Other assets 5,203.1 4,366.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $50,473.7 $46,325.2
====================================================================================================================================
Debt:
Deposits $ 2,695.9 $ 2,580.0 5.7% 6.0% $ 152.7 $ 155.3 $ (2.6) $ 6.8 $ (9.4)
Commercial paper 9,495.6 8,992.5 5.5 5.6 525.0 499.9 25.1 27.8 (2.7)
Bank and other borrowings 2,640.8 1,419.5 5.6 6.5 147.1 92.5 54.6 69.7 (15.1)
Senior and senior
subordinated
debt (with original
maturities
over one year) 26,365.4 23,743.4 6.4 6.8 1,692.2 1,610.7 81.5 171.4 (89.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt $41,197.7 $36,735.4 6.1 6.4% $2,517.0 $2,358.4 $ 158.6 $ 276.6 $ (118.0)
Other liabilities 2,426.8 3,798.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 43,624.5 40,533.9
Preferred securities 577.1 442.1
Common shareholders' equity 6,272.1 5,349.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $50,473.7 $46,325.2
====================================================================================================================================
Net Interest Margin-
Owned Basis/1, 5/ 7.3% 7.2% $3,144.3 $2,822.4 $ 321.9 $ 164.9 $ 157.0
====================================================================================================================================
Interest Spread-Owned
Basis/4/ 7.1% 6.7%
====================================================================================================================================
</TABLE>
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Net Interest Margin-1999 Compared to 1998 and 1997 Pg. 50 - 1999 Annual Report
(Managed Basis)
- --------------------------------------------------------------------------------
Net Interest Margin on a Managed Basis As receivables are securitized rather
than held in our portfolio, net interest income is reclassified to
securitization income. We retain a substantial portion of the profit inherent in
the receivable while increasing liquidity. The comparability of net interest
margin between periods may be impacted by the level and type of receivables
securitized.
<TABLE>
<CAPTION>
Finance and Interest
Average Outstanding/1/ Average Rate Income/Interest Expense
--------------------------------- ---------------------- ------------------------------
All dollar amounts are stated in
millions. 1999 1998 1997 1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables:
Home equity $24,574.5 $20,951.0 $18,011.5 11.6% 12.0% 12.2% $2,847.5 $2,524.2 $2,200.0
Auto finance 2,370.4 1,260.2 282.6 19.0 20.1 18.6 449.6 252.8 52.6
MasterCard/Visa 15,295.7 18,742.2 18,506.2 13.2 12.9 13.1 2,025.7 2,426.3 2,431.1
Private label 10,255.9 9,710.4 10,180.4 13.6 14.1 13.9 1,398.7 1,370.0 1,413.5
Other unsecured 13,008.6 11,912.3 11,843.5 19.6 19.2 18.3 2,555.8 2,287.0 2,164.1
Commercial and other 809.6 1,101.0 1,623.0 8.0 5.3 6.2 65.0 58.0 101.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total receivables 66,314.7 63,677.1 60,447.2 14.1 14.0 13.8 9,342.3 8,918.3 8,362.7
Noninsurance investments 975.0 1,106.3 661.4 3.4 5.2 7.5 33.4 57.1 49.8
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets
(excluding insurance
investments) 67,289.7 64,783.4 61,108.6 13.9 13.9 13.8 9,375.7 8,975.4 8,412.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt $64,552.7 $62,882.3 $58,857.9 5.9 6.2 6.3 3,836.5 3,881.3 3,692.2
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin-
Managed Basis/2/ 8.2% 7.9% 7.7% $5,539.2 $5,094.1 $4,720.3
===================================================================================================================================
Interest Spread-Managed Basis/3/ 8.0% 7.7% 7.5%
===================================================================================================================================
</TABLE>
/1/Nonaccrual loans are included in average outstanding balances.
/2/As a percent of average interest-earning assets.
/3/Represents the difference between the yield earned on interest-earning assets
and cost of the debt used to fund the assets.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Selected Quarterly Financial Data (Unaudited) Pg. 51 - 1999 Annual Report
<TABLE>
<CAPTION>
All dollar amounts except per share 1999-Three Months Ended 1998- Three Months Ended
data are stated in millions. --------------------------------------- ----------------------------------------
Dec. Sept. June March Dec. Sept. June March
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance income $1,773.2 $1,694.7 $1,583.0 $1,498.6 $1,492.2 $1,425.8 $1,372.6 $1,313.6
Other interest income 8.1 8.0 7.4 9.9 15.5 15.2 11.1 15.3
Interest expense 762.8 703.7 661.2 648.9 659.9 628.1 616.8 612.2
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 1,018.5 999.0 929.2 859.6 847.8 812.9 766.9 716.7
Provision for credit losses on
owned receivables 453.2 438.1 407.3 417.8 377.5 358.4 391.6 389.3
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin after provision
for credit losses 565.3 560.9 521.9 441.8 470.3 454.5 375.3 327.4
- -----------------------------------------------------------------------------------------------------------------------------------
Securitization income 398.2 357.9 312.5 324.9 365.3 370.1 394.2 419.3
Insurance revenues 129.2 130.6 132.6 142.2 126.3 129.2 117.8 119.5
Investment income 40.8 45.0 41.8 41.2 40.3 42.5 38.5 39.9
Fee income 174.3 155.7 135.8 129.7 155.6 151.8 145.0 147.3
Other income 43.8 32.4 38.4 109.2 60.1 55.8 40.1 87.7
Gain on sale of Beneficial Canada - - - - - - - 189.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total other revenues 786.3 721.6 661.1 747.2 747.6 749.4 735.6 1,003.1
- -----------------------------------------------------------------------------------------------------------------------------------
Salaries and fringe benefits 307.2 304.7 298.6 284.1 268.0 280.1 287.1 292.3
Occupancy and equipment expense 70.9 66.6 66.6 66.8 69.9 74.5 86.1 85.6
Other marketing expenses 106.0 91.5 84.0 88.5 99.5 101.7 99.0 103.0
Other servicing and
administrative expenses 114.5 128.5 142.3 162.6 155.5 160.8 161.3 177.3
Amortization of acquired intangibles
and goodwill 36.1 35.5 36.0 36.3 38.3 45.1 44.8 42.4
Policyholders' benefits 59.1 61.0 69.4 68.6 62.2 57.1 55.3 63.6
Merger and integration related costs - - - - - - 1,000.0 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 693.8 687.8 696.9 706.9 693.4 719.3 1,733.6 764.2
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 657.8 594.7 486.1 482.1 524.5 484.6 (622.7) 566.3
Income taxes (benefit) 219.0 194.8 159.2 161.3 174.6 166.6 (121.1) 208.5
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 438.8 $ 399.9 $ 326.9 $ 320.8 $ 349.9 $ 318.0 $ (501.6) $ 357.8
===================================================================================================================================
Basic earnings per share/1/ $ .93 $ .84 $ .67 $ .66 $ .72 $ .64 (1.03) $ .73
===================================================================================================================================
Diluted earnings per share/1/ .92 .83 .67 .65 .71 .63 (1.03) .71
===================================================================================================================================
Weighted average common
and common equivalent
shares outstanding/1/ 472.7 480.2 484.3 490.1 489.0 498.3 489.4 497.0
===================================================================================================================================
Dividends declared/1/ $ .17 $ .17 $ .17 $ .17 $ .15 $ .15 $ .15 $ .15
===================================================================================================================================
</TABLE>
/1/Quarterly earnings per share amounts are computed on the basis of the
weighted average number of shares outstanding for each quarter. Changes
between quarters in the number of shares outstanding may result in the annual
computation differing from the aggregate of the quarterly amounts. The June
1998 quarter's average common and common equivalent shares reflect basic
average shares outstanding.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Income Pg. 52 - 1999 Annual Report
<TABLE>
<CAPTION>
In millions, except per share data.
Year ended December 31 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance income $6,549.5 $5,604.2 $5,131.0
Other interest income 33.4 57.1 49.8
Interest expense 2,776.6 2,517.0 2,358.4
-------------------------------------------------------------------------------------------------------------------------
Net interest margin 3,806.3 3,144.3 2,822.4
Provision for credit losses on owned receivables 1,716.4 1,516.8 1,493.0
-------------------------------------------------------------------------------------------------------------------------
Net interest margin after provision for credit losses 2,089.9 1,627.5 1,329.4
-------------------------------------------------------------------------------------------------------------------------
Securitization income 1,393.5 1,548.9 1,638.4
Insurance revenues 534.6 492.8 454.2
Investment income 168.8 161.2 173.1
Fee income 595.5 599.7 592.4
Other income 223.8 243.7 355.7
Gain on sale of Beneficial Canada - 189.4 -
-------------------------------------------------------------------------------------------------------------------------
Total other revenues 2,916.2 3,235.7 3,213.8
-------------------------------------------------------------------------------------------------------------------------
Salaries and fringe benefits 1,194.6 1,127.5 1,085.3
Occupancy and equipment expense 270.9 316.1 333.6
Other marketing expenses 370.0 403.2 449.6
Other servicing and administrative expenses 547.9 654.9 857.9
Amortization of acquired intangibles and goodwill 143.9 170.6 158.4
Policyholders' benefits 258.1 238.2 255.9
Merger and integration related costs - 1,000.0 -
-------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 2,785.4 3,910.5 3,140.7
-------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,220.7 952.7 1,402.5
Income taxes 734.3 428.6 462.2
-------------------------------------------------------------------------------------------------------------------------
Net income $1,486.4 $ 524.1 $ 940.3
=========================================================================================================================
Earnings Per Common Share
Net income $1,486.4 $ 524.1 $ 940.3
Preferred dividends (9.2) (15.0) (17.0)
-------------------------------------------------------------------------------------------------------------------------
Earnings available to common shareholders $1,477.2 $ 509.1 $ 923.3
=========================================================================================================================
Average common shares 477.0 487.2 470.2
Average common and common equivalent shares 481.8 496.4 479.1
-------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 3.10 $ 1.04 $ 1.97
-------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 3.07 $ 1.03 $ 1.93
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Balance Sheets Pg. 53 - 1999 Annual Report
<TABLE>
<CAPTION>
In millions, except share data.
At December 31 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 270.6 $ 457.4
Investment securities 3,128.1 3,202.1
Receivables, net 52,158.4 43,948.1
Acquired intangibles and goodwill, net 1,590.4 1,700.8
Properties and equipment, net 476.4 472.1
Real estate owned 271.5 253.9
Other assets 2,854.0 2,858.3
----------------------------------------------------------------------------------------
Total assets $60,749.4 $52,892.7
========================================================================================
Liabilities and Shareholders' Equity
Debt:
Deposits $ 4,980.0 $ 2,105.0
Commercial paper, bank and other borrowings 10,777.8 9,917.9
Senior and senior subordinated debt
(with original maturities over one year) 34,887.3 30,438.6
----------------------------------------------------------------------------------------
Total debt 50,645.1 42,461.5
Insurance policy and claim reserves 1,308.9 1,371.7
Other liabilities 1,805.1 2,298.7
----------------------------------------------------------------------------------------
Total liabilities 53,759.1 46,131.9
Company obligated mandatorily redeemable preferred securities
of subsidiary trusts* 375.0 375.0
Preferred stock 164.4 164.4
Common shareholders' equity:
Common stock, $1.00 par value, 750,000,000 shares
authorized; 550,431,057 and 544,124,170 shares
issued at December 31, 1999 and 1998, respectively 550.4 544.1
Additional paid-in capital 1,780.8 1,652.5
Retained earnings 6,338.7 5,184.4
Accumulated other comprehensive income (256.9) (145.1)
Less common stock in treasury, 82,519,612 and 60,986,431
shares at December 31, 1999 and 1998, respectively, at cost (1,962.1) (1,014.5)
----------------------------------------------------------------------------------------
Total common shareholders' equity 6,450.9 6,221.4
----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $60,749.4 $52,892.7
========================================================================================
</TABLE>
*The sole assets of the three trusts are Junior Subordinated Deferrable
Interest Notes issued by Household International, Inc. in March 1998, June
1996 and June 1995, bearing interest at 7.25, 8.70 and 8.25 percent,
respectively, with principal balances of $206.2, $103.1 and $77.3 million,
respectively, and due December 31, 2037, June 30, 2036 and June 30, 2025,
respectively.
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows Pg. 54 - 1999 Annual Report
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Provided by Operations
Net income $ 1,486.4 $ 524.1 $ 940.3
Adjustments to reconcile net income to net cash provided by operations:
Provision for credit losses on owned receivables 1,716.4 1,516.8 1,493.0
Non-cash merger and integration related costs - 291.0 -
Provision for loss on German disposal - - 58.8
Insurance policy and claim reserves 76.1 64.2 98.3
Depreciation and amortization 292.1 308.1 303.5
Net realized gains from sales of assets - (183.4) (102.5)
Deferred income tax provision 33.1 253.0 75.9
Other, net (350.1) (435.7) (440.8)
----------------------------------------------------------------------------------------------------------------
Cash provided by operations 3,254.0 2,338.1 2,426.5
- ---------------------------------------------------------------------------------------------------------------------
Investments in Operations
Investment securities available-for-sale:
Purchased (1,431.7) (1,526.1) (2,028.0)
Matured 792.5 510.4 399.9
Sold 732.5 858.3 1,721.3
Short-term investment securities, net change (111.1) (205.1) (49.0)
Receivables:
Originations, net (32,888.1) (28,648.5) (29,356.5)
Purchases and related premiums (2,571.6) (2,949.6) (1,737.5)
Sold 25,249.8 24,352.6 32,621.0
Acquisition of business operations (43.4) - -
Purchase of Transamerica Financial Services
Holding Company capital stock - - (1,065.0)
Properties and equipment purchased (139.8) (135.1) (127.7)
Properties and equipment sold 29.1 43.7 8.6
----------------------------------------------------------------------------------------------------------------
Cash increase (decrease) from investments in operations (10,381.8) (7,699.4) 387.1
- ---------------------------------------------------------------------------------------------------------------------
Financing and Capital Transactions
Short-term debt and demand deposits, net change 839.1 (1,127.6) (332.2)
Time certificates, net change 2,961.6 380.3 (438.2)
Senior and senior subordinated debt issued 11,281.3 13,285.5 7,730.0
Senior and senior subordinated debt retired (6,870.6) (5,455.8) (7,383.3)
Prepayment of debt - (1,140.8) -
Repayment of Transamerica Financial Services Holding
Company debt - - (2,795.0)
Policyholders' benefits paid (126.9) (130.9) (123.5)
Cash received from policyholders 63.0 109.5 98.0
Shareholders' dividends (332.1) (256.5) (186.5)
Shareholders' dividends-pooled affiliate - (61.8) (115.5)
Issuance of company obligated mandatorily redeemable
preferred securities of subsidiary trusts - 200.0 -
Redemption of preferred stock - (100.1) (55.0)
Purchase of treasury stock (915.9) (412.0) (155.7)
Treasury stock activity-pooled affiliate - (11.4) (80.0)
Issuance of common stock 45.0 .8 1,023.8
----------------------------------------------------------------------------------------------------------------
Cash increase (decrease) from financing and capital transactions 6,944.5 5,279.2 (2,813.1)
----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (3.5) 5.2 15.0
----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (186.8) (76.9) 15.5
Cash at January 1 457.4 534.3 518.8
----------------------------------------------------------------------------------------------------------------
Cash at December 31 $ 270.6 $ 457.4 $ 534.3
================================================================================================================
Supplemental Cash Flow Information:
Interest paid $ 2,757.6 $ 2,431.6 $ 2,348.9
Income taxes paid 337.6 311.0 308.7
----------------------------------------------------------------------------------------------------------------
Supplemental Non-Cash Investing and Financing Activities:
Common stock issued for acquisition $ 15.0 - $ 157.3
----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Changes in Preferred Pg. 55 - 1999 Annual Report
Stock and Common Shareholders' Equity
<TABLE>
<CAPTION>
Common Shareholders' Equity
----------------------------------------------------------------------------
Accumulated
Additional Other Common Total Common
All amounts except per share Preferred Common Paid-in Retained Comprehensive Stock in Shareholders'
data are stated in millions. Stock Stock Capital Earnings Income/1/ Treasury Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 319.5 $511.9 $ 360.2 $4,340.3 $ (182.4) $ (508.5) $ 4,521.5
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 940.3 940.3
Other comprehensive income, net of tax:
Foreign currency translation adjustments (4.4) (4.4)
Unrealized gain on investments,
net of reclassification adjustment 19.1 19.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 955.0
Cash dividends:
Preferred at stated rates (17.0) (17.0)
Common, $.54 per share (169.5) (169.5)
Pooled affiliate/2/ (115.5) (115.5)
Exercise of stock options 1.4 36.5 16.2 54.1
Issuance of common stock 27.3 984.1 12.4 1,023.8
Purchase of treasury stock, net (3.7) 42.7 (117.4) (78.4)
Redemption of preferred stock (55.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 264.5 536.9 1,423.5 4,978.6 (167.7) (597.3) 6,174.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 524.1 524.1
Other comprehensive income, net of tax:
Foreign currency translation adjustments 9.0 9.0
Unrealized gain on investments,
net of reclassification adjustment 13.6 13.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 546.7
Cash dividends:
Preferred at stated rates (15.0) (15.0)
Common, $.60 per share (241.5) (241.5)
Pooled affiliate/2/ (61.8) (61.8)
Exercise of stock options 7.4 220.3 13.9 241.6
Issuance of common stock .2 19.7 (19.1) .8
Purchase of treasury stock (.4) (11.0) (412.0) (423.4)
Redemption of preferred stock (100.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 164.4 544.1 1,652.5 5,184.4 (145.1) (1,014.5) 6,221.4
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 1,486.4 1,486.4
Other comprehensive income, net of tax:
Foreign currency translation adjustments (18.1) (18.1)
Unrealized loss on investments,
net of reclassification adjustment (93.7) (93.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 1,374.6
Cash dividends:
Preferred at stated rates (9.2) (9.2)
Common, $.68 per share (322.9) (322.9)
Exercise of stock options 6.1 103.0 (51.2) 57.9
Issuance of common stock .2 25.3 19.5 45.0
Purchase of treasury stock (915.9) (915.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 164.4 $550.4 $1,780.8 $6,338.7 $ (256.9) $ (1,962.1) $ 6,450.9
====================================================================================================================================
</TABLE>
/1/At December 31, 1999, 1998, 1997 and 1996 items in the accumulated other
comprehensive income column include cumulative adjustments for foreign
currency translation adjustments of $(185.6), $(167.5), $(176.5) and $(172.1)
million, respectively, and net unrealized gains (losses) on available-for-
sale investments of $(71.3), $22.4, $8.8 and $(10.3) million, respectively.
