-----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, LT2/2m8x6Rysi+pSoqFnZcIlqmj3BVzPk8zvIRNTiQ4UDck5LPx6+OZCDkANMjTl 4d4UjJgnikWU8h3iSf5Vfw== 0000354964-02-000035.txt : 20020510 0000354964-02-000035.hdr.sgml : 20020510 ACCESSION NUMBER: 0000354964-02-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020510 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08198 FILM NUMBER: 02642194 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-Q 1 hi10q.txt HI 10Q 3-31-01 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 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) Delaware 36-3121988 -------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 2700 Sanders Road, Prospect Heights, Illinois 60070 (Address of principal executive offices) (Zip Code) (847) 564-5000 Registrant's telephone number, including area code 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 [ ] At April 30, 2002, there were 456,518,617 shares of the registrant's common stock outstanding. HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES Table of Contents PART I. Financial Information Page ---- Item 1. Financial Statements Condensed Consolidated Statements of Income (Unaudited) - Three months ended March 31, 2002 and 2001....................... 2 Condensed Consolidated Balance Sheets - March 31, 2002 (Unaudited) and December 31, 2001................. 3 Condensed Consolidated Statements of Cash Flows (Unaudited) - Three months ended March 31, 2002 and 2001....................... 4 Notes to Interim Condensed Consolidated Financial Statements (Unaudited)........................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................13 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K.................................24 Signature ................................................................25 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Household International, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - -------------------------------------------------------------------------------- Three months ended March 31, (In millions, except per share data) 2002 2001 - -------------------------------------------------------------------------------- Finance and other interest income $2,547.0 $ 2,430.3 Interest expense 938.8 1,106.8 ------------- ------------- Net interest margin 1,608.2 1,323.5 Provision for credit losses on owned receivables 923.0 703.6 ------------- ------------- Net interest margin after provision for credit losses 685.2 619.9 ------------- ------------- Securitization revenue 521.2 406.3 Insurance revenue 170.1 158.6 Investment income 46.2 41.8 Fee income 237.9 237.9 Other income 188.0 161.7 ------------- ------------- Total other revenues 1,163.4 1,006.3 ------------- ------------- Salaries and fringe benefits 445.3 377.6 Sales incentives 54.1 54.5 Occupancy and equipment expense 92.2 83.5 Other marketing expenses 148.4 135.2 Other servicing and administrative expenses 229.3 193.4 Amortization of acquired intangibles and goodwill 18.2 38.9 Policyholders' benefits 84.0 77.5 ------------- ------------- Total costs and expenses 1,071.5 960.6 ------------- ------------- Income before income taxes 777.1 665.6 Income taxes 266.1 233.8 - -------------------------------------------------------------------------------- Net income $ 511.0 $ 431.8 ================================================================================ EARNINGS PER COMMON SHARE Net income $ 511.0 $ 431.8 Preferred dividends (8.5) (2.3) ------------- ------------- Earnings available to common shareholders $ 502.5 $ 429.5 ------------- ------------- Average common shares 456.8 466.0 Average common and common equivalent shares 462.1 472.0 ------------- ------------- Basic earnings per common share $ 1.10 $ .92 Diluted earnings per common share 1.09 .91 - -------------------------------------------------------------------------------- DIVIDENDS DECLARED PER COMMON SHARE $ .22 $ .19 - -------------------------------------------------------------------------------- See notes to interim condensed consolidated financial statements. Household International, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- March 31, December 31, (In millions, except share and per share data) 2002 2001 - -------------------------------------------------------------------------------- ASSETS (UNAUDITED) Cash $ 436.3 $ 543.6 Investment securities 5,035.8 3,580.5 Receivables, net 78,624.3 79,263.5 Acquired intangibles, net 426.4 447.9 Goodwill 1,122.1 1,107.4 Properties and equipment, net 552.5 531.1 Real estate owned 459.4 398.9 Other assets 3,711.1 3,543.1 - -------------------------------------------------------------------------------- Total assets $ 90,367.9 $ 89,416.0 ================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Debt: Deposits $ 6,194.9 $ 6,562.3 Commercial paper, bank and other borrowings 7,731.7 12,024.3 Senior and senior subordinated debt (with original maturities over one year) 60,536.2 56,823.6 -------------- ------------------ Total debt 74,462.8 75,410.2 Insurance policy and claim reserves 1,201.2 1,094.5 Other liabilities 4,010.3 3,277.7 -------------- ------------------ Total liabilities 79,674.3 79,782.4 Company obligated mandatorily redeemable preferred securities of subsidiary trusts* 975.0 975.0 Preferred stock 843.2 455.8 Common shareholders' equity: Common stock, $1.00 par value, 750,000,000 shares authorized, 551,732,369 and 551,684,740 shares issued at March 31, 2002 and December 31, 2001, respectively 551.7 551.7 Additional paid-in capital 2,037.8 2,030.0 Retained earnings 9,599.5 9,197.4 Accumulated other comprehensive income (loss) (395.6) (732.4) Less common stock in treasury, 95,524,297 and 94,560,437 shares at March 31, 2002 and December 31, 2001, respectively, at cost (2,918.0) (2,843.9) -------------- ------------------ Total common shareholders' equity 8,875.4 8,202.8 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 90,367.9 $ 89,416.0 ================================================================================ * As described in note 8 to the condensed consolidated financial statements, the sole assets of the trusts are Junior Subordinated Deferrable Interest Notes issued by Household International, Inc. in November 2001, January 2001, June 2000, March 1998 and June 1995, bearing interest at 7.50, 8.25, 10.00, 7.25 and 8.25 percent, respectively, with principal balances of $206.2, $206.2, $309.3, $206.2 and $77.3 million, respectively, and due November 2031, January 2031, June 2030, December 2037 and June 2025, respectively. See notes to interim condensed consolidated financial statements. Household International, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - -------------------------------------------------------------------------------- Three months ended March 31, (In millions) 2002 2001 - -------------------------------------------------------------------------------- CASH PROVIDED BY OPERATIONS Net income $ 511.0 $ 431.8 Adjustments to reconcile net income to cash provided by operations: Provision for credit losses on owned receivables 923.0 703.6 Insurance policy and claim reserves 115.8 46.2 Depreciation and amortization 61.4 83.1 Interest-only strip receivables, net change (29.0) (3.5) Other, net 405.9 74.9 ----------- ------------ Cash provided by operations 1,988.1 1,336.1 ----------- ------------ INVESTMENTS IN OPERATIONS Investment securities: Purchased (428.7) (480.3) Matured 147.2 120.2 Sold 190.3 143.3 Short-term investment securities, net change (1,375.5) 59.2 Receivables: Originations, net (9,747.4) (8,848.5) Purchases and related premiums (184.9) (137.3) Sold 9,453.6 6,779.0 Properties and equipment purchased (57.9) (57.9) Properties and equipment sold 1.5 1.6 ----------- ------------ Cash decrease from investments in operations (2,001.8) (2,420.7) ----------- ------------ FINANCING AND CAPITAL TRANSACTIONS Short-term debt and demand deposits, net change (4,260.8) (435.8) Time certificates, net change (367.2) 139.9 Senior and senior subordinated debt issued 7,190.0 4,317.6 Senior and senior subordinated debt retired (2,863.4) (2,869.3) Policyholders' benefits paid (28.2) (27.0) Cash received from policyholders 16.9 14.3 Shareholders' dividends (108.9) (90.4) Purchase of treasury stock (100.0) (398.3) Issuance of common stock 32.0 4.4 Issuance of preferred stock 387.4 - Issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts - 200.0 ----------- ------------- Cash (decrease) increase from financing and capital transactions (102.2) 855.4 ----------- ------------- Effect of exchange rate changes on cash 8.6 11.3 ----------- ------------- Decrease in cash (107.3) (217.9) Cash at January 1 543.6 490.2 - -------------------------------------------------------------------------------- Cash at March 31 $ 436.3 $ 272.3 ================================================================================ SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 989.5 $ 1,040.2 Income taxes paid 23.6 102.2 - -------------------------------------------------------------------------------- See notes to interim condensed consolidated financial statements. Household International, Inc. and Subsidiaries NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Household International, Inc. ("Household") and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results for the three months ended March 31, 2002 should not be considered indicative of the results for any future quarters or the year ending December 31, 2002. Household and its subsidiaries may also be referred to in this Form 10-Q as "we," "us" or "our." These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2001. 2. INVESTMENT SECURITIES Investment securities consisted of the following available-for-sale investments: - -------------------------------------------------------------------------------- March 31, December 31, 2002 2001 - -------------------------------------------------------------------------------- Amortized Fair Amortized Fair (In millions) Cost Value Cost Value - -------------------------------------------------------------------------------- Corporate debt securities $ 2,060.3 $1,987.4 $ 2,089.5 $ 2,054.0 Money market funds 1,681.5 1,681.5 342.3 342.3 Certificates of deposit 229.6 241.8 246.1 259.8 U.S. government and federal agency debt securities 234.8 232.2 217.0 217.8 Marketable equity securities 29.0 26.0 24.4 21.2 Other 762.7 785.3 611.6 638.9 - ------------------------------------------------------------------------------- Subtotal 4,997.9 4,954.2 3,530.9 3,534.0 Accrued investment income 81.6 81.6 46.5 46.5 - ------------------------------------------------------------------------------- Total available-for-sale investments $ 5,079.5 $ 5,035.8 $ 3,577.4 $ 3,580.5 ================================================================================ 3. RECEIVABLES Receivables consisted of the following: - -------------------------------------------------------------------------------- March 31, December 31, (In millions) 2002 2001 - -------------------------------------------------------------------------------- Real estate secured $ 45,628.9 $ 43,856.8 Auto finance 2,602.9 2,368.9 MasterCard*/Visa* 6,970.2 8,141.2 Private label 10,688.4 11,663.9 Personal non-credit card 13,213.0 13,337.0 Commercial and other 491.1 506.9 - -------------------------------------------------------------------------------- Total owned receivables 79,594.5 79,874.7 Accrued finance charges 1,515.3 1,559.8 Credit loss reserve for owned receivables (2,876.6) (2,663.1) Unearned credit insurance premiums and claims reserves (886.4) (895.8) Interest-only strip receivables 1,034.5 968.2 Amounts due and deferred from receivable sales 243.0 419.7 - -------------------------------------------------------------------------------- Total owned receivables, net 78,624.3 79,263.5 Receivables serviced with limited recourse 21,583.2 20,948.0 - -------------------------------------------------------------------------------- Total managed receivables, net $100,207.5 $100,211.5 ================================================================================ Interest-only strip receivables are reported net of our estimate of probable losses under the recourse provisions for receivables serviced with limited recourse. Our estimate of the recourse obligation totaled $1,269.9 million at March 31, 2002 and $1,148.3 million at December 31, 2001. Interest-only strip receivables also included fair value mark-to-market adjustments of $386.1 million at March 31, 2002 and $348.6 million at December 31, 2001. Receivables serviced with limited recourse consisted of the following: - -------------------------------------------------------------------------------- March 31, December 31, (In millions) 2002 2001 - -------------------------------------------------------------------------------- Real estate secured $ 619.8 $ 861.8 Auto finance 4,012.7 4,026.6 MasterCard/Visa 9,378.3 9,254.0 Private label 2,634.0 2,150.0 Personal non-credit card 4,938.4 4,655.6 - -------------------------------------------------------------------------------- Total receivables serviced with limited recourse $ 21,583.2 $ 20,948.0 ================================================================================ * MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of VISA USA, Inc. The combination of owned receivables and receivables serviced with limited recourse, which we consider our managed portfolio, consisted of the following: - -------------------------------------------------------------------------------- March 31, December 31, (In millions) 2002 2001 - -------------------------------------------------------------------------------- Real estate secured $ 46,248.7 $ 44,718.6 Auto finance 6,615.6 6,395.5 MasterCard/Visa 16,348.5 17,395.2 Private label 13,322.4 13,813.9 Personal non-credit card 18,151.4 17,992.6 Commercial and other 491.1 506.9 - -------------------------------------------------------------------------------- Total managed receivables $101,177.7 $100,822.7 ================================================================================ 4. CREDIT LOSS RESERVES An analysis of credit loss reserves for the three months ended March 31 was as follows: - ------------------------------------------------------------------------------- Three months ended March 31, (In millions) 2002 2001 - ------------------------------------------------------------------------------- Owned receivables: Credit loss reserves at beginning of period $ 2,663.1 $ 2,111.9 Provision for credit losses 923.0 703.6 Charge-offs (778.6) (588.1) Recoveries 59.9 56.6 Other, net 9.2 (1.6) - ------------------------------------------------------------------------------- Credit loss reserves for owned receivables at March 31 2,876.6 2,282.4 - ------------------------------------------------------------------------------- Receivables serviced with limited recourse: Credit loss reserves at beginning of period 1,148.3 1,082.3 Provision for credit losses 439.3 229.2 Charge-offs (335.9) (264.3) Recoveries 23.1 16.2 Other, net (4.9) (5.6) - ------------------------------------------------------------------------------- Credit loss reserves for receivables serviced with limited recourse at March 31 1,269.9 1,057.8 - ------------------------------------------------------------------------------- Total credit loss reserves for managed receivables at March 31 $ 4,146.5 $ 3,340.2 =============================================================================== We maintain credit loss reserves to cover probable losses of principal, interest and fees, including late, overlimit and annual fees. Credit loss reserves are based on a range of estimates and intended to be adequate but not excessive. We estimate losses for consumer receivables based on delinquency status and past loss experience. In addition, we provide loss reserves on consumer receivables to reflect our assessment of portfolio risk factors which may not be fully reflected in the statistical calculation (which uses roll rates and migration analysis). These risk factors include bankruptcy trends, recent growth, product mix, economic conditions and current levels of charge-offs and delinquencies. 5. ACQUIRED INTANGIBLES AND GOODWILL Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS No. 142"). FAS No. 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill recorded in past business combinations ceased upon adoption of the statement on January 1, 2002. We have completed the transitional goodwill impairment test required by FAS No. 142 and have concluded that none of our goodwill is impaired. We do not hold any intangible assets which are not subject to amortization. Amortized acquired intangibles consisted of the following: - -------------------------------------------------------------------------------- (In millions) March 31, December 31, 2002 2001 - -------------------------------------------------------------------------------- Purchased credit card relationships $ 1,038.6 $ 1,038.6 Accumulated amortization (612.2) (590.7) - ----------------------------------------------------------- -------------------- Purchased credit card relationships, net $ 426.4 $ 447.9 =========================================================== ==================== Acquired intangible amortization expense totaled $18.2 million for the first quarter of 2002, $24.2 million for the first quarter of 2001 and $92.6 million for the twelve-months ended December 31, 2001. Estimated amortization expense associated with purchased credit card relationships for each of the following years is as follows: - ------------------------------------------------------- (In millions) Year ended December 31, - ------------------------------------------------------- 2002 $51.1 2003 43.7 2004 41.1 2005 36.7 2006 34.3 - ------------------------------------------------------- The following tables disclose the impact of goodwill amortization on net income and earnings per share for the periods indicated. - -------------------------------------------------------------------------------- Three months ended March 31, (In millions) 2002 2001 - ------------------------------------------------------------ ------------------- Reported net income $ 511.0 $ 431.8 Add back: Goodwill amortization, net -- 11.6 - ------------------------------------------------------------ ------------------- Adjusted net income $ 511.0 $ 443.4 ============================================================ =================== - ------------------------------------ ------------------------------------------- Three months ended March 31, 2002 2001 - ------------------------------------ ---------------------- -------------------- Basic Diluted Basic Diluted - ------------------------------------ ---------- ---------- ----------- --------- Reported earnings per share $ 1.10 $ 1.09 $ .92 $ .91 Add back: Goodwill amortization, net -- -- .02 .02 - ------------------------------------ ---------- ---------- ----------- --------- Adjusted earnings per share $ 1.10 $ 1.09 $ .94 $ .93 ==================================== ========== ========== =========== ========= There were no significant changes to our goodwill balance, either in total or by segment, during the current quarter. 6. INCOME TAXES Our effective tax rate was 34.2 percent for the three months ended March 31, 2002 and 35.1 percent for the first three months of 2001. The effective tax rate differs from the statutory federal income tax rate primarily because of the effects of state and local income taxes and tax credits. 7. EARNINGS PER COMMON SHARE Computations of earnings per common share for the three months ended March 31 were as follows: - -------------------------------------------------------------------------------- Three months ended Three months ended (In millions, except March 31, March 31, per share data) 2002 2001 - -------------------------------------------------------------------------------- Diluted Basic Diluted Basic --------------------------------------------------- Earnings: Net income $ 511.0 $ 511.0 $ 431.8 $ 431.8 Preferred dividends (8.5) (8.5) (2.3) (2.3) - -------------------------------------------------------------------------------- Earnings available to common shareholders $ 502.5 $ 502.5 $ 429.5 $ 429.5 - -------------------------------------------------------------------------------- Average shares outstanding: Common 456.8 456.8 466.0 466.0 Common equivalents 5.3 - 6.0 - - -------------------------------------------------------------------------------- Average shares outstanding assuming dilution 462.1 456.8 472.0 466.0 - -------------------------------------------------------------------------------- Earnings per common share $ 1.09 $ 1.10 $ 0.91 $ 0.92 ================================================================================ 8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS We have formed special purpose trusts for the purpose of issuing trust preferred securities. The sole assets of these trusts are Junior Subordinated Deferrable Interest Notes ("Junior Subordinated Notes") issued by Household. The following table summarizes our company obligated mandatorily redeemable preferred securities of subsidiary trusts ("Preferred Securities") and the related Junior Subordinated Notes: - ------------------------- ------------------- ----------------- ----------------- ----------------- ----------------- Household Household Household Household Household (Dollar amounts are Capital Trust VII Capital Trust Capital Trust V Capital Trust Capital Trust I in millions) ("HCT VII") VI ("HCT VI") ("HCT V") IV ("HCT IV") ("HCT I") - ------------------------- ------------------- ----------------- ----------------- ----------------- ----------------- Preferred Securities: Interest rate 7.50% 8.25% 10.00% 7.25% 8.25% Face value $200 $200 $300 $200 $75 Issue date November 2001 January 2001 June 2000 March 1998 June 1995 Junior Subordinated Notes: Principal balance $206.2 $206.2 $309.3 $206.2 $77.3 Redeemable by issuer November 2006 January 2006 June 2005 March 2003 June 2001 Stated maturity November 2031 January 2031 June 2030 December 2037 June 2025 - ------------------------- ------------------- ----------------- ----------------- ----------------- -----------------
The Preferred Securities must be redeemed when the Junior Subordinated Notes are paid. The Junior Subordinated Notes have a stated maturity date, but are redeemable by Household, in whole or in part, beginning on the dates indicated above at which time the preferred securities are callable at par ($25 per Preferred Security) plus accrued and unpaid dividends. Dividends on the Preferred Securities are cumulative, payable quarterly in arrears, and are deferrable at Household's option for up to five years. Household cannot pay dividends on its preferred and common stocks during such deferments. The Preferred Securities have a liquidation value of $25 per preferred security. HCT I may elect to extend the maturity of its Preferred Securities to June 2044. Dividends on the Preferred Securities have been classified as interest expense in our statements of income. HCT I, HCT IV, HCT V, HCT VI and HCT VII (collectively, "the Trusts") are wholly owned subsidiaries of Household. Household's obligations with respect to the Junior Subordinated Notes, when considered together with certain undertakings of Household with respect to the Trusts, constitute full and unconditional guarantees by Household of the Trust's obligations under the respective Preferred Securities. The Preferred Securities are classified in our balance sheet as company obligated mandatorily redeemable preferred securities of subsidiary trusts (representing the minority interests in the trusts) at their face and redemption amount of $975 million at both March 31, 2002 and December 31, 2001. 9. FORWARD PURCHASE AGREEMENTS At March 31, 2002, we had agreements to purchase, on a forward basis, approximately 6 million shares of our common stock at a weighted-average forward price of $57.11 per share. The agreements expire at various dates through September 2002. These agreements may be settled either physically or on a net basis in shares of our common stock, at our option and consequently are accounted for as permanent equity. During the current quarter, we received 1.2 million shares at an average cost of $65.69 per share as a result of settlements under these forward contracts. Under a net share settlement, if the price of our common stock falls below the forward price, we would be required to deliver common shares to the counterparty based upon the difference between the forward price and the then current stock price. Conversely, if the price of our common stock rises above the forward price, the counterparty would be required to deliver to us shares of our common stock based on the price difference. Based upon the closing price of our common stock of $56.80 per share at March 31, 2002, we would have been required to deliver approximately 32,600 shares of our common stock to net share settle these contracts at March 31, 2002. If our common stock price had been lower by $1 per share at March 31, 2002, we would have been required to deliver an additional 107,700 common shares to net share settle these contracts. Alternatively, if our common stock price had been higher by $1 per share at March 31, 2002, we would have received 71,300 shares of our common stock from the counterparty to net share settle the contracts. These agreements, however, contain limits on the number of shares to be delivered under a net share settlement, regardless of the price of our common stock. At March 31, 2002, the maximum number of common shares we would be required to deliver to net share settle the 6 million shares currently outstanding was 30.7 million shares. 10. COMPREHENSIVE INCOME Comprehensive income was $847.8 million for the quarter ended March 31, 2002 and $131.2 million for the quarter ended March 31, 2001. The components of accumulated other comprehensive income (loss) were as follows: - ------------------------------------------------------------- ------------------ (In millions) March 31, December 31, 2002 2001 - ------------------------------------------------------------- ------------------ Unrealized losses on cash flow hedging instruments $ (353.7) $ (699.1) Unrealized gains on investments and interest-only strip receivables 223.4 223.3 Foreign currency translation adjustments (265.3) (256.6) - -------------------------------------------------------------------------------- Accumulated other comprehensive income (loss) $ (395.6) $ (732.4) ==============================================================-================= 11. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS No. 144"). The adoption of FAS No. 144 did not have a significant impact on our operations. 12. SEGMENT REPORTING We have three reportable segments: Consumer, Credit Card Services and International. Our Consumer segment consists of our consumer lending, mortgage services, retail services and auto finance businesses. Our Credit Card Services segment consists of our domestic MasterCard and Visa credit card business. Our International segment consists of our foreign operations in the United Kingdom and Canada. There has been no change in the basis of our segmentation or in the measurement of segment profit as compared with the presentation in our Annual Report on Form 10-K for the year ended December 31, 2001. Reportable Segments - Managed Basis Adjustments Managed Owned Recon- Basis Securiti- Basis Credit Card Inter- All ciling Consolidated zation Consolidated (In millions) Consumer Services national Other Totals Items Totals Adjustments Totals - ------------------------------------------------------------------------------------------------------------------------------------ Three months ended March 31, 2002 Net interest margin $1,658.2 $429.1 $153.4 $23.8 $2,264.5 -- $2,264.5 $(656.3)(5) $1,608.2 Fee income 88.6 294.8 10.1 2.8 396.3 -- 396.3 (158.4)(5) 237.9 Other revenues (1) 165.4 66.9 43.1 238.3 513.7 (47.6)(2) 466.1 375.4 (5) 841.5 Intersegment revenues 35.8 10.0 2.3 (.5) 47.6 (47.6)(2) -- -- -- Provision for credit losses 921.0 370.6 62.1 33.1 1,386.8 (24.5)(3) 1,362.3 (439.3)(5) 923.0 Net income 307.2 97.4 25.8 95.2 525.6 (14.6) 511.0 -- 511.0 Receivables 76,987.6 16,194.8 7,000.6 994.7 101,177.7 -- 101,177.7 (21,583.2)(6) 79,594.5 Assets 79,184.6 17,781.4 8,314.8 16,142.2 121,423.0 (9,471.9)(4) 111,951.1 (21,583.2)(6) 90,367.9 Goodwill 857.6 248.7 1.0 14.8 1,122.1 -- 1,122.1 -- 1,122.1 - ------------------------------------------------------------------------------------------------------------------------------------ Three months ended March 31, 2001 Net interest margin $1,351.0 $362.8 $152.9 $(36.9) $1,829.8 -- $1,829.8 $(506.3)(5) $1,323.5 Fee income 95.6 281.4 14.9 1.3 393.2 -- 393.2 (155.3)(5) 237.9 Other revenues (1) 28.7 20.3 39.0 227.0 315.0 (56.5)(2) 258.5 432.4 (5) 690.9 Intersegment revenues 46.2 8.9 1.9 (.5) 56.5 (56.5)(2) -- -- -- Provision for credit losses 577.3 296.7 55.0 3.3 932.3 .5 (3) 932.8 (229.2)(5) 703.6 Net income 278.4 59.5 46.4 83.6 467.9 (36.1) 431.8 -- 431.8 Receivables 64,790.3 15,369.6 7,604.2 608.5 88,372.6 -- 88,372.6 (19,567.0)(6) 68,805.6 Assets 67,336.6 16,937.4 8,808.6 14,591.1 107,673.7 (9,853.4)(4) 97,820.3 (19,567.0)(6) 78,253.3 Goodwill 875.6 259.0 1.0 15.5 1,151.1 -- 1,151.1 -- 1,151.1 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Net of policyholder benefits and excluding fees. (2) Eliminates intersegment revenues. (3) Eliminates bad debt recovery sales and reclassifies loss reserves between operating segments. (4) Eliminates investments in subsidiaries and intercompany borrowings. (5) Reclassifies net interest margin, fee income and loss provisions relating to securitized receivables to other revenues. (6) Represents receivables serviced with limited recourse. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Household International, Inc. and Subsidiaries FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- Three months ended (Dollar amounts are in millions, except per March 31, share data) 2002 2001 - -------------------------------------------------------------------------------- (Unaudited) (Unaudited) Net income $ 511.0 $ 431.8 Diluted earnings per common share 1.09 .91 Net interest margin and other revenues (1) 2,687.6 2,252.3 Owned Basis Ratios: Return on average owned assets 2.26 % 2.21 % Return on average common shareholders' equity 23.4 22.4 Net interest margin 7.87 7.60 Consumer net charge-off ratio 3.61 3.12 Reserves as a percentage of net charge-offs 100.1 107.4 Efficiency ratio (2) 36.7 39.2 Managed Basis Ratios:(3) Return on average managed assets 1.82 % 1.77 % Net interest margin 8.79 8.22 Consumer net charge-off ratio 4.09 3.56 Reserves as a percentage of net charge-offs 100.5 107.1 Efficiency ratio (2) 31.6 35.6 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- March 31, December 31, (Dollar amounts are in millions) 2002 2001 - -------------------------------------------------------------------------------- (Unaudited) Owned Basis: Total assets $ 90,367.9 $ 89,416.0 Receivables 79,594.5 79,874.7 Common and preferred equity as a percentage of owned assets 10.75 % 9.68 % Common and preferred equity and trust preferred securities as a percentage of owned assets (4) 11.83 10.77 Two-month-and-over contractual delinquency ratio 4.77 4.53 Reserves as a percentage of receivables 3.61 3.33 Reserves as a percentage of nonperforming loans 92.7 91.0 Managed Basis:(3) Total assets $ 111,951.1 $ 110,364.0 Receivables 101,177.7 100,822.7 Common and preferred equity as a percentage of managed assets 8.68 % 7.85 % Common and preferred equity and trust preferred securities as a percentage of managed assets (4) 9.55 8.73 Tangible equity to tangible managed assets(4)(5) 8.41 7.87 Two-month-and-over contractual delinquency ratio 4.63 4.46 Reserves as a percentage of receivables 4.10 3.78 Reserves as a percentage of nonperforming loans 108.3 105.0 - -------------------------------------------------------------------------------- (1) Net of policyholder benefits. (2) Ratio of operating expenses to net interest margin and other revenues less policyholders' benefits. (3) We monitor our operations and evaluate trends on both an owned basis as shown in our financial statements and on a managed basis. Managed basis reporting adjustments assume that securitized receivables have not been sold and are still on our balance sheet. Managed basis information is intended to supplement, and should not be considered a substitute for, owned basis reporting and should be read in conjunction with reported owned basis results. (4) The ratio of common and preferred equity and trust preferred securities as a percentage of owned and managed assets and the ratio of tangible equity to tangible managed assets are non-GAAP ratios that are used by rating agencies as a measure to evaluate capital adequacy. These ratios may differ from similarly named measures presented by other companies. Because of its long-term nature and our ability to defer dividends, rating agencies consider trust preferred securities as equity in calculating these ratios. (5) Tangible shareholders' equity includes trust preferred securities, preferred equity, and common shareholders' equity, excluding unrealized gains and losses on investments and cash flow hedging instruments, less acquired intangibles and goodwill. Tangible managed assets represents total managed assets less acquired intangibles, goodwill and derivative assets. BASIS OF REPORTING This discussion should be read in conjunction with the unaudited condensed consolidated financial statements, notes and tables included elsewhere in this report and in the Household International, Inc. Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 Form 10-K") filed with the Securities and Exchange Commission. Management's discussion and analysis may contain certain statements that may be forward-looking in nature within the meaning of the Private Securities Litigation Reform Act of 1995. Our results may differ materially from those noted in the forward-looking statements. Forward-looking statements are typically identified by words or phrases such as "believe", "expect", "anticipate", "intend", "may", "will", "should", "would" and "could". Forward-looking statements involve risks and uncertainties and are based on current views and assumptions. For a list of important factors that may affect our actual results, see our 2001 Form 10-K. We monitor our operations and evaluate trends on a managed basis which assumes that securitized receivables have not been sold and are still on our balance sheet. We manage our operations on a managed basis because the receivables that we securitize are subjected to underwriting standards comparable to our owned portfolio, are serviced by operating personnel without regard to ownership and result in a similar credit loss exposure for us. In addition, we fund our operations, review our operating results and make decisions about allocating resources such as employees and capital on a managed basis. See Note 12, "Segment Reporting," to the accompanying condensed consolidated financial statements for additional information related to our results on a managed basis. The following discussion of our financial condition and results of operations is presented on an owned basis of reporting unless specifically noted. On an owned basis of reporting, net interest margin, provision for credit losses and fee income resulting from securitized receivables are included as components of securitization revenue. OPERATIONS SUMMARY Our net income for the first quarter of 2002 increased 18 percent to $511.0 million, from $431.8 million a year ago. Diluted earnings per share was $1.09 in the first quarter compared to $.91 in the same period in 2001. Our improved results were due to strong revenue growth from an expanded net interest margin and higher receivable volume as well as higher income from our tax refund lending business. Our tax refund lending business contributed $.19 to our first quarter earnings per share, a 27 percent increase over the $.15 contribution in the year-ago quarter. Partially offsetting the revenue growth were higher credit loss provision, including provision greater than charge-offs of $204 million in the current quarter, and higher operating expenses that result from receivable growth. Our annualized return on average owned assets ("ROA") was 2.26 percent in the first quarter, compared to 2.21 percent in the same period in 2001. SEGMENT RESULTS - MANAGED BASIS Our Consumer segment reported net income of $307.2 million in the current quarter compared to $278.4 million in the year-ago quarter. Net interest margin, fee income and other revenues increased $436.9 million to $1.9 billion in the first quarter of 2002 as a result of strong receivable growth and higher securitization activity pursuant to our liquidity management plans. The higher revenues were partially offset by substantially higher credit loss provision and expenses. Our credit loss provision rose $343.7 million to $921.0 million as a result of increased levels of receivables and the continued weakened economy. In the first quarter, we recorded managed loss provision greater than charge-offs of $254.7 million which increased loss reserves. Higher salary expenses were the result of additional employees to support the increased receivable levels, additional collectors, and investments in the growth of our businesses. Managed receivables grew to $77.0 billion at March 31, 2002, compared to $75.6 billion at December 31, 2001 and $64.8 billion at March 31, 2001. The managed receivable growth was driven by growth in all products with the strongest growth in our real estate secured receivables, which was partially offset by the sale of approximately $900 million of loans by our mortgage services business. Return on average managed assets ("ROMA") was 1.55 percent in the first quarter of 2002, compared to 1.66 percent in the year-ago quarter. The decline in the ratio reflects higher credit loss provision and the continued shift in our portfolio to lower margin real estate secured receivables. Our Credit Card Services segment also reported improved results as net income increased to $97.4 million for the quarter, compared to $59.5 million for the year-ago quarter. The increase was due primarily to increased net interest margin which increased $66.3 million to $429.1 million as a result of higher receivable levels. Net interest margin as a percent of average receivables increased in the quarter as a result of lower funding costs and pricing floors on certain variable rate credit card products which capped rate reductions. Other revenues (excluding fee income and net of policyholder benefits) increased $46.6 million to $66.9 million for the current quarter primarily due to increases in securitization activity pursuant to liquidity management plans. Revenue growth was partially offset by an $73.9 million increase in credit loss provision and higher operating expenses associated with the higher receivable levels. In the first quarter, we recorded managed loss provision greater than charge-offs of $64.5 million to increase loss reserves. Managed receivables were $16.2 billion at March 31, 2002, compared to $17.2 billion at year-end 2001 and $15.4 billion at March 31, 2001. The decrease from year-end was due to normal seasonal runoff. ROMA improved to 2.14 percent for the quarter, compared to 1.39 percent for the prior year quarter. Our International segment reported net income of $25.8 million for the first quarter compared to $46.4 million for the year-ago quarter. Net interest margin dollars were flat over the prior year, despite a substantial increase in net interest margin as a percent of average receivables, due to lower average receivables following the fourth quarter 2001 sale of the $1 billion Goldfish portfolio. A higher credit loss provision, increased marketing expense associated with portfolio growth initiatives and higher operating expenses associated with our branch expansion efforts contributed to the decline in net income. Managed receivables totaled $7.0 billion at March 31, 2002, compared to $7.2 billion at year-end 2001, and $7.6 billion at March 31, 2001. The decline in the quarter reflects normal seasonal runoff in our MasterCard and Visa and private label credit card portfolios. Compared to the prior year quarter, growth in real estate secured, private label and personal non-credit card receivables was offset by reductions in our MasterCard and Visa portfolio resulting from the Goldfish receivable sale. ROMA was 1.13 percent in the current year quarter and 2.13 in the prior year quarter, reflecting investments to grow our international businesses. These investments included higher marketing expenses and operating expenses as a result of our branch expansion efforts. BALANCE SHEET REVIEW Increase (decrease) Increase (decrease) from prior year from prior quarter ------------------------------------------------------ March 31, (All dollar amounts are stated in millions) 2002 $ % $ % - -------------------------------------------------------------------------------------------------------------------- Real estate secured $ 45,628.9 $ 8,942.1 24 % $ 1,772.1 4 % Auto finance 2,602.9 614.9 31 234.0 10 MasterCard*/Visa* 6,970.2 (478.3) (6) (1,171.0) (14) Private label 10,688.4 463.0 5 (975.5) (8) Personal non-credit card (1) 13,213.0 1,328.8 11 (124.0) (1) Commercial and other 491.1 (81.6) (14) (15.8) (3) - -------------------------------------------------------------------------------------------------------------------- Total owned receivables $ 79,594.5 $ 10,788.9 16 % $ (280.2) - % ====================================================================================================================
(1) Personal non-credit card receivables are comprised of the following: (In millions) March 31, December 31, March 31, 2002 2001 2001 - ----------------------------------------------------------------------------- Domestic personal unsecured $ 6,379.2 $ 6,547.4 $ 6,324.2 UP personal unsecured 1,065.0 1,067.7 867.1 Personal homeowner loans 4,055.0 4,121.6 3,293.2 Foreign unsecured 1,713.8 1,600.3 1,399.7 - ------------------------------------------------------------------------------ Total personal non-credit card $ 13,213.0 $ 13,337.0 $ 11,884.2 ============================================================================== Receivables growth was a key contributor to our improved results. Owned receivables increased $10.8 billion, or 16 percent from a year ago, to $79.6 billion. Growth in dollars of receivables was strongest in our real estate secured portfolio, which increased 24 percent over the year-ago period. Growth in our real estate secured portfolio was balanced between our branch based consumer lending business and our mortgage services business. This growth was partially offset by the sale of approximately $900 million in whole loans by our mortgage services business in March 2002 pursuant to our liquidity management plans. Our auto finance business also reported strong, but controlled growth increasing receivables $615 million, or 31 percent while maintaining stringent underwriting criteria. A strong market, larger sales force, increased dealer penetration and strong Internet originations contributed to the growth in auto finance receivables. Growth in our MasterCard and Visa receivables during the year was more than offset by the December 2001 sale of the $1 billion Goldfish portfolio in the U.K. Private label receivables increased 5 percent to $10.7 billion primarily as a result of organic growth from existing merchants and a $725 million portfolio acquisition in the fourth quarter of 2001. Strong growth in our branches contributed to the growth in personal non-credit card receivables. These growth trends reflect increased securitization activity. We securitized $2.4 billion of receivables in the first quarter of 2002, as compared to $902 million in the first quarter of 2001. Compared to December 31, 2001, growth in our real estate secured and auto finance portfolios were more than offset by the previously discussed sale of $900 million in real estate secured receivables and normal, seasonal run-off in our MasterCard and Visa and private label credit card portfolios. Increased securitization activity during the quarter also contributed to the decrease. Owned consumer two-months-and-over contractual delinquency as a percent of owned consumer receivables was 4.77 percent at March 31, 2002, compared with 4.53 percent at December 31, 2001 and 4.36 percent at March 31, 2001. The annualized consumer owned charge-off ratio in the first quarter of 2002 was 3.61 percent, compared with 3.43 percent in the prior quarter and 3.12 percent in the year-ago quarter. * MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of VISA USA, Inc. LIQUIDITY AND CAPITAL RESOURCES We substantially strengthened our ratio of tangible equity to tangible managed assets to 8.41 percent at March 31, 2002 compared to 7.87 percent at December 31, 2001. During the quarter, we issued $400 million of 7.60 percent cumulative preferred stock. Net proceeds from the issuance were $387.4 million. We also repurchased 1.6 million shares of our common stock, for a total of $100.0 million. We accessed the debt capital markets during the quarter in accordance with our customary funding plans. Commercial paper, bank and other borrowings decreased to $7.7 billion at March 31, 2002 from $12.0 billion at year-end. Senior and senior subordinated debt (with original maturities over one year) increased to $60.5 billion from $56.8 billion at year-end. In the quarter, we took a number of steps to reduce our reliance on short-term debt to strengthen our protection against market induced volatility. These steps included the following: o We reduced our domestic outstanding commercial paper balance to $5.8 billion, a $2.9 billion reduction from December 31, 2001. o We built a $1 billion investment security liquidity portfolio. o We issued $2.5 billion of 5-year global debt. o We issued (pound)500 million of 10-year debt to investors in the U.K. o We accelerated the timing of our securitization activity planned for later in the year. The composition of receivables securitized (excluding replenishments of certificateholder interests) was as follows: Three months ended March 31, (In millions) 2002 2001 ---------------------------- -------------------- -------------------- MasterCard/Visa $ 600.0 $ 73.2 Auto finance 425.0 378.8 Private label 500.0 -- Personal non-credit card 902.7 450.0 ---------------------------- -------------------- -------------------- Total $ 2,427.7 $ 902.0 ============================ ==================== ==================== o We established $5 billion in incremental conduit capacity for our real estate secured product. Consistent with previous transactions, draws on these facilities are structured as secured financings for accounting purposes. o We issued securities backed by dedicated home equity loan receivables of $1.5 billion, including $500 million which was drawn on incremental conduit capacity which was put in place during the quarter. For accounting purposes, these transactions were structured as secured financings, therefore, the receivables and the related debt remain on our balance sheet. As of March 31, 2002, closed-end real estate secured receivables totaling $3.3 billion secured $2.8 billion of outstanding debt related to these transactions. At December, 31, 2001, closed-end real estate secured receivables totaling $1.7 billion secured $1.5 billion of outstanding debt related to these transactions. o We sold approximately $900 million in real estate secured loans that were held by our mortgage services business. Securitizations and secured financings of consumer receivables have been, and will continue to be, a source of liquidity for us. In a securitization, a designated pool of consumer receivables, typically MasterCard or Visa credit card, private label credit card, personal non-credit card or auto finance, is removed from the balance sheet and transferred to an unaffiliated trust that is a qualifying special purpose entity ("QSPE") as defined by Statement of Financial Accounting Standards No. 140 ("SFAS No. 140) and therefore is not consolidated. Under the terms of the securitizations, we receive annual servicing fees on the outstanding balance of the securitized receivables and the rights to future residual cash flows on the sold receivables after the investors receive their contractual return. The estimated present value of these rights to future residual cash flows are recorded on our balance sheet at the time of sale as interest-only strip receivables, net of our recourse obligation to investors for failure of debtors to pay. Cash flows related to the interest-only strip receivables and servicing the receivables are collected over the life of the underlying securitized receivables. In a secured financing, a designated pool of receivables, typically real estate secured, are transferred to a trust which sells interests to investors. Repayment of the debt issued by the trust is secured by the receivables transferred. The transactions are structured as secured financings under SFAS No. 140. Therefore, the receivables and the underlying debt of the trust remain on our balance sheet. Using this source of funding results in similar operating results and cash flows as issuing debt through alternative funding sources. Our securitized receivables totaled $21.6 billion at March 31, 2002, compared to $20.9 billion at December 31, 2001. We believe the market for securities backed by receivables is a reliable, efficient and cost-effective source of funds. At March 31, 2002, securitizations represented 22 percent of the funding associated with our managed portfolio compared to 23 percent a year earlier. Our banking subsidiaries are subject to the capital adequacy guidelines adopted by the Office of Thrift Supervision ("OTS"), Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") and are well capitalized. In the quarter, we made capital contributions to our banking subsidiaries of approximately $1.2 billion in response to the 2001 Guidance for Subprime Lending Programs issued by the OTS, OCC and FDIC. We currently do not anticipate the need for additional capital contributions to our banking subsidiaries. RESULTS OF OPERATIONS Unless noted otherwise, the following discusses amounts reported in our owned basis statements of income. Net interest margin Our net interest margin on an owned basis was $1.6 billion for the first quarter of 2002, up 22 percent from $1.3 billion for the prior-year quarter. The increase was primarily due to receivables growth and lower funding costs resulting from easing in United States monetary policy in 2001. Net interest margin as a percent of average interest-earning assets, annualized, was 7.87 percent in the first quarter of 2002 and 7.60 percent in the year-ago quarter. Lower funding costs were the primary reasons for the expansion over the prior year quarter, as we received the full benefit of 2001 interest rate reductions. Our net interest margin on a managed basis includes finance income earned on our owned receivables as well as on our securitized receivables. This finance income is offset by interest expense on the debt recorded on our balance sheet as well as the contractual rate of return on the instruments issued to investors when the receivables were securitized. Managed basis net interest margin increased to $2.3 billion in the first quarter of 2002, up from $1.8 billion in the first quarter of 2001 primarily due to higher receivable levels and an expanded margin. Net interest margin as a percent of average managed interest-earning assets, annualized, was 8.79 percent in the current quarter, compared to 8.22 percent in the year-ago quarter. Lower funding costs were the primary driver of the increased margin. Net interest margin as a percent of receivables on a managed basis is greater than on an owned basis because auto finance and MasterCard and Visa receivables, which have wider spreads, are a larger portion of the off-balance sheet portfolio than of the owned portfolio, which primarily consists of lower margin real estate secured loans. Provision for credit losses The provision for credit losses for receivables totaled $923.0 million for the first quarter of 2002, compared to $703.6 million in the prior-year quarter. The provision as a percent of average owned receivables, annualized, was 4.62 percent in the first quarter of 2002, compared to 4.10 percent in the first quarter of 2001. We recorded owned loss provision greater than charge-offs of $204 million during the first quarter. Receivables growth, increases in personal bankruptcy filings and uncertainty as to the timing and extent of an economic recovery contributed to a higher provision. The provision for credit losses may vary from quarter to quarter, depending on the product mix and credit quality of loans in our portfolio. See Note 4, "Credit Loss Reserves" to the accompanying condensed consolidated financial statements for further discussion of factors affecting the provision for credit losses. Other revenues Total other revenues on an owned basis were $1.2 billion in the first quarter of 2002 and $1.0 billion in the first quarter of 2001 and included the following: Three months ended March 31, (In millions) 2002 2001 - ------------------------------ ---------------- ----------------- Securitization revenue $ 521.2 $ 406.3 Insurance revenue 170.1 158.6 Investment income 46.2 41.8 Fee income 237.9 237.9 Other income 188.0 161.7 - ------------------------------ ------------------ ----------------- Total other revenues $ 1,163.4 $ 1,006.3 ============================== ================== ================= Securitization revenue is the result of the securitization of our receivables and includes initial and replenishment gains on sale, net of our estimate of probable credit losses under the recourse provisions, as well as servicing revenue and excess spread. Securitization revenue was $521.2 million in the first quarter of 2002, compared to $406.3 million in the prior-year quarter. The increase was due to higher average securitized receivables as well as increases in the level of receivables securitized during the period as a result of our decision to accelerate the timing of securitization activity planned for later in the year. Securitization revenue will vary each period based on the level and mix of receivables securitized in that particular period (which will impact the gross initial gains and related estimated probable credit losses under the recourse provisions). It is also affected by the overall level and mix of previously securitized receivables (which will impact servicing revenue and excess spread). The estimate for probable credit losses for securitized receivables is also impacted by the level and mix of current period securitizations because, depending upon loss estimates and severities, securitized receivables with longer lives may result in higher over-the-life losses than receivables securitized with shorter lives. Securitization revenue included the following: Three months ended March 31, (In millions) 2002 2001 - --------------------------------------------- ---------------- ---------------- Net initial gains $ 74.4 $ 26.2 Net replenishment gains 124.2 95.0 Servicing revenue and excess spread 322.6 285.1 - --------------------------------------------- ---------------- ----------------- Total $ 521.2 $ 406.3 ============================================= ================ ================= The change in our interest-only strip receivables, net of the related loss reserve and excluding the mark-to-market adjustment recorded in accumulated other comprehensive income (loss), was $29.0 million in the first quarter of 2002 compared to $3.5 million in the year-ago period. Insurance revenue was $170.1 million in the first quarter of 2002 compared to $158.6 million in the year-ago period. The increase reflected increased sales on a larger receivables portfolio. Investment income, which includes interest income on investment securities in the insurance business as well as realized gains and losses from the sale of investment securities, was $46.2 million in the first quarter of 2002, compared to $41.8 million in the year-ago period. The increase was primarily due to higher interest income, primarily resulting from higher average investment balances, partially offset by lower yields. Fee income, which includes revenues from fee-based products such as credit cards, was $237.9 million in both the current and the year-ago quarter. Increases in our domestic MasterCard and Visa fee income was offset by decreases in the U.K. as a result of the fourth quarter 2001 sale of the $1 billion Goldfish credit card portfolio. See Note 12, "Segment Reporting," to the accompanying condensed consolidated financial statements for additional information on fee income on a managed basis. Other income, which includes revenue from our tax refund lending business, was $188.0 million in the first quarter of 2002, compared to $161.7 million in the prior-year period. Higher revenues from our seasonal tax refund lending business drove the increase in other income. Expenses Total costs and expenses for the first quarter of 2002 were $1.1 billion compared to $1.0 billion in the comparable prior-year period. The increase was driven by higher compensation and other expenses to support our growing portfolio. Our owned basis efficiency ratio was 36.7 percent in the first quarter of 2002 compared to 39.2 percent in the comparable prior-year period. Total costs and expenses included the following: Three months ended March 31, (In millions) 2002 2001 - ----------------------------------------------------------------- -------------- Salaries and fringe benefits $ 445.3 $ 377.6 Sales incentives 54.1 54.5 Occupancy and equipment expense 92.2 83.5 Other marketing expenses 148.4 135.2 Other servicing and administrative expenses 229.3 193.4 Amortization of acquired intangibles and goodwill 18.2 38.9 Policyholders' benefits 84.0 77.5 - ----------------------------------------------------------------- -------------- Total costs and expenses $ 1,071.5 $ 960.6 ================================================================= ============== Salaries and fringe benefits for the first quarter of 2002 were $445.3 million compared to $377.6 million in the first quarter of 2001. The increase was primarily due to additional staffing at all businesses to support growth including sales, collections and service quality. Sales incentives for the first quarter of 2002 were $54.1 million compared to $54.5 million in the comparable prior-year period. The decrease was due to lower new loan volume and the implementation of 2002 incentive plans in our branches which, generally, have higher volume requirements than the prior year plans. Occupancy and equipment expense for the first quarter of 2002 was $92.2 million compared to $83.5 million in the comparable prior-year period. The increase was primarily the result of higher repairs and maintenance costs as well as support facility growth, including new branches in the U.K. and Canada. Other marketing expenses for the first quarter of 2002 were $148.4 million compared to $135.2 million in the same prior-year period. The increase was primarily due to increased credit card marketing initiatives, primarily in the U.K. MasterCard and Visa portfolio. Other servicing and administrative expenses for the first quarter of 2002 were $229.3 million compared to $193.4 million in the comparable prior-year period. The increase was primarily due to higher collection, REO and consulting expenses. Amortization of acquired intangibles and goodwill for the first quarter of 2002 was $18.2 million compared to $38.9 million in the comparable prior-year period. The decrease was primarily attributable to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", on January 1, 2002. Amortization of goodwill recorded in past business combinations ceased upon adoption of the new accounting statement. Policyholders' benefits for the first quarter of 2002 were $84.0 million compared to $77.5 million in the comparable prior-year period. The increase is consistent with the increase in insurance revenues resulting from the increased policy sales. CREDIT LOSS RESERVES Our consumer credit management policies focus on product type and specific portfolio risk factors. Our consumer credit portfolio is diversified by product and geographic location. See Note 3, "Receivables" in the accompanying condensed consolidated financial statements for receivables by product type and Note 4, "Credit Loss Reserves," for our credit loss reserve methodology and an analysis of changes in the credit loss reserves for the current and prior year quarter. The following table sets forth owned basis credit loss reserves for the periods indicated: (All dollar amounts are stated March 31, December 31, March 31, in millions) 2002 2001 2001 - ----------------------------- ---------------- ----------------- --------------- Owned credit loss reserves $ 2,876.6 $ 2,663.1 $ 2,282.4 Reserves as a percent of: Receivables 3.61% 3.33% 3.32% Net charge-offs (1) 100.1 98.6 107.4 Nonperforming loans 92.7 91.0 91.1 ============================= ================ ================= =============== (1) Quarter-to-date, annualized Reserves as a percentage of receivables at March 31, 2002 reflect the impact of the weakened economy, higher levels of delinquency and charge-off, and the continuing uncertainty as to the ultimate impact the weakened economy will have on charge-off and delinquency levels. For securitized receivables, we also record a provision for estimated probable losses that we expect to incur under the recourse provisions. The following table sets forth managed credit loss reserves for the periods indicated: (All dollar amounts are stated March 31, December 31, March 31, in millions) 2002 2001 2001 - --------------------------------- ---------------- --------------- ------------- Managed credit loss reserves $ 4,146.5 $ 3,811.4 $ 3,340.2 Reserves as a percent of: Receivables 4.10% 3.78% 3.78% Net charge-offs (1) 100.5 98.9 107.1 Nonperforming loans 108.3 105.0 107.6 ================================= ================ ================= =========== (1) Quarter-to-date, annualized CREDIT QUALITY Delinquency - Owned Basis Two-Months-and-Over Contractual Delinquency (as a percent of consumer receivables): March 31, December 31, March 31, 2002 2001 2001 - ----------------------------- ---------------- ----------------- --------------- Real estate secured 2.88% 2.63% 2.55% Auto finance 2.04 2.92 1.74 MasterCard/Visa 6.54 5.67 5.02 Private label 6.33 5.99 5.62 Personal non-credit card 9.60 9.04 8.79 - ----------------------------- ---------------- ----------------- --------------- Total Owned 4.77% 4.53% 4.36% ============================= ================ ================= =============== Delinquency as a percent of consumer receivables increased over both the previous and prior-year quarters. Compared to the previous quarter, all products except auto finance reported higher delinquencies principally as the result of the weakened economy. This increase was well within our expectations. The sequential decrease in auto finance delinquency is consistent with historical seasonal trends. Increases in MasterCard and Visa and private label delinquency also reflect lower levels of receivables due to normal seasonal run-off. Compared to a year ago, all products reported higher delinquency rates primarily as a result of the weakened economy. These increases were partially offset by improved collections in our real estate secured, private label and personal non-credit card portfolios as a direct result of increasing the size of our collection staff, especially in our branch network. In our real estate secured portfolio, these increases were further offset by the benefits of the growing percentage of loans on which we hold a first lien position. Net Charge-offs of Consumer Receivables - Owned Basis Net Charge-offs of Consumer Receivables (as a percent, annualized, of average consumer receivables): March 31, December 31, March 31, 2002 2001 2001 - ------------------------------------------- ----------- ----------- ---------- Real estate secured .65% .64% .43% Auto finance 5.63 4.91 3.93 MasterCard/Visa 9.73 7.90 8.17 Private label 6.25 6.12 5.02 Personal non-credit card 7.71 6.97 6.12 - ------------------------------------------- ----------- ----------- ---------- Total Owned 3.61% 3.43% 3.12% =========================================== =========== =========== ========== Real estate charge-offs and REO expense as a percent of average real estate secured receivables 1.05% .94% .77% =========================================== =========== =========== ========== The weakened economy drove the increase in charge-off ratios over both the previous and prior year quarters. The increase was consistent with our expectations. Loss severities in our auto finance portfolio improved slightly during the quarter. Reductions in average MasterCard and Visa receivables due to the fourth quarter 2001 sale of $1 billion in Goldfish receivables and normal seasonal run-off also contributed to the increase in the MasterCard and Visa charge-off ratio compared to the previous quarter. Compared to the prior year quarter, the increase in the charge-off ratio was primarily attributable to the weakened economy. These increases were partially offset by improved collections in our real estate secured, private label and personal non-credit card portfolios as a direct result of increasing the size of our collection staff, especially in our branch network. OWNED NONPERFORMING ASSETS (In millions) March 31, December 31, March 31, 2002 2001 2001 - ------------------------------------- -------------- -------------- ------------ Nonaccrual receivables $ 2,261.0 $ 2,079.5 $ 1,825.1 Accruing consumer receivables 90 or more days delinquent 839.3 844.1 669.3 Renegotiated commercial loans 1.3 2.1 12.3 - ------------------------------------- -------------- -------------- ------------ Total nonperforming receivables 3,101.6 2,925.7 2,506.7 Real estate owned 459.4 398.9 350.2 - ------------------------------------- -------------- -------------- ------------ Total nonperforming assets $ 3,561.0 $ 3,324.6 $ 2,856.9 ===================================== ============== ============== ============ Credit loss reserves as a percent of nonperforming receivables 92.7% 91.0% 91.1% ===================================== ============== ============== ============ Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.3 Household International Long-Term Incentive Compensation Plan. 10.5 Household International, Inc. 1996 Long-Term Executive Incentive Compensation Plan, as amended. 10.12 Executive Employment Agreement between Household International, Inc. and W. F. Aldinger. 10.13 Executive Employment Agreement between Household International, Inc. and G. D. Gilmer. 10.14 Executive Employment Agreement between Household International, Inc. and D. A. Schoenholz. 10.16 Executive Employment Agreement between Household International, Inc. and R. J. Fabiano. 10.17 Executive Employment Agreement between Household International, Inc. and S. N. Mehta. 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 99.1 Debt and Preferred Stock Securities Ratings. (b) Reports on Form 8-K During the first quarter of 2002, the Registrant filed the following Current Reports on Form 8-K: o Report filed January 16, 2002 with respect to the press release pertaining to the financial results of Household International, Inc. for the quarter and year ended December 31, 2001. o Report dated January 28, 2002 with respect to presentations to certain fixed income investors and analysts at various locations in Europe. o Report dated March 13, 2002 with respect to presentations to certain fixed income investors in London, England. o Report dated March 21, 2002 with respect to exhibits to a registration statement on Form S-3 (Reg. No.333-60510) for the offering of 400,000 shares of 7.60% Cumulative Preferred Stock, Series 2002-A. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOUSEHOLD INTERNATIONAL, INC. ---------------------------- (Registrant) Date: May 10, 2002 By: /s/ David A. Schoenholz ------------ --------------------------- David A. Schoenholz Vice Chairman - Chief Financial Officer and on behalf of Household International, Inc. Exhibit Index 10.3 Household International Long-Term Incentive Compensation Plan. 10.5 Household International, Inc. 1996 Long-Term Executive Incentive Compensation Plan, as amended. 10.12 Executive Employment Agreement between Household International, Inc. and W. F. Aldinger. 10.13 Executive Employment Agreement between Household International, Inc. and G. D. Gilmer. 10.14 Executive Employment Agreement between Household International, Inc. and D. A. Schoenholz. 10.16 Executive Employment Agreement between Household International, Inc. and R. J. Fabiano. 10.17 Executive Employment Agreement between Household International, Inc. and S. N. Mehta. 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 99.1 Debt and Preferred Stock Securities Ratings. EX-10 3 hiexhibit10-3.txt EXHIBIT 10-3 LONG TERM INCENTIVE HOUSEHOLD INTERNATIONAL LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN (as amended March 12, 2002) 1. Purpose The purpose of the Household International Long-Term Executive Incentive Compensation Plan (the "Plan") is to further the long-term growth of Household International Inc. ("Household") and its subsidiaries by strengthening the ability of Household to attract and retain key employees and to provide additional motivation and incentives for the performance of key employees. 2. Administration The Plan shall be administered by the Compensation Committee of Household's Board of Directors (the "Committee"). The Committee shall have such powers to administer the Plan as are delegated to it by the Plan and the Board of Directors, including the power to interpret the Plan and any agreements executed thereunder, to prescribe rules and regulations relating to the Plan, to determine the terms, restrictions, and provisions of any agreement relating to awards granted pursuant to the Plan, and to make all other determinations necessary or advisable for administering the Plan. No member of the Committee shall be eligible to receive any awards under the Plan while a member of the Committee or at any time within one year prior to becoming a member of the Committee. 