-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T80yYukhM6gtwhKGDxOt5QF/shK/VwPREkpwg+6C9DOgMeyvuPKHoNtLGguiPLMn 4Nog3tVcFxyRUej7Srw5Rw== 0000950131-00-002085.txt : 20000329 0000950131-00-002085.hdr.sgml : 20000329 ACCESSION NUMBER: 0000950131-00-002085 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOUSEHOLD INTERNATIONAL INC CENTRAL INDEX KEY: 0000354964 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 363121988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08198 FILM NUMBER: 581193 BUSINESS ADDRESS: STREET 1: 2700 SANDERS RD CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 BUSINESS PHONE: 8475645000 MAIL ADDRESS: STREET 1: 2700 SANDERS ROAD CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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:
Name of each exchange Title of each class on which registered ------------------- --------------------- 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
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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
PART/Item No. Page - ------------- ---- 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
2 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. - -------- * MasterCard is a registered trademark of MasterCard International, Incorporated and VISA is a registered trademark of VISA USA, Inc. 3 . 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. 4 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 5 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 6 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. 7 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. 8 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. 9 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 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 (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. 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).
12 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.
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 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.
Signature Title Date --------- ----- ---- /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)
14 /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)
15 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 SCHEDULE I HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME (In millions)
Year ended December 31 ---------------------- 1999 1998 1997 -------- ------ ------ 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 ======== ====== ======
See accompanying note to condensed financial statements. F-2 SCHEDULE I (continued) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (In millions)
December 31 ----------------- 1999 1998 -------- -------- 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 ======== ========
- -------- * 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 SCHEDULE I (continued) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (In millions)
Year ended December 31 ------------------------------ 1999 1998 1997 --------- -------- --------- 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 ========= ======== =========
See accompanying note to condensed financial statements. F-4 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 EXHIBIT INDEX
Exhibit No Document Description ------- -------------------- 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).
Exhibit No. Document Description ------- -------------------- 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.
EX-10.2 2 CORPORATE EXECUTIVE BONUS PLAN 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. 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
Group Target Bonus Maximum Bonus ------------------------------------------------ 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%
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 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 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 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 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 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 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 EX-10.5 3 AMENDED 1996 LONG-TERM EXEC.INCENTIVE COMP. PLAN 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- 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- 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- 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- 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- 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- 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- 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- 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- 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. -10- (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 -11- 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 -12- 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 -13- 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. -14- (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. -15- 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 -16- 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. -17- EX-10.7 4 DEFERRED FEE PLAN FOR DIRECTORS 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 -1- 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 -2- 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 -3- 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 -4- 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 -5- 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 -6- 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. -7- EX-10.8 5 DEFERRED PHANTOM STOCK PLAN FOR DIRECTORS 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 -1- 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- 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- 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- 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- EX-11 6 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (In millions, except per share data.)
- ---------------------------------------------------------------------------------------------------------------- 1999 1998 1997 ------------------ ---------------- ---------------- Year ended December 31 Diluted Basic Diluted Basic Diluted Basic - ---------------------------------------------------------------------------------------------------------------- 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 ================================================================================================================
EX-12 7 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 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.)
- ---------------------------------------------------------------------------------------------------------------- Year ended December 31 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- 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 ================================================================================================================
(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. EX-13 8 MATERIAL INCORPORATED BY REFERENCE EXHIBIT 13 Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Selected Financial Data and Statistics Pg. 26 - 1999 Annual Report
All dollar amounts except per share data are stated in millions. 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------------------------
/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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Selected Financial Data and Statistics Pg. 27 - 1999 Annual Report (continued)
All dollar amounts except per share data are stated in millions. 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- 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 =============================================================================================================================
/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 . 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. 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:
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 - ---------------------------------------------------------------------------------------------------------------------------- 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) - ============================================================================================================================
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. 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. 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:
Increase (Decrease) Increase (Decrease) All dollar amounts are stated in millions. December 31, 1999 in 1999/1998 in 1998/1997 - ----------------------------------------------------------------------------------------------------------------- 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% ============================================================================================================
/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. 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. 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
In millions. Year ended December 31 1999 1998 1997 ------------------------------------------------------------------------------------------- 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 ===========================================================================================
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. 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. 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. 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
1999 Quarter End 1998 Quarter End ------------------------------- ------------------------------ 4 3 2 1 4 3 2 1 ----------------------------------------------------------------------------------------- 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% ==========================================================================================
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. 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
1999 Quarter Annualized 1998 Quarter Annualized Full Year -------------------------------- Full Year --------------------------------- Full Year 1999 4 3 2 1 1998 4 3 2 1 1997 - -------------------------------------------------------------------------------------------------------------------------------- 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% ==========================================================================================================================
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:
All dollar amounts are stated in millions. At December 31 1999 1998 1997 1996 1995 --------------------------------------------------------------------------------------------- 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% ==============================================================================================
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.