The gross unrealized gain (loss) on available-for-sale investments at
December 31, 1999, 1998 and 1997 of $(109.8), $34.0 and $13.1 million,
respectively, is recorded net of income tax expense (benefit) of $(38.5),
$11.6 and $4.3 million, respectively.
/2/Represents historical common stock dividends of Beneficial Corporation.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Changes in Preferred Pg. 56 - 1999 Annual Report
Stock and Common Shareholders' Equity (continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Common Stock
------------------------------------------------
Shares Outstanding Preferred Stock Issued In Treasury Net Outstanding
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 2,048,279 511,925,714 (54,497,763) 457,427,951
Exercise of common stock options 1,390,283 1,618,671 3,008,954
Issuance of common stock 27,340,697 1,359,738 28,700,435
Issuance of common stock-ACC 4,101,825 4,101,825
Purchase of treasury stock (4,101,900) (4,101,900)
Purchase of stock-pooled affiliates (3,785,748) (3,785,748)
Redemption of preferred stock (550,000)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 1,498,279 536,870,946 (51,519,429) 485,351,517
Exercise of common stock options 7,432,207 1,136,446 8,568,653
Issuance of common stock 244,821 (99,448) 145,373
Purchase of treasury stock (10,504,000) (10,504,000)
Purchase of stock-pooled affiliates (423,804) (423,804)
Redemption of preferred stock (100,000)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 1,398,279 544,124,170 (60,986,431) 483,137,739
Exercise of common stock options 6,083,549 (791,681) 5,291,868
Issuance of common stock 223,338 1,055,566 1,278,904
Purchase of treasury stock (21,797,066) (21,797,066)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 1,398,279 550,431,057 (82,519,612) 467,911,445
=======================================================================================================================
</TABLE>
Comprehensive Income
The following discloses the related tax effects allocated to each component
of other comprehensive income and reclassification adjustments:
<TABLE>
<CAPTION>
Tax
In millions. (Expense)
At December 31 Before-Tax Benefit Net-of-Tax
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Foreign currency translation adjustments $ 15.3 $(19.7) $ (4.4)
Unrealized gains on investments:
Unrealized holding gains arising during the period 53.2 (18.3) 34.9
Less: Reclassification adjustment for gains realized in net income (24.1) 8.3 (15.8)
------------------------------------------------------------------------------------------------------------
Net unrealized gains on investments 29.1 (10.0) 19.1
--------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 44.4 $(29.7) $ 14.7
- -----==============================================================================================================
1998
Foreign currency translation adjustments $ 9.3 $ (.3) $ 9.0
Unrealized gains on investments:
Unrealized holding gains arising during the period 26.9 (9.4) 17.5
Less: Reclassification adjustment for gains realized in net income (6.0) 2.1 (3.9)
------------------------------------------------------------------------------------------------------------
Net unrealized gains on investments 20.9 (7.3) 13.6
--------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 30.2 $ (7.6) $ 22.6
- -----==============================================================================================================
1999
Foreign currency translation adjustments $ (20.9) $ 2.8 $ (18.1)
Unrealized losses on investments:
Unrealized holding losses arising during the period (134.4) 46.8 (87.6)
Less: Reclassification adjustment for gains realized in net income (9.4) 3.3 (6.1)
------------------------------------------------------------------------------------------------------------
Net unrealized losses on investments (143.8) 50.1 (93.7)
--------------------------------------------------------------------------------------------------------------
Other comprehensive income (expense) $(164.7) $ 52.9 $(111.8)
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 57 - 1999 Annual Report
Household International, Inc. and subsidiaries ("Household") is a leading
provider of consumer lending products to middle-market consumers in the
United States, United Kingdom and Canada with $71.7 billion of managed
receivables at December 31, 1999. Household may also be referred to in
these notes to the consolidated financial statements as "we," "us" or
"our." Our lending products include: home equity loans, auto finance loans,
MasterCard* and Visa* credit cards, private label credit cards, tax refund
anticipation loans and other types of unsecured loans. We also offer credit
and specialty insurance in the United States, the United Kingdom and
Canada. We have three reportable segments: Consumer, which includes our
branch-based and correspondent consumer finance, private label and auto
finance businesses; Credit Card, which includes our domestic MasterCard and
Visa business; and International, which includes our United Kingdom and
Canadian operations. We also have traditional first mortgages, commercial
loans and leases, periodic payment annuities, and corporate owned life
insurance products which we no longer originate.
- --------------------------------------------------------------------------------
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 We maintain investment portfolios (comprised
primarily of debt securities) in both our noninsurance and insurance
operations. Our entire investment securities portfolio was classified as
available-for-sale at December 31, 1999 and 1998. Available-for-sale
investments are intended to be invested for an indefinite period but may be
sold in response to events we expect to occur 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 in accumulated other comprehensive income, 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. 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. MasterCard and Visa annual fees are netted with direct lending
costs, deferred, and amortized on a straight-line basis over one year. Net
deferred annual fees (lending costs) related to these receivables totaled
$29.3 million at December 31, 1999 and $(.9) million at December 31, 1998.
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 our 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 our control, such as consumer
payment
*MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 58 - 1999 Annual Report
(continued)
patterns and economic conditions, there is uncertainty inherent in
these estimates, making it reasonably possible that they could change.
Our chargeoff policy for consumer receivables varies by product.
Unsecured receivables are written off at the following stages of
contractual delinquency: MasterCard and Visa-6 months; private label-9
months; and other unsecured-9 months and no payment received in 6 months.
For real estate secured receivables, carrying values are written down to
net realizable value at the time of foreclosure. For loans secured by
automobiles, carrying values are written down to net realizable value when
the loan becomes 5 months contractually delinquent. 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 except for
credit card and auto finance receivables when principal or interest
payments are more than three months contractually past due. For credit card
receivables, interest continues to accrue until the receivable is charged
off. For auto finance receivables, accrual of interest income is
discontinued when payments are more than two months contractually past due.
Accrual of income on nonaccrual consumer receivables is resumed if the
receivable becomes less than three months contractually past due (two
months for auto finance receivables). Accrual of income on nonaccrual
commercial loans is resumed if the loan becomes contractually current. Cash
payments received on nonaccrual commercial loans are either applied against
principal or reported as interest income, according to our 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. We have retained the servicing rights to
these receivables. 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 sold receivables. Future
cash flows are based on estimates of prepayments, the impact of interest
rate movements on yields of receivables and securities issued, delinquency
of receivables sold, servicing fees, operating expenses and other factors.
The resulting gain is also adjusted by 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.
Properties and Equipment Properties and equipment, which include
leasehold improvements, are recorded at cost, net of accumulated
depreciation and amortization of $847.7 million at December 31, 1999 and
$755.2 million at December 31, 1998. 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 necessary. Costs of holding real estate, and
related gains and losses on disposition, are credited or charged to
operations as incurred.
Repossessed vehicles 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.
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 useful lives which vary by portfolio and range
from 4 to 15 years. Goodwill represents the purchase price over the fair
value of identifiable assets acquired less liabilities assumed from
business combinations and is amortized over periods not exceeding 25 years
on a
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 59 - 1999 Annual Report
straight-line basis. We review acquired intangibles and goodwill for
impairment utilizing undiscounted cash flows whenever events indicate that
the carrying amounts may not be recoverable. We consider significant and
long term changes in industry and economic conditions to be our primary
indicator of potential impairment.
Treasury Stock We account 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 at average cost.
Interest Rate Contracts Interest rate swaps are the principal vehicle
used to manage interest rate risk; however, we also utilize interest rate
futures, options, caps and floors, and forward contracts. We also have
entered into currency swaps to convert both principal and interest payments
on debt issued from one currency to the appropriate functional currency.
Our interest rate contracts are designated as an effective hedge/synthetic
alteration of the specific underlying assets or liabilities (or specific
groups of assets or liabilities) and off-balance sheet items. The net
amount to be paid or received is accrued and included in net interest
margin in the statements of income.
Correlation between all interest rate contracts and the underlying asset,
liability or off-balance sheet item is direct because we use 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 in the balance sheets at amortized
cost. If interest rate contracts are terminated early, the realized gains
and losses are deferred and amortized over the life of the underlying
hedged/synthetically altered item as an adjustment 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/synthetically altered 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.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). FAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. FAS No. 133 requires that changes in
a derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset the
related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting.
In June 1999, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 137 which deferred the effective date for FAS
No. 133 to fiscal years beginning after June 15, 2000. A company may also
implement FAS No. 133 as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter).
FAS No. 133 cannot be applied retroactively. FAS No. 133 must be applied to
(a) derivative instruments and (b) certain derivative instruments embedded
in hybrid contracts that were issued, acquired, or substantially modified
after December 31, 1998. We expect to adopt FAS No. 133 on January 1, 2001
and have not yet quantified its impact on our financial statements.
Foreign Currency Translation We have foreign subsidiaries located in the
United Kingdom and Canada. The functional currency for each foreign
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 in common shareholders' equity as a component of
accumulated other comprehensive income.
We periodically enter into forward exchange contracts to hedge our
investment in foreign subsidiaries. After-tax gains and losses on contracts
to hedge foreign currency fluctuations are accumulated in common
shareholders' equity as a component of accumulated other comprehensive
income. Effects of foreign currency translation in the
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 60 - 1999 Annual Report
(continued)
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 We account 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.
Income Taxes Household and its subsidiaries file a consolidated federal
income tax return. 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. Investment tax
credits generated by leveraged leases are accounted for using the deferral
method.
- --------------------------------------------------------------------------------
2. Business Combinations, Acquisitions and Divestitures
In November 1999, we signed a definitive agreement to purchase all of the
outstanding capital stock of Renaissance Holdings, Inc. ("Renaissance") for
approximately 5 million shares of common stock and cash. Renaissance is a
privately held issuer of secured and unsecured credit cards to non-prime
customers. The transaction closed in February 2000 and was accounted for as
a purchase. Accordingly, Renaissance's operating results will be included
with our results of operations subsequent to the acquisition date.
In August 1999, we acquired all of the outstanding capital stock of
Decision One Mortgage Company LLC ("Decision One") for approximately $60
million in common stock and cash. Decision One originates loans through a
30-state broker network and packages them for sale to investors. The
acquisition was accounted for as a purchase and, accordingly, earnings from
Decision One have been included in our results of operations subsequent to
the acquisition date.
On June 30, 1998, Household merged with Beneficial Corporation
("Beneficial"), a consumer finance holding company headquartered in
Wilmington, Delaware. Each outstanding share of Beneficial common stock was
converted into 3.0666 shares of Household common stock, resulting in the
issuance of approximately 168.4 million shares of common stock. Each share
of Beneficial $5.50 Convertible Preferred Stock (the "Beneficial
Convertible Stock") was converted into the number of shares of Household
common stock the holder would have been entitled to receive in the merger
had the Beneficial Convertible Stock been converted into shares of
Beneficial common stock immediately prior to the merger. Additionally, each
other share of Beneficial preferred stock outstanding was converted into
one share of a newly-created series of Household preferred stock with terms
substantially similar to those of existing Beneficial preferred stock. The
merger was accounted for as a pooling of interests and therefore, the
consolidated financial statements include the results of operations,
financial position, and changes in cash flows of Beneficial for all periods
presented.
As a result of the merger, adjustments were made in 1998 to align
accounting policies of the two companies, particularly relating to
chargeoffs for the private label and consumer businesses. These adjustments
did not have a material impact on our reported results.
In connection with the merger, we established an integration plan. The
plan was approved by the appropriate levels of management and identified
activities that would not be continued as a result of the merger and the
related costs of exiting those activities. Our plan also identified the
number of employees who would be involuntarily terminated and established
the benefit levels those employees would receive upon termination. These
benefit levels were communicated to employees in April 1998. Pursuant to
our plan, we accrued pretax merger and integration related costs of
approximately $1 billion ($751 million after-tax) in 1998 which has been
reflected in the statement of income in total costs and expenses. The
merger and integration plan was completed during 1999. The costs incurred
to execute the plan were consistent with our originally estimated cost of
$1 billion.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 61 - 1999 Annual Report
The merger and integration costs were comprised of the following:
<TABLE>
<CAPTION>
Restructure Restructure
1998 Activity Reserve Reserve
Restructure ------------------------ Balance at 1999 Balance at
Reserve at Cash Non-Cash December 31, Cash December 31,
In millions. Inception Payments Items 1998 Payments 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Employee termination costs $ 270 $(240) $30 $(30) -
------------------------------------------------------------------------------------------------------------------
Facility closures:
Lease termination costs:
Beneficial corporate office 100 (100) - -
Branch offices and other
operating facilities 142 (115) 27 (27) -
Fixed asset writedowns 40 $ (40) - -
Vendor contract termination
penalties 37 (14) 23 (23) -
------------------------------------------------------------------------------------------------------------------
Total facility closure costs 319 (229) (40) 50 (50) -
------------------------------------------------------------------------------------------------------------------
Asset writedowns to reflect
modified business plans:
Goodwill and other intangibles 183 (183) - -
Real estate interests 68 (68) - -
------------------------------------------------------------------------------------------------------------------
Total asset writedowns 251 - (251) - -
------------------------------------------------------------------------------------------------------------------
Investment banking fees 75 (75) - -
Legal and other expenses 25 (25) - -
Debt prepayment premiums 60 (60) - -
------------------------------------------------------------------------------------------------------------------
$1,000 $(629) $(291) $80 $(80) -
==================================================================================================================
</TABLE>
Employee termination costs of $270 million (of which $86 million related to
key executives with pre-existing severance agreements) were accrued to
cover costs related to approximately 3,000 employees whose functions were
eliminated due to redundancy and consolidation of branches, corporate staff
and back office operations. As of December 31, 1998, substantially all
identified employees had been severed and approximately $240 million of
severance payments had been made to terminated employees. The remaining $30
million was paid in 1999 pursuant to our plan.
