-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, fIQz3BqkENFf2kNe+5VwsuXUEPjVkHUVXHeZas7dycYI4yay03ls10Ve/kkYRPGD V7BYiFpWSc2SLu4hCz9p1g== 0000950124-94-000625.txt : 19940330 0000950124-94-000625.hdr.sgml : 19940330 ACCESSION NUMBER: 0000950124-94-000625 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOUSEHOLD INTERNATIONAL INC CENTRAL INDEX KEY: 0000354964 STANDARD INDUSTRIAL CLASSIFICATION: 6141 IRS NUMBER: 363121988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-08198 FILM NUMBER: 94518415 BUSINESS ADDRESS: STREET 1: 2700 SANDERS RD CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 BUSINESS PHONE: 7085645000 MAIL ADDRESS: STREET 1: 2700 SANDERS ROAD, 3 NORTH CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 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)
Registrant's telephone number, including area code: (708) 564-5000 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ---------------------------- COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE AND CHICAGO STOCK EXCHANGE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE NEW YORK STOCK EXCHANGE AND RIGHTS (ATTACHED TO AND TRANSFERABLE ONLY WITH THE CHICAGO STOCK EXCHANGE COMMON STOCK) $6.25 CUMULATIVE CONVERTIBLE VOTING PREFERRED STOCK, NEW YORK STOCK EXCHANGE NO PAR, $50 STATED VALUE DEPOSITARY SHARES (EACH REPRESENTING ONE-QUARTER SHARE NEW YORK STOCK EXCHANGE OF 9 1/2% CUMULATIVE PREFERRED STOCK, SERIES 1989-A, NO PAR, $100 STATED VALUE) DEPOSITARY SHARES (EACH REPRESENTING ONE-TENTH SHARE OF NEW YORK STOCK EXCHANGE 9 1/2% CUMULATIVE PREFERRED STOCK, SERIES 1991-A, NO PAR, $100 STATED VALUE) DEPOSITARY SHARES (EACH REPRESENTING ONE-FORTIETH SHARE NEW YORK STOCK EXCHANGE OF 8 1/4% CUMULATIVE PREFERRED STOCK, SERIES 1992-A, NO PAR, $1,000 STATED VALUE) DEPOSITARY SHARES (EACH REPRESENTING ONE-FORTIETH SHARE NEW YORK STOCK EXCHANGE OF 7.35% CUMULATIVE PREFERRED STOCK, SERIES 1993-A, NO PAR, $1,000 STATED VALUE)
Securities registered pursuant to Section 12(g) of the Act: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. Yes/X/ No/ / INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. / / AT MARCH 16, 1994, THERE WERE 94,598,901 SHARES OF REGISTRANT'S COMMON STOCK OUTSTANDING, AND THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $3.2 BILLION. DOCUMENTS INCORPORATED BY REFERENCE CERTAIN PORTIONS OF THE REGISTRANT'S 1993 ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993: PARTS I, II AND IV. CERTAIN PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS 1994 ANNUAL MEETING SCHEDULED TO BE HELD MAY 11, 1994: PART I AND PART III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I. ITEM 1. BUSINESS. GENERAL Household International, Inc. ("Household International" or the "Company") is a publicly owned corporation which, with its subsidiaries, provides a broad range of diversified financial services for individuals and businesses. The Company employs approximately 16,900 people and serves approximately 17 million customers in the United States, Canada, the United Kingdom and Australia. In 1993 Household International was ranked as the 61st largest publicly owned company, based on total assets by Forbes magazine which annually lists the 500 largest public corporations in the United States. The Company's operations are divided into three business segments: Finance and Banking, Individual Life Insurance, and Liquidating Commercial Lines. Household International was created in 1981 as a result of a shareholder approved restructuring of Household Finance Corporation ("HFC"), a publicly owned corporation since 1925, whereby Household International became a holding company for various subsidiaries, including HFC. At that time Household International had operations in the financial services, manufacturing, transportation and merchandising industries. In 1985 the Company began to restructure its operations away from being a diversified conglomerate. This action resulted in the disposition of its merchandising (1985), transportation (1986) and manufacturing (1989-1990) businesses, including the spin-off to its common stock shareholders of three manufacturing companies in 1989: Eljer Industries, Inc., Schwitzer, Inc. and Scotsman Industries, Inc. The products offered by Household International, a description of the geographic markets in which the Company operates and summary financial information for each of the Company's business segments is set forth in the Company's Annual Report to Shareholders (the "1993 Annual Report"), portions of which are incorporated herein by reference. See pages 12, 13 and 33 through 80 of the 1993 Annual Report. The Company markets its products to its customers through a number of different distribution channels, including consumer finance branch offices, consumer bank branch offices, loan origination offices, retail merchants, independent insurance agents, direct mail and telemarketing, and retail securities brokerage offices. 1993 DEVELOPMENTS. In 1993 the Company's bankcard operations continued to grow, principally through the continuing success of the GM Card(sm). The GM Card is a general-purpose credit card which allows the users thereof to earn credit toward the purchase of new General Motors vehicles. The GM Card was publicly introduced in September 1992 and as of December 31, 1993, there were approximately 5.9 million accounts which had generated approximately $4.9 billion credit card receivables. As of this date, the GM Card accounts are generally active and are of high credit quality. In the fourth quarter, the Company announced expansion of its alliance with General Motors Corporation with the introduction of a GM Card from Vauxhall in the United Kingdom, permitting users to earn rebates toward the purchase of a new Vauxhall vehicle. The card will be issued by HFC Bank plc, the Company's principal operating subsidiary in the United Kingdom. Also in the fourth quarter, the Company announced an alliance to issue a new co-branded credit card with Charles Schwab & Co. In 1993 Household International strengthened its capital base through the issuance of additional equity securities. In March 1993 the Company raised additional capital of approximately $269 million (net of issuance costs) through the sale of 4,025,000 shares of common stock (on a pre-split basis). In addition, during the year the Company issued approximately $44 million of common stock through employee benefit and dividend reinvestment plans. The Company also issued 4,000,000 depositary shares, with each depositary share representing a one-fortieth interest in a share of the Company's 7.35% Cumulative Preferred Stock, Series 1993-A. The underwritten public offering raised approximately $97 million (net of issuance costs) for the Company. The issuance of this common and preferred stock, together with a conservative growth posture, strengthened its capital ratios. In October, the Company's common stock was split 2-for-1 through a 100% stock dividend. The split doubled the number of shares of common stock outstanding and was affected for the primary purpose of making the common stock more affordable to a broader base of investors. 1 3 The lowest interest rates in the United States in over twenty years contributed to high prepayment rates in the first mortgage portfolio, resulting in write-downs of capitalized servicing rights and lower earnings for the mortgage banking operation. In foreign operations, despite continuing weak economic growth in the United Kingdom, Household International's United Kingdom operation was profitable for the first time in five years. The improvement was primarily attributable to actions taken in prior years such as implementing tightened underwriting standards and improved collections efforts. For the year, the United Kingdom operation earned $10.3 million compared to a 1992 loss of $45.9 million. The Company's operation in Canada was adversely affected by a continuing poor economic environment resulting in low receivables origination volume. The Company's performance in Canada was also impacted by establishment of higher loss reserves during the fourth quarter as a result of the completion of the first phase of a strategic assessment of the Canadian market, economic conditions, products and the Company's Canadian cost structure and policies. The Company's Australian operation was profitable, comparable with its 1992 results. FINANCE AND BANKING Total Finance and Banking receivables at December 31, classified by type, consisted of the following (in millions):
1993 1992 1991 --------- --------- --------- First mortgage................ $ 3,534.1 $ 4,513.8 $ 4,717.7 Home equity................... 2,850.9 2,943.6 3,108.0 Other secured................. 875.4 827.9 942.3 Bankcard...................... 4,356.9 3,416.9 1,549.7 Merchant participation........ 2,636.5 2,063.8 2,389.9 Other unsecured............... 4,320.8 3,850.6 3,884.2 --------- --------- --------- Subtotal--Consumer............ 18,574.6 17,616.6 16,591.8 Equipment financing and other....................... 765.9 832.7 966.1 --------- --------- --------- Finance and Banking receivables................. $19,340.5 $18,449.3 $17,557.9 ========= ========= =========
CONSUMER OPERATIONS. Household International is primarily a consumer financial services company, with consumer receivables of $18.6 billion, representing approximately 96 percent of Finance and Banking owned receivables and approximately 59 percent of total assets at December 31, 1993, excluding the discontinued commercial product lines. The Company's primary target customer for consumer lending is generally between 25 and 50 years of age with a household income of $15,000 to $50,000. Approximately 82 percent of the Company's Finance and Banking receivables are located in the United States. Through its consumer lending businesses, the Company competes with banks, thrifts, finance companies and other financial institutions through the offering of a variety of products, a strong service orientation and innovative marketing programs. The Company believes that the fragmented nature of the consumer financial services industry provides ample opportunity for the Company to increase market share, and therefore profitability. The Company has focused on being a low-cost producer in its consumer financial services businesses. Highly automated processing facilities have been developed to support underwriting, loan administration and collection functions across business lines. By supporting its multiple-distribution networks with centralized processing centers, the Company has improved efficiency through specialization and economies of scale. In addition, by removing such functions from branch offices, the Company is able to concentrate on sales activities in the branch offices. Underwriting and collection of consumer credit products and internal controls over these functions have been improved over the last few years through the segregation of the sales, underwriting and collection functions. For example, loan approvals are handled by non-sales personnel located in regional servicing centers ("RSC") whose primary concern is credit quality, not volume. Underwriting and collections are supported by automated systems which analyze the likelihood of delinquency or bankruptcy. The Company believes it is an industry leader in implementing automated underwriting and collection management systems which improve its ability to manage credit quality. The Company considers factors such as the applicant's income, expenses, 2 4 paying habits, value of collateral, if any, and length and stability of employment, in its effort to determine whether the borrower has the ability to support the loan. The objective of the Company's program to automate and centralize the back office processing of U.S. consumer finance accounts has been to transfer the record keeping and collection tasks necessary to service accounts from its branch offices to an RSC. The RSCs were created to provide higher quality customer service and cost savings resulting from greater efficiency through economies of scale. By doing so, the Company's branch offices have been able to focus on sales and marketing efforts. The Company's first RSC began operations in Illinois in 1987. By the first quarter of 1990, all U.S. branch offices of HFC were served by RSCs. As a result of efficiencies achieved since that time, the operations of the servicing centers have been further consolidated, and in 1993 the servicing operation for all HFC originated loans was moved to a single servicing center located in Illinois. The former western region RSC, which began operations in the first quarter of 1989, now supports HFC's portfolio acquisition business and services acquired consumer credit receivables. The former eastern region RSC, which opened in Virginia in the fourth quarter of 1989, now supports the GM Card exclusively. Additional facilities exist to provide the Company's bankcard and merchant participation business with centralized automated support. The Company has also established regional processing centers ("RPC") in California, Illinois, Maryland, Nevada and Ohio to perform payment processing, check processing, statement billings and other administrative tasks for all domestic consumer operations. In the United Kingdom, HFC Bank plc's Birmingham Business Center provides operating and administrative functions in centers modeled after the RSCs and RPCs used in the United States. In 1990, the Canadian operation opened two centers similar to the United Kingdom center and the Australian operation opened one center. Over the last few years, the Company has invested in the development of its bankcard, private-label credit card and consumer and mortgage banking services which have been an important contributor to the Company's growth. Net income on an operating basis from these newer businesses increased from $7 million in 1988 to $201 million in 1993. At December 31, 1993, the Company had acquired intangibles associated with acquisitions of thrift institutions and bankcard portfolios of approximately $473 million. The Company amortizes purchased credit card intangibles on a straight-line basis, not to exceed 10 years and other intangibles over their estimated life not exceeding 15 years. The average amortization period for the acquired intangibles was approximately 7 years in 1993. Since 1988 the Company has increased significantly its portfolio of receivables sold and serviced with limited recourse. This portfolio has grown to $9.8 billion at year-end 1993 from none at the beginning of 1988. The Company was the first public issuer of home equity loan asset-backed securities in 1988 and continues to be one of the largest issuers of asset-backed securities. In 1993, including replenishments of certificateholders interests, the Company securitized and sold $9.4 billion of receivables. In addition, the Company sells first mortgages with no recourse and retains the servicing and also acquires servicing rights for first mortgages. This portfolio of first mortgage receivables serviced with no recourse has grown to $13.9 billion at year-end 1993 from $500 million at year-end 1986. In the third quarter of 1993, the Company began servicing an unsecured consumer portfolio without recourse which totaled $1.3 billion at December 31, 1993. Major consumer business units within the Finance and Banking segment are described below. Household Finance Corporation Household Finance Corporation, the Company's principal business, traces its origins to a loan office established in 1878. HFC offers a variety of secured and unsecured lending products to middle-income customers through a network of 432 branch lending offices throughout the United States. This business is conducted primarily through state-licensed companies. Home equity loans, and to a lesser extent, unsecured credit products have been HFC's primary focuses over the last several years as these products are preferred by consumers due to the flexible nature of the credit relationship, where the timing and amount of borrowing can be tailored to the borrower's particular circumstances. These products also are advantageous to HFC due to lower relative administrative costs and typically have variable rate terms which move with market rates of interest. Home equity loans and unsecured consumer credit products in the HFC domestic network represented approximately 30 percent of total Finance and Banking managed receivables at December 31, 1993. Home equity loans, representing approximately 3 5 27 percent of total Finance and Banking managed receivables at December 31, 1993, have lower chargeoff rates than the unsecured credit products. In 1992, HFC launched a new portfolio acquisition business focusing on open-end and closed-end home equity loan products. In 1993, HFC acquired approximately 3,800 new accounts aggregating $430 million in such receivables. In addition, in 1993 HFC acquired the right to service without recourse approximately 1.1 million accounts aggregating approximately $2.0 billion in unsecured loans. The Company believes that the portfolio acquisition business provides an additional source for developing new customer relationships. Household Retail Services Household Retail Services ("HRS") is a revolving credit merchant participation business. HRS purchases and services merchants' revolving charge accounts. These accounts result from consumer purchases of furniture, appliances, home improvement products and other durable merchandise, and generally are without credit recourse to the originating merchant. Loans are underwritten by HRS based on its credit standards. This business is an important source of new customers to HFC's direct lending business. HRS became a separate business unit in 1988 and is currently the second largest provider of private-label credit cards in the United States. This business is conducted through state-licensed companies and through Household Bank (Illinois), National Association. Household Bank, f.s.b. Household Bank, f.s.b. (the "Bank"), a federally chartered savings bank, comprises the majority of the Company's consumer banking and mortgage business. At December 31, 1993, the Bank's assets totaled $9.1 billion, which includes $2.2 billion of receivables attributable to the GM Card. Although there was a slight decline in deposits in 1993 from $6.5 billion at December 31, 1992, deposits have increased to $6.2 billion at December 31, 1993 from $1.6 billion at year-end 1986. Much of the strategic growth of the Company has been through its consumer banking operations, where the Company believes the most efficient use of capital can be achieved. The Company's consumer banking strategy is intended to diversify its funding base, provide a stable and relatively low-cost funding source, create a more competitively leveraged entity and market financial service products to a different customer base. In 1988, the Company formalized its consumer banking strategy and launched its consumer bank development program with a geographic focus on California and the arc of states from Illinois to Maryland. At December 31, 1993 the Bank had 171 branches in 7 states: California (54); Illinois (44); Ohio (26); Maryland (24); Virginia (15); Indiana (5); and Kansas (3). The Bank is a full-service consumer bank, marketing itself as "America's Family Bank"(R). It operates as a single institution in all states where it is active, with common marketing programs and processing systems. The Company believes the Bank is one of the few consumer banks of its size to operate in this manner. The Bank's acquisition strategy involves identification of institutions which complement the existing network in target markets. The ideal acquisition includes only deposits, customer relationships and branches. Acquired institutions are quickly integrated into the existing network. The integration process includes new signage, decor, product offerings, pricing and back office systems. Since the Bank generally does not need acquired administrative and executive personnel and facilities, operating expenses of the acquired entity have been reduced in most acquisitions. First mortgages are originated in branch locations and loan production offices by Household Mortgage Services, a division of the Bank, or may be acquired from correspondents and other wholesale sources. In 1993, Household Mortgage Services originated approximately $4 billion in first mortgages. However, refinancing resulting from the record low interest rates caused the first mortgage portfolio to decline by approximately $1 billion in 1993. At December 31, 1993, $2 billion, or approximately 28 percent, of the Bank's owned receivables represented first mortgages for single-family residences. Adjustable-rate mortgage loans represented approximately 43 percent of this portfolio. This first mortgage portfolio is well-diversified geographically and the Bank has originated no negative amortization loans. The weighted average loan-to-value ratio at the origination of the loan for the entire portfolio was approximately 70 percent. While emphasizing single-family mortgage lending, the Bank also provides mortgage loans for various multi-family 4 6 and income-producing properties and makes various types of consumer loans, including savings account secured loans and secured and unsecured lines of credit. Household Credit Services Household Credit Services is the tradename used for the marketing of bankcards throughout the United States issued by one of the Company's subsidiary national credit card banks, the Bank, or one of the other financial institutions affiliated with Household International. The Company had $8.8 billion of bankcard receivables owned and serviced with limited recourse at December 31, 1993, up from $207 million at year-end 1986. The Company is one of the top 6 issuers of VISA and MasterCard credit cards in the United States. The Company strives to build its bankcard business by developing strategic alliances with industry leaders to effectively create and market general purpose credit cards to targeted consumers. In accordance with this philosophy, in 1991 the Company established a program with Ameritech Corporation, in 1992 established a program with General Motors Corporation and in 1993 expanded the relationship through an agreement with General Motors to issue the GM Card from Vauxhall in the United Kingdom. Also in 1993 the Company announced an alliance with Charles Schwab & Co. See "1993 Developments." The Company intends to continue to explore other co-branding relationships of this type with various entities. The Company also seeks to build its bankcard business by selectively purchasing portfolios while managing geographic concentrations. The Company evaluates bankcard acquisitions utilizing criteria related to strategic fit and economic value. To assess strategic fit, the Company considers the following: the composition and behavior of the customer franchise; product pricing compatibility with the Company's pricing strategies; geographic distribution of the customer base; and opportunities to add value through improved portfolio management. To assess economic value, the Company evaluates the risk/return characteristics of the portfolio, particularly with respect to revenue generating potential and asset quality, and identifies and quantifies legitimate opportunities to add value through price changes, more efficient servicing, improved collections, and credit line management. The Company also applies traditional financial analysis techniques to evaluate financial returns in relation to the proposed investment. The bankcard business is a highly competitive and fragmented industry currently in the process of consolidation. The Company believes that its relatively large size in the industry provides substantial competitive advantages over smaller credit card issuers through reduced operating expense ratios. The Company's focus is to develop a nationally diverse customer franchise that contains three to four hubs of concentration while employing value-based pricing. These hubs are expected to promote operating and marketing efficiencies without creating overdependence on a single geographic area that would potentially expose the Company to regional credit risk and usage patterns. Currently, the Company's largest account base is in California supplemented by significant hubs in the Midwest and on the East coast. International Operations International operations in Canada, the United Kingdom and Australia accounted for approximately 18 percent of the Finance and Banking owned receivables at December 31, 1993. In Canada, the Company operates consumer finance, private-label credit card and consumer banking operations similar to its businesses in the United States. With 30 offices at December 31, 1993, the Canadian consumer finance business operates under the HFC tradename. The Canadian consumer banking business, with 12 branches, operates as Household Trust Company. At December 31, 1993, the Canadian operations had $1.9 billion of receivables. In the United Kingdom, the Company owns HFC Bank plc, a fully licensed United Kingdom bank. HFC Bank plc had 150 branches at December 31, 1993 and approximately $1.2 billion of receivables. In Australia, the Company operates primarily as a consumer finance company under the HFC tradename. The Company had 22 offices in Australia at December 31, 1993 and approximately $375 million of consumer receivables. Credit Insurance In conjunction with its consumer lending operations and where applicable laws permit, the Company makes credit life, credit accident and health, term and specialty insurance products available to its customers. This insurance generally is directly written by or reinsured with Alexander Hamilton Life Insurance Company 5 7 of America ("Alexander Hamilton"). Financial results for sales of these types of products through affiliated operations are reported as part of the Finance and Banking segment. Hamilton Investments Hamilton Investments was acquired by Household International during 1989 as part of the Bank's acquisition of a savings institution. Hamilton Investments is a retail-oriented investment banking and brokerage firm. It has 24 branch offices which are located in the following states: Illinois (9); Wisconsin (6); Minnesota (5); Michigan (2); and one each in Indiana and Nebraska. In addition, Hamilton operates through 150 Household Bank locations. In 1992 Hamilton Investments acquired Craig-Hallum, Inc., a Minneapolis-based investment banking and brokerage firm with 100 registered representatives and 26,000 customer accounts. Hamilton Investments is registered as a broker-dealer with the Securities and Exchange Commission and as a futures commission merchant with the Commodities Futures Trading Commission. It is a member of the National Association of Securities Dealers, the New York Stock Exchange, the American Stock Exchange, the Chicago Stock Exchange and the National Futures Association. A subsidiary of Hamilton Investments acts as the investment adviser to the Oberweis Emerging Growth Fund, the Household Personal Portfolios and General Securities, Inc., mutual funds with assets of approximately $101, $26 and $28 million, respectively, at year-end 1993. COMMERCIAL OPERATIONS. Approximately 3 percent of the Finance and Banking managed receivables portfolio at December 31, 1993 consisted of leveraged leases, other equipment financing, and specialized corporate lending. Products in these areas include loan and lease financing for aircraft, other transportation equipment, capital equipment and specialized secured corporate loans. In addition, the Company invests in term preferred stocks. See also "Liquidating Commercial Lines" below. The commercial finance business of the Company has been operated under Household Commercial Financial Services ("Household Commercial") since 1974. The industry in which Household Commercial operates is highly competitive and the Company's position in this market is relatively small. Commercial loans are underwritten based upon specific criteria by product, which include the following items: borrower's financial strength; underlying value of any collateral; ability of the property/business to generate cash flow and pricing considerations. For financing commitments in excess of $1 million, the loan request must be approved by an investment committee consisting of senior management. The financial and operating performance of all borrowers is monitored and reported to management on an ongoing basis. Additionally, the conclusions of this monitoring process are reported to the senior management of the Company on a quarterly basis. A description of Household's operational policy with respect to commercial receivables is set forth on page 41 of the 1993 Annual Report. INDIVIDUAL LIFE INSURANCE The Company's individual life insurance operations are conducted by Alexander Hamilton Life Insurance Company of America. Alexander Hamilton markets universal life, term life and annuity products to a higher income category consumer than that targeted by the consumer lending businesses. Alexander Hamilton also underwrites credit life, credit accident and health, and other specialty products sold through the Company's consumer businesses. The Alexander Hamilton products sold by affiliated entities are included in results of the Finance and Banking segment. Alexander Hamilton offers universal life insurance, term life insurance and annuity products through approximately 16,300 independent agents and 1,790 licensed consumer finance and banking employees. These individual products are sold in all states, with the largest concentration in 10 states (California, Florida, Illinois, Maryland, Michigan, New Jersey, New York, Ohio, Pennsylvania and Wisconsin) accounting for 63 percent of premium income in 1993. The Company also sells credit insurance to customers of banks and retail merchants which are not affiliated with Household International. Alexander Hamilton has been assigned a claims-paying ability rating of "AA" from three nationally recognized statistical rating organizations. 6 8 LIQUIDATING COMMERCIAL LINES As of December 31, 1991, Household International ceased offering certain commercial product lines. The decision to withdraw from these product lines was made to enable Household International to concentrate its resources on operations it believes offer the opportunity for more consistent financial returns relative to risks assumed. These liquidating commercial lines are: speculative real estate secured lending; highly leveraged acquisition finance transactions; subordinated corporate lending; higher-risk equipment loans and leases and other commercial assets. These discontinued product lines are managed by Household Commercial separately from continuing commercial lines. The Company intends to liquidate this portfolio over time in a manner that will maximize the value of these assets and believes that, depending on the economic environment, it should be able to liquidate these portfolios over the next several years. Liquidating commercial assets at December 31, 1993 consisted of the following (in millions): Receivables: Commercial real estate................................................... $ 297.1 Highly leveraged acquisition finance and other........................... 892.8 -------- Receivables owned.......................................................... 1,189.9 Accrued finance charges.................................................... 9.2 Reserve for credit losses.................................................. (172.9) -------- Total receivables owned, net............................................... 1,026.2 Real estate owned.......................................................... 256.6 Other assets............................................................... 272.9 -------- Total liquidating commercial assets.............................. $1,555.7 ========
INVESTMENT SECURITIES Investment securities of the Company are principally held by Alexander Hamilton. At December 31, 1993, Alexander Hamilton had $6.4 billion or approximately 73 percent of the Company's $8.8 billion total investment portfolio. The composition of this portfolio is set forth on pages 59 and 60 of the 1993 Annual Report. Investment securities are also held by the Bank, Household Global Funding, Inc., the United States holding company for Household's operations in Canada and the United Kingdom, and Household Commercial and represent approximately 14, 6 and 4 percent, respectively, of the Company's total investment portfolio. FUNDING RESOURCES As a financial services organization, Household International must have access to funds at competitive rates, terms and conditions to be successful. Household International and its subsidiaries fund their operations in the global capital markets, primarily through the use of commercial paper, medium-term notes and long-term debt, and have used financial instruments to hedge their currency and interest-rate exposure. Four nationally recognized statistical rating organizations currently assign investment grade ratings to the debt and preferred stock issued by the Company and its subsidiaries. In addition, these organizations rated the commercial paper of HFC in their highest rating category. The securitization and sale of consumer receivables is an important source of liquidity for HFC and the Bank. During 1993 the Company's subsidiaries securitized and sold, including replenishments of certificateholder interests, approximately $9.4 billion of home equity, merchant participation and bankcard receivables compared to $4.8 billion in 1992. To diversify its funding base and add more stability to funding costs, the Company developed a retail deposit base in recent years through its consumer banking business. Customer deposits have grown from $3.9 billion at year-end 1988 to $7.5 billion at December 31, 1993. The Company intends to continue to expand this deposit base through selective acquisitions of savings institutions. See "Finance and Banking-- Household Bank, f.s.b.". 7 9 REGULATION AND COMPETITION REGULATION. The Company's businesses are subject to various regulations covering their conduct. Generally, HFC's consumer branch lending offices are regulated by legislation and licensed in those jurisdictions where they operate. Such licenses have limited terms but are renewable, and are revocable for cause. In addition to licensing provisions, statutes in some jurisdictions may provide that a loan not exceed a certain period of time, or may place limits on the size or interest rate of the loan. HFC's sales finance business is also subject to regulatory legislation in certain jurisdictions which, among other things, may limit the interest rates or fees which may be charged or which may inhibit HFC's ability to collect or foreclose upon delinquent loans. All of Household International's consumer finance operations are subject to federal laws relating to discrimination in credit extensions, use of credit reports, disclosure of credit terms, and correction of billing errors. The Bank is chartered by the Office of Thrift Supervision ("OTS") and is a member of the Federal Home Loan Bank System. The Bank has its customer deposit accounts insured for up to $100,000 per insured depositor by the Federal Deposit Insurance Corporation ("FDIC"), for which the Bank is assessed a fee. The Bank is subject to examination and supervision by the OTS and FDIC and to federal regulations governing such matters as general investment authority, acquisitions of financial institutions, transactions with affiliates, establishment of branch offices, subsidiaries' investments and activities, and restrictions on dividend payments to Household International. The Bank is also subject to regulatory requirements setting forth minimum capital and liquidity levels. In addition, regulations of the Federal Reserve Board require the Bank to maintain non- interest bearing reserves against the Bank's transaction accounts (primarily NOW and money-market checking accounts) and non-personal time deposits. Because of its ownership of the Bank, Household International is a savings and loan holding company subject to reporting and other regulations of the OTS. Household International has agreed with the OTS to maintain the regulatory capital of the Bank at certain specified levels. This agreement between Household International and the OTS was amended in 1989 to reflect regulatory changes in the methodology of calculating the Bank's regulatory capital. Household Bank, National Association, Household Bank (Illinois), National Association, Household Bank (Nevada), National Association and Household Bank (SB), National Association are chartered by the Comptroller of the Currency and are members of the Federal Reserve System. The deposit accounts of these national banks are insured by the FDIC. National banks are generally subject to the same type of regulatory supervision and restrictions as the Bank, although these national banks only engage in credit card operations. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), enacted in December 1991, significantly expanded the regulatory and enforcement powers of federal banking regulators, in particular the FDIC. FDICIA also created additional reporting, disclosure and independent auditing requirements, changed FDIC insurance premiums from flat amounts to a new system of risk-based assessments, and placed limits on the ability of depository institutions to acquire brokered deposits. Under FDICIA, there are five tiers of capital measurement for regulatory purposes ranging from "Well-Capitalized" to "Critically Undercapitalized". FDICIA directs banking regulators to take increasingly strong corrective steps, based on the capital tier of any subject insured depository institution, to cause such bank to achieve and maintain capital adequacy. Even if an insured depository institution is adequately capitalized, the banking regulators are authorized to apply corrective measures if the insured depository institution is determined to be in an unsafe or unsound condition or engaging in an unsafe or unsound activity. FDICIA grants the banking regulators broad powers to require undercapitalized institutions to adopt and implement a capital restoration plan and to restrict or prohibit a number of activities, including the payment of cash dividends, which may impair or threaten the capital adequacy of the insured depository institution. FDICIA also expanded the grounds upon which a receiver or conservator may be appointed for an insured depository institution. Pursuant to FDICIA, federal banking regulatory agencies have proposed new safety and soundness standards governing operational and managerial activities of insured depository institutions and their holding companies, regarding internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation. 8 10 The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), among other things, provides generally that, upon the default of any insured institution, the FDIC may assess an affiliated insured depository institution for the estimated losses incurred by the FDIC. Specifically, FIRREA provides that a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. "In danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. As an insurance company, Alexander Hamilton is subject to regulatory supervision under the laws of the states in which it operates. Regulations vary from state to state but generally cover licensing of insurance companies, premium rates, dividend restrictions, types of insurance that may be sold, permissible investments, policy reserve requirements, and insurance marketing practices. COMPETITION. The consumer credit industry is highly fragmented, with thousands of banks, thrifts and other financial institutions competing in the United States alone. The industry has been consolidating in recent years, and the Company expects this consolidation to continue. The Company believes it has positioned itself to compete effectively and benefit from this consolidation because of its centralized distribution, processing and marketing capabilities, and advanced technology to support these activities. The financial services industry is highly competitive, and the Company's financial services businesses compete with a number of institutions that extend credit to consumers and businesses, some of which are larger than the Company. The Company competes not only with other finance companies, banks, and savings and loan companies, but also with credit unions and retailers. Alexander Hamilton competes with many other life insurance companies offering similar products. ITEM 2. PROPERTIES. Household International has operations in 35 states in the United States, 10 provinces in Canada, 6 states and 2 territories in Australia and in the United Kingdom with principal facilities located in Anaheim, California; Chesapeake, Virginia; Chicago, Illinois; Elmhurst, Illinois; Farmington Hills, Michigan; Hanover, Maryland; Las Vegas, Nevada; North York, Ontario, Canada; Pomona, California; Prospect Heights, Illinois; St. Leonards, New South Wales, Australia; Salinas, California; Windsor, Berkshire, United Kingdom; Wood Dale, Illinois; and Worthington, Ohio. Substantially all branch offices, bank branches, divisional offices, corporate offices, RPC and RSC space is operated under lease with the exception of the principal executive offices of Household International in Prospect Heights, Illinois, the headquarters building for HFC Bank plc in the United Kingdom, Alexander Hamilton's headquarters building in Farmington Hills, Michigan, and administration buildings in Northbrook, Illinois and Salinas, California. An additional administrative facility is currently under construction in Las Vegas, Nevada. The Company believes that such properties are in good condition and are adequate to meet Household International's current and reasonably anticipated needs. Household International has, and will continue to, invest in property and technological improvements to achieve greater efficiencies in the marketing, servicing and production of its loan products. During 1993 the Company invested $110 million in capital expenditures, compared to $90 million in 1992. Automobiles, office equipment and real estate properties owned and in use by the Company are not significant in relation to the total assets of the Company. ITEM 3. LEGAL PROCEEDINGS. The Company and its subsidiaries are parties to various legal proceedings, including product liability and environmental claims, resulting from ordinary business activities related to its current operations and/or former businesses which were managed as independent subsidiaries of the Company. Certain of these actions are or purport to be class actions seeking damages in very large amounts. Due to the uncertainties in litigation and other factors, no assurance can be given that the Company or its subsidiaries will ultimately prevail in each instance. However, for all litigation involving the Company and/or its subsidiaries, the Company believes that amounts, if any, that may ultimately be paid by the Company as damages in any such proceedings will not have a material adverse effect on the consolidated financial position of the Company. 9 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT. The following information on executive officers of Household International is included pursuant to Item 401(b) of Regulation S-K. Information with respect to Mr. Clark is incorporated herein by reference to "Election of Household Directors--Information Regarding Nominees" in Household International's definitive Proxy Statement for its 1994 Annual Meeting of Stockholders scheduled to be held May 11, 1994 (the "1994 Proxy Statement"). References herein to "Household" refer to Household International, Inc. for all periods after June 26, 1981 (the date of the corporate restructuring by which Household International became the holding company of Household Finance Corporation) and to Household Finance Corporation on and before such date. Robert F. Elliott, age 53, was appointed Group Executive-Office of the President in 1993. Prior thereto he was the Group Executive-U.S. Consumer Finance and Australia. Mr. Elliott joined Household in 1964 and has served in various capacities in the Company's consumer finance business during his career with Household. Joseph W. Saunders, age 48, was appointed Group Executive-Office of the President in 1993, having previously served as Group Executive-U.S. BankCard and Canada: He is also President of the Company's subsidiary, Household Bank, National Association. Prior to joining Household in 1985, Mr. Saunders was Vice President-Credit Card Operations of Bank of America. Antonia Shusta, age 44, was appointed to her present position as Group Executive-Office of the President in 1993. Ms. Shusta joined Household in 1988 as Group Executive-Mortgage Banking and Acquisitions and most recently served as Group Executive-U.S. Consumer and Mortgage Banking and the United Kingdom. Prior to joining Household, she was employed with Citicorp for 16 years, most recently as division executive for its Northern Latin American operation. Glen O. Fick, age 47, was appointed Group Executive-Commercial Finance and President of Household Commercial in 1991. Mr. Fick joined Household in 1971 and has served in various capacities in the Company's treasury, corporate finance and investor relations departments, as well as the specialty commercial services division of its commercial finance business. Gary D. Gilmer, age 43, was appointed President and Chief Executive Officer of Alexander Hamilton in 1993. Mr. Gilmer joined Household in 1972 and has served in various capacities within the consumer finance and banking divisions, most recently as President of Household Retail Services. Richard H. Headlee, age 63, has been Chairman of the Board of Alexander Hamilton since 1988. Mr. Headlee joined Alexander Hamilton in 1970 and served as its Chief Executive Officer from 1972 to 1993. Gaylen N. Larson, age 54, is Group Vice President of Household. Mr. Larson has previously served Household as Chief Accounting Officer, Controller and Group Vice President-Finance. Mr. Larson was a partner of the accounting firm of Deloitte & Touche prior to joining Household in 1979. David B. Barany, age 50, was appointed to his present position as Vice President-Chief Information Officer of Household in 1988. Mr. Barany joined Household in 1985 as Vice President/Controller of Household's financial services business. Prior to joining Household, he was employed by Four Phase Systems, Inc., a subsidiary of Motorola, Inc., as Vice President/Finance. John W. Blenke, age 38, is Assistant General Counsel and Secretary of Household. Mr. Blenke joined Household in 1989 as Corporate Finance Counsel, was promoted to Assistant General Counsel-Securities & Corporate Law and Assistant Secretary in 1991 and was appointed Secretary in 1993. Prior to joining Household, Mr. Blenke was employed with a subsidiary of Transamerica Corporation. Michael A. DeLuca, age 45, joined Household in 1985 as Director of Tax Planning and Tax Counsel and was appointed to his present position as Vice President-Taxes in 1988. 10 12 Colin P. Kelly, age 51, is Vice President-Human Resources of Household. Mr. Kelly joined Household in 1965 and has served in various management positions, most recently as Senior Vice President-Human Resources of Household's financial services business. Mr. Kelly was appointed to his present position in 1988. Michael H. Morgan, age 39, was appointed to his present position as Vice President-Corporate Communications in 1989. Mr. Morgan joined Household in 1984, and has served in various capacities within the planning and analysis and investor relations areas. From 1978 until joining Household, Mr. Morgan was employed with Arthur Andersen & Co. Randall L. Raup, age 40, was appointed Vice President-Planning in 1992, having most recently served as Vice President-Financial Control Treasury. Since joining Household in 1984, Mr. Raup has held positions in the treasury control, corporate reporting and internal audit areas. Prior to joining Household, he served as an auditor with Esmark, Inc. and KPMG Peat Marwick. Kenneth H. Robin, age 47, was appointed Vice President-General Counsel of Household in 1993, having previously served as Assistant General Counsel -- Financial Services. Prior to joining Household in 1989, Mr. Robin was employed with Citicorp from 1977 to 1989, most recently as a vice president responsible for legal policies for its operations in 23 countries in the Caribbean, Central America and South America. David A. Schoenholz, age 42, was appointed Vice President-Chief Accounting Officer of Household in 1993, Vice President in 1989 and Controller in 1987. He joined Household in 1985 as Director-Internal Audit. Prior to joining Household, Mr. Schoenholz was employed with The Commodore Corporation, a manufacturer of mobile homes, as Vice President/Controller from 1983 to 1985. Charles R. Wallace, age 45, was appointed Corporate Controller of Household in 1993, having previously served as Executive Vice President-Chief Operating Officer of Hamilton Investments since 1989. Prior to joining Household, Mr. Wallace was employed with Clayton Brown & Associates, Inc. and Ernst & Young. There are no family relationships among the executive officers of the Company. The term of office of each executive officer is at the discretion of the Board of Directors. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The number of record holders of Household International's Common Stock, as of March 16, 1994, was 14,679. Additional information required by this Item is incorporated by reference to page 32 of Household International's 1993 Annual Report. ITEM 6. SELECTED FINANCIAL DATA. Information required by this Item is incorporated by reference to page 34 of Household International's 1993 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Information required by this Item is incorporated by reference to pages 38 through 51 of Household International's 1993 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Financial Statements of Household International and subsidiaries meeting the requirements of Regulation S-X, and supplementary financial information specified by Item 302 of Regulation S-K, is incorporated by reference to pages 35 through 37 and pages 52 through 80 of Household International's 1993 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 11 13 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information required by this Item is incorporated by reference to "Election of Household Directors-- Information Regarding Nominees" and "Shares of Household Stock Beneficially Owned by Directors and Executive Officers" in Household International's 1994 Proxy Statement. Also, information on certain Executive Officers appears in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. Information required by this Item is incorporated by reference to "Remuneration of Executive Officers", "Savings--Stock Ownership and Pension Plans", "Incentive and Stock Option Plans", and "Directors' Compensation" in Household International's 1994 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required by this Item is incorporated by reference to "Shares of Household Stock Beneficially Owned by Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in Household International's 1994 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required by this Item is incorporated by reference to "Remuneration of Executive Officers" in Household International's 1994 Proxy Statement. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (A) FINANCIAL STATEMENTS. The following financial statements, together with the opinion thereon of Arthur Andersen & Co., dated February 1, 1994, appearing on pages 35 through 37 and pages 52 through 80 of Household International's 1993 Annual Report are incorporated herein by reference. An opinion of Arthur Andersen & Co. is included in this Annual Report on Form 10-K. Household International, Inc. and Subsidiaries: Statements of Income for the Three Years Ended December 31, 1993. Balance Sheets, December 31, 1993 and 1992. Statements of Cash Flows for the Three Years Ended December 31, 1993. Statements of Changes in Preferred Stock and Common Shareholders' Equity for the Three Years Ended December 31, 1993. Business Segment Data. Notes to Financial Statements. Independent Auditors' Report. Selected Quarterly Financial Data (Unaudited). (B) REPORTS ON FORM 8-K. During the three months ended December 31, 1993, the Company did not file with the Securities and Exchange Commission any Current Report on Form 8-K. 12 14 (C) EXHIBITS. 2 Reorganization and Distribution Agreement dated as of March 15, 1989 by and among Household International, Eljer Industries, Inc., Schwitzer, Inc., and Scotsman Industries, Inc. (incorporated by reference to Exhibit 2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 3(i) Restated Certificate of Incorporation of Household International, as amended (incorporated by reference to Exhibit 3(i) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993). 3(ii) Bylaws of Household International, as amended April 13, 1993 (incorporated by reference to Exhibit 3(ii) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4(a) Rights Agreement dated as of August 14, 1984, between the Company and Harris Trust and Savings Bank, as Rights Agent, as supplemented and amended (incorporated by reference to Exhibit 4 of the Company's Current Report on Form 8-K dated August 28, 1984, Exhibit 4(a) of the Company's Current Report on Form 8-K dated January 14, 1986, and Exhibit 4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988). 4(b) The principal amount of debt outstanding under each instrument defining the rights of holders of long-term senior and senior subordinated debt of Household International and its subsidiaries does not exceed 10 percent of the total assets of Household International and its subsidiaries on a consolidated basis. Household International agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each instrument defining the rights of holders of long-term senior and senior subordinated debt of Household International and its subsidiaries. 10.1 Household International Corporate Executive Bonus Plan. 10.2 1976 Employee Stock Option Plan, as amended (incorporated by reference to Exhibit 10(b) of the Company's Annual Report on Form 10-K for the fiscal year ended on December 31, 1991). 10.3 Household International Long-Term Executive Incentive Compensation Plan, as amended (incorporated by reference to Exhibit 10(c) of the Company's Annual Report on Form 10-K for the fiscal year ended on December 31, 1991). 10.4 Forms of stock option and restricted stock rights agreements under the Household International Long-Term Executive Incentive Compensation Plan. 10.5 Household International Directors' Retirement Income Plan. 10.6 Form of restricted stock compensation agreement for the Company's non-management directors (incorporated by reference to Exhibit 10(f) of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 10.7 Executive Employment Agreement between the Company and D. C. Clark (incorporated by reference to Exhibit 10.7 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.8 Executive Employment Agreement between the Company and A. Shusta (incorporated by reference to Exhibit 10.9 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.9 Executive Employment Agreement between the Company and J. W. Saunders. 10.10 Executive Employment Agreement between the Company and R. F. Elliott. 10.11 Executive Employment Agreement between Alexander Hamilton and R. H. Headlee (incorporated by reference to Exhibit 10.11 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends.