Nonperforming Assets 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% ----------------------------------------------------------------------------------------------------------------
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:
At December 31 1999 1998 --------------------------------------------------------------------------- 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. ---------------------------------------------------------------------------
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 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 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. 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:
In billions. 1999 1998 1997 - ------------------------------------------------------------- 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 =============================================================
The following table summarizes the expected amortization of our securitizations by type:
In millions. At December 31, 1999 2000 2001 2002 2003 2004 Thereafter Total - ----------------------------------------------------------------------------------------------------------------------- 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 =======================================================================================================================
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. 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. 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. Household International, Inc. and Subsidiaries --------------------------------------------------------------------------- Credit Quality Statistics Pg. 45 - 1999 Annual Report
All dollar amounts are stated in millions. At December 31, unless otherwise indicated. 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------------------------------------------------- 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 =======================================================================================================================
/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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Analysis of Credit Loss Reserves Activity- Pg. 46 - 1999 Annual Report Owned Receivables
All dollar amounts are stated in millions. 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- 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% ====================================================================================================================
/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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Analysis of Credit Loss Reserves Activity- Pg. 47 - 1999 Annual Report Managed Receivables
All dollar amounts are stated in millions. 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- 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% ============================================================================================================================
/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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Net Interest Margin-1999 Compared to 1998 Pg. 48 - 1999 Annual Report (Owned Basis)
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/ - ------------------------------------------------------------------------------------------------------------------------------------ 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% ===================================================================================================================================
/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:
1999 1998 1997 - -------------------------------------------------------------------------------------------- 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% - --------------------------------------------------------------------------------------------
Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Net Interest Margin-1998 Compared to 1997 Pg. 49 - 1999 Annual Report (Owned Basis)
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/ - ------------------------------------------------------------------------------------------------------------------------------------ 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% ====================================================================================================================================
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.
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 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% ===================================================================================================================================
/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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Selected Quarterly Financial Data (Unaudited) Pg. 51 - 1999 Annual Report
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 - ----------------------------------------------------------------------------------------------------------------------------------- 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 ===================================================================================================================================
/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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Consolidated Statements of Income Pg. 52 - 1999 Annual Report
In millions, except per share data. Year ended December 31 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Consolidated Balance Sheets Pg. 53 - 1999 Annual Report
In millions, except share data. At December 31 1999 1998 - --------------------------------------------------------------------------------------------- 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 ========================================================================================
*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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows Pg. 54 - 1999 Annual Report
In millions. Year ended December 31 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- 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 ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Consolidated Statements of Changes in Preferred Pg. 55 - 1999 Annual Report Stock and Common Shareholders' Equity
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 ====================================================================================================================================
/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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Consolidated Statements of Changes in Preferred Pg. 56 - 1999 Annual Report Stock and Common Shareholders' Equity (continued)
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 =======================================================================================================================
Comprehensive Income The following discloses the related tax effects allocated to each component of other comprehensive income and reclassification adjustments:
Tax In millions. (Expense) At December 31 Before-Tax Benefit Net-of-Tax - ------------------------------------------------------------------------------------------------------------------- 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) ==============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 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. 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 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 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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Pg. 61 - 1999 Annual Report The merger and integration costs were comprised of the following:
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 ------------------------------------------------------------------------------------------------------------------ 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) - ==================================================================================================================
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. 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
In millions. At December 31 1999 1998 --------------------------------------------------------------------------- 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 ===========================================================================
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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Pg. 63 - 1999 Annual Report The gross unrealized gains (losses) of investment securities were as follows:
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 - ----------------------------------------------------------------------------------------------------------------------------------- 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 ===================================================================================================================================
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:
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* --------------------------------------------------------------------------------------------------------------------- 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% =====================================================================================================================
*Computed by dividing annualized interest by the amortized cost of the respective investment securities. - -------------------------------------------------------------------------------- 4. Receivables