3. Grant of Awards; Shares Subject to Plan (a) The Committee may grant any type of award permitted under the terms of the Plan (all such awards in the aggregate being hereinafter referred to as "Awards"). Only employees of Household and its subsidiaries may be selected by the Committee for Awards under the Plan. (b) The maximum number of shares of Common Stock of Household that may be issued under the Plan is 6,017,884 (adjusted to reflect the 2-for-l Common Stock split effected on October 15, 1993), all of which shares may be made subject to Options. The Stock issued pursuant to the Plan may consist of authorized and unissued shares of Household's Common Stock, Common Stock held in Household's treasury or Common Stock purchased on the open market. If any Award granted under the Plan shall terminate or lapse for any reason, any shares of Common Stock subject to such Award shall again be available for the grant of an Award. (c) In the event of corporate changes affecting Household's Common Stock or this Plan or Awards granted thereunder (including, without limiting the generality of the foregoing, stock dividends, stock splits, recapitalizations, reorganizations, mergers, consolidations, or other relevant changes in capitalization), the Board of Directors or the Committee shall make appropriate adjustments in price, number and kind of shares of Common Stock or other consideration subject to such Awards or in the terms of such Awards, which it deems equitable to prevent dilution or enlargement of rights under the Awards. In addition, the Board of Directors or the Committee may from time to time equitably change the aggregate number or remaining number or kind of shares which may be issued under the Plan to reflect any such corporate changes. (d) The Committee may, in its discretion and subject to such rules as it may adopt, permit an employee to satisfy, in whole or in part, withholding tax obligations incurred in connection with Awards: 1) by electing to have Household withhold shares of Household Common Stock (otherwise deliverable to the employee in connection with an Award) in payment for such withholding tax obligation or 2) by delivering shares of Household Common Stock owned by such employee in payment for such withholding tax obligation. 4. Options (a) The Committee may grant any type of statutory or non-statutory Option to purchase shares of Household Common Stock as is permitted by law at the time the Option is granted. The term of the initial grant of each Option shall not be more than ten years and one day from the date of grant and may be exercised at the rate set by the Committee or as stated herein; provided, however, that no Option shall be exercised less than one year from the date of grant, except as provided herein. The Committee may, in its discretion, extend the expiration date of certain Options, other than Options which are intended to qualify as Incentive Stock Options ("ISO") pursuant to Section 422A of the Internal Revenue Code of 1954, as amended (the "Code"), provided no expiration date of any Option may exceed 15 years from the date of the grant of that Option. (b) The per share purchase price of Household Common Stock which may be acquired pursuant to an Option shall be at least 100% of the fair market value of one share of Common Stock of Household on the date on which the Option is granted. Within this limitation such price shall be determined by the Committee. (c) Payment for shares purchased upon the exercise of an Option shall be made in cash or, in the discretion of the Committee, in shares of Common Stock of Household valued at the then fair market value of such shares or by a combination of cash and shares of Common Stock. (d) Each Option granted by the Committee which is intended to qualify as an ISO pursuant to the Code shall comply with the applicable provisions of the Code pertaining to ISOs. The aggregate fair market value (determined as of the time the ISO is granted) of Household Common Stock for which an employee may be granted an ISO in any calendar year (under all plans of Household and subsidiaries) shall not exceed $100,000 plus any unused "limit carryover" for such year, as determined in accordance with Section 422A of the Code. (e) The Committee may, in its discretion and subject to such rules as it may adopt, authorize an extension of credit from Household to an employee holding an Award granted under this Plan (including an employee who is an officer or director of Household) to assist the employee in settling withholding tax obligations on Awards. Household may extend or guarantee loans under this provision. Except for existing variable rate loans referred to below, loans will not be made under this provision to assist the employee in paying the exercise price for stock options. Loans extended under the Plan will bear interest, compounded semiannually, at the applicable rate in effect under Section 1274(d) of the Internal Revenue Code (the "Applicable Federal Rate") on the day the loan is made. The Committee may, in its discretion, permit employees with existing variable rate loans made under the Plan, to convert said loans to fixed rate loans which will bear interest, compounded semiannually, at the Applicable Federal Rate in effect on the day the loan is converted; provided, however, that the fixed interest rate will not be set below the rate required to avoid creation of cancellation of indebtedness income for Federal income tax purposes. Payment terms will be established by the Committee and may or may not require periodic payments of interest and/or principal. The term of loans will be established by the Committee, as well as provisions governing the acceleration of maturity upon termination of employment or default. Loans financed or guaranteed by Household will be secured by retention of the issued stock certificates by Household and execution of an agreement with respect to such shares. To the extent necessary to satisfy the provisions of Regulation G or another similar regulatory restriction, other security may be required by the Committee. 5. Stock Appreciation Rights (a) The Committee may grant Stock Appreciation Rights ("SARs") in tandem with the grant of an Option under the Plan or with respect to a previously granted Option under the Plan, except that the Committee may grant SARs in connection with an Option which is an ISO only to the extent that such grant is consistent with the treatment of the Option as an ISO. In either case the number of shares in respect of which SARs are granted by the Committee shall not be greater than the number of shares subject to the related Option. In exchange for the surrender in whole or in part of the right to exercise the related Option, such SAR shall entitle the employee to payment of an amount equal to the appreciation in value of the surrendered Options (the excess of the fair market value of such Stock subject to Options at the time of surrender over their aggregate option price). An SAR granted pursuant to this subsection (a) shall be exercisable to the extent and only to the extent that the related Option is exercisable, but if an SAR is granted with respect to a previously-granted Option, the SAR will not be exercisable for a period of twelve months from the date of grant of such SAR, except as provided herein. No such SAR shall be exercisable except upon surrender of the related Option, and to the extent such Option is surrendered, the shares covered by such Option shall again be available for purposes of the Plan to the extent that payment of such SAR is not made in shares of Stock of Household. The exercise of any Option shall result in the cancellation of any related SAR. An SAR issued in tandem with an ISO may be exercised only when the market price of the Stock subject to the ISO exceeds the exercise price of the ISO. (b) The Committee may also grant units of SARs on a stand-alone basis which are not issued in tandem with Options. The term of each such SAR shall not be more than ten years from the date of grant and may be exercised at the rate set by the Committee or as stated herein; provided, however, that no such SAR shall be exercised less than one year from the date of grant, except as provided herein. The "base price" of each unit of a "stand-alone" SAR shall be at least 100% of the fair market value of one share of Common Stock of Household on the date on which such SAR is granted. Within this limitation the base price shall be determined by the Committee. Each unit of a "stand-alone" SAR entitles the holder, upon exercise, to payment of an amount equal to the difference between the base price of such SAR unit and the fair market value on the date of exercise of a share of Common Stock of Household. (c) At the discretion of the Committee, payment for SARs may be made in cash, in shares of Common Stock of Household valued at their fair market value as of the date of exercise of the SAR, or partly in cash and partly in shares of Common Stock of Household. (d) The Committee may establish a maximum appreciation value payable under an SAR. 6. Transfer of Options and Stock Appreciation Rights; Exercise of Options and Stock Appreciation Rights Following Termination of Employment (a) Options and SARs may not be transferred except by will or the laws of descent and distribution and during the lifetime of the holder may be exercised only by him. Subject to Section 6(b) hereof, if the holder of an Option or SAR shall cease to be an employee of Household or a subsidiary, and unless otherwise provided by the Committee, all rights under such Option or SAR shall immediately terminate, except: (i) in the event of termination of employment of a holder who is retirement-eligible under the terms of a pension plan of Household or a subsidiary, the Option or SAR may be exercised within five (5) years of the date of termination of employment. (ii) in the event of termination of employment due to permanent and total disability of a holder who is not retirement-eligible under the terms of a pension plan of Household or a subsidiary, the Option or SAR may be exercised within twelve (12) months following the date of such termination of employment. (iii) in the event of death during employment, the Option or SAR may be exercised by the executor, administrator, or other personal representative of the holder within five (5) years succeeding death if such holder was retirement-eligible under the terms of a pension plan of Household or a subsidiary, or twelve (12) months if such holder was not retirement-eligible under the terms of a pension plan of Household or a subsidiary. (iv) in the event of termination of employment other than as set forth in subsections (i), (ii) or (iii) above, the Option or SAR may be exercised within three (3) months following the date of termination, except for termination for cause. (v) in the event of death of a holder of an Option or SAR following termination of employment, the Option or SAR may be exercised by the executor, administrator, or other personal representative of the holder, notwithstanding the time period specified in (i), (ii), (iii) or (iv) above, within a) twelve (12) months following death or b) the remainder of the period in which the holder was entitled to exercise the Option or SAR, whichever period is longer. If, prior to a Change in Control, the Committee determines that the termination is for cause, the Option or SAR will not under any circumstances be exercisable following termination of employment. (b) Notwithstanding anything in the Plan or an Award agreement to the contrary, (i) if a holder's employment is terminated for any reason (including for cause), following a Change in Control, each option held by such holder as of the date of such Change in Control that was granted under the Plan prior to the date of such Change in Control may be exercised until the expiration of the original full term of the option, and (ii) if a holder's employment is terminated under the circumstances described in Section 10(b) hereof, each option held by such holder as of the date of any such termination that was granted under the Plan following the date of such Change in Control may be exercised until the expiration of the original full term of the option. (c) An Option or SAR may not be exercised pursuant to this Section 6 after the expiration of the term of such Option or SAR and may be exercised only to the extent that the holder was entitled to exercise such Option or SAR on the date of termination of employment. 7. Performance Unit Awards and Performance Share Awards (a) The Committee may grant Performance Unit Awards and Performance Share Awards pursuant to this Section 7. The Committee shall establish, with respect to and at the time of grant of each Performance Unit Award or Performance Share Award, a performance period over which the performance of the holder of a Performance Unit Award or Performance Share Award shall be measured. The Committee shall also establish performance levels but subject to such later revisions as the Committee, in its sole judgment, shall deem appropriate to reflect significant, unforeseen events or changes. The Committee in its discretion may also grant Performance Unit Awards and Performance Share Awards to employees following the start of any performance period and may also grant additional Performance Unit Awards and Performance Share Awards to participants after the start of any performance period. (b) Each Performance Unit shall have an initial value of $100 per unit. Each Performance Share shall initially represent one share of Household Common Stock with a value equal to the fair market value of one share of Household Common Stock on the date of grant of the Performance Share Award. As determined by the Committee, the value of Performance Units and the number of shares of Household Common Stock represented by Performance Shares may increase or decrease depending upon the extent to which the performance targets set by the Committee in respect of the holder of the Performance Unit Award or Performance Share Award are achieved. (c) The holder of a Performance Unit Award shall be entitled to receive payment of an amount equal to the value of the Performance Unit Award, based on the achievement of the performance targets for such performance period, as determined by the Committee at the time of settlement of the Performance Unit Award, except that no more than 50% of the Performance Unit Award may be paid in Household Common Stock. (d) The holder of a Performance Share Award shall be entitled to receive a number of shares of Household Common Stock represented by the Performance Share Award, based on the performance targets for such performance period, as determined by the Committee. At the discretion of the Committee, payment for Performance Share Awards may be made in whole or in part in cash, in which case Household shall pay an amount equal to the fair market value of a share of Household Common Stock on the date of settlement for each share of Household Common Stock that would otherwise be delivered to the holder of the Performance Share Award. (e) Payment shall be made in a lump sum or in installments as prescribed by the Committee. If any payment in Household Common Stock is to be made on a deferred basis, the recipient may be entitled, in the discretion of and on terms and conditions established by the Committee, to receive a payment or credit equivalent to any dividend payable with respect to the number of shares of Common Stock which, as of the record date for the dividend, had been awarded or made payable to the recipient but not delivered. If a payment in cash is to be made on a deferred basis, the recipient may be entitled, in the discretion of and on terms and conditions established by the Committee, to be paid interest on the unpaid amount. (f) In the event of death, permanent and total disability, or retirement under the terms of a pension plan of Household or a subsidiary and, unless the Committee in its sole discretion adopts a contrary rule, the holder of a Performance Unit Award or Performance Share Award shall receive payment of such Award prorated on the number of elapsed months in the performance period but based on the extent to which performance targets are achieved for the full performance period. Such Performance Unit Award or Performance Share Award shall be payable at the time of payment of all other Performance Unit Awards or Performance Share Awards granted for the same performance period. Subject to Section 10(b), a holder of a Performance Unit Award or Performance Share Award whose employment terminates for reasons other than those listed in this paragraph will forfeit his rights to any outstanding Performance Unit Award or Performance Share Award. Such forfeiture may be waived in whole or in part by the Committee, in its sole discretion. (g) The Committee may grant Performance Unit Awards or Performance Share Awards in tandem with SARs and Options (including ISOs if such grant is consistent with the treatment of the Option as an ISO). However, to the extent of an exercise or payout of any such Performance Unit Award, Performance Share Award, Option, and/or SAR granted in tandem, the exercise or payout of any unit of such tandem Award shall automatically cancel the corresponding units of such Award. Awards granted to the same individual, whether or not on the same day, will not be considered to be issued in tandem pursuant to this Section unless the Committee designates such Awards as tandem Awards. 8. Restricted Stock Rights (a) The Committee from time to time may grant Restricted Stock Rights ("RSRs") to any employee selected by the Committee, which would entitle such employee to receive a stated number of shares of Common Stock of Household, subject to forfeiture of such RSRs if such employee failed to remain continuously an employee of Household or any subsidiary for the period stipulated by the Committee (the "Restricted Period"). (b) RSRs shall be subject to the following restrictions and limitations: (i) The RSRs may not be transferred except by will or the laws of descent and distribution; (ii) Except as otherwise provided in Paragraphs (d) and (e) of this Section 8, the RSRs and the shares subject to such RSRs shall be forfeited and all rights of a grantee of such RSRs and shares shall terminate without any payment of consideration by Household if the employee fails to remain continuously as an employee of Household or any subsidiary for the Restricted Period. A grantee shall not be deemed to have terminated his period of continuous employment with Household or any subsidiary if he leaves the employ of Household or any subsidiary for immediate reemployment with Household or any subsidiary. (c) The holder of RSRs shall not be entitled to any of the rights of a holder of the Common Stock with respect to the shares subject to such RSRs prior to the issuance of such shares pursuant to the Plan. At the Committee's discretion, during the Restricted Period, for each share subject to an RSR, Household will pay the holder an amount in cash equal to the cash dividend declared on a share of Common Stock of Household during the Restricted Period on or about the date Household pays such dividend to its stockholders of record. (d) The Committee in its sole discretion may accelerate the payment of Household Common Stock under RSRs prior to the termination of the Restricted Period if the holder of the RSR has achieved certain performance levels established by the Committee at the time an RSR is granted. The Committee in its sole judgment may revise such performance levels as it deems appropriate to reflect significant, unforeseen events or changes. (e) In the event that the employment of a holder terminates by reason of death or permanent and total disability, such holder shall be entitled to receive the number of shares subject to the RSR multiplied by a fraction (x) the numerator of which shall be the number of full months between the date of grant of such RSR and the date of such termination of employment, and (y) the denominator of which shall be the number of full months in the Restricted Period; provided, however, that any fractional share shall not be awarded. Subject to Section 10(b), a holder of an RSR whose employment terminates for reasons other than those listed in this paragraph will forfeit his rights under any outstanding RSRs. This automatic forfeiture may be waived in whole or in part by the Committee in its sole discretion. (f) When a grantee shall be entitled to receive shares pursuant to an RSR, Household shall issue the appropriate number of shares registered in the name of the grantee. 9. Amendment and Termination of the Plan The Board of Directors or the Committee may amend the Plan or any Award granted thereunder at any time, except as provided in Section 10(d) and that the Board of Directors or the Committee may not, without shareholder approval, and except as permitted by Section 3(c), increase the number of shares of Common Stock of Household which may be issued pursuant to the Plan, change the purchase price of an Option or base price of a "stand-alone" SAR, or make any other amendment to the Plan which is required by law to be approved by the shareholders of Household. The Board of Directors may terminate the Plan at any time except as provided in Section 10(d), but such termination shall not affect Awards previously granted under the Plan. 10. Change in Control (a) In order to protect employees of Household and its subsidiaries who have been granted Awards, if a "Change in Control" occurs, then the Committee, in its sole discretion, may: (i) accelerate the time periods for exercising or realizing any Awards, notwithstanding any minimum holding periods set forth in the Plan or established by the Committee at the time of the grant of the Award; (ii) provide for the purchase by Household of any Awards in cash equal to the amount that could have been received upon the exercise or realization of such Awards had the Awards been currently exercisable or payable on the day before said cash payment is made; (iii) make such adjustments, including the granting of additional Awards, to any outstanding Award as the Committee deems appropriate to reflect the Change in Control; and (iv) cause outstanding Awards to be assumed, or new rights substituted therefor, by any corporation that is the successor to Household. (b) Any employee whose position with Household or any of its subsidiaries is "materially changed" (as defined below) or is terminated without "cause" (as defined below), within twenty-four (24) months after a Change in Control, shall be deemed to be involuntary terminated from Household and its subsidiaries. In the event of an employee's termination as described in this Section 10(b), notwithstanding anything to the contrary contained in the Plan or any Award agreement, such employee shall become fully vested in such Awards and shall be entitled to exercise or receive the payment of all Awards granted under the Plan following the date of such Change in Control that were outstanding immediately prior to the event causing such termination without any action by the Committee or Board of Directors. In addition, upon a termination of employment described in this Section 10(b), any minimum holding period set forth in the Plan or an Award agreement shall be deemed immediately satisfied. (c) For purposes of this Section and to determine the rights of any employee who has an outstanding Award, the term: (i) "Change in Control" means: (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 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 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 (as defined below), 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, or termination by the employee within the special 60-day window period which begins 6 months after a Change in Control as provided in the employee's employment agreement; (2) the employee was assigned to a position of lesser rank or status; (3) the employee's annual target bonus or targeted performance unit awards were reduced and compensation equivalent in aggregate value was not substituted; (4) the employee's annual salary was reduced; (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 or any successor 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 9 hereof, upon 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. IN WITNESS WHEREOF, Household International, Inc. has caused this Plan to be amended effective March 12, 2002 and its corporate seal attached hereto by its duly authorized officers. HOUSEHOLD INTERNATIONAL, INC. Dated: April 8, 2002 By: /s/ Colin P. Kelly ------------------------------- Colin P. Kelly Executive Vice President- Administration ATTEST: By: /s/ K. H. Robin - ----------------------------------- Secretary EX-10 4 hiexhibit10-5.txt EXHIBIT 10-5 HI 1996 LONG-TERM EXECUTIVE INCEN HOUSEHOLD INTERNATIONAL 1996 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN (as amended March 12, 2002) 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 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 24,000,000, 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 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 the minimum required withholding tax obligation of Household, or (ii) by delivering shares of Household Common Stock owned by such employee in payment for a withholding tax obligation, or (iii) by obtaining an extension of credit from Household in payment for the withholding tax obligation. Any shares of Common Stock delivered 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 delivered 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 settling withholding tax obligations on Awards. Household may extend or guarantee loans under this provision. Except for existing variable rate loans referred to below, loans will not be made under this provision to assist the employee in paying the exercise price for stock options. Loans extended under the Plan will bear interest, compounded semiannually, at the applicable rate in effect under Section 1274 (d) of the Internal Revenue Code (the "Applicable Federal Rate") on the day the loan is made. The Committee may, in its discretion, permit employees with existing variable rate loans made under the Plan, to convert said loans to fixed rate loans which will bear interest, compounded semiannually, at the Applicable Federal Rate in effect on the day the loan is converted; provided, however, that the fixed interest rate will not be set below the rate required to avoid creation of cancellation of indebtedness income for Federal income tax purposes. Payment terms will be established by the Committee and may or may not require periodic payments of interest and/or principal. The term of loans will be established by the Committee, as well as provisions governing the acceleration of maturity upon termination of employment or default. Loans financed or guaranteed by Household will be secured by retention of the issued stock certificates by Household and execution of an agreement with respect to such shares. To the extent necessary to satisfy the provisions of Regulation G or another similar regulatory restriction, other security may be required by the Committee. 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 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. Subject to Section 5(b) hereof, 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 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 the 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, prior to a Change in Control, the Committee determines that the termination is for 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) Notwithstanding anything in the Plan or an Award agreement to the contrary, (i) if a holder's employment is terminated for any reason (including for cause), following a Change in Control, each option held by such holder as of the date of such Change in Control that was granted under the Plan prior to the date of such Change in Control may be exercised until the expiration of the original full term of the option, and (ii) if a holder's employment is terminated under the circumstances described in Section 11(b) hereof, each option held by such holder as of the date of any such termination that was granted under the Plan following the date of such Change in Control may be exercised until the expiration of the original full term of the option. (c) 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 10,000 shares of Household Common Stock annually on the same date grants are made to employees. In addition, in lieu of cash compensation, non-employee Directors may choose to receive a number of stock options equivalent to 10% of the annual cash compensation they choose to receive in stock options. 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 for such date. However, if the Stock Exchange 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 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; (iv) notwithstanding anything in the Plan or an Award agreement to the contrary, in the event service on the Board of Directors terminates for any reason following a Change in Control, outstanding options may be exercised until the expiration of the original full term of the option; and (v) in the event service on the Board of Directors terminates other than as set forth in subsections (i), (ii), (iii) or (iv) 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 delivered 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 delivered 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 delivered 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 delivered. (e) Non-employee Director options are not transferable other than by will and the laws of descent and distribution. 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, such holder shall be entitled to receive, without restriction or limitation, 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. Subject to Section 11(b), 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 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. Notwithstanding anything contained in the Plan or an Award agreement to the contrary, upon and following a Change in Control, the forfeiture provisions described in this Section 9 and any similar forfeiture provisions contained in an Award agreement shall be of no further force and effect and shall be deemed null and void for all purposes of all Awards granted under this Plan. 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 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), notwithstanding anything to the contrary contained in the Plan or any Award agreement, (i) all Awards outstanding under the Plan as of the date of such Change in Control, including options granted to non-employee Directors and the RSR Awards granted on May 10, 2000, will immediately vest in full and any Restricted Period with respect thereto shall lapse, such Awards shall become exercisable or payable in full, notwithstanding any minimum holding period set forth in the Plan or an Award agreement, and all Awards that are options shall be exercisable in accordance with Section 5(b)(i), (ii) Household shall require that this Plan, and the Awards issued hereunder, including options granted to non-employee Directors, be assumed by the entity causing the Change in Control or the public company parent thereof (the "Acquiror") and, if appropriate, new rights of equal value with substantially similar terms be substituted for such Awards by the Acquiror, and (iii) the Committee, in its sole discretion (notwithstanding any contrary provision in Section 3(f)), may: (i) provide for the purchase by Household or the Acquiror of any Awards, including options granted to non-employee Directors, 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; (ii) make such adjustments, including the granting of additional Awards, to any outstanding Award, including options granted to non-employee Directors, as the Committee deems appropriate to reflect the Change in Control; and (iii) take such other action deemed appropriate by the Committee to ensure that the rights of participants and the Awards, including options granted to non-employee Directors, are not adversely affected by the Change in Control. (b) Any employee whose position with Household or any of its subsidiaries is "Materially Changed" (as defined below) or is terminated without "cause" (as defined below), within twenty-four (24) months after a Change in Control, shall be deemed to be involuntarily terminated from Household and its subsidiaries. In the event of an employee's termination as described in this Section 11(b), notwithstanding anything to the contrary contained in the Plan or any Award agreement, (i) any options granted to the employee under the Plan following the date of such Change in Control that were outstanding immediately prior to the event causing such termination or were awarded subsequent to the event causing such termination will immediately vest in full and be exercisable in accordance with Section 5(b)(ii) of the Plan and (ii) the Restricted Period with respect to any RSRs granted to the employee under the Plan following the date of such Change in Control that were outstanding immediately prior to the event causing such termination or were awarded subsequent to the event causing such termination shall lapse and such Awards shall become payable in full without any action by the Committee or Board of Directors. In addition, upon a termination of employment described in this Section 11(b), any minimum holding period set forth in the Plan or an Award agreement shall be deemed immediately satisfied. (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 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 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 (as defined below), 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, or the termination by the employee within the special 60-day window period which begins 12 months after a Change in Control as provided in the employee's employment agreement; (2) the employee was assigned to a position of lesser rank or status; (3) the employee's annual target bonus or targeted performance unit awards were reduced and compensation equivalent in aggregate value was not substituted; (4) the employee's annual salary was reduced; (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 or any successor 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, upon 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 or required to be 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 permit the deferral of receipt of any shares of Household Common Stock to be issued under a vested Award or exercised Award or authorize the creation of trusts or other plans and arrangements to meet the obligations created under the Plan to deliver shares of Household Common Stock or payments hereunder consistent with the foregoing. (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. This document together with the Amendment of November 11, 1997, attached hereto, constitute the complete restatement of the Plan. IN WITNESS WHEREOF, Household International, Inc. has caused this Plan to be amended effective March 12, 2002 and its corporate seal attached hereto by its duly authorized officers. HOUSEHOLD INTERNATIONAL, INC. Dated: April 8, 2002 By: /s/ Colin P. Kelly ------------------------------ Colin P. Kelly Executive Vice President- Administration ATTEST: By: /s/ K. H. Robin - --------------------------- Secretary 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 Non-employee Directors and Senior Managers - -------------------------------------------------------------------------------- This amendment only applies to non-employee 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 Sections 5(a) and 6(e) as regards the transferability of options granted to non-employee Directors and Senior Managers; all other provisions continue to apply. Who is Eligible This provision only applies to non-employee 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 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. EX-10 5 hiexhibit10-12.txt EXHIBIT 10-12 EMPLOYMENT AGREEMENT - WFA EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of March 1, 2002 by and between Household International, Inc., a Delaware corporation, (hereinafter called the "Corporation") and William F. Aldinger (hereinafter called the "Executive"). WITNESSETH THAT: WHEREAS, the Executive is currently employed by the Corporation under an employment agreement dated January 1, 1999; and WHEREAS, the Corporation desires to continue to employ the Executive as its Chairman and Chief Executive Officer, and the Executive desires to continue in such employment, on amended and restated terms and conditions; NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. Employment and Term. ------------------- (a) Employment. The Corporation shall continue to employ the Executive as the Chairman and Chief Executive Officer of the Corporation, and the Executive shall so serve, for the term set forth in Paragraph 1(b). (b) Term. The initial term of the Executive's employment under this Agreement shall commence as of March 1, 2002 (the "Effective Date") and end on August 31, 2003, subject to the extension of such term as hereinafter provided and subject to earlier termination as provided in Paragraph 7, below. Beginning on March 1, 2002, the term of this Agreement shall be extended automatically for one (1) additional day for each day which has then elapsed since March 1, 2002, unless, at any time after March 1, 2002, either the Board of Directors of the Corporation (the "Board"), on behalf of the Corporation, or the Executive gives written notice to the other that such automatic extension of the term of this Agreement shall cease. Any such notice shall be effective immediately upon delivery. The initial term of this Agreement, plus any extension by operation of this Paragraph 1, shall be hereinafter referred to as the "Term." 2. Duties. During the period of employment as provided in Paragraph 1(b) hereof, the Executive shall serve as Chairman and Chief Executive Officer of the Corporation and have all powers and duties consistent with such position, subject to the reasonable direction of the Board. The Executive shall also continue to serve as a member of the Board if elected as such. The Executive shall devote substantially his entire time during reasonable business hours (reasonable sick leave and vacations excepted) and best efforts to fulfill faithfully, responsibly and to the best of his ability his duties hereunder. However, the Executive may, with the approval of the Board, which shall not be withheld unreasonably, serve on corporate, civic and/or charitable boards and committees. 