Facility closure costs of $319 million were accrued related to planned
costs to be incurred in connection with the exiting of the Beneficial
corporate office lease, early termination of branch offices and other
operating facility leases and the cancellation of contracts with third
party vendors, primarily for technology, whose services would no longer be
required. The accrual for facility closures included lease termination and
other exit costs for closures of 335 duplicative U.S. and U.K. branch
offices and 8 redundant operating centers as well as fixed asset write
downs primarily related to the closed facilities. In November 1998, we
entered into an agreement to sublease the Beneficial corporate offices to a
third party to whom we paid total consideration of approximately $100
million. As of December 31, 1998, $115 million of lease termination and
other costs for closed branch offices and operating centers had been
incurred. The remaining $27 million in lease termination costs were
incurred in 1999. In addition, $14 million of charges were incurred in 1998
due to early termination of third party vendor contracts. During 1999, the
termination of vendor contracts was completed and the remaining $23 million
of charges were incurred.
In connection with the merger, we re-assessed Beneficial's existing
business plans and assumptions used in evaluating goodwill and other
related intangibles related to various operations, loan product and
acquired receivable portfolios. Our plan identified modifications to these
existing business plans. In connection with these modifications, we
utilized discounted cash flow analysis to value the related goodwill and
other intangible assets using assumptions which reflected our modified
business plans. As a result of our analysis, we wrote off goodwill and
other related intangible assets of $183 million to their estimated fair
values. None of the items included in the "goodwill and other intangibles"
classification were individually significant to warrant
separate disclosure. In addition, we wrote down real estate interests to
reflect their net realizable values. Assets held for disposal are not
material.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 62 - 1999 Annual Report
(continued)
We and Beneficial incurred merger-related investment banking fees of $75
million and legal and other expenses of $25 million. In addition, in order
to align the asset liability position of the combined company, we paid $60
million prepayment premiums to retire outstanding debt.
In April 1998, the sale of Beneficial's German consumer banking
operations was completed. An after-tax loss of $27.8 million was recorded
in the fourth quarter of 1997. This loss was recorded after consideration
of a $31.0 million tax benefit.
In March 1998, the sale of Beneficial's Canadian operations was
completed. An after-tax gain of $118.5 million was recorded upon
consummation of the transaction.
In June 1997, we purchased Transamerica Financial Services Holding
Company ("TFS"), the branch-based consumer finance subsidiary of
Transamerica Corporation, for $1.1 billion. We also repaid $2.8 billion of
debt that TFS owed to affiliates of Transamerica Corporation. The
acquisition strengthened our core consumer finance operations by adding new
markets, new customer accounts, seasoned employees and receivables secured
by collateral. In connection with this acquisition, in June 1997, we
completed a public offering of 27.3 million shares of common stock for $1.0
billion. We used the net proceeds from the offering to repay short-term
borrowings related to the acquisition.
In October 1997, we purchased all of the outstanding capital stock of ACC
Consumer Finance Corporation ("ACC"), an auto finance company, for about
4.2 million shares of our common stock and cash. This purchase expanded our
business of making loans to non-prime borrowers secured by automobiles,
primarily used vehicles sold through franchised dealers, and increased our
market share in the non-prime auto finance market.
In late December 1997, Beneficial acquired Endeavour Personal Finance
Ltd. ("Endeavour"), including receivables of approximately $250 million for
cash, expanding our United Kingdom presence.
All of the 1997 acquisitions were accounted for as purchases. Thus, our
statement of income for 1997 included the results of operations of TFS, ACC
and Endeavour from the closing dates of the transactions.
- --------------------------------------------------------------------------------
3. Investment Securities
<TABLE>
<CAPTION>
In millions.
At December 31 1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
Available-For-Sale Investments
Marketable equity securities $ 33.4 $ 70.8
Corporate debt securities 1,692.3 1,731.3
U.S. government and federal agency debt securities 236.7 301.2
Other 1,127.5 1,062.5
---------------------------------------------------------------------------
Subtotal 3,089.9 3,165.8
Accrued investment income 38.2 36.3
---------------------------------------------------------------------------
Total investment securities $3,128.1 $3,202.1
===========================================================================
</TABLE>
Proceeds from the sale of available-for-sale investments totaled
approximately $.8, $.9 and $1.7 billion in 1999, 1998 and 1997,
respectively. Gross gains of $12.1, $9.2 and $27.4 million and gross losses
of $2.7, $3.2 and $3.3 million in 1999, 1998 and 1997, respectively, were
realized on those sales.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 63 - 1999 Annual Report
The gross unrealized gains (losses) of investment securities were as
follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
In millions. Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
At December 31 Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-For-Sale Investments
Marketable equity securities $ 32.7 $ .9 $ (.2) $ 33.4 $ 68.2 $ 2.8 $ (.2) $ 70.8
Corporate debt securities 1,790.4 3.7 (101.8) 1,692.3 1,705.1 55.3 (29.1) 1,731.3
U.S. government and federal
agency debt securities 248.6 1.0 (12.9) 236.7 296.9 5.7 (1.4) 301.2
Other 1,128.0 .2 (.7) 1,127.5 1,061.6 1.3 (.4) 1,062.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale
investments $3,199.7 $5.8 $(115.6) $3,089.9 $3,131.8 $65.1 $(31.1) $3,165.8
===================================================================================================================================
</TABLE>
See Note 12, "Fair Value of Financial Instruments," for further discussion
of the relationship between the fair value of our assets, liabilities and
off-balance sheet financial instruments.
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, 1999 Cost Value Yield* Cost Value Yield*
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due within 1 year $ 141.8 $ 141.8 6.63% $ 30.0 $ 30.1 8.43%
After 1 but within 5 years 389.6 383.5 6.46 69.3 58.7 6.74
After 5 but within 10 years 426.7 409.6 6.68 36.5 46.9 6.17
After 10 years 832.3 757.4 7.24 112.8 101.0 6.03
---------------------------------------------------------------------------------------------------------------------
Total $ 1,790.4 $ 1,692.3 6.89% $248.6 $ 236.7 6.54%
=====================================================================================================================
</TABLE>
*Computed by dividing annualized interest by the amortized cost of the
respective investment securities.
- --------------------------------------------------------------------------------
4. Receivables
<TABLE>
<CAPTION>
In millions.
At December 31 1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C>
Home equity $24,661.9 $18,692.7
Auto finance 1,233.5 805.0
MasterCard/Visa 6,314.4 7,180.2
Private label 10,119.7 9,566.0
Other unsecured 9,151.6 7,108.6
Commercial and other 808.3 853.4
------------------------------------------------------------------------------------------------
Total owned receivables 52,289.4 44,205.9
Accrued finance charges 879.3 642.5
Credit loss reserve for owned receivables (1,757.0) (1,734.2)
Unearned credit insurance premiums and claims reserves (569.3) (505.1)
Amounts due and deferred from receivables sales 2,225.6 2,152.9
Reserve for receivables serviced with limited recourse (909.6) (813.9)
------------------------------------------------------------------------------------------------
Total owned receivables, net 52,158.4 43,948.1
Receivables serviced with limited recourse 19,438.9 19,701.8
------------------------------------------------------------------------------------------------
Total managed receivables, net $71,597.3 $63,649.9
================================================================================================
</TABLE>
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 64 - 1999 Annual Report
(continued)
Foreign receivables included in owned receivables were as follows:
<TABLE>
<CAPTION>
United Kingdom Canada Germany
In millions. -------------------------------- -------------------------------- -----------------------
At December 31 1999 1998 1997 1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Home equity $ 751.0 $ 913.6 $ 784.0 $ 339.2 $ 305.0 $ 632.8 - - $ 20.9
MasterCard/Visa 2,167.8 1,852.4 1,350.8 - - - - - .5
Private label 1,145.6 1,165.8 975.4 427.4 349.2 790.2 - - 134.3
Other unsecured 1,310.8 1,191.5 1,133.2 371.0 343.8 617.9 - - 53.3
Commercial
and other 1.1 3.2 3.1 2.7 6.2 26.5 - - 74.4
-----------------------------------------------------------------------------------------------------------------------
Total $5,376.3 $5,126.5 $4,246.5 $1,140.3 $1,004.2 $2,067.4 - - $283.4
=======================================================================================================================
</TABLE>
Foreign managed receivables represented 11 and 12 percent of total managed
receivables at December 31, 1999 and 1998.
The outstanding balance of receivables serviced with limited recourse
consisted of the following:
<TABLE>
<CAPTION>
In millions.
At December 31 1999 1998
-------------------------------------------------------------
<S> <C> <C>
Home equity $ 2,273.6 $ 3,637.4
Auto finance 1,806.3 960.3
MasterCard/Visa 9,478.7 9,430.6
Private label 1,150.0 811.5
Other unsecured 4,730.3 4,862.0
-------------------------------------------------------------
Total $19,438.9 $19,701.8
=============================================================
</TABLE>
At December 31, 1999, the expected weighted average remaining life of these
securitization transactions was 1.7 years.
The combination of receivables owned and receivables serviced with
limited recourse, which we consider our managed portfolio, is shown below:
<TABLE>
<CAPTION>
In millions.
At December 31 1999 1998
-------------------------------------------------------------
<S> <C> <C>
Home equity $26,935.5 $22,330.1
Auto finance 3,039.8 1,765.3
MasterCard/Visa 15,793.1 16,610.8
Private label 11,269.7 10,377.5
Other unsecured 13,881.9 11,970.6
Commercial and other 808.3 853.4
-------------------------------------------------------------
Managed receivables $71,728.3 $63,907.7
=============================================================
</TABLE>
The amounts due and deferred included unamortized securitization assets and
other assets established under the recourse provisions for certain sales
totaling $2,230.5 million at December 31, 1999 and $2,031.3 million at
December 31, 1998. It also included net customer payments (owed by us to)
not received from the securitization trustee of $(68.9) million at December
31, 1999 and $79.6 million at December 31, 1998. The reserve for
receivables serviced with limited recourse represents our best estimate of
probable losses on these receivables.
The providers of credit enhancements for securitization transactions have
no recourse to us. We maintain facilities with third parties which provide
for the securitization of receivables on a revolving basis totaling $9.6
billion, of which $9.4 billion were utilized at December 31, 1999. The
amount available under these facilities will vary based on the timing and
volume of public securitization transactions.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 65 - 1999 Annual Report
Contractual maturities of owned receivables were as follows:
<TABLE>
<CAPTION>
In millions.
At December 31, 1999 2000 2001 2002 2003 2004 Thereafter Total
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Home equity $ 5,802.4 $4,326.2 $2,980.2 $2,253.4 $1,700.8 $ 7,598.9 $24,661.9
Auto finance 6.7 28.3 107.4 238.4 502.2 350.5 1,233.5
MasterCard/Visa 2,627.3 1,503.0 1,364.7 1,386.7 304.1 2,933.9 10,119.7
Private label 1,104.1 828.3 614.1 491.6 404.6 2,871.7 6,314.4
Other unsecured 3,781.2 1,983.0 1,152.8 706.8 451.6 1,076.2 9,151.6
Commercial and other 219.3 43.0 29.3 38.2 52.1 426.4 808.3
----------------------------------------------------------------------------------------------------------------------
Total $13,541.0 $8,711.8 $6,248.5 $5,115.1 $3,415.4 $15,257.6 $52,289.4
======================================================================================================================
</TABLE>
A substantial portion of consumer receivables, based on our 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 62
percent in 1999 and 59 percent in 1998.
The following table summarizes contractual maturities of owned
receivables due after one year by repricing characteristic:
<TABLE>
<CAPTION>
In millions. Over 1 But
At December 31, 1999 Within 5 years Over 5 years
---------------------------------------------------------------------------------------
<S> <C> <C>
Receivables at predetermined interest rates $14,000.0 $ 9,294.6
Receivables at floating or adjustable rates 9,490.8 5,963.0
---------------------------------------------------------------------------------------
Total $23,490.8 $15,257.6
=======================================================================================
</TABLE>
Nonaccrual consumer receivables totaled $1,412.2 and $1,034.5 million at
December 31, 1999 and 1998, respectively, including $236.7 and $178.3
million, respectively, relating to foreign operations. Interest income that
would have been recorded in 1999 and 1998 if such nonaccrual receivables
had been current and in accordance with contractual terms was approximately
$240.1 and $162.4 million, respectively, including $42.0 and $30.3 million,
respectively, relating to foreign operations. Interest income that was
included in net income for 1999 and 1998, prior to these loans being placed
on nonaccrual status, was approximately $132.4 and $91.5 million,
respectively, including $22.6 and $16.3 million, respectively, relating to
foreign operations.
For an analysis of reserves for credit losses, see our Analysis of Credit
Loss Reserves Activity on an owned and managed basis.
- --------------------------------------------------------------------------------
5. Deposits
<TABLE>
<CAPTION>
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 $3,765.9 6.3% $ 930.2 6.8%
Savings accounts 9.2 1.9 3.5 2.7
Demand accounts 1.2 - 1.4 -
---------------------------------------------------------------------------------------------------------------
Total domestic deposits 3,776.3 6.3 935.1 6.8
---------------------------------------------------------------------------------------------------------------
Foreign
Time certificates 1,054.1 5.6 953.7 6.7
Savings accounts 68.4 5.5 84.9 6.1
Demand accounts 81.2 2.3 131.3 4.2
---------------------------------------------------------------------------------------------------------------
Total foreign deposits 1,203.7 5.3 1,169.9 6.4
---------------------------------------------------------------------------------------------------------------
Total deposits $4,980.0 6.0% $2,105.0 6.5%
===============================================================================================================
</TABLE>
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 66 - 1999 Annual Report
(continued)
Average deposits and related weighted average interest rates for 1999, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
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 $1,857.0 6.1% $1,056.3 6.1% $1,167.1 6.8%
Savings and demand accounts 12.1 1.4 215.1 2.1 221.4 4.1
---------------------------------------------------------------------------------------------------------------------------
Total domestic deposits 1,869.1 6.1 1,271.4 5.4 1,388.5 6.3
---------------------------------------------------------------------------------------------------------------------------
Foreign
Time certificates 967.7 4.8 1,177.8 6.0 979.1 6.3
Savings and demand accounts 200.5 4.4 246.7 5.3 212.4 3.4
---------------------------------------------------------------------------------------------------------------------------
Total foreign deposits 1,168.2 4.7 1,424.5 5.9 1,191.5 5.8
---------------------------------------------------------------------------------------------------------------------------
Total deposits $3,037.3 5.5% $2,695.9 5.7% $2,580.0 6.0%
===========================================================================================================================
</TABLE>
Interest expense on total deposits was $168.4, $152.7 and $155.3 million
for 1999, 1998 and 1997, respectively. Interest expense on domestic
deposits was $113.4, $68.7 and $90.4 million for 1999, 1998 and 1997,
respectively.