13 15 13 Material incorporated by reference to the Company's 1993 Annual Report to Shareholders. 21 List of Household International subsidiaries. 23 Consent of Arthur Andersen & Co., Certified Public Accountants. 99(a) Annual Report on Form 11-K for the Household International Tax Reduction Investment Plan (to be filed by amendment).
Copies of exhibits referred to above will be furnished to stockholders upon written request at a cost of fifteen cents per page. Requests should be made to Household International, Inc., 2700 Sanders Road, Prospect Heights, Illinois 60070, Attention: Office of the Secretary. (D) SCHEDULES. Report of Independent Public Accountants. III--Condensed Financial Information of Registrant. VIII--Valuation and Qualifying Accounts. X--Supplementary Statement of Income Information. 14 16 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, HOUSEHOLD INTERNATIONAL, INC. HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. HOUSEHOLD INTERNATIONAL, INC. Dated: March 28, 1994 By /s/ D. C. CLARK ------------------------------------ D. C. Clark, Chairman of the Board and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF HOUSEHOLD INTERNATIONAL, INC. AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE -------------------- /s/ D. C. CLARK Chairman of the Board, } - --------------------------------------------- Chief Executive Officer } (D. C. Clark) and Director } } /s/ J. C. BIEGLER Director } - --------------------------------------------- } (J. C. Biegler) } } /s/ R. J. DARNALL Director } - --------------------------------------------- } (R. J. Darnall) } } March 28, 1994 /s/ G. G. DILLON Director } - --------------------------------------------- } (G. G. Dillon) } } /s/ M. J. EVANS Director } - --------------------------------------------- } (M. J. Evans) } } /s/ C. F. FREIDHEIM, JR. Director } - --------------------------------------------- } (C. F. Freidheim, Jr.) }
15 17
SIGNATURE TITLE DATE -------------------- /s/ L. E. LEVY Director } - --------------------------------------------- } (L. E. Levy) } } /s/ J. D. NICHOLS Director } - --------------------------------------------- } (J. D. Nichols) } } /s/ G. P. OSLER Director } - --------------------------------------------- } (G. P. Osler) } } /s/ A. E. RASMUSSEN Director } - --------------------------------------------- } March 28, 1994 (A. E. Rasmussen) } } /s/ L. W. SULLIVAN, M.D. Director } - --------------------------------------------- } (L. W. Sullivan, M.D.) } } /s/ R. C. TOWER Director } - --------------------------------------------- } (R. C. Tower) } } /s/ D. A. SCHOENHOLZ Vice President-- } - --------------------------------------------- Chief Accounting Officer } (D. A. Schoenholz) (A Principal Financial } Officer) }
16 18 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Household International, Inc.: We have audited in accordance with generally accepted auditing standards, the financial statements included in Household International, Inc.'s 1993 annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 1, 1994. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in Item 14(d) are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN & CO. Chicago, Illinois February 1, 1994 F-1 19 SCHEDULE III HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONDENSED STATEMENTS OF INCOME (ALL DOLLAR AMOUNTS EXCEPT PER SHARE DATA ARE STATED IN MILLIONS.)
YEAR ENDED DECEMBER 31 ------------------------------ 1993 1992 1991 ------ ------ ------ Equity in income of subsidiaries............................... $326.7 $221.2 $161.9 Finance and other income....................................... 36.1 26.1 41.7 ------ ------ ------ Total income.............................................. 362.8 247.3 203.6 ------ ------ ------ Costs and expenses: Administrative............................................ 41.8 20.2 17.5 Provision for credit losses............................... 19.1 26.6 5.4 Interest.................................................. 25.2 35.7 41.5 Income tax benefits....................................... (22.0) (26.1) (10.6) ------ ------ ------ Total expenses............................................ 64.1 56.4 53.8 ------ ------ ------ Net income..................................................... $298.7 $190.9 $149.8 ====== ====== ====== Earnings per common share*: Fully diluted................................................ $ 2.85 $ 1.93 $ 1.55 ====== ====== ====== Primary...................................................... $ 2.91 $ 1.97 $ 1.57 ====== ====== ======
- --------------- * Amounts have been restated to reflect the two-for-one stock split in the form of a 100 percent stock dividend, effective October 15, 1993. See accompanying notes to condensed financial statements. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F-2 20 SCHEDULE III (CONTINUED) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONDENSED BALANCE SHEETS (IN MILLIONS)
DECEMBER 31 ---------------------- 1993 1992 -------- -------- Assets: Investments in and advances from subsidiaries..................... $2,534.2 $2,207.1 Finance receivables............................................... 98.4 102.7 Other assets...................................................... 356.2 229.7 -------- -------- Total assets...................................................... $2,988.8 $2,539.5 ======== ======== Liabilities and shareholders' equity: Bank borrowings................................................... $ 153.8 $ 63.1 Senior debt (with original maturities over one year).............. 200.0 300.0 -------- -------- Total debt........................................................ 353.8 363.1 Other liabilities................................................. 217.4 294.8 Convertible preferred stock subject to mandatory redemption....... 19.3 36.0 Preferred stock................................................... 320.0 300.0 Common shareholders' equity....................................... 2,078.3 1,545.6 -------- -------- Total liabilities and shareholders' equity........................ $2,988.8 $2,539.5 ======== ========
See accompanying notes to condensed financial statements. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F-3 21 SCHEDULE III (CONTINUED) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOWS (IN MILLIONS)
YEAR ENDED DECEMBER 31 ------------------------------- 1993 1992 1991 ------- ------- ------- CASH PROVIDED BY (USED IN) OPERATIONS......................... $(127.9) $ 28.8 $ 110.2 ------- ------- ------- INVESTMENT IN OPERATIONS Dividends from subsidiaries................................... 100.0 175.3 93.0 Investment in and advances to/from subsidiaries, net.......... (153.3) (229.3) (155.1) Investment securities sold (purchased), net................... 16.0 (16.0) -- Finance receivables originated, net of collections............ (17.2) 16.3 (18.7) Purchase of property and equipment............................ (.2) (.6) (14.2) ------- ------- ------- Cash decrease from investment in operations................... (54.7) (54.3) (95.0) ------- ------- ------- FINANCING AND CAPITAL TRANSACTIONS Net increase (decrease) in bank borrowings.................... 90.7 (133.5) (31.7) Retirement of debt............................................ (100.0) -- (157.6) Issuance of debt.............................................. -- 200.0 100.0 Dividends to shareholders..................................... (141.3) (124.6) (115.0) Common stock issued........................................... 313.3 33.0 134.5 Preferred stock issued........................................ 100.0 50.0 55.0 Preferred stock repurchased................................... (80.0) -- -- ------- ------- ------- Cash increase (decrease) from financing and capital transactions................................................ 182.7 24.9 (14.8) ------- ------- ------- Increase (decrease) in cash................................... .1 (.6) .4 Cash at January 1............................................. 1.6 2.2 1.8 ------- ------- ------- CASH AT DECEMBER 31........................................... $ 1.7 $ 1.6 $ 2.2 ======= ======= =======
See accompanying notes to condensed financial statements - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F-4 22 SCHEDULE III (CONTINUED) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT 1. FINANCE RECEIVABLES Receivables at December 31 consisted of the following (in millions):
1993 1992 ------ ------ Other unsecured........................................ $128.8 $120.4 Credit loss reserve.................................... (30.4) (17.7) ------ ------ Total........................................ $ 98.4 $102.7 ====== ======
2. SENIOR DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR) Debt at December 31 consisted of the following (in millions):
1993 1992 ------ ------ 7.00% notes; due 1993.................................. -- $100.0 5.75% notes; due 1994.................................. $100.0 100.0 7.35% notes; due 1995.................................. 100.0 100.0 ------ ------ Total........................................ $200.0 $300.0 ====== ======
3. COMMITMENTS Under an agreement with the Office of Thrift Supervision, the Company will maintain the net worth of Household Bank, f.s.b., at a level consistent with certain minimum net worth requirements. The Company has guaranteed payment of all debt obligations issued subsequent to 1989 (excluding deposits) of Household Financial Corporation Limited ("HFCL"), a Canadian subsidiary. The amount of guaranteed debt outstanding at HFCL on December 31, 1993 was approximately $853 million. The Company has also guaranteed payment of all debt obligations (excluding certain deposits) of Household International (U.K.) Limited ("HIUK"). The amount of guaranteed debt outstanding at HIUK on December 31, 1993 was approximately $936 million. The Company has guaranteed payment of a $62 million deposit held by one of its operating subsidiaries on behalf of another operating subsidiary. 4. CONVERTIBLE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION At December 31, 1993 and 1992, the Company had outstanding 385,439 and 720,415 shares, respectively, of the $6.25 cumulative convertible preferred stock subject to mandatory redemption provisions (the "$6.25 stock"). Each share of the $6.25 stock is convertible, at the option of its holder, into 4.654 shares of common stock, is entitled to one vote, as are common shares, and has a liquidation value of $50 per share. Holders of such stock are entitled to payment before any capital distribution is made to common shareholders. The Company is required to call for redemption, on an annual basis through 2010, a minimum of 4 percent to a maximum of 8 percent of the 3.5 million originally issued shares and is required to redeem all of the remaining unconverted and unredeemed shares in 2011. The Company called for redemption 8 percent of the originally issued shares in both 1993 and 1992. The Company redeemed 2,323 and 4,711 shares for $50 per share in 1993 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F-5 23 SCHEDULE III (CONTINUED) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT -- (CONTINUED) and 1992, respectively. The remaining shares called, but not redeemed for cash, were converted into common stock. If certain conditions are met, the Company may redeem the entire $6.25 stock issue at $50 per share plus accrued and unpaid dividends. At December 31, 1993, 1.8 million shares of common stock were reserved for conversion of the $6.25 stock. 5. COMMON STOCK On September 14, 1993 the Board of Directors of the Company declared a two-for-one stock split in the form of a 100 percent stock dividend effective October 15, 1993. The stock split resulted in an increase in common stock and a reduction in additional paid-in capital of $56.6 million. All share and per share data, except as otherwise indicated, have been restated to give retroactive effect to the stock split. On March 8, 1993 the Company sold 4,025,000 shares of common stock at $68.88 per share, on a pre-split basis. Net proceeds of approximately $269 million were used for general corporate purposes, including investments in the Company's subsidiaries and reduction of short-term debt. Assuming the additional shares of common stock had been issued on January 1, 1993 and the proceeds resulted in after-tax interest savings from reduction of short-term debt since that date, earnings per share for 1993 would have been $2.82 per share on a fully diluted basis. Common stock at December 31 consisted of the following (millions of shares):
1993 1992 ----- ---- Authorized -- $1 par value........................................... 150.0 67.5 ===== ==== Issued............................................................... 113.3 55.5 ===== ==== Outstanding.......................................................... 94.4 41.4 ===== ====
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F-6 24 SCHEDULE III (CONTINUED) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT -- (CONTINUED) 6. PREFERRED STOCK Preferred stock at December 31 consisted of the following (in millions):
1993 1992 ------ ------ Fixed rate and enhanced rate preferred stock: 9.50% Preferred stock Series 1989-A, 3,000,000 depositary shares(1)................. $ 75.0 $ 75.0 9.50% Preferred stock Series 1991-A, 5,500,000 depositary shares(2)................. 55.0 55.0 8.25% Preferred stock Series 1992-A, 2,000,000 depositary shares(3)................. 50.0 50.0 7.35% Preferred stock Series 1993-A, 4,000,000 depositary shares(3)................. 100.0 -- 11.25% Enhanced rate preferred stock 4,500,000 depositary shares(2)................................ -- 45.0 Flexible rate auction preferred stock: Series A, 350,000 shares......................................... -- 35.0 Series B, 400,000 shares......................................... 40.0 40.0 ------ ------ Total preferred stock.............................................. $320.0 $300.0 ====== ======
- --------------- (1) Depositary share represents 1/4 share of preferred stock. (2) Depositary share represents 1/10 share of preferred stock. (3) Depositary share represents 1/40 share of preferred stock. Dividends on the 9.50 percent preferred stock, Series 1989-A, are cumulative and payable quarterly. The Company may, at its option, redeem in whole or in part the 9.50 percent preferred stock, Series 1989-A, at $26.19 per depositary share beginning on November 9, 1994 and at amounts declining to $25 per depositary share thereafter, plus accrued and unpaid dividends. Dividends on the 9.50 percent preferred stock, Series 1991-A, are cumulative and payable quarterly. The Company may, at its option, redeem in whole or in part the 9.50 percent preferred stock, Series 1991-A, on any date after August 13, 1996 for $10 per depositary share plus accrued and unpaid dividends. Dividends on the 8.25 percent preferred stock, Series 1992-A, are cumulative and payable quarterly. The Company may, at its option, redeem in whole or in part the 8.25 percent preferred stock, Series 1992-A, on any date after October 15, 2002 for $25 per depositary share plus accrued and unpaid dividends. Dividends on the 7.35 percent preferred stock, Series 1993-A, are cumulative and payable quarterly. The Company may, at its option, redeem in whole or in part the 7.35 percent preferred stock, Series 1993-A, on any date after October 15, 1998 for $25 per depositary share plus accrued and unpaid dividends. On October 1, 1993 the Company redeemed 450,000 shares (equivalent to 4,500,000 depositary shares) of the 11.25 percent Enhanced Rate Cumulative Preferred Stock for $102.50 per share plus accrued and unpaid dividends. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F-7 25 SCHEDULE III (CONTINUED) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT -- (CONTINUED) On July 13, 1993 the Company redeemed 350,000 shares of the Flexible Rate Auction Preferred Stock ("Flex APS"), Series A, for $100 per share plus accrued and unpaid dividends. Dividends on the Flex APS are cumulative and payable when and as declared by the Board of Directors of the Company. The initial dividend rate on the Flex APS, Series B, is 9.50 percent. The initial rate on the Flex APS, Series B, extends through July 15, 1995, with subsequent dividend rates determined in accordance with a formula based on orders placed in a dutch auction generally held every 49 days. The Company may, at its option, redeem in whole or in part the Flex APS, Series B, for $100 per share plus accrued and unpaid dividends beginning on July 15, 1995. Each preferred stock issue ranks equally with the $6.25 stock and has a liquidation value of $100 per share except for the 8.25 percent preferred stock, Series 1992-A, and the 7.35 percent preferred stock, Series 1993-A, each of which have a liquidation value of $1,000 per share. Holders of all issues of preferred stock are entitled to payment before any capital distribution is made to common shareholders. The Company is authorized to issue cumulative nonconvertible preferred stock in one or more series in an amount not to exceed $620 million, and currently has $320 million of such preferred stock outstanding. 7. INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS No. 109"). As a result of implementing FAS No. 109, retained earnings for all periods between 1986 and 1992 have been reduced by approximately $63 million from amounts previously reported. The statements of income for those periods subsequent to December 31, 1986 have not been restated as the impact of FAS No. 109 on net income is immaterial to any such year and in total. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F-8 26 SCHEDULE VIII HOUSEHOLD INTERNATIONAL, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1993 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
1993 1992 1991 ------- ------- ------- (IN MILLIONS) Insurance reserves applicable to receivables: Policy: Balance at January 1............................... $ 61.3 $ 83.1 $ 118.2 Earned premiums.................................... (134.2) (138.6) (149.3) Net premiums written and reinsurance assumed....... 131.7 127.8 122.7 Other items........................................ .4 (11.0) (8.5) ------- ------- ------- Balance at December 31............................. 59.2 61.3 83.1 ------- ------- ------- Claims: Balance at January 1............................... 52.4 50.6 27.5 Provision for claims............................... 74.1 77.3 91.6 Benefits paid...................................... (67.9) (71.7) (69.6) Other items........................................ (.3) (3.8) 1.1 ------- ------- ------- Balance at December 31............................. 58.3 52.4 50.6 ------- ------- ------- Total insurance reserves at December 31............ $ 117.5 $ 113.7 $ 133.7 ======= ======= =======
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F-9 27 SCHEDULE X HOUSEHOLD INTERNATIONAL, INC. SUPPLEMENTARY STATEMENT OF INCOME INFORMATION FOR THE THREE YEARS ENDED DECEMBER 31, 1993 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
COLUMN B --------------------------- CHARGED TO COSTS COLUMN A AND EXPENSES - ------------------------------------------------------------------ --------------------------- ITEM 1993 1992 1991 - ------------------------------------------------------------------ ------ ----- ------ (IN MILLIONS) Depreciation and amortization of intangible assets and similar deferral: Amortization of insurance policy acquisition costs.............. $ 67.8 $30.3 $ 36.8 Amortization of acquired intangibles............................ 81.0 64.0 64.1 ------ ----- ------ Total........................................................ $148.8 $94.3 $100.9 ====== ===== ====== Advertising costs................................................. * $13.6 $ 22.2 ====== ===== ======
- --------------- * Represents less than 1 percent of total revenues as reported in the related consolidated statements of income. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F-10 28 EXHIBIT INDEX
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGES - ----------- ---------------------------------------------------------------------- ------------ 2 Reorganization and Distribution Agreement dated as of March 15, 1989 by and among Household International, Eljer Industries, Inc., Schwitzer, Inc., and Scotsman Industries, Inc. (incorporated by reference to Exhibit 2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 3(i) Restated Certificate of Incorporation of Household International, as amended (incorporated by reference to Exhibit 3(i) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993). 3(ii) Bylaws of Household International, as amended April 13, 1993 (incorporated by reference to Exhibit 3(ii) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4(a) Rights Agreement dated as of August 14, 1984, between the Company and Harris Trust and Savings Bank, as Rights Agent, as supplemented and amended (incorporated by reference to Exhibit 4 of the Company's Current Report on Form 8-K dated August 28, 1984, Exhibit 4(a) of the Company's Current Report on Form 8-K dated January 14, 1986, and Exhibit 4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988). 4(b) The principal amount of debt outstanding under each instrument defining the rights of holders of long-term senior and senior subordinated debt of Household International and its subsidiaries does not exceed 10 percent of the total assets of Household International and its subsidiaries on a consolidated basis. Household International agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each instrument defining the rights of holders of long-term senior and senior subordinated debt of Household International and its subsidiaries. 10.1 Household International Corporate Executive Bonus Plan. 10.2 1976 Employee Stock Option Plan, as amended (incorporated by reference to Exhibit 10(b) of the Company's Annual Report on Form 10-K for the fiscal year ended on December 31, 1991). 10.3 Household International Long-Term Executive Incentive Compensation Plan, as amended (incorporated by reference to Exhibit 10(c) of the Company's Annual Report on Form 10-K for the fiscal year ended on December 31, 1991). 10.4 Forms of stock option and restricted stock rights agreements under the Household International Long-Term Executive Incentive Compensation Plan. 10.5 Household International Directors' Retirement Income Plan. 10.6 Form of restricted stock compensation agreement for the Company's non-management directors (incorporated by reference to Exhibit 10(f) of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 10.7 Executive Employment Agreement between the Company and D. C. Clark (incorporated by reference to Exhibit 10.7 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.8 Executive Employment Agreement between the Company and A. Shusta (incorporated by reference to Exhibit 10.9 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.9 Executive Employment Agreement between the Company and J. W. Saunders. 10.10 Executive Employment Agreement between the Company and R. F. Elliott.
29
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGES - ----------- ---------------------------------------------------------------------- ------------ 10.11 Executive Employment Agreement between Alexander Hamilton and R. H. Headlee (incorporated by reference to Exhibit 10.11 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 13 Material incorporated by reference to the Company's 1993 Annual Report to Shareholders. 21 List of Household International subsidiaries. 23 Consent of Arthur Andersen & Co., Certified Public Accountants. 99(a) Annual Report on Form 11-K for the Household International Tax Reduction Investment Plan (to be filed by amendment).
EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 HOUSEHOLD INTERNATIONAL EXECUTIVE BONUS PLAN SUMMARY The Household International Executive Bonus Plan is a short-term, annual incentive plan. The purpose of the annual bonus is to place a significant part of pay at risk and reward executives for the achievements of individual, business unit and corporate financial and operational goals. Performance goals and award opportunities will be communicated to plan participants at the beginning of each calendar year. PARTICIPATION Participation in the Plan will be restricted to key line and staff executives. For purposes of the Plan, participants will be divided into groups. (See attached list). Any changes in the group of executives participating in the Plan will be made by the Chief Executive Officer, subject to the approval of the Compensation Committee in the case of any participant whose base salary must be determined by the Committee. LEVEL OF AWARDS The corporate measurement of performance will be return on equity (ROE). Household's ROE performance will be measured against the ROE performance of a selected financial comparator group. In order to reward individual performance, individual awards will vary above and below target levels in any plan year. Management may reduce bonus awards in light of overall business conditions or other exceptional circumstances. Target/Maximum Awards Target awards will be paid for fully satisfactory ROE and individual performance in a given year. The target award percentage for each group will approximate the guideline percentage shown below of the executive's base salary at the end of the plan year. The table below shows the portions of the target bonus that will be determined by corporate, business unit, and individual performance. 2 ---Guideline % of Annual Base Salary Determined by---
Total HI Unit Individual Target Maximum Group Performance Performance Performance Bonus Bonus* - ----- ----------- ----------- ----------- ------ ------- A 30% 30% 60% 90% B 20% 20% 40% 60% C 5% 10% 20% 35% 52.5% 15% (Staff) -- 20% D 5% 10% 15% 30% 45% 10% (Staff) -- 20% E -- 10% 10% 20% 30% F -- -- 20% 20% 30%
*The maximum award that may be paid to any executive is 150% of the target bonus for the position. DETERMINATION OF AWARDS A. Financial Performance Awards With the exception of Group F participants, ROE results will determine the size of a portion of each individuals's annual bonus. The ROE portion of the award will be paid out at maximum if the results are in the 75th percentile of the comparator group; at target if HI's results are at the 50th percentile; and, at minimum (threshold) if HI's results are 150 basis points below the 50th percentile of the comparator group. B. Individual Performance Awards Early in each plan year, goals for individual performance for that year will be established for each participant. The goals should require the level of performance which is expected of a fully satisfactory incumbent and must be agreed to by the immediate superior. The Compensation Committee of the Board of Directors must approve the goals for those executives whose salaries are determined by the Committee. These goals will be the primary criteria for measuring individual performance and determining the individual performance portion of the bonus for that year. The Chief Executive Officer will recommend the awards for participants, excluding himself, whose salaries are determined by the Compensation Committee of the Board of Directors. The Compensation Committee will then determine the awards for all such participants, as well as the award for the Chief Executive Officer. The Chief Executive Officer, will determine the awards for all participants whose salaries are not determined by the Compensation Committee. The Group Executives and Senior 3 Vice Presidents, in consultation with their appropriate subordinates, will recommend to the Chief Executive Officer the awards for all other participants. PAYMENT OF AWARDS Awards will be paid as soon as practical at the end of the plan period, subject to all required tax withholdings. Awards may be paid in cash, shares of Household common stock, or some combination thereof. Neither eligible participation in the plan, nor award payments thereunder shall guarantee an employee, any right to continued employment. The plan does not give any employee right or claim to an award under the program. Management reserves the right to change or discontinue the plan at any time. ADMINISTRATIVE MATTERS A. Promotions Normally awards will be pro-rated according to the portion of the plan year that an incumbent is eligible for the bonus. B. Effect on Benefits Payments made under this plan shall be included in an employee's income for purposes of determining pension benefits, life insurance, long-term disability, and participation in the TRIP plan. C. Termination of Employment Normally awards will be pro-rated in the case of death, permanent and total disability, or retirement under one of the Corporation's pension plans during a plan year. If a participant terminates employment for any other reason prior to the last working day of a plan year, he will normally forfeit any right to an award for the plan year. THE GOAL SETTING PROCESS Before the beginning of the plan year, the manager and subordinate will meet in a goal setting session. The purpose of the session is to discuss areas where goals will be established and agree on their priority and establish the number of points that will be earned based upon various levels of achievement during the plan period. 4 Preparation for the Goal Setting Meeting To prepare for the goal setting session with the bonus eligible subordinate, the manager should have a clear idea of function or department goals and objectives for the plan year, priorities for the subordinate's unit or area, and three or four possible objectives to suggest as appropriate. During the session, the manager's role will be to direct the discussion and ensure that its results are jointly understood. The subordinate will prepare for the session by establishing a list of priorities for the unit or area during the plan year, and developing four to eight potential goals for discussion. The subordinate's role during the session will be to actively discuss goals and expected levels of achievement with the manager in order to ensure that the final agreement is realistic and achievable and that there is a clear understanding of expected performance and the amount of bonus associated with various levels of achievement. Guidelines for Setting Goals For the purpose of establishing goals for the plan year, the following criteria should apply: - - They should be consistent and supportive of goals reflected in the Company's strategic business plans. - - They should be primarily job or task oriented. They must be realistic and achievable yet challenging with build in "stretch" to test individual capabilities. They should clearly specify action, tasks or results to be accomplished as well as a clear understanding of how the accomplishment will be evaluated. - - They must be understood and agreed to by both the manager and the subordinate. Setting goals for staff positions is somewhat more difficult than for line-type positions because staff performance is usually not measured numerically and rarely lends itself to quantitative measurement. Staff responsibilities tend to be contributory, interpretive and are more easily measured qualitatively. Frequently, the goals may include completion of specific projects. Non-quantitative goals should clearly state the criteria that will be used for evaluating successful achievement. The results of the goal setting process will be documented in the format of the Executive Bonus Plan Goal Setting Form and approved by the appropriate level of management. 5 12/31/93 CORPORATE EXECUTIVE BONUS PLAN POSITIONS Group/Title GROUP A-60%/90% CHAIRMAN AND CHIEF EXECUTIVE OFFICER GROUP B-40%/60% CHAIRMAN, AHLIC OFFICE OF PRESIDENT-GROUP EXEC US BANK CARD & CANADA OFFICE OF PRESIDENT-GROUP EXEC US CONSUMER FINANCE & AUSTRALIA OFFICE OF PRESIDENT-GROUP EXEC US CONSUMER & MORT BANK & UK SVP GENERAL COUNSEL & SECRETARY GROUP C-Heads of Major Business Units or Staff Units-35%/52-1/2% EVP CHIEF OPERATING OFFICER-HAMILTON INVESTMENTS GROUP EXECUTIVE COMMERCIAL FINANCE PRESIDENT & CEO - AHL VP CHIEF ACCOUNTING OFFICER VP CHIEF INFORMATION OFFICER VP GENERAL COUNSEL GROUP D-Heads of Major Business Segments or Staff Units - 30%/45% ASSISTANT GENERAL COUNSEL & CORPORATE SECRETARY CORPORATE CONTROLLER EVP-AHLIC EVP-CHIEF OPERATING OFFICER-AHLIC GROUP VICE PRESIDENT-HI GROUP VICE PRESIDENT MARKETING SERVICES MANAGING DIRECTOR AUSTRALIA MANAGING DIRECTOR/CEO-UK MANAGING DIRECTOR USCB PRESIDENT CORPORATE FINANCE-HCFS PRESIDENT EQUIPMENT FINANCE-HCFS PRESIDENT CANADA PRESIDENT HMS PRESIDENT HRSI PRESIDENT REAL ESTATE SERVICES DIVN-HCFS SVP CHIEF FINANCIAL OFFICER AHL SVP CHIEF MARKETING OFFICER AHL SVP HFC BRAND MANAGEMENT SVP MANAGING DIRECTOR HFS PROCESSING SERVICES SVP MANAGING DIRECTOR HFC PROCESSING SERVICES SVP OPERATIONS SUPPORT SERVICES SVP REGIONAL GENERAL MANAGER SVP TREASURY & ASSET MANAGEMENT AHL VP GOVERNMENTAL RELATIONS 6 VP HUMAN RESOURCES VP MONEY & CAPITAL MARKETS VP TAXES VP TREASURER GROUP E - Head of Operating Divisions - 20%/30% PRESIDENT HOUSEHOLD BANK SVP CONSUMER FINANCE-CANADA SVP TRUST-CANADA GROUP F - Heads of Major Staff Departments and Other Executives as Designated by the President - 20%/30% CORPORATE STAFF DEPARTMENTS: Chief Accounting Office: Audit DIRECTOR INTERNAL AUDIT-COMPUTER SYS DIRECTOR INTERNAL AUDIT-FINANCIAL SERVICES VP AUDIT Controller DIRECTOR INTERNAL REPORTING DEPUTY CONTROLLER-EXTERNAL REPORTING DIRECTOR-SPECIAL PROJECTS DIRECTOR POLICY & REGULATORY REPORTING VP DATA ADMINISTRATION Risk Management DIRECTOR RISK MANAGEMENT Tax DIRECTOR FEDERAL TAX AUDIT DIRECTOR FEDERAL TAX COMPLIANCE DIRECTOR STATE & LOCAL TAXES DIRECTOR TAX PLANNING & TAX COUNSEL Valuation & Assessment Services VP VALUATION & ASSESSMENT SERVICES General Counsel: General Counsel/Governmental Relations ASSISTANT GENERAL COUNSEL EMPLOYEE RELATIONS ASSISTANT GENERAL COUNSEL LITIGATION 7 GENERAL COUNSEL GENERAL COUNSEL - HAMILTON INVESTMENTS VP FEDERAL GOVERNMENTAL RELATIONS VP STATE GOVERNMENTAL RELATIONS Human Resources DIRECTOR EMPLOYEE COMMUNICATIONS DIRECTOR HUMAN RESOURCES HI DIRECTOR MANAGEMENT DEVELOPMENT & TRAINING VP COMPENSATION & ADMINISTRATION VP BENEFITS & HR POLICY Treasury: Corporate Communications DIRECTOR PUBLIC RELATIONS VP CORPORATE COMMUNICATIONS Treasury DIRECTOR-ASSET BACKED FINANCINGS DIRECTOR ASSET SECURITIZATION DIRECTOR PLANNING VP-FINANCE-HI VP FINANCIAL CONTROL TREASURY VP PLANNING VP SPECIALTY FINANCE VP TREASURY ADMINISTRATION U.S. BankCard & Canada HCS CHIEF FINANCIAL OFFICER-HCS CONTROLLER-HCS DIRECTOR BUSINESS PLANNING & RISK MANAGEMENT DIRECTOR BUSINESS SYSTEMS DIRECTOR COLLECTIONS HCS/E DIRECTOR CUSTOMER SERVICE & CREDIT SERVICES DIRECTOR FRAUD/BANK SECURITY DIRECTOR GM CARD HCS DIRECTOR HBNA PRODUCT DIRECTOR HUMAN RESOURCES DIRECTOR INFORMATION SERVICES DIRECTOR MARKETING HCS DIRECTOR OPERATIONS & RISK CONTROL DIRECTOR RISK CONTROL DIRECTOR STRATEGIC RISK TECHNOLOGIES DIRECTOR SYSTEMS & FINANCIAL SERVICES GROUP DIRECTOR INFORMATION SYSTEMS GROUP DIRECTOR NEVADA OPERATIONS NATIONAL DIRECTOR COLLECTIONS HCS 8 VP BUSINESS ANALYSIS VP CREDIT CYCLE MANAGEMENT VP DIRECTOR RESEARCH AHLIC SVP ACTUARIAL & PLANNING SVP AFFILIATED MARKETING AHL SVP GENERAL COUNSEL & SECRETARY AHL SVP OPERATIONS AHL SVP VOLUNTARY BENEFITS DIVISION AHL VP ACTUARY AHL VP AFFILIATED MARKETING AHL VP AGENCIES AHL VP ASSOCIATE GENERAL COUNSEL AHL VP COMMERCIAL REAL ESTATE AHL VP CONTROLLER AHL VP CHIEF OPERATIONS OFFICER AHL VP CREDIT MANAGEMENT VP DATA PROCESSING AHL VP FINANCE AHL VP HUMAN RESOURCES & RISK MANAGEMENT VP MANAGING DIRECTOR FAHIC VP MARKETING RESEARCH & DEVELOPMENT VP MARKETING SUPPORT-VBD AHL VP PUBLIC AFFAIRS/INDUSTRY RELATIONS AHL VP SPECIAL MARKETS AHL VP TECHNOLOGY DEVELOPMENT AHL VP TREASURER AHL VP UNDERWRITING & ISSUE AHL CANADA CONTROLLER DIRECTOR-APPLICATION SYSTEMS DEVELOPMENT* DIRECTOR-COLLECTIONS-CANADA* GROUP VP-INFORMATION SYSTEMS CANADA* GROUP VP-LEGAL & BUSINESS CONTROL SVP-ADMINISTRATION SVP-CHIEF FINANCIAL OFFICER-CANADA* SVP-OPERATIONS-CANADA* SVP-SALES VP-CREDIT RISK VP-DIRECTOR-LENDING RSC E/W VP-HUMAN RESOURCES VP-RSC-GENERAL MANAGER SVP MERCHANT SERVICES* * Position held by expatriate 9 U.S. Consumer Finance & Australia HFC Staff GROUP FINANCIAL CONTROL OFFICER GROUP HUMAN RESOURCES OFFICER VP CONTROLLER CONSUMER FINANCE STARS/HFC Division DIRECTOR OPERATIONS SUPPORT VP OF CUSTOMER SERVICE VP CHIEF OF STAFF VP COLLECTIONS USCF VP CREDIT VP DIRECTOR POLICY/COMPLIANCE/PROJECT CONTROL VP DIRECTOR OF SALES HRSI CHIEF FINANCIAL OFFICER-HRS DIRECTOR CREDIT/CUSTOMER SERVICE VP CHIEF COLLECTIONS OFFICER VP CHIEF CREDIT OFFICER VP CHIEF OF MARKETING & SALES HRSI VP CONTROLLER-HRSI VP CREDIT RISK VP DIRECTOR OF SALES HRSI VP HOUSEHOLD RECOVERY SERVICES HFS DIRECTOR OF SYSTEMS-HFS REGIONAL COLLECTIONS DIRECTOR REGIONAL CREDIT DIRECTOR SVP INDIRECT LENDING HFS VP FINANCE HFS HCFS SVP COMMERCIAL FINANCE RISK ASSET MANAGEMENT SVP FINANCE & ADMINISTRATION SVP GENERAL COUNSEL HCFS VP DIRECTOR PORTFOLIO MANAGEMENT VP REAL ESTATE ADMINISTRATION Australia DIVISION MANAGER-COMMERCIAL DIVISION MANAGER-CONSUMER FINANCE GROUP FINANCIAL CONTROLLER GROUP MANAGER-CENTRAL PROCESSING CENTRE GROUP MANAGER-CORPORATE ATTORNEY GROUP MANAGER-HUMAN RESOURCES 10 GROUP MANAGER-MARKETING GROUP MANAGER-SYSTEMS AND TECHNOLOGY GROUP MANAGER-TREASURY U.S. Consumer & Mortgage Banking & U.K. Household Bank DIRECTOR SYSTEMS & SPECIAL PROJECTS HB CREDIT RISK OFFICER VP BANK MARKETING & DEVELOPMENT VP BUSINESS DEVELOPMENT VP FINANCIAL ADMINISTRATION VP HUMAN RESOURCES USC&MB VP MARKET DEVELOPMENT & RISK MANAGEMENT HMS VP ASSET MANAGEMENT VP FINANCIAL CONTROL VP HMS OPERATIONS & STRATEGIC PLANNING VP LOAN ADMINISTRATION VP MORTGAGE ORIGINATIONS OSS VP ADMINISTRATIVE SERVICES VP BANK OPERATIONS VP BANK PROPERTY MANAGEMENT VP CASH OPERATIONS VP CHIEF FINANCIAL OFFICER OSS VP CORPORATE PROPERTY MANAGEMENT VP FACILITIES VP OSS MARKETING PRODUCTION VP PRODUCTION OSS VP SECURITY MANAGEMENT Hamilton Investments SVP BANK SERVICES GROUP SVP DIRECTOR OPERATIONS SVP PRODUCT & SERVICES HFN AVP ASSISTANT TO CIO DIRECTOR BUSINESS SYSTEMS DIRECTOR COMMUNICATIONS SERVICES/OFFICE SYSTEMS DIRECTOR DATA CENTER OPERATIONS DIRECTOR DISTRIBUTED INFRASTRUCTURE DIRECTOR STANDARDS & DATA ADMIN DIRECTOR SYSTEMS RESEARCH & DEVELOPMENT VP ADMINISTRATION VP ENTERPRISE SYSTEMS 11 VP INFORMATION SERVICES VP SYSTEMS ASSURANCE U.K. CHIEF FINANCIAL OFFICER DIRECTOR PERSONAL BANKING UK* DIRECTOR PRODUCTION PERSONAL BANKING UK* DIRECTOR-COLLECTIONS DIRECTOR-CORPORATE COMMUNICATION DIRECTOR-CREDIT POLICY DIRECTOR-HUMAN RESOURCES DIRECTOR-INFORMATION TECHNOLOGY* DIRECTOR-INSURANCE DIRECTOR-INTERNAL AUDIT DIRECTOR-LEGAL DIRECTOR-MARKETING DIRECTOR-PROPERTY & FACILITIES DIRECTOR-RETAIL SALES DIRECTOR-SERVICE QUALITY DIVISION GENERAL MANAGER FINANCE DIRECTOR-INSURANCE/COMPLIANCE OFFICER GENERAL MANAGER BUSINESS CONTROL GROUP FINANCIAL CONTROLLER PERSONNEL OPERATIONS MANAGER PRODUCTION DIRECTOR-INSURANCE PRODUCTION DIRECTOR-RETAIL SALES SALES DIRECTOR-INSURANCE SALES DIRECTOR-RETAIL SALES TECHNOLOGY PLANNING MANAGER TRAINING & DEVELOPMENT MANAGER TREASURY MANAGER * Position held by expatriate. Revised December, 1993 EX-10.4 3 EXHIBIT 10.4 1 EXHIBIT 10.4 HOUSEHOLD INTERNATIONAL NOTICE OF STOCK OPTIONS AND GRANT AGREEMENT , 1993 (Employee Name) (Employee Social Security Number) (Employee Home Address) On , 1993, the Compensation Committee of Household's Board of Directors granted you stock options under the Household International Long-Term Executive Incentive Compensation Plan as follows: Date of Grant ##/##/## Option Price Per Share $##.#### # of Shares Granted ## Enclosed are two #(2) copies of the Stock Option Agreement for your signature, which state the terms and conditions under which these options were granted. Please return one signed copy of the agreement, retaining the second for your files, to: Household International ATTENTION: Office of the Secretary 2700 Sanders Road, 3 North Prospect Heights, IL 60070 Sincerely, /s/ John W. Blenke ------------------ John W. Blenke Secretary _____________________________ __________________ Employee's Signature Date 2 HOUSEHOLD INTERNATIONAL, INC. HOUSEHOLD INTERNATIONAL LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN ------------------------------------- NON-TAX QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, between HOUSEHOLD INTERNATIONAL, INC., a Delaware corporation (the "Company"), and the employee referenced on the cover sheet to this Agreement (the "Employee"), is made pursuant to the Household International Long-Term Executive Incentive Compensation Plan (the "Incentive Plan"). The terms of such agreement are as follows: 1. The Company hereby grants to the Employee an option, for a period of 10 years and one day from the date hereof, to purchase, on the terms and conditions set forth herein and subject to the provisions set forth in the Incentive Plan, shares of the common stock of the Company as set forth in the cover sheet to this Agreement. 2. No shares may be purchased under this option for one year from the date hereof. At the close of said one-year period this option may, unless sooner terminated under the provisions hereof, be exercised in numbers of shares not to exceed 25 percent of the aggregate number of shares under option on and after each of the first, second, third and fourth anniversaries of the date hereof, provided that 100% of the shares in this option may be exercised (a) on the last day of employment in the case of an Employee who is retirement-eligible under the terms of a pension plan of the Company or a subsidiary, or (b) if so determined by the Committee during the Employee's employment. If the Employee does not purchase the full number of shares which he or she is entitled to purchase hereunder in any of said years, then the Employee may purchase such shares at any subsequent time during the term thereof. The option shall be exercised by giving to the Company ten days written notice of exercise specifying the number of shares to be purchased, which must be a minimum of twenty-five (25) shares, such notice to be accompanied by payment of the purchase price by cash or check to the order of the Company. Payment for the option may also be made with shares of common stock of the Company valued at the then fair market value of such shares or by a combination of cash and shares of common stock pursuant to such rules as have been established by the Compensation Committee or Board of Directors and which are in effect at the time the option is exercised. The Compensation Committee or Board of Directors may rescind at any time the right to use common stock of the Company in payment for shares purchased through the option. 3. The option may not be transferred except by will or the laws of descent and distribution. The option may be exercised during the lifetime of the Employee only by the Employee and only 3 while he or she is an employee of the Company (or a subsidiary thereof) and shall have been continuously so employed from the date hereof, except that: (i) in the event of termination of employment of the Employee and the Employee is retirement-eligible under the terms of a pension plan of the Company or a subsidiary, the option may be exercised within five years of the date of termination of employment; (ii) in the event of termination of employment due to permanent and total disability of the Employee and the Employee is not retirement-eligible under the terms of a pension plan of the Company or a subsidiary, the option may be exercised within twelve months following the date of such termination of employment; (iii) in the event of death during employment, the option may be exercised by the executor, administrator, or other personal representative of the Employee within five years succeeding death if such Employee was retirement-eligible under the terms of a pension plan of the Company or a subsidiary, or twelve months if such Employee was not retirement-eligible under the terms of a pension plan of the Company or a subsidiary; (iv) in the event of termination of employment other than as set forth in subsections (i), (ii) or (iii) above, the option may be exercised within three months following the date of termination, except for termination for cause; (v) in the event of death of the Employee following termination of employment, the option may be exercised by the executor, administrator, or other personal representative of the Employee, notwithstanding the time periods specified in (i), (ii), (iii) or (iv) above, within a) twelve months following death or b) the remainder of the period in which the Employee was entitled to exercise the option, whichever period is longer. If the Compensation Committee determines that the termination is for cause, the option will not under any circumstances be exercisable following termination of employment. Notwithstanding anything herein to the contrary, the option may not be exercised pursuant to this Section after the expiration of the term of such option and may be exercised only to the extent that the holder was entitled to exercise such option on the date of termination of employment. The option will expire in all events and for all purposes 10 years and one day from the date hereof. 4. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of the option herein granted prior to the listing of such shares on all stock exchanges on which the Company's stock shall then be listed. Upon any exercise of said option, the Company shall take the steps required for listing. 5. Neither the Employee nor his personal representative shall have any of the rights or privileges of a stockholder with respect to any shares subject to this option unless and until certificates evidencing such shares shall have been delivered. 6. Notice to the Company shall be addressed to the Company in care of its Secretary at 2700 Sanders Road, Prospect Heights, Illinois 60070 and notice to the Employee shall be addressed to 4 him or her at the address as set forth on the cover sheet of this Agreement, or at such other address as either party may hereafter designate in writing to the other. 7. Anything herein to the contrary notwithstanding, this option agreement shall be subject to amendment by the Company from time to time to the extent permitted by the Incentive Plan and is subject to the provisions of the Incentive Plan. 5 HOUSEHOLD INTERNATIONAL NOTICE OF STOCK OPTIONS AND GRANT AGREEMENT , 1993 (Employee Name) (Employee Social Security Number) (Employee Home Address) On , 1993, the Compensation Committee of Household's Board of Directors granted you stock options under the Household International Long-Term Executive Incentive Compensation Plan as follows: Date of Grant ##/##/## Option Price Per Share $##.#### # of Shares Granted ## Enclosed are two #(2) copies of the Stock Option Agreement for your signature, which state the terms and conditions under which these options were granted. Please return one signed copy of the agreement, retaining the second for your files, to: Household International ATTENTION: Office of the Secretary 2700 Sanders Road, 3 North Prospect Heights, IL 60070 Sincerely, /s/ John W. Blenke ------------------- John W. Blenke Secretary _____________________________ __________________ Employee's Signature Date 6 HOUSEHOLD INTERNATIONAL, INC. HOUSEHOLD INTERNATIONAL LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN ---------------------- U.K. STOCK OPTION PROVISIONS CERTIFICATE OF OPTION THIS AGREEMENT, between HOUSEHOLD INTERNATIONAL, INC., a Delaware corporation (the "Company"), and the employee referenced on the cover sheet to this Agreement (the "Employee"), is made pursuant to the Household International Long-Term Executive Incentive Compensation Plan and the U.K. Stock Option Provisions issued thereunder (the "Incentive Plan"). The terms of such agreement are as follows: 1. The Company hereby grants to the Employee an option, for a period of 10 years from the date hereof, to purchase, on the terms and conditions set forth herein and subject to the provisions set forth in the Incentive Plan, shares of the common stock of the Company as set forth in the cover sheet to this Agreement. 2. No shares may be purchased under this option for one year from the date hereof. At the close of said one-year period this option may, unless sooner terminated under the provisions hereof, be exercised in numbers of shares not to exceed 25 percent of the aggregate number of shares under option on and after each of the first, second, third and fourth anniversaries of the date hereof, provided that 100% of the shares in this option may be exercised if so determined by the Committee during the Employee's employment. If the Employee does not purchase the full number of shares which he or she is entitled to purchase hereunder in any of said years, then the Employee may purchase such shares at any subsequent time during the term thereof. The option shall be exercised by giving to the Company ten days written notice of exercise specifying the number of shares to be purchased, which must be a minimum of twenty-five (25) shares, such notice to be accompanied by payment of the purchase price by cash or check to the order of the Company. 3. The option may be exercised during the lifetime of the Employee only by him or her and only while he or she is an employee of the Company (or a subsidiary thereof) and shall have been continuously so employed from the date thereof, except that an option may be exercised within: (a) one year from the date of death if any option holder dies while still holding an option, by the executor, administrator or other personal representative of the individual, or (b) five years from the date of termination of employment by reason of the Employee becoming retirement-eligible, or (c) twelve months from the date of termination of employment by reason of total disability, or (d) three months from the date of termination of employment in all other cases. 7 Notwithstanding anything herein to the contrary, the option may not be exercised pursuant to this Section after the expiration of the term of such option and may be exercised only to the extent that the holder was entitled to exercise such option on the date of termination of employment. The option will expire in all events and for all purposes 10 years from the date hereof. 4. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of the option herein granted prior to the listing of such shares on all stock exchanges on which the Company's stock shall then be listed. Upon any exercise of said option, the Company shall take the steps required for listing. 5. Neither the Employee nor his personal representative shall have any of the rights or privileges of a stockholder with respect to any shares subject to this option unless and until certificates evidencing such shares shall have been delivered. 6. Notice to the Company shall be addressed to the Company in care of its Secretary at 2700 Sanders Road, Prospect Heights, Illinois 60070 and notice to the Employee shall be addressed to him or her at the address as set forth on the cover sheet of this Agreement, or at such other address as either party may hereafter designate in writing to the other. 7. Anything herein to the contrary notwithstanding, this option agreement shall be subject to amendment by the Company from time to time (subject to prior approval from the Inland Revenue) to the extent permitted by the Incentive Plan and is subject to the provisions of the Incentive Plan. 8 HOUSEHOLD INTERNATIONAL NOTICE OF RESTRICTED STOCK RIGHTS AGREEMENT , 1993 (Employee Name) (Employee Social Security Number) (Employee Home Address) On , 1993, the Compensation Committee of Household's Board of Directors granted you restricted stock rights under the Household International Long-Term Executive Incentive Compensation Plan as follows: Date of Grant ##/##/## Option Price Per Share $##.#### # of Shares Granted ## Enclosed are two #(2) copies of the Restricted Stock Rights Agreement for your signature, which state the terms and conditions under which these rights were granted. Please return one signed copy of the agreement, retaining the second for your files, to: Household International ATTENTION: Office of the Secretary 2700 Sanders Road, 3 North Prospect Heights, IL 60070 Sincerely, /s/ John W. Blenke -------------------------- John W. Blenke Secretary _____________________________ __________________ Employee's Signature Date 9 HOUSEHOLD INTERNATIONAL, INC. HOUSEHOLD INTERNATIONAL LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN ---------------------- RESTRICTED STOCK RIGHTS AGREEMENT THIS AGREEMENT, between HOUSEHOLD INTERNATIONAL, INC., a Delaware corporation (the "Company"), and the employee referenced on the cover sheet to this Agreement (the "Employee"), is made pursuant to the Household International Long-Term Executive Incentive Compensation Plan (the "Incentive Plan"). The terms of such agreement are as follows: 1. The Company hereby grants to the Employee Restricted Stock Rights (the "RSRs"), for a period of five (5) years from the date hereof (the "Restricted Period"), to receive on the terms and conditions set forth herein and subject to the provisions set forth in the Incentive Plan, shares of the Common Stock of the Company as set forth in the cover sheet to this Agreement. 2. No shares may be issued under RSRs for one year from the date hereof. The shares subject to such RSRs shall be forfeited and all rights of a holder of such RSRs and shares shall terminate without any payment of consideration by the Company if the Employee fails to remain continuously as an Employee of the Company or any subsidiary for the Restricted Period, except (i) in the case of an Employee who is retirement-eligible under the terms of a pension plan of the Company or a subsidiary, the Employee will receive 100% of the shares subject to RSRs on his or her last day of employment, and (ii) in the event that the employment of a holder of RSRs terminates by reason of death or permanent and total disability, such holder shall be entitled to receive the number of shares subject to the RSR multiplied by a fraction (x) the numerator of which shall be the number of full months between 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. An Employee shall not be deemed to have terminated his or her period of continuous employment with the Company if he or she leaves the employ of the Company or any subsidiary for immediate reemployment with the Company or any subsidiary. A holder of RSRs whose employment terminates for reasons other than those listed in this paragraph 2 (other than a change-in-control of the Company) will forfeit his or her rights under any outstanding RSRs. This automatic forfeiture may be waived in whole or in part by the Committee in its sole discretion. 3. The RSRs may not be transferred except by will or the laws of descent and distribution. 10 4. When an Employee shall be entitled to receive shares pursuant to RSRs, the Company shall issue the appropriate number of shares registered in the name of the Employee. 5. The holder of RSRs shall not be entitled to any of the rights of a holder of the Common Stock with respect to the shares subject to such RSRs prior to the issuance of such shares pursuant to the Plan. However, during the Restricted Period, for each share subject to an RSR, the Company will pay the Employee an amount in cash equal to the cash dividend declared on a share of Common Stock of the Company during the Restricted Period on or about the date the Company pays such dividend to its stockholders of record. 6. Notice to the Company shall be addressed to the Company in care of its Secretary at 2700 Sanders Road, Prospect Heights, Illinois 60070 and notice to the Employee shall be addressed to him or her at the address as set forth on the cover sheet of this Agreement, or at such other address as either party may hereafter designate in writing to the other. 7. Anything herein to the contrary notwithstanding, this RSR agreement shall be subject to amendment by the Company from time to time to the extent permitted by the Incentive Plan and is subject to the provisions of the Incentive Plan. EX-10.5 4 EXHIBIT 10.5 1 EXHIBIT 10.5 HOUSEHOLD INTERNATIONAL DIRECTORS' RETIREMENT INCOME PLAN I. PURPOSE The Directors' Retirement Income Plan is created to provide retirement income to certain non-management members of the Household International Board of Directors who retire from the Board or do not stand for re-election. II. ELIGIBILITY All non-management members of the Household International Board of Directors who have completed ten years of service on the Board or have attained the mandatory retirement age and have completed three years of service are eligible to participate in this Plan upon their retirement from or failure to stand for re-election to the Board. III. BENEFITS Benefits shall be paid to the director in quarterly installments equal to 1/4 of the annual retainer for service as a Board member in effect at the time of the last Board meeting attended. Payment of benefits will begin the quarter following retirement and will continue for the number of full years of service as a member of the Board up to a maximum of ten years. IV. SURVIVING SPOUSE BENEFIT In the event of the death of a director who is eligible to receive benefits under this Plan, those benefits that would otherwise have been payable to the director will be paid to the director's surviving spouse. Such payments to a surviving spouse will terminate on the earlier of the death of the surviving spouse or the date that benefit payments to the director would have terminated had he/she not died. V. EFFECTIVE DATE The effective date of this Plan is August 15, 1984. Past service of members of the Board on the effective date is considered service for purposes of this Plan. VI. PAYMENT OF CERTAIN COSTS OF THE PARTICIPANT If a dispute arises regarding the interpretation or enforcement of this Plan and the Participant (or in the event of his death, his beneficiary) obtains a final 2 judgment in his favor from a court of competent jurisdiction from which no appeal may be taken, whether because the time to do so has expired or otherwise, or his claim is settled by the Corporation prior to the rendering of such a judgment, all reasonable legal and other professional fees and expenses incurred by the Participant in contesting or disputing any such claim or in seeking to obtain or enforce any right or benefit provided for in this Plan or in otherwise pursuing his claim will be promptly paid by the Corporation with interest thereon at the highest Illinois statutory rate for interest on judgments against private parties from the date of payment thereof by the Participant to the date of reimbursement to him by the Corporation. EX-10.9 5 EXHIBIT 10.9 1 EXHIBIT 10.9 May 28, 1993 Mr. Joseph W. Saunders Household Credit Services, Inc. 1441 Schilling Place Salinas, CA 93901 Dear Joe: SUBJECT: Employment Agreement We wish you to remain in the employ of Household International, Inc. ("Household" or the "Corporation") and to provide you with fair and equitable treatment along with a competitive compensation package. Also, we wish to assure your continued attention to your duties without any possible distraction arising out of uncertain personal circumstances in a change in control environment. We recognize that in the event of a Change in Control of Household (as such term is defined herein) it is likely that your duties and responsibilities would be substantially altered. 1. At present you are employed by Household as Office of the President, Group Executive. In that capacity you are entitled to the following: a. A minimum annual salary of $358,900; b. An annual bonus having a targeted value equal to 40% of your annualized salary as of the end of the period in which the bonus is earned. The amount of bonus for any year that you actually receive, if any, will depend on the achievement of the corporate and your individual goals established for that year and the terms of the Household International Corporate Executive Bonus Plan, and any successor or substitute plan or plans (the "Bonus Plan"). Your bonus will be prorated based on the number of elapsed months in the performance period in the case of death, permanent and total disability, or retirement under the Household Retirement Income Plan or any successor tax qualified defined benefit plan; 2 EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders Page 2 May 28, 1993 c. An annual grant of any combination of performance units and restricted stock rights under the Household International Long-Term Executive Incentive Compensation Plan, and any successor or substitute plan or plans (the "Long-Term Plan"), having a targeted value of 25% of your then annual salary at the time of the grant. The performance unit awards are to be earned over a three year cycle, which will be prorated on the number of elapsed months in the performance period in the case of death, permanent and total disability or retirement under the Household Retirement Income Plan or any successor tax qualified defined benefit plan. Performance unit awards will be valued at their targeted value and restricted stock rights will be valued at the fair market value of stock at the date of grant; and d. Other compensation, benefits and perquisites as described in, and in accordance with, Household's compensation, benefit and perquisite plans (the "Plans"). 2. Subject to termination as provided herein, the term of this Agreement shall be for 18 whole calendar months, shall commence on the date hereof, and shall be "evergreen"; that is shall continue monthly as an 18 month term, unless the Corporation gives to you not less than 17 whole calendar months notice that the term as monthly continued shall not be so continued; provided further, that in no event shall the term be continued beyond your sixty-fifth birthday. 3. During your employment with Household you will devote your reasonably full time and energies to the faithful and diligent performance of the duties inherent in, and implied by, your executive position. 4. In consideration of your employment with Household, it is mutually agreed that: a. In the event your employment with Household is terminated during the term of this Agreement by Household for any reason other than: i. willful and deliberate misconduct which is detrimental in a significant way to the interests of the Corporation; 3 EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders Page 3 May 28, 1993 ii. death; iii. inability, for reasons of disability, reasonably to perform your duties for 6 consecutive calendar months; or, b. In the event that during the term of this Agreement you resign your position with Household because within 6 whole calendar months of your resignation one or more of the following events occurred to you: i. your annual salary was reduced; ii. your annual target bonus or the targeted value of any combination of performance unit awards and restricted stock rights calculated as provided in paragraph 1c was reduced and compensation equivalent in aggregate value was not substituted; iii. your benefits under the Household Retirement Income Plan or any successor tax qualified defined benefit plan were reduced for reasons other than to maintain its tax qualified status and such reductions were not supplemented in the Household Supplemental Retirement Income Plan ("HSRIP"); or your benefits under HSRIP were reduced; iv. your other benefits or perquisites were reduced and such reductions were not uniformally applied with respect to all similarly situated employees; v. you were reassigned to a geographical area outside of the Chicago, Illinois metropolitan area or the Salinas, California area; vi. any successor to the Corporation by acquisition of stock or substantially all of the assets, by merger or otherwise, failed to expressly adopt or otherwise repudiated this Employment Agreement; or vii. you received written notice that your employment contract was not renewed; Household shall be required, and hereby agrees, to make 4 EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders Page 4 May 28, 1993 promptly a lump sum cash payment to you in an amount equal to 290% of your then annual salary (prior to any of the aforesaid reductions) (representing approximately the present value of what you would have received had your employment, compensation and participation in benefit plans, other than stock options, continued for the term of this employment contract); provided, however, if the term of this Agreement is less than 18 months because you are within 18 months of becoming age 65, the amount shall be multiplied by a fraction the numerator of which is the number of months left in the term, and the denominator of which is 18. This payment shall be in addition to all other compensation and benefits accrued to the date of termination of employment. Also, the Compensation Committee of Household's Board of Directors has determined that you will be entitled to receive a portion of your bonus and performance unit awards for the performance periods in which your employment terminates. Such portion will be determined on the basis of the portion of the performance period elapsed as of your date of termination over the total performance period, and it will be assumed that individual and corporate target levels have been met. 5. It is further mutually agreed that: a. should your employment be terminated pursuant to the provisions of paragraph 4a, or b. should you resign your position pursuant to the provisions of paragraph 4b, or c. should you resign your position because you are assigned to a position of lesser rank or status than you had immediately prior to the Change in Control at any time within sixty (60) whole calendar months following a Change in Control of Household, Household or its successor shall pay to you the amounts (including the lump sum payment) described in paragraph 4 regardless of whether you are otherwise entitled to them under paragraph 4. In addition, Household or its successor shall promptly make a lump sum cash payment to you in an amount equal to 290% of your then annual salary (prior to any reduction). Because of the performance history of Household and your performance with us, we hereby agree to an irrebuttable presumption that a reduction in compensation shall be deemed to have occurred in any year (within five years 5 EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders Page 5 May 28, 1993 following a Change in Control) in which you do not receive at least: i. a bonus payment under the Bonus Plan, and ii. an award of any combination of performance unit awards and restricted stock rights under the Long-Term Plan for years in which awards were payable under the Long-Term Plan as it existed prior to the Change in Control, both at corporate and individual target levels as those plans existed prior to the Change in Control (or compensation, benefits and perquisites equivalent in aggregate value) and should you choose to resign, payments shall be made to you as outlined earlier in this paragraph 5. For purposes of this Agreement, a Change in Control of Household shall be deemed to occur when and if: A. any "person" (as the term is used in Section 13(d) and Section 14(d)(2) of the Securities Exchange Act of 1934) other than a trustee or other fiduciary of securities held under an employee benefit plan of Household becomes the beneficial owner, directly or indirectly, of securities of Household representing 20% or more of the combined voting power of Household's then outstanding securities; or B. persons who were directors of Household as of the effective date hereof, or successor directors nominated by those directors or by such successor directors cease to constitute a majority of the Board of Directors of Household or its successor by merger, consolidation or sale of assets. 6. You are not required to mitigate the amount of any payments to be made by Household pursuant to this Agreement by seeking other employment, or otherwise, nor shall the amount of any payments provided for in this Agreement be reduced by any compensation earned by you as the result of self-employment or your employment by another employer after the date of termination of your employment with Household. 7. Except as provided below, it is the intent and desire of Household that the salary, bonuses and other benefits 6 EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders Page 6 May 28, 1993 provided for herein shall be paid to you without any diminution by reason of the assessment of any "golden parachute" excise tax pursuant to the Internal Revenue Code of 1986, as from time to time amended, (hereinafter the "Code"), or state law. Accordingly, in the event that any excise tax is assessed against you pursuant to the provisions of sections 280G and 4999 of the Code (or successor provisions) or comparable provisions of state law, whether with respect to any payments made to you pursuant to the provisions of this Agreement or payments otherwise arising out of your employment relationship, Household or any successor, upon notification of such assessment, shall promptly pay to you such amount as is necessary to provide you with the same after-tax benefit that you would have received had there been no "golden parachute" excise tax. For this purpose, Household or its successor shall assume that you are taxed at the highest individual federal and state income tax rates (without regard to Section 1(g) of the Code or successor provisions thereto). However, if any part or all of the amounts to be paid to you constitute "parachute payments" within the meaning of section 280G(b)(2)(A) of the Code, and a reduction of the amount by 10% or less would totally avoid the imposition of any excise tax, such amounts shall be reduced so that the aggregate present value of the amounts constituting such parachute payments will be equal to 299% of your "annualized includible compensation for the base period," as such term is defined in section 280G(d)(1) of the Code. For the purpose of this subparagraph, present value shall be determined in accordance with section 280G(d)(4) of the Code. 8. If a dispute arises regarding the termination of your employment or the interpretation or enforcement of this Agreement and you obtain a final judgment in your favor from a court of competent jurisdiction from which no appeal may be taken, whether because the time to do so has expired or otherwise, or your claim is settled by Household or its successor prior to the rendering of such a judgment, all reasonable legal and other professional fees and expenses incurred by you in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided for in this Agreement or in otherwise pursuing your claim will be promptly paid by Household or its successor with interest thereon at the highest statutory rate of your state of 7 EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders Page 7 May 28, 1993 domicile for interest on judgments against private parties from the date of payment thereof by you to the date of reimbursement to you by Household or its successor. 9. You agree that you will not, without prior written consent of the Chairman of the Board and Chief Executive Officer or the General Counsel of Household, during the term of or after the termination of your employment under this Agreement, directly or indirectly, disclose to any individual, corporation, or other entity (other than Household, or any subsidiary or affiliate thereof, or its officers, directors, or employees entitled to such information, or any other person or entity to whom such information is regularly disclosed in the normal course of Household's business), or use for your own benefit or for the benefit of such individual, corporation or other entity, any information whether or not reduced to written or other tangible form, which: a. is not generally known to the public or in the industry; b. has been treated by Household as confidential or proprietary; and c. is of competitive advantage to Household and in the confidentiality of which Household has a legally protectible interest, (such information being referred to herein as "Confidential Information"). Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which Household ceases to have a legally protectible interest, shall cease to be subject to the restrictions of this paragraph. 10. This Agreement supersedes and replaces the Employment Agreement dated May 1, 1991, and the Employment Agreement dated August 16, 1990, between you and Household, all in furtherance of the objectives authorized and deemed by the Board of Directors of Household to serve the best interests of the Corporation. 11. Any successor to the Corporation, by acquisition of stock or substantially all of the assets, by merger or otherwise, shall be required to adopt and abide by the terms of this Agreement. This Agreement, and any rights to receive payments hereunder, may not be transferred, 8 EMPLOYMENT AGREEMENT - Mr. Joseph W. Saunders Page 8 May 28, 1993 assigned or alienated by you. 12. All benefits under this Agreement shall be general obligations of the Corporation which shall not require the segregation of any funds or property. Notwithstanding the foregoing, in the discretion of the Corporation, the Corporation may establish a grantor trust or other vehicle to assist it in meeting its obligations hereunder, but any such trust or other vehicle shall not create a funded account or security interest for you. 13. This Agreement may only be amended or terminated by written agreement, signed by both of the parties. Our signatures below indicate our mutual agreement and acceptance of the foregoing terms and provisions, all as of the date first above set forth. Sincerely, HOUSEHOLD INTERNATIONAL, INC. By: /s/ Donald C. Clark Donald C. Clark Chief Executive Officer /s/ Joseph W. Saunders Joseph W. Saunders EX-10.10 6 EXHIBIT 10.10 1 EXHIBIT 10.10 May 28, 1993 Mr. Robert F. Elliott 2700 Sanders Road Prospect Heights, IL 60070 Dear Bob: SUBJECT: Employment Agreement - ------------------------------ We wish you to remain in the employ of Household International, Inc. ("Household" or the "Corporation") and to provide you with fair and equitable treatment along with a competitive compensation package. Also, we wish to assure your continued attention to your duties without any possible distraction arising out of uncertain personal circumstances in a change in control environment. We recognize that in the event of a Change in Control of Household (as such term is defined herein) it is likely that your duties and responsibilities would be substantially altered. 1. At present you are employed by Household as Office of the President, Group Executive. In that capacity you are entitled to the following: a. A minimum annual salary of $307,300; b. An annual bonus having a targeted value equal to 40% of your annualized salary as of the end of the period in which the bonus is earned. The amount of bonus for any year that you actually receive, if any, will depend on the achievement of the corporate and your individual goals established for that year and the terms of the Household International Corporate Executive Bonus Plan, and any successor or substitute plan or plans (the "Bonus Plan"). Your bonus will be prorated based on the number of elapsed months in the performance period in the case of death, permanent and total disability, or retirement under the Household Retirement Income Plan or any successor tax qualified defined benefit plan; 2 EMPLOYMENT AGREEMENT - Mr. Robert E. Elliott Page 2 May 28, 1993 c. An annual grant of any combination of performance units and restricted stock rights under the Household International Long-Term Executive Incentive Compensation Plan, and any successor or substitute plan or plans (the "Long-Term Plan"), having a targeted value of 25% of your then annual salary at the time of the grant. The performance unit awards are to be earned over a three year cycle, which will be prorated on the number of elapsed months in the performance period in the case of death, permanent and total disability or retirement under the Household Retirement Income Plan or any successor tax qualified defined benefit plan. Performance unit awards will be valued at their targeted value and restricted stock rights will be valued at the fair market value of stock at the date of grant; and d. Other compensation, benefits and perquisites as described in, and in accordance with, Household's compensation, benefit and perquisite plans (the "Plans"). 2. Subject to termination as provided herein, the term of this Agreement shall be for 18 whole calendar months, shall commence on the date hereof, and shall be "evergreen"; that is shall continue monthly as an 18 month term, unless the Corporation gives to you not less than 17 whole calendar months notice that the term as monthly continued shall not be so continued; provided further, that in no event shall the term be continued beyond your sixty-fifth birthday. 3. During your employment with Household you will devote your reasonably full time and energies to the faithful and diligent performance of the duties inherent in, and implied by, your executive position. 4. In consideration of your employment with Household, it is mutually agreed that: a. In the event your employment with Household is terminated during the term of this Agreement by Household for any reason other than: i. willful and deliberate misconduct which is detrimental in a significant way to the interests of the Corporation; 3 EMPLOYMENT AGREEMENT - Mr. Robert F. Elliott Page 3 May 28, 1993 ii. death; iii. inability, for reasons of disability, reasonably to perform your duties for 6 consecutive calendar months; or, b. In the event that during the term of this Agreement you resign your position with Household because within 6 whole calendar months of your resignation one or more of the following events occurred to you: i. your annual salary was reduced; ii. your annual target bonus or the targeted value of any combination of performance unit awards and restricted stock rights calculated as provided in paragraph 1c was reduced and compensation equivalent in aggregate value was not substituted; iii. your benefits under the Household Retirement Income Plan or any successor tax qualified defined benefit plan were reduced for reasons other than to maintain its tax qualified status and such reductions were not supplemented in the Household Supplemental Retirement Income Plan ("HSRIP"); or your benefits under HSRIP were reduced; iv. your other benefits or perquisites were reduced and such reductions were not uniformally applied with respect to all similarly situated employees; v. you were reassigned to a geographical area outside of the Chicago, Illinois metropolitan area; vi. any successor to the Corporation by acquisition of stock or substantially all of the assets, by merger or otherwise, failed to expressly adopt or otherwise repudiated this Employment Agreement; or vii. you received written notice that your employment contract was not renewed; Household shall be required, and hereby agrees, to make 4 EMPLOYMENT AGREEMENT - Mr. Robert F. Elliott Page 4 May 28, 1993 promptly a lump sum cash payment to you in an amount equal to 290% of your then annual salary (prior to any of the aforesaid reductions) (representing approximately the present value of what you would have received had your employment, compensation and participation in benefit plans, other than stock options, continued for the term of this employment contract); provided, however, if the term of this Agreement is less than 18 months because you are within 18 months of becoming age 65, the amount shall be multiplied by a fraction the numerator of which is the number of months left in the term, and the denominator of which is 18. This payment shall be in addition to all other compensation and benefits accrued to the date of termination of employment. Also, the Compensation Committee of Household's Board of Directors has determined that you will be entitled to receive a portion of your bonus and performance unit awards for the performance periods in which your employment terminates. Such portion will be determined on the basis of the portion of the performance period elapsed as of your date of termination over the total performance period, and it will be assumed that individual and corporate target levels have been met. 5. It is further mutually agreed that: a. should your employment be terminated pursuant to the provisions of paragraph 4a, or b. should you resign your position pursuant to the provisions of paragraph 4b, or c. should you resign your position because you are assigned to a position of lesser rank or status than you had immediately prior to the Change in Control at any time within sixty (60) whole calendar months following a Change in Control of Household, Household or its successor shall pay to you the amounts (including the lump sum payment) described in paragraph 4 regardless of whether you are otherwise entitled to them under paragraph 4. In addition, Household or its successor shall promptly make a lump sum cash payment to you in an amount equal to 290% of your then annual salary (prior to any reduction). Because of the performance history of Household and your performance with us, we hereby agree to an irrebuttable presumption that a reduction in compensation shall be deemed to have occurred in any year (within five years 5 EMPLOYMENT AGREEMENT - Mr. Robert F. Elliott Page 5 May 28, 1993 following a Change in Control) in which you do not receive at least: i. a bonus payment under the Bonus Plan, and ii. an award of any combination of performance unit awards and restricted stock rights under the Long-Term Plan for years in which awards were payable under the Long-Term Plan as it existed prior to the Change in Control, both at corporate and individual target levels as those plans existed prior to the Change in Control (or compensation, benefits and perquisites equivalent in aggregate value) and should you choose to resign, payments shall be made to you as outlined earlier in this paragraph 5. For purposes of this Agreement, a Change in Control of Household shall be deemed to occur when and if: A. any "person" (as the term is used in Section 13(d) and Section 14(d)(2) of the Securities Exchange Act of 1934) other than a trustee or other fiduciary of securities held under an employee benefit plan of Household becomes the beneficial owner, directly or indirectly, of securities of Household representing 20% or more of the combined voting power of Household's then outstanding securities; or B. persons who were directors of Household as of the effective date hereof, or successor directors nominated by those directors or by such successor directors cease to constitute a majority of the Board of Directors of Household or its successor by merger, consolidation or sale of assets. 6. You are not required to mitigate the amount of any payments to be made by Household pursuant to this Agreement by seeking other employment, or otherwise, nor shall the amount of any payments provided for in this Agreement be reduced by any compensation earned by you as the result of self-employment or your employment by another employer after the date of termination of your employment with Household. 7. Except as provided below, it is the intent and desire of Household that the salary, bonuses and other benefits 6 EMPLOYMENT AGREEMENT - Mr. Robert F. Elliott Page 6 May 28, 1993 provided for herein shall be paid to you without any diminution by reason of the assessment of any "golden parachute" excise tax pursuant to the Internal Revenue Code of 1986, as from time to time amended, (hereinafter the "Code"), or state law. Accordingly, in the event that any excise tax is assessed against you pursuant to the provisions of sections 280G and 4999 of the Code (or successor provisions) or comparable provisions of state law, whether with respect to any payments made to you pursuant to the provisions of this Agreement or payments otherwise arising out of your employment relationship, Household or any successor, upon notification of such assessment, shall promptly pay to you such amount as is necessary to provide you with the same after-tax benefit that you would have received had there been no "golden parachute" excise tax. For this purpose, Household or its successor shall assume that you are taxed at the highest individual federal and state income tax rates (without regard to Section 1(g) of the Code or successor provisions thereto). However, if any part or all of the amounts to be paid to you constitute "parachute payments" within the meaning of section 280G(b)(2)(A) of the Code, and a reduction of the amount by 10% or less would totally avoid the imposition of any excise tax, such amounts shall be reduced so that the aggregate present value of the amounts constituting such parachute payments will be equal to 299% of your "annualized includible compensation for the base period," as such term is defined in section 280G(d)(1) of the Code. For the purpose of this subparagraph, present value shall be determined in accordance with section 280G(d)(4) of the Code. 8. If a dispute arises regarding the termination of your employment or the interpretation or enforcement of this Agreement and you obtain a final judgment in your favor from a court of competent jurisdiction from which no appeal may be taken, whether because the time to do so has expired or otherwise, or your claim is settled by Household or its successor prior to the rendering of such a judgment, all reasonable legal and other professional fees and expenses incurred by you in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided for in this Agreement or in otherwise pursuing your claim will be promptly paid by Household or its successor with interest thereon at the highest statutory rate of your state of 7 EMPLOYMENT AGREEMENT - Mr. Robert F. Elliott Page 7 May 28, 1993 domicile for interest on judgments against private parties from the date of payment thereof by you to the date of reimbursement to you by Household or its successor. 9. You agree that you will not, without prior written consent of the Chairman of the Board and Chief Executive Officer or the General Counsel of Household, during the term of or after the termination of your employment under this Agreement, directly or indirectly, disclose to any individual, corporation, or other entity (other than Household, or any subsidiary or affiliate thereof, or its officers, directors, or employees entitled to such information, or any other person or entity to whom such information is regularly disclosed in the normal course of Household's business), or use for your own benefit or for the benefit of such individual, corporation or other entity, any information whether or not reduced to written or other tangible form, which: a. is not generally known to the public or in the industry; b. has been treated by Household as confidential or proprietary; and c. is of competitive advantage to Household and in the confidentiality of which Household has a legally protectible interest, (such information being referred to herein as "Confidential Information"). Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which Household ceases to have a legally protectible interest, shall cease to be subject to the restrictions of this paragraph. 10. This Agreement supersedes and replaces the Employment Agreement dated May 1, 1991, and the Employment Agreement dated August 16, 1990, between you and Household, all in furtherance of the objectives authorized and deemed by the Board of Directors of Household to serve the best interests of the Corporation. 11. Any successor to the Corporation, by acquisition of stock or substantially all of the assets, by merger or otherwise, shall be required to adopt and abide by the terms of this Agreement. This Agreement, and any rights to receive payments hereunder, may not be transferred, 8 EMPLOYMENT AGREEMENT - Mr. Robert F. Elliott Page 8 May 28, 1993 assigned or alienated by you. 12. All benefits under this Agreement shall be general obligations of the Corporation which shall not require the segregation of any funds or property. Notwithstanding the foregoing, in the discretion of the Corporation, the Corporation may establish a grantor trust or other vehicle to assist it in meeting its obligations hereunder, but any such trust or other vehicle shall not create a funded account or security interest for you. 13. This Agreement may only be amended or terminated by written agreement, signed by both of the parties. Our signatures below indicate our mutual agreement and acceptance of the foregoing terms and provisions, all as of the date first above set forth. Sincerely, HOUSEHOLD INTERNATIONAL, INC. By: /s/ Donald C. Clark Donald C. Clark Chief Executive Officer /s/ Robert F. Elliott Robert F. Elliott EX-12 7 EXHIBIT 12 1 EXHIBIT 12 HOUSEHOLD INTERNATIONAL, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS.)