3. Salary. ------ (a) Base Salary. For services performed by the Executive for the Corporation pursuant to this Agreement during the period of employment as provided in Paragraph 1(b) hereof, the Corporation shall pay the Executive a base salary of $1,000,000 per year, payable in substantially equal installments in accordance with the Corporation's regular payroll practices. The Executive's base salary (with any increases under paragraph (b), below) shall not be subject to reduction. Any compensation which may be paid to the Executive under any additional compensation or incentive plan of the Corporation or which may be otherwise authorized from time to time by the Board (or an appropriate committee thereof) shall be in addition to the base salary to which the Executive shall be entitled under this Agreement. (b) Salary Increases. During the period of employment as provided in Paragraph 1(b) hereof, the base salary of the Executive shall be reviewed no less frequently than annually by the Board or the Compensation Committee of the Board to determine whether or not the same should be increased in light of the duties and responsibilities of the Executive and the performance thereof, and if it is determined that an increase is merited, such increase shall be promptly put into effect and the base salary of the Executive as so increased shall constitute the base salary of the Executive for purposes of Paragraph 3(a). 4. Annual Bonuses. For each calendar year during the term of employment, the Executive shall be eligible to receive in cash an annual performance bonus based upon the terms of the Corporation's bonus plan from time to time for senior executives, as adopted by the Board and administered by the Compensation Committee. 5. Equity Incentive Compensation. During the term of employment hereunder the Executive shall be eligible to participate, in the manner and to the extent approved by the Board or the Compensation Committee, in any equity-based incentive compensation plan or program approved by the Board from time to time, including (but not by way of limitation) any plan providing for the granting of (a) options to purchase stock of the Corporation, (b) restricted stock of the Corporation or (c) similar equity-based units or interests, with awards to the Executive that are of appropriate size and nature relative to those for other senior executives and the individual performance of the Executive. 6. Other Benefits. In addition to the compensation described in Paragraphs 3, 4 and 5, above, the Executive shall also be entitled to participate in all of the various retirement, welfare, fringe benefit, executive perquisite, and expense reimbursement plans, programs and arrangements of the Corporation to the extent the Executive is eligible for participation under the terms of such plans, programs and arrangements, with benefit levels and terms of participation at least as favorable to the Executive as those in effect on the Effective Date, except that the Executive's benefits and/or perquisites may be reduced in connection with similar reductions uniformly applied with respect to all similarly situated employees provided, however, that the Executive's overall benefits shall be no less favorable than those for any other executive of the Corporation. 7. Termination. Unless earlier terminated in accordance with the following provisions of this Paragraph 7, the Corporation shall continue to employ the Executive and the Executive shall remain employed by the Corporation during the entire term of this Agreement as set forth in Paragraph 1(b). Paragraph 9 hereof sets forth certain obligations of the Corporation in the event that the Executive's employment hereunder is terminated. Certain capitalized terms used in this Paragraph 7 and in Paragraphs 8 and 9 hereof are defined in Paragraph 7(d), below. (a) Death or Disability. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination payment obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event of the Executive's death or in the event that the Executive becomes disabled. The Executive will be deemed to be disabled upon the earlier of (i) the end of a six (6)-consecutive month period during which, by reason of physical or mental injury or disease, the Executive has been unable to perform substantially all of his usual and customary duties under this Agreement or (ii) the date that a reputable physician selected by the Board, and as to whom the Executive has no reasonable objection, determines in writing that the Executive will, by reason of physical or mental injury or disease, be unable to perform substantially all of the Executive's usual and customary duties under this Agreement for a period of at least six (6) consecutive months. If any question arises as to whether the Executive is disabled, upon reasonable request therefor by the Board, the Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Board shall promptly give the Executive written notice of any such determination of the Executive's disability and of any decision of the Board to terminate the Executive's employment by reason thereof. Until the Date of Termination for disability, the base salary payable to the Executive under Paragraph 3 hereof shall be reduced dollar-for-dollar by the amount of any disability benefits paid to the Executive in accordance with any disability policy or program of the Corporation. (b) Discharge for Cause. In accordance with the procedures hereinafter set forth, the Board may discharge the Executive from his employment hereunder for Cause. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged for Cause. Any discharge of the Executive for Cause shall be communicated by a Notice of Termination to the Executive given in accordance with Paragraph 17 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, which may be as early as the date of the giving of such notice. In the case of a discharge of the Executive for Cause, the Notice of Termination shall include a copy of a resolution duly adopted by the Board at a meeting called and held for such purpose (after reasonable notice to the Executive and reasonable opportunity for the Executive, together with the Executive's counsel, to be heard before the Board prior to such vote), finding that, in the reasonable and good faith opinion of the Board, the Executive was guilty of conduct constituting Cause. No purported termination of the Executive's employment for Cause shall be effective without a Notice of Termination. (c) Termination for Other Reasons. The Corporation may discharge the Executive without Cause by giving written notice to the Executive in accordance with Paragraph 17 at least fifteen (15) days prior to the Date of Termination. The Executive may resign from his employment, without liability to the Corporation, by giving written notice to the Corporation in accordance with Paragraph 17 at least fifteen (15) days prior to the Date of Termination. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged without Cause or resigns. (d) Definitions. For purposes of this Agreement, the following capitalized terms shall have the meanings set forth below: (i) "Accrued Obligations" shall mean, as of the Date of Termination, the sum of (A) the Executive's base salary under Paragraph 3 through the Date of Termination to the extent not theretofore paid, (B) the amount of any bonus, incentive compensation, deferred compensation and other cash compensation accrued by the Executive as of the Date of Termination to the extent not theretofore paid and (C) any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive as of the Date of Termination to the extent not theretofore paid. For the purpose of this Paragraph 7(d)(i), amounts shall be deemed to accrue ratably over the period during which they are earned, but no discretionary compensation shall be deemed earned or accrued until it is specifically approved by the Board or the Compensation Committee in accordance with the applicable plan, program or policy. (ii) "Cause" shall mean: (A) the Executive's commission of an act materially and demonstrably detrimental to the financial condition and/or goodwill of the Corporation or any of its subsidiaries, which act constitutes gross negligence or willful misconduct by the Executive in the performance of his material duties to the Corporation or any of its subsidiaries, or (B) the Executive's commission of any material act of dishonesty or breach of trust resulting or intended to result in material personal gain or enrichment of the Executive at the expense of the Corporation or any of its subsidiaries, or (C) the Executive's conviction of a felony involving moral turpitude, but specifically excluding any conviction based entirely on vicarious liability. No act or failure to act will be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that his action or omission was in the best interests of the Corporation. In addition, no act or omission will constitute Cause unless (A) a resolution finding that Cause exists has been approved by a majority of all of the members of the Board at a meeting at which the Executive is allowed to appear with his legal counsel and (B) the Corporation has given detailed written notice thereof to the Executive and, where remedial action is feasible, he then fails to remedy the act or omission within a reasonable time after receiving such notice. (iii) A "Change in Control" shall be deemed to have occurred 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 Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation'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 Corporation by the Corporation 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 Corporation's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Corporation shall be deemed a Change in Control; and provided further that if the Board of Directors of the Corporation determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation'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 Corporation 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 Corporation's then outstanding securities, then no Change in Control shall be deemed to have occurred; (B) During any period of two (2) consecutive years (not including any period prior to the Effective Date of this Agreement), individuals who at the beginning of such two-year period constitute the Board of Directors of the Corporation and any new director or directors (except for any director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in subparagraph (A), above, or subparagraph (C), below) whose election by the Board or nomination for election by the Corporation'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 Corporation or all or substantially all of the Corporation's assets, (2) a plan of merger or consolidation of the Corporation with any other corporation, or (3) a similar transaction or series of transactions involving the Corporation (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 Corporation 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 Corporation or all or substantially all of the Corporation'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 Corporation 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 Corporation 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) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. Any other provision of this Agreement to the contrary notwithstanding, a "Change in Control" shall not include any transaction described in subparagraph (A) or (C), above, where, in connection with such transaction, the Executive and/or any party acting in concert with the Executive substantially increases his or its, as the case may be, ownership interest in the Corporation or a successor to the Corporation (other than through conversion of prior ownership interests in the Corporation and/or through equity awards received entirely as compensation for past or future personal services). (iv) "Date of Termination" shall mean (A) in the event of a discharge of the Executive by the Board for Cause, the date specified in such Notice of Termination, (B) in the event of a discharge of the Executive without Cause or a resignation by the Executive, the date specified in the written notice to the Executive (in the case of discharge) or the Corporation (in the case of resignation), which date shall be no less than fifteen (15) days from the date of such written notice, (C) in the event of the Executive's death, the date of the Executive's death, and (D) in the event of termination of the Executive's employment by reason of disability pursuant to Paragraph 7(a), the date the Executive receives written notice of such termination. (v) "Good Reason" shall mean any of the following without the consent of the Executive: (A) the failure to re-elect the Executive as Chairman and Chief Executive Officer, (B)assignment of duties inconsistent with the Executive's position, authority, duties or responsibilities, or any other action by the Corporation which results in a substantial diminution of such position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, (C) any failure by the Corporation to comply with any of the provisions of this Agreement, including (but not by way of limitation) those provisions regarding compensation and benefits, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (D) the Corporation giving notice to the Executive to stop further operation of the evergreen feature described in Paragraph 1(b), above. However, during the period of three (3) years after a Change in Control, "Good Reason" shall also include the Executive being reassigned, without the Executive's consent, to an office location outside of the Chicago, Illinois metropolitan area. In addition, termination by the Executive for any reason during the thirty-six (36)-month period beginning with a Change in Control shall be deemed to be a termination for Good Reason; provided, however, that if the Executive dies after a Change in Control but less than twelve (12) months after a Change in Control, the Executive will be deemed to have terminated employment for Good Reason twelve (12) months after the Change in Control. (vi) "Qualifying Termination" shall mean termination of the Executive's employment under this Agreement (A) by reason of the discharge of the Executive by the Corporation other than for Cause or disability or (B) by reason of the resignation of the Executive for Good Reason within twelve (12) months after an event constituting Good Reason or (C) in accordance with the last sentence of the definition of Good Reason in subparagraph (v), above. (e) Continuing Obligations. Notwithstanding the termination of this Agreement pursuant to Paragraph 7(a), 7(b) or 7(c) above, or upon the expiration of the term described in Paragraph 1 above, the respective covenants, agreements and obligations of the Corporation and the Executive set forth hereinafter shall continue. 8. Vesting of Equity Awards Upon a Change in Control. Immediately upon the Change in Control, all stock options, restricted stock and other equity awards previously made to the Executive which are not otherwise vested shall vest in full, and all such options shall remain exercisable for the remainder of the originally designated respective term of each option. 9. Obligations of the Corporation Upon Termination. The following provisions describe the obligations of the Corporation to the Executive under this Agreement upon termination of his employment. However, except as explicitly provided in this Agreement, nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Corporation or any of its subsidiaries, or under any compensation or benefit plan, program, policy or practice of the Corporation or any of its subsidiaries. (a) Death, Disability, Discharge for Cause, or Resignation Without Good Reason. In the event this Agreement terminates by reason of the death or disability of the Executive, or by reason of the discharge of the Executive by the Corporation for Cause, or by reason of the resignation of the Executive other than for Good Reason, the Corporation shall pay to the Executive, or his heirs or estate, in the event of the Executive's death, all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation, or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive. (b) Death, Disability or Retirement. In the event that Executive's employment is terminated by death, disability or retirement under a retirement plan of the Corporation, the Executive shall be entitled to receive in a lump sum within thirty (30) days after the Date of Termination, in addition to the compensation and benefits described in paragraph (a) above, a pro rata cash bonus for the year in which the Date of Termination occurs equal to the product of (i) the highest of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, including any bonus or portion thereof that has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months) (the "Highest Annual Bonus"), and (ii) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365. (c) Qualifying Termination Without a Change in Control. In th event of a Qualifying Termination without a Change in Control, the Executive shall, upon executing and delivering a release of liability satisfactory to the Corporation, receive the following benefits: (i) Payment of all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to two hundred percent (200%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to two hundred percent (200%) of the Highest Annual Bonus, (iv) Continuation, for two (2) years after the Date of Termination, of the welfare benefits and perquisites which are described in paragraph (d) (iv), below, with the cost of such benefits to be paid by the Corporation, but such benefits may be discontinued earlier to the extent that the Executive becomes entitled to comparable benefits from a subsequent employer, (v) Immediate full vesting of all stock options, restricted stock and other equity or incentive compensation awards to the Executive which are not otherwise vested, options to remain exercisable for the full respective term originally designated for each award, (vi) Outplacement services, at the expense of the Corporation, from a provider reasonably selected by the Executive. In addition, the Executive may, in the discretion of the Compensation Committee, be awarded a pro rata cash bonus for the year in which the Date of Termination occurs. (d) Qualifying Termination After a Change in Control. In the event of a Qualifying Termination within three (3) years after a Change in Control, the Executive shall receive, in addition to the compensation and benefits described in subparagraphs (c)(i) and (c)(vi), above, the following benefits: (i) Payment in a lump sum within thirty (30) days after the Date of Termination of a pro rata cash bonus for the year in which the Date of Termination occurs equal to the product of (x) the Highest Annual Bonus and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365; (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to three hundred percent (300%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to three hundred percent (300%) of the Highest Annual Bonus; (iv) Continuation, for a period of three (3) years after the Date of Termination, of the following welfare benefits and senior executive perquisites on terms at least as favorable to the Executive as those which would have been provided if the Executive's employment had continued for that time pursuant to this Agreement: medical and dental benefits, life and disability insurance, umbrella liability insurance coverage, executive physical examinations, and automobile and financial counseling allowances, with the cost of such benefits to be paid by the Corporation. To the extent the Corporation is unable to provide comparable insurance for reasons other than cost, the Corporation may provide a lesser level or no coverage and compensate the Executive for the difference in coverage through a cash lump sum payment grossed up for taxes. This payment will be tied to the cost of an individual insurance policy if it were assumed to be available. The medical and dental benefits provided hereunder shall not be considered a continuation of coverage under COBRA, and continuation coverage under COBRA shall be made available to the Executive at the end of such three (3) year period as if the Executive's employment had terminated on the last day of such period. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to post-retirement welfare benefit plans, practices, programs and policies of the Corporation, the Executive shall be considered to have remained employed for three (3) years after the Date of Termination and, therefore, will be treated as having three (3) additional years of age and service credit after the Date of Termination and as having retired on the last day of such three (3) year period; (v) For purposes of determining the Executive's benefits under the Corporation's non-qualified excess and supplemental defined benefit retirement plans (the "SERP") in which the Executive participates, the Executive's benefits under the SERP shall equal the excess of (x) the actuarial equivalent (utilizing actuarial assumptions determined on a basis no less favorable to the Executive than the basis used under the terms of the Retirement Plan as in effect immediately prior to the Change in Control) of the sum of (A) the benefit under the Corporation's qualified defined benefit retirement plan (the "Retirement Plan") and (B) the benefit under any excess or supplemental retirement plans in which the Executive participates (collectively, the "SERP"), based on the Executive's period of service through the Date of Termination and assuming for this purpose that: (1) the Executive's employment continued for three years after the Date of Termination, and, therefore, the Executive had three (3) additional years of age and service credit after the Date of Termination under the Retirement Plan and the SERP, (2) all accrued benefits under the Retirement Plan and the SERP are fully vested and (3) the Executive's salary and annual bonus for each year during such three (3) year period were the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii) above, over (y) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan, as of the Date of Termination; and (vi) Payment in a lump sum within thirty (30) days after the Date of Termination of an amount equal to the sum of the maximum matching contributions by the Corporation under the Corporation's tax-qualified and supplemental Section 401(k) plans in which the Executive participates that the Executive would have received if the Executive's employment continued for three (3) years after the Date of Termination, assuming for this purpose that: (x) the Executive's salary and annual bonus for each year during such three (3) year period were the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii) above and (y) the Company's matching contributions are determined pursuant to the applicable provisions of the Corporation's tax-qualified and supplemental Section 401(k) plans, as in effect immediately prior to the Change in Control. (e) Termination of Employment Prior to Change in Control. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Corporation is terminated within six (6) months prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who was taking steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement the termination of the Executive's employment shall be deemed to have occurred immediately after the Change in Control. 10. Certain Additional Payments by the Corporation. The Corporation agrees that: (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or if any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of paragraph (c), below, all determinations required to be made under this Paragraph 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the accounting firm which is then serving as the auditors for the Corporation (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Corporation. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Paragraph 10, shall be paid by the Corporation to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any good faith determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to paragraph (c), below, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive. (c) The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which Executive gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Corporation any information reasonably requested by the Corporation relating to such claim, (ii) Take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation, (iii) Cooperate with the Corporation in good faith in order effectively to contest such claim, and (iv) Permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph (c), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to paragraph (c), above, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation's complying with the requirements of said paragraph (c)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon, after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to said paragraph (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid; and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. 11. No Set-Off or Mitigation. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Corporation may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. 12. Payment of Certain Expenses. The Corporation agrees to pay promptly as incurred, to the fullest extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome) by the Corporation, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest initiated by the Executive about the amount of any payment due pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, however, that, notwithstanding anything contained herein to the contrary, with respect to contests arising prior to a Change in Control (and not otherwise directly associated with the Change in Control), the Corporation shall not be obligated to make such payment with respect to any such contest in which the Corporation prevails over the Executive. 13. Indemnification. To the full extent permitted by law, the Corporation shall, both during and after the term of the Executive's employment, indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being (or having been) an officer, director or employee of the Corporation or any of its subsidiaries. In addition, the Executive shall be covered, both during and after the term of the Executive's employment, by director and officer liability insurance to the maximum extent that such insurance covers any officer or director (or former officer or director) of the Corporation. 14. Confidentiality. During and after the period of employment with the Corporation, the Executive shall not, without prior written consent from the General Counsel of the Corporation directly or indirectly disclose to any individual, corporation or other entity, other than to the Corporation or any subsidiary or affiliate thereof or their officers, directors or employees entitled to such information or any other person or entity to whom such information is disclosed in the normal course of the business of the Corporation) or use for the Executive's own benefit or for the benefit of any such individual, corporation or other entity, any Confidential Information of the Corporation. For purposes of this Agreement, "Confidential Information" is information relating to the business of the Corporation or its subsidiaries or affiliates (a) which is not generally known to the public or in the industry, (b) which has been treated by the Corporation and its subsidiaries and affiliates as confidential or proprietary, (c) which provides the Corporation or its subsidiaries or affiliates with a competitive advantage, and (d) in the confidentiality of which the Corporation has a legally protectable interest. Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which the Corporation and its subsidiaries and affiliates cease to have a legally protectable interest, shall cease to be subject to the restrictions of this Paragraph 14. 15. Status Under FDIC Regulations. This Agreement amends and restates a prior employment agreement dated February 13, 1995 which was entered into prior to March 29, 1995, which was the date that regulations were proposed by the Federal Deposit Insurance Corporation (the "FDIC") limiting "golden parachute" and indemnification payments by insured depository institutions and their holding companies. As of March 29, 1995 that prior agreement provided for a lump sum payment equal to 600% of the Executive's base salary. In view of the foregoing, if the payments and other benefits under Paragraph 9 of this Agreement are limited by those FDIC regulations, it is currently anticipated that any limits on "golden parachute" payments resulting from regulations issued by the FDIC should not reduce the payments under this Agreement below the lesser of (a) 600% of the Executive's base salary or (b) the payments and other benefits calculated under Paragraph 9 of this Agreement. However, if FDIC regulations are ultimately determined to further limit payments and other benefits under this Agreement, then such FDIC limits shall supersede the terms of Paragraph 9, above. 16. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law, and such successor shall be deemed the "Corporation" for purposes of this Agreement. 17. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or by recognized commercial delivery service or if mailed within the continental United States by first class certified mail, return receipt requested, postage prepaid, addressed as follows: (1) If to the Board or the Corporation, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: Executive Vice President-Administration (2) If to the Executive, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: William F. Aldinger Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. 18. Tax Withholding. The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state, or local law with respect to any payment in cash, shares of stock and/or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (a) withhold such taxes from any cash payments owing from the Corporation to the Executive, (b) require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding obligations and/or (c) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 19. Arbitration. Except as to any controversy or claim which the Executive elects, by written notice to the Corporation, to have adjudicated by a court of competent jurisdiction, any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in Chicago, Illinois in accordance with the laws of the State of Illinois. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association. The costs and expenses of the arbitrator(s) shall be borne by the Corporation. The award of the arbitrator(s) shall be binding upon the parties. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. 20. No Assignment. Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 21. Execution in Counterparts. This Agreement may be executed by the parties hereto in two (2) or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 22. Jurisdiction and Governing Law. This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of Illinois, other than the conflict of laws provisions of such laws. 23. Severability. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. Furthermore, if the scope of any restriction or requirement contained in this Agreement is too broad to permit enforcement of such restriction or requirement to its full extent, then such restriction or requirement shall be enforced to the maximum extent permitted by law, and the Executive consents and agrees that any court of competent jurisdiction may so modify such scope in any proceeding brought to enforce such restriction or requirement. 24. Prior Understandings. This Agreement embodies the entire understanding of the parties hereto and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof, including but not by way of limitation by amending and restating the Employment Agreement dated January 1, 1999 and the Employment Agreement dated July 9, 1996 between the parties. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. The headings in this Agreement are for convenience of reference only and shall not be construed as part of this Agreement or to limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. Attest: HOUSEHOLD INTERNATIONAL, INC. /s/ K. H. Robin By: /s/ George A. Lorch - ------------------------------------- ------------------------------------- Kenneth H. Robin Title: Chairman of the Compensation Senior Vice President-General Counsel Committee of Household International, and Corporate Secretary Inc. /s/ William F. Aldinger -------------------------------------- William F. Aldinger EX-10 6 hiexhibit10-13.txt EXHIBIT 10-13 - EMPLOYMENT AGREEMENT - GDG EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of March 1, 2002 by and between Household International, Inc., a Delaware corporation, (hereinafter called the "Corporation") and Gary D. Gilmer (hereinafter called the "Executive"). WITNESSETH THAT: WHEREAS, the Executive is currently employed by the Corporation under an employment agreement dated January 1, 1999; and WHEREAS, the Corporation desires to continue to employ the Executive as its Vice Chairman, and the Executive desires to continue in such employment, on amended and restated terms and conditions; NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. Employment and Term. ------------------- (a) Employment. The Corporation shall continue to employ the Executive as Vice Chairman of the Corporation, and the Executive shall so serve, for the term set forth in Paragraph 1(b). (b) Term. The initial term of the Executive's employment under this Agreement shall commence as of March 1, 2002 (the "Effective Date") and end on August 31, 2003, subject to the extension of such term as hereinafter provided and subject to earlier termination as provided in Paragraph 7, below. Beginning on March 1, 2002, the term of this Agreement shall be extended automatically for one (1) additional day for each day which has then elapsed since March 1, 2002, unless, at any time after March 1, 2002, either the Board of Directors of the Corporation (the "Board"), on behalf of the Corporation, or the Executive gives written notice to the other that such automatic extension of the term of this Agreement shall cease. Any such notice shall be effective immediately upon delivery. The initial term of this Agreement, plus any extension by operation of this Paragraph 1, shall be hereinafter referred to as the "Term." 2. Duties. During the period of employment as provided in Paragraph 1(b) hereof, the Executive shall serve as Vice Chairman of the Corporation and have all powers and duties consistent with such position, subject to the reasonable direction of the Board and of the Chief Executive Officer of the Corporation. The Executive shall also continue to serve as a member of the Board if elected as such. The Executive shall devote substantially his entire time during reasonable business hours (reasonable sick leave and vacations excepted)and best efforts to fulfill faithfully, responsibly and to the best of his ability his duties hereunder. However, the Executive may, with the approval of the Board or of the Chief Executive Officer of the Corporation, which shall not be withheld unreasonably, serve on corporate, civic and/or charitable boards and committees. 3. Salary. ------ (a) Base Salary. For services performed by the Executive for the Corporation pursuant to this Agreement during the period of employment as provided in Paragraph 1(b) hereof, the Corporation shall pay the Executive a base salary of $500,000 per year, payable in substantially equal installments in accordance with the Corporation's regular payroll practices. The Executive's base salary (with any increases under paragraph (b), below) shall not be subject to reduction. Any compensation which may be paid to the Executive under any additional compensation or incentive plan of the Corporation or which may be otherwise authorized from time to time by the Board (or an appropriate committee thereof) shall be in addition to the base salary to which the Executive shall be entitled under this Agreement. (b) Salary Increases. During the period of employment as provided in Paragraph 1(b) hereof, the base salary of the Executive shall be reviewed no less frequently than annually by the Board or the Compensation Committee of the Board to determine whether or not the same should be increased in light of the duties and responsibilities of the Executive and the performance thereof, and if it is determined that an increase is merited, such increase shall be promptly put into effect and the base salary of the Executive as so increased shall constitute the base salary of the Executive for purposes of Paragraph 3(a). 4. Annual Bonuses. For each calendar year during the term of employment, the Executive shall be eligible to receive in cash an annual performance bonus based upon the terms of the Corporation's bonus plan from time to time for senior executives, as adopted by the Board and administered by the Compensation Committee. 5. Equity Incentive Compensation. During the term of employment hereunder the Executive shall be eligible to participate, in the manner and to the extent approved by the Board or the Compensation Committee, in any equity-based incentive compensation plan or program approved by the Board from time to time, including (but not by way of limitation) any plan providing for the granting of (a) options to purchase stock of the Corporation, (b) restricted stock of the Corporation or (c) similar equity-based units or interests, with awards to the Executive that are of appropriate size and nature relative to those for other senior executives and the individual performance of the Executive. 6. Other Benefits. In addition to the compensation described in Paragraphs 3, 4 and 5, above, the Executive shall also be entitled to participate in all of the various retirement, welfare, fringe benefit, executive perquisite, and expense reimbursement plans, programs and arrangements of the Corporation to the extent the Executive is eligible for participation under the terms of such plans, programs and arrangements, with benefit levels and terms of participation at least as favorable to the Executive as those in effect on the Effective Date, except that the Executive's benefits and/or perquisites may be reduced in connection with similar reductions uniformly applied with respect to all similarly situated employees. 7. Termination. Unless earlier terminated in accordance with the following provisions of this Paragraph 7, the Corporation shall continue to employ the Executive and the Executive shall remain employed by the Corporation during the entire term of this Agreement as set forth in Paragraph 1(b). Paragraph 9 hereof sets forth certain obligations of the Corporation in the event that the Executive's employment hereunder is terminated. Certain capitalized terms used in this Paragraph 7 and in Paragraphs 8 and 9 hereof are defined in Paragraph 7(d), below. (a) Death or Disability. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination payment obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event of the Executive's death or in the event that the Executive becomes disabled. The Executive will be deemed to be disabled upon the earlier of (i) the end of a six (6)-consecutive month period during which, by reason of physical or mental injury or disease, the Executive has been unable to perform substantially all of his usual and customary duties under this Agreement or (ii) the date that a reputable physician selected by the Board, and as to whom the Executive has no reasonable objection, determines in writing that the Executive will, by reason of physical or mental injury or disease, be unable to perform substantially all of the Executive's usual and customary duties under this Agreement for a period of at least six (6) consecutive months. If any question arises as to whether the Executive is disabled, upon reasonable request therefor by the Board, the Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Board shall promptly give the Executive written notice of any such determination of the Executive's disability and of any decision of the Board to terminate the Executive's employment by reason thereof. Until the Date of Termination for disability, the base salary payable to the Executive under Paragraph 3 hereof shall be reduced dollar-for-dollar by the amount of any disability benefits paid to the Executive in accordance with any disability policy or program of the Corporation. (b) Discharge for Cause. In accordance with the procedures hereinafter set forth, the Board may discharge the Executive from his employment hereunder for Cause. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged for Cause. Any discharge of the Executive for Cause shall be communicated by a Notice of Termination to the Executive given in accordance with Paragraph 17 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, which may be as early as the date of the giving of such notice. No purported termination of the Executive's employment for Cause shall be effective without a Notice of Termination. (c) Termination for Other Reasons. The Corporation may discharge the Executive without Cause by giving written notice to the Executive in accordance with Paragraph 17 at least fifteen (15) days prior to the Date of Termination. The Executive may resign from his employment, without liability to the Corporation, by giving written notice to the Corporation in accordance with Paragraph 17 at least fifteen (15) days prior to the Date of Termination. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged without Cause or resigns. (d) Definitions. For purposes of this Agreement, the following capitalized terms shall have the meanings set forth below: (i) "Accrued Obligations" shall mean, as of the Date of Termination, the sum of (A) the Executive's base salary under Paragraph 3 through the Date of Termination to the extent not theretofore paid, (B) the amount of any bonus, incentive compensation, deferred compensation and other cash compensation accrued by the Executive as of the Date of Termination to the extent not theretofore paid and (C) any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive as of the Date of Termination to the extent not theretofore paid. For the purpose of this Paragraph 7(d)(i), amounts shall be deemed to accrue ratably over the period during which they are earned, but no discretionary compensation shall be deemed earned or accrued until it is specifically approved by the Board or the Compensation Committee in accordance with the applicable plan, program or policy. (ii) "Cause" shall mean: (A) the Executive's commission of an act materially and demonstrably detrimental to the financial condition and/or goodwill of the Corporation or any of its subsidiaries, which act constitutes gross negligence or willful misconduct by the Executive in the performance of his material duties to the Corporation or any of its subsidiaries, or (B) the Executive's commission of any material act of dishonesty or breach of trust resulting or intended to result in material personal gain or enrichment of the Executive at the expense of the Corporation or any of its subsidiaries, or (C) the Executive's conviction of a felony involving moral turpitude, but specifically excluding any conviction based entirely on vicarious liability. No act or failure to act will be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that his action or omission was in the best interests of the Corporation. In addition, no act or omission will constitute Cause unless the Corporation has given detailed written notice thereof to the Executive and, where remedial action is feasible, he then fails to remedy the act or omission within a reasonable time after receiving such notice. (iii) A "Change in Control" shall be deemed to have occurred 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 Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation'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 Corporation by the Corporation 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 Corporation's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Corporation shall be deemed a Change in Control; and provided further that if the Board of Directors of the Corporation determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation'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 Corporation 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 Corporation's then outstanding securities, then no Change in Control shall be deemed to have occurred; (B) During any period of two (2) consecutive years (not including any period prior to the Effective Date of this Agreement), individuals who at the beginning of such two-year period constitute the Board of Directors of the Corporation and any new director or directors (except for any director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in subparagraph (A), above, or subparagraph (C), below) whose election by the Board or nomination for election by the Corporation'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 Corporation or all or substantially all of the Corporation's assets, (2) a plan of merger or consolidation of the Corporation with any other corporation, or (3) a similar transaction or series of transactions involving the Corporation (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 Corporation 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 Corporation or all or substantially all of the Corporation'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 Corporation 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 Corporation 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) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. Any other provision of this Agreement to the contrary notwithstanding, a "Change in Control" shall not include any transaction described in subparagraph (A) or (C), above, where, in connection with such transaction, the Executive and/or any party acting in concert with the Executive substantially increases his or its, as the case may be, ownership interest in the Corporation or a successor to the Corporation (other than through conversion of prior ownership interests in the Corporation and/or through equity awards received entirely as compensation for past or future personal services). (iv) "Date of Termination" shall mean (A) in the event of a discharge of the Executive by the Board for Cause, the date specified in such Notice of Termination, (B) in the event of a discharge of the Executive without Cause or a resignation by the Executive, the date specified in the written notice to the Executive (in the case of discharge) or the Corporation (in the case of resignation), which date shall be no less than fifteen (15) days from the date of such written notice, (C) in the event of the Executive's death, the date of the Executive's death, and (D) in the event of termination of the Executive's employment by reason of disability pursuant to Paragraph 7(a), the date the Executive receives written notice of such termination. (v) "Good Reason" shall mean any of the following without the consent of the Executive: (A) the failure to re-elect the Executive as Vice Chairman, (B) assignment of duties inconsistent with the Executive's position, authority, duties or responsibilities, or any other action by the Corporation which results in a substantial diminution of such position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, (C) any failure by the Corporation to comply with any of the provisions of this Agreement, including (but not by way of limitation) those provisions regarding compensation and benefits, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (D) the Corporation giving notice to the Executive to stop further operation of the evergreen feature described in Paragraph 1(b), above. However, during the period of three (3) years after a Change in Control, "Good Reason" shall also include the Executive being reassigned, without the Executive's consent, to an office location outside of the Chicago, Illinois metropolitan area. In addition, termination by the Executive for any reason during the sixty (60)-day period which begins twelve (12) months after a Change in Control shall be deemed to be a termination for Good Reason; provided, however, that if the Executive dies after a Change in Control but less than twelve (12) months after a Change in Control, the Executive will be deemed to have terminated employment for Good Reason twelve (12) months after the Change in Control. (vi) "Qualifying Termination" shall mean termination of the Executive's employment under this Agreement (A) by reason of the discharge of the Executive by the Corporation other than for Cause or disability or (B) by reason of the resignation of the Executive for Good Reason within twelve (12) months after an event constituting Good Reason or (C) in accordance with the last sentence of the definition of Good Reason in subparagraph (v), above. (e) Continuing Obligations. Notwithstanding the termination of this Agreement pursuant to Paragraph 7(a), 7(b) or 7(c) above, or upon the expiration of the term described in Paragraph 1 above, the respective covenants, agreements and obligations of the Corporation and the Executive set forth hereinafter shall continue. 8. Vesting of Equity Awards Upon a Change in Control. Immediately upon the Change in Control, all stock options, restricted stock and other equity awards previously made to the Executive which are not otherwise vested shall vest in full, and all such options shall remain exercisable for the period provided for the applicable plan or award agreement. 9. Obligations of the Corporation Upon Termination. The following provisions describe the obligations of the Corporation to the Executive under this Agreement upon termination of his employment. However, except as explicitly provided in this Agreement, nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Corporation or any of its subsidiaries, or under any compensation or benefit plan, program, policy or practice of the Corporation or any of its subsidiaries. (a) Death, Disability, Discharge for Cause, or Resignation Without Good Reason. In the event this Agreement terminates by reason of the death or disability of the Executive, or by reason of the discharge of the Executive by the Corporation for Cause, or by reason of the resignation of the Executive other than for Good Reason, the Corporation shall pay to the Executive, or his heirs or estate, in the event of the Executive's death, all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation, or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive. (b) Death, Disability or Retirement. In the event that Executive's employment is terminated by death, disability or retirement under a retirement plan of the Corporation, the Executive shall be entitled to receive in a lump sum within thirty (30) days after the Date of Termination, in addition to the compensation and benefits described in paragraph (a) above, a pro rata cash bonus for the year in which the Date of Termination occurs equal to the product of (i) the highest of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, including any bonus or portion thereof that has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months) (the "Highest Annual Bonus"), and (ii) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365. (c) Qualifying Termination Without a Change in Control. In the event of a Qualifying Termination without a Change in Control, the Executive shall, upon executing and delivering a release of liability satisfactory to the Corporation, receive the following benefits: (i) Payment of all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to one hundred fifty percent (150%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to one hundred fifty percent (150%) of the Highest Annual Bonus, (iv) Continuation, for a period of eighteen (18) months after the Date of Termination, of health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") with the cost of such benefits to be paid by the Corporation, but such benefits may be discontinued earlier to the extent that the Executive becomes entitled to comparable benefits from a subsequent employer, (v) Immediate pro rata vesting of all stock options, restricted stock and other equity or incentive compensation awards to the Executive which are not otherwise fully vested, with all options to remain exercisable for the period provided for in the applicable plan or award agreement. The proration of each award shall be done by multiplying the full award by a fraction, the numerator of which shall be the number of full months between the date of grant and the Date of Termination, and the denominator of which shall be the number of full months in the period of employment required for full vesting under the original terms of the award, and (vi) Outplacement services, at the expense of the Corporation, from a provider reasonably selected by the Executive. In addition, the Executive may, in the discretion of the Compensation Committee, be awarded a pro rata cash bonus for the year in which the Date of Termination occurs. (d) Qualifying Termination After a Change in Control. In the event of a Qualifying Termination within three (3) years after a Change in Control, the Executive shall receive, in addition to the compensation and benefits described in subparagraphs (c)(i) and (c)(vi), above, the following benefits: (i) Payment in a lump sum within thirty (30) days after the Date of Termination of a pro rata cash bonus for the year in which the Date of Termination occurs equal to the product of (x) the Highest Annual Bonus and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365; (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to three hundred percent (300%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to three hundred percent (300%) of the Highest Annual Bonus; (iv) Continuation, for a period of three (3) years after the Date of Termination, of the following welfare benefits and senior executive perquisites on terms at least as favorable to the Executive as those which would have been provided if the Executive's employment had continued for that time pursuant to this Agreement: medical and dental benefits, life and disability insurance, umbrella liability insurance coverage, executive physical examinations, and automobile and financial counseling allowances, with the cost of such benefits to be paid by the Corporation. To the extent the Corporation is unable to provide comparable insurance for reasons other than cost, the Corporation may provide a lesser level or no coverage and compensate the Executive for the difference in coverage through a cash lump sum payment grossed up for taxes. This payment will be tied to the cost of an individual insurance policy if it were assumed to be available. The medical and dental benefits provided hereunder shall not be considered a continuation of coverage under COBRA, and continuation coverage under COBRA shall be made available to the Executive at the end of such three (3) year period as if the Executive's employment had terminated on the last day of such period. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to post-retirement welfare benefit plans, practices, programs and policies of the Corporation, the Executive shall be considered to have remained employed for three (3) years after the Date of Termination and, therefore, will be treated as having three (3) additional years of age and service credit after the Date of Termination and as having retired on the last day of such three (3) year period; (v) For purposes of determining the Executive's benefits under the Corporation's non-qualified excess and supplemental defined benefit retirement plans (the "SERP") in which the Executive participates, the Executive's benefits under the SERP shall equal the excess of (x) the actuarial equivalent (utilizing actuarial assumptions determined on a basis no less favorable to the Executive than the basis used under the terms of the Retirement Plan as in effect immediately prior to the Change in Control) of the sum of (A) the benefit under the Corporation's qualified defined benefit retirement plan (the "Retirement Plan") and (B) the benefit under any excess or supplemental retirement plans in which the Executive participates (collectively, the "SERP"), based on the Executive's period of service through the Date of Termination and assuming for this purpose that: (1) the Executive's employment continued for three years after the Date of Termination, and, therefore, the Executive had three (3) additional years of age and service credit after the Date of Termination under the Retirement Plan and the SERP, (2) all accrued benefits under the Retirement Plan and the SERP are fully vested and (3) the Executive's salary and annual bonus for each year during such three (3) year period were the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii) above, over (y) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan, as of the Date of Termination; and (vi) Payment in a lump sum within thirty (30) days after the Date of Termination of an amount equal to the sum of the maximum matching contributions by the Corporation under the Corporation's tax-qualified and supplemental Section 401(k) plans in which the Executive participates that the Executive would have received if the Executive's employment continued for three (3) years after the Date of Termination, assuming for this purpose that: (x) the Executive's salary and annual bonus for each year during such three (3) year period were the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii) above and (y) the Company's matching contributions are determined pursuant to the applicable provisions of the Corporation's tax-qualified and supplemental Section 401(k) plans, as in effect immediately prior to the Change in Control. (e) Termination of Employment Prior to Change in Control. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Corporation is terminated within six (6) months prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who was taking steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement the termination of the Executive's employment shall be deemed to have occurred immediately after the Change in Control. 10. Certain Additional Payments by the Corporation. The Corporation agrees that: (a) Anything in this Agreement to the contrary notwithstanding in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or if any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of paragraph (c), below, all determinations required to be made under this Paragraph 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the accounting firm which is then serving as the auditors for the Corporation (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Corporation. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Paragraph 10, shall be paid by the Corporation to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any good faith determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to paragraph (c), below, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive. (c) The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which Executive gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Corporation any information reasonably requested by the Corporation relating to such claim, (ii) Take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation, (iii) Cooperate with the Corporation in good faith in order effectively to contest such claim, and (iv) Permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph (c), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to paragraph (c), above, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation's complying with the requirements of said paragraph (c)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon, after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to said paragraph (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid; and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. 11. No Set-Off or Mitigation. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Corporation may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. 12. Payment of Certain Expenses. The Corporation agrees to pay promptly as incurred, to the fullest extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome) by the Corporation, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest initiated by the Executive about the amount of any payment due pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, however, that, notwithstanding anything contained herein to the contrary, with respect to contests arising prior to a Change in Control (and not otherwise directly associated with the Change in Control), the Corporation shall not be obligated to make such payment with respect to any such contest in which the Corporation prevails over the Executive. 13. Indemnification. To the full extent permitted by law, the Corporation shall, both during and after the term of the Executive's employment, indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being (or having been) an officer, director or employee of the Corporation or any of its subsidiaries. In addition, the Executive shall be covered, both during and after the term of the Executive's employment, by director and officer liability insurance to the maximum extent that such insurance covers any officer or director (or former officer or director) of the Corporation. 14. Confidentiality. During and after the period of employment with the Corporation, the Executive shall not, without prior written consent from the Chief Executive Officer or the General Counsel of the Corporation directly or indirectly disclose to any individual, corporation or other entity, other than to the Corporation or any subsidiary or affiliate thereof or their officers, directors or employees entitled to such information or any other person or entity to whom such information is disclosed in the normal course of the business of the Corporation) or use for the Executive's own benefit or for the benefit of any such individual, corporation or other entity, any Confidential Information of the Corporation. For purposes of this Agreement, "Confidential Information" is information relating to the business of the Corporation or its subsidiaries or affiliates (a) which is not generally known to the public or in the industry, (b) which has been treated by the Corporation and its subsidiaries and affiliates as confidential or proprietary, (c) which provides the Corporation or its subsidiaries or affiliates with a competitive advantage, and (d) in the confidentiality of which the Corporation has a legally protectable interest. Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which the Corporation and its subsidiaries and affiliates cease to have a legally protectable interest, shall cease to be subject to the restrictions of this Paragraph 14. 15. Status Under FDIC Regulations. This Agreement amends and restates a prior employment agreement dated July 11, 1994 which was entered into prior to March 29, 1995, which was the date that regulations were proposed by the Federal Deposit Insurance Corporation (the "FDIC") limiting "golden parachute" and indemnification payments by insured depository institutions and their holding companies. As of March 29, 1995 that prior agreement provided for a lump sum payment equal to 488% of the Executive's base salary. In view of the foregoing, if the payments and other benefits under Paragraph 9 of this Agreement are limited by those FDIC regulations, it is currently anticipated that any limits on "golden parachute" payments resulting from regulations issued by the FDIC should not reduce the payments under this Agreement below the lesser of (a) 488% of the Executive's base salary or (b) the payments and other benefits calculated under Paragraph 9 of this Agreement. However, if FDIC regulations are ultimately determined to further limit payments and other benefits under this Agreement, then such FDIC limits shall supersede the terms of Paragraph 9, above. 16. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law, and such successor shall be deemed the "Corporation" for purposes of this Agreement. 17. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or by recognized commercial delivery service or if mailed within the continental United States by first class certified mail, return receipt requested, postage prepaid, addressed as follows: (1) If to the Board or the Corporation, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: Executive Vice President-Administration (2) If to the Executive, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: Gary D. Gilmer Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. 18. Tax Withholding. The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state, or local law with respect to any payment in cash, shares of stock and/or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (a) withhold such taxes from any cash payments owing from the Corporation to the Executive, (b) require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding obligations and/or (c) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 19. Arbitration. Except as to any controversy or claim which the Executive elects, by written notice to the Corporation, to have adjudicated by a court of competent jurisdiction, any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in Chicago, Illinois in accordance with the laws of the State of Illinois. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association. The costs and expenses of the arbitrator(s) shall be borne by the Corporation. The award of the arbitrator(s) shall be binding upon the parties. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. 20. No Assignment. Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 21. Execution in Counterparts. This Agreement may be executed by the parties hereto in two (2) or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 22. Jurisdiction and Governing Law. This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of Illinois, other than the conflict of laws provisions of such laws. 23. Severability. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. Furthermore, if the scope of any restriction or requirement contained in this Agreement is too broad to permit enforcement of such restriction or requirement to its full extent, then such restriction or requirement shall be enforced to the maximum extent permitted by law, and the Executive consents and agrees that any court of competent jurisdiction may so modify such scope in any proceeding brought to enforce such restriction or requirement. 24. Prior Understandings. This Agreement embodies the entire understanding of the parties hereto and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof, including but not by way of limitation by amending and restating the Employment Agreement dated January 1, 1999 between the parties. This Agreement supersedes the Employment Agreement dated July 9, 1996 between the Executive and Alexander Hamilton, the Employment Agreement dated May 28, 1993, between the Executive and Alexander Hamilton, and the Employment Agreement dated March 9, 1992, between the Executive and the Corporation. No change, alteration or modification hereof may be made except in writing, signed by each of the parties hereto. The headings in this Agreement are for convenience of reference only and shall not be construed as part of this Agreement or to limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. Attest: HOUSEHOLD INTERNATIONAL, INC. /s/ K. H. Robin By: /s/ William F. Aldinger - ------------------------------------ ------------------------------------ Kenneth H. Robin Title: Chairman and Chief Executive Senior Vice President-General Counsel Officer and Corporate Secretary /s/ Gary D. Gilmer ---------------------------------------- Gary D. Gilmer EX-10 7 hiexhibit10-14.txt EXHIBIT 10-14 - EMPLOYMENT AGREEMENT - DAS EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of March 1, 2002 by and between Household International, Inc., a Delaware corporation, (hereinafter called the "Corporation") and David A. Schoenholz (hereinafter called the "Executive"). WITNESSETH THAT: WHEREAS, the Executive is currently employed by the Corporation under an employment agreement dated January 1, 1999, and WHEREAS, the Corporation desires to continue to employ the Executive as its Vice Chairman-Chief Financial Officer, and the Executive desires to continue in such employment, on amended and restated terms and conditions; NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. Employment and Term. ------------------- (a) Employment. The Corporation shall continue to employ the Executive as the Vice Chairman-Chief Financial Officer of the Corporation, and the Executive shall so serve, for the term set forth in Paragraph 1(b). (b) Term. The initial term of the Executive's employment under this Agreement shall commence as of March 1, 2002 (the "Effective Date") and end on August 31, 2003, subject to the extension of such term as hereinafter provided and subject to earlier termination as provided in Paragraph 7, below. Beginning on March 1, 2002, the term of this Agreement shall be extended automatically for one (1) additional day for each day which has then elapsed since March 1, 2002, unless, at any time after March 1, 2002, either the Board of Directors of the Corporation (the "Board"), on behalf of the Corporation, or the Executive gives written notice to the other that such automatic extension of the term of this Agreement shall cease. Any such notice shall be effective immediately upon delivery. The initial term of this Agreement, plus any extension by operation of this Paragraph 1, shall be hereinafter referred to as the "Term." 2. Duties. During the period of employment as provided in Paragraph 1(b) hereof, the Executive shall serve as Vice Chairman-Chief Financial Officer of the Corporation and have all powers and duties consistent with such position, subject to the reasonable direction of the Board and of the Chief Executive Officer of the Corporation. The Executive shall also continue to serve as a member of the Board if elected as such. The Executive shall devote substantially his entire time during reasonable business hours (reasonable sick leave and vacations excepted) and best efforts to fulfill faithfully, responsibly and to the best of his ability his duties hereunder. However, the Executive may, with the approval of the Board or of the Chief Executive Officer of the Corporation, which shall not be withheld unreasonably, serve on corporate, civic and/or charitable boards and committees. 