Maturities of time certificates in amounts of $100,000 or more were:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31, 1999 Domestic Foreign Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
3 months or less $ .5 $ 555.7 $ 556.2
Over 3 months through 6 months .5 160.5 161.0
Over 6 months through 12 months - 93.7 93.7
Over 12 months .1 241.7 241.8
----------------------------------------------------------------------------------------
Total $1.1 $1,051.6 $1,052.7
========================================================================================
</TABLE>
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, 1999 2000 2001 2002 2003 2004 Thereafter Total
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
(Less-Than) 4.00% $ 8.7 $ .1 - - - - $ 8.8
4.00%-5.99% 766.7 462.7 $121.9 $164.9 $ 91.6 - 1,607.8
6.00%-7.99% 232.5 730.3 747.0 423.9 769.1 $200.1 3,102.9
8.00%-9.99% 57.5 - - - - - 57.5
----------------------------------------------------------------------------------------------------------------------------
Total $1,065.4 $1,193.1 $868.9 $588.8 $860.7 $200.1 $4,777.0
============================================================================================================================
</TABLE>
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 67 - 1999 Annual Report
- --------------------------------------------------------------------------------
6. Commercial Paper, Bank and Other Borrowings
<TABLE>
<CAPTION>
Bank
All dollar amounts are stated in millions. Commercial and Other
At December 31 Paper* Borrowings Total
---------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Balance $8,822.2 $1,955.6 $10,777.8
Highest aggregate month-end balance 11,454.6
Average borrowings 8,620.3 1,426.7 10,047.0
Weighted average interest rate:
At year end 5.6% 5.6% 5.6%
Paid during year 5.2 5.0 5.2
---------------------------------------------------------------------------------
1998
Balance $7,713.2 $2,204.7 $ 9,917.9
Highest aggregate month-end balance 12,677.6
Average borrowings 9,495.6 2,640.8 12,136.4
Weighted average interest rate:
At year end 5.2% 7.1% 5.6%
Paid during year 5.5 5.6 5.5
---------------------------------------------------------------------------------
1997
Balance $9,064.7 $1,601.4 $10,666.1
Highest aggregate month-end balance 11,654.6
Average borrowings 8,992.5 1,419.5 10,412.0
Weighted average interest rate:
At year end 5.7% 7.5% 6.0%
Paid during year 5.6 6.5 5.7
---------------------------------------------------------------------------------
</TABLE>
*Included in outstanding balances at year-end 1999, 1998 and 1997 were
commercial paper obligations of foreign subsidiaries of $359.4, $322.8 and
$958.4 million, respectively.
Interest expense for commercial paper, bank and other borrowings totaled
$522.5, $672.1 and $592.4 million for 1999, 1998 and 1997, respectively.
We maintain various bank credit agreements primarily to support
commercial paper borrowings. At December 31, 1999 and 1998, we had
committed back-up lines and other bank lines of $12.6 and $13.5 billion,
respectively, of which $11.4 and $11.7 billion, respectively, were unused.
Formal credit lines are reviewed annually, and expire at various dates from
2000 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, 1999 totaled $10.8 million.
- --------------------------------------------------------------------------------
7. Senior and Senior Subordinated Debt (with original maturities over one year)
<TABLE>
<CAPTION>
All dollar amounts are stated in millions.
At December 31 1999 1998
-------------------------------------------------------------------------------------
<S> <C> <C>
Senior Debt
3.50% to 4.99%; due 2000 to 2004 $ 413.5 -
5.00% to 6.49%; due 2000 to 2013 10,267.0 $ 6,817.1
6.50% to 6.99%; due 2000 to 2013 5,293.0 4,167.9
7.00% to 7.49%; due 2000 to 2023 3,098.7 1,569.9
7.50% to 7.99%; due 2000 to 2012 660.7 1,779.0
8.00% to 8.99%; due 2000 to 2008 679.6 1,359.0
9.00% and greater; due 2000 to 2001 428.8 480.0
Variable interest rate debt; 3.55% to 7.52%; due 2000 to 2019 13,576.5 13,765.9
Senior Subordinated Debt
6.50% to 9.63%; due 2000 to 2003 494.7 494.7
10.25%; due 2003 - 20.0
Unamortized Discount (25.2) (14.9)
-------------------------------------------------------------------------------------
Total senior and senior subordinated debt $34,887.3 $30,438.6
=====================================================================================
</TABLE>
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 68 - 1999 Annual Report
(continued)
Weighted average interest rates were 6.4 and 6.3 percent at December 31,
1999 and 1998, respectively. Interest expense for senior and senior
subordinated debt was $2,085.7, $1,692.2 and $1,610.7 million for 1999,
1998 and 1997, respectively. The most restrictive financial covenant
contained in the terms of our debt agreements are the maintenance of a
minimum shareholders' equity of $2.0 billion for Household International,
Inc., and the maintenance of a minimum shareholder's equity of $3.0 billion
for Household Finance Corporation ("HFC"), a wholly-owned subsidiary of
Household.
Maturities of senior and senior subordinated debt were:
<TABLE>
<CAPTION>
In millions.
At December 31, 1999
- -------------------------------------------------------------------------------
<S> <C>
2000 $ 6,571.2
2001 6,043.4
2002 4,291.1
2003 4,125.3
2004 3,255.1
Thereafter 10,601.2
- -------------------------------------------------------------------------------
Total $34,887.3
===============================================================================
</TABLE>
8. Derivative Financial Instruments and Other Financial Instruments with Off-
Balance Sheet Risk
In the normal course of business and in connection with our asset/liability
management program, we enter into various transactions involving derivative
and other off-balance sheet financial instruments. These instruments
primarily are used to manage our exposure to fluctuations in interest rates
and foreign exchange rates. We do not serve as a financial intermediary to
make markets in any derivative financial instruments. For further
information on our strategies for managing interest rate and foreign
exchange rate risk, see the Risk Management section within the Management's
Discussion and Analysis of Financial Condition and Results of Operations.
We use interest rate contracts and foreign exchange rate contracts. Each
of these financial instruments has 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. Our 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. We control the credit risk of our off-balance sheet
financial instruments through established credit approvals, risk control
limits and ongoing monitoring procedures. We have 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. We mitigate this risk by
establishing limits for positions and other controls.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 69 - 1999 Annual Report
Interest Rate and Foreign Exchange Contracts The following table summarizes
the activity in interest rate and foreign exchange contracts for 1999, 1998 and
1997:
Hedging/Synthetic Alteration Instruments
<TABLE>
<CAPTION>
Exchange Traded Non-Exchange Traded
- ---------------------------------------------------------------------------- -----------------------------------------------
Interest Rate Foreign Exchange
Futures Contracts Options Rate contracts
--------------------- --------------------- Interest Currency ---------------------
In millions Purchased Sold Purchased Written Rate Swaps Swaps Purchased Sold
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
Notional amount, 1996 $ 1,338.0 - - - $10,774.6 $2,457.9 $ 169.7 $ (951.8)
New contracts 8,584.0 $(7,350.0) - - 3,854.0 988.5 4,256.6 (4,548.5)
Matured or expired
contracts (2,020.0) 120.0 - - (3,168.3) (397.3) (652.6) 843.4
Terminated contracts - - - - (1,175.9) (205.4) (95.6) 95.6
In-substance maturities/1/ (7,030.0) 7,030.0 - - - - (3,242.2) 3,242.2
- ------------------------------------------------------------------------------------------------------------------------------
Notional amount, 1997 $ 872.0 $ (200.0) - - $10,284.4 $2,843.7 $ 435.9 $(1,319.1)
==============================================================================================================================
Fair value, 1997/2/ $ - $ - - - $ 152.4 $ (126.0) $ 4.5 $ (6.4)
- ------------------------------------------------------------------------------------------------------------------------------
1998
Notional amount, 1997 $ 872.0 $ (200.0) - - $10,284.4 $2,843.7 $ 435.9 $(1,319.1)
New contracts 2,736.0 (2,281.0) $1,344.0 - 7,237.1 2,099.9 5,869.9 (6,546.5)
Matured or expired
contracts (1,072.0) 15.0 (800.0) - (2,476.6) (282.7) (1,450.4) 1,770.1
Terminated contracts - - - - (1,329.3) (254.6) (307.6) 307.6
In-substance maturities/1/ (2,466.0) 2,466.0 - - - - (4,538.0) 4,538.0
- ------------------------------------------------------------------------------------------------------------------------------
Notional amount, 1998 $ 70.0 $ - $ 544.0 - $13,715.6 $4,406.3 $ 9.8 $(1,249.9)
==============================================================================================================================
Fair value, 1998/2/ $ - $ - $ - - $ 68.9 $ 159.5 $ (.2) $ 2.1
- ------------------------------------------------------------------------------------------------------------------------------
1999
Notional amount, 1998 $ 70.0 - $ 544.0 - $13,715.6 $4,406.3 $ 9.8 $(1,249.9)
New contracts 5,743.0 $(4,725.0) 1,158.0 $(50.0) 18,734.2 2,070.2 2,089.9 (1,479.3)
Matured or expired
contracts (1,013.0) 25.0 (949.0) - (2,894.5) (723.8) (116.6) 171.5
Terminated contracts - - - - (1,796.4) (80.0) (18.8) 13.8
In-substance maturities/1/ (4,700.0) 4,700.0 (50.0) 50.0 - - (1,846.2) 1,846.2
- ------------------------------------------------------------------------------------------------------------------------------
Notional amount, 1999 $ 100.0 $ - $ 703.0 $ - $27,758.9 $5,672.7 $ 118.1 $ (697.7)
==============================================================================================================================
Fair value, 1999/2/ $ (.1) $ - $ - $ - $ (125.3) $ (319.2) $ .5 $ 4.9
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Non-Exchange Traded
- ------------------------------------------------------------------
Interest Rate
Forward Contracts Other Risk
---------------------- Management
In millions Purchased Sold Instruments
- ------------------------------------------------------------------
<S> <C> <C> <C>
1997
Notional amount, 1996 $ 1,731.9 $ (269.2) $2,676.2
New contracts 6,055.8 (1,326.3) 372.4
Matured or expired
contracts (4,477.7) 1,489.5 (495.9)
Terminated contracts - - (85.3)
In-substance maturities/1/ - - -
- ------------------------------------------------------------------
Notional amount, 1997 $ 3,310.0 $ (106.0) $2,467.4
==================================================================
Fair value, 1997/2/ $ 1.7 $ - $ 11.3
- ------------------------------------------------------------------
1998
Notional amount, 1997 $ 3,310.0 $ (106.0) $2,467.4
New contracts 3,549.8 (1,199.6) 883.1
Matured or expired
contracts (4,458.1) 1,069.7 (306.9)
Terminated contracts (139.8) 148.9 (5.8)
In-substance maturities/1/ - - -
- ------------------------------------------------------------------
Notional amount, 1998 $ 2,261.9 $ (87.0) $3,037.8
==================================================================
Fair value, 1998/2/ $ (6.2) $ - $ 2.8
- ------------------------------------------------------------------
1999
Notional amount, 1998 $ 2,261.9 $ (87.0) $3,037.8
New contracts 6,946.7 (1,242.0) 2,089.4
Matured or expired
contracts (5,759.4) 666.4 (442.1)
Terminated contracts (207.7) 593.4 (1,231.1)
In-substance maturities/1/ - - -
- ------------------------------------------------------------------
Notional amount, 1999 $ 3,241.5 $ (69.2) $3,454.0
==================================================================
Fair value, 1999/2/ $ 6.4 $ - $ 4.8
- ------------------------------------------------------------------
</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 us
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 our assets, liabilities and off-balance sheet financial instruments.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 70 - 1999 Annual Report
(continued)
We operate in three functional currencies, the U.S. dollar, the British pound
and the Canadian dollar. Of the above instruments, the U.S. dollar is the
functional currency for exchange traded interest rate futures and options. The
remaining instruments are restated in U.S. dollars by country as follows:
<TABLE>
<CAPTION> Foreign Exchange Interest Rate
Interest Rate Contracts Forward Contracts Other Risk
Rate Currency -------------------------- ----------------------- Management
In millions. Swaps Swaps Purchased Sold Purchased Sold Instruments
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
United States $ 8,883.5 $1,762.1 $435.9 $(1,319.1) - - $1,350.0
Canada 361.6 427.3 - - $ 447.5 $(106.0) 7.0
United Kingdom 1,039.3 654.3 - - 2,862.5 - 1,110.4
- --------------------------------------------------------------------------------------------------------------------------------
$10,284.4 $2,843.7 $435.9 $(1,319.1) $3,310.0 $(106.0) $2,467.4
================================================================================================================================
1998
United States $12,158.4 $3,052.7 $ 6.5 $(1,249.9) - - $2,073.8
Canada 287.3 334.7 3.3 - $ 344.6 $ (45.5) 29.3
United Kingdom 1,269.9 1,018.9 - - 1,917.3 (41.5) 934.7
- --------------------------------------------------------------------------------------------------------------------------------
$13,715.6 $4,406.3 $ 9.8 $(1,249.9) $2,261.9 $ (87.0) $3,037.8
================================================================================================================================
1999
United States $25,916.7 $4,258.2 $113.0 $ (697.7) - - $2,701.5
Canada 374.1 223.0 5.1 - $ 245.5 $ (67.6) -
United Kingdom 1,468.1 1,191.5 - - 2,996.0 (1.6) 752.5
- --------------------------------------------------------------------------------------------------------------------------------
$27,758.9 $5,672.7 $118.1 $ (697.7) $3,241.5 $ (69.2) $3,454.0
================================================================================================================================
</TABLE>
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. We primarily enter
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, 1999:
<TABLE>
<CAPTION>
In millions.
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investment securities $ 36.8
Receivables:
Home equity 4,290.0
Private label 12.1
Other unsecured 16.3
- --------------------------------------------------------------------------------------------------------------------------------
Total owned receivables 4,318.4
Commercial paper, bank and
other borrowings 1,234.0
Senior and senior subordinated debt 10,924.7
Receivables serviced with limited recourse 11,245.0
- --------------------------------------------------------------------------------------------------------------------------------
Total items synthetically altered with interest rate swaps $27,758.9
================================================================================================================================
</TABLE>
In all instances, the notional amount is not greater than the carrying value of
the related asset/liability or off-balance sheet item.
We manage our 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 our 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 us 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).