YEAR ENDED DECEMBER 31 -------------------------------------------------------- 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- Income from continuing operations............ $ 298.7 $ 190.9 $ 149.8 $ 235.3 $ 218.4 -------- -------- -------- -------- -------- Income taxes................................. 152.0 87.1 50.0 113.4 114.6 -------- -------- -------- -------- -------- Fixed charges: Interest expense(1)........................ 1,155.5 1,431.5 1,905.4 2,028.4 1,713.8 Interest portion of rentals(2)............. 33.6 35.3 35.1 30.9 26.0 Capitalized interest....................... -- -- 1.0 -- .5 -------- -------- -------- -------- -------- Total fixed charges..................... 1,189.1 1,466.8 1,941.5 2,059.3 1,740.3 -------- -------- -------- -------- -------- Capitalized interest....................... -- -- (1.0) -- (.5) -------- -------- -------- -------- -------- Total earnings as defined............... $1,639.8 $1,744.8 $2,140.3 $2,408.0 $2,072.8 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges........... 1.38 1.19 1.10 1.17 1.19 ======== ======== ======== ======== ======== Preferred stock dividends(3)................. $ 46.9 $ 44.3 $ 38.3 $ 29.8 $ 16.9 ======== ======== ======== ======== ======== Ratio of earnings to combined fixed charges and preferred stock dividends.............. 1.33 1.15 1.08 1.15 1.18 ======== ======== ======== ======== ========
- ------------------------- (1) For financial statement purposes, these amounts are reduced for income earned on temporary investment of excess funds, generally resulting from over-subscriptions of commercial paper issuances. (2) Represents one-third of rental which approximates the portion representing interest. (3) Preferred stock dividends are grossed up to their pre-tax equivalents based on effective tax rates of 33.7, 31.3, 25.0, 32.5 and 34.4 percent, for the years ended December 31, 1993, 1992, 1991, 1990 and 1989, respectively. EX-13 8 EXHIBIT 13 1 EXHIBIT 13 ALL PAGE NUMBERS REFERENCED IN EXHIBIT 13 REFER TO PAGE NUMBERS IN THE HOUSEHOLD INTERNATIONAL 1993 ANNUAL REPORT TO SHAREHOLDERS. 2
CORPORATE PROFILE MARKETS - ----------------- ------- HOUSEHOLD FINANCE Household Finance Corporation 2700 Sanders Road Prospect Heights, IL 60070-2799 708 564.5000 35 States HOUSEHOLD RETAIL SERVICES Household Retail Services, Inc. 700 N. Wood Dale Road Wood Dale, IL 60191-1155 708 350.4000 (Also in Hawaii and Puerto Rico) HOUSEHOLD BANK Household Bank, f.s.b. 4301 MacArthur Blvd. Newport Beach, CA 92660-2021 714 955.4600 7 States HOUSEHOLD MORTGAGE SERVICES Household Mortgage Services, Inc. 2700 Sanders Road Prospect Heights, IL 60070-2799 708 564.5000 42 States HOUSEHOLD CREDIT SERVICES Household Bank, N.A. 1441 Schilling Place Salinas, CA 93901-4543 408 754.1400 (Also in Alaska and Hawaii) ALEXANDER HAMILTON LIFE Alexander Hamilton Life Insurance Company of America 33045 Hamilton Blvd. Farmington Hills, MI 48334-3358 1-800 521.4397 (Also in Alaska, Hawaii, Canada, and the U.K.) HOUSEHOLD COMMERCIAL Household Commercial Financial Services, Inc. 2700 Sanders Road Prospect Heights, IL 60070-2799 708 564.6100 (Also Internationally) International Operations HOUSEHOLD FINANCIAL Household Financial Corporation Limited CORPORATION 100 Sheppard Avenue East, Suite 1000 North York, Ontario M2N 6N7 Canada 416 250.3400 10 Provinces in Canada HFC BANK PLC HFC Bank plc North Street Winkfield, Windsor Berkshire SL4 4TD United Kingdom 0344 890000 England, Scotland and Wales HOUSEHOLD FINANCIAL Household Financial Services Limited SERVICES LIMITED 33 Herbert Street St. Leonards, Australia NSW 2065 612 901.6666 6 States and 2 Territories in Australia
A full range of investment services is provided by Hamilton Investments, a Household International subsidiary. At December 31, 1993, Hamilton Investments, Inc. managed 100,000 customer accounts with assets of $3.3 billion through a network of 24 branch offices and 150 Household Bank locations. Hamilton Investments employees totaled 629. 3 APPENDIX TO PAGE ONE OF EXHIBIT 13 Under the column heading "Markets" and with respect to each of the companies listed, maps are depicted, shaded to show the geographic markets in which such company operates. A description of such maps and the applicable shading is set out below. Household Finance - a map of the continental United States is depicted, with 35 states shaded. The states which are not shaded are: Arkansas, Colorado, Idaho, Iowa, Louisiana, Maine, Mississippi, Montana, North Dakota, South Dakota, Utah, Vermont and Wyoming. Household Retail Services - a map of the continental United States is depicted, and the entire map is shaded. Household Bank - a map of the continental United States is depicted, with seven states shaded. The states which are shaded are: California, Illinois, Indiana, Kansas, Ohio, Maryland and Virginia. Household Mortgage Services - a map of the continental United States is depicted, with 42 states shaded. The states which are not shaded are: Alabama, Louisiana, Mississippi, Oklahoma, North Dakota and South Dakota. Household Credit Services - a map of the continental United States is depicted, and the entire map is shaded. Alexander Hamilton Life - a map of the continental United States is depicted, and the entire map is shaded. Household Commercial - a map of the continental United States is depicted, and the entire map is shaded. Household Financial Corporation - a map of Canada is depicted and the entire map is shaded. HFC Bank plc - a map of England, Scotland and Wales, the Isle of Man, the Hebrides and Orlsney Islands, Northern Ireland and the Republic of Ireland are depicted, and the entire map is shaded with the exception of Northern Ireland and the Republic of Ireland. Household Financial Services Limited - a map of the Australia and Tasmania is depicted, and the entire map is shaded. 4
Products Business Information as of December 31, 1993 ------- -------------------------------------------- Home equity credit lines, unsecured credit lines, $10.5 billion in receivables owned or serviced secured and unsecured closed-end loans, Alexander 2 regional centers, 432 branch offices Hamilton insurance products, purchased portfolio 3,600 employees servicing through Household Financial Services* 1.7 million customer accounts Private-label revolving credit cards, closed-end $2.3 billion in receivables owned or serviced sales contracts, Alexander Hamilton insurance 3 regional centers products, marketing services 825 employees 1.6 million customer accounts Checking, savings and money market accounts; $6.2 billion in deposits certificates of deposit; IRA's; Alexander Hamilton $1.5 billion in receivables owned or serviced insurance products; secured and unsecured personal 171 branches loans; first and second mortgages; student loans; 1,938 employees children's "Banker Bear" accounts; investment 1 million customer accounts planning services through Hamilton Investments, tax deferred annuities Fixed, adjustable and balloon first mortgages on $16.3 billion in receivables owned or serviced residential and income-producing properties 23 offices 899 employees 163,000 customer accounts Credit card accounts featuring both standard and $9.1 billion in receivables owned or serviced Gold Visa and MasterCard, the GM Card, the Ameritech 3 regional centers Complete Card, the Charles Schwab Visa and revolving 3,035 employees lines of credit 9.5 million customer accounts Universal life, term, and annuity products through $7 billion in managed assets independent agents and financial institutions, and 718 employees credit life, disability and specialty insurance 1.6 million customer accounts through 16,300 products through Household business units independent agents and 1,790 licensed Household employees Capital equipment loans and leases, term-preferred $1 billion receivables and investments in continuing stocks, senior term and revolving debt to middle commercial lines; additionally, manages Liquidating market and larger companies Commercial Lines 150 employees Secured and unsecured credit lines, conventional $2.5 billion in receivables owned or serviced loans, first and second mortgages, deposit 42 offices products, private-label credit cards, Alexander 1,074 employees Hamilton insurance products 553,000 customer accounts Full service bank offering fixed term and $1.2 billion in receivables owned or serviced revolving unsecured and secured loans, insurance 150 offices through Alexander Hamilton; the GM Card from 1,503 employees Vauxhall 424,000 customer accounts Home equity revolving lines of credit, unsecured $.4 billion in receivables owned or serviced revolving lines of credit, secured and unsecured 22 offices personal loans, revolving credit sales contracts 366 employees and other secured finance products, credit life, 113,000 customer accounts accident and sickness insurance
*Household Financial Services establishes relationships with other financial institutions to acquire and service consumer loans. At December 31, 1993, HFS' 378 employees managed receivables totaling $2.2 billion, representing 850,000 accounts. Additionally, Operations Support Services and Corporate personnel accounted for approximately 1,750 employees. 5 COMMON AND PREFERRED STOCK INFORMATION COMMON STOCK Household International, Inc. common stock is listed on the New York and Chicago stock exchanges. It also has unlisted trading privileges on the Boston, Pacific and Philadelphia stock exchanges. Call and put options are traded on the American Stock Exchange. A 2-for-1 stock split effected in the form of a 100% stock dividend on Household's common stock took place October 15, 1993. PREFERRED STOCK Household International also has several series of preferred stocks, all of which, with the exception of the Flexible Rate Auction Preferred Stock, Series B, are listed on the New York Stock Exchange. During 1993, Household redeemed its Flexible Rate Auction Preferred Stock, Series A, on July 13, and its 11 1/4% Enhanced Rate Cumulative Preferred Stock on October 1.
Dividends Declared ------------------ Ticker Stock Symbol 1993 1992 Features Redemption Features - -------------------------------------------------------------------------------------------------------------------- Common HI $1.18 $1.15 Quarterly dividend rate increased N/A to $.30 effective 10/15/93 $6.25 Preferred HI+PRD $6.25 $6.25 Convertible into Common Stock Mandatory sinking fund at rate of 4.654 shares of common redemption began in 1991 per share of preferred (See Note 9, Page 68) 9 1/2% Preferred, HI+PRA $2.375 $2.375 Nonconvertible Cannot be redeemed prior to Series 1989-A 11/9/94: Redeemable at Depositary Shares company's option after representing 1/4 11/9/94 in whole or in part: share of 9 1/2 % $26.1875--11/9/94-11/9/95 Preferred Stock, $25.9500--11/9/95-11/9/96 Series 1989-A $25.7125--11/9/96-11/9/97 $25.4750--11/9/97-11/9/98 $25.2375--11/9/98-11/9/99 $25.0000--11/9/99 & thereafter 9 1/2% Preferred, HI+PRX $.95 $.95 Nonconvertible Cannot be redeemed prior to Series 1991-A 8/13/96: Redeemable at Depositary company's option after Shares representing 8/13/96 in whole or in part at 1/10 share of $10.00 9 1/2% Preferred Stock, Series 1991-A 8 1/4% Preferred, HI+PRZ $2.0625 $.4125* Nonconvertible Cannot be redeemed prior Series 1992-A to 10/15/02: Redeemable representing 1/40 at company's option share of 8 1/4% after 10/15/02 in whole Preferred Stock, or in part at $25.00 Series 1992-A 7.35% Preferred, HI+PRJ $.581875* N/A Nonconvertible Cannot be redeemed prior Series 1993-A to 10/15/98: Redeemable Depository Shares at company's option representing 1/40 after 10/15/98 in whole share of 7.35% or in part at $25.00 Preferred Stock, Series 1993-A Flexible Rate N/A $9.50 $9.50 Nonconvertible Redeemable at the option of Auction Preferred, Dividend rate fixed company at the end of the Series B at 9 1/2% until dividend period and at 7/15/95; set by certain times thereafter auction procedures at a price of $100 per share thereafter plus an amount equal to accrued and unpaid dividends to the redemption date.
*Partial Payment Period
Shareholders Shares Outstanding of Record 1993 Market Price 1992 Market Price ------------------ -------------- ----------------- ----------------- Stock 1993 1992 1993 1992 High Low High Low - -------------------------------------------------------------------------------------------------------------------- Common 94,448,132 41,438,133 14,632 14,605 40 3/8 26 7/8 30 1/4 20 3/4 $6.25 Preferred 385,439 720,415 641 842 186 134 1/2 132 1/2 105 9 1/2% Preferred, 3,000,000 3,000,000 591 595 28 1/2 26 1/4 27 7/8 24 1/2 Series 1989-A (Per Depositary Share) 11 1/4% Enhanced N/A 4,500,000 N/A 1,055 11 1/8 10 1/4 11 7/8 10 1/8 Rate Preferred (Per Depositary Share) 9 1/2% Preferred, 5,500,000 5,500,000 939 889 11 5/8 10 1/2 11 1/8 9 7/8 Series 1991-A (Per Depositary Share) 8 1/4% Preferred, 2,000,000 2,000,000 512 409 28 23 7/8 24 3/4 23 1/8 Series 1992-A (Per Depositary Share) 7.35% Preferred, 4,000,000 N/A 305 N/A 25 3/4 24 5/8 N/A N/A Series 1993-A (Per Depositary Share) Flexible Rate N/A 350,000 N/A 1 N/A N/A N/A N/A Auction Preferred, Series A Flexible Rate 400,000 400,000 4 4 N/A N/A N/A N/A Auction Preferred, Series B
6 FINANCIAL SECTION CONTENTS SELECTED FINANCIAL DATA & STATISTICS 34 ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY-- OWNED RECEIVABLES 35 ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY-- MANAGED RECEIVABLES 36 OTHER CREDIT QUALITY STATISTICS 37 MANAGEMENT'S DISCUSSION & ANALYSIS 38 STATEMENTS OF INCOME 52 BALANCE SHEETS 53 STATEMENTS OF CASH FLOWS 54 STATEMENTS OF CHANGES IN PREFERRED STOCK & COMMON SHAREHOLDERS' EQUITY 55 BUSINESS SEGMENT DATA 56 NOTES TO FINANCIAL STATEMENTS 57 MANAGEMENT'S REPORT 77 INDEPENDENT AUDITORS' REPORT 77 NET INTEREST MARGIN--1993 COMPARED TO 1992 78 NET INTEREST MARGIN--1992 COMPARED TO 1991 79 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) 80 7 SELECTED FINANCIAL DATA AND STATISTICS
Household International, Inc. and Subsidiaries All dollar amounts except per share data are stated in millions. 1993 1992 1991 1990 1989 - ---------------------------------------------------------------- --------- --------- --------- --------- --------- STATEMENT OF INCOME DATA--YEAR ENDED DECEMBER 31 Net interest margin and other revenues $ 3,305.0 $ 2,760.4 $ 2,707.0 $ 2,293.8 $ 1,781.7 Provision for credit losses on owned receivables 735.8 671.5 843.2 463.7 235.0 Total costs and expenses 2,118.5 1,810.9 1,664.0 1,481.4 1,213.7 Income taxes 152.0 87.1 50.0 113.4 114.6 --------- --------- --------- --------- --------- Income from continuing operations 298.7 190.9 149.8 235.3 218.4 Income from discontinued operations, net of income taxes -- -- -- -- 21.1 --------- --------- --------- --------- --------- Net income $ 298.7 $ 190.9 $ 149.8 $ 235.3 $ 239.5 ========= ========= ========= ========= ========= PER SHARE DATA(1) Earnings from continuing operations per common share: Primary $ 2.91 $ 1.97 $ 1.57 $ 3.03 $ 2.94 Fully diluted 2.85 1.93 1.55 2.88 2.80 Earnings per common share: Primary 2.91 1.97 1.57 3.03 3.24 Fully diluted 2.85 1.93 1.55 2.88 3.07 Dividends declared per common share 1.18 1.15 1.12 1.09 1.07 Book value per common share (2),(3) 22.01 18.65 18.38 17.89 16.02 --------- --------- --------- --------- --------- BALANCE SHEET DATA AT DECEMBER 31 Total assets $32,961.5 $31,128.4 $29,982.3 $29,454.7 $26,178.7 --------- --------- --------- --------- --------- Finance and Banking receivables: Owned $19,340.5 $18,449.3 $17,557.9 $18,512.4 $16,771.8 Serviced with limited recourse 9,827.8 7,946.3 7,068.8 4,635.0 2,550.4 --------- --------- --------- --------- --------- Managed 29,168.3 26,395.6 24,626.7 23,147.4 19,322.2 Receivables serviced with no recourse 15,229.4 11,406.7 7,820.2 4,201.1 3,517.3 --------- --------- --------- --------- --------- Receivables owned or serviced $44,397.7 $37,802.3 $32,446.9 $27,348.5 $22,839.5 ========= ========= ========= ========= ========= Liquidating commercial assets $ 1,555.7 $ 1,851.2 $ 2,051.9 $ 2,485.1 $ 2,367.2 Deposits 7,516.1 8,030.3 7,969.6 6,938.0 5,062.0 Total other debt 14,755.9 14,267.7 13,936.9 15,442.1 14,980.5 Convertible preferred stock 19.3 36.0 54.4 74.0 74.7 Preferred stock 320.0 300.0 250.0 195.0 75.0 Common shareholders' equity (2),(3) 2,078.3 1,545.6 1,462.1 1,281.1 1,131.2 --------- --------- --------- --------- --------- SELECTED FINANCIAL RATIOS (5) Common shareholders' equity as a percent of owned assets (2),(3) 6.31% 4.97% 4.88% 4.35% 4.32% Total shareholders' equity as a percent of owned assets (2),(3),(6) 7.28 5.93 5.71 5.01 4.61 Total dividends to net income 47.3 65.3 76.8 41.3 35.9 Return on average common shareholders' equity: Core Business (2),(3) 20.8 13.2 20.9 21.5 22.2 Total (2),(3) 14.2 10.7 8.5 18.0 21.3 Total, as originally reported (4) 14.2 10.2 8.1 17.1 20.0 Return on average owned assets: Core Business 1.03 .71 1.05 .97 1.10 Total .91 .62 .49 .82 .93 Operating expenses as a percent of average Finance and Banking receivables owned or serviced (7) 3.49 3.41 3.51 3.83 4.03 --------- --------- --------- --------- ---------
(1) Amounts have been restated to reflect the two-for-one stock split in the form of a 100 percent stock dividend, effective October 15, 1993. (2) Effective December 31, 1993 the company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS No. 115") and has included unrealized holding gains and losses on available-for-sale investments as a net amount in a separate component of common shareholders' equity, net of income taxes and, for certain investments of the life insurance operation, related unrealized deferred insurance policy acquisition cost adjustments. Before the impact of the market value adjustment at December 31, 1993, book value per common share was $21.58, common shareholders' equity was $2,037.8 million, common shareholders' equity as a percent of owned assets was 6.18 percent and total shareholders' equity as a percent of owned assets was 7.21 percent. The 1993 return on average common shareholders' equity was not materially impacted by the adoption of FAS No. 115. (3) The company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS No. 109") effective January 1, 1993. As 8 a result of implementing FAS No. 109, retained earnings for all periods prior to December 31, 1993 have been reduced by approximately $63 million from the amounts previously reported. (4) Excludes the effect of adoption of FAS No. 109 for the periods 1989 through 1992. (5) See pages 35 through 37 for selected credit quality tables and statistics. (6) Total shareholders' equity as a percent of owned assets excludes convertible term preferred stock. Based on conversion ratios the company believes substantially all of this stock will be converted to common stock. Including this preferred stock (as well as the impact of the adoption of FAS No. 109 and FAS No. 115), total shareholders' equity as a percent of owned assets would be 7.33, 6.04, 5.89, 5.26 and 4.89 percent at December 31, 1993, 1992, 1991, 1990 and 1989, respectively. (7) Operating expenses include salaries and fringe benefits and other operating expenses of the Finance and Banking segment. 9 ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--OWNED RECEIVABLES
Household International, Inc. and Subsidiaries All dollar amounts are stated in millions. 1993 1992 1991 1990 1989 - ------------------------------------------ ------ ------ ------ ------ ------ TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT JANUARY 1 $564.1 $611.4 $364.7 $299.0 $276.4 ------ ------ ------ ------ ------ PROVISION FOR CREDIT LOSSES--OWNED RECEIVABLES Finance and Banking 635.7 621.2 583.2 373.0 221.6 Liquidating Commercial Lines 90.1 35.3 260.0 90.7 13.4 Corporate 10.0 15.0 -- -- -- ------ ------ ------ ------ ------ Total provision for credit losses--owned receivables 735.8 671.5 843.2 463.7 235.0 ------ ------ ------ ------ ------ OWNED RECEIVABLES CHARGED OFF Finance and Banking-- Domestic: First mortgage (13.5) (7.2) (7.5) (1.6) -- Home equity (36.2) (37.2) (30.1) (12.7) (8.8) Other secured (10.8) (6.0) (1.8) (2.8) -- Bankcard (172.4) (129.5) (103.4) (82.5) (56.0) Merchant participation (88.5) (95.5) (100.5) (77.8) (32.8) Other unsecured (205.7) (202.5) (176.1) (131.4) (117.5) Equipment financing and other (1.1) -- (.1) -- -- Foreign (162.9) (234.6) (219.5) (99.4) (45.6) ------ ------ ------ ------ ------ Finance and Banking owned receivables charged off (691.1) (712.5) (639.0) (408.2) (260.7) Liquidating Commercial Lines owned receivables charged off (121.7) (60.8) (71.3) (42.1) (10.4) ------ ------ ------ ------ ------ Total owned receivables charged off (812.8) (773.3) (710.3) (450.3) (271.1) ------ ------ ------ ------ ------ RECOVERIES ON OWNED RECEIVABLES Finance and Banking-- Domestic: First mortgage 2.6 2.2 1.7 .1 -- Home equity 1.2 .6 .4 .4 .2 Other secured .4 .2 -- .9 .1 Bankcard 12.5 10.5 10.2 7.4 5.3 Merchant participation 19.4 15.3 15.1 14.1 1.9 Other unsecured 38.8 35.8 30.1 24.1 17.8 Foreign 26.5 22.0 15.7 10.3 7.7 ------ ------ ------ ------ ------ Finance and Banking recoveries 101.4 86.6 73.2 57.3 33.0 Liquidating Commercial Lines recoveries 1.2 .2 -- .1 -- ------ ------ ------ ------ ------ Total recoveries on owned receivables 102.6 86.8 73.2 57.4 33.0 Credit loss reserves on receivables purchased, net (1) 1.6 (19.1) 42.3 (16.4) 22.0 Other, net (1) 30.6 (13.2) (1.7) 11.3 3.7 ------ ------ ------ ------ ------ TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES Finance and Banking-- Domestic: First mortgage 4.1 6.0 7.3 7.2 8.1 Home equity 16.9 12.4 14.2 6.0 6.5 Other secured 8.0 6.5 3.3 -- -- Bankcard 122.7 60.7 67.4 21.6 32.1 Merchant participation 70.2 65.4 54.0 58.1 48.6 Other unsecured 129.3 111.6 129.1 86.6 92.4 Equipment financing and other 16.1 12.7 15.0 20.2 15.6 Foreign 56.7 70.5 92.4 92.0 62.2 ------ ------ ------ ------ ------ Finance and Banking 424.0 345.8 382.7 291.7 265.5 Liquidating Commercial Lines 172.9 203.3 228.7 73.0 33.5 Corporate 25.0 15.0 -- -- -- ------ ------ ------ ------ ------ TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT DECEMBER 31 $621.9 $564.1 $611.4 $364.7 $299.0 ====== ====== ====== ====== ====== RATIO OF TOTAL CREDIT LOSS RESERVES TO OWNED RECEIVABLES Finance and Banking 2.19% 1.87% 2.18% 1.58% 1.58% Liquidating Commercial Lines 14.53 12.56 12.38 3.22 1.53 ------ ------ ------ ------ ------ Total owned (2) 3.03% 2.81% 3.15% 1.76% 1.58% ====== ====== ====== ====== ======
(1) Relates to the Finance and Banking segment. (2) Includes credit loss reserve of the Corporate segment. 10 ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--MANAGED RECEIVABLES
Household International, Inc. and Subsidiaries All dollar amounts are stated in millions. 1993 1992 1991 1990 1989 - ------------------------------------------ -------- ------ ------ ------ ------ TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT JANUARY 1 $ 724.8 $702.3 $389.3 $305.1 $277.9 -------- ------ ------ ------ ------ PROVISION FOR CREDIT LOSSES--MANAGED RECEIVABLES Finance and Banking 916.7 872.3 724.9 398.6 221.6 Liquidating Commercial Lines 90.1 35.3 260.0 90.7 13.4 Corporate 10.0 15.0 -- -- -- -------- ------ ------ ------ ------ Total provision for credit losses--managed receivables 1,016.8 922.6 984.9 489.3 235.0 -------- ------ ------ ------ ------ MANAGED RECEIVABLES CHARGED OFF Finance and Banking-- Domestic: First mortgage (13.5) (7.2) (7.5) (1.6) -- Home equity (75.3) (59.2) (42.0) (14.9) (8.9) Other secured (10.8) (6.0) (1.8) (2.8) -- Bankcard (284.6) (237.6) (147.7) (82.5) (56.0) Merchant participation (113.5) (109.5) (102.0) (77.8) (32.8) Other unsecured (222.3) (248.9) (197.7) (131.4) (117.5) Equipment financing and other (1.1) -- (.1) -- -- Foreign (162.9) (234.6) (219.5) (99.4) (45.6) -------- ------ ------ ------ ------ Finance and Banking managed receivables charged off (884.0) (903.0) (718.3) (410.4) (260.8) Liquidating Commercial Lines managed receivables charged off (121.7) (60.8) (71.3) (42.1) (10.4) -------- ------ ------ ------ ------ Total managed receivables charged off (1,005.7) (963.8) (789.6) (452.5) (271.2) -------- ------ ------ ------ ------ RECOVERIES ON MANAGED RECEIVABLES Finance and Banking-- Domestic: First mortgage 2.6 2.2 1.7 .1 -- Home equity 1.2 .6 .4 .4 .2 Other secured .4 .2 -- .9 .1 Bankcard 15.8 13.3 11.0 7.4 5.3 Merchant participation 20.9 15.8 15.1 14.1 1.9 Other unsecured 38.8 35.8 30.1 24.1 17.8 Foreign 26.5 22.0 15.7 10.3 7.7 -------- ------ ------ ------ ------ Finance and Banking recoveries 106.2 89.9 74.0 57.3 33.0 Liquidating Commercial Lines recoveries 1.2 .2 -- .1 -- -------- ------ ------ ------ ------ Total recoveries on managed receivables 107.4 90.1 74.0 57.4 33.0 Credit loss reserves on receivables purchased, net (1) (.5) (19.1) 42.3 (16.4) 22.0 Other, net (1) 1.9 (7.3) 1.4 6.4 8.4 -------- ------ ------ ------ ------ TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES Finance and Banking-- Domestic: First mortgage 4.1 6.0 7.3 7.2 8.1 Home equity 75.5 54.4 33.9 13.2 12.6 Other secured 8.0 6.5 3.3 -- -- Bankcard 274.6 126.5 93.6 32.8 32.1 Merchant participation 82.5 87.0 68.1 58.1 48.6 Other unsecured 129.3 142.9 160.0 92.8 92.4 Equipment financing and other 16.1 12.7 15.0 20.2 15.6 Foreign 56.7 70.5 92.4 92.0 62.2 -------- ------ ------ ------ ------ Finance and Banking 646.8 506.5 473.6 316.3 271.6 Liquidating Commercial Lines 172.9 203.3 228.7 73.0 33.5 Corporate 25.0 15.0 -- -- -- -------- ------ ------ ------ ------ TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT DECEMBER 31 $ 844.7 $724.8 $702.3 $389.3 $305.1 ======== ====== ====== ====== ====== RATIO OF TOTAL CREDIT LOSS RESERVES TO MANAGED RECEIVABLES Finance and Banking 2.22% 1.92% 1.92% 1.37% 1.41% Liquidating Commercial Lines 14.53 12.56 12.38 3.22 1.53 -------- ------ ------ ------ ------ Total managed (2) 2.78% 2.59% 2.65% 1.53% 1.42% ======== ====== ====== ====== ======
(1) Relates to the Finance and Banking segment. (2) Includes credit loss reserve of the Corporate segment. 11 OTHER CREDIT QUALITY STATISTICS
Household International, Inc. and Subsidiaries All dollar amounts are stated in millions. 1993 1992 1991 1990 1989 - ------------------------------------------ ------ ------ -------- ------ ------ NONACCRUAL MANAGED RECEIVABLES AT DECEMBER 31 (1) First mortgage $ 25.6 $ 26.4 $ 25.1 $ 40.4 $ 31.2 Home equity 155.5 230.2 234.7 159.5 60.6 Other secured 20.5 12.9 23.2 13.1 -- Merchant participation 21.7 20.8 12.4 17.0 19.5 Other unsecured 153.5 173.7 194.8 156.8 121.2 Equipment financing and other 6.5 -- -- -- -- ------ ----- -------- ------ ------ Domestic 383.3 464.0 490.2 386.8 232.5 Foreign 145.4 219.9 306.9 291.3 136.6 ------ ----- -------- ------ ------ Finance and Banking nonaccrual managed receivables 528.7 683.9 797.1 678.1 369.1 Liquidating Commercial Lines nonaccrual managed receivables 228.7 259.2 257.6 157.6 145.2 ------ ----- -------- ------ ------ Total nonaccrual managed receivables $757.4 $943.1 $1,054.7 $835.7 $514.3 ====== ====== ======== ====== ====== RENEGOTIATED COMMERCIAL LOANS AT DECEMBER 31 Finance and Banking--domestic -- $ 1.6 $ 3.8 -- -- Liquidating Commercial Lines $ 28.7 196.8 202.6 $ 27.9 $ 10.2 ------ ------ -------- ------ ------ Total renegotiated commercial loans $ 28.7 $198.4 $ 206.4 $ 27.9 $ 10.2 ====== ====== ======== ====== ====== REAL ESTATE OWNED AT DECEMBER 31 Domestic $110.6 $124.5 $ 103.8 $ 29.7 $ 21.2 Foreign 58.3 73.0 83.6 28.6 3.7 ------ ------ -------- ------ ------ Total Finance and Banking 168.9 197.5 187.4 58.3 24.9 Liquidating Commercial Lines 256.6 249.6 237.5 116.2 77.2 ------ ------ -------- ------ ------ Total real estate owned $425.5 $447.1 $ 424.9 $174.5 $102.1 ====== ====== ======== ====== ====== OTHER ASSETS ACQUIRED THROUGH FORECLOSURE AT DECEMBER 31 Finance and Banking--domestic $ 82.9 $102.6 $ 21.5 -- -- ------ ------ -------- ------ ------ ACCRUING MANAGED RECEIVABLES 90 OR MORE DAYS DELINQUENT AT DECEMBER 31 (2) Domestic $197.0 $196.3 $ 180.0 $165.4 $110.4 Foreign 10.3 14.1 27.9 30.1 10.8 ------ ------ -------- ------ ------ Total Finance and Banking $207.3 $210.4 $ 207.9 $195.5 $121.2 ====== ====== ======== ====== ====== CONSUMER DELINQUENCY ON MANAGED RECEIVABLES AT DECEMBER 31 (3) First mortgage 1.42% 1.08% 1.16% 1.19% 1.03% Home equity 3.16 4.05 4.83 3.94 2.41 Other secured 1.38 2.71 5.35 4.77 1.65 Bankcard 2.41 2.70 4.39 3.20 2.27 Merchant participation 5.01 6.34 6.40 6.78 6.23 Other unsecured 6.63 7.77 8.62 8.69 7.71 ------ ------ ------- ------ ------ Domestic 3.28 3.89 4.79 4.14 3.39 Foreign 5.82 8.08 10.22 9.09 5.66 ------ ------ ------- ------ ------ Total consumer delinquency on managed receivables 3.58% 4.48% 5.72% 5.08% 3.86% ====== ====== ======== ====== ====== RATIO OF NET CHARGEOFFS TO AVERAGE MANAGED RECEIVABLES First mortgage .35% .12% .15% .08% -- Home equity 1.00 .87 .67 .26 .11% Other secured 1.79 1.04 .29 .19 -- Bankcard 3.84 5.69 4.87 4.00 3.66 Merchant participation 4.32 4.49 4.11 3.15 1.82 Other unsecured 6.10 7.21 5.78 4.37 5.35 ------ ------ ------- ------ ------ Domestic 2.75 2.98 2.35 1.64 1.60 Foreign 3.88 5.51 4.99 2.13 1.14 ------ ------ ------- ------ ------ Total consumer 2.90% 3.38% 2.83% 1.77% 1.50% ====== ====== ======= ====== ====== Finance and Banking 2.82% 3.27% 2.69% 1.65% 1.38% Liquidating Commercial Lines 8.50 3.41 3.51 1.80 .56 ------ ------ ------- ------ ------ Total ratio of net chargeoffs to average managed receivables 3.10% 3.28% 2.75% 1.66% 1.30% ====== ====== ======= ====== ======
12 (1) Excludes bankcard and private-label credit card receivables, consistent with industry practice. (2) Primarily includes bankcard and private-label credit card receivables. (3) Consumer delinquency is defined as consumer receivables which are two months or more contractually past due. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS Household International, Inc. and Subsidiaries BUSINESS SEGMENT DATA The combination of the company's consumer and continuing commercial product lines are referred to as Finance and Banking. Assets of liquidating commercial product lines, which are separately managed as receivables are collected or otherwise disposed of, have been disclosed separately in the consolidated balance sheets and as a separate business segment, referred to as Liquidating Commercial Lines. To better define and report the results of operations, the company refers to its Finance and Banking and Individual Life Insurance segments, net of corporate expenses, as its Core Business.