3. Salary. ------ (a) Base Salary. For services performed by the Executive for the Corporation pursuant to this Agreement during the period of employment as provided in Paragraph 1(b) hereof, the Corporation shall pay the Executive a base salary of $500,000 per year, payable in substantially equal installments in accordance with the Corporation's regular payroll practices. The Executive's base salary (with any increases under paragraph (b), below) shall not be subject to reduction. Any compensation which may be paid to the Executive under any additional compensation or incentive plan of the Corporation or which may be otherwise authorized from time to time by the Board (or an appropriate committee thereof) shall be in addition to the base salary to which the Executive shall be entitled under this Agreement. (b) Salary Increases. During the period of employment as provided in Paragraph 1(b) hereof, the base salary of the Executive shall be reviewed no less frequently than annually by the Board or the Compensation Committee of the Board to determine whether or not the same should be increased in light of the duties and responsibilities of the Executive and the performance thereof, and if it is determined that an increase is merited, such increase shall be promptly put into effect and the base salary of the Executive as so increased shall constitute the base salary of the Executive for purposes of Paragraph 3(a). 4. Annual Bonuses. For each calendar year during the term of employment, the Executive shall be eligible to receive in cash an annual performance bonus based upon the terms of the Corporation's bonus plan from time to time for senior executives, as adopted by the Board and administered by the Compensation Committee. 5. Equity Incentive Compensation. During the term of employment hereunder the Executive shall be eligible to participate, in the manner and to the extent approved by the Board or the Compensation Committee, in any equity-based incentive compensation plan or program approved by the Board from time to time, including (but not by way of limitation) any plan providing for the granting of (a) options to purchase stock of the Corporation, (b) restricted stock of the Corporation or (c) similar equity-based units or interests, with awards to the Executive that are of appropriate size and nature relative to those for other senior executives and the individual performance of the Executive. 6. Other Benefits. In addition to the compensation described in Paragraphs 3, 4 and 5, above, the Executive shall also be entitled to participate in all of the various retirement, welfare, fringe benefit, executive perquisite, and expense reimbursement plans, programs and arrangements of the Corporation to the extent the Executive is eligible for participation under the terms of such plans, programs and arrangements, with benefit levels and terms of participation at least as favorable to the Executive as those in effect on the Effective Date, except that the Executive's benefits and/or perquisites may be reduced in connection with similar reductions uniformly applied with respect to all similarly situated employees. 7. Termination. Unless earlier terminated in accordance with the following provisions of this Paragraph 7, the Corporation shall continue to employ the Executive and the Executive shall remain employed by the Corporation during the entire term of this Agreement as set forth in Paragraph 1(b). Paragraph 9 hereof sets forth certain obligations of the Corporation in the event that the Executive's employment hereunder is terminated. Certain capitalized terms used in this Paragraph 7 and in Paragraphs 8 and 9 hereof are defined in Paragraph 7(d), below. (a) Death or Disability. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination payment obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event of the Executive's death or in the event that the Executive becomes disabled. The Executive will be deemed to be disabled upon the earlier of (i) the end of a six (6)-consecutive month period during which, by reason of physical or mental injury or disease, the Executive has been unable to perform substantially all of his usual and customary duties under this Agreement or (ii) the date that a reputable physician selected by the Board, and as to whom the Executive has no reasonable objection, determines in writing that the Executive will, by reason of physical or mental injury or disease, be unable to perform substantially all of the Executive's usual and customary duties under this Agreement for a period of at least six (6) consecutive months. If any question arises as to whether the Executive is disabled, upon reasonable request therefor by the Board, the Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Board shall promptly give the Executive written notice of any such determination of the Executive's disability and of any decision of the Board to terminate the Executive's employment by reason thereof. Until the Date of Termination for disability, the base salary payable to the Executive under Paragraph 3 hereof shall be reduced dollar-for-dollar by the amount of any disability benefits paid to the Executive in accordance with any disability policy or program of the Corporation. (b) Discharge for Cause. In accordance with the procedures hereinafter set forth, the Board may discharge the Executive from his employment hereunder for Cause. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged for Cause. Any discharge of the Executive for Cause shall be communicated by a Notice of Termination to the Executive given in accordance with Paragraph 17 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, which may be as early as the date of the giving of such notice. No purported termination of the Executive's employment for Cause shall be effective without a Notice of Termination. (c) Termination for Other Reasons. The Corporation may discharge the Executive without Cause by giving written notice to the Executive in accordance with Paragraph 17 at least fifteen (15) days prior to the Date of Termination. The Executive may resign from his employment, without liability to the Corporation, by giving written notice to the Corporation in accordance with Paragraph 17 at least fifteen (15) days prior to the Date of Termination. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged without Cause or resigns. (d) Definitions. For purposes of this Agreement, the following capitalized terms shall have the meanings set forth below: (i) "Accrued Obligations" shall mean, as of the Date of Termination, the sum of (A) the Executive's base salary under Paragraph 3 through the Date of Termination to the extent not theretofore paid, (B) the amount of any bonus, incentive compensation, deferred compensation and other cash compensation accrued by the Executive as of the Date of Termination to the extent not theretofore paid and (C) any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive as of the Date of Termination to the extent not theretofore paid. For the purpose of this Paragraph 7(d)(i), amounts shall be deemed to accrue ratably over the period during which they are earned, but no discretionary compensation shall be deemed earned or accrued until it is specifically approved by the Board or the Compensation Committee in accordance with the applicable plan, program or policy. (ii) "Cause" shall mean: (A) the Executive's commission of an act materially and demonstrably detrimental to the financial condition and/or goodwill of the Corporation or any of its subsidiaries, which act constitutes gross negligence or willful misconduct by the Executive in the performance of his material duties to the Corporation or any of its subsidiaries, or (B) the Executive's commission of any material act of dishonesty or breach of trust resulting or intended to result in material personal gain or enrichment of the Executive at the expense of the Corporation or any of its subsidiaries, or (C) the Executive's conviction of a felony involving moral turpitude, but specifically excluding any conviction based entirely on vicarious liability. No act or failure to act will be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that his action or omission was in the best interests of the Corporation. In addition, no act or omission will constitute Cause unless the Corporation has given detailed written notice thereof to the Executive and, where remedial action is feasible, he then fails to remedy the act or omission within a reasonable time after receiving such notice. (iii) A "Change in Control" shall be deemed to have occurred 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 Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation'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 Corporation by the Corporation 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 Corporation's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Corporation shall be deemed a Change in Control; and provided further that if the Board of Directors of the Corporation determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation'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 Corporation 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 Corporation's then outstanding securities, then no Change in Control shall be deemed to have occurred; (B) During any period of two (2) consecutive years (not including any period prior to the Effective Date of this Agreement), individuals who at the beginning of such two-year period constitute the Board of Directors of the Corporation and any new director or directors (except for any director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in subparagraph (A), above, or subparagraph (C), below) whose election by the Board or nomination for election by the Corporation'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 Corporation or all or substantially all of the Corporation's assets, (2) a plan of merger or consolidation of the Corporation with any other corporation, or (3) a similar transaction or series of transactions involving the Corporation (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 Corporation 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 Corporation or all or substantially all of the Corporation'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 Corporation 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 Corporation 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) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. Any other provision of this Agreement to the contrary notwithstanding, a "Change in Control" shall not include any transaction described in subparagraph (A) or (C), above, where, in connection with such transaction, the Executive and/or any party acting in concert with the Executive substantially increases his or its, as the case may be, ownership interest in the Corporation or a successor to the Corporation (other than through conversion of prior ownership interests in the Corporation and/or through equity awards received entirely as compensation for past or future personal services). (iv) "Date of Termination" shall mean (A) in the event of a discharge of the Executive by the Board for Cause, the date specified in such Notice of Termination, (B) in the event of a discharge of the Executive without Cause or a resignation by the Executive, the date specified in the written notice to the Executive (in the case of discharge) or the Corporation (in the case of resignation), which date shall be no less than fifteen (15) days from the date of such written notice, (C) in the event of the Executive's death, the date of the Executive's death, and (D) in the event of termination of the Executive's employment by reason of disability pursuant to Paragraph 7(a), the date the Executive receives written notice of such termination. (v) "Good Reason" shall mean any of the following without the consent of the Executive: (A) the failure to re-elect the Executive as Vice Chairman-Chief Financial Officer, (B) assignment of duties inconsistent with the Executive's position, authority, duties or responsibilities, or any other action by the Corporation which results in a substantial diminution of such position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, (C) any failure by the Corporation to comply with any of the provisions of this Agreement, including (but not by way of limitation) those provisions regarding compensation and benefits, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (D) the Corporation giving notice to the Executive to stop further operation of the evergreen feature described in Paragraph 1(b), above. However, during the period of three (3) years after a Change in Control, "Good Reason" shall also include the Executive being reassigned, without the Executive's consent, to an office location outside of the Chicago, Illinois metropolitan area. In addition, termination by the Executive for any reason during the sixty (60)-day period which begins twelve (12) months after a Change in Control shall be deemed to be a termination for Good Reason; provided, however, that if the Executive dies after a Change in Control but less than twelve (12) months after a Change in Control, the Executive will be deemed to have terminated employment for Good Reason twelve (12) months after the Change in Control. (vi) "Qualifying Termination" shall mean termination of the Executive's employment under this Agreement (A) by reason of the discharge of the Executive by the Corporation other than for Cause or disability or (B) by reason of the resignation of the Executive for Good Reason within twelve (12) months after an event constituting Good Reason or (C) in accordance with the last sentence of the definition of Good Reason in subparagraph (v), above. (e) Continuing Obligations. Notwithstanding the termination of this Agreement pursuant to Paragraph 7(a), 7(b) or 7(c) above, or upon the expiration of the term described in Paragraph 1 above, the respective covenants, agreements and obligations of the Corporation and the Executive set forth hereinafter shall continue. 8. Vesting of Equity Awards Upon a Change in Control. Immediately upon the Change in Control, all stock options, restricted stock and other equity awards previously made to the Executive which are not otherwise vested shall vest in full, and all such options shall remain exercisable for the period provided for the applicable plan or award agreement. 9. Obligations of the Corporation Upon Termination. The following provisions describe the obligations of the Corporation to the Executive under this Agreement upon termination of his employment. However, except as explicitly provided in this Agreement, nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Corporation or any of its subsidiaries, or under any compensation or benefit plan, program, policy or practice of the Corporation or any of its subsidiaries. (a) Death, Disability, Discharge for Cause, or Resignation Without Good Reason. In the event this Agreement terminates by reason of the death or disability of the Executive, or by reason of the discharge of the Executive by the Corporation for Cause, or by reason of the resignation of the Executive other than for Good Reason, the Corporation shall pay to the Executive, or his heirs or estate, in the event of the Executive's death, all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation, or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive. (b) Death, Disability or Retirement. In the event that Executive's employment is terminated by death, disability or retirement under a retirement plan of the Corporation, the Executive shall be entitled to receive in a lump sum within thirty (30) days after the Date of Termination, in addition to the compensation and benefits described in paragraph (a) above, a pro rata cash bonus for the year in which the Date of Termination occurs equal to the product of (i) the highest of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, including any bonus or portion thereof that has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months) (the "Highest Annual Bonus"), and (ii) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365. (c) Qualifying Termination Without a Change in Control. In the event of a Qualifying Termination without a Change in Control, the Executive shall, upon executing and delivering a release of liability satisfactory to the Corporation, receive the following benefits: (i) Payment of all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to one hundred fifty percent (150%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to one hundred fifty percent (150%) of the Highest Annual Bonus, (iv) Continuation, for a period of eighteen (18) months after the Date of Termination, of health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") with the cost of such benefits to be paid by the Corporation, but such benefits may be discontinued earlier to the extent that the Executive becomes entitled to comparable benefits from a subsequent employer, (v) Immediate pro rata vesting of all stock options, restricted stock and other equity or incentive compensation awards to the Executive which are not otherwise fully vested, with all options to remain exercisable for the period provided for in the applicable plan or award agreement. The proration of each award shall be done by multiplying the full award by a fraction, the numerator of which shall be the number of full months between the date of grant and the Date of Termination, and the denominator of which shall be the number of full months in the period of employment required for full vesting under the original terms of the award, and (vi) Outplacement services, at the expense of the Corporation, from a provider reasonably selected by the Executive. In addition, the Executive may, in the discretion of the Compensation Committee, be awarded a pro rata cash bonus for the year in which the Date of Termination occurs. (d) Qualifying Termination After a Change in Control. In the event of a Qualifying Termination within three (3) years after a Change in Control, the Executive shall receive, in addition to the compensation and benefits described in subparagraphs (c)(i) and (c)(vi), above, the following benefits: (i) Payment in a lump sum within thirty (30) days after the Date of Termination of a pro rata cash bonus for the year in which the Date of Termination occurs equal to the product of (x) the Highest Annual Bonus and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365; (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to three hundred percent (300%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to three hundred percent (300%) of the Highest Annual Bonus; (iv) Continuation, for a period of three (3) years after the Date of Termination, of the following welfare benefits and senior executive perquisites on terms at least as favorable to the Executive as those which would have been provided if the Executive's employment had continued for that time pursuant to this Agreement: medical and dental benefits, life and disability insurance, umbrella liability insurance coverage, executive physical examinations, and automobile and financial counseling allowances, with the cost of such benefits to be paid by the Corporation. To the extent the Corporation is unable to provide comparable insurance for reasons other than cost, the Corporation may provide a lesser level or no coverage and compensate the Executive for the difference in coverage through a cash lump sum payment grossed up for taxes. This payment will be tied to the cost of an individual insurance policy if it were assumed to be available. The medical and dental benefits provided hereunder shall not be considered a continuation of coverage under COBRA, and continuation coverage under COBRA shall be made available to the Executive at the end of such three (3) year period as if the Executive's employment had terminated on the last day of such period. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to post-retirement welfare benefit plans, practices, programs and policies of the Corporation, the Executive shall be considered to have remained employed for three (3) years after the Date of Termination and, therefore, will be treated as having three (3) additional years of age and service credit after the Date of Termination and as having retired on the last day of such three (3) year period; (v) For purposes of determining the Executive's benefits under the Corporation's non-qualified excess and supplemental defined benefit retirement plans (the "SERP") in which the Executive participates, the Executive's benefits under the SERP shall equal the excess of (x) the actuarial equivalent (utilizing actuarial assumptions determined on a basis no less favorable to the Executive than the basis used under the terms of the Retirement Plan as in effect immediately prior to the Change in Control) of the sum of (A) the benefit under the Corporation's qualified defined benefit retirement plan (the "Retirement Plan") and (B) the benefit under any excess or supplemental retirement plans in which the Executive participates (collectively, the "SERP"), based on the Executive's period of service through the Date of Termination and assuming for this purpose that: (1) the Executive's employment continued for three years after the Date of Termination, and, therefore, the Executive had three (3) additional years of age and service credit after the Date of Termination under the Retirement Plan and the SERP, (2) all accrued benefits under the Retirement Plan and the SERP are fully vested and (3) the Executive's salary and annual bonus for each year during such three (3) year period were the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii) above, over (y) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan, as of the Date of Termination; and (vi) Payment in a lump sum within thirty (30) days after the Date of Termination of an amount equal to the sum of the maximum matching contributions by the Corporation under the Corporation's tax-qualified and supplemental Section 401(k) plans in which the Executive participates that the Executive would have received if the Executive's employment continued for three (3) years after the Date of Termination, assuming for this purpose that: (x) the Executive's salary and annual bonus for each year during such three (3) year period were the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii) above and (y) the Company's matching contributions are determined pursuant to the applicable provisions of the Corporation's tax-qualified and supplemental Section 401(k) plans, as in effect immediately prior to the Change in Control. (e) Termination of Employment Prior to Change in Control. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Corporation is terminated within six (6) months prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who was taking steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement the termination of the Executive's employment shall be deemed to have occurred immediately after the Change in Control. 10. Certain Additional Payments by the Corporation. The Corporation agrees that: (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or if any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of paragraph (c), below, all determinations required to be made under this Paragraph 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the accounting firm which is then serving as the auditors for the Corporation (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Corporation. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Paragraph 10, shall be paid by the Corporation to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any good faith determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to paragraph (c), below, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive. (c) The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which Executive gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Corporation any information reasonably requested by the Corporation relating to such claim, (ii) Take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation, (iii) Cooperate with the Corporation in good faith in order effectively to contest such claim, and (iv) Permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph (c), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to paragraph (c), above, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation's complying with the requirements of said paragraph (c)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon, after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to said paragraph (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid; and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. 11. No Set-Off or Mitigation. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Corporation may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. 12. Payment of Certain Expenses. The Corporation agrees to pay promptly as incurred, to the fullest extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome) by the Corporation, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest initiated by the Executive about the amount of any payment due pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, however, that, notwithstanding anything contained herein to the contrary, with respect to contests arising prior to a Change in Control (and not otherwise directly associated with the Change in Control), the Corporation shall not be obligated to make such payment with respect to any such contest in which the Corporation prevails over the Executive. 13. Indemnification. To the full extent permitted by law, the Corporation shall, both during and after the term of the Executive's employment, indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being (or having been) an officer, director or employee of the Corporation or any of its subsidiaries. In addition, the Executive shall be covered, both during and after the term of the Executive's employment, by director and officer liability insurance to the maximum extent that such insurance covers any officer or director (or former officer or director) of the Corporation. 14. Confidentiality. During and after the period of employment with the Corporation, the Executive shall not, without prior written consent from the Chief Executive Officer or the General Counsel of the Corporation directly or indirectly disclose to any individual, corporation or other entity, other than to the Corporation or any subsidiary or affiliate thereof or their officers, directors or employees entitled to such information or any other person or entity to whom such information is disclosed in the normal course of the business of the Corporation) or use for the Executive's own benefit or for the benefit of any such individual, corporation or other entity, any Confidential Information of the Corporation. For purposes of this Agreement, "Confidential Information" is information relating to the business of the Corporation or its subsidiaries or affiliates (a) which is not generally known to the public or in the industry, (b) which has been treated by the Corporation and its subsidiaries and affiliates as confidential or proprietary, (c) which provides the Corporation or its subsidiaries or affiliates with a competitive advantage, and (d) in the confidentiality of which the Corporation has a legally protectable interest. Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which the Corporation and its subsidiaries and affiliates cease to have a legally protectable interest, shall cease to be subject to the restrictions of this Paragraph 14. 15. Status Under FDIC Regulations. This Agreement amends and restates a prior employment agreement dated July 11, 1994 which was entered into prior to March 29, 1995, which was the date that regulations were proposed by the Federal Deposit Insurance Corporation (the "FDIC") limiting "golden parachute" and indemnification payments by insured depository institutions and their holding companies. As of March 29, 1995 that prior agreement provided for a lump sum payment equal to 560% of the Executive's base salary. In view of the foregoing, if the payments and other benefits under Paragraph 9 of this Agreement are limited by those FDIC regulations, it is currently anticipated that any limits on "golden parachute" payments resulting from regulations issued by the FDIC should not reduce the payments under this Agreement below the lesser of (a) 560% of the Executive's base salary or (b) the payments and other benefits calculated under Paragraph 9 of this Agreement. However, if FDIC regulations are ultimately determined to further limit payments and other benefits under this Agreement, then such FDIC limits shall supersede the terms of Paragraph 9, above. 16. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law, and such successor shall be deemed the "Corporation" for purposes of this Agreement. 17. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or by recognized commercial delivery service or if mailed within the continental United States by first class certified mail, return receipt requested, postage prepaid, addressed as follows: (1) If to the Board or the Corporation, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: Executive Vice President-Administration (2) If to the Executive, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: David A. Schoenholz Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. 18. Tax Withholding. The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state, or local law with respect to any payment in cash, shares of stock and/or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (a) withhold such taxes from any cash payments owing from the Corporation to the Executive, (b) require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding obligations and/or (c) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 19. Arbitration. Except as to any controversy or claim which the Executive elects, by written notice to the Corporation, to have adjudicated by a court of competent jurisdiction, any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in Chicago, Illinois in accordance with the laws of the State of Illinois. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association. The costs and expenses of the arbitrator(s) shall be borne by the Corporation. The award of the arbitrator(s) shall be binding upon the parties. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. 20. No Assignment. Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 21. Execution in Counterparts. This Agreement may be executed by the parties hereto in two (2) or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 22. Jurisdiction and Governing Law. This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of Illinois, other than the conflict of laws provisions of such laws. 23. Severability. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. Furthermore, if the scope of any restriction or requirement contained in this Agreement is too broad to permit enforcement of such restriction or requirement to its full extent, then such restriction or requirement shall be enforced to the maximum extent permitted by law, and the Executive consents and agrees that any court of competent jurisdiction may so modify such scope in any proceeding brought to enforce such restriction or requirement. 24. Prior Understandings. This Agreement embodies the entire understanding of the parties hereto and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof, including but not by way of limitation by amending and restating the Employment Agreement dated January 1, 1999 between the parties. This Agreement also supersedes the Employment Agreement dated July 9, 1996, the Employment Agreement dated January 3, 1994, the Employment Agreement dated May 28, 1993, the Employment Agreement dated December 1, 1989, the Senior Executive Employment Agreement dated January 1, 1988, and the Supplemental Employment Agreement dated January 1, 1988, between the parties. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. The headings in this Agreement are for convenience of reference only and shall not be construed as part of this Agreement or to limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. Attest: HOUSEHOLD INTERNATIONAL, INC. /s/ K. H. Robin By: /s/ William F. Aldinger - ------------------------------------- -------------------------------------- Kenneth H. Robin Title: Chairman and Chief Executive Senior Vice President-General Counsel Officer and Corporate Secretary /s/ David A. Schoenholz --------------------------------------- David A. Schoenholz EX-10 8 hiexhibit10-16.txt HI EXHIBIT 10-16 - EMPLOYMENT CONTRACT RJF EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of March 1, 2002 by and between Household International, Inc., a Delaware corporation, (hereinafter called the "Corporation") and Rocco J. Fabiano (hereinafter called the "Executive"). WITNESSETH THAT: WHEREAS, the Executive is currently employed by the Corporation under an employment agreement dated April 1, 1999; and WHEREAS, the Corporation desires to continue to employ the Executive as its Group Executive, and the Executive desires to continue in such employment, on amended and restated terms and conditions; NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. Employment and Term. ------------------- (a) Employment. The Corporation shall continue to employ the Executive as Group Executive of the Corporation, and the Executive shall so serve, for the term set forth in Paragraph 1(b). (b) Term. The initial term of the Executive's employment under this Agreement shall commence as of March 1, 2002 (the "Effective Date") and end on August 31, 2003, subject to the extension of such term as hereinafter provided and subject to earlier termination as provided in Paragraph 7, below. Beginning on March 1, 2002, the term of this Agreement shall be extended automatically for one (1) additional day for each day which has then elapsed since March 1, 2002, unless, at any time after March 1, 2002, either the Board of Directors of the Corporation (the "Board"), on behalf of the Corporation, or the Executive gives written notice to the other that such automatic extension of the term of this Agreement shall cease. Any such notice shall be effective immediately upon delivery. The initial term of this Agreement, plus any extension by operation of this Paragraph 1, shall be hereinafter referred to as the "Term." 2. Duties. During the period of employment as provided in Paragraph 1(b) hereof, the Executive shall serve as Group Executive of the Corporation and have all powers and duties consistent with such position, subject to the reasonable direction of the Board and of the Chief Executive Officer of the Corporation. The Executive shall also continue to serve as a member of the Board if elected as such. The Executive shall devote substantially his entire time during reasonable business hours (reasonable sick leave and vacations excepted)and best efforts to fulfill faithfully, responsibly and to the best of his ability his duties hereunder. However, the Executive may, with the approval of the Board or of the Chief Executive Officer of the Corporation, which shall not be withheld unreasonably, serve on corporate, civic and/or charitable boards and committees. 