We also have entered into currency swaps to convert both principal and interest
payments on debt issued from one currency to the appropriate functional
currency.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 71 - 1999 Annual Report
The following table summarizes the maturities and related weighted average
receive/pay rates of interest rate swaps outstanding at December 31, 1999:
<TABLE>
<CAPTION>
All dollar amounts are stated in millions. 2000 2001 2002 2003 2004 2005 Thereafter Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay a fixed rate/receive a floating rate:
Notional value $ 1,843.5 $4,855.0 $1,296.4 $1,324.4 $ 226.1 $177.7 - $ 9,723.1
Weighted average receive rate 6.24% 6.28% 6.19% 6.34% 6.28% 6.28% - 6.27%
Weighted average pay rate 6.31 6.04 6.27 6.02 6.87 7.17 - 6.16
- -----------------------------------------------------------------------------------------------------------------------------------
Pay a floating rate/receive a fixed rate:
Notional value $ 199.2 $ 224.4 $ 259.7 $ 100.0 $1,213.4 $100.0 $4,597.1 $ 6,693.8
Weighted average receive rate 6.78% 6.52% 6.15% 6.50% 5.91% 6.86% 6.44% 6.35%
Weighted average pay rate 5.94 6.12 5.53 5.60 6.10 6.11 6.10 6.06
- -----------------------------------------------------------------------------------------------------------------------------------
Pay a floating rate/receive a different floating rate:
Notional value $ 8,337.0 $ 500.0 $2,505.0 - - - - $11,342.0
Weighted average receive rate 6.36% 6.11% 6.00% - - - - 6.27%
Weighted average pay rate 5.73 5.63 5.88 - - - - 5.76
------------------------------------------------------------------------------------------------------------------------------
Total notional value $10,379.7 $5,579.4 $4,061.1 $1,424.4 $1,439.5 $277.7 $4,597.1 $27,758.9
===================================================================================================================================
Total weighted average rates on swaps:
Receive rate 6.35% 6.27% 6.07% 6.35% 5.97% 6.49% 6.44% 6.29%
------------------------------------------------------------------------------------------------------------------------------
Pay rate 5.83 6.00 5.98 5.99 6.22 6.79 6.10 5.97
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The floating rates paid or received by us 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. We use hedging/synthetic alteration instruments 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 increased by 1 basis point in 1999 and declined by 7 and
9 basis points in 1998 and 1997, respectively, had these instruments not
been utilized.
Forwards and futures are agreements between two parties, committing one
to sell and the other to buy a specific quantity of an instrument on some
future date. The parties agree to buy or sell at a specified price in the
future, and their profit or loss is determined by the difference between
the arranged price and the level of the spot price when the contract is
settled. We have both interest rate and foreign exchange rate forward
contracts and interest rate futures contracts. We use foreign exchange
contracts to reduce our exposure to foreign currency exchange risk.
Interest rate forward and futures contracts are used to hedge resets of
interest rates on our floating rate assets and liabilities. Our 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 us 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 $51.2 and $56.9 million and deferred losses of $1.6 and
$1.5 million from hedging/synthetic alteration instruments were recorded on
the balance sheets at December 31, 1999 and 1998, respectively. The
weighted average amortization period associated with the deferred gains was
4.0 and 5.0 years at December 31, 1999 and 1998, respectively. The weighted
average amortization period for the deferred losses was 1.2 and .5 years at
December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, 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
$48.8 and $33.6 million, respectively.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 72 - 1999 Annual Report
(continued)
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 we primarily lend to consumers, we do not have receivables from
any industry group that equal or exceed 10 percent of total managed
receivables at December 31, 1999 and 1998. We lend nationwide, with the
following geographic areas comprising more than 10 percent of total managed
domestic receivables at December 31, 1999: California-17 percent; Southwest
(AZ, AR, LA, NM, OK, TX)-10 percent; Midwest (IL, IN, IA, KS, MI, MN, MO,
NE, ND, OH, SD, WI)-21 percent; Middle Atlantic (DE, DC, MD, NJ, PA, VA,
WV)-15 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 March 1998 Household Capital Trust IV ("HCT IV"), a wholly-owned
subsidiary of Household, issued 8 million 7.25 percent Trust Preferred
Securities ("preferred securities") at $25 per preferred security. The sole
asset of HCT IV is $206.2 million of 7.25 percent Junior Subordinated
Deferrable Interest Notes issued by Household. The junior subordinated
notes held by HCT IV mature on December 31, 2037 and are redeemable by
Household in whole or in part beginning on March 19, 2003, at which time
the HCT IV preferred securities are callable at par ($25 per preferred
security) plus accrued and unpaid dividends.
In June 1996 Household Capital Trust II ("HCT II"), a wholly-owned
subsidiary of Household, issued 4 million 8.70 percent 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
Household. The junior subordinated notes held by HCT II mature on June 30,
2036 and are redeemable by Household in whole or in part beginning on June
30, 2001, at which time the HCT II preferred securities are callable at par
($25 per preferred security) plus accrued and unpaid dividends.
In June 1995 Household Capital Trust I ("HCT I"), a wholly-owned
subsidiary of Household, 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
Household. The junior subordinated notes held by HCT I mature on June 30,
2025 and are redeemable by Household in whole or in part beginning on June
30, 2000, at which time the HCT I preferred securities are callable at par
($25 per preferred security) plus accrued and unpaid dividends. HCT I may
elect to extend the maturity of the preferred securities to June 30, 2044.
The obligations of Household with respect to the junior subordinated
notes, when considered together with certain undertakings of Household with
respect to HCT I, HCT II and HCT IV, constitute full and unconditional
guarantees by Household of HCT I's, HCT II's and HCT IV's obligations under
the respective preferred securities. The preferred securities are
classified in our 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
$375 million at December 31, 1999 and 1998. 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 Household's option for up to five years from date of issuance. Household
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
10. Preferred Stock
All dollar amounts are stated in millions.
At December 31 1999 1998
--------------------------------------------------------------------------------------------
<S> <C> <C>
$4.30 Preferred Stock, 836,585 shares $ 83.6 $ 83.6
$4.50 Preferred Stock, 103,976 shares 10.4 10.4
5.00% Preferred Stock, 407,718 shares 20.4 20.4
8.25% Preferred Stock, Series 1992-A, 2,000,000 depositary shares/1/ 50.0 50.0
--------------------------------------------------------------------------------------------
Total preferred stock $164.4 $164.4
============================================================================================
</TABLE>
/1/Depositary share represents 1/40 share of preferred stock.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 73 - 1999 Annual Report
Dividends on the $4.30 preferred stock are cumulative and payable
semiannually. We may, at our option, redeem in whole or in part the $4.30
preferred stock for $100 per share plus accrued and unpaid dividends. This
stock has a liquidation value of $100 per share plus accrued and unpaid
dividends in the event of an involuntary liquidation or $100 in the event
of a voluntary liquidation.
Dividends on the $4.50 preferred stock are cumulative and payable
semiannually. We may, at our option, redeem in whole or in part the $4.50
preferred stock for $103 per share plus accrued and unpaid dividends. This
stock has a liquidation value of $100 per share.
Dividends on the 5.00 percent preferred stock are cumulative and payable
semiannually. We may, at our option, redeem in whole or in part the 5.00
percent preferred stock for $50 per share plus accrued and unpaid
dividends. This stock has a liquidation value of $50 per share.
Dividends on the 8.25 percent preferred stock, Series 1992-A, are
cumulative and payable quarterly. We may, at our 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 8.25 percent
preferred stock is nonvoting. Holders of the $4.30 preferred, $4.50
preferred and 5 percent preferred stock will be entitled to vote as a
separate class to elect two directors if the equivalent of three or more
semiannual dividends shall be in arrears, until the dividends in arrears
are paid in full.
Household'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, 1999, up to 2.6 million shares of preferred stock were
authorized for issuance.
- --------------------------------------------------------------------------------
11. Junior Preferred Share Purchase Rights
In 1996, Household 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 three-thousandth of
a share of a new series of junior participating preferred stock at an
exercise price of $100 per one three-thousandth of a share, subject to
further 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 Household's common stock and (b) ten business days (or
later date as determined by the Board of Directors of Household) after a
party or an associated group initiates or announces its intention to make
an offer to acquire 15 percent or more of Household's common stock. The
Rights, which cannot vote or receive dividends, expire on July 31, 2006 and
may be redeemed by Household at a price of $.0033 per Right at any time
prior to expiration or acquisition of 15 percent of Household's common
stock.
- --------------------------------------------------------------------------------
12. Fair Value of Financial Instruments
We have estimated the fair value of our 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 our 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.
A significant portion of our financial instruments do not have a quoted
market price. For these items, fair values 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 our 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.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 74 - 1999 Annual Report
(continued)
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 our business units) are not
considered financial instruments and, accordingly, are not valued for
purposes of this disclosure. We believe 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 our financial instruments:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- ----------------------------------------
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 $ 270.6 $ 270.6 - $ 457.4 $ 457.4 -
Investment securities 3,128.1 3,128.1 - 3,202.1 3,202.1 -
Receivables 52,158.4 52,459.9 $ 301.5 43,948.1 44,415.2 $ 467.1
----------------------------------------------------------------------------------------------------------------------------
Subtotal 55,557.1 55,858.6 301.5 47,607.6 48,074.7 467.1
----------------------------------------------------------------------------------------------------------------------------
Deposits (4,980.0) (4,906.3) 73.7 (2,105.0) (2,113.0) (8.0)
Commercial paper, bank and
other borrowings (10,777.8) (10,777.8) - (9,917.9) (9,917.9) -
Senior and senior subordinated debt (34,887.3) (34,106.5) 780.8 (30,438.6) (31,139.9) (701.3)
Insurance reserves (1,308.9) (1,472.5) (163.6) (1,371.7) (1,726.2) (354.5)
----------------------------------------------------------------------------------------------------------------------------
Subtotal (51,954.0) (51,263.1) 690.9 (43,833.2) (44,897.0) (1,063.8)
----------------------------------------------------------------------------------------------------------------------------
Interest rate and foreign
exchange contracts 40.8 (428.0) (468.8) 15.9 226.9 211.0
Commitments to extend
credit and guarantees - 49.1 49.1 - 55.3 55.3
----------------------------------------------------------------------------------------------------------------------------
Subtotal 40.8 (378.9) (419.7) 15.9 282.2 266.3
----------------------------------------------------------------------------------------------------------------------------
Total $ 3,643.9 $ 4,216.6 $ 572.7 $ 3,790.3 $ 3,459.9 $ (330.4)
============================================================================================================================
</TABLE>
The following methods and assumptions were used to estimate the fair value
of our financial instruments:
Cash: Carrying value approximates fair value due to cash's liquid nature.
Investment securities: Investment securities are classified as
available-for-sale and are carried at fair value on the balance sheets.
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
Receivables: The fair value of adjustable rate consumer receivables
approximates 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 us 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 we believe 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 our 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 that we offer on such products at the respective
valuation dates.
Commercial paper, bank and other borrowings: The fair value of these
instruments approximates existing carrying value because interest rates on
these instruments adjust with changes in market interest rates due to their
short-term maturity or repricing characteristics.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 75 - 1999 Annual Report
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, 1999 and 1998. 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 using 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). We enter into foreign exchange contracts to hedge our exposure
to currency risk on foreign denominated debt. We also enter into interest
rate contracts to hedge our exposure to interest rate risk on assets and
liabilities, including debt. As a result, decreases/increases in the fair
value of these contracts would be offset by a corresponding
increase/decrease in the fair value of the individual asset or liability
being hedged. See Note 8, "Derivative Financial Instruments and Other
Financial Instruments with Off-Balance Sheet Risk," for additional
discussion of the nature of these items.
Commitments to extend credit and guarantees: These commitments were
valued by considering our relationship with the counterparty, the
creditworthiness of the counterparty and the difference between committed
and current interest rates.
- -------------------------------------------------------------------------------
13. Leases
We lease certain offices, buildings and equipment for periods of up to 25
years with various renewal options. The office space leases generally
require us to pay certain operating expenses. Net rental expense under
operating leases was $89.4, $118.8 and $135.5 million for 1999, 1998 and
1997, respectively.
In connection with our merger with Beneficial, we have a lease obligation
on a facility located in Peapack, New Jersey expiring in 2010. This
facility has been subleased through the end of the lease period with the
sublessor assuming our future rental obligations.
Future net minimum lease commitments under noncancelable operating lease
arrangements were:
<TABLE>
<CAPTION>
Minimum Minimum
In millions. Rental Sublease
At December 31, 1999 Payments Income Net
------------------------------------------------------------------
<S> <C> <C> <C>
2000 $117.6 $ 23.1 $ 94.5
2001 106.8 23.1 83.7
2002 94.4 23.0 71.4
2003 83.9 22.7 61.2
2004 81.1 22.2 58.9
Thereafter 338.5 119.8 218.7
------------------------------------------------------------------
Net minimum lease commitments $822.3 $233.9 $588.4
==================================================================
</TABLE>
- -------------------------------------------------------------------------------
14. Incentive Compensation and Stock Option Plans
Household's executive compensation plans provide for issuance of
nonqualified stock options and restricted stock rights ("RSRs"). Stock
options permit the holder to purchase, under certain limitations,
Household'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 generally vest equally over four years and expire 10 years from the
date of grant.
Non-employee directors annually receive options to purchase shares of
Household's common stock at the stock's fair market value the day the
option is granted. 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.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 76 - 1999 Annual Report
(continued)
Common stock data for the stock option plans is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ ------------------------
Price per Price per Price per
Shares Share Shares Share Shares Share
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 21,600,569 $21.14 30,166,477 $19.90 23,779,041 $14.81
Granted/1/ 2,311,500 44.78 2,380,000 38.01 11,362,485 29.03
Exercised (7,805,549) 17.48 (9,811,659) 20.89 (3,081,428) 11.35
Expired or canceled (38,194) 31.45 (1,134,249) 25.67 (1,893,621) 23.49
--------------------------------------------------------------------------------------------------------------------------
Outstanding at the end of year 16,068,326 $26.30 21,600,569 $21.14 30,166,477 $19.90
==========================================================================================================================
Exercisable at end of year 11,023,619 $19.64 16,806,843 $17.39 17,870,085 $17.24
==========================================================================================================================
Weighted average fair value
of options granted $19.65 $13.43 $10.82
==========================================================================================================================
</TABLE>
/1/Beneficial's stock option grants for 1997 were 9,297,318 shares.
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ------------------------------------
Number Number
Range of Outstanding at Weighted Average Weighted Average Outstanding at Weighted Average
Exercise Prices December 31, 1999 Remaining Life Exercise Price December 31, 1999 Exercise Price
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.65-$25.90 8,163,682 4.6 years $14.18 8,155,434 $14.18
$28.22-$51.38 7,904,644 8.5 years $38.81 2,868,185 $35.17
------------------------------------------------------------------------------------------------------------------------
</TABLE>
RSRs entitle an employee to receive a stated number of shares of
Household's common stock if the employee satisfies the conditions set by
the Compensation Committee for the award.
Household maintains an Employee Stock Purchase Plan (the "ESPP"). The
ESPP provides a means for employees to purchase shares of Household's
common stock at 85% of the lesser of its market price at the beginning or
end of a one year subscription period.
We account 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,
"Accounting for Stock-Based Compensation," our net income and earnings per
share, on a pro forma basis, would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
In millions, except per share data. ----------------- --------------- ---------------
Year ended December 31 Diluted Basic Diluted Basic Diluted Basic
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings available to common shareholders:
As Reported $1,477.2 $1,477.2 $509.1 $509.1 $923.3 $923.3
Pro Forma 1,460.7 1,460.7 452.6 452.6 902.9 902.9
Earnings per share:
As Reported $ 3.07 $ 3.10 $ 1.03 $ 1.04 $ 1.93 $ 1.97
Pro Forma 3.03 3.06 .92 .93 1.88 1.92
---------------------------------------------------------------------------------------------------
</TABLE>
The pro forma compensation expense included in the table above may not be
representative of the actual effects on net income for future years. Pro
forma earnings per share in 1998 includes the acceleration of compensation
expense associated with Beneficial options.