In millions. Year ended December 31 1993 1992 1991 - ---------------------- --------- --------- --------- NET INCOME Finance and Banking $ 303.2 $ 200.6 $ 289.4 Individual Life Insurance 45.2 41.7 35.0 Corporate (28.5) (37.4) (25.9) --------- --------- --------- Core Business 319.9 204.9 298.5 Liquidating Commercial Lines (21.2) (14.0) (148.7) --------- --------- --------- Total $ 298.7 $ 190.9 $ 149.8 ========= ========= ========= ASSETS Finance and Banking $24,362.5 $23,315.3 $22,631.9 Individual Life Insurance 6,959.0 5,926.2 5,273.8 Corporate 84.3 35.7 24.7 --------- --------- --------- Core Business 31,405.8 29,277.2 27,930.4 Liquidating Commercial Lines 1,555.7 1,851.2 2,051.9 --------- --------- --------- Total $32,961.5 $31,128.4 $29,982.3 ========= ========= ========= RECEIVABLES OWNED Finance and Banking $19,340.5 $18,449.3 $17,557.9 Liquidating Commercial Lines 1,189.9 1,619.0 1,846.6 --------- --------- --------- Total $20,530.4 $20,068.3 $19,404.5 ========= ========= ========= RECEIVABLES MANAGED Finance and Banking $29,168.3 $26,395.6 $24,626.7 Liquidating Commercial Lines 1,189.9 1,619.0 1,846.6 --------- --------- --------- Total $30,358.2 $28,014.6 $26,473.3 ========= ========= ========= Receivables serviced with no recourse $15,229.4 $11,406.7 $7,820.2 ========= ========= ========
CONSOLIDATED RESULTS OF OPERATIONS Net income in 1993 was a record $298.7 million, an increase of 56 percent over 1992 net income of $190.9 million due to substantially improved earnings in the Finance and Banking segment. Net income in 1992 was 27 percent higher than 1991 earnings of $149.8 million when the company reported a large loss in the Liquidating Commercial Lines segment associated with its decision to withdraw from the higher-risk portion of its commercial business. On September 14, 1993 the board of directors of the company declared a two-for-one stock split in the form of a 100 percent stock dividend effective October 15, 1993. All share and per share data have been restated to give retroactive effect to the stock split, except where otherwise indicated. Fully diluted earnings per share were $2.85 in 1993, up 48 percent from $1.93 in 1992, which were up 25 percent from $1.55 in 1991. During 1993 fully diluted earnings per share were negatively impacted by the following: The enactment of new Federal tax legislation which increased the statutory corporate income tax rate from 34 percent to 35 percent retroactive to January 1, 1993, which decreased earnings per share by $.09. Implementation of Statement of Financial Accounting Standards No. 106 on postretirement benefits, which the company adopted effective January 1, 1993, which reduced earnings per share by $.11. Dilution created by the issuance of 4,025,000 shares (on a pre-split basis) of common stock in March 1993, which reduced earnings per share by $.16. The following summarizes key highlights of the company's operations during 1993: The domestic Finance and Banking businesses increased earnings over 1992 with the bankcard and consumer finance businesses showing the greatest improvement. The bankcard business has grown substantially as a result of an 14 alliance with General Motors Corporation ("GM") in September 1992 to issue a co-branded credit card, the GM Card. GM Card managed receivables totaled approximately $4.9 billion, and the number of accounts totaled 5.9 million at December 31, 1993 in comparison to $1.8 billion in receivables and 2.7 million accounts a year earlier. The GM Card receivable growth generated higher interest margins, securitization income and fee income, offset somewhat by higher operating expenses related to servicing the GM Card and an increased provision for credit losses. Domestic consumer finance earnings increased primarily due to wider interest spreads on variable rate products and growth in the managed portfolio. The low interest rate environment in the U.S. in 1993 resulted in lower earnings in the mortgage banking business due to mortgage loan prepayments in excess of new originations, which negatively impacted spreads in the owned portfolio. Additionally, prepayments in the serviced mortgage portfolio resulted in write-downs of capitalized servicing rights. Operating results of the foreign businesses improved despite weak economic growth in the countries where the company operates. Collectively, foreign operations lost $3.0 million compared to losses of $60.1 and $40.4 million in 1992 and 1991, respectively. The United Kingdom operation earned $10.3 million, compared to losses of $45.9 and $16.9 million in 1992 and 1991, respectively. This was the United Kingdom's first profitable year since 1988. The improvement primarily was due to lower credit losses and improved operations related to actions taken in prior years, including new management, tighter underwriting standards, improved collections and reduced expenses. Canadian operations reported a loss in 1993 comparable to those reported in 1992 and 1991. Operating results continue to be negatively impacted by the sluggish Canadian economic environment resulting in lower receivable volume. Additionally, in the fourth quarter the company concluded the first phase of a strategic assessment of its Canadian operations, including a review of market and economic conditions, cost structure, products, policies and legal entity structure. As a result of this assessment, the company recorded higher loss provision and other expenses in the fourth quarter, which resulted in a higher loss than originally anticipated. While the company has not completed its assessment, it currently believes that 1994 may be impacted as operations are realigned and products repositioned. The company believes, however, that the loss in the fourth quarter is not indicative of future Canadian profitability and expects improved performance in 1994. Australia was profitable in 1993, comparable with its 1992 operating results and currently is expected to remain profitable. Consumer two-months-and-over contractual delinquency ("delinquency") continued to decline throughout the year due to tighter credit standards implemented in prior years and an improving economic environment. Total consumer delinquency as a percent of managed consumer receivables was 3.58 percent at December 31, 1993, down significantly from 4.48 percent at December 31, 1992 and was at the lowest level since 1989. The full year chargeoff ratio for the managed consumer portfolio declined to 2.90 percent from 3.38 percent in 1992. Consumer managed chargeoff ratios in the fourth quarter were slightly higher, as anticipated, than the prior quarter level due to the maturing of the GM Card portfolio and to the previously mentioned actions taken in Canada. Excluding the effect of these items, the consumer managed chargeoff ratio in the fourth quarter would have declined. Although 1993 delinquency and chargeoff levels were impacted by the GM Card portfolio, the credit quality of the GM Card portfolio continued to exhibit strong performance. The company increased credit loss reserves for Finance and Banking managed receivables by $140.3 million, or 28 percent, over 1992, despite a $128.2 million decrease in delinquency. The increase was due to continued caution regarding the uncertainty of the economic outlook, the shift in product mix towards unsecured receivables from secured receivables due to the rapid growth of the GM Card portfolio, continued relatively high chargeoff levels and more conservative recognition of recourse obligations for receivables serviced with limited recourse. Reserves, as a percent of the managed Finance and Banking receivable portfolio, were at their highest level since the company adopted the contractual basis of delinquency in 1990. Owned assets totaled $33.0 billion at December 31, 1993, up 6 percent from year-end 1992. The increase primarily was due to a 19 percent increase in the investment securities portfolio, principally in the Individual Life Insurance segment, and a 5 percent increase in owned Finance and Banking receivables. Managed Finance and Banking receivables (owned receivables plus those serviced with limited recourse) of the company's domestic consumer businesses grew 14 percent in 1993. Excluding the first mortgage portfolio, which contracted due to customer refinancings, managed receivables grew 21 percent. The increase related primarily to growth of GM Card receivables, although the other portfolios grew 6 percent during the year. Domestic growth was limited by lower market demand than seen in previous years and by additional run-off of second mortgages from customer loan refinancings. The first mortgage portfolio declined 20 percent since year-end 1992. First mortgage loan originations, although slow early in the year, increased sharply in the last three quarters. However, prepayment activity remained high as mortgage rates reached their lowest level in over two decades during 1993. The foreign consumer portfolio declined 6 percent during the year due to weak economic conditions. Despite the improvement in the domestic economy, all businesses have continued to apply the stringent underwriting standards adopted in 1990 in anticipation of the economic downturn. The Liquidating Commercial Lines ("LCL") segment experienced an increased loss due to the resolution of the company's largest problem loan 15 in the third quarter. The company reached a cash settlement on a nonaccrual equipment finance loan which resulted in a higher chargeoff than expected and a complete disposition of the loan, with no continuing involvement on the part of the company. The company anticipates that future LCL results will improve. LCL assets totaled $1.6 billion, down $295.5 and $496.2 million from year-end 1992 and 1991, respectively. This trend is consistent with management's strategy to dispose of these assets over several years. Nonperforming LCL assets declined $191.6 million during the year and reached their lowest level since June 1991. Credit loss reserves at December 31, 1993 as a percent of both LCL receivables and nonperforming loans increased over the year-ago period. In March 1993 the company strengthened its capital position through the sale of 4,025,000 shares of common stock at $67 per share, net of issuance costs (on a pre-split basis). The ratio of common and preferred shareholders' equity (including convertible preferred stock) to total assets was 7.33 percent at December 31, 1993, up from 6.04 percent at year-end 1992 and 5.89 percent at December 31, 1991. These ratios reflect the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which reduced total shareholders' equity at December 31, 1992 and all prior periods by approximately $63 million from the amounts previously reported. The ratio at December 31, 1993 also includes the impact of the adoption of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which increased total shareholders' equity on that date by $40.5 million. In July 1993 Standard & Poor's Corporation upgraded its credit rating outlook for the company and two wholly-owned subsidiaries, Household Finance Corporation and Household Bank, f.s.b. In November 1993 Moody's Investors Service, Inc. upgraded its credit ratings for the company and all principally rated subsidiaries. These upgrades were a result of improving trends in capital levels, asset quality and profitability. CONSOLIDATED CREDIT LOSS RESERVES
In millions. At December 31 1993 1992 - -------------- ------ ------ Finance and Banking: Owned $424.0 $345.8 Serviced with limited recourse 222.8 160.7 ------ ------ Managed 646.8 506.5 Liquidating Commercial Lines 172.9 203.3 Corporate 25.0 15.0 ------ ------ Total managed credit loss reserves $844.7 $724.8 ====== ======
The level of reserves for credit losses is based on delinquency and chargeoff experience by product and management's evaluation of economic conditions, including regional considerations. See Note 1, "Summary of Significant Accounting Policies" on pages 57 and 58 in the accompanying financial statements for further description of the basis for establishing such reserves. The company serves commercial and several different consumer markets through its consumer finance, credit card and consumer and mortgage banking operations. At December 31, 1993 the company had 12 percent of its managed receivables portfolio in first mortgages, which tend to have lower credit losses than other types of receivables. Because of these factors, industry reserve comparisons are less meaningful on an overall basis and reserves should be evaluated by product. An analysis of credit loss reserves by product and other credit quality statistics are shown on pages 35 through 37. While management allocates reserves among the company's various products and segments, all reserves are considered to be available to cover total loan losses. During 1993 the company strengthened its managed credit loss reserves for Finance and Banking receivables as described on page 39. Reserves for Liquidating Commercial Lines decreased from year-end 1992 levels primarily due to the continued disposition of LCL receivables, including the resolution of a large nonaccrual equipment finance loan as described earlier. Despite the dollar decrease in LCL reserve levels, credit loss reserves at December 31, 1993 as a percent of both LCL receivables and nonperforming loans increased over December 31, 1992 and 1991. In the first half of 1993, due to concern about the economic recovery and its impact on both the consumer and commercial portfolios, the company further strengthened total credit loss reserves by increasing the corporate credit loss reserve by $10 million to $25 million. 16 CONSOLIDATED CREDIT LOSS RESERVES (as a percent of receivables)
At December 31 1993 1992 - -------------- ----- ----- OWNED Finance and Banking 2.19% 1.87% Liquidating Commercial Lines 14.53 12.56 ----- ----- Total owned* 3.03% 2.81% ===== ===== MANAGED Finance and Banking 2.22% 1.92% Liquidating Commercial Lines 14.53 12.56 ----- ----- Total managed* 2.78% 2.59% ===== =====
*Includes credit loss reserve of the Corporate segment. CREDIT MANAGEMENT POLICIES The company's credit portfolios and credit management policies historically have been divided into two distinct components--consumer and commercial. For consumer products, credit policies focus on product type and specific portfolio risk factors. The consumer credit portfolio is diversified by product and geographic location. The commercial credit portfolio is monitored by individual transaction as well as being evaluated by overall risk factors. See Note 3, "Finance and Banking Receivables" and Note 4, "Liquidating Commercial Assets" in the accompanying financial statements for receivables by product type. CONSUMER The consumer credit risk management process has four key elements: Computerized scoring systems to assess the risk characteristics of new applicants and monitor the payment behavior of existing customers for early warning signs of troubled accounts. A centralized credit system for past due accounts to make the collection process more productive and provide the analytical capability to measure the effectiveness of collection strategies. A chargeoff policy intended to eliminate problem loans early and improve the quality of the remaining portfolio. A senior executive position of credit risk manager in each consumer lending operation which places credit management at a high level of priority and provides the means for the credit function to interact more productively with other business functions. Based on this credit risk management process, expected credit losses for each consumer product are estimated on a statistical basis. The company suspends accrual of interest on all consumer receivables when payments are three months contractually past due, except for bankcards and private-label credit cards. On these credit card receivables, consistent with industry practice, interest continues to accrue until the receivable is charged off. Consumer loans are charged off when an account is contractually delinquent for a pre-established period of time. The period of time is dependent on the terms, collateral and credit loss experience of each consumer product category. This period ranges from 4 to 9 months. The company's domestic consumer businesses lend funds nationwide, with California accounting for 22 percent of total managed domestic consumer receivables. It is the only state with receivables in excess of 10 percent of domestic managed receivables. The company's foreign consumer operations, located in Canada, the United Kingdom and Australia, accounted for 7, 4 and 1 percent, respectively, of managed consumer receivables at December 31, 1993. Due to its centralized underwriting, collection and processing functions, the company can quickly revise underwriting standards and intensify collection efforts for specific geographic locations. COMMERCIAL Commercial loans, in continued or discontinued product lines, are underwritten based upon specific criteria by product, which include the following items: borrower's financial strength, underlying value of collateral, ability of the property/business to generate cash flow and pricing considerations. For financing commitments in excess of $1 million, the loan request must be approved by an investment committee consisting of senior management. The financial and operating performance of all borrowers is monitored and reported to management on an ongoing basis. Additionally, the conclusions of this monitoring process are reported to senior management on a quarterly basis. Substantially all commercial chargeoffs have related to the product lines which are being liquidated. The company administers a classification of assets policy whereby, on a quarterly basis, all commercial credits are reviewed and assigned a rating based on a process similar to that used by bank regulatory authorities. The review process specifically addresses whether any commercial loans need to be 17 charged off and uses the following criteria: (a) ability of the borrower to make loan payments; (b) ability of the property or business to generate cash flow; (c) value of collateral; (d) other debt associated with the property or business; and (e) passage of title or in-substance possession of collateral. The quarterly evaluation of the adequacy of credit loss reserves is based on this review process and management's evaluation of probable future losses in the portfolio as a whole given its geographic and industry diversification and historical loss experience. Management also evaluates the potential impact of existing and anticipated economic conditions on the portfolio in establishing credit loss reserves. Commercial loans are placed on nonaccrual when they become 90 days past due, or sooner if the company believes that the loan has experienced significant adverse developments that could result in a loss of interest or principal. There are no commercial loans that are 90 days past due and on full accrual status. Loans are disclosed as renegotiated loans or troubled debt restructurings if the rate of interest has been reduced because of the inability of the borrower to meet the original terms of the loan. Such loans continue to accrue interest at the renegotiated rate, unless they become 90 days past due, because the company believes the borrowers will be able to meet their obligations following the restructuring. Commercial loans that are modified in the normal course of business, for which additional consideration is received or significant concessions are not made, are not reported as renegotiated loans or troubled debt restructurings. Real estate owned is recorded at the lower of cost or fair value less estimated costs to sell. These values are periodically reviewed and reduced, if appropriate. FINANCE AND BANKING STATEMENTS OF INCOME
All dollar amounts are stated in millions. Year ended December 31 1993 1992 1991 - ------------------------------------------ --------- --------- --------- Finance income $ 2,448.3 $ 2,436.9 $ 2,814.9 Interest income from noninsurance investment securities 129.2 152.6 179.9 Interest expense 1,066.4 1,269.8 1,680.2 --------- --------- --------- Net interest margin 1,511.1 1,319.7 1,314.6 --------- --------- --------- Securitization and servicing fee income 460.0 376.0 398.3 Insurance premiums and contract revenues 160.4 169.9 189.7 Investment income 33.6 42.0 49.6 Fee income 290.6 163.5 103.1 Other income 127.3 94.1 110.3 --------- --------- --------- Other revenues 1,071.9 845.5 851.0 --------- --------- --------- Net interest margin and other revenues 2,583.0 2,165.2 2,165.6 Provision for credit losses on owned receivables 635.7 621.2 583.2 Costs and expenses: Operating expenses 1,415.6 1,163.9 1,055.1 Policyholders' benefits 82.2 86.2 94.4 Income taxes 146.3 93.3 143.5 --------- --------- --------- Net income $ 303.2 $ 200.6 $ 289.4 ========= ========= ========= End-of-period receivables: Owned $19,340.5 $18,449.3 $17,557.9 Serviced with limited recourse 9,827.8 7,946.3 7,068.8 --------- --------- --------- Receivables managed 29,168.3 26,395.6 24,626.7 Serviced with no recourse 15,229.4 11,406.7 7,820.2 --------- --------- --------- Receivables owned or serviced $44,397.7 $37,802.3 $32,446.9 ========= ========= ========= Average receivables: Owned $19,325.8 $18,119.7 $18,750.3 Serviced with limited recourse 8,258.4 6,826.3 5,218.9 --------- --------- --------- Average receivables managed 27,584.2 24,946.0 23,969.2 Serviced with no recourse 13,021.8 9,208.4 6,097.4 --------- --------- --------- Average receivables owned or serviced $40,606.0 $34,154.4 $30,066.6 ========= ========= ========= End-of-period deposits $ 7,516.1 $ 8,030.3 $ 7,969.6 --------- --------- --------- Return on average owned assets 1.24% .87% 1.23% --------- --------- ---------
18 OVERVIEW Domestic Finance and Banking earnings increased to $306.2 million from $260.7 million in 1992 primarily due to improved operating results in the bankcard and consumer finance businesses, partially offset by reduced earnings in the mortgage banking operations as discussed earlier. Earnings from continuing commercial activities declined due to reduced margin, lower levels of earning assets in the company's aircraft portfolio and lower gains on dispositions of assets. The company anticipates increased profitability from its continuing commercial activities in 1994, but below results achieved in previous years. If domestic economic conditions meet the expectations of economists and continue to improve, the company expects higher earnings in 1994 in its bankcard and consumer finance businesses. The expected increases will be partially offset by lower earnings in the consumer banking business due to lower yields on first mortgage receivables. Foreign operations in total lost $3.0 million, compared to losses of $60.1 and $40.4 million in 1992 and 1991, respectively. The improvement was attributable to the United Kingdom operation which earned $10.3 million, compared to net losses of $45.9 million in 1992 and $16.9 million in 1991. In October 1993 GM announced the expansion of its GM Card alliance with the company into the United Kingdom. Although the start-up of this venture will reduce 1994 earnings, the company expects continued improvement in the United Kingdom's 1994 operating results due to continued improvement in the strength of its underlying business. RECEIVABLES Domestic consumer managed receivables, excluding receivables of the mortgage banking operation, increased 21 percent in 1993. Foreign receivables declined 6 percent over the same period, from $3.6 billion at December 31, 1992 to $3.4 billion at December 31, 1993. See Consolidated Results of Operations on page 39 for further discussion. Receivables owned were $19.3 billion at December 31, 1993, up 5 percent from $18.4 billion at December 31, 1992. Changes in owned receivables from period to period may vary depending on the timing and significance of securitization transactions in a particular period. The company securitized and sold with limited recourse approximately $4.5 billion of receivables compared to $2.2 billion in 1992. Since 1989, securitizations and sales of consumer receivables have been an important source of liquidity for the company. The company continues to service the securitized receivables after such receivables are sold and retains a limited recourse obligation. Securitizations impact the classification of revenues and expenses in the income statement. Amounts related to receivables serviced, including net interest margin, fee income, such as interchange fees, and provision for credit losses on receivables serviced with limited recourse are reported as a net amount in securitization and servicing fee income in the company's statements of income. The company monitors its Finance and Banking segment on a managed basis as well as on the historical owned basis reflected in its statements of income. The managed basis assumes that the receivables securitized and sold are instead still held in the portfolio. Pro forma statements of income on a managed basis for the Finance and Banking segment for 1993 and 1992 are presented below. For purposes of this analysis, the results do not reflect the differences between the company's accounting policies for owned receivables and receivables serviced with limited recourse. Accordingly, net income on the pro forma managed basis equals net income on an historical owned basis. 19 PRO FORMA MANAGED FINANCE AND BANKING STATEMENTS OF INCOME
AS A PERCENT As a Percent OF AVERAGE of Average All dollar amounts are stated in millions. MANAGED INTEREST- Managed Interest- Year ended December 31 1993 EARNING ASSETS 1992 Earning Assets - ------------------------------------------ --------- ----------------- --------- ----------------- Finance income $ 3,450.2 11.6% $ 3,357.5 12.4% Interest income from noninsurance investment securities 129.2 .4 152.6 .6 Interest expense 1,457.5 4.9 1,654.9 6.1 --------- ---- --------- ---- Net interest margin 2,121.9 7.1 1,855.2 6.9 --------- ---- --------- ---- Servicing fee income 24.0 .1 19.1 .1 Insurance premiums and contract revenues 160.4 .6 169.9 .6 Investment income 33.6 .1 42.0 .1 Fee income 396.8 1.3 236.0 .9 Other income 127.3 .4 94.1 .3 --------- ---- --------- ---- Other revenues 742.1 2.5 561.1 2.0 --------- ---- --------- ---- Net interest margin and other revenues 2,864.0 9.6 2,416.3 8.9 Provision for credit losses 916.7 3.1 872.3 3.2 Costs and expenses: Operating expenses 1,415.6 4.7 1,163.9 4.3 Policyholders' benefits 82.2 .3 86.2 .3 Income taxes 146.3 .5 93.3 .4 --------- ---- --------- ---- Net income $ 303.2 1.0% $ 200.6 .7% ========= ==== ========= ==== Average receivables managed $27,584.2 $24,946.0 Average noninsurance investments 2,106.1 2,089.0 --------- --------- Average managed interest-earning assets $29,690.3 $27,035.0 ========= =========
The following discussion on revenues, where applicable, and provision for credit losses includes comparisons to amounts reported on the company's historical statements of income ("Owned Basis") as well as on the above pro forma statements of income ("Managed Basis"). NET INTEREST MARGIN Net interest margin on an Owned Basis was $1.5 billion, up from $1.3 billion in 1992 due to higher levels of interest-earning assets, wider spreads on variable rate products and a shift in product mix towards higher yielding bankcard receivables and away from lower yielding first mortgages. Spreads on variable rate products in 1993 exceeded those achieved in the prior year periods. The company does not anticipate that spreads in 1994 will remain at the level reached in 1993. Net interest margin on an Owned Basis as a percent of average owned interest-earning assets was 7.0 percent, compared to 6.5 percent in 1992 and 6.2 percent in 1991. See further analysis in the net interest margin table on pages 78 and 79. Net interest margin on a Managed Basis increased to $2.1 billion from $1.9 billion in 1992 and, as a percent of average managed interest-earning assets, increased to 7.1 percent from 6.9 percent in 1992. Net interest margin on a Managed Basis is greater than on an Owned Basis because credit card receivables, which have wider spreads, are a larger portion of the portfolio serviced with limited recourse than of the owned portfolio. OTHER REVENUES Securitization and servicing fee income on an Owned Basis consists of two components: income associated with the securitization and sale of receivables with limited recourse and servicing fee income related to the servicing of first mortgage loans which have been sold with no recourse, and unsecured receivables. Securitization income on an Owned Basis, which includes net interest income, fee income and provision for credit losses related to receivables serviced with limited recourse, increased in 1993 as the total managed receivables portfolio continued to grow. The components of securitization income are reclassified to the applicable line in the statements of income on a Managed Basis. Servicing fee income increased in 1993, consistent with the serviced receivable portfolio growth. Average receivables serviced with no recourse increased to $13.0 billion, up from $9.2 billion in 1992 and $6.1 billion in 1991. The portfolio of loans serviced for others continued to grow due to acquisitions of first mortgage loan servicing rights and sales of originated first mortgages to investors with servicing rights retained. Portfolio growth, however, has been impacted by high levels of prepayments on first mortgage loans associated with the low domestic interest rate environment. In the third quarter of 1993, the company began servicing an unsecured consumer loan 20 portfolio without recourse which totaled $1.3 billion at December 31, 1993. Growth in servicing income in 1993 related to the portfolio growth was substantially offset by write-downs of $29 million in the value of first mortgage capitalized servicing rights. The company continually monitors overall market conditions and their effect on prepayments of first mortgage loans and on the carrying value of capitalized servicing rights. The carrying value is adjusted when appropriate. The company currently anticipates that interest rates and prepayments will stabilize in 1994 and mitigate the exposure for future write-downs of capitalized servicing rights. Insurance premiums and contract revenues of $160.4 million were down from $169.9 million in 1992 and $189.7 million in 1991 due to lower sales volumes of specialty and credit insurance in the United Kingdom operation. Investment income of $33.6 million in 1993 declined due to lower capital gains and lower yields on the insurance investment portfolio in the United Kingdom. Fee income on an Owned Basis includes revenues from fee-based products such as bankcards, consumer banking deposits and private-label credit cards, as well as commission income from the company's brokerage business. Fee income was $290.6 million, up substantially from $163.5 million in 1992 and $103.1 million in 1991 primarily due to interchange and other fees relating to owned GM Card receivables. The GM Card was introduced in September 1992. Fee income on a Managed Basis, which in addition to the items discussed above, includes other fees related to receivables serviced with limited recourse. Fee income increased from $236.0 million in 1992 to $396.8 million in 1993. This increase reflects the items discussed above as well as a significant increase in interchange income related to GM Card receivables that have been securitized and sold with limited recourse. Other Income is primarily comprised of recurring items in the ordinary course of business. Other income in 1993 was up due to increased gains on the sale of held-for-trade first mortgage receivables, increased gains from the company's proprietary trading activities and higher gains from sales of loan portfolios. PROVISION FOR CREDIT LOSSES The provision for credit losses for receivables on an Owned Basis totaled $635.7 million, up 2 percent from $621.2 million in 1992 and up 9 percent from 1991's level. The provision for credit losses for receivables on a Managed Basis totaled $916.7 million in 1993, an increase of 5 percent from $872.3 million in 1992. As a percent of managed interest-earning assets, the provision decreased slightly to 3.1 percent from 3.2 percent in 1992, reflecting the underlying improvement in the credit quality of the managed portfolio, which experienced lower delinquency and chargeoffs in 1993. Despite the lower provision expressed as a percent of managed interest-earning assets, total Finance and Banking managed reserves as a percent of managed receivables increased from 1.92 percent at December 31, 1992 to 2.22 percent at December 31, 1993. See the credit quality section beginning on this page for further discussion of factors affecting the provision for credit losses. EXPENSES Operating expenses, which the company defines as salaries and fringe benefits plus other operating expenses, were $1.4 billion, up 22 percent over 1992. Operating expenses as a percent of average receivables owned or serviced increased to 3.49 percent compared to 3.41 percent in 1992 and 3.51 percent in 1991. Operating expenses in 1993 increased slightly faster than growth in the receivable base primarily due to higher costs associated with servicing the 54 percent increase in bankcard receivables. The company anticipates that the operating expense ratio will decline in 1994 as costs associated with the credit card growth stabilize and the receivables base continues to grow. Headcount for the Finance and Banking segment at December 31, 1993 was approximately 15,800, up 12 percent from the prior year primarily due to credit card growth. The effective tax rate was 32.5 percent compared to 31.7 percent in 1992 and 33.1 percent in 1991. The effective tax rate in 1993 included the impact of the increase in the statutory federal income tax rate from 34 percent to 35 percent. CREDIT QUALITY The company experienced improved credit quality in virtually all product categories during 1993, both domestically and in foreign operations. These improvements were a result of better domestic economic conditions and the higher quality of recently originated receivables. At year-end 1993 delinquency had fallen for seven consecutive quarters. Chargeoffs in 1993 were below the prior year. Overall portfolio statistics in 1993 were impacted by a change in product mix as bankcard receivables became a larger portion of the overall managed portfolio, and first mortgages became a smaller portion. Because bankcard receivables have higher delinquency and chargeoff rates than first mortgages, this change in product mix has the result of increasing the overall delinquency and chargeoff statistics of the portfolio as a whole. In addition, credit quality statistics also were impacted by the anticipated higher delinquency and chargeoffs related to the seasoning of the GM Card portfolio. However, the credit quality of the GM Card portfolio continued to 21 exhibit strong performance. DELINQUENCY Delinquency levels are monitored for both receivables owned and receivables managed. The company looks at delinquency levels which include receivables serviced with limited recourse because this portfolio is subjected to underwriting standards comparable to the owned portfolio, is managed by operating personnel without regard to portfolio ownership and results in a similar credit loss exposure for the company. Total delinquent receivables at December 31, 1993 were $128 million lower than a year earlier despite higher receivable levels. This improvement consisted of a $35 million decrease in the domestic operations and a $93 million decrease in the foreign operations. Delinquency as a percent of managed consumer receivables fell 20 percent in 1993 and was the lowest since 1989. The company currently believes the positive trend in delinquency ratios will continue but recognizes the trend may moderate in future periods. Further improvement will depend on the extent and timing of improvement in economic conditions in the various countries where the company operates, the composition of the managed receivables base and the maturation of the GM Card portfolio. TWO-MONTHS-AND-OVER CONTRACTUAL DELINQUENCY (as a percent of managed consumer receivables)
1993 QUARTER END 1992 Quarter End ---------------------------------- -------------------------------- 4 3 2 1 4 3 2 1 ------------------------------------------------------------------------- DOMESTIC First mortgage 1.42% 1.21% 1.15% 1.27% 1.08% 1.02% .95% .99% Home equity 3.16 3.38 3.20 3.46 4.05 4.34 4.60 5.28 Other secured 1.38 1.83 3.20 2.80 2.71 3.45 5.17 6.23 Bankcard 2.41 2.57 2.47 2.58 2.70 4.16 4.31 4.41 Merchant participation 5.01 5.43 5.73 6.36 6.34 6.80 6.44 6.44 Other unsecured 6.63 7.23 7.46 7.53 7.77 8.09 8.17 8.68 ---- ---- ----- ------ ----- ----- ----- ----- Total domestic 3.28 3.50 3.46 3.68 3.89 4.39 4.54 4.90 ---- ---- ----- ------ ----- ----- ----- ----- FOREIGN Canada 4.65 5.11 5.61 6.00 6.17 6.82 6.79 7.52 United Kingdom 6.74 7.34 8.37 9.31 10.13 11.39 12.93 13.77 Australia 8.93 9.59 10.95 12.06 12.48 12.21 12.08 14.14 ---- ---- ----- ------ ----- ----- ----- ----- Total foreign 5.82 6.32 7.06 7.68 8.08 8.95 9.51 10.36 ---- ---- ----- ------ ----- ----- ----- ----- Total 3.58% 3.85% 3.93% 4.24% 4.48% 5.10% 5.36% 5.79% ==== ==== ===== ====== ===== ===== ===== =====