In millions. At December 31 1999 1998 ------------------------------------------------------------------------------------------------ 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 ================================================================================================
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:
United Kingdom Canada Germany In millions. -------------------------------- -------------------------------- ----------------------- At December 31 1999 1998 1997 1999 1998 1997 1999 1998 1997 ----------------------------------------------------------------------------------------------------------------------- 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 =======================================================================================================================
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:
In millions. At December 31 1999 1998 ------------------------------------------------------------- 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 =============================================================
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:
In millions. At December 31 1999 1998 ------------------------------------------------------------- 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 =============================================================
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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Pg. 65 - 1999 Annual Report Contractual maturities of owned receivables were as follows:
In millions. At December 31, 1999 2000 2001 2002 2003 2004 Thereafter Total ---------------------------------------------------------------------------------------------------------------------- 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 ======================================================================================================================
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:
In millions. Over 1 But At December 31, 1999 Within 5 years Over 5 years --------------------------------------------------------------------------------------- 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 =======================================================================================
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
All dollar amounts are stated in millions. Weighted Weighted At December 31 Amount Average Rate Amount Average Rate --------------------------------------------------------------------------------------------------------------- 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% ===============================================================================================================
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:
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 --------------------------------------------------------------------------------------------------------------------------- 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% ===========================================================================================================================
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:
All dollar amounts are stated in millions. At December 31, 1999 Domestic Foreign Total ---------------------------------------------------------------------------------------- 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 ========================================================================================
Contractual maturities of time certificates within each interest rate range were as follows:
All dollar amounts are stated in millions. At December 31, 1999 2000 2001 2002 2003 2004 Thereafter Total ---------------------------------------------------------------------------------------------------------------------------- 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 ============================================================================================================================
Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Pg. 67 - 1999 Annual Report - -------------------------------------------------------------------------------- 6. Commercial Paper, Bank and Other Borrowings
Bank All dollar amounts are stated in millions. Commercial and Other At December 31 Paper* Borrowings Total --------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------
*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)
All dollar amounts are stated in millions. At December 31 1999 1998 ------------------------------------------------------------------------------------- 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 =====================================================================================
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:
In millions. At December 31, 1999 - ------------------------------------------------------------------------------- 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 ===============================================================================
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. 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
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 - ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------
Non-Exchange Traded - ------------------------------------------------------------------ Interest Rate Forward Contracts Other Risk ---------------------- Management In millions Purchased Sold Instruments - ------------------------------------------------------------------ 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 - ------------------------------------------------------------------
/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. 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:
Foreign Exchange Interest Rate Interest Rate Contracts Forward Contracts Other Risk Rate Currency -------------------------- ----------------------- Management In millions. Swaps Swaps Purchased Sold Purchased Sold Instruments - -------------------------------------------------------------------------------------------------------------------------------- 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 ================================================================================================================================
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:
In millions. - -------------------------------------------------------------------------------------------------------------------------------- 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 ================================================================================================================================
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. 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:
All dollar amounts are stated in millions. 2000 2001 2002 2003 2004 2005 Thereafter Total - ----------------------------------------------------------------------------------------------------------------------------------- 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 ------------------------------------------------------------------------------------------------------------------------------
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. 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.
- ------------------------------------------------------------------------------------------------ 10. Preferred Stock All dollar amounts are stated in millions. At December 31 1999 1998 -------------------------------------------------------------------------------------------- $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 ============================================================================================
/1/Depositary share represents 1/40 share of preferred stock. 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. 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:
1999 1998 ---------------------------------------- ---------------------------------------- In millions. Carrying Estimated Carrying Estimated At December 31 Value Fair Value Difference Value Fair Value Difference ---------------------------------------------------------------------------------------------------------------------------- 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) ============================================================================================================================
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. 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:
Minimum Minimum In millions. Rental Sublease At December 31, 1999 Payments Income Net ------------------------------------------------------------------ 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 ==================================================================
- ------------------------------------------------------------------------------- 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. 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:
1999 1998 1997 ------------------------ ------------------------ ------------------------ Price per Price per Price per Shares Share Shares Share Shares Share -------------------------------------------------------------------------------------------------------------------------- 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 ==========================================================================================================================
/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:
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 ------------------------------------------------------------------------------------------------------------------------ $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 ------------------------------------------------------------------------------------------------------------------------