The fair value of each option granted was estimated as of the date of
grant using the Black-Scholes option pricing model and the following
weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.84% 4.66% 5.86%
Expected dividend yield 1.65 1.62 1.45
Expected life 5 years 5 years 5 years
Expected volatility 46.9% 37.7% 23.9%
-------------------------------------------------------------------------
</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.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 77 - 1999 Annual Report
- --------------------------------------------------------------------------------
15. Employee Benefit Plans
The company sponsors several defined benefit pension plans covering
substantially all of its U.S. and non-U.S. employees. At December 31, 1999,
plan assets included an investment in 3,542,155 shares of Household's
common stock with a fair value of $131.9 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 1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $(28.7) $(23.0) $(19.0)
Interest cost on projected benefit obligation (31.0) (39.8) (38.0)
Expected return on assets 80.4 75.4 72.6
Amortization of transition asset 1.2 12.1 13.2
Recognized gains (losses) 4.1 (1.7) (4.9)
---------------------------------------------------------------------------------------
Pension income $ 26.0 $ 23.0 $ 23.9
=======================================================================================
</TABLE>
In September 1998, the Beneficial defined benefit plan was merged into the
Household plan. Prior to 1998, each plan was separately valued based on the
individual plan's underlying terms and asset mix. The range of assumptions
used in determining the benefit obligation and pension income of the
domestic defined benefit plans at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 8.0% 7.0% 7.0%-7.5%
Salary increase assumption 4.0% 4.0% 4.0%-4.5%
Expected long-term rate of return on plan assets 10.0% 10.0% 9.0%-10.0%
=========================================================================================
</TABLE>
A reconciliation of beginning and ending balances of the projected benefit
obligation of the defined benefit pension plans is as follows:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1999 1998
----------------------------------------------------------------------
<S> <C> <C>
Benefit obligation at beginning of year $567.2 $546.7
Service cost 28.7 23.0
Interest cost 31.0 39.8
Actuarial (gains) losses .8 15.7
Foreign currency exchange rate changes 1.9 (2.6)
Plan amendments (1.8) 3.2
Benefits paid (79.9) (58.6)
----------------------------------------------------------------------
Benefit obligation at end of year $547.9 $567.2
======================================================================
</TABLE>
A reconciliation of beginning and ending balances of the fair value of plan
assets associated with the defined benefit pension plans is as follows:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C>
Fair value of plan assets at beginning of year $821.8 $824.1
Actual return on plan assets 181.1 41.8
Foreign currency exchange rate changes 2.3 (2.9)
Employer contributions 1.2 7.9
Transfer of plan assets - 9.5
Benefits paid (79.9) (58.6)
-----------------------------------------------------------------------------
Fair value of plan assets at end of year $926.5 $821.8
=============================================================================
</TABLE>
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 78 - 1999 Annual Report
(continued)
The funded status of defined benefit pension plans was as follows:
<TABLE>
<CAPTION>
In millions.
At December 31 1999 1998
--------------------------------------------------------------------
<S> <C> <C>
Funded status $378.6 $254.6
Unrecognized net actuarial (gain) loss (3.2) 89.0
Unamortized prior service cost (7.3) (5.9)
Unamortized assets - (.2)
--------------------------------------------------------------------
Prepaid pension cost $368.1 $337.5
====================================================================
</TABLE>
We also sponsor various 401(k) savings plans and profit sharing plans for
employees meeting certain eligibility requirements. Under the Household
plan, each participant's contribution is matched by the company up to a
maximum of 6 percent of the participant's compensation. The Beneficial
401(k) savings plan provided for annual employer contributions up to 2.5%
of each eligible employee's annual compensation. Upon completion of the
merger, participants of the Beneficial plan could elect to participate in
Household's plan. In December 1998, the Beneficial 401(k) plan was merged
into the existing Household plan. For 1999, 1998 and 1997, total expense
for these plans was $39.1, $32.2 and $23.9 million, respectively.
We have several plans which provide medical, dental and life insurance
benefits to retirees and eligible dependents. These plans cover
substantially all employees who meet certain age and vested service
requirements. We have instituted dollar limits on our payments under the
plans to control the cost of future medical benefits.
The net postretirement benefit cost included the following:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1999 1998 1997
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ (4.3) $ (4.6) $ (4.8)
Interest cost on accumulated postretirement
benefit obligation (9.4) (12.7) (12.1)
Amortization of transition obligation (6.3) (6.3) (6.3)
Amortization of prior service cost 1.7 1.2 .8
Recognized actuarial gain 1.2 1.7 2.7
-----------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $(17.1) $(20.7) $(19.7)
=========================================================================================
</TABLE>
A reconciliation of the beginning and ending balances of the accumulated
post-retirement benefit obligation is as follows:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
Benefit obligation at beginning of year $180.7 $183.9
Service cost 4.3 4.6
Interest cost 9.4 12.7
Actuarial (gains) losses (27.0) 4.5
Plan amendments - (17.6)
Benefits paid (6.9) (7.4)
-------------------------------------------------------------------------
Benefit obligation at end of year $160.5 $180.7
=========================================================================
</TABLE>
Our postretirement benefit plans are funded on a pay-as-you-go basis. A
reconciliation of the components of the accrued postretirement benefit
obligation is as follows:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C>
Funded status $160.5 $180.7
Unamortized prior service cost 22.9 24.5
Unrecognized net actuarial gain 54.1 24.4
Unamortized transition obligation (81.7) (88.0)
-----------------------------------------------------------------------------
Accrued postretirement benefit obligation $155.8 $141.6
=============================================================================
</TABLE>
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 79 - 1999 Annual Report
The range of assumptions used in determining the benefit obligation and
cost of such plans at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 8.0% 7.0% 7.0%-7.5%
Salary increase assumption 4.0% 4.0% 4.0%-4.5%
--------------------------------------------------------------
</TABLE>
An 8.0 percent annual rate of increase in the gross cost of covered health
care benefits was assumed for 2000. This rate of increase is assumed to
decline gradually to 5.0 percent in 2006.
Assumed health care cost trend rates have an effect on the amounts
reported for health care plans. A one-percentage point change in assumed
health care cost trend rates would have the following effects (in
millions):
<TABLE>
<CAPTION>
One Percent One Percent
Increase Decrease
-----------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components $ (.5) $ .6
Effect on postretirement benefit obligation 8.0 (6.8)
-----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
16. Income Taxes
Total income taxes as follows:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1999 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes related to operations $734.3 $428.6 $462.2
Income taxes related to adjustments
included in common shareholders' equity:
Unrealized gain (loss) on investments, net (50.1) 7.3 10.0
Foreign currency translation adjustments (2.8) .3 19.7
Exercise of stock options (89.1) (77.4) (21.1)
---------------------------------------------------------------------------------------------
Total $592.3 $358.8 $470.8
=============================================================================================
</TABLE>
Provisions for income taxes related to operations were:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Current
United States $633.8 $122.5 $326.3
Foreign 67.4 53.1 60.0
----------------------------------------------------------------
Total current 701.2 175.6 386.3
----------------------------------------------------------------
Deferred
United States 32.3 239.2 66.8
Foreign .8 13.8 9.1
----------------------------------------------------------------
Total deferred 33.1 253.0 75.9
----------------------------------------------------------------
Total income taxes $734.3 $428.6 $462.2
================================================================
</TABLE>
The significant components of deferred income tax provisions attributable
to income from operations were:
<TABLE>
<CAPTION>
In millions.
Year ended December 31 1999 1998 1997
----------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred income tax provision $17.3 $246.7 $67.9
Adjustment of valuation allowance 20.7 (3.3) (4.7)
Change in operating loss carryforwards (4.9) 9.6 12.7
----------------------------------------------------------------------------
Deferred income tax provision $33.1 $253.0 $75.9
============================================================================
</TABLE>
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 80 - 1999 Annual Report
(continued)
Income before income taxes from foreign operations was $290.0, $216.9 and
$143.2 million in 1999, 1998 and 1997, respectively.
Effective tax rates are analyzed as follows:
<TABLE>
<CAPTION>
Year ended December 31 1999 1998 1997
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in rate resulting from:
Nondeductible acquisition costs - 12.2 -
State and local taxes, net of federal benefit 2.4 3.2 2.3
Capital losses-Germany - - (2.0)
Leveraged lease tax benefits (1.2) (4.0) (1.9)
Other (3.1) (1.4) (.4)
-----------------------------------------------------------------------------------
Effective tax rate 33.1% 45.0% 33.0%
===================================================================================
</TABLE>
Provision for U.S. income taxes had not been made at December 31, 1999 and
1998 on $328.1 and $217.8 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. In addition, provision for U.S. income taxes had not been
made at December 31, 1999 on $80.1 million of undistributed earnings of
life insurance subsidiaries accumulated as policyholders' surplus under tax
laws in effect prior to 1984. If this amount was distributed, the
additional income tax payable would be approximately $28.0 million.
Our 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 $20.3 million at
December 31, 1999. Because this amount would become taxable only in the
event of certain circumstances which we do not expect to occur within the
foreseeable future, no deferred tax liability has been established for this
item.
At December 31, 1999 we had net operating loss carryforwards for tax
purposes of $37.5 million, of which $.3 million expire in 2001; $5.3
million expire in 2002; $6.5 million expire in 2003; $12.1 million expire
in 2004; $6.9 million expire in 2005, and $6.4 million expire in 2006. We
also had foreign tax credit carryforwards of $20.7 million, of which $8.1
million expire in 2003 and $12.6 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.
Year ended December 31 1999 1998
------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Liabilities
Receivables sold $ 748.4 $ 632.0
Leveraged lease transactions, net 297.8 301.0
Pension plan assets 136.3 135.6
Other 361.1 322.5
------------------------------------------------------------------------------------------
Total deferred tax liabilities $1,543.6 $1,391.1
------------------------------------------------------------------------------------------
Deferred Tax Assets
Credit loss reserves $ 936.4 $ 908.0
Other 462.1 315.0
------------------------------------------------------------------------------------------
Total deferred tax assets 1,398.5 1,223.0
Valuation allowance (20.7) -
------------------------------------------------------------------------------------------
Total deferred tax assets net of valuation allowance 1,377.8 1,223.0
------------------------------------------------------------------------------------------
Net deferred tax liability at end of year $ 165.8 $ 168.1
==========================================================================================
</TABLE>
The deferred tax asset valuation allowance primarily relates to foreign tax
credit carryforwards. Management believes sufficient uncertainty exists
regarding the realization of these carryforwards that a valuation allowance
is required.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 81 - 1999 Annual Report
- --------------------------------------------------------------------------------
17. Earnings Per Common Share
<TABLE>
<CAPTION>
1999 1998 1997
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 $1,486.4 $1,486.4 $524.1 $524.1 $940.3 $940.3
Preferred dividends (9.2) (9.2) (15.0) (15.0) (17.0) (17.0)
-----------------------------------------------------------------------------------------------------------------------
Earnings available to common shareholders $1,477.2 $1,477.2 $509.1 $509.1 $923.3 $923.3
=======================================================================================================================
Average Shares
Common 477.0 477.0 487.2 487.2 470.2 470.2
Common equivalents 4.8 - 9.2 - 8.9 -
-----------------------------------------------------------------------------------------------------------------------
Total 481.8 477.0 496.4 487.2 479.1 470.2
=======================================================================================================================
Earnings per common share $ 3.07 $ 3.10 $ 1.03 $ 1.04 $ 1.93 $ 1.97
=======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
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 our consolidated financial position. However, as the ultimate
resolution of these proceedings is influenced by factors that are outside
of our control, it is reasonably possible our estimated liability under
these proceedings may change. See Note 13 for discussion of lease
commitments.
- --------------------------------------------------------------------------------
19. Segment Reporting
We have three reportable segments which are managed separately and are
characterized by different middle-market consumer lending products,
origination processes, and locations. Consumer, which includes our domestic
branch-based and correspondent consumer finance, private label credit card
and auto finance businesses; Credit Card, which includes our domestic
MasterCard/Visa business; and International, which includes our United
Kingdom and Canadian operations. The Consumer segment provides real estate
secured, automobile secured and unsecured loans. Loans are offered with
both revolving and closed-end terms and with fixed or variable interest
rates. Loans are originated through branch locations, direct mail,
telemarketing or independent merchants or automobile dealers. The Credit
Card segment offers MasterCard and Visa credit cards throughout the United
States primarily via strategic affinity and co-branding relationships and
direct mail to non-prime customers. The International segment offers
secured and unsecured lines of credit, and secured and unsecured closed-end
loans primarily in the United Kingdom and Canada. In addition, the United
Kingdom operation offers MasterCard and Visa credit cards and credit
insurance in connection with all loan products. We also cross sell our
credit cards to existing home equity, private label and Refund Anticipation
Loan ("RAL") customers. All segments offer products and service customers
through the Internet. The All Other caption includes our insurance, RAL and
commercial businesses, as well as our corporate and treasury activities,
each of which falls below the quantitative threshold tests under Statement
of Financial Accounting Standards No. 131 for determining reportable
segments. Our merger and integration related costs in 1998 of $751 million
after-tax, related to the Beneficial merger, were recorded in corporate.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Intra segment
transactions have not been eliminated. We evaluate performance and allocate
resources based on income from operations after income taxes and returns on
equity and managed assets. We generally account for transactions between
segments as if they were with third parties.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Pg. 82 - 1999 Annual Report
(continued)
<TABLE>
<CAPTION>
Reportable Segments
Owned Basis Total Adjustments/
In millions. Total Domestic Reconciling Consolidated
For the year ended December 31, 1999 Consumer Credit Card International All Other Totals Items Totals
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest margin and other
revenues/7/ $ 4,107.4 $ 1,366.5 $ 795.8 $ 339.3 $ 6,609.0 $ (144.6)/1/ $ 6,464.4
Intersegment revenues 124.0 17.2 3.4 - 144.6 (144.6)/1/ -
Provision for credit losses 1,104.7 397.2 191.4 (.4) 1,692.9 23.5/2/ 1,716.4
Depreciation and amortization 80.8 108.4 17.5 67.7 274.4 - 274.4
Income tax expense (benefit) 625.6 100.2 59.4 10.6 795.8 (61.5)/3/ 734.3
Segment net income (loss) 991.5 152.8 218.7 230.0 1,593.0 (106.6) 1,486.4
Total segment assets 42,598.2 6,257.1 7,741.1 14,141.2 70,737.6 (9,988.2)/5/ 60,749.4
Total segment assets-managed 51,840.1 15,489.7 8,846.0 14,000.7 90,176.5 (9,988.2)/5/ 80,188.3
Expenditures for long-lived assets/8/ 78.9 5.8 45.6 64.4 194.7 - 194.7
- ------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin and other
revenues/7/ $ 3,485.7 $ 1,454.8 $ 746.5 $ 561.2 $ 6,248.2 $ (106.4)/1/ $ 6,141.8
Intersegment revenues 91.4 10.6 3.8 .6 106.4 (106.4)/1/ -
Provision for credit losses 860.3 406.0 167.2 11.7 1,445.2 71.6/2/ 1,516.8
Depreciation and amortization 72.6 136.4 17.9 81.2 308.1 - 308.1
Income tax expense (benefit) 519.6 96.6 57.8 (179.8) 494.2 (65.6)/3/ 428.6
Segment net income (loss) 833.5 140.8 153.7 (491.5)/4/ 636.5 (112.4) 524.1
Total segment assets 34,029.1 7,228.7 7,399.0 9,442.6 58,099.4 (5,206.7)/5/ 52,892.7
Total segment assets-managed 43,330.8 16,387.6 8,640.3 9,442.6 77,801.3 (5,206.7)/5/ 72,594.6
Expenditures for long-lived assets/8/ 21.3 2.8 31.4 79.6 135.1 - 135.1
- ------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin and other
revenues/7/ $ 3,088.6 $ 1,523.7 $ 812.6 $ 448.4 $ 5,873.3 $ (93.0)/1/ $ 5,780.3
Intersegment revenues 76.1 11.4 3.7 1.8 93.0 (93.0)/1/ -
Provision for credit losses 901.6 368.3 169.3 24.5 1,463.7 29.3/2/ 1,493.0
Depreciation and amortization 53.6 150.5 20.2 79.2 303.5 - 303.5
Income tax expense (benefit) 350.2 145.2 66.9 (54.9) 507.4 (45.2)/3/ 462.2
Segment net income (loss) 591.4 218.3 134.6/6/ 73.2 1,017.5 (77.2) 940.3
Total segment assets 26,610.6 7,316.5 7,617.6 10,020.8 51,565.5 (4,748.5)/5/ 46,817.0
Total segment assets-managed 37,877.8 19,392.2 8,753.2 10,020.8 76,044.0 (4,748.5)/5/ 71,295.5
Expenditures for long-lived assets/8/ 976.8 7.0 28.2 74.1 1,086.1 - 1,086.1
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/Eliminates intersegment revenues.