DOMESTIC DELINQUENCY First mortgage delinquency increased during the fourth quarter of 1993 and remained higher than the December 31, 1992 level, primarily due to the maturation of the portfolio coupled with continued weak regional economic conditions. Overall, the first mortgage portfolio has had a relatively stable and low rate of delinquency compared to industry averages and has not deviated from a reasonable range since the beginning of the economic downturn in the second half of 1990. The company believes this favorable delinquency comparison was due to low-risk product offerings and tight underwriting standards, which are adjusted for region-specific market conditions. At December 31, 1993 the weighted average loan-to-value ratio was approximately 70 percent for the first mortgage portfolio. Home equity delinquency declined during the fourth quarter of 1993 and remained below the year-end 1992 level. Home equity delinquency was the lowest since December 1990 and was down approximately 40 percent from the peak in the first quarter of 1992. The improvement was a result of tighter underwriting standards instituted at the start of the recent economic downturn and improvements in the economy. Vintage analysis of home equity loans originated after June 1991 continued to demonstrate the favorable performance of recently underwritten receivables. The delinquency level for other secured receivables at December 31, 1993 decreased from the prior quarter and prior year, but did not impact total delinquency due to the small size of the portfolio. Bankcard delinquency declined compared to the prior quarter and was below the December 1992 level. The improvement was due to growth in the GM Card, as accounts were added to the receivable base but, due to their newness, did not contribute significantly to delinquency. As GM Card accounts have aged, their contribution to delinquency has increased, and is expected to continue to increase. Merchant participation delinquency levels continued to decline in the fourth quarter of 1993 and were below the year-end 1992 level. The steady decline during 1993 was the result of an improved economy coupled with tighter underwriting standards and a greater focus on association with low delinquency 22 merchants. The delinquency level for other unsecured receivables decreased in the 1993 fourth quarter and has fallen for seven consecutive quarters. This steady decline was due to the improvement of the quality of receivables recently underwritten combined with improved economic conditions. The company anticipates further improvement in this portfolio. Since chargeoff rates on unsecured receivables are much higher than secured receivables, improvements in delinquency are significant in evaluating potential future credit losses. FOREIGN DELINQUENCY Foreign delinquency continued to show improvement from the prior quarter and from the 1992 fourth quarter. United Kingdom delinquency, which is based on a portfolio of primarily unsecured products, continued to decline and was at its lowest level since February 1990. The improvement was due to tightened underwriting standards implemented in the early 1990's resulting in better quality of receivables originated. Delinquency in Canada also continued to improve due to improved underwriting standards instituted in 1991 and 1990. Delinquency levels in Australia continued to improve as well; however, due to the relatively small size of the receivable portfolio, the decrease in delinquency had a small impact on total delinquency for both the foreign operations and the company. The company expects that foreign delinquency will continue to show improvement. However, further improvement will depend on the extent and timing of improvement in economic conditions in the countries where the company operates. NONPERFORMING ASSETS The decrease in nonaccrual managed receivables during 1993 primarily was due to improvements in the domestic consumer finance and United Kingdom operations. Consumer real estate owned declined due to fewer properties entering foreclosure, an improved domestic housing market and stabilizing home values, which have contributed to a quicker liquidation of the inventory of properties. As part of continuing commercial activities, the company held at December 31, 1993 approximately $83 million of aircraft acquired through foreclosure of loans and leases. The company is actively marketing these aircraft for sale or lease. However, due to the current economic condition of the airline industry, the company is uncertain about the timing of the disposition of these aircraft. These aircraft were recorded at date of acquisition at the lower of cost or fair value, with such values subsequently being depreciated over their estimated remaining useful lives. NONPERFORMING ASSETS--FINANCE AND BANKING SEGMENT
DEC. 31, Sept. 30, Dec. 31, Dec. 31, All dollar amounts are stated in millions. 1993 1993 1992 1991 - ------------------------------------------ ------- -------- -------- -------- Nonaccrual managed receivables $528.7 $ 565.4 $ 683.9 $ 797.1 Accruing managed receivables 90 or more days delinquent 207.3 198.5 210.4 207.9 Renegotiated commercial loans -- -- 1.6 3.8 ------ -------- -------- -------- Total nonperforming managed receivables 736.0 763.9 895.9 1,008.8 ------ -------- -------- -------- Real estate owned 168.9 193.1 197.5 187.4 Other assets acquired through foreclosure 82.9 84.4 102.6 21.5 ------ -------- -------- -------- Total nonperforming assets $987.8 $1,041.4 $1,196.0 $1,217.7 ====== ======== ======== ======== Credit loss reserves for managed receivables as a percent of nonperforming managed receivables 87.9% 76.6% 56.5% 46.9% ------ -------- -------- --------
CHARGEOFFS Chargeoffs decreased in 1993 as a result of improved delinquency trends and better domestic economic conditions. The following table presents chargeoffs on a full year and quarterly basis, by product: NET CHARGEOFFS OF CONSUMER RECEIVABLES (as a percent of average consumer receivables managed)
1993 QUARTER ANNUALIZED 1992 Quarter Annualized FULL YEAR ----------------------------- Full Year ----------------------------- Full Year 1993 4 3 2 1 1992 4 3 2 1 1991 --------------------------------------------------------------------------------------------------- DOMESTIC First mortgage .35% .21% .59% .40% .20% .12% .15% .12% .12% .10% .15%
23 Home equity 1.00 1.17 .87 .98 .98 .87 1.16 .85 .68 .75 .67 Other secured 1.79 .64 3.11 3.51 (.07) 1.04 2.03 .61 .60 .94 .29 Bankcard 3.84 3.99 3.78 3.43 4.20 5.69 5.18 6.64 6.02 5.05 4.87 Merchant participation 4.32 4.26 4.44 4.02 4.57 4.49 4.60 4.30 4.69 4.37 4.11 Other unsecured 6.10 5.41 5.99 6.62 6.42 7.21 6.91 7.27 7.57 6.98 5.78 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Total domestic 2.75 2.82 2.78 2.66 2.75 2.98 3.07 3.08 2.98 2.77 2.35 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- FOREIGN Canada 3.16 3.86 2.83 2.83 3.18 3.84 3.70 3.55 4.26 3.85 3.82 United Kingdom 5.22 4.07 4.62 5.55 6.72 9.13 8.64 9.06 9.30 9.46 8.11 Australia 3.77 3.77 2.61 3.38 5.21 3.33 3.48 3.17 2.64 4.05 2.49 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Total foreign 3.88 3.92 3.38 3.73 4.46 5.51 5.18 5.37 5.74 5.72 4.99 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Total 2.90% 2.96% 2.86% 2.81% 2.99% 3.38% 3.38% 3.46% 3.43% 3.26% 2.83% ===== ===== ==== ==== ==== ==== ==== ==== ==== ==== ====
Net chargeoffs as a percent of average consumer receivables managed were 2.90 percent, down from 3.38 percent in 1992, due to improvements in the foreign operations, primarily the United Kingdom, and in domestic other unsecured receivables. The net chargeoff ratio for the full year also benefited from the growth in GM Card receivables, which due to their recent origination, had minimal chargeoffs during the year. Excluding the effect of the GM Card program, the total chargeoff ratio decreased from 3.41 percent in 1992 to 3.12 percent in 1993. Chargeoffs are a lagging indicator of credit quality and generally reflect prior delinquency trends. As previously discussed, overall delinquency levels have continued to decline. However, net chargeoffs in the last two quarters of 1993 did not follow this trend primarily due to the one-time chargeoffs in Canada during the fourth quarter and the impact of the GM Card which contributed 9 and 10 basis points, respectively, to the increase in the total net chargeoff ratio in the fourth quarter. These increases were offset by a 9 basis point improvement in other domestic product lines and in the United Kingdom operations. Growth associated with the GM Card portfolio has resulted in a shift in product mix toward bankcard receivables, which have higher chargeoff rates than secured receivables. Although GM Card chargeoffs remained better than management's expectations, they increased during the year, offsetting improvements in other categories. The company anticipates that chargeoffs associated with the GM Card will continue to increase in the near term as the portfolio matures. These increases are expected to be offset by further improvement in other domestic products and in foreign operations. However, future improvement in net chargeoffs may be impacted by factors such as a shift in product mix toward bankcard receivables, economic conditions and the impact of personal bankruptcies. Consequently, the extent and timing of an overall improved chargeoff trend remains uncertain. Domestic net chargeoffs were 2.75 percent for the year, down from 2.98 percent in 1992 due to improvements in the unsecured portfolios. Net chargeoffs for first mortgages increased in 1993 compared to 1992 but declined in the fourth quarter. The first mortgage chargeoff ratio continued to be affected by the maturation of the portfolio and weak regional economic conditions. Home equity chargeoffs increased slightly on both a year-over-year basis and in the fourth quarter as this portfolio continued to be impacted by weak economic conditions in the western region. Net chargeoffs for other secured receivables did not significantly impact total chargeoffs as these receivables represented approximately 3 percent of total managed receivables at year end. In the domestic unsecured portfolios, bankcard net chargeoffs declined in 1993 compared to the prior year. While the bankcard and total domestic chargeoff ratios benefited from the GM Card program throughout 1993, this positive contribution decreased in the latter half of the year and resulted in an overall increase in bankcard chargeoffs in the last two quarters as the GM Card receivables matured. Net chargeoffs of merchant participation and other unsecured receivables were below both the 1992 level and the prior quarter. These improvements were consistent with the downward trend in delinquency in these portfolios. Foreign net chargeoffs declined in 1993 but increased in the fourth quarter of 1993 compared to the third quarter despite continued improvement in the United Kingdom operations. Chargeoffs in Canada were lower on a year-to-date basis but higher during the fourth quarter related to one-time chargeoffs as previously discussed. Excluding these one-time chargeoffs, the Canadian chargeoff ratio in the fourth quarter would have been 2.92 percent, and the total foreign chargeoff ratio in the fourth quarter would have been 3.23 percent. Chargeoffs in Australia increased year-over-year and during the fourth quarter. However, due to the size of the receivable portfolio, Australia's chargeoffs did not significantly impact the overall chargeoff level of the company. 24 INDIVIDUAL LIFE INSURANCE Individual Life Insurance net income was $45.2 million, up 8 percent from 1992 due to higher investment income resulting from gains on the sale of available-for-sale investments, a larger investment portfolio and higher levels of contract revenues from individual life and annuity contracts. STATEMENTS OF INCOME
All dollar amounts are stated in millions. Year ended December 31 1993 1992 1991 - ------------------------------------------ --------- --------- --------- Investment and other income $ 540.4 $ 481.7 $ 421.9 Contract revenues 127.9 111.3 98.7 --------- --------- --------- Total revenues 668.3 593.0 520.6 --------- --------- --------- Costs and expenses: Policyholders' benefits 456.9 427.7 377.8 Operating expenses 140.2 102.1 95.2 Income taxes 26.0 21.5 12.6 --------- --------- --------- Net income $ 45.2 $ 41.7 $ 35.0 ========= ========= ========= Sales $ 652.2 $ 736.3 $ 655.6 --------- --------- --------- Life insurance in force $32,371.6 $28,390.4 $25,280.8 --------- --------- --------- Return on average assets .72% .73% .71% --------- --------- ---------
Investment securities for the Individual Life Insurance segment totaled $6.4 billion, up from $5.3 billion at December 31, 1992. This portfolio represented 73 percent of the company's total investment portfolio at December 31, 1993. During 1993 the company continued to emphasize conservative investment strategies. Higher-risk securities, which include non-investment grade bonds, common and preferred stocks, commercial mortgage loans and real estate, represented 7 percent of the insurance investment portfolio at December 31, 1993, compared to 9 percent at December 31, 1992. Commercial real estate loans totaled less than 2 percent of Individual Life Insurance segment investments at December 31, 1993. At December 31, 1993 there were no significant nonaccrual or renegotiated loans in this portfolio. Commercial real estate acquired in foreclosure, which is included in the investment portfolio, totaled $12.4 million. Underwriting standards and credit monitoring procedures for these residential and commercial real estate loans are similar to those described in the credit management policy section on page 41. At December 31, 1993 the market value of the insurance held-to-maturity investment portfolio was 108 percent of the amortized cost. Reductions in market value which are determined to be other than temporary are charged to income as realized losses. There were no unrealized losses in the insurance investment portfolio at December 31, 1993 which would materially impact current or future earnings or the capital position of the company. Investment and other income was $540.4 million in 1993, a 12 percent increase over 1992. The improvement was primarily due to higher gains on sales of available-for-sale investments. These investments were sold consistent with pre-established interest rate and exchange rate policies. A substantially larger investment portfolio, partially offset by lower yields on investments, also contributed to the increase in investment income. Contract revenues also increased in 1993 due to higher levels of insurance in force. Policyholders' benefits were $456.9 million, a 7 percent increase over 1992 due to increased life insurance and annuity contracts. Operating expenses were $140.2 million compared with $102.1 and $95.2 million in 1992 and 1991, respectively. Both the 1993 and 1992 increases were due to higher amortization of deferred insurance policy acquisition costs ("DAC"). The higher levels of DAC amortization resulted from increased gross profits on universal life and deferred annuity products. Amortization rates are based on estimated lifetime gross profits and are periodically adjusted as required by generally accepted accounting principles. Unamortized insurance policy acquisition costs totaled $381.6 million at December 31, 1993. In the event of policy surrender, the write-off of unamortized insurance policy acquisition costs would be offset by surrender charges to the policyholder. Surrender charges on policies for which acquisition costs have been capitalized approximated $490 million at December 31, 1993. The effective income tax rate was 36.5 percent compared to 34 and 26.5 percent in 1992 and 1991, respectively. The 1993 effective tax rate included the impact of the retroactive increase to January 1, 1993 in the statutory federal income tax rate from 34 percent to 35 percent. The 1991 income tax rate 25 was favorably impacted as a result of the resolution of prior years' tax matters. LIQUIDATING COMMERCIAL LINES The 1993 net loss for the Liquidating Commercial Lines segment was $21.2 million, compared to a loss of $14.0 million in 1992. The net loss was higher primarily due to the previously described resolution of the company's largest problem loan. The company expects future results of operations for this segment to improve. STATEMENTS OF OPERATIONS
In millions. Year ended December 31 1993 1992 1991 - ---------------------- ------ ------ ------- Interest margin $ 59.3 $ 38.0 $ 65.7 Other revenues 22.9 11.9 (2.6) ------ ------ ------- Interest margin and other revenues 82.2 49.9 63.1 Provision for credit losses 90.1 35.3 260.0 Operating expenses 21.6 37.6 43.9 ------ ------ ------- Loss before income taxes (29.5) (23.0) (240.8) Income tax benefit (8.3) (9.0) (92.1) ------ ------ ------- Net loss $(21.2) $(14.0) $(148.7) ====== ====== =======
Interest margin increased over 1992 primarily due to wider spreads and gains on terminating debt and related hedges associated with assets which have been liquidated. Other revenues increased due to the company's 25 percent equity investment in a commercial joint venture of liquidating assets made in 1993. See page 41 for a discussion of factors impacting the determination of provision for credit losses. Operating expenses declined 43 percent due to lower write-downs and net expenses for real estate owned and other expenses. Loans decreased 27 percent in 1993 to $1.2 billion. Commercial real estate loans and acquisition finance and other loans declined during the year. Acquisition finance receivables at December 31, 1993 totaled $717.3 million and consisted of 27 individual credit extensions. The average credit extension was $27 million and the largest credit extension was $50 million. The company defines highly leveraged acquisition finance receivables as corporate loans to finance the buyout, acquisition or recapitalization of an existing business, in which the debt and equity subordinated to the company's claims in a borrower are less than 25 percent of the borrower's total assets. The company had unfunded secured working capital lines and letters of credit related to these acquisition finance borrowers of $98 million at December 31, 1993. Lending for highly leveraged acquisition finance loans was discontinued in 1991. Nonperforming commercial assets decreased 27 percent during 1993 to $514.0 million. Nonaccrual loans at December 31, 1993 were down 12 percent compared to the December 31, 1992 level, while renegotiated loans declined by $168.1 million during the year. The previously mentioned problem equipment finance loan was transferred during the year from renegotiated loan status to nonaccrual loan status prior to being resolved. Despite the resolution of this credit, the ratio of reserves to nonperforming loans increased to 67.2 percent at December 31, 1993 from 44.6 percent at December 31, 1992. Real estate owned was flat with the prior year. The company expects the longer term downward trend in nonperforming assets to continue, although it may stabilize in the near future before decreasing. The future level of nonperforming assets will depend, in part, on the timing and extent of economic recovery. In addition, comparisons between periods may be impacted by individual transactions which mask the overall trend. The company continues to estimate its ultimate loss exposure for nonperforming assets based upon performance and specific reviews of individual loans and its outlook for economic conditions. Because the portfolio consists of a number of loans with relatively large balances, changes in individual borrower circumstances which currently are unforeseen have the potential to change the estimate of ultimate loss exposure in the future. There were no significant potential problem loans not classified as nonperforming assets at December 31, 1993. Management believes that commercial real estate markets began to stabilize in the second half of 1993. The level of future write-downs will continue to depend heavily on changes in overall market conditions as well as circumstances surrounding individual properties. To preserve value in liquidating the real estate portfolio over time, the company has segregated its portfolio into two categories. Properties in weak markets or with poor cash flow will be divested in an expeditious, orderly fashion. These properties, 26 which have been written down an average of 51 percent, represent 19 percent of the commercial real estate owned portfolio at December 31, 1993. The average carrying value of a property in this portfolio at December 31 1993 was $2 million. Properties with positive and/or improved cash flows and in markets which, the company believes, have potential for improvement are being held for sale at prices which reflect this value and may, therefore, take longer to divest. Net operating income on all commercial real estate properties in 1993 was $17.7 million, up from $8.5 million in 1992. Commercial real estate write-downs and carrying costs on all commercial real estate properties were $30.8 million in 1993, compared to $25.8 million in 1992. COMMERCIAL NONPERFORMING LOANS AND REAL ESTATE OWNED
DEC. 31, Sept. 30, Dec. 31, Dec. 31, All dollar amounts are stated in millions. 1993 1993 1992 1991 - ------------------------------------------ ------ ------ ------ ------ Real estate nonaccrual $ 54.8 $ 79.6 $ 80.7 $ 98.6 Other nonaccrual 173.9 164.1 178.5 159.0 ------ ------ ------ ------ Total nonaccrual 228.7 243.7 259.2 257.6 Renegotiated 28.7 17.3 196.8 202.6 ------ ------ ------ ------ Total nonperforming loans 257.4 261.0 456.0 460.2 Real estate owned 256.6 262.2 249.6 237.5 ------ ------ ------ ------ Total $514.0 $523.2 $705.6 $697.7 ====== ====== ====== ====== Credit loss reserves as a percent of nonperforming loans 67.2% 71.2% 44.6% 49.7% ------ ------ ------ ------
CORPORATE Corporate expenses, net of tax benefits, were $28.5 million compared to $37.4 million in 1992 and $25.9 million in 1991. Expenses in 1993 decreased from 1992 primarily due to a lower provision for credit losses and lower interest expense. In 1993 the company recorded a general provision for credit losses of $10 million compared to $15 million in 1992. LIQUIDITY AND CAPITAL RESOURCES The company continued to strengthen its capital and liquidity position in 1993. The ratio of common and preferred shareholders' equity, including convertible preferred stock, to total assets was 7.33 percent, up from 6.04 percent at December 31, 1992. In 1993 the company issued approximately $313 million of common stock, including $269 million in a public offering in March 1993 and approximately $44 million through employee stock ownership and dividend reinvestment plans. Additionally, the company issued $100 million of preferred stock in 1993. The company's principal sources of funds are cash received from its subsidiaries, primarily in the form of dividends and borrowings under intercorporate agreements, and cash received from external sources using various debt and equity instruments. Funds received by the parent company are disbursed to shareholders and creditors or returned to subsidiaries as capital or advances under intercorporate agreements. In 1993 the company paid $141.3 million of dividends to shareholders and made capital contributions of approximately $135 million to its subsidiaries. The company employs an integrated and comprehensive program to manage liquidity and capital resources. The major usage of cash by the company's subsidiaries is the origination or purchase of receivables or investment securities. During 1993 and 1992 the company purchased $430 and $364 million of home equity loan portfolios, respectively. During 1992 the company purchased $195 million of bankcard portfolios. The main sources of cash for the company's subsidiaries are the collection and sales of receivable balances, maturities or sales of investment securities, proceeds from the issuance of debt, the acceptance of deposits, cash received from policyholders and cash provided from operations. The company's subsidiary, Household Finance Corporation ("HFC") obtains a majority of its funding through the issuance of commercial paper, long-term debt and preferred stock as well as through the securitizations and sales of consumer receivables. At December 31, 1993 outstanding commercial paper of HFC was $4 billion compared to $3 billion at December 31, 1992. HFC markets its commercial paper through an in-house sales force, directly reaching more than 165 investors. HFC also markets medium-term notes through its in-house sales force and investment banks and issued a total of $1.6 billion in 1993. During 1993 HFC also issued $626 million of intermediate and long-term debt to the public through investment banks and brokerage houses. To facilitate liquidity, 27 HFC had committed back-up lines of credit totaling $3.5 billion at December 31, 1993, 76 percent of which did not contain a material adverse change clause which could restrict availability. The company's subsidiary, Household Bank, f.s.b. ("the Bank") is funded primarily by customer deposits which are gathered through its multi-state branch network. Also used are advances from the Federal Home Loan Bank, Federal funds borrowings, repurchase agreements, brokered deposits, bank and other capital market borrowings, and the securitizations and sales of credit card receivables. The Bank had approximately $3 billion of available funding under advance and borrowing agreements at December 31, 1993. The company views core deposits as a stable and relatively low-cost source of funding even in uncertain financial markets. Deposits, including time certificates and savings and demand accounts, totaled $7.5 and $8.0 billion for the company at December 31, 1993 and 1992, respectively. Deposits represented 79 and 77 percent of the Bank's total borrowings at December 31, 1993 and 1992, respectively. Securitizations and sales of consumer receivables have been, and will continue to be, an important source of liquidity for both HFC and the Bank. During 1993 the company securitized and sold, including replenishments of certificate holder interests, approximately $9.4 billion of home equity, merchant participation and bankcard receivables compared to $4.8 billion in 1992. The company has a comprehensive program which addresses the management and diversification of financial risk, such as interest rate, funding, liquidity and currency risk, at all of its entities. The company manages these risks both domestically and internationally through an asset/liability management committee ("ALCO") composed of senior management. Interest rate risk is the exposure of earnings to changes in interest rates. The ALCO sets and monitors policy so that the potential impact on earnings from future changes in interest rates is managed within approved limits. Simulation models are utilized to measure the impact on net interest margin of changes in interest rates. By policy, no more than 4 percent of the company's expected full year net interest margin on a managed basis can be at risk to a gradual 250 basis point change in interest rates over a twelve month period, assuming no additional interest rate risk management actions are taken. The company, whenever possible, funds its assets with liability instruments of similar interest rate sensitivity, thereby reducing structural interest rate risk. To manage its liquidity position, the company may synthetically create liabilities with similar characteristics to its assets. As a result of changing market conditions over the last few years, the company's balance sheet composition has changed dramatically. This shift primarily has been driven by the conversion of fixed rate credit card receivables to a floating rate and the success of variable rate home equity loan products. At December 31, 1993 the company owned approximately $9.9 billion of domestic receivables with variable interest rates based on the prime rate. To manage liquidity to acceptable levels, these receivables have been funded with $4.5 billion of short-term debt with the remainder funded by longer duration liabilities creating an asset-sensitive position. Through the use of derivatives, primarily interest rate swaps, the company has been able to offset the asset sensitivity of its balance sheet and achieve a cost of funds based on shorter-term interest rates, thereby reducing interest rate risk while also preserving liquidity. As a result of this strategy and the change in the pricing characteristics of the receivable portfolio, the company's portfolio of off-balance sheet risk instruments increased significantly during the year. These instruments also are used to manage basis risk or the risk due to the difference in movement of market rate indices on which assets and liabilities are priced (primarily prime and LIBOR, respectively). The company does not serve as a financial intermediary to make markets in any off-balance sheet financial instruments. While the notional amount of the company's synthetic portfolio is large, the economic exposure underlying these instruments is substantially less. The notional amount is used to determine the fixed or variable rate interest payment due by each counterparty but does not result in an exchange of principal payments. The company's exposure on its synthetic portfolio is counterparty risk, or the risk that a counterparty may default on a contract when the company is owed money. The potential for economic loss is the present value of the interest rate differential, determined by reference to the notional amount, discounted using current interest rates. Counterparty limits have been established and are closely monitored as part of the overall risk management process. At December 31, 1993 approximately 96 percent of the company's derivative instrument counterparties were rated A- or better and 65 percent were rated AA- or better. The company has never suffered a loss due to counterparty failure. While attempting to eliminate structural interest rate risk, the company also strives to take advantage of the profit opportunities available in short-term interest rate movements principally using exchange-traded options. Limits have been established for each instrument based on potential daily changes in market values due to interest rate movements, volatility and market liquidity. Positions are monitored daily to ensure compliance with established policies and limits. Income from these trading activities has not been, nor is anticipated to be, material to the company. See Note 8, "Financial Instruments With Off-Balance Sheet Risk and 28 Concentrations of Credit Risk" for additional information related to interest rate risk management. During 1993 the company's credit rating was upgraded by one nationally recognized rating agency and its credit rating outlook was upgraded by another. At December 31, 1993 the long-term debt and preferred stock of the company and its subsidiaries, HFC and the Bank, had been assigned an investment grade rating by four "nationally recognized" rating agencies. Furthermore, these agencies included the commercial paper of HFC in their highest rating category. With these ratings the company believes it and its subsidiaries have substantial capacity to raise capital from wholesale sources to refinance maturing obligations and fund business growth. In 1992 the Office of Thrift Supervision ("OTS") adopted a rule which classifies savings associations based on capital ratios. At December 31, 1993 the Bank was classified as "well capitalized," the highest category. The company had investments in foreign subsidiaries of $389 million at December 31, 1993. Total assets of foreign subsidiaries were $4.2 billion at year-end 1993. The company enters into foreign exchange contracts to partially hedge its investment in foreign subsidiaries. Foreign currency translation adjustments, net of gains and losses on contracts used to hedge foreign currency fluctuations, totaled $14.1 and $37.5 million in net losses in 1993 and 1992, respectively, and are included as a component of common shareholders' equity. The functional currency for each subsidiary is its local currency. While each foreign subsidiary primarily borrows funds in local currency, in 1993, both the United Kingdom and Canadian subsidiaries borrowed funds for the first time directly in the United States capital market. These borrowings were converted to their local currencies using foreign currency swaps, and achieved a lower cost of funds than that available in the subsidiaries' local market. The company's net realized gains and losses in foreign currency transactions were not material to results of operations or financial position in 1993 or 1992. Household Global Funding, Inc. ("Global") was established in 1989 to consolidate ownership of the company's Canadian and United Kingdom financial services businesses. During 1993 Global exchanged $44 million of its preferred stock for an identical amount of fixed rate senior debt. Canadian operations are funded with retail deposits, commercial paper and intermediate and long-term debt. Deposits were $1.0 and $1.1 billion at December 31, 1993 and 1992, respectively. Intermediate and long-term debt totaled $574 million at year-end 1993 compared with $636 million a year ago. Committed back-up lines of credit for Canada were approximately $420 million compared to approximately $400 million at December 31, 1992. The company has guaranteed payment of the debt obligations of its Canadian subsidiary, except for debt obligations previously guaranteed by HFC. In addition, the Canadian operation sold with no recourse first mortgage portfolios totaling $419.0 million during 1993. The United Kingdom operations are funded with deposits and short and intermediate-term bank lines of credit. Deposits at year-end 1993 were $426 million compared to $463 million a year earlier. Borrowings from bank lines of credit at year-end 1993 were $621 million compared to $552 million a year ago. The company has guaranteed payment of all debt obligations, except for certain deposits, of its United Kingdom subsidiary. The company's life insurance subsidiary, Alexander Hamilton Life Insurance Company ("Alexander Hamilton"), plans for capital needs based on target leverage ratios determined in consultation with key rating agencies. The target leverage ratios are based on Alexander Hamilton's statutory financial position. At the end of 1993 Alexander Hamilton's operating leverage ratio, as defined statutorily, was consistent with its target. Alexander Hamilton has an A+ (Superior) rating from A.M. Best and has an "AA" claims-paying ability rating from Standard & Poor's Corporation, Duff and Phelps Credit Rating Co. and Fitch Investors Services, Inc. The company believes that future growth of Alexander Hamilton can be funded through its own operations. Household has strengthened its consolidated capital base over the past four years. From year-end 1989 to year-end 1993, common and preferred equity increased 89 percent, while owned assets grew only 26 percent. The increase in common and preferred shareholders' equity reflects the adoption of FAS No. 109 and FAS No. 115 during 1993. The adoption of FAS No. 109 resulted in retained earnings being reduced by approximately $63 million from the amounts previously reported, while the adoption of FAS No. 115 resulted in retained earnings at December 31, 1993 being increased by $40.5 million. Excluding the impact of FAS No. 115, common and preferred equity still increased 26 percent over the prior year. The company's double leverage ratio, which is defined as parent company investments in and advances to subsidiaries divided by consolidated equity, was 1.05 and 1.14 at December 31, 1993 and 1992, respectively. HFC's debt to equity ratio declined from 6.8 at December 31, 1992 to 6.2 at December 31, 1993, while the Bank's capital ratios met the highest regulatory classification. Management anticipates additional strengthening of these ratios through improving returns on assets and managed balance sheet growth. During 1993 the company invested $110 million in capital expenditures, compared to the prior year level of $90 million. In the accompanying financial statements, Note 13 provides information regarding the fair value of certain financial instruments. 29 STATEMENTS OF INCOME Household International, Inc. and Subsidiaries All dollar amounts except per share data are stated in millions.
Year ended December 31 1993 1992 1991 - ---------------------- -------- -------- -------- Finance income $2,561.4 $2,584.4 $3,037.5 Interest income from noninsurance investment securities 129.3 152.8 187.4 Interest expense 1,149.5 1,420.2 1,886.9 -------- -------- -------- Net interest margin 1,541.2 1,317.0 1,338.0 Provision for credit losses on owned receivables 735.8 671.5 843.2 -------- -------- -------- Net interest margin after provision for credit losses 805.4 645.5 494.8 -------- -------- -------- Securitization and servicing fee income 460.0 376.0 398.3 Insurance premiums and contract revenues 288.3 281.2 288.4 Investment income 574.0 523.7 471.5 Fee income 292.6 164.5 104.0 Other income 148.9 98.0 106.8 -------- -------- -------- Total other revenues 1,763.8 1,443.4 1,369.0 -------- -------- -------- Net interest margin after provision for credit losses and other revenues 2,569.2 2,088.9 1,863.8 -------- -------- -------- Salaries and fringe benefits 615.4 535.9 489.7 Other operating expenses 964.0 761.1 702.1 Policyholders' benefits 539.1 513.9 472.2 -------- -------- -------- Total costs and expenses 2,118.5 1,810.9 1,664.0 -------- -------- -------- Income before income taxes 450.7 278.0 199.8 Income taxes 152.0 87.1 50.0 -------- -------- -------- Net income $ 298.7 $ 190.9 $ 149.8 ======== ======== ======== EARNINGS PER COMMON SHARE* Net income $ 298.7 $ 190.9 $ 149.8 Preferred dividends (28.2) (25.3) (21.2) -------- -------- -------- Earnings available to common shareholders $ 270.5 $ 165.6 $ 128.6 ======== ======== ======== Average common and common equivalent shares 94.8 86.0 83.0 -------- -------- -------- Fully diluted earnings per common share $ 2.85 $ 1.93 $ 1.55 -------- -------- -------- Primary earnings per common share $ 2.91 $ 1.97 $ 1.57 -------- -------- -------- Dividends declared per common share $ 1.18 $ 1.15 $ 1.12 -------- -------- --------
*Amounts have been restated to reflect the two-for-one stock split in the form of a 100 percent stock dividend, effective October 15, 1993. The accompanying notes are an integral part of these financial statements. BALANCE SHEETS Household International, Inc. and Subsidiaries In millions.