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:
1999 1998 1997 In millions, except per share data. ----------------- --------------- --------------- Year ended December 31 Diluted Basic Diluted Basic Diluted Basic --------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------
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:
1999 1998 1997 ------------------------------------------------------------------------- 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% -------------------------------------------------------------------------
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. 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:
In millions. Year ended December 31 1999 1998 1997 --------------------------------------------------------------------------------------- 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 =======================================================================================
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:
1999 1998 1997 ----------------------------------------------------------------------------------------- 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% =========================================================================================
A reconciliation of beginning and ending balances of the projected benefit obligation of the defined benefit pension plans is as follows:
In millions. Year ended December 31 1999 1998 ---------------------------------------------------------------------- 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 ======================================================================
A reconciliation of beginning and ending balances of the fair value of plan assets associated with the defined benefit pension plans is as follows:
In millions. Year ended December 31 1999 1998 ----------------------------------------------------------------------------- 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 =============================================================================
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:
In millions. At December 31 1999 1998 -------------------------------------------------------------------- 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 ====================================================================
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:
In millions. Year ended December 31 1999 1998 1997 ----------------------------------------------------------------------------------------- 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) =========================================================================================
A reconciliation of the beginning and ending balances of the accumulated post-retirement benefit obligation is as follows:
In millions. Year ended December 31 1999 1998 ------------------------------------------------------------------------- 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 =========================================================================
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:
In millions. Year ended December 31 1999 1998 ----------------------------------------------------------------------------- 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 =============================================================================
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:
1999 1998 1997 -------------------------------------------------------------- Discount rate 8.0% 7.0% 7.0%-7.5% Salary increase assumption 4.0% 4.0% 4.0%-4.5% --------------------------------------------------------------
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):
One Percent One Percent Increase Decrease ----------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ (.5) $ .6 Effect on postretirement benefit obligation 8.0 (6.8) -----------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 16. Income Taxes Total income taxes as follows:
In millions. Year ended December 31 1999 1998 1997 --------------------------------------------------------------------------------------------- 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 =============================================================================================
Provisions for income taxes related to operations were:
In millions. Year ended December 31 1999 1998 1997 ---------------------------------------------------------------- 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 ================================================================
The significant components of deferred income tax provisions attributable to income from operations were:
In millions. Year ended December 31 1999 1998 1997 ---------------------------------------------------------------------------- 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 ============================================================================
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:
Year ended December 31 1999 1998 1997 ----------------------------------------------------------------------------------- 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% ===================================================================================
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:
In millions. Year ended December 31 1999 1998 ------------------------------------------------------------------------------------------ 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 ==========================================================================================
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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Pg. 81 - 1999 Annual Report - -------------------------------------------------------------------------------- 17. Earnings Per Common Share
1999 1998 1997 In millions, except per share data. ---------------------- ------------------- ------------------- Year ended December 31 Diluted Basic Diluted Basic Diluted Basic ----------------------------------------------------------------------------------------------------------------------- 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 =======================================================================================================================
- -------------------------------------------------------------------------------- 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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Pg. 82 - 1999 Annual Report (continued)
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------
/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
Identifiable Assets Long-Lived Assets/1/ ------------------------------- ----------------------------- In millions. 1999 1998 1997 1999 1998 1997 - -------------------------------------------------------------------------------- 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 ================================================================================
/1/Represents properties and equipment, net of accumulated depreciation, and goodwill, net of accumulated amortization.
Revenues Income Before Income Taxes ------------------------------ ----------------------------- In millions. 1999 1998 1997 1999 1998 1997 - -------------------------------------------------------------------------------- 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 ================================================================================
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 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.
Dividends Declared ------------------ Stock Ticker Symbol 1999 1998 Features Redemption Features - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------
/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. Household International, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Pg. 85 - 1999 Annual Report
Year ended December 31, unless otherwise indicated 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ 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 -------------------------------------------------------------------------------------------------------------------------------
/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. EX-21 9 LIST OF SUBSIDIARIES 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.
% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ 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%
EX-23 10 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- Household International, Inc.: As independent public accountants, we hereby consent to the incorporation of our report dated January 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 EX-27 11 FINANCIAL DATA SCHEDULE
5 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. 1,000 YEAR DEC-31-1999 DEC-31-1999 270,600 3,128,100 52,289,400 2,666,600 0 0 1,324,100 847,700 60,749,400 0 34,887,300 0 164,400 550,400 6,275,500 60,749,400 0 9,499,100 0 2,785,400 0 1,716,400 2,776,600 2,220,700 734,300 1,486,400 0 0 0 1,486,400 3.10 3.07 FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S BALANCE SHEETS WERE NON-CLASSIFIED.
EX-99.B 12 RATINGS OF HI & ITS SIGNIFICANT SUBSIDIARIES EXHIBIT 99(b) HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES DEBT AND PREFERRED STOCK SECURITIES RATINGS OF THE COMPANY AND ITS SIGNIFICANT SUBSIDIARIES
Duff & Standard Moody's Fitch Phelps & Poor's Investors Investors Credit Thomson Corporation Service Services Rating Co. BankWatch - ---------------------------------------------------------------------------------------------------------------- At December 31, 1999 - ---------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------
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