/2/Eliminates bad debt recovery sales between operating segments.
/3/Tax benefit associated with items comprising adjustments/reconciling items.
/4/Includes merger and integration related costs of approximately $751.0 million
after-tax related to the Beneficial merger and the gain on the sale of
Beneficial Canada of $118.5 million after-tax.
/5/Eliminates investments in subsidiaries and intercompany borrowings.
/6/Includes the nonrecurring charge of $27.8 million after-tax for the
disposition of Beneficial Germany.
/7/Represents net interest margin and other revenues, including intersegment
revenues, net of policyholder benefits.
/8/Includes goodwill associated with purchase business combinations and capital
expenditures.
Geographic Data
<TABLE>
<CAPTION>
Identifiable Assets Long-Lived Assets/1/
------------------------------- -----------------------------
In millions. 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $52,886.9 $45,387.5 $39,133.1 $1,310.2 $1,315.9 $1,388.1
United Kingdom 6,486.6 6,284.8 5,071.3 91.7 71.5 66.8
Canada 1,188.2 1,040.0 2,142.6 5.8 2.3 3.5
Other 187.7 180.4 470.0 .2 .6 6.1
- --------------------------------------------------------------------------------
Total $60,749.4 $52,892.7 $46,817.0 $1,407.9 $1,390.3 $1,464.5
================================================================================
</TABLE>
/1/Represents properties and equipment, net of accumulated depreciation, and
goodwill, net of accumulated amortization.
<TABLE>
<CAPTION>
Revenues Income Before Income Taxes
------------------------------ -----------------------------
In millions. 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $8,290.5 $7,712.4 $7,229.2 $1,930.7 $735.8 $1,219.2
United Kingdom 995.0 931.7 760.6 223.9 168.7 146.2
Canada 178.2 211.8 339.8 39.4 28.7 39.2
Other 35.4 41.1 65.0 26.7 19.5 (2.1)
- --------------------------------------------------------------------------------
Total $9,499.1 $8,897.0 $8,394.6 $2,220.7 $952.7 $1,402.5
================================================================================
</TABLE>
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Management's Report Pg. 83 - 1999 Annual Report
To the Shareholders of Household International, Inc. Household International
Inc.'s ("Household") 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. These controls are designed to provide
reasonable assurance to the company's Board of Directors and officers that the
financial statements have been fairly presented in accordance with the generally
accepted accounting principles. The Board, operating through its audit
committee, is composed entirely of non-executive directors and oversees the
financial reporting process.
Internal auditors monitor the operation of the internal control system, and
actions are taken by management to respond to deficiencies as they are
identified. 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's management periodically assesses the internal controls for
adequacy. Based upon these assessments, Household's management believes that, in
all material respects, its internal controls relating to preparation of
consolidated financial statements as of December 31, 1999 functioned effectively
during the year ended December 31, 1999.
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 Chief Executive Officer Group Executive-Chief Financial
January 14, 2000 Officer
- --------------------------------------------------------------------------------
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, 1999 and 1998, 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, 1999. These financial statements are the responsibility of
Household International Inc.'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 consolidated 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, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Chicago, Illinois
January 14, 2000
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Common and Preferred Stock Information Pg. 84 - 1999 Annual Report
Household International common stock is listed on the New York and Chicago stock
exchanges. We also have unlisted trading privileges on the Boston, Pacific and
Philadelphia stock exchanges. Call and put options are traded on the American
Stock Exchange.
<TABLE>
<CAPTION>
Dividends Declared
------------------
Stock Ticker Symbol 1999 1998 Features Redemption Features
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common HI $.68 $ .60 Quarterly dividend N/A
rate increased to $.17
effective 4/15/99
- -----------------------------------------------------------------------------------------------------------------------------------
5% Cumulative Preferred/1/ HI + PRM $2.50 $ 1.25 Nonconvertible Redeemable at our option
- -----------------------------------------------------------------------------------------------------------------------------------
$4.50 Cumulative Preferred/1/ HI + PRN $4.50 $ 2.25 Nonconvertible Redeemable at our option
- -----------------------------------------------------------------------------------------------------------------------------------
$4.30 Cumulative Preferred/1/ HI + PRO $4.30 $ 1.15 Nonconvertible Redeemable at our option
- -----------------------------------------------------------------------------------------------------------------------------------
8 1/4% Cumulative Preferred,
Series 1992-A HI + PRZ $2.0625 $2.0625 Nonconvertible Cannot be redeemed
Depositary Shares representing prior to 10/15/2002.
1/40 share of 8 1/4% Cumulative Redeemable at our
Preferred Stock, Series 1992-A option after 10/15/2002
in whole or in part at
$25.00 per depositary
share plus accrued and
unpaid dividends.
- -----------------------------------------------------------------------------------------------------------------------------------
Net Shares Outstanding Shareholders of Record 1999 Market Price 1998 Market Price
-------------------------- ---------------------- -------------------- -------------------
Stock 1999 1998 1999 1998 High Low High Low
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common 467,911,445 483,137,739 19,991 20,584 $52 5/16 $35 13/16 $53 11/16 $23
- ------------------------------------------------------------------------------------------------------------------------------------
5% Cumulative Preferred/1/ 407,718 407,718 1,363 1,329 46 1/2 28 49 44 3/4
- ------------------------------------------------------------------------------------------------------------------------------------
$4.50 Cumulative Preferred/1/ 103,976 103,976 288 283 84 7/8 60 87 1/2 83
- ------------------------------------------------------------------------------------------------------------------------------------
$4.30 Cumulative Preferred/1/ 836,585 836,585 592 380 85 1/4 60 87 80 1/2
- ------------------------------------------------------------------------------------------------------------------------------------
8 1/4% Cumulative Preferred,
Series 1992-A 2,000,000 2,000,000 258 309 29 25 7/16 29 3/8 27
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/The 5%, $4.50 and $4.30 Cumulative Preferred Stock was issued by Household to
replace Beneficial preferred stock outstanding at the time of the merger.
<PAGE>
Household International, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pg. 85 - 1999 Annual Report
<TABLE>
<CAPTION>
Year ended December 31,
unless otherwise indicated 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Market Value Share of
Common Stock
(High-Low prices on NYSE)
First Quarter 46 11/16-38 11/16 47 51/64-37 45/64 36 5/64-28 1/3 23 53/64-17 1/3 15-11 31/32
-------------------------------------------------------------------------------------------------------------------------------
Second Quarter 52 5/16-42 52 9/16-41 43/64 39 9/64-26 13/64 25 1/2-21 17 11/64-14 3/8
-------------------------------------------------------------------------------------------------------------------------------
Third Quarter 50 3/16-36 3/16 53 11/16-35 1/4 43 1/3-36 9/64 27 31/32-22 53/64 20 2/3-16 19/64
-------------------------------------------------------------------------------------------------------------------------------
Fourth Quarter 48-35 13/16 40 1/2-23 43 7/32-36 1/8 32 23/32-27 1/2 22 51/64-18 5/64
-------------------------------------------------------------------------------------------------------------------------------
Yearly range 52 5/16-35 13/16 53 11/16-23 43 1/3-26 13/64 32 23/32-17 1/3 22 51/64-11 31/32
-------------------------------------------------------------------------------------------------------------------------------
Year-end close 37 1/4 39 5/8 42 35/64 30 3/4 19 53/64
-------------------------------------------------------------------------------------------------------------------------------
Composite common
shares traded 390,575,200 454,878,500 302,551,200 211,903,500 231,726,900
-------------------------------------------------------------------------------------------------------------------------------
Average daily volume 1,549,902 1,805,073 1,195,854 834,267 919,551
- -----===============================================================================================================================
Shares Outstanding at
December 31
Common 467,911,445 483,137,739 485,351,517 457,427,951 455,180,345
-------------------------------------------------------------------------------------------------------------------------------
9 1/2% Preferred,
Series 1991-A/1/ - - - 5,500,000 5,500,000
-------------------------------------------------------------------------------------------------------------------------------
5% Cumulative
Preferred/2/ 407,718 407,718 - - -
-------------------------------------------------------------------------------------------------------------------------------
$4.50 Cumulative
Preferred/2/ 103,976 103,976 - - -
-------------------------------------------------------------------------------------------------------------------------------
$4.30 Cumulative
Preferred/2/ 836,585 836,585 - - -
-------------------------------------------------------------------------------------------------------------------------------
8 1/4% Cumulative
Preferred,
Series 1992-A/1/ 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000
-------------------------------------------------------------------------------------------------------------------------------
7.35% Preferred,
Series 1993-A/1/ - - 4,000,000 4,000,000 4,000,000
- -----===============================================================================================================================
Shareholders of Record at
December 31
Common 19,991 20,584 10,239 11,147 13,515
-------------------------------------------------------------------------------------------------------------------------------
9 1/2% Preferred,
Series 1991-A/1/ - - - 690 786
-------------------------------------------------------------------------------------------------------------------------------
5% Cumulative
Preferred/2/ 1,363 1,329 - - -
-------------------------------------------------------------------------------------------------------------------------------
$4.50 Cumulative
Preferred/2/ 288 283 - - -
-------------------------------------------------------------------------------------------------------------------------------
$4.30 Cumulative
Preferred/2/ 592 380 - - -
-------------------------------------------------------------------------------------------------------------------------------
8 1/4% Cumulative
Preferred,
Series 1992-A/1/ 258 309 356 408 453
-------------------------------------------------------------------------------------------------------------------------------
7.35% Preferred,
Series 1993-A/1/ - - 247 290 317
-------------------------------------------------------------------------------------------------------------------------------
Total 22,492 22,885 10,842 12,535 15,071
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/Per depositary share.
/2/The 5%, $4.50 and $4.30 Cumulative Preferred Stock was issued by
Household to replace Beneficial preferred stock outstanding at the time
of the merger. The information presented for these preferred shares is
for the period subsequent to the merger.
<PAGE>
Exhibit 21
SUBSIDIARIES OF HOUSEHOLD INTERNATIONAL, INC.
- ---------------------------------------------
As of December 31, 1999, the following subsidiaries were directly or indirectly
owned by the Registrant. Certain subsidiaries which in the aggregate do not
constitute significant subsidiaries may be omitted.
<TABLE>
<CAPTION>
%
Voting
Stock
Organized Owned
Under By
Names of Subsidiaries Laws of: Parent
- --------------------- --------- ------
<S> <C> <C>
Hamilton Investments, Inc. Delaware 100%
Craig-Hallum Corporation Delaware 100%
Renaissance Credit Services, Inc. Delaware 100%
Household Bank, f.s.b. California 100%
Beneficial Retail Services, Inc. Delaware 100%
HHTS, Inc. Illinois 100%
Household Bank (SB), N.A. United States 100%
Household Affinity Funding Corporation Delaware 100%
Household Service Corporation of Illinois, Inc. Illinois 100%
Household Insurance Services, Inc. Illinois 100%
Housekey Financial Corporation Illinois 100%
Household Mortgage Services, Inc. Delaware 100%
Beneficial Service Corporation Delaware 100%
Beneficial Service Corporation of Delaware Delaware 100%
Household Capital Corporation Delaware 100%
Household Commercial Canada Inc. Ontario 100%
Household Finance Corporation Delaware 100%
Beneficial Corporation Delaware 100%
Beneficial Credit Corp. Delaware 100%
Guaranty and Indemnity Insurance Company Delaware 100%
Bencharge Credit Service Holding Company Delaware 100%
Beneficial Credit Services Northeast, Inc. Delaware 100%
Bencharge Credit Service of America, Inc. Delaware 100%
Beneficial Credit Services of Connecticut Inc. Delaware 100%
Beneficial Credit Services of Mississippi Inc. Delaware 100%
Beneficial Credit Services of South Carolina Inc. Delaware 100%
Beneficial Credit Services Inc. Delaware 100%
Beneficial Alabama Inc. Alabama 100%
Beneficial Arizona Inc. Delaware 100%
Beneficial California Inc. Delaware 100%
Beneficial Colorado Inc. Delaware 100%
Beneficial Commercial Holding Corporation Delaware 100%
Beneficial Commercial Corporation Delaware 100%
Beneficial Finance Leasing Corporation Delaware 100%
Beneficial Leasing Group, Inc. Delaware 100%
Neil Corporation Delaware 100%
Silliman Corporation Delaware 100%
Beneficial Connecticut Inc. Delaware 100%
Beneficial Consumer Discount Company Pennsylvania 100%
Beneficial Delaware Inc. Delaware 100%
Beneficial Discount Co. of Virginia Delaware 100%
Beneficial Finance Co. of West Virginia Delaware 100%
Beneficial Finance Services, Inc. Kansas 100%
Beneficial Florida Inc. Delaware 100%
Beneficial Mortgage Co. of Florida Delaware 100%
Beneficial Georgia Inc. Delaware 100%
Beneficial Hawaii Inc. Delaware 100%
Beneficial Idaho Inc. Delaware 100%
Beneficial Illinois Inc. Delaware 100%
Beneficial Income Tax Service Holding Co., Inc. Delaware 100%
Household Tax Masters Inc. Delaware 100%
Beneficial Indiana Inc. Delaware 100%
Beneficial Investment Co. Delaware 100%
Beneficial Credit Services of New York, Inc. Delaware 100%
Beneficial New York Inc. New York 100%
Beneficial Homeowner Service Corporation Delaware 100%
Beneficial Iowa Inc. Iowa 100%
Beneficial Kansas Inc. Kansas 100%
Beneficial Kentucky Inc. Delaware 100%
Beneficial Land Company, Inc. New Jersey 100%