3. Salary. ------ (a) Base Salary. For services performed by the Executive for the Corporation pursuant to this Agreement during the period of employment as provided in Paragraph 1(b) hereof, the Corporation shall pay the Executive a base salary of $500,000 per year, payable in substantially equal installments in accordance with the Corporation's regular payroll practices. The Executive's base salary (with any increases under paragraph (b), below) shall not be subject to reduction. Any compensation which may be paid to the Executive under any additional compensation or incentive plan of the Corporation or which may be otherwise authorized from time to time by the Board (or an appropriate committee thereof) shall be in addition to the base salary to which the Executive shall be entitled under this Agreement. (b) Salary Increases. During the period of employment as provided in Paragraph 1(b) hereof, the base salary of the Executive shall be reviewed no less frequently than annually by the Board or the Compensation Committee of the Board or the Chief Executive Officer of the Corporation to determine whether or not the same should be increased in light of the duties and responsibilities of the Executive and the performance thereof, and if it is determined that an increase is merited, such increase shall be promptly put into effect and the base salary of the Executive as so increased shall constitute the base salary of the Executive for purposes of Paragraph 3(a). 4. Annual Bonuses. For each calendar year during the term of employment, the Executive shall be eligible to receive in cash an annual performance bonus based upon the terms of the Corporation's bonus plan from time to time for senior executives, as adopted by the Board and administered by the Compensation Committee. 5. Equity Incentive Compensation. During the term of employment hereunder the Executive shall be eligible to participate, in the manner and to the extent approved by the Board or the Compensation Committee, in any equity-based incentive compensation plan or program approved by the Board from time to time, including (but not by way of limitation) any plan providing for the granting of (a) options to purchase stock of the Corporation, (b) restricted stock of the Corporation or (c) similar equity-based units or interests, with awards to the Executive that are of appropriate size and nature relative to those for other senior executives and the individual performance of the Executive. 6. Other Benefits. In addition to the compensation described in Paragraphs 3, 4 and 5, above, the Executive shall also be entitled to participate in all of the various retirement, welfare, fringe benefit, executive perquisite, and expense reimbursement plans, programs and arrangements of the Corporation to the extent the Executive is eligible for participation under the terms of such plans, programs and arrangements, with benefit levels and terms of participation at least as favorable to the Executive as those in effect on the Effective Date, except that the Executive's benefits and/or perquisites may be reduced in connection with similar reductions uniformly applied with respect to all similarly situated employees. 7. Termination. Unless earlier terminated in accordance with the following provisions of this Paragraph 7, the Corporation shall continue to employ the Executive and the Executive shall remain employed by the Corporation during the entire term of this Agreement as set forth in Paragraph 1(b). Paragraph 9 hereof sets forth certain obligations of the Corporation in the event that the Executive's employment hereunder is terminated. Certain capitalized terms used in this Paragraph 7 and in Paragraphs 8 and 9 hereof are defined in Paragraph 7(d), below. (a) Death or Disability. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination payment obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event of the Executive's death or in the event that the Executive becomes disabled. The Executive will be deemed to be disabled upon the earlier of (i) the end of a six (6)-consecutive month period during which, by reason of physical or mental injury or disease, the Executive has been unable to perform substantially all of his usual and customary duties under this Agreement or (ii) the date that a reputable physician selected by the Board, and as to whom the Executive has no reasonable objection, determines in writing that the Executive will, by reason of physical or mental injury or disease, be unable to perform substantially all of the Executive's usual and customary duties under this Agreement for a period of at least six (6) consecutive months. If any question arises as to whether the Executive is disabled, upon reasonable request therefor by the Board, the Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Board shall promptly give the Executive written notice of any such determination of the Executive's disability and of any decision of the Board to terminate the Executive's employment by reason thereof. Until the Date of Termination for disability, the base salary payable to the Executive under Paragraph 3 hereof shall be reduced dollar-for-dollar by the amount of any disability benefits paid to the Executive in accordance with any disability policy or program of the Corporation. (b) Discharge for Cause. In accordance with the procedures hereinafter set forth, the Board may discharge the Executive from his employment hereunder for Cause. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged for Cause. Any discharge of the Executive for Cause shall be communicated by a Notice of Termination to the Executive given in accordance with Paragraph 16 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, which may be as early as the date of the giving of such notice. No purported termination of the Executive's employment for Cause shall be effective without a Notice of Termination. (c) Termination for Other Reasons. The Corporation may discharge the Executive without Cause by giving written notice to the Executive in accordance with Paragraph 16 at least fifteen (15) days prior to the Date of Termination. The Executive may resign from his employment, without liability to the Corporation, by giving written notice to the Corporation in accordance with Paragraph 16 at least fifteen (15) days prior to the Date of Termination. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged without Cause or resigns. (d) Definitions. For purposes of this Agreement, the following capitalized terms shall have the meanings set forth below: (i) "Accrued Obligations" shall mean, as of the Date of Termination, the sum of (A) the Executive's base salary under Paragraph 3 through the Date of Termination to the extent not theretofore paid, (B) the amount of any bonus, incentive compensation, deferred compensation and other cash compensation accrued by the Executive as of the Date of Termination to the extent not theretofore paid and (C) any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive as of the Date of Termination to the extent not theretofore paid. For the purpose of this Paragraph 7(d)(i), amounts shall be deemed to accrue ratably over the period during which they are earned, but no discretionary compensation shall be deemed earned or accrued until it is specifically approved by the Board or the Compensation Committee in accordance with the applicable plan, program or policy. (ii) "Cause" shall mean: (A) the Executive's commission of an act materially and demonstrably detrimental to the financial condition and/or goodwill of the Corporation or any of its subsidiaries, which act constitutes gross negligence or willful misconduct by the Executive in the performance of his material duties to the Corporation or any of its subsidiaries, or (B) the Executive's commission of any material act of dishonesty or breach of trust resulting or intended to result in material personal gain or enrichment of the Executive at the expense of the Corporation or any of its subsidiaries, or (C) the Executive's conviction of a felony involving moral turpitude, but specifically excluding any conviction based entirely on vicarious liability. No act or failure to act will be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that his action or omission was in the best interests of the Corporation. In addition, no act or omission will constitute Cause unless the Corporation has given detailed written notice thereof to the Executive and, where remedial action is feasible, he then fails to remedy the act or omission within a reasonable time after receiving such notice. (iii) A "Change in Control" shall be deemed to have occurred 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 Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation'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 Corporation by the Corporation 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 Corporation's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Corporation shall be deemed a Change in Control; and provided further that if the Board of Directors of the Corporation determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation'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 Corporation 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 Corporation's then outstanding securities, then no Change in Control shall be deemed to have occurred; (B) During any period of two (2) consecutive years (not including any period prior to the Effective Date of this Agreement), individuals who at the beginning of such two-year period constitute the Board of Directors of the Corporation and any new director or directors (except for any director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in subparagraph (A), above, or subparagraph (C), below) whose election by the Board or nomination for election by the Corporation'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 Corporation or all or substantially all of the Corporation's assets, (2) a plan of merger or consolidation of the Corporation with any other corporation, or (3) a similar transaction or series of transactions involving the Corporation (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 Corporation 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 Corporation or all or substantially all of the Corporation'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 Corporation 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 Corporation 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) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. Any other provision of this Agreement to the contrary notwithstanding, a "Change in Control" shall not include any transaction described in subparagraph (A) or (C), above, where, in connection with such transaction, the Executive and/or any party acting in concert with the Executive substantially increases his or its, as the case may be, ownership interest in the Corporation or a successor to the Corporation (other than through conversion of prior ownership interests in the Corporation and/or through equity awards received entirely as compensation for past or future personal services). (iv) "Date of Termination" shall mean (A) in the event of a discharge of the Executive by the Board for Cause, the date specified in such Notice of Termination, (B) in the event of a discharge of the Executive without Cause or a resignation by the Executive, the date specified in the written notice to the Executive (in the case of discharge) or the Corporation (in the case of resignation), which date shall be no less than fifteen (15) days from the date of such written notice, (C) in the event of the Executive's death, the date of the Executive's death, and (D) in the event of termination of the Executive's employment by reason of disability pursuant to Paragraph 7(a), the date the Executive receives written notice of such termination. (v) "Good Reason" shall mean any of the following without the consent of the Executive: (A) the failure to re-elect the Executive as Group Executive, (B) assignment of duties inconsistent with the Executive's position, authority, duties or responsibilities, or any other action by the Corporation which results in a substantial diminution of such position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, (C) any failure by the Corporation to comply with any of the provisions of this Agreement, including (but not by way of limitation) those provisions regarding compensation and benefits, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (D) the Corporation giving notice to the Executive to stop further operation of the evergreen feature described in Paragraph 1(b), above. However, during the period of three (3) years after a Change in Control, "Good Reason" shall also include the Executive being reassigned, without the Executive's consent, to an office location outside of the San Diego, California metropolitan area. In addition, termination by the Executive for any reason during the sixty (60)-day period which begins twelve (12) months after a Change in Control shall be deemed to be a termination for Good Reason; provided, however, that if the Executive dies after a Change in Control but less than twelve (12) months after a Change in Control, the Executive will be deemed to have terminated employment for Good Reason twelve (12) months after the Change in Control. (vi) "Qualifying Termination" shall mean termination of the Executive's employment under this Agreement (A) by reason of the discharge of the Executive by the Corporation other than for Cause or disability or (B) by reason of the resignation of the Executive for Good Reason within twelve (12) months after an event constituting Good Reason or (C) in accordance with the last sentence of the definition of Good Reason in subparagraph (v), above. (e) Continuing Obligations. Notwithstanding the termination of pursuant to Paragraph 7(a), 7(b) or 7(c) above, or upon the expiration of the term described in Paragraph 1 above, the respective covenants, agreements and obligations of the Corporation and the Executive set forth hereinafter shall continue. 8. Vesting of Equity Awards Upon a Change in Control. Immediately upon the Change in Control, all stock options, restricted stock and other equity awards previously made to the Executive which are not otherwise vested shall vest in full, and all such options shall remain exercisable for the period provided for the applicable plan or award agreement. 9. Obligations of the Corporation Upon Termination. The following provisions describe the obligations of the Corporation to the Executive under this Agreement upon termination of his employment. However, except as explicitly provided in this Agreement, nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Corporation or any of its subsidiaries, or under any compensation or benefit plan, program, policy or practice of the Corporation or any of its subsidiaries. (a) Death, Disability, Discharge for Cause, or Resignation Without Good Reason. In the event this Agreement terminates by reason of the death or disability of the Executive, or by reason of the discharge of the Executive by the Corporation for Cause, or by reason of the resignation of the Executive other than for Good Reason, the Corporation shall pay to the Executive, or his heirs or estate, in the event of the Executive's death, all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation, or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive. (b) Death, Disability or Retirement. In the event that Executive's employment is terminated by death, disability or retirement under a retirement plan of the Corporation, the Executive shall be entitled to receive in a lump sum within thirty (30) days after the Date of Termination, in addition to the compensation and benefits described in paragraph (a) above, a pro rata cash bonus for the year in which the Date of Termination occurs equal to the product of (i) the highest of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, including any bonus or portion thereof that has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months) (the "Highest Annual Bonus"), and (ii) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365. (c) Qualifying Termination Without a Change in Control. In the event of a Qualifying Termination without a Change in Control, the Executive shall, upon executing and delivering a release of liability satisfactory to the Corporation, receive the following benefits: (i) Payment of all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to one hundred fifty percent (150%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to one hundred fifty percent (150%) of the Highest Annual Bonus, (iv) Continuation, for a period of eighteen (18) months after the Date of Termination, of health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") with the cost of such benefits to be paid by the Corporation, but such benefits may be discontinued earlier to the extent that the Executive becomes entitled to comparable benefits from a subsequent employer, (v) Immediate pro rata vesting of all stock options, restricted stock and other equity or incentive compensation awards to the Executive which are not otherwise fully vested, with all options to remain exercisable for the period provided for in the applicable plan or award agreement. The proration of each award shall be done by multiplying the full award by a fraction, the numerator of which shall be the number of full months between the date of grant and the Date of Termination, and the denominator of which shall be the number of full months in the period of employment required for full vesting under the original terms of the award, and (vi) Outplacement services, at the expense of the Corporation, from a provider reasonably selected by the Executive. In addition, the Executive may, in the discretion of the Compensation Committee, be awarded a pro rata cash bonus for the year in which the Date of Termination occurs. (d) Qualifying Termination After a Change in Control. In the event of a Qualifying Termination within three (3) years after a Change in Control, the Executive shall receive, in addition to the compensation and benefits described in subparagraphs (c)(i) and (c)(vi), above, the following benefits: (i) Payment in a lump sum within thirty (30) days after the Date of Termination of a pro rata cash bonus for the year in which the Date of Termination occurs equal to the product of (x) the Highest Annual Bonus and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365; (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to three hundred percent (300%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to three hundred percent (300%) of the Highest Annual Bonus; (iv) Continuation, for a period of three (3) years after the Date of Termination, of the following welfare benefits and senior executive perquisites on terms at least as favorable to the Executive as those which would have been provided if the Executive's employment had continued for that time pursuant to this Agreement: medical and dental benefits, life and disability insurance, umbrella liability insurance coverage, executive physical examinations, and automobile and financial counseling allowances, with the cost of such benefits to be paid by the Corporation. To the extent the Corporation is unable to provide comparable insurance for reasons other than cost, the Corporation may provide a lesser level or no coverage and compensate the Executive for the difference in coverage through a cash lump sum payment grossed up for taxes. This payment will be tied to the cost of an individual insurance policy if it were assumed to be available. The medical and dental benefits provided hereunder shall not be considered a continuation of coverage under COBRA, and continuation coverage under COBRA shall be made available to the Executive at the end of such three (3) year period as if the Executive's employment had terminated on the last day of such period. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to post-retirement welfare benefit plans, practices, programs and policies of the Corporation, the Executive shall be considered to have remained employed for three (3) years after the Date of Termination and, therefore, will be treated as having three (3) additional years of age and service credit after the Date of Termination and as having retired on the last day of such three (3) year period; (v) For purposes of determining the Executive's benefits under the Corporation's non-qualified excess and supplemental defined benefit retirement plans (the "SERP") in which the Executive participates, the Executive's benefits under the SERP shall equal the excess of (x) the actuarial equivalent (utilizing actuarial assumptions determined on a basis no less favorable to the Executive than the basis used under the terms of the Retirement Plan as in effect immediately prior to the Change in Control) of the sum of (A) the benefit under the Corporation's qualified defined benefit retirement plan (the "Retirement Plan") and (B) the benefit under any excess or supplemental retirement plans in which the Executive participates (collectively, the "SERP"), based on the Executive's period of service through the Date of Termination and assuming for this purpose that: (1) the Executive's employment continued for three years after the Date of Termination, and, therefore, the Executive had three (3) additional years of age and service credit after the Date of Termination under the Retirement Plan and the SERP, (2) all accrued benefits under the Retirement Plan and the SERP are fully vested and (3) the Executive's salary and annual bonus for each year during such three (3) year period were the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii) above, over (y) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan, as of the Date of Termination; and (vi) Payment in a lump sum within thirty (30) days after the Date of Termination of an amount equal to the sum of the maximum matching contributions by the Corporation under the Corporation's tax-qualified and supplemental Section 401(k) plans in which the Executive participates that the Executive would have received if the Executive's employment continued for three (3) years after the Date of Termination, assuming for this purpose that: (x) the Executive's salary and annual bonus for each year during such three (3) year period were the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii) above and (y) the Company's matching contributions are determined pursuant to the applicable provisions of the Corporation's tax-qualified and supplemental Section 401(k) plans, as in effect immediately prior to the Change in Control. (e) Termination of Employment Prior to Change in Control. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Corporation is terminated within six (6) months prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who was taking steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement the termination of the Executive's employment shall be deemed to have occurred immediately after the Change in Control. 10. Certain Additional Payments by the Corporation. The Corporation agrees that: (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or if any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of paragraph (c), below, all determinations required to be made under this Paragraph 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the accounting firm which is then serving as the auditors for the Corporation (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Corporation. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Paragraph 10, shall be paid by the Corporation to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any good faith determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to paragraph (c), below, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive. (c) The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which Executive gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Corporation any information reasonably requested by the Corporation relating to such claim, (ii) Take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation, (iii) Cooperate with the Corporation in good faith in order effectively to contest such claim, and (iv) Permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph (c), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to paragraph (c), above, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation's complying with the requirements of said paragraph (c)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon, after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to said paragraph (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid; and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. 11. No Set-Off or Mitigation. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Corporation may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. 12. Payment of Certain Expenses. The Corporation agrees to pay promptly as incurred, to the fullest extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome) by the Corporation, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest initiated by the Executive about the amount of any payment due pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, however, that, notwithstanding anything contained herein to the contrary, with respect to contests arising prior to a Change in Control (and not otherwise directly associated with the Change in Control), the Corporation shall not be obligated to make such payment with respect to any such contest in which the Corporation prevails over the Executive. 13. Indemnification. To the full extent permitted by law, the Corporation shall, both during and after the term of the Executive's employment, indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being (or having been) an officer, director or employee of the Corporation or any of its subsidiaries. In addition, the Executive shall be covered, both during and after the term of the Executive's employment, by director and officer liability insurance to the maximum extent that such insurance covers any officer or director (or former officer or director) of the Corporation. 14. Confidentiality. During and after the period of employment with the Corporation, the Executive shall not, without prior written consent from the Chief Executive Officer or the General Counsel of the Corporation directly or indirectly disclose to any individual, corporation or other entity, other than to the Corporation or any subsidiary or affiliate thereof or their officers, directors or employees entitled to such information or any other person or entity to whom such information is disclosed in the normal course of the business of the Corporation) or use for the Executive's own benefit or for the benefit of any such individual, corporation or other entity, any Confidential Information of the Corporation. For purposes of this Agreement, "Confidential Information" is information relating to the business of the Corporation or its subsidiaries or affiliates (a) which is not generally known to the public or in the industry, (b) which has been treated by the Corporation and its subsidiaries and affiliates as confidential or proprietary, (c) which provides the Corporation or its subsidiaries or affiliates with a competitive advantage, and (d) in the confidentiality of which the Corporation has a legally protectable interest. Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which the Corporation and its subsidiaries and affiliates cease to have a legally protectable interest, shall cease to be subject to the restrictions of this Paragraph 14. 15. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law, and such successor shall be deemed the "Corporation" for purposes of this Agreement. 16. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or by recognized commercial delivery service or if mailed within the continental United States by first class certified mail, return receipt requested, postage prepaid, addressed as follows: (1) If to the Board or the Corporation, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: Executive Vice President-Administration (2) If to the Executive, to: Rocco J. Fabiano 1646 Lugano Lane Del Mar, California 92014 Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. 17. Tax Withholding. The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state, or local law with respect to any payment in cash, shares of stock and/or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (a) withhold such taxes from any cash payments owing from the Corporation to the Executive, (b)require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding obligations and/or (c) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 18. Arbitration. Except as to any controversy or claim which the Executive elects, by written notice to the Corporation, to have adjudicated by a court of competent jurisdiction, any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in accordance with the laws of the State of Illinois, except for the provisions of paragraph 23 where the laws of the State of California shall apply. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association. The costs and expenses of the arbitrator(s) shall be borne by the Corporation. The award of the arbitrator(s) shall be binding upon the parties. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. 19. No Assignment. Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 20. Execution in Counterparts. This Agreement may be executed by the parties hereto in two (2) or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 21. Jurisdiction and Governing Law. Other than the conflict of laws provisions of such laws, this Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of Illinois, except for the provision of paragraph 23 where the laws of the State of California shall apply. 22. Severability. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. Furthermore, if the scope of any restriction or requirement contained in this Agreement is too broad to permit enforcement of such restriction or requirement to its full extent, then such restriction or requirement shall be enforced to the maximum extent permitted by law, and the Executive consents and agrees that any court of competent jurisdiction may so modify such scope in any proceeding brought to enforce such restriction or requirement. 23. Non-Competition After Sale. In consideration of the fact that a subsidiary of the Corporation purchased all of the Executive's shares of ACC Consumer Finance Corporation on October 21, 1997, the Executive agrees that during the 3 year period ending on October 20, 2000, the Executive will not invest or engage in any business which is principally a sub-prime consumer auto lender (a "Competitor") within the United States or Canada or accept employment with or render services to any Competitor within the United States or Canada and during the 2 year period commencing October 21, 2000, the Executive will not invest or engage in any business which is a Competitor within the United States or Canada or accept employment with or render services to any Competitor within the United States or Canada unless that Competitor has been in existence and operating for more than three (3) years at that time. For the period ending one (1) year after the date of termination, the Executive will not solicit to hire any employee of the Corporation or its subsidiaries which would result in a termination of his or her employment with the Corporation or any of its subsidiaries in order to join any company or organization in which the Executive has an interest, financially or otherwise. The provisions of this paragraph shall terminate upon a Change in Control. 24. Prior Understandings. This Agreement embodies the entire understanding of the parties hereto and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof, including but not by way of limitation by amending and restating the Employment Agreement dated April 1, 1999 between the parties. This Agreement also supersedes the Employment Agreement dated August 23, 1997 between the Executive and ACC Consumer Finance Corporation (now known as Household Automotive Finance Corporation), a subsidiary of the Corporation, and any other employment agreement entered into by and between the Executive and ACC Consumer Finance and American Credit Corporation and/or any subsidiary or affiliate thereof, including the Employment Agreement dated November 1, 1995. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. The headings in this Agreement are for convenience of reference only and shall not be construed as part of this Agreement or to limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. Attest: HOUSEHOLD INTERNATIONAL, INC. /s/ K. H. Robin By: /s/ William F. Aldinger - -------------------------------------- ----------------------------------- Kenneth H. Robin Title: Chairman and Chief Executive Senior Vice President-General Counsel Officer and Corporate Secretary /s/ Rocco J. Fabiano ----------------------------------- Rocco J. Fabiano EX-10 9 hiexhibit10-17.txt EXHIBIT 10-17 EMPLOYMENT AGREEMENT - SNM EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of March 1, 2002 by and between Household International, Inc., a Delaware corporation, (hereinafter called the "Corporation") and Siddharth N. (Bobby) Mehta (hereinafter called the "Executive"). WITNESSETH THAT: WHEREAS, the Executive is currently employed by the Corporation under an employment agreement dated January 1, 1999; and WHEREAS, the Corporation desires to continue to employ the Executive as its Group Executive, and the Executive desires to continue in such employment, on amended and restated terms and conditions; NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. Employment and Term. ------------------- (a) Employment. The Corporation shall continue to employ the Executive as the Group Executive of the Corporation, and the Executive shall so serve, for the term set forth in Paragraph 1(b). (b) Term. The initial term of the Executive's employment under this Agreement shall commence as of March 1, 2002 (the "Effective Date") and end on August 31, 2003, subject to the extension of such term as hereinafter provided and subject to earlier termination as provided in Paragraph 7, below. Beginning on March 1, 2002, the term of this Agreement shall be extended automatically for one (1) additional day for each day which has then elapsed since March 1, 2002, unless, at any time after March 1, 2002, either the Board of Directors of the Corporation (the "Board"), on behalf of the Corporation, or the Executive gives written notice to the other that such automatic extension of the term of this Agreement shall cease. Any such notice shall be effective immediately upon delivery. The initial term of this Agreement, plus any extension by operation of this Paragraph 1, shall be hereinafter referred to as the "Term." 2. Duties. During the period of employment as provided in Paragraph 1(b) hereof, the Executive shall serve as Group Executive of the Corporation and have all powers and duties consistent with such position, subject to the reasonable direction of the Board and of the Chief Executive Officer of the Corporation. The Executive shall also continue to serve as a member of the Board if elected as such. The Executive shall devote substantially his entire time during reasonable business hours (reasonable sick leave and vacations excepted)and best efforts to fulfill faithfully, responsibly and to the best of his ability his duties hereunder. However, the Executive may, with the approval of the Board or of the Chief Executive Officer of the Corporation, which shall not be withheld unreasonably, serve on corporate, civic and/or charitable boards and committees. 3. Salary. ------ (a) Base Salary. For services performed by the Executive for the Corporation pursuant to this Agreement during the period of employment as provided in Paragraph 1(b) hereof, the Corporation shall pay the Executive a base salary of $500,000 per year, payable in substantially equal installments in accordance with the Corporation's regular payroll practices. The Executive's base salary (with any increases under paragraph (b), below) shall not be subject to reduction. Any compensation which may be paid to the Executive under any additional compensation or incentive plan of the Corporation or which may be otherwise authorized from time to time by the Board (or an appropriate committee thereof) shall be in addition to the base salary to which the Executive shall be entitled under this Agreement. (b) Salary Increases. During the period of employment as provided in Paragraph 1(b) hereof, the base salary of the Executive shall be reviewed no less frequently than annually by the Board or the Compensation Committee of the Board to determine whether or not the same should be increased in light of the duties and responsibilities of the Executive and the performance thereof, and if it is determined that an increase is merited, such increase shall be promptly put into effect and the base salary of the Executive as so increased shall constitute the base salary of the Executive for purposes of Paragraph 3(a). 4. Annual Bonuses. For each calendar year during the term of employment, the Executive shall be eligible to receive in cash an annual performance bonus based upon the terms of the Corporation's bonus plan from time to time for senior executives, as adopted by the Board and administered by the Compensation Committee. 5. Equity Incentive Compensation. During the term of employment hereunder the Executive shall be eligible to participate, in the manner and to the extent approved by the Board or the Compensation Committee, in any equity-based incentive compensation plan or program approved by the Board from time to time, including (but not by way of limitation) any plan providing for the granting of (a) options to purchase stock of the Corporation, (b) restricted stock of the Corporation or (c) similar equity-based units or interests, with awards to the Executive that are of appropriate size and nature relative to those for other senior executives and the individual performance of the Executive. 6. Other Benefits. In addition to the compensation described in Paragraphs 3, 4 and 5, above, the Executive shall also be entitled to participate in all of the various retirement, welfare, fringe benefit, executive perquisite, and expense reimbursement plans, programs and arrangements of the Corporation to the extent the Executive is eligible for participation under the terms of such plans, programs and arrangements, with benefit levels and terms of participation at least as favorable to the Executive as those in effect on the Effective Date, except that the Executive's benefits and/or perquisites may be reduced in connection with similar reductions uniformly applied with respect to all similarly situated employees. 7. Termination. Unless earlier terminated in accordance with the following provisions of this Paragraph 7, the Corporation shall continue to employ the Executive and the Executive shall remain employed by the Corporation during the entire term of this Agreement as set forth in Paragraph 1(b). Paragraph 9 hereof sets forth certain obligations of the Corporation in the event that the Executive's employment hereunder is terminated. Certain capitalized terms used in this Paragraph 7 and in Paragraphs 8 and 9 hereof are defined in Paragraph 7(d), below. (a) Death or Disability. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination payment obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event of the Executive's death or in the event that the Executive becomes disabled. The Executive will be deemed to be disabled upon the earlier of (i) the end of a six (6)-consecutive month period during which, by reason of physical or mental injury or disease, the Executive has been unable to perform substantially all of his usual and customary duties under this Agreement or (ii) the date that a reputable physician selected by the Board, and as to whom the Executive has no reasonable objection, determines in writing that the Executive will, by reason of physical or mental injury or disease, be unable to perform substantially all of the Executive's usual and customary duties under this Agreement for a period of at least six (6) consecutive months. If any question arises as to whether the Executive is disabled, upon reasonable request therefor by the Board, the Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Board shall promptly give the Executive written notice of any such determination of the Executive's disability and of any decision of the Board to terminate the Executive's employment by reason thereof. Until the Date of Termination for disability, the base salary payable to the Executive under Paragraph 3 hereof shall be reduced dollar-for-dollar by the amount of any disability benefits paid to the Executive in accordance with any disability policy or program of the Corporation. (b) Discharge for Cause. In accordance with the procedures hereinafter set forth, the Board may discharge the Executive from his employment hereunder for Cause. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged for Cause. Any discharge of the Executive for Cause shall be communicated by a Notice of Termination to the Executive given in accordance with Paragraph 16 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, which may be as early as the date of the giving of such notice. No purported termination of the Executive's employment for Cause shall be effective without a Notice of Termination. (c) Termination for Other Reasons. The Corporation may discharge the Executive without Cause by giving written notice to the Executive in accordance with Paragraph 16 at least fifteen (15) days prior to the Date of Termination. The Executive may resign from his employment, without liability to the Corporation, by giving written notice to the Corporation in accordance with Paragraph 16 at least fifteen (15) days prior to the Date of Termination. Except to the extent otherwise provided in Paragraph 9 with respect to certain post-Date of Termination obligations of the Corporation, this Agreement shall terminate immediately as of the Date of Termination in the event the Executive is discharged without Cause or resigns. (d) Definitions. For purposes of this Agreement, the following capitalized terms shall have the meanings set forth below: (i) "Accrued Obligations" shall mean, as of the Date of Termination, the sum of (A) the Executive's base salary under Paragraph 3 through the Date of Termination to the extent not theretofore paid, (B) the amount of any bonus, incentive compensation, deferred compensation and other cash compensation accrued by the Executive as of the Date of Termination to the extent not theretofore paid and (C) any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive as of the Date of Termination to the extent not theretofore paid. For the purpose of this Paragraph 7(d)(i), amounts shall be deemed to accrue ratably over the period during which they are earned, but no discretionary compensation shall be deemed earned or accrued until it is specifically approved by the Board or the Compensation Committee in accordance with the applicable plan, program or policy. (ii) "Cause" shall mean: (A) the Executive's commission of an act materially and demonstrably detrimental to the financial condition and/or goodwill of the Corporation or any of its subsidiaries, which act constitutes gross negligence or willful misconduct by the Executive in the performance of his material duties to the Corporation or any of its subsidiaries, or (B) the Executive's commission of any material act of dishonesty or breach of trust resulting or intended to result in material personal gain or enrichment of the Executive at the expense of the Corporation or any of its subsidiaries, or (C) the Executive's conviction of a felony involving moral turpitude, but specifically excluding any conviction based entirely on vicarious liability. No act or failure to act will be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that his action or omission was in the best interests of the Corporation. In addition, no act or omission will constitute Cause unless the Corporation has given detailed written notice thereof to the Executive and, where remedial action is feasible, he then fails to remedy the act or omission within a reasonable time after receiving such notice. (iii) A "Change in Control" shall be deemed to have occurred 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 Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation'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 Corporation by the Corporation 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 Corporation's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Corporation shall be deemed a Change in Control; and provided further that if the Board of Directors of the Corporation determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation'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 Corporation 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 Corporation's then outstanding securities, then no Change in Control shall be deemed to have occurred; (B) During any period of two (2) consecutive years (not including any period prior to the Effective Date of this Agreement), individuals who at the beginning of such two-year period constitute the Board of Directors of the Corporation and any new director or directors (except for any director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in subparagraph (A), above, or subparagraph (C), below) whose election by the Board or nomination for election by the Corporation'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 Corporation or all or substantially all of the Corporation's assets, (2) a plan of merger or consolidation of the Corporation with any other corporation, or (3) a similar transaction or series of transactions involving the Corporation (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 Corporation 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 Corporation or all or substantially all of the Corporation'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 Corporation 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 Corporation 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) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. Any other provision of this Agreement to the contrary notwithstanding, a "Change in Control" shall not include any transaction described in subparagraph (A) or (C), above, where, in connection with such transaction, the Executive and/or any party acting in concert with the Executive substantially increases his or its, as the case may be, ownership interest in the Corporation or a successor to the Corporation (other than through conversion of prior ownership interests in the Corporation and/or through equity awards received entirely as compensation for past or future personal services). (iv) "Date of Termination" shall mean (A) in the event of a discharge of the Executive by the Board for Cause, the date specified in such Notice of Termination, (B) in the event of a discharge of the Executive without Cause or a resignation by the Executive, the date specified in the written notice to the Executive (in the case of discharge) or the Corporation (in the case of resignation), which date shall be no less than fifteen (15) days from the date of such written notice, (C) in the event of the Executive's death, the date of the Executive's death, and (D) in the event of termination of the Executive's employment by reason of disability pursuant to Paragraph 7(a), the date the Executive receives written notice of such termination. (v) "Good Reason" shall mean any of the following without the consent of the Executive: (A) the failure to re-elect the Executive as Group Executive, (B) assignment of duties inconsistent with the Executive's position, authority, duties or responsibilities, or any other action by the Corporation which results in a substantial diminution of such position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, (C) any failure by the Corporation to comply with any of the provisions of this Agreement, including (but not by way of limitation) those provisions regarding compensation and benefits, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (D) the Corporation giving notice to the Executive to stop further operation of the evergreen feature described in Paragraph 1(b), above. However, during the period of three (3) years after a Change in Control, "Good Reason" shall also include the Executive being reassigned, without the Executive's consent, to an office location outside of the Salinas, California metropolitan area. In addition, termination by the Executive for any reason during the sixty (60)-day period which begins twelve (12) months after a Change in Control shall be deemed to be a termination for Good Reason; provided, however, that if the Executive dies after a Change in Control but less than twelve (12) months after a Change in Control, the Executive will be deemed to have terminated employment for Good Reason twelve (12) months after the Change in Control. (vi) "Qualifying Termination" shall mean termination of the Executive's employment under this Agreement (A) by reason of the discharge of the Executive by the Corporation other than for Cause or disability or (B) by reason of the resignation of the Executive for Good Reason within twelve (12) months after an event constituting Good Reason or (C) in accordance with the last sentence of the definition of Good Reason in subparagraph (v), above. (e) Continuing Obligations. Notwithstanding the termination of this Agreement pursuant to Paragraph 7(a), 7(b) or 7(c) above, or upon the expiration of the term described in Paragraph 1 above, the respective covenants, agreements and obligations of the Corporation and the Executive set forth hereinafter shall continue. 8. Vesting of Equity Awards Upon a Change in Control. Immediately upon the Change in Control, all stock options, restricted stock and other equity awards previously made to the Executive which are not otherwise vested shall vest in full, and all such options shall remain exercisable for the period provided for the applicable plan or award agreement. 9. Obligations of the Corporation Upon Termination. The following provisions describe the obligations of the Corporation to the Executive under this Agreement upon termination of his employment. However, except as explicitly provided in this Agreement, nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Corporation or any of its subsidiaries, or under any compensation or benefit plan, program, policy or practice of the Corporation or any of its subsidiaries. (a) Death, Disability, Discharge for Cause, or Resignation Without Good Reason. In the event this Agreement terminates by reason of the death or disability of the Executive, or by reason of the discharge of the Executive by the Corporation for Cause, or by reason of the resignation of the Executive other than for Good Reason, the Corporation shall pay to the Executive, or his heirs or estate, in the event of the Executive's death, all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation, or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive. (b) Death, Disability or Retirement. In the event that Executive's employment is terminated by death, disability or retirement under a retirement plan of the Corporation, the Executive shall be entitled to receive in a lump sum within thirty (30) days after the Date of Termination, in addition to the compensation and benefits described in paragraph (a) above, a pro rata cash bonus for the year in which the Date of Termination occurs equal to the product of (i) the highest of the annual bonuses payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs, including any bonus or portion thereof that has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months) (the "Highest Annual Bonus"), and (ii) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365. (c) Qualifying Termination Without a Change in Control. In the event of a Qualifying Termination without a Change in Control, the Executive shall, upon executing and delivering a release of liability satisfactory to the Corporation, receive the following benefits: (i) Payment of all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive, (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to one hundred fifty percent (150%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to one hundred fifty percent (150%) of the Highest Annual Bonus, (iv) Continuation, for a period of eighteen (18) months after the Date of Termination, of health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") with the cost of such benefits to be paid by the Corporation, but such benefits may be discontinued earlier to the extent that the Executive becomes entitled to comparable benefits from a subsequent employer, (v) Immediate pro rata vesting of all stock options, restricted stock and other equity or incentive compensation awards to the Executive which are not otherwise fully vested, with all options to remain exercisable for the period provided for in the applicable plan or award agreement. The proration of each award shall be done by multiplying the full award by a fraction, the numerator of which shall be the number of full months between the date of grant and the Date of Termination, and the denominator of which shall be the number of full months in the period of employment required for full vesting under the original terms of the award, and (vi) Outplacement services, at the expense of the Corporation, from a provider reasonably selected by the Executive. In addition, the Executive may, in the discretion of the Compensation Committee, be awarded a pro rata cash bonus for the year in which the Date of Termination occurs. (d) Qualifying Termination After a Change in Control. In the event of a Qualifying Termination within three (3) years after a Change in Control, the Executive shall receive, in addition to the compensation and benefits described in subparagraphs (c)(i) and (c)(vi), above, the following benefits: (i) Payment in a lump sum within thirty (30) days after the Date of Termination of a pro rata cash bonus for the year in which the Date of Termination occurs equal to the product of (x) the Highest Annual Bonus and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365; (ii) Payment in a lump sum within thirty (30) days after the Date of Termination of a salary replacement amount equal to three hundred percent (300%) of the Executive's base salary as in effect prior to the termination, (iii) Payment in a lump sum within thirty (30) days after the Date of Termination of a bonus replacement amount equal to three hundred percent (300%) of the Highest Annual Bonus; (iv) Continuation, for a period of three (3) years after the Date of Termination, of the following welfare benefits and senior executive perquisites on terms at least as favorable to the Executive as those which would have been provided if the Executive's employment had continued for that time pursuant to this Agreement: medical and dental benefits, life and disability insurance, umbrella liability insurance coverage, executive physical examinations, and automobile and financial counseling allowances, with the cost of such benefits to be paid by the Corporation. To the extent the Corporation is unable to provide comparable insurance for reasons other than cost, the Corporation may provide a lesser level or no coverage and compensate the Executive for the difference in coverage through a cash lump sum payment grossed up for taxes. This payment will be tied to the cost of an individual insurance policy if it were assumed to be available. The medical and dental benefits provided hereunder shall not be considered a continuation of coverage under COBRA, and continuation coverage under COBRA shall be made available to the Executive at the end of such three (3) year period as if the Executive's employment had terminated on the last day of such period. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to post-retirement welfare benefit plans, practices, programs and policies of the Corporation, the Executive shall be considered to have remained employed for three (3) years after the Date of Termination and, therefore, will be treated as having three (3) additional years of age and service credit after the Date of Termination and as having retired on the last day of such three (3) year period; (v) For purposes of determining the Executive's benefits under the Corporation's non-qualified excess and supplemental defined benefit retirement plans (the "SERP") in which the Executive participates, the Executive's benefits under the SERP shall equal the excess of (x) the actuarial equivalent (utilizing actuarial assumptions determined on a basis no less favorable to the Executive than the basis used under the terms of the Retirement Plan as in effect immediately prior to the Change in Control) of the sum of (A) the benefit under the Corporation's qualified defined benefit retirement plan (the "Retirement Plan") and (B) the benefit under any excess or supplemental retirement plans in which the Executive participates (collectively, the "SERP"), based on the Executive's period of service through the Date of Termination and assuming for this purpose that: (1)the Executive's employment continued for three years after the Date of Termination, and, therefore, the Executive had three (3) additional years of age and service credit after the Date of Termination under the Retirement Plan and the SERP, (2) all accrued benefits under the Retirement Plan and the SERP are fully vested and (3) the Executive's salary and annual bonus for each year during such three (3) year period were the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii) above, over (y) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan, as of the Date of Termination; and (vi) Payment in a lump sum within thirty (30) days after the Date of Termination of an amount equal to the sum of the maximum matching contributions by the Corporation under the Corporation's tax-qualified and supplemental Section 401(k) plans in which the Executive participates that the Executive would have received if the Executive's employment continued for three (3) years after the Date of Termination, assuming for this purpose that: (x) the Executive's salary and annual bonus for each year during such three (3) year period were the salary replacement and bonus replacement amounts described in subparagraphs (ii) and (iii) above and (y) the Company's matching contributions are determined pursuant to the applicable provisions of the Corporation's tax-qualified and supplemental Section 401(k) plans, as in effect immediately prior to the Change in Control. e) Termination of Employment Prior to Change in Control. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Corporation is terminated within six (6) months prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who was taking steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement the termination of the Executive's employment shall be deemed to have occurred immediately after the Change in Control. 10. Certain Additional Payments by the Corporation. The Corporation agrees that: (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or if any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of paragraph (c), below, all determinations required to be made under this Paragraph 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the accounting firm which is then serving as the auditors for the Corporation (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Corporation. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Paragraph 10, shall be paid by the Corporation to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any good faith determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to paragraph (c), below, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive. (c) The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which Executive gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Corporation any information reasonably requested by the Corporation relating to such claim, (ii) Take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation, (iii) Cooperate with the Corporation in good faith in order effectively to contest such claim, and (iv) Permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph (c), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to paragraph (c), above, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation's complying with the requirements of said paragraph (c)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon, after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to said paragraph (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid; and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. 11. No Set-Off or Mitigation. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Corporation may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. 12. Payment of Certain Expenses. The Corporation agrees to pay promptly as incurred, to the fullest extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome) by the Corporation, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest initiated by the Executive about the amount of any payment due pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, however, that, notwithstanding anything contained herein to the contrary, with respect to contests arising prior to a Change in Control (and not otherwise directly associated with the Change in Control), the Corporation shall not be obligated to make such payment with respect to any such contest in which the Corporation prevails over the Executive. 13. Indemnification. To the full extent permitted by law, the Corporation shall, both during and after the term of the Executive's employment, indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being (or having been) an officer, director or employee of the Corporation or any of its subsidiaries. In addition, the Executive shall be covered, both during and after the term of the Executive's employment, by director and officer liability insurance to the maximum extent that such insurance covers any officer or director (or former officer or director) of the Corporation. 14. Confidentiality. During and after the period of employment with the Corporation, the Executive shall not, without prior written consent from the Chief Executive Officer or the General Counsel of the Corporation directly or indirectly disclose to any individual, corporation or other entity, other than to the Corporation or any subsidiary or affiliate thereof or their officers, directors or employees entitled to such information or any other person or entity to whom such information is disclosed in the normal course of the business of the Corporation) or use for the Executive's own benefit or for the benefit of any such individual, corporation or other entity, any Confidential Information of the Corporation. For purposes of this Agreement, "Confidential Information" is information relating to the business of the Corporation or its subsidiaries or affiliates (a) which is not generally known to the public or in the industry, (b) which has been treated by the Corporation and its subsidiaries and affiliates as confidential or proprietary, (c) which provides the Corporation or its subsidiaries or affiliates with a competitive advantage, and (d) in the confidentiality of which the Corporation has a legally protectable interest. Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which the Corporation and its subsidiaries and affiliates cease to have a legally protectable interest, shall cease to be subject to the restrictions of this Paragraph 14. 15. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law, and such successor shall be deemed the "Corporation" for purposes of this Agreement. 16. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or by recognized commercial delivery service or if mailed within the continental United States by first class certified mail, return receipt requested, postage prepaid, addressed as follows: (1) If to the Board or the Corporation, to: Household International, Inc. 2700 Sanders Road Prospect Heights, Illinois 60070 Attention: Executive Vice President-Administration (2) If to the Executive, to: Household International, Inc. 1441 Schilling Place Salinas, California 93901 Attention: Siddharth N. Mehta Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. 17. Tax Withholding. The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state, or local law with respect to any payment in cash, shares of stock and/or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (a) withhold such taxes from any cash payments owing from the Corporation to the Executive, (b)require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding obligations and/or (c) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 18. Arbitration. Except as to any controversy or claim which the Executive elects, by written notice to the Corporation, to have adjudicated by a court of competent jurisdiction, any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in Chicago, Illinois in accordance with the laws of the State of Illinois. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association. The costs and expenses of the arbitrator(s) shall be borne by the Corporation. The award of the arbitrator(s) shall be binding upon the parties. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. 19. No Assignment. Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 20. Execution in Counterparts. This Agreement may be executed by the parties hereto in two (2) or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 21. Jurisdiction and Governing Law. This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of Illinois, other than the conflict of laws provisions of such laws. 22. Severability. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. Furthermore, if the scope of any restriction or requirement contained in this Agreement is too broad to permit enforcement of such restriction or requirement to its full extent, then such restriction or requirement shall be enforced to the maximum extent permitted by law, and the Executive consents and agrees that any court of competent jurisdiction may so modify such scope in any proceeding brought to enforce such restriction or requirement. 23. Prior Understandings. This Agreement embodies the entire understanding of the parties hereto and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof, including but not by way of limitation by amending and restating the Employment Agreement dated January 1, 1999 between the parties. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. The headings in this Agreement are for convenience of reference only and shall not be construed as part of this Agreement or to limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. Attest: HOUSEHOLD INTERNATIONAL, INC. /s/ K. H. Robin By: /s/ William F. Aldinger - ------------------------------------ ------------------------------------- Kenneth H. Robin Title: Chairman and Chief Executive Senior Vice President-General Counsel Officer and Corporate Secretary /s/ Siddharth N. Mehta ------------------------------------- Siddharth N. Mehta EX-12 10 hiexhibit12.txt HI EXHIBIT 12 - COMPUTATION OF RATIO EARNINGS EXHIBIT 12 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS - -------------------------------------------------------------------------------- Three months ended March 31, (In millions) 2002 2001 - ------------------------------------------------------------------------------- Net income $ 511.0 $ 431.8 Income taxes 266.1 233.8 ------------- ------------- Income before income taxes 777.1 665.6 ------------- ------------- Fixed charges: Interest expense (1) 937.2 1,115.3 Interest portion of rentals (2) 16.4 14.9 ------------- ------------- Total fixed charges 953.6 1,130.2 ------------- ------------- Total earnings as defined $ 1,730.7 $ 1,795.8 ============= ============= Ratio of earnings to fixed charges 1.81 1.59 Preferred stock dividends (3) $ 12.9 $ 3.5 Ratio of earnings to combined fixed charges and preferred stock dividends 1.79 1.58 =============================================================================== (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 pretax equivalent based upon an effective tax rate of 34.2 percent for the three months ended March 31, 2002 and 35.1 percent for the same period in 2001. EX-99 11 hiexhib991.txt HIEXHIBIT 99.1 DEBT AND PREFERRED STOCK EXHIBIT 99.1 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES DEBT AND PREFERRED STOCK SECURITIES RATINGS Standard Moody's & Poor's Investors Corporation Service Fitch, Inc. - ---------------------------------- ----------- -------------- -------------- At March 31, 2002 - ---------------------------------- ------------ --------------- -------------- Household International, Inc. Senior debt A A3 A Commercial paper A-1 P-2 F-1 Preferred stock BBB+ Baa2 A- Household Finance Corporation Senior debt A A2 A Senior subordinated debt A- A3 A- Commercial paper A-1 P-1 F-1 Household Bank, f.s.b. Senior debt A A2 A Subordinated debt A- A3 A- Certificates of deposit (long/short-term) A/A-1 A2/P-1 A+/F-1 Bank notes A-1 P-1 F-1 Household Bank plc Senior debt A A2 A Commercial paper A-1 P-1 NR - ---------------------------------- ------------ --------------- -------------- NR - Not rated -----END PRIVACY-ENHANCED MESSAGE-----