Beneficial Loan & Thrift Co. Minnesota 100%
Beneficial Louisiana Inc. Delaware 100%
Beneficial Maine Inc. Delaware 100%
Beneficial Management Corporation Delaware 100%
Beneficial Management Institute, Inc. New York 100%
Beneficial Management Corporation of America Delaware 100%
Beneficial Franchise Company Inc. Delaware 100%
Beneficial Business Credit Corp. Delaware 100%
Beneficial Mark Holding Inc. Delaware 100%
Beneficial Trademark Co. Delaware 100%
Beneficial Management Headquarters, Inc. New Jersey 100%
Beneficial Facilities Corporation New Jersey 100%
Beneficial Maryland Inc. Delaware 100%
Beneficial Massachusetts Inc. Delaware 100%
Beneficial Michigan Inc. Delaware 100%
Beneficial Mississippi Inc. Delaware 100%
Beneficial Missouri, Inc. Delaware 100%
Beneficial Montana Inc. Delaware 100%
Beneficial Mortgage Holding Company Delaware 100%
Beneficial Excess Servicing Inc. Delaware 100%
Beneficial Home Mortgage Loan Corp. Delaware 100%
Beneficial Mortgage Co. of Arizona Delaware 100%
Beneficial Mortgage Co. of Colorado Delaware 100%
Beneficial Mortgage Co. of Connecticut Delaware 100%
Beneficial Mortgage Co. of Georgia Delaware 100%
Beneficial Mortgage Co. of Idaho Delaware 100%
Beneficial Mortgage Co. of Indiana Delaware 100%
Beneficial Mortgage Co. of Kansas, Inc. Delaware 100%
Beneficial Mortgage Co. of Louisiana Delaware 100%
Beneficial Mortgage Co. of Maryland Delaware 100%
Beneficial Mortgage Co. of Massachusetts Delaware 100%
Beneficial Mortgage Co. of Mississippi Delaware 100%
Beneficial Mortgage Co. of Missouri, Inc. Delaware 100%
Beneficial Mortgage Co. of Nevada Delaware 100%
Beneficial Mortgage Co. of New Hampshire Delaware 100%
Beneficial Mortgage Co. of Oklahoma Delaware 100%
Beneficial Mortgage Co. of Rhode Island Delaware 100%
Beneficial Mortgage Co. of South Carolina Delaware 100%
Beneficial Mortgage Co. of Texas Delaware 100%
Beneficial Mortgage Co. of Utah Delaware 100%
Beneficial Mortgage Co. of Virginia Delaware 100%
Beneficial Mortgage Co. of North Carolina Delaware 100%
Decision One Mortgage Company, LLC North Carolina 100%
Beneficial National Bank USA Delaware 100%
Beneficial Service Corporation of New Jersey Delaware 100%
Beneficial Nebraska Inc. Nebraska 100%
Beneficial Nevada Inc. Delaware 100%
Beneficial New Hampshire Inc. Delaware 100%
Beneficial New Jersey Inc. Delaware 100%
Beneficial New Mexico Inc. Delaware 100%
Beneficial North Carolina Inc. Delaware 100%
Beneficial Oklahoma Inc. Delaware 100%
Beneficial Oregon Inc. Delaware 100%
Beneficial Real Estate Company, Inc. New Jersey 100%
Beneficial Rhode Island Inc. Delaware 100%
Beneficial South Carolina Inc. Delaware 100%
Beneficial South Dakota Inc. Delaware 100%
Beneficial Systems Development Corporation Delaware 100%
Beneficial Technology Corporation Delaware 100%
Beneficial Tennessee Inc. Tennessee 100%
Beneficial Texas Inc. Texas 100%
Beneficial Utah Inc. Delaware 100%
Beneficial Vermont Inc. Delaware 100%
Beneficial Virginia Inc. Delaware 100%
Beneficial Washington Inc. Delaware 100%
Beneficial West Virginia, Inc. West Virginia 100%
Beneficial Wisconsin Inc. Delaware 100%
Beneficial Wyoming Inc. Wyoming 100%
Benevest Group Inc. Delaware 100%
Benevest Service Company Delaware 100%
Benevest Services, Inc. Washington 100%
Benevest Escrow Company Delaware 100%
BMC Holding Company Delaware 100%
Beneficial Mortgage Corporation Delaware 100%
Beneficial Mortgage Services, Inc. Delaware 100%
Bon Secour Properties Inc. Alabama 100%
Capital Financial Services Inc. Nevada 100%
Harbour Island Inc. Florida 100%
Harbour Island Venture One, Inc. Florida 100%
Harbour Island Venture Three, Inc. Florida 100%
Harbour Island Venture Four, Inc. Florida 100%
Tampa Island Transit Company, Inc. Florida 100%
Personal Mortgage Holding Company Delaware 100%
Personal Mortgage Corporation Delaware 100%
Southern Trust Company Delaware 100%
Southwest Beneficial Finance, Inc. Illinois 100%
Wasco Properties, Inc. Delaware 100%
Beneficial Real Estate Joint Venture, Inc. Delaware 100%
BFC Agency, Inc. Delaware 100%
BFC Insurance Agency of Nevada Nevada 100%
Beneficial Direct, Inc. New Jersey 100%
Household Insurance Group, Inc. Delaware 100%
Service Administrators, Inc. (USA) Colorado 100%
Service General Insurance Company Ohio 100%
Beneficial Ohio Inc. Delaware 100%
Service Management Corporation Ohio 100%
B.I.G. Insurance Agency, Inc. Ohio 100%
First Central National Life Insurance
Company of New York New York 100%
Wesco Insurance Company Delaware 100%
Southwest Texas General Agency, Inc. Texas 100%
Alabama Properties Delaware 100%
HFC Card Funding Corporation Delaware 100%
HFC Funding Corporation Delaware 100%
HFC Revolving Corporation Delaware 100%
HFS Funding Corporation Delaware 100%
Household Acquisition Corporation Delaware 100%
HFTA Corporation Delaware 100%
Pacific Agency, Inc. Nevada 100%
HFTA Consumer Discount Company Pennsylvania 100%
HFTA First Financial Corporation California 100%
HFTA Second Corporation Alabama 100%
HFTA Third Corporation Delaware 100%
HFTA Fourth Corporation Minnesota 100%
HFTA Fifth Corporation Nevada 100%
HFTA Sixth Corporation Nevada 100%
HFTA Seventh Corporation New Jersey 100%
HFTA Eighth Corporation Ohio 100%
HFTA Ninth Corporation West Virginia 100%
HFTA Tenth Corporation Washington 100%
Household Finance Corporation of Hawaii Hawaii 100%
Household Realty Corporation (1997) Limited British Columbia 100%
Pacific Finance Loans California 100%
Household Automotive Finance Corporation Delaware 100%
ACC Funding Corp. Delaware 100%
ACC Receivables Corp. Delaware 100%
Household Automotive Credit Corporation Delaware 100%
OFL-A Receivables Corp. Delaware 100%
Household Auto Receivables Corporation Nevada 100%
Household Bank (Nevada), N.A. United States 100%
Household Card Funding Corporation Delaware 100%
Household Receivables Funding Corporation Nevada 100%
Household Receivables Funding Corporation II Delaware 100%
Household Receivables Funding, Inc. Delaware 100%
Household Capital Markets, Inc. Delaware 100%
Household Card Services, Inc. Nevada 100%
Household Consumer Loan Corporation Nevada 100%
Household Corporation Delaware 100%
Household Credit Services, Inc. Delaware 100%
Household Credit Services of Mexico, Inc. Delaware 100%
Household Financial Services, Inc. Delaware 100%
Household Group, Inc. Delaware 100%
Household Insurance Group Holding Company Delaware 100%
Household Life Insurance Company Michigan 100%
Household Insurance Agency, Inc. Michigan 100%
Household Insurance Agency, Inc. Nevada 100%
Arcadia Insurance Administrators, Inc. Delaware 100%
AHLIC Investment Holdings Corporation Delaware 100%
Cal-Pacific Services, Inc. California 100%
HFS Investments, Inc. Nevada 100%
JV Mortgage Capital, Inc. Delaware 50%
JV Mortgage Capital, L.P. Delaware 50.5%
JV Mortgage Capital Consumer Discount Company Pennsylvania 100%
Household Life Insurance Co. of Arizona Arizona 100%
Household Business Services, Inc. Delaware 100%
Financial Network Alliance, L.L.P. Illinois 50%
FNA Consumer Discount Company Pennsylvania 100%
Household Commercial Financial Services, Inc. Delaware 100%
The Generra Company Delaware 100%
Business Realty Inc. Delaware 100%
Business Lakeview, Inc. Delaware 100%
Capital Graphics, Inc. Delaware 100%
CPI Enterprises Delaware 100%
HCFS Business Equipment Corporation Delaware 100%
HFC Commercial Realty, Inc. Delaware 100%
PPSG Corporation Delaware 100%
G.C. Center, Inc. Delaware 100%
Com Realty, Inc. Delaware 100%
Lighthouse Property Corporation Delaware 100%
Household OPEB I, Inc. Illinois 100%
Steward's Glenn Corporation Delaware 100%
HFC Leasing, Inc. Delaware 100%
First HFC Leasing Corporation Delaware 100%
Second HFC Leasing Corporation Delaware 100%
Valley Properties Corporation Tennessee 100%
Fifth HFC Leasing Corporation Delaware 100%
Sixth HFC Leasing Corporation Delaware 100%
Seventh HFC Leasing Corporation Delaware 100%
Eighth HFC Leasing Corporation Delaware 100%
Tenth HFC Leasing Corporation Delaware 100%
Eleventh HFC Leasing Corporation Delaware 100%
Thirteenth HFC Leasing Corporation Delaware 100%
Fourteenth HFC Leasing Corporation Delaware 100%
Seventeenth HFC Leasing Corporation Delaware 100%
Nineteenth HFC Leasing Corporation Delaware 100%
Twenty-second HFC Leasing Corporation Delaware 100%
Twenty-sixth HFC Leasing Corporation Delaware 100%
Beaver Valley, Inc. Delaware 100%
Hull 752 Corporation Delaware 100%
Hull 753 Corporation Delaware 100%
Third HFC Leasing Corporation Delaware 100%
Macray Corporation California 100%
Fourth HFC Leasing Corporation Delaware 100%
Pargen Corporation California 100%
Fifteenth HFC Leasing Corporation Delaware 100%
Hull Fifty Corporation Delaware 100%
HFC Retail Credit Services, Inc. Delaware 100%
Household Capital Investment Corporation Delaware 100%
B and K Corporation Michigan 94.4%
Household Commercial of California, Inc. California 100%
OLC, Inc. Rhode Island 100%
OPI, Inc. Virginia 100%
Household Finance Consumer Discount Company Pennsylvania 100%
Overseas Leasing Two FSC, Ltd. Bermuda 100%
Household Finance Corporation II Delaware 100%
Household Finance Corporation of Alabama Alabama 100%
Household Finance Corporation of California Delaware 100%
Household Finance Corporation of Nevada Delaware 100%
Household Finance Realty Corporation of New York Delaware 100%
Household Finance Corporation of West Virginia West Virginia 100%
Household Finance Industrial Loan Company Washington 100%
Household Finance Industrial Loan Company of Iowa Iowa 100%
Household Finance Realty Corporation of Nevada Delaware 100%
Household Finance Corporation III Delaware 100%
Amstelveen FSC, Ltd. Bermuda 100%
HFC Agency of Connecticut, Inc. Connecticut 100%
HFC Agency of Michigan, Inc. Michigan 100%
HFC Agency of Missouri, Inc. Missouri 100%
Night Watch FSC, Ltd. Bermuda 100%
Household Realty Corporation Delaware 100%
Overseas Leasing One FSC, Ltd. Bermuda 100%
Overseas Leasing Four FSC, Ltd. Bermuda 100%
Overseas Leasing Five FSC, Ltd. Bermuda 100%
Household Retail Services, Inc. Delaware 100%
HRSI Funding, Inc. Nevada 100%
Household Financial Center Inc. Tennessee 100%
Household Industrial Finance Company Minnesota 100%
Household Industrial Loan Co. of Kentucky Kentucky 100%
Household Recovery Services Corporation Delaware 100%
Household Relocation Management, Inc. Illinois 100%
Household Servicing, Inc. Delaware 100%
Mortgage One Corporation Delaware 100%
Mortgage Two Corporation Delaware 100%
Sixty-First HFC Leasing Corporation Delaware 100%
Household Pooling Corporation Nevada 100%
Household Receivables Acquisition Company Delaware 100%
Household REIT Corporation Nevada 100%
Household Financial Group, Ltd. Delaware 100%
Household Global Funding, Inc. Delaware 100%
Beneficial Premium Services Limited England 100%
Beneficial Limited England 99.9%
Beneficial Financial Services Limited England 100%
Beneficial Leasing Limited England 100%
Beneficial Trust Investments Limited England 100%
Beneficial Trust Nominees Limited England 100%
Endeavour Personal Finance Limited England 100%
Security Trust Limited England 100%
Sterling Credit Limited England 100%
Sterling Credit Management Limited England 100%
The Loan Corporation Limited England 100%
Extracard Corp. Delaware 100%
Household Ireland Holdings, Inc. Delaware 100%
BFC Ireland (Holdings) Limited Ireland 100%
BFC Insurance (Life) Limited Ireland 100%
BFC Management Services Limited Ireland 100%
BFC Insurance Limited Ireland 100%
Household International (U.K.) Limited England 100%
D.L.R.S. Limited Cheshire 100%
HFC Bank plc England 100%
Hamilton Financial Planning Services Ltd. England 100%
Hamilton Insurance Company Limited England 100%
Hamilton Life Assurance Company Limited England 100%
HFC Pension Plan Limited England 100%
Household Funding Limited England 100%
Household Investments Limited England 100%
Household Leasing Limited England 100%
Household Management Corporation Limited England and Wales 100%
Household Overseas Limited England 100%
Household International Netherlands B.V. Netherlands 100%
Household Financial Corporation Limited Ontario 100%
Household Finance Corporation of Canada Canada 100%
Household Realty Corporation Limited Ontario 100%
Household Trust Company Canada 100%
Household Financial Corporation Inc. Ontario 100%
Household Reinsurance Ltd. Bermuda 100%
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
Household International, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report dated January 14, 2000, included in this Annual Report on Form 10-K of
Household International, Inc. for the year ended December 31, 1999, into the
Company's previously filed Registration Statements No. 2-86383, No. 33-21343,
No. 2-97495, No. 33-45454, No. 33-45455, No. 33-52211, No. 33-58727, No. 333-
00397, No. 33-44066, No. 333-03673, No. 333-39639, No. 333-59287, No. 333-58289,
No. 333-59291, No. 333-47073, No. 333-36589 and No. 333-30600 on Form S-8,
Registration Statements No. 33-48854, No. 33-56599, No. 33-57249, No. 333-1025,
No. 333-65679 and No. 333-27305 on Form S-3, and Registration Statement No. 333-
35657 on Form S-4.
Chicago, Illinois
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND ITS SUBSIDIARIES
IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL
STATEMENTS PREVIOUSLY FILED WITH THE SECURITIES & EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 270,600
<SECURITIES> 3,128,100
<RECEIVABLES> 52,289,400
<ALLOWANCES> 2,666,600
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,324,100
<DEPRECIATION> 847,700
<TOTAL-ASSETS> 60,749,400
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 34,887,300
0
164,400
<COMMON> 550,400
<OTHER-SE> 6,275,500
<TOTAL-LIABILITY-AND-EQUITY> 60,749,400
<SALES> 0
<TOTAL-REVENUES> 9,499,100
<CGS> 0
<TOTAL-COSTS> 2,785,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,716,400
<INTEREST-EXPENSE> 2,776,600
<INCOME-PRETAX> 2,220,700
<INCOME-TAX> 734,300
<INCOME-CONTINUING> 1,486,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,486,400
<EPS-BASIC> 3.10
<EPS-DILUTED> 3.07
<FN>
<F1>FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH
FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S BALANCE
SHEETS WERE NON-CLASSIFIED.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99(b)
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
DEBT AND PREFERRED STOCK SECURITIES RATINGS OF THE
COMPANY AND ITS SIGNIFICANT SUBSIDIARIES
<TABLE>
<CAPTION>
Duff &
Standard Moody's Fitch Phelps
& Poor's Investors Investors Credit Thomson
Corporation Service Services Rating Co. BankWatch
- ----------------------------------------------------------------------------------------------------------------
At December 31, 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Household International, Inc.
Senior debt A A3 A A A
Commercial paper A-1 P-2 F-1 Duff 1 TBW-1
Preferred stock BBB+ baa1 A- A- BBB+
- ----------------------------------------------------------------------------------------------------------------
Household Finance Corporation
Senior debt A A2 A+ A+ A+
Senior subordinated debt A- A3 A A A
Commercial paper A-1 P-1 F-1 Duff 1+ TBW-1
- ---------------------------------------------------------------------------------------------------------------
Household Bank, f.s.b.
Senior debt A A2 A A NR
Subordinated debt A- A3 A- A- A
Certificates of deposit
(long/short-term) A/A-1 A2/P-1 A/F-1 A/Duff 1 TBW-1
Thrift notes A-1 P-1 F-1 Duff 1 TBW-1
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