December 31 1993 1992 - ----------- --------- --------- ASSETS Cash $ 317.4 $ 255.8 Investment securities (fair value of $9,045.5 and $7,633.4) 8,795.1 7,389.8 Finance and banking receivables 19,563.0 18,960.6 Liquidating commercial assets 1,555.7 1,851.2 Deferred insurance policy acquisition costs 381.6 453.4 Acquired intangibles 473.4 491.6 Properties and equipment 434.3 397.4 Assets acquired through foreclosure 251.8 300.1 Other assets 1,189.2 1,028.5 --------- --------- Total assets $32,961.5 $31,128.4 ========= =========
30
LIABILITIES AND SHAREHOLDERS' EQUITY Debt: Deposits $ 7,516.1 $ 8,030.3 Commercial paper, bank and other borrowings 5,642.1 5,253.3 Senior and senior surbordinated debt (with original maturities over one year) 9,113.8 9,014.4 --------- --------- Total debt 22,272.0 22,298.0 Insurance policy and claim reserves 6,064.2 5,326.5 Other liabilities 2,207.7 1,622.3 --------- --------- Total liabilities 30,543.9 29,246.8 Convertible preferred stock subject to mandatory redemption 19.3 36.0 Preferred stock* 320.0 300.0 Common shareholders' equity* 2,078.3 1,545.6 --------- --------- Total liabilities and shareholders' equity $32,961.5 $31,128.4 ========= =========
*See the Statements of Changes in Preferred Stock and Common Shareholders' Equity on page 55 for number of shares issued and outstanding. The accompanying notes are an integral part of these financial statements. 31 STATEMENTS OF CASH FLOWS
Household International, Inc. and Subsidiaries In millions. Year ended December 31 1993 1992 1991 - ---------------------- --------- --------- -------- CASH PROVIDED BY OPERATIONS Net income $ 298.7 $ 190.9 $ 149.8 Adjustments to reconcile net income to net cash provided by operations: Provision for credit losses on owned receivables 735.8 671.5 843.2 Insurance policy and claim reserves 226.7 161.8 202.9 Depreciation and amortization 243.1 176.1 170.3 Net realized (gains) losses from sales of assets 29.3 (15.3) (103.9) Deferred insurance policy acquisition costs (86.6) (85.2) (81.2) Deferred income tax provision (6.3) 40.3 (84.1) Other, net 264.1 (187.2) 115.7 --------- --------- -------- Cash provided by operations 1,704.8 952.9 1,212.7 --------- --------- -------- INVESTMENTS IN OPERATIONS Investment securities: Purchased (4,053.1) (3,633.9) (3,505.4) Matured 1,270.9 1,382.2 685.8 Sold 1,992.2 2,107.6 2,225.8 Short-term investment securities, net change (154.2) 607.7 (641.9) Receivables, excluding bankcard: Originated or purchased (10,218.4) (10,719.8) (9,236.7) Collected 7,784.6 7,597.7 7,252.2 Sold 2,351.8 2,599.9 3,857.8 Bankcard receivables: Originated or collected, net (8,729.8) (4,216.5) (1,470.6) Purchased -- (195.1) (1,587.5) Sold 7,483.2 2,389.2 1,451.4 Acquisition of banking organizations: Assets acquired, net (53.5) (64.3) (203.6) Deposits and other liabilities assumed, net 362.0 525.9 2,662.9 Acquisition of other businesses -- (26.2) -- Properties and equipment purchased (110.2) (90.4) (150.4) Properties and equipment sold 8.2 4.0 14.9 --------- --------- -------- Cash increase (decrease) from investments in operations (2,066.3) (1,732.0) 1,354.7 --------- --------- -------- FINANCING AND CAPITAL TRANSACTIONS Short-term debt, net change 590.0 1,707.9 (1,572.4) Time certificates accepted 2,340.9 3,081.5 4,551.1 Time certificates paid (3,320.8) (3,739.3) (6,002.9) Senior and senior subordinated debt issued 2,765.0 2,862.0 3,680.9 Senior and senior subordinated debt retired (2,645.3) (3,594.8) (3,781.3) Policyholders' benefits paid (341.2) (349.6) (325.8) Cash received from policyholders 859.7 895.3 820.0 Shareholders' dividends (141.3) (124.6) (115.0) Issuance of preferred stock 100.0 50.0 55.0 Repurchase of preferred stock (80.0) -- -- Issuance of common stock 313.3 33.0 134.5 --------- --------- -------- Cash increase (decrease) from financing and capital transactions 440.3 821.4 (2,555.9) --------- --------- -------- Effect of exchange rate changes on cash (17.2) (14.4) (9.7) --------- --------- -------- Increase in cash 61.6 27.9 1.8 Cash at January 1 255.8 227.9 226.1 --------- --------- -------- Cash at December 31 $ 317.4 $ 255.8 $ 227.9 Supplemental cash flow information: ========= ========= ======== Interest paid $ 1,188.2 $ 1,493.6 $1,922.1 ========= ========= ======== Income taxes paid $ 128.8 $ 100.9 $ 114.8 ========= ========= ========
The accompanying notes are an integral part of these financial statements. 32 STATEMENTS OF CHANGES IN PREFERRED STOCK AND COMMON SHAREHOLDERS' EQUITY
Common Shareholders' Equity ------------------------------------------------------------ Nonconvertible Additional Total Common Household International, Inc. and Subsidiaries Preferred Common Paid-in Retained Shareholders' All dollar amounts are stated in millions. Stock Stock Capital Earnings(1) Other(2) Equity - ------------------------------------------ -------------- ------ ---------- ----------- -------- ------------- BALANCE AT DECEMBER 31, 1990 $195.0 $ 53.6 $234.3 $1,917.8 $(924.6) $1,281.1 Net income 149.8 149.8 Cash dividends-preferred, at stated rates (28.7) (28.7) Cash dividends-common, $1.12 per share (86.3) (86.3) Foreign currency translation adjustments (3) (16.5) (16.5) Conversion of preferred stock .9 5.4 6.3 Exercise of stock options .1 17.0 17.1 Issuance of common stock (1.8) 136.3 134.5 Issuance of nonconvertible preferred stock 55.0 (2.0) (2.0) Unrealized gain on marketable equity securities 6.8 6.8 ------ ------ ------ -------- ------- -------- BALANCE AT DECEMBER 31, 1991 250.0 54.6 252.9 1,952.6 (798.0) 1,462.1 Net income 190.9 190.9 Cash dividends-preferred, at stated rates (30.4) (30.4) Cash dividends-common, $1.15 per share (94.2) (94.2) Foreign currency translation adjustments (3) (37.5) (37.5) Conversion of preferred stock .9 17.3 18.2 Exercise of stock options .1 5.9 6.0 Issuance of common stock 1.1 31.9 33.0 Issuance of nonconvertible preferred stock 50.0 (1.6) (1.6) Unrealized loss on investments, net (0.9) (0.9) ------ ------ ------ -------- ------- -------- BALANCE AT DECEMBER 31, 1992 300.0 55.6 275.6 2,018.9 (804.5) 1,545.6 Net income 298.7 298.7 Cash dividends-preferred, at stated rates (31.1) (31.1) Cash dividends-common, $1.18 per share (110.2) (110.2) Foreign currency translation adjustments (3) (14.1) (14.1) Conversion of preferred stock .8 16.4 17.2 Exercise of stock options .3 15.5 15.8 Issuance of common stock 87.8 225.5 313.3 Stock split, two-for-one 56.6 (56.6) -- Issuance of nonconvertible preferred stock 100.0 (.1) (.1) Redemption of nonconvertible preferred stock (80.0) (1.3) (1.3) Unrealized gain on investments, net (4) 44.5 44.5 ------ ------ ------ -------- ------- -------- BALANCE AT DECEMBER 31, 1993 $320.0 $113.3 $337.3 $2,176.3 $(548.6) $2,078.3 ====== ====== ====== ======== ======= ========
(1) The company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS No. 109") effective January 1, 1993. As a result of implementing FAS No. 109, retained earnings for all periods presented prior to December 31, 1993 have been reduced by approximately $63 million from the amounts previously reported. (2) At December 31, 1993, 1992, 1991 and 1990 items in the other column include cumulative adjustments for: foreign currency translation adjustments of $(132.7), $(118.6), $(81.1), and $(64.6) million, respectively; unrealized gains (losses) on marketable equity securities and available-for-sale investments of $40.5, $(4.0), $(3.1), and $(9.9) million, respectively; and common stock in treasury of $(456.4), $(681.9), $(713.8), and $(850.1) million, respectively. (3) Net of $1.1, $(12.2) and $(6.2) million of income tax expense (benefits) in 1993, 1992 and 1991, respectively. (4) Effective December 31, 1993 the company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS No. 115"). As a result of implementing FAS No. 115, the gross unrealized gain on available-for-sale investments of $152.8 million is recorded net of income taxes of $22.1 million and, for certain available-for-sale investments of the life insurance operation, related unrealized deferred insurance policy acquisition cost adjustments of $90.2 million at December 31, 1993. 33
Common Stock(5) Nonconvertible --------------------------------------------- Shares Preferred Stock Issued In Treasury Net Outstanding - ------ --------------- ---------- ------------ --------------- BALANCE AT DECEMBER 31, 1990 1,950,000 53,547,445 (17,749,492) 35,797,953 Exercise of common stock options 107,035 107,035 Conversion of $6.25 preferred stock 901,428 901,428 Repurchase of common stock (16) (16) Issuance of common stock 2,970,328 2,970,328 Issuance of nonconvertible preferred stock 550,000 --------- ----------- ------------ ---------- BALANCE AT DECEMBER 31, 1991 2,500,000 54,555,908 (14,779,180) 39,776,728 Exercise of common stock options 149,452 149,452 Conversion of $6.25 preferred stock 843,442 843,442 Issuance of common stock 668,511 668,511 Issuance of nonconvertible preferred stock 50,000 --------- ----------- ----------- ---------- BALANCE AT DECEMBER 31, 1992 2,550,000 55,548,802 (14,110,669) 41,438,133 Exercise of common stock options 316,732 316,732 Conversion of $6.25 preferred stock 812,430 812,430 Issuance of common stock 4,902,574 4,902,574 Stock split, two-for-one 56,576,057 (9,597,794) 46,978,263 Issuance of nonconvertible preferred stock 100,000 Redemption of nonconvertible preferred stock (800,000) --------- ----------- ----------- ---------- BALANCE AT DECEMBER 31, 1993 1,850,000 113,254,021 (18,805,889) 94,448,132 ========= =========== =========== ==========
(5) At December 31, 1993 and 1992 the company had authorized 150.0 and 67.5 million shares, respectively of $1 par value common stock. The accompanying notes are an integral part of these financial statements. BUSINESS SEGMENT DATA
Household International, Inc. and Subsidiaries Revenues Operating Profit Net Income ------------------------------ ------------------------ ------------------------- In millions. 1993 1992 1991 1993 1992 1991 1993 1992 1991 - ------------ -------- -------- -------- ------ ------ ------ ------ ------ ------ Finance and Banking $3,650.2 $3,435.0 $3,845.8 $449.5 $293.9 $432.9 $303.2 $200.6 $289.4 Individual Life Insurance 668.3 593.0 520.6 71.2 63.2 47.6 45.2 41.7 35.0 Corporate: Administrative expenses (10.6) (13.3) (9.7) (10.6) (13.3) (9.7) Provision for credit losses (10.0) (15.0) -- (10.0) (15.0) -- Interest expense, net (19.9) (27.8) (30.2) (19.9) (27.8) (30.2) Income tax benefits -- -- -- 12.0 18.7 14.0 -------- -------- -------- ------ ------- ------ ------ ------ ------ Total Corporate -- -- -- (40.5) (56.1) (39.9) (28.5) (37.4) (25.9) -------- -------- -------- ------ ------- ------ ------ ------ ------ Core Business 4,318.5 4,028.0 4,366.4 480.2 301.0 440.6 319.9 204.9 298.5 Liquidating Commercial Lines 136.0 152.6 227.5 (29.5) (23.0) (240.8) (21.2) (14.0) (148.7) -------- -------- -------- ------ ------ ------ ------ ------ ------ Total $4,454.5 $4,180.6 $4,593.9 $450.7 $278.0 $199.8 $298.7 $190.9 $149.8 ======== ======== ======== ======= ====== ====== ====== ====== ======
PRESENTATION OF INCOME DATA The combination of the company's consumer and continuing commercial product lines are referred to as Finance and Banking. Assets of the liquidating commercial product lines, which are separately managed as receivables are collected or otherwise disposed of, have been disclosed separately in the consolidated balance sheets and as a separate business segment, referred to as Liquidating Commercial Lines. To better define and report the results of operations, the company refers to its Finance and Banking and Individual Life Insurance segments, net of corporate expenses, as its Core Business. Operating profits represent income before income taxes but include interest expense, as financing costs are integral to the company's operations. Income by segment assumes each business services its own debt. The segments generally provide for income taxes as if separate tax returns were filed subject to certain consolidated return limitations and benefits. Equity is allocated to the business segments based on the underlying regulatory and business requirements. 34
Identifiable Assets --------------------------------------------------- In millions. 1993 1992 1991 - ------------ --------- --------- --------- Finance and Banking $24,362.5 $23,315.3 $22,631.9 Individual Life Insurance 6,959.0 5,926.2 5,273.8 Corporate 84.3 35.7 24.7 --------- --------- --------- Core Business 31,405.8 29,277.2 27,930.4 Liquidating Commercial Lines 1,555.7 1,851.2 2,051.9 --------- --------- --------- Total $32,961.5 $31,128.4 $29,982.3 ========= ========= =========
PRESENTATION OF BUSINESS SEGMENT DATA The Finance and Banking segment markets first mortgages, home equity loans, other secured consumer receivables, bankcards, merchant participation receivables, other unsecured consumer receivables, equipment and other secured commercial loans and leases, credit and specialty insurance and retail securities brokerage services. The Individual Life Insurance segment provides ordinary life, universal life and annuity insurance products. The Liquidating Commercial Lines segment manages the discontinued commercial product lines which consist of commercial real estate, acquisition finance and other loans and other commercial assets being liquidated. The Corporate segment represents general corporate expenses and assets which are not allocable to specific business segments. GEOGRAPHIC AREA
Household International, Inc. and Subsidiaries Identifiable Assets Revenues Operating Profit ---------------------------------- ------------------------------ ------------------------- In millions. 1993 1992 1991 1993 1992 1991 1993 1992 1991 --------- --------- --------- -------- -------- -------- ------ ------ ------ United States $28,800.5 $26,912.1 $24,997.9 $3,833.9 $3,435.6 $3,663.1 $472.1 $362.1 $251.2 United Kingdom 1,494.1 1,402.7 1,768.4 273.7 346.5 423.4 13.0 (47.7) (16.9) Canada 2,247.3 2,358.7 2,685.5 275.4 309.5 406.9 (33.8) (38.7) (26.7) Australia 419.6 454.9 530.5 71.5 89.0 100.5 (.6) 2.3 (7.8) --------- --------- --------- -------- -------- -------- ------ ------ ------ Total $32,961.5 $31,128.4 $29,982.3 $4,454.5 $4,180.6 $4,593.9 $450.7 $278.0 $199.8 ========= ========= ========= ======== ======== ======== ====== ====== ======
NOTES TO FINANCIAL STATEMENTS Household International, Inc. and Subsidiaries 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The financial statements include the accounts of Household International, Inc. and all subsidiaries (the "company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the current year's presentation. INVESTMENT SECURITIES The company maintains investment portfolios in both its noninsurance and insurance operations. These portfolios are comprised primarily of debt securities. The insurance portfolio also includes mortgage and policyholder loans and other real estate investments. Effective December 31, 1993 the company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS No. 115"). In accordance with FAS No. 115, investment securities in both the noninsurance and insurance operations are classified in three separate categories: trading, available-for-sale or held-to-maturity. Trading invest- ments are bought and held principally for the purpose of selling them in the near term and are carried at fair value. Adjustments to the carrying value of trading investments are included in current earnings. Investments which the company has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost. Investments not classified as trading or held-to-maturity are classified as available-for-sale. They are intended to be invested for an indefinite period but may be sold in response to events reasonably expected in the foreseeable future. These investments are carried at fair value. Unrealized holding gains and losses on available-for-sale investments are recorded as adjustments to common 35 shareholders' equity, net of income taxes and, for certain investments of the insurance operation, related unrealized deferred insurance policy acquisition cost adjustments (see `Insurance' on the following page). Prior to the adoption of FAS No. 115, available-for-sale investments were carried at the lower of aggregate amortized cost or fair value, and any adjustments to carrying value for the noninsurance operations were included in earnings, while any adjustments to carrying value for the insurance operations were included in common shareholders' equity. Any decline in the fair value of available-for-sale or held-to-maturity investments which is deemed to be other than temporary are charged against current earnings. Cost of investment securities sold by the insurance operation generally is determined using the first-in, first-out ("FIFO") method, and cost of noninsurance investment securities sold is determined by specific identification. Interest income earned on the noninsurance investment portfolio is classified in the statements of income in net interest margin. Realized gains and losses from the noninsurance portfolio and investment income from the insurance portfolio are recorded in investment income. Gains and losses on trading investments are recorded in other income. Accrued investment income is classified with investment securities. RECEIVABLES Receivables, except first mortgages held for trade, are carried at amortized cost. Receivables held for trade are those originated or purchased with the intent of current resale. Such receivables, net of related hedges, are carried at market value with changes in this value recorded in current earnings. The company periodically sells receivables from its home equity, bankcard and merchant participation portfolios. Because these receivables were originated with variable rates of interest or rates comparable to those currently offered by the company for such receivables, carrying value approximates market value. Finance income is earned using the effective yield method and classified on the balance sheets, to the extent not collected, with the related receivables. Origination fees are deferred and amortized to finance income over the estimated life of the related receivables, except to the extent they offset directly related lending costs. Annual fees on bankcards are netted with direct lending costs associated with the issuance of the cards. The net amount is deferred and amortized on a straight-line basis over one year. Net deferred direct lending costs related to bankcard receivables totaled $24 and $9 million at December 31, 1993 and 1992, respectively. Insurance reserves applicable to credit risks on consumer receivables are treated as a reduction of receivables in the balance sheets since payments on such policies generally are used to reduce outstanding receivables. Provisions for credit losses are made in amounts sufficient to maintain reserves at a level considered adequate to cover probable losses of principal and earned interest in the existing portfolio of owned receivables. Probable losses are estimated for consumer receivables based on contractual delinquency status and historical loss experience and, for commercial loans, based on a specific loan review process as well as management's assessment of general reserve requirements. These estimates are reviewed periodically, and adjustments are reported in earnings in the periods in which they become known. The company's chargeoff policy for all consumer receivables is based on contractual delinquency over periods ranging from 4 to 9 months. Commercial loans are written off when it becomes apparent that an account is uncollectible. LIQUIDATING COMMERCIAL ASSETS The company has discontinued selected, high-risk, commercial product lines. These assets are managed separately from the continuing core businesses and therefore have been presented separately for financial reporting purposes. Liquidating commercial assets are recorded in the accompanying balance sheets at amortized cost net of reserves for credit losses. The carrying value recorded does not exceed amounts estimated to be recoverable, which is consistent with the current intent to hold these assets and collect or otherwise dispose of them in the normal course of business. These assets are accounted for consistent with accounting policies discussed herein. NONACCRUAL LOANS Nonaccrual loans are loans on which accrual of interest has been suspended. Interest income is suspended on all consumer and commercial loans when principal or interest payments are more than three months contractually past due, except for bankcards and private-label credit cards, which are included in the merchant participation product line. On these credit card receivables, interest continues to accrue until the receivable is charged off. There were no commercial loans at December 31, 1993 which were 90 days or more past due which remained on accrual status. Accrual of income on nonaccrual consumer receivables is not resumed until such receivables become less than three months contractually past due. Accrual of income on nonaccrual commercial loans is not resumed until such loans become contractually current. RECEIVABLES SOLD AND SERVICED WITH LIMITED RECOURSE AND SECURITIZATION INCOME Certain home equity, bankcard and merchant participation receivables have been securitized and sold to investors with limited recourse. The servicing rights to these receivables have been retained by the company. Upon sale, the receivables are removed from the balance sheet, and a gain on sale is 36 recognized for the difference between the carrying value of the receivables and the adjusted sales proceeds. The adjusted sales proceeds are based on a present value estimate of future cash flows to be recognized over the life of the receivables. Future cash flows are based on estimates of prepayments, the impact of interest rate movements on yields of receivables sold and securities issued, delinquency of receivables sold, normal servicing fees, operating expenses and other factors. The resulting gain is reduced by establishing a reserve for estimated probable losses under the recourse provisions. Gains on sale, recourse provisions and servicing cash flows on receivables sold are reported in the accompanying statements of income as securitization and servicing fee income. RECEIVABLES SOLD AND SERVICED WITH NO RECOURSE Certain first mortgage receivables are originated and routinely sold to investors with servicing rights retained by the company. Excess servicing rights of $32 and $21 million were recorded at December 31, 1993 and 1992, respectively, related to these sales. These excess servicing rights are amortized over the expected repayment patterns of the underlying loans, not to exceed 10 years. The average amortization period was approximately 8 years in 1993, 1992 and 1991. The company routinely purchases first mortgage receivable servicing rights, referred to as purchased mortgage servicing rights ("PMSR"). PMSR totaled $180.4 and $138.2 million at December 31, 1993 and 1992, respectively, and are amortized in a manner which corresponds to the estimated net servicing revenue stream over their estimated useful life not to exceed 15 years. The average amortization period was approximately 8 years in 1993, 1992 and 1991. The company periodically evaluates the carrying value of its capitalized servicing rights in light of the actual repayment experience of the underlying loans and makes adjustments to reduce the carrying value where appropriate. Servicing income and amortization of excess servicing rights and PMSR are included in securitization and servicing fee income in the statements of income. PROPERTIES AND EQUIPMENT Properties and equipment are recorded at cost and depreciated over their estimated useful lives principally using the straight-line method for financial reporting purposes and accelerated methods for tax purposes. REAL ESTATE OWNED Real estate owned, which is included in assets acquired through foreclosure on the accompanying balance sheets, is valued at the lower of cost or fair value less estimated costs to sell. Costs of holding this real estate, and related gains and losses on disposition, are credited or charged to operations as incurred. These values are periodically reviewed and reduced, if appropriate. INSURANCE Premiums for ordinary life policies are recognized when due. Premiums for credit insurance are recognized over the period at risk in relationship to anticipated claims. Premiums received on single premium life, universal life and annuity policies ("interest sensitive policies') are considered insurance deposits. Revenues on interest sensitive policies consist of contract charges against policyholders' accounts and are reported in the period assessed. Costs associated with acquisition of insurance risks are deferred and generally amortized in relation to premium revenues on ordinary and credit insurance and in relation to gross profits on interest sensitive policies. Amortization of deferred insurance policy acquisition costs has been adjusted for unrealized gains or losses on available-for-sale investments on the same basis as if the gains or losses were realized. Such amortization related to unrealized gains or losses has been netted against the unrealized gains or losses as an adjustment to common shareholders' equity. Liability for future contract benefits on interest sensitive policies is computed in accordance with the retrospective deposit method using interest rates which vary with rates credited to policyholders' accounts. Liabilities for future policy benefits on other life insurance products generally are computed using the net level premium method, based upon estimated future investment yields, mortality and withdrawals appropriate when the policies were issued. Mortality and withdrawal assumptions principally are based on industry tables. Policy and contract claim reserves are based on estimated settlement amounts for both reported and incurred but not reported losses. ACQUIRED INTANGIBLES Acquired intangibles consist of the cost of investments in excess of net tangible assets acquired and acquired credit card relationships. Acquired credit card relationships are amortized on a straight-line basis over their estimated remaining lives, not to exceed 10 years. Other intangible assets are amortized using straight-line and other methods over their estimated useful lives, not to exceed 15 years. The average amortization period for acquired intangibles was approximately 7 years in 1993 and 8 years in both 1992 and 1991. TREASURY STOCK The company accounts for repurchases of common stock using the cost method with common stock in treasury classified in the balance sheets as a reduction of common shareholders' equity. Repurchases of convertible preferred stock subject to mandatory redemption are accounted for using the par value method with the excess of cost over stated value of repurchased preferred stock charged to retained earnings. Treasury stock 37 reissued is removed from the accounts at average cost. INTEREST RATE CONTRACTS The company enters into a variety of interest rate contracts in the management of its interest rate exposure and in its trading activities. For interest rate swaps that are designated as hedges, the interest rate differential to be paid or received is accrued and included in interest expense. For interest rate futures, options, caps and floors and forward contracts that qualify as hedges, realized and unrealized gains and losses are deferred and amortized over the lives of the hedged items as adjustments to interest expense. Realized and unrealized gains and losses on contracts that do not qualify as hedges are included in other income. FOREIGN CURRENCY TRANSLATION Foreign subsidiary assets and liabilities are located in the United Kingdom, Canada and Australia. The functional currency for each subsidiary is its local currency. Foreign subsidiary financial data are translated into U.S. dollars at the current exchange rate, and translation adjustments are accumulated as a separate component of common shareholders' equity. The company enters into forward exchange contracts to hedge its investment in foreign subsidiaries. After-tax gains and losses on contracts to hedge foreign currency fluctuations are included in the foreign currency translation adjustment in common shareholders' equity. Effects of foreign currency translation in the statements of cash flows are offset against the cumulative foreign currency adjustment, except for the impact on cash. Foreign currency transaction gains and losses are included in income as they occur. INCOME TAXES The company and its eligible subsidiaries file a consolidated federal income tax return. Investment tax credits generated by leveraged leases are accounted for by the deferral method. The company adopted Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes" ("FAS No. 109") effective January 1, 1993 which requires that deferred tax assets and liabilities, other than those associated with leveraged leasing transactions, be adjusted to the tax rates expected to apply in the periods in which the deferred tax assets and liabilities are expected to be realized or settled. 2. INVESTMENT SECURITIES
1993 1992 ---------------------- ---------------------- In millions. CARRYING Carrying At December 31 VALUE FAIR VALUE Value Fair Value - -------------- -------- ---------- -------- ---------- TRADING INVESTMENTS Government securities and other $ 108.8 $ 108.8 $ 39.8 $ 39.8 -------- -------- -------- -------- AVAILABLE-FOR-SALE INVESTMENTS Marketable equity securities: Common stocks 18.5 18.5 10.8 10.8 Preferred stocks 66.3 66.3 85.8 85.8 Corporate securities 2,047.1 2,047.1 323.3 323.3 Government securities 536.3 536.3 82.3 82.3 Mortgage-backed securities 1,983.9 1,983.9 634.7 648.9 Other 347.8 347.8 -- -- -------- -------- -------- -------- Subtotal 4,999.9 4,999.9 1,136.9 1,151.1 -------- -------- -------- -------- HELD-TO-MATURITY INVESTMENTS Corporate securities 1,852.3 2,049.4 2,956.8 3,104.7 Government securities 34.5 36.7 181.7 186.9 Mortgage-backed securities 882.1 928.1 2,024.5 2,084.8 Mortgage loans on real estate 222.4 226.0 351.0 365.7 Policy loans 81.6 81.6 75.2 75.2 Other 494.6 496.1 508.2 509.5 -------- -------- -------- -------- Subtotal 3,567.5 3,817.9 6,097.4 6,326.8 -------- -------- -------- -------- Accrued investment income 118.9 118.9 115.7 115.7 -------- -------- -------- -------- Total investment securities $8,795.1 $9,045.5 $7,389.8 $7,633.4 ======== ======== ======== ========
The company's insurance subsidiaries held $6.7 and $5.7 billion of the investment securities at December 31, 1993 and 1992, respectively. Policy loans and mortgage loans on real estate held by the company's insurance subsidiaries are classified as investment securities, consistent with insurance industry 38 practice. Included in the company's earnings for 1993, 1992 and 1991 were changes in net unrealized holding gains (losses) of $1.3, $(3.3) and $6.6 million, respectively, from trading investments. Proceeds from the sale of available-for-sale investments totaled approximately $1.2 billion in both 1993 and 1992. Gross gains of $49.7 and $31.1 million and gross losses of $7.9 and $21.9 million in 1993 and 1992, respectively, were realized on those sales. There were no investments classified as available-for-sale in 1991. The amortized cost of held-to-maturity investments transferred to available-for-sale in 1993 was $3.7 billion. Proceeds from sales of held-to-maturity investments were $834.3 million, $871.4 million and $2.2 billion during 1993, 1992 and 1991, respectively. Sales and transfers of held-to-maturity investments in 1993 were due to restructuring of the investment security portfolio in anticipation of the adoption of FAS No. 115 on December 31, 1993. Approximately $400 and $800 million of sales proceeds in 1992 and 1991 were related to a decision made in 1991 to restructure held-to-maturity investments to significantly reduce exposure in the company's non-investment grade bond portfolio. Gross gains of $48.1, $35.4 and $59.3 million and gross losses of $9.6, $15.9 and $28.0 million were realized on sales of held-to-maturity investments in 1993, 1992 and 1991, respectively. The gross unrealized gains (losses) on investment securities were as follows:
1993 1992 ------------------------------------------------ ---------------------------------------------- GROSS GROSS Gross Gross In millions. AMORTIZED UNREALIZED UNREALIZED FAIR Amortized Unrealized Unrealized Fair At December 31 COST GAINS LOSSES VALUE Cost Gains Losses Value - -------------- --------- ---------- ---------- -------- --------- ---------- ---------- -------- AVAILABLE-FOR-SALE INVESTMENTS Marketable equity securities: Common stocks $ 16.9 $ 1.7 $ (.1) $ 18.5 $ 10.1 $ .8 $ (.1) $ 10.8 Preferred stocks 63.8 4.2 (1.7) 66.3 89.6 2.1 (5.9) 85.8 Corporate securities 1,960.4 95.9 (9.2) 2,047.1 324.3 11.0 (12.0) 323.3 Government securities 531.9 6.3 (1.9) 536.3 79.2 3.2 (.1) 82.3 Mortgage-backed securities 1,926.3 63.2 (5.6) 1,983.9 638.6 15.1 (4.8) 648.9 Other 347.8 -- -- 347.8 -- -- -- -- -------- ------ ------ -------- -------- ------ ------ -------- Total available-for-sale investments $4,847.1 $171.3 $(18.5) $4,999.9 $1,141.8 $ 32.2 $(22.9) $1,151.1 ======== ====== ====== ======== ======== ====== ====== ======== HELD-TO-MATURITY INVESTMENTS Corporate securities $1,852.3 $202.9 $ (5.8) $2,049.4 $2,956.8 $154.5 $ (6.6) $3,104.7 Government securities 34.5 2.2 -- 36.7 181.7 5.6 (.4) 186.9 Mortgage-backed securities 882.1 48.5 (2.5) 928.1 2,024.5 69.9 (9.6) 2,084.8 Mortgage loans on real estate 222.4 6.2 (2.6) 226.0 351.0 18.8 (4.1) 365.7 Policy loans 81.6 -- -- 81.6 75.2 -- -- 75.2 Other 494.6 1.5 -- 496.1 508.2 1.5 (.2) 509.5 -------- ------ ------ -------- -------- ----- ------ -------- Total held-to-maturity investments $3,567.5 $261.3 $(10.9) $3,817.9 $6,097.4 $250.3 $(20.9) $6,326.8 ======== ====== ====== ======== ======== ====== ====== ========
See Note 13, "Fair Value of Financial Instruments" for further discussion of the relationship between the fair value of the company's assets, liabilities and off-balance sheet financial instruments. As of December 31, 1993 the company did not hold any debt or equity securities from a single issuer that exceeded 10 percent of the company's shareholders' equity. 39 Contractual maturities and yields of investments in debt securities available-for-sale and held-to-maturity were as follows:
Corporate Securities Government Securities All Other Debt Securities --------------------------- -------------------------- ---------------------------- In millions. Amortized Fair Amortized Fair Amortized Fair At December 31, 1993 Cost Value Yield* Cost Value Yield* Cost Value Yield* - -------------------- --------- ----- ------ --------- ----- ------ --------- ------- -------- AVAILABLE-FOR-SALE INVESTMENTS Due within 1 year $ 7.3 $ 7.5 8.10% $206.6 $206.9 4.35% $ 545.0 $ 543.8 3.76% After 1 but within 5 years 139.0 145.2 7.51 152.1 153.7 5.06 -- -- -- After 5 but within 10 years 1,151.4 1,194.7 7.43 153.3 153.6 5.88 162.2 171.0 8.08 After 10 years 662.7 699.7 7.70 19.9 22.1 8.04 1,294.8 1,344.8 6.73 -------- -------- ---- ------ ------ ---- -------- -------- ---- Total $1,960.4 $2,047.1 7.53% $531.9 $536.3 5.13% $2,002.0 $2,059.6 6.03% ======== ======== ===== ====== ====== ==== ======== ======== ==== HELD-TO-MATURITY INVESTMENTS Due within 1 year $ 67.0 $ 68.3 10.61% $ 2.3 $ 2.4 6.44% $ 10.7 $ 10.7 4.62% After 1 but within 5 years 276.2 304.3 9.57 3.6 3.7 5.88 -- -- -- After 5 but within 10 years 447.2 496.9 8.83 16.2 17.0 6.66 148.8 157.7 6.60 After 10 years 1,061.9 1,179.9 8.78 12.4 13.6 9.69 868.9 907.4 8.59 -------- -------- ---- ------ ------ ---- -------- -------- ---- Total $1,852.3 $2,049.4 8.98% $ 34.5 $ 36.7 7.65% $1,028.4 $1,075.8 8.26% ======== ======== ===== ====== ====== ==== ======== ======== ====
*Computed by dividing annualized interest by the amortized cost of the respective investment securities. 3. FINANCE AND BANKING RECEIVABLES
In millions. At December 31 1993 1992 - -------------- --------- --------- First mortgage $ 3,534.1 $ 4,513.8 Home equity 2,850.9 2,943.6 Other secured 875.4 827.9 Bankcard 4,356.9 3,416.9 Merchant participation 2,636.5 2,063.8 Other unsecured 4,320.8 3,850.6 Equipment financing and other 765.9 832.7 --------- --------- Receivables owned 19,340.5 18,449.3 Accrued finance charges 251.8 257.7 Credit loss reserve for owned receivables (424.0) (345.8) Unearned credit insurance premiums and claims reserves (117.5) (113.7) Amounts due and deferred from receivables sales 735.0 873.8 Reserve for receivables serviced with limited recourse (222.8) (160.7) --------- --------- Total receivables owned, net 19,563.0 18,960.6 Receivables serviced with limited recourse 9,827.8 7,946.3 Receivables serviced with no recourse 15,229.4 11,406.7 --------- --------- Total receivables owned or serviced, net $44,620.2 $38,313.6 ========= =========
Foreign receivables included in receivables owned were as follows:
1993 1992 -------------------------------- ------------------------------- In millions. UNITED United At December 31 CANADA KINGDOM AUSTRALIA Canada Kingdom Australia - -------------- ------ ------- --------- ------ ------- --------- First mortgage $ 789.3 $ 54.1 -- $ 861.0 $ 63.1 -- Home equity 384.5 127.0 $ 76.6 508.9 130.7 $ 67.0 Other secured 71.4 -- 161.1 91.4 -- 176.7 Merchant participation 225.9 356.2 30.7 248.0 267.3 34.1 Other unsecured 394.2 613.8 106.6 403.0 622.3 133.3 -------- -------- ------ -------- -------- ------ Total $1,865.3 $1,151.1 $375.0 $2,112.3 $1,083.4 $411.1 ======== ======== ====== ======== ======== ======
40 Advances from the Federal Home Loan Bank and other borrowings of the company's banking subsidiary were secured by first mortgage receivables totaling approximately $1.0 billion at December 31, 1993. Receivables held for trade which are first mortgage loans that were originated or purchased with the intent to be resold totaled $661.7 and $246.0 million at December 31, 1993 and 1992, respectively. The company has securitized and sold certain receivables which it services with limited recourse. Securitizations and sales of receivables, including replenishments of certificate holders interests, were as follows:
In millions. Year ended December 31 1993 1992 1991 - ---------------------- -------- -------- -------- Home equity $1,667.5 $1,986.4 $1,858.3 Bankcard 7,563.2 2,335.6 2,430.2 Merchant participation 213.6 484.9 445.7 Other unsecured -- -- 75.2 -------- -------- -------- Total $9,444.3 $4,806.9 $4,809.4 ======== ======== ========
The outstanding balance of receivables serviced with limited recourse consisted of the following:
In millions. At December 31 1993 1992 - -------------- -------- -------- Home equity $5,029.5 $4,799.3 Bankcard 4,485.7 2,309.7 Merchant participation 312.6 602.5 Other unsecured -- 234.8 -------- -------- Total $9,827.8 $7,946.3 ======== ========
The combination of receivables owned and receivables serviced with limited recourse, which the company considers its managed portfolio, is shown below:
In millions. At December 31 1993 1992 - -------------- --------- --------- First mortgage $ 3,534.1 $ 4,513.8 Home equity 7,880.4 7,742.9 Other secured 875.4 827.9 Bankcard 8,842.6 5,726.6 Merchant participation 2,949.1 2,666.3 Other unsecured 4,320.8 4,085.4 Equipment financing and other 765.9 832.7 --------- --------- Receivables managed $29,168.3 $26,395.6 ========= =========
For certain securitizations, wholly-owned subsidiaries were created (HRSI Funding, Inc., HFS Funding Corporation, Household Finance Receivables Corporation II, Household Receivables Funding Corporation II, and HFC Funding Corporation) for the limited purpose of consummating such transactions. The amount due and deferred from receivables sales of $735.0 million at December 31, 1993 included unamortized excess servicing assets and funds established pursuant to the recourse provisions and holdback reserves for certain sales totaling $608.4 million. The amount due and deferred also included customer payments not yet remitted by the securitization trustee to the company. In addition, the company has made guarantees relating to certain securitizations of $281.3 million plus unpaid interest and has subordinated interests in certain transactions, which are recorded as receivables, for $190.8 million at December 31, 1993. The company maintains credit loss reserves pursuant to the recourse provisions for receivables serviced with limited recourse which are based on estimated probable losses under such provisions. These reserves totaled $222.8 million at December 31, 1993 and represent the company's best estimate of probable losses on receivables serviced with limited recourse. 41 Contractual maturities of owned receivables were as follows:
In millions. There- At December 31, 1993 1994 1995 1996 1997 1998 after Total - -------------------- -------- -------- -------- -------- ------ -------- --------- First mortgage $ 360.2 $ 107.3 $ 119.2 $ 179.4 $194.2 $2,573.8 $ 3,534.1 Home equity 851.2 345.4 228.8 178.5 138.2 1,108.8 2,850.9 Other secured 214.0 137.8 94.2 128.3 96.5 204.6 875.4 Bankcard 760.2 763.7 799.3 825.2 156.2 1,052.3 4,356.9 Merchant participation 1,403.9 663.7 370.7 151.2 15.8 31.2 2,636.5 Other unsecured 1,787.6 792.2 498.3 311.4 204.4 726.9 4,320.8 Equipment financing and other 67.0 32.5 55.2 29.7 79.9 501.6 765.9 -------- -------- -------- -------- ------ -------- --------- Total $5,444.1 $2,842.6 $2,165.7 $1,803.7 $885.2 $6,199.2 $19,340.5 ======== ======== ======== ======== ======= ======== =========
First mortgages have maximum terms of up to 30 years, whereas other consumer receivables have substantially shorter maximum terms. A substantial portion of all consumer receivables, based on the company's experience, will be paid prior to contractual maturity. This tabulation, therefore, is not to be regarded as a forecast of future cash collections. The ratio of annual cash collections of principal to average principal balances, excluding bankcard receivables, approximated 44 and 41 percent in 1993 and 1992, respectively. The following table summarizes contractual maturities of owned receivables due after one year by repricing characteristic:
Over 1 In millions. But Within At December 31, 1993 5 years 5 Years - -------------------- -------- -------- Receivables at predetermined interest rates $3,281.1 $3,775.4 Receivables at floating or adjustable rates 4,416.1 2,423.8 -------- -------- Total $7,697.2 $6,199.2 ======== ========
Finance and Banking nonaccrual owned receivables totaled $409.1 million at December 31, 1993 including $145.4 million relating to foreign operations. Interest income that would have been recorded in 1993 if such nonaccrual receivables had been current and in accordance with contractual terms was approximately $63 million, including $27 million relating to foreign operations. Interest income that was included in net income for 1993 on those receivables was approximately $32 million, including $12 million relating to foreign operations. For further information on nonperforming assets, see Credit Quality Statistics on pages 37 and 46. For an analysis of Finance and Banking reserves for credit losses, see pages 35 and 36. 4. LIQUIDATING COMMERCIAL ASSETS
In millions. At December 31 1993 1992 - ---------------- -------- ------- Receivables Commercial real estate $ 297.1 $ 349.4 Acquisition finance and other 892.8 1,269.6 -------- -------- Receivables owned 1,189.9 1,619.0 Accrued finance charges 9.2 12.1 Reserve for credit losses (172.9) (203.3) -------- -------- Total receivables owned, net 1,026.2 1,427.8 Real estate owned 256.6 249.6 Other assets 272.9 173.8 -------- -------- Total liquidating commercial assets $1,555.7 $1,851.2 ======== ========
At December 31, 1993 contractual maturities of receivables were: Within 1 year--$207.3 million; 1-2 years--$99.1 million; 2-3 years--$249.1 million; 3-4 42 years--$158.9 million; 4-5 years--$129.9 million and over 5 years--$345.6 million. Receivables with predetermined interest rates maturing in over 1 year but within 5 years were $331.1 million, and those maturing in over 5 years were $288.2 million. Receivables with floating or adjustable rates maturing in over 1 year but within 5 years were $305.9 million, and those maturing in over 5 years were $57.4 million. See pages 35 and 36 for an analysis of the liquidating commercial assets reserve for credit losses. Liquidating commercial nonaccrual loans totaled $228.7 million at December 31, 1993. See page 37 for nonaccrual data for prior years. Interest income that would have been recorded in 1993 if such nonaccrual receivables had been current and in accordance with contractual terms was approximately $33 million. Interest income that was included in net income in 1993 on those receivables was approximately $2 million. Renegotiated loans included in liquidating commercial assets at December 31, 1993 totaled $28.7 million. The company recorded $2.5 million of interest earned on such loans in 1993. Had the loans been performing in accordance with their original terms, interest income in 1993 would have been approximately $4 million higher. There were $.7 million of commitments at December 31, 1993 to lend additional funds to borrowers whose loans were renegotiated. See page 37 and pages 48 and 49 for further information on nonperforming assets. 5. DEPOSITS
1993 1992 ------------------ ------------------ WEIGHTED Weighted All dollar amounts are stated in millions. AVERAGE Average At December 31 AMOUNT RATE Amount Rate - ------------------------------------------ -------- -------- -------- -------- DOMESTIC Time certificates $3,094.4 3.6% $3,706.9 5.6% Savings accounts 2,287.9 2.9 2,130.4 3.3 Demand accounts 702.9 1.0 644.9 1.4 -------- --- -------- ---- Total domestic deposits 6,085.2 3.0 6,482.2 4.4 -------- --- -------- ---- FOREIGN Time certificates 1,157.8 8.2 1,338.7 10.3 Savings accounts 268.5 5.5 188.4 8.5 Demand accounts 4.6 3.7 21.0 5.5 -------- --- -------- ---- Total foreign deposits 1,430.9 7.7 1,548.1 10.1 -------- --- -------- ---- Total deposits $7,516.1 3.9% $8,030.3 5.5% ======== === ======== ====
Average deposits and related weighted average interest rates were as follows:
1993 1992 1991 ---------------------- ---------------------- ---------------------- AVERAGE WEIGHTED Average Weighted Average Weighted All dollar amounts are stated in millions. DEPOSITS AVERAGE RATES Deposits Average Rates Deposits Average Rates - ------------------------------------------ -------- ------------- -------- ------------- -------- ------------- DOMESTIC Time certificates $3,368.3 3.9% $3,952.1 5.8% $3,996.8 7.4% Savings and demand accounts 2,875.9 2.5 2,687.9 3.0 1,987.3 4.6 -------- --- -------- ---- -------- ---- Total domestic deposits 6,244.2 3.3 6,640.0 4.7 5,984.1 6.5 -------- --- -------- ---- -------- ---- FOREIGN Time certificates 1,278.5 8.2 1,122.2 10.7 1,169.2 11.2 Savings and demand accounts 212.3 5.8 224.7 10.1 581.5 12.1 -------- --- -------- ---- -------- ---- Total foreign deposits 1,490.8 7.9 1,346.9 10.6 1,750.7 11.5 -------- --- -------- ---- -------- ---- Total deposits $7,735.0 4.2% $7,986.9 5.8% $7,734.8 7.7% ======== === ======== ==== ======== ====
Interest expense on deposits was $321.2, $462.9 and $595.1 million for 1993, 1992 and 1991, respectively. Interest expense on domestic deposits was $203.9, $309.3 and $387.9 million for 1993, 1992 and 1991, respectively. 43 Maturities of time certificates in amounts of $100,000 or more were:
In millions. At December 31, 1993 Domestic Foreign Total - -------------------- -------- ------- ------ 3 months or less $ 61.3 $102.4 $163.7 Over 3 months through 6 months 40.8 75.0 115.8 Over 6 months through 12 months 49.0 7.4 56.4 Over 12 months 104.8 7.9 112.7 ------ ------ ------ Total $255.9 $192.7 $448.6 ====== ====== ======
Contractual maturities of time certificates within each interest rate range were as follows:
In millions. At December 31, 1993 1994 1995 1996 1997 1998 Thereafter Total - -------------------- -------- ------ ------ ------ ----- ---------- -------- INTEREST RATE < 4.00% $1,359.4 $129.8 $ 22.3 $ .5 $ .2 $ .2 $1,512.4 4.00% -- 5.99% 613.7 199.6 77.5 37.0 57.9 34.9 1,020.6 6.00% -- 7.99% 329.1 55.7 118.3 22.2 24.2 116.6 666.1 8.00% -- 9.99% 220.6 154.5 108.7 298.7 12.5 61.1 856.1 10.00% -- 13.99% 87.8 85.8 21.6 .2 1.3 .3 197.0 -------- ------ ------ ------ ----- ------ -------- Total $2,610.6 $625.4 $348.4 $358.6 $96.1 $213.1 $4,252.2 ======== ====== ====== ====== ===== ====== ========
6. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS
Bank and All dollar amounts are stated in millions. Commercial Other At December 31 Paper* Borrowings Total - -------------- --------- ---------- -------- 1993 Balance $4,123.5 $1,518.6 $5,642.1 Highest aggregate month-end balance -- -- 6,582.4 Average borrowings 3,826.9 1,978.8 5,805.7 Weighted average interest rate: At year end 3.7% 5.2% 4.1% Paid during year 3.7% 5.5% 4.3% -------- -------- -------- 1992 Balance $3,519.9 $1,733.4 $5,253.3 Highest aggregate month-end balance -- -- 5,636.1 Average borrowings 3,721.7 1,377.7 5,099.4 Weighted average interest rate: At year end 4.3% 5.4% 4.7% Paid during year 4.1% 8.1% 5.2% -------- -------- -------- 1991 Balance $2,765.8 $1,376.6 $4,142.4 Highest aggregate month-end balance -- -- 6,311.8 Average borrowings 3,778.3 1,759.9 5,538.2 Weighted average interest rate: At year end 5.9% 8.8% 6.8% Paid during year 6.4% 8.6% 7.1% -------- -------- --------
*Included in outstanding balances at year-end 1993, 1992, and 1991 were commercial paper obligations of foreign subsidiaries of $583.3, $487.6 and $522.6 million, respectively. Interest expense for commercial paper, bank and other borrowings totaled $251.1, $263.2 and $391.2 million for 1993, 1992 and 1991, respectively. The company maintains various bank credit agreements primarily to support commercial paper borrowings. At December 31, 1993 the company had total bank credit agreements of $5.3 billion, of which $4.3 billion were unused. 44 Formal credit lines are reviewed annually, and revolving credit agreements expire at various dates from 1994 to 1997. Borrowings under credit agreements generally are available at the prime rate or at a surcharge over the London Interbank Offered Rate (LIBOR). Annual commitment fee requirements to support availability of credit agreements at December 31, 1993 totaled $9.3 million. 7. SENIOR AND SENIOR SUBORDINATED DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR)
In millions. At December 31 1993 1992 - -------------- -------- -------- SENIOR DEBT 3.75% to 7.49%; due 1994 to 2003 $1,706.3 $1,044.7 7.5% to 7.99%; due 1994 to 2003 1,627.9 1,351.2 8.0% to 8.99%; due 1994 to 2002 1,162.3 1,553.8 9.0% to 9.99%; due 1994 to 2001 1,477.7 1,839.6 10.0% to 12.99%; due 1994 to 2001 344.8 587.9 Variable interest rate debt; 2.98% to 8.26%; due 1994 to 2015 1,778.5 1,372.6 SENIOR SUBORDINATED DEBT 6.5% to 9.63%; due 2000 to 2003 685.0 733.7 10.13% to 11.15%; due 1996 to 1998 215.0 314.7 PREFERRED STOCK OF SUBSIDIARIES Household Finance Corporation Exchangeable money market cumulative preferred Series A, 100 shares -- 50.0 7.25% term cumulative preferred Series 1992-A, 1,000,000 depositary shares* 100.0 100.0 Household Global Funding 9.85% term cumulative preferred, 18 and 40 shares in 1993 and 1992, respectively 36.0 80.0 Unamortized discount (19.7) (13.8) -------- -------- Total senior and senior subordinated debt $9,113.8 $9,014.4 ======== ========
*Depositary share represents 1/3000 share of preferred stock. Weighted average interest rates, excluding the impact of interest rate swap agreements, were 7.5, 8.1 and 8.8 percent at December 31, 1993, 1992 and 1991, respectively. Including the impact of interest rate swap agreements, weighted average interest rates were 5.1, 6.4 and 8.2 percent at December 31, 1993, 1992 and 1991, respectively. The dividends on the preferred stock of subsidiaries have been classified in the statements of income as interest expense. Interest expense for senior and senior subordinated debt was $577.2, $694.1 and $900.6 million for 1993, 1992 and 1991, respectively. Maturities of senior and senior subordinated debt were:
In millions. At December 31, 1993 - -------------------- 1994 $2,210.5 1995 1,236.8 1996 1,658.8 1997 1,042.7 1998 584.0 Thereafter 2,381.0 -------- Total $9,113.8 ========
At December 31, 1993 the preferred stock of Household Finance Corporation ("HFC"), a wholly-owned subsidiary of the company, represented $100 million of term cumulative preferred stock. The term cumulative preferred stock is non-voting and has a dividend rate of 7.25 percent, is not redeemable at the option of the company prior to the mandatory redemption date of August 15, 1997 and has a liquidation value of $100 per depositary share. On October 1, 1993 HFC's exchangeable money market cumulative preferred stock was redeemed in whole for $500,000 per share plus accrued and unpaid dividends. The preferred stock of Household Global Funding, Inc. ("Global") represented term cumulative preferred stock. The term cumulative preferred stock has a dividend rate of 9.85 percent, is not redeemable at the option of the company prior to the mandatory redemption date of October 1, 1996 and has a liquidation value of $2 million per share. During 1993 Global exchanged $44 million of the 9.85 percent term cumulative preferred stock for an identical amount of fixed rate senior debt maturing on October 1, 1996. In January 1994 Global exchanged an additional $22 million of the 9.85 percent term cumulative 45 preferred stock for an identical amount of fixed rate senior debt maturing on October 1, 1996. 8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK In connection with its asset/liability management program and in the normal course of business, the company enters into various transactions involving off-balance sheet financial instruments. These instruments are used to reduce the company's exposure to fluctuations in interest rates and foreign exchange rates, and to a lesser extent for proprietary trading purposes or to meet the financing needs of its customers. The company does not serve as a financial intermediary to make markets in any off-balance sheet financial instruments. These financial instruments, which include interest rate contracts, foreign exchange rate contracts, commitments to extend credit, financial guarantees and recourse obligations have varying degrees of credit risk and/or market risk. CREDIT RISK Credit risk is the possibility that a loss may occur because the counterparty to a transaction fails to perform according to the terms of the contract. The company's exposure to credit loss under commitments to extend credit, financial guarantees and recourse obligations is represented by the contract amount. The company's credit quality and collateral policies for commitments and guarantees are the same as those for receivables that are recorded on the balance sheet. The company's exposure to credit loss related to interest rate swaps, cap and floor transactions, forward and futures contracts and options is the amount of uncollected interest or premium related to these instruments. These interest rate related instruments are generally expressed in terms of notional principal or contract amounts which are much larger than the amounts potentially at risk for nonpayment by counterparties. The company controls the credit risk of its off-balance sheet financial instruments through established credit approvals, risk control limits and ongoing monitoring procedures. The company has never experienced nonperformance by any counterparty. MARKET RISK Market risk is the possibility that a change in interest rates or foreign exchange rates will cause a financial instrument to decrease in value or become more costly to settle. The company mitigates this risk by establishing limits for positions and other controls and by entering into counterbalancing positions. OFF-BALANCE SHEET INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS The following tables summarize the notional amounts of the company's off-balance sheet interest rate and foreign exchange contracts:
Notional Matured or Notional Fair In millions. Amount New Expired Terminated Amount Value At December 31 1992* Contracts Contracts Contracts 1993* 1993 - -------------- --------- --------- ---------- ---------- --------- ------- HEDGING INSTRUMENTS Interest rate swaps $10,418.3 $8,866.5 $(3,384.5) $ (920.5) $14,979.8 $299.8 Forwards and futures, net (559.3) 3,347.4 (3,995.5) 263.2 (944.2) (.9) Options, net 85.5 (248.3) 173.6 (11.2) (.4) -- Other risk management instruments 435.3 1,203.1 (222.1) -- 1,416.3 49.3 ========= ======== ========= ======== ========= ====== Notional Notional Fair In millions. Amount Net Amount Value At December 31 1992* Change 1993* 1993 - -------------- --------- -------- --------- ----- TRADING INSTRUMENTS Interest rate swaps $ 100.0 -- $ 100.0 $.6 Forwards and futures, net (397.8) $ (194.5) (592.3) (.7) Options, net (7,917.5) 1,180.4 (6,737.1) .8 Other risk management instruments 800.0 (300.0) 500.0 -- ========= ======== ========= ===
*Bracketed amounts at year end represent net short positions. Interest rate swaps are contractual agreements between two counterparties for the exchange of periodic interest payments generally based on a notional principal amount and agreed-upon fixed or floating rates. The company utilizes interest rate swaps to allow it to match fund its receivables, which are primarily floating rate, with its liabilities, which are primarily fixed rate. Credit and market risks exist with respect to these instruments. 46 The following table summarizes the interest rate swaps outstanding:
Weighted Average Interest Rates Weighted All dollar amounts are stated in millions. Notional ---------------- Average At December 31, 1993 Amount Pay Receive Maturity - -------------------- -------- ---- ------- -------- TYPE Pay a fixed rate/receive a floating rate $ 1,121.7 7.72% 3.90% 1.9 years Pay a floating rate/receive a fixed rate 9,570.9 3.13 5.57 3.6 years Pay a floating rate/receive a different floating rate 4,387.2 3.38 3.68 1.5 years --------- ---- ---- --------- Total $15,079.8 =========
Forwards and futures are contracts for delivery at a future date in which the buyer agrees to take delivery of a specified instrument or cash at a specified price. The company has both interest rate and foreign exchange rate forward contracts and interest rate futures contracts. Foreign exchange contracts are utilized by the company to reduce exposure in its foreign operations to fluctuations in exchange rates. Interest rate forward and interest rate futures contracts primarily are used in the company's proprietary trading activities. Interest rate forward and futures contracts also are used to mitigate basis risk which arises due to the difference in movement of market rate indices (prime and LIBOR) on which a large portion of the company's assets and liabilities are priced. For futures, the company's exposure to credit risk is limited as these contracts are traded on organized exchanges and are settled on a daily basis with the exchanges. In contrast, forward contracts have credit risk relating to the performance of the counterparty. These instruments also are subject to market risk. For forward and futures contracts entered into as hedging activities, the company had commitments to purchase of $680.7 and $543.6 million and commitments to sell of $1,624.9 and $1,102.9 million at December 31, 1993 and 1992, respectively. In connection with its trading activities, the company had commitments to purchase of $342.5 and $2,710.2 million and commitments to sell of $934.8 and $3,108.0 million at December 31, 1993 and 1992, respectively. Options grant the purchaser the right to either purchase or sell a financial instrument at a specified price within a specified period. The company primarily uses options, both written and purchased, for its proprietary trading activities. Gains and losses from the company's trading activities were immaterial to the financial results of the company. For written options, the company is exposed to market risk but generally not credit risk. The credit risk and market risk associated with purchased options is limited to the premium paid which is recorded on the balance sheet. The company had options purchased for trading activities of $9.7 and $2.7 billion and options written for trading activities of $16.4 and $10.6 billion at December 31, 1993 and 1992, respectively. The company also had options purchased for hedging activities of $69.6 and $100.0 million and options written for hedging activities of $70.0 and $14.5 million at December 31, 1993 and 1992, respectively. Other risk management instruments consist of caps and floors and foreign currency swaps. Caps and floors written expose the company to market risk but not to credit risk. Credit and market risk associated with caps and floors purchased is limited to the premium paid which is recorded on the balance sheet. Deferred gains of $10.2 and $15.4 million and deferred losses of $22.5 and $16.4 million were recorded on the balance sheet from interest rate risk management instruments at December 31, 1993 and 1992, respectively. The weighted average amortization period associated with the deferred gains was 3.8 years at both December 31, 1993 and 1992. The weighted average amortization period for the deferred losses was 4.0 and 2.2 years at December 31, 1993 and 1992, respectively. Interest margin was increased by $207.0, $110.8 and $36.1 million in 1993, 1992 and 1991, respectively, through the use of off-balance sheet interest rate risk management instruments. At December 31, 1993 the accrued interest, unamortized premium and other assets recorded for agreements which would be written off should all related counterparties fail to meet the terms of their contracts was $78.3 million. COMMITMENTS AND GUARANTEES The company enters into various commitments and guarantees to meet the financing needs of its customers. However, the company expects a substantial portion of these agreements to expire unexercised. 47 The company's significant commitments and guarantees consisted of the following:
In millions. At December 31 1993 1992 - -------------- --------- --------- Bank and private-label credit cards $43,164.0 $29,151.0 Other consumer lines of credit 2,771.8 2,586.1 Other loan commitments and guarantees 3,121.1 2,142.3
Commitments to extend credit to consumers represent the unused credit limits on bank and private-label credit cards and on other lines of credit. Commitments on bank and private-label credit cards are cancelable at any time. The company does not require collateral to secure credit card agreements. Other consumer lines of credit include home equity lines of credit, which are secured by residential real estate, and other unsecured lines of credit. Commitments on these lines of credit generally are cancelable by the company when a determination is made that a borrower may not be able to meet the terms of the credit agreement. Other loan commitments include commitments to originate and purchase mortgage loans, commitments to fund commercial loans and letters of credit and guarantees for the payment of principal and interest on municipal industrial development bonds. Commitments to originate or purchase approved consumer mortgages and commitments to purchase mortgage-backed securities totaled approximately $1.7 and $1.3 billion at December 31, 1993 and 1992, respectively. The company also had commitments to sell loans and mortgage-backed securities of approximately $1.0 and $.5 billion at December 31, 1993 and 1992, respectively. Commercial loan commitments, primarily related to the Liquidating Commercial Lines segment, including working capital lines and letters of credit, totaled $153 and $169 million at December 31, 1993 and 1992, respectively. These commitments are collateralized to varying extents by inventory, receivables, property and equipment and other assets of the borrowers. These commitments were entered into prior to the company's decision to exit these product lines. The company has issued guarantees of $146 million at both December 31, 1993 and 1992 for the payment of principal and interest on municipal industrial development bonds. The guarantees expire from 1994 through 1997. The company has security interests in underlying properties for these guarantees, with an average collateral value of 112 and 111 percent of the guarantees at December 31, 1993 and 1992, respectively. OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Certain receivables securitized and serviced with limited recourse include floating interest rate provisions whereby the underlying receivables pay a fixed (floating) rate and the pass-through rate to the investor is floating (fixed). Further, in other transactions the underlying receivables reprice based on one index while the pass-through rate reprices on another index. The company manages its exposure to interest rate risk on these financial instruments primarily through the use of interest rate swaps. See Note 3, "Finance and Banking Receivables," for additional information on securitizations and sales of receivables. CONCENTRATIONS OF CREDIT RISK A concentration of credit risk is defined as a significant credit exposure with an individual or group engaged in similar activities or affected similarly by economic conditions. Because the company primarily lends to consumers, it does not have receivables from any industry group that equal or exceed 10 percent of total managed receivables at December 31, 1993 and 1992. The company lends nationwide; the following geographic areas comprised more than 10 percent of total managed domestic receivables at December 31, 1993: California--22 percent, Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)--25 percent, Middle Atlantic (DE, DC, MD, NJ, PA, VA, WV)--16 percent, Northeast (CT, ME, MA, NH, NY, RI, VT)--13 percent and Southeast (AL, FL, GA, KY, MS, NC, SC, TN)--13 percent. 9. CONVERTIBLE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION At December 31, 1993 and 1992 the company had outstanding 385,439 and 720,415 shares, respectively, of the $6.25 cumulative convertible preferred stock subject to mandatory redemption provisions (the "$6.25 stock"). Each share of the $6.25 stock is convertible, at the option of its holder, into 4.654 shares of common stock, is entitled to one vote, as are common shares, and has a liquidation value of $50 per share. Holders of such stock are entitled to payment before any capital distribution is made to common shareholders. The company is required to call for redemption, on an annual basis through 2010, a minimum of 4 percent to a maximum of 8 percent of the 48 3.5 million originally issued shares and is required to redeem all of the remaining unconverted and unredeemed shares in 2011. The company called for redemption 8 percent of the originally issued shares in both 1993 and 1992. The company redeemed 2,323 and 4,711 shares for $50 per share in 1993 and 1992, respectively. The remaining shares called, but not redeemed for cash, were converted into common stock. If certain conditions are met, the company may redeem the entire $6.25 stock issue at $50 per share plus accrued and unpaid dividends. At December 31, 1993 1.8 million shares of common stock were reserved for conversion of the $6.25 stock. 10. PREFERRED STOCK
In millions. At December 31 1993 1992 - -------------- ----- ------ FIXED RATE AND ENHANCED RATE PREFERRED STOCK 9.50% Preferred stock Series 1989-A, 3,000,000 depositary shares (1) $ 75.0 $ 75.0 9.50% Preferred stock Series 1991-A, 5,500,000 depositary shares (2) 55.0 55.0 8.25% Preferred stock Series 1992-A, 2,000,000 depositary shares (3) 50.0 50.0 7.35% Preferred stock Series 1993-A, 4,000,000 depositary shares (3) 100.0 -- 11.25% Enhanced rate preferred stock, 4,500,000 depositary shares (2) -- 45.0 FLEXIBLE RATE AUCTION PREFERRED STOCK Series A, 350,000 shares -- 35.0 Series B, 400,000 shares 40.0 40.0 ------ ------ Total preferred stock $320.0 $300.0 ====== ======
(1) Depositary share represents 1/4 share of preferred stock. (2) Depositary share represents 1/10 share of preferred stock. (3) Depositary share represents 1/40 share of preferred stock. Dividends on the 9.50 percent preferred stock, Series 1989-A are cumulative and payable quarterly. The company may, at its option, redeem in whole or in part the 9.50 percent preferred stock, Series 1989-A at $26.19 per depositary share beginning on November 9, 1994 and at amounts declining to $25 per depositary share thereafter, plus accrued and unpaid dividends. Dividends on the 9.50 percent preferred stock, Series 1991-A, are cumulative and payable quarterly. The company may, at its option, redeem in whole or in part the 9.50 percent preferred stock, Series 1991-A on any date after August 13, 1996 for $10 per depositary share plus accrued and unpaid dividends. Dividends on the 8.25 percent preferred stock, Series 1992-A are cumulative and payable quarterly. The company may, at its option, redeem in whole or in part the 8.25 percent preferred stock, Series 1992-A on any date after October 15, 2002 for $25 per depositary share plus accrued and unpaid dividends. Dividends on the 7.35 percent preferred stock, Series 1993-A are cumulative and payable quarterly. The company may, at its option, redeem in whole or in part the 7.35 percent preferred stock, Series 1993-A on any date after October 15, 1998 for $25 per depositary share plus accrued and unpaid dividends. On October 1, 1993 the company redeemed 450,000 shares (equivalent to 4,500,000 depositary shares) of the 11.25 percent Enhanced Rate Cumulative Preferred Stock for $102.50 per share plus accrued and unpaid dividends. On July 13, 1993 the company redeemed 350,000 shares of the Flexible Rate Auction Preferred Stock, Series A for $100 per share plus accrued and unpaid dividends. Dividends on the flexible rate auction preferred stock ("Flex APS") are cumulative and payable when and as declared by the Board of Directors of the company. The initial dividend rate on the Flex APS Series B is 9.50 percent. The initial rate on the Flex APS Series B extends through July 15, 1995 with subsequent dividend rates determined in accordance with a formula based on orders placed in a dutch auction generally held every 49 days. The company may, at its option, redeem in whole or in part the Flex APS Series B for $100 per share plus accrued and unpaid dividends beginning on July 15, 1995. Each preferred stock issue ranks equally with the $6.25 stock and has a liquidation value of $100 per share except for the 8.25 percent preferred stock, Series 1992-A and the 7.35 percent preferred stock, Series 1993-A which have a liquidation value of $1,000 per share. Holders of all issues of preferred stock are entitled to payment before any capital distribution is made to common shareholders. The company is authorized to issue cumulative nonconvertible preferred stock in one or more series in an amount not to exceed $500 million. 49 11. PREFERRED STOCK PURCHASE RIGHTS The company has issued one preferred stock purchase right for each share of common stock. Under certain conditions, each right may be exercised to purchase one one-hundredth of a share of a new series of participating preferred stock at an exercise price of $100, subject to adjustment. The rights may be exercised only after a public announcement that a party acquired or obtained the right to acquire 20 percent or more of the company's common stock or after commencement or public announcement of an offer for 30 percent or more of the company's common stock. The rights, which cannot vote, expire on August 31, 1994 and may be redeemed by the company at a price of $.50 per right at any time prior to expiration or acquisition of 20 percent of the company's common stock. The participating preferred stock purchasable upon exercise of the rights is nonredeemable and subordinate to the company's currently outstanding preferred stock. In the event that the company is acquired in a merger or other business combination transaction, provision shall be made so that each holder of a right shall have the right to receive, upon exercise thereof at the then current exercise price, that number of shares of common stock of the surviving company which at the time of such transaction would have a market value of two times the exercise price of the right. 12. COMMON STOCK On September 14, 1993 the board of directors of the company declared a two-for-one stock split in the form of a 100 percent stock dividend effective October 15, 1993. The stock split resulted in an increase in common stock and a reduction in additional paid-in capital of $56.6 million. All share and per share data, except as otherwise indicated, have been restated to give retroactive effect to the stock split. On March 8, 1993 the company sold 4,025,000 shares of common stock at $68.88 per share, on a pre-split basis. Net proceeds of approximately $269 million were used for general corporate purposes, including investments in the company's subsidiaries and reduction of short-term debt. Assuming the additional shares of common stock had been issued on January 1, 1993 and the proceeds resulted in after-tax interest savings from reduction of short-term debt since that date, earnings per share for 1993 would have been $2.82 per share on a fully diluted basis. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The company has estimated the fair value of its financial instruments in accordance with Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("FAS No. 107"). The estimates were made as of December 31, 1993 and 1992 based on relevant market information. Financial instruments include cash, receivables, investments, liquidating commercial assets, debt, certain insurance reserves and off-balance sheet financial instruments. Accordingly, a number of other assets recorded in the balance sheet (such as core deposit intangibles and acquired credit card relationships) and other intangible assets not recorded in the balance sheet (such as the value of consumer lending relationships for originated receivables and the franchise values of the company's business units) are not required to be valued for purposes of this disclosure. The company believes there is substantial value associated with these assets based on current market conditions and historical experience. The company has estimated the value of its core deposits as discussed more fully below. Approximately 25 percent in 1993 and 30 percent in 1992 of the fair value of financial instruments disclosed were determined using quoted market prices. Because no actively traded market exists, however, for a significant portion of the company's financial instruments, fair values for items lacking a quoted market price were estimated by discounting estimated future cash flows at estimated current market discount rates. Assumptions used to estimate future cash flows are consistent with management's assessments regarding ultimate collectability of assets and related interest and with estimates of product lives and repricing characteristics used in the company's asset/liability management process. All assumptions were based on historical experience adjusted for future expectations. Assumptions used to determine fair values for financial instruments for which no active market exists are inherently judgmental and changes in these assumptions could significantly affect fair value calculations. 50 The following is a summary of the carrying value and estimated fair value of the company's financial instruments:
1993 1992 ----------------------------------- ----------------------------------- ESTIMATED ESTIMATED In millions. CARRYING FAIR CARRYING FAIR At December 31 VALUE VALUE DIFFERENCE VALUE VALUE DIFFERENCE - -------------- -------- --------- ---------- -------- --------- ---------- Cash $ 317 $ 317 -- $ 256 $ 256 -- Investment securities 8,795 9,046 $ 251 7,390 7,633 $ 243 Finance and banking receivables 19,563 20,202 639 18,960 19,302 342 Liquidating commercial assets 1,556 1,441 (115) 1,851 1,677 (174) -------- -------- ------ -------- -------- ----- Subtotal 30,231 31,006 775 28,457 28,868 411 -------- -------- ------ -------- -------- ----- Deposits (7,516) (7,638) (122) (8,030) (8,161) (131) Commercial paper, bank and other borrowings (5,642) (5,642) -- (5,253) (5,253) -- Senior and senior subordinated debt (9,114) (9,574) (460) (9,014) (9,333) (319) Insurance reserves (6,064) (6,434) (370) (5,326) (5,526) (200) -------- -------- ------ -------- -------- ----- Subtotal (28,336) (29,288) (952) (27,623) (28,273) (650) -------- -------- ------ -------- -------- ----- Interest rate and foreign exchange contracts 78 349 271 43 148 105 Commitments to extend credit and guarantees -- 36 36 -- 20 20 -------- -------- ------ -------- -------- ----- Subtotal 78 385 307 43 168 125 -------- -------- ------ -------- -------- ----- Total $ 1,973 $ 2,103 $ 130 $ 877 $ 763 $(114) ======== ======== ===== ======== ======== =====
The estimated fair value in excess of carrying value of the company's financial instruments was $130 million at December 31, 1993, an increase of $244 million from year-end 1992. The relationship between the decline in the overall interest rate environment from December 31, 1992 to December 31, 1993 and the repricing characteristics of the company's assets and liabilities was the most significant factor in causing increases in the excess of fair value over carrying value (the "Difference"). The adoption of FAS No. 115 on December 31, 1993 reduced the Difference associated with investment securities as available-for-sale investment securities are now carried at estimated fair value. Excluding the impact of FAS No. 115, the Difference for investment securities at December 31, 1993 would have been approximately $403 million. The excess of carrying value over estimated fair value of liquidating commercial assets declined in 1993, as discussed more fully below. Recently adopted generally accepted accounting principles (FAS No. 115) require recognition of the difference between fair market and carrying values of certain debt and equity securities. As previously disclosed, the differential increased shareholders' equity by $40.5 million after partially offsetting adjustments for the impact of income taxes and deferred insurance policy acquisition costs. The company believes it is not meaningful to evaluate the difference between fair market and carrying values for assets without evaluating similar differences for all liabilities and off-balance sheet financial instruments utilized in the company's asset/liability management process. As market interest rates change, application of this new accounting principle will result in volatility of the reported capital base that is inconsistent with economic value. The analysis presented on the previous page presents a more complete view of the differences between fair market and carrying values of both assets and liabilities. Although the disclosed pretax excess of fair value over carrying value of $130 million covers a substantial portion of the elements of the company's financial position, it excludes the substantial value associated with core deposit and other intangible values described earlier. Core deposits provide stable, low cost funding compared to alternative sources of funds. The estimated value associated with the company's core deposits at December 31, 1993 was $156 million. In addition, the disclosures presented previously exclude fair market valuation of certain insurance reserves and leases as prescribed by generally accepted accounting principles. Both the analysis of the fair value information presented previously, as well as the adjustments required by FAS No. 115, therefore have inherent limitations. The following methods and assumptions were used to estimate the fair value of the company's financial instruments: Cash: The carrying value approximates fair value for this instrument due to its liquid nature. Investment securities: Quoted market prices were used to determine fair 51 value for investment securities. Finance and banking receivables: Quoted market prices were used to determine fair value for domestic first mortgages. The fair value of adjustable rate consumer receivables was determined to approximate existing carrying value because interest rates on these receivables adjust with changing market interest rates. The fair value of fixed rate consumer receivables was estimated by discounting future expected cash flows at interest rates approximating those offered by the company on such products at the respective valuation dates. This approach to estimating fair value for fixed rate consumer receivables results in a disclosed fair value that is less than amounts the company believes could be currently realizable on a sale of these receivables. These receivables are relatively insensitive to changes in overall market interest rates and therefore have additional value compared to alternative uses of funds in a low interest rate environment. The fair value of consumer receivables included an estimate, on a present value basis, of future excess servicing cash flows associated with securitizations and sales of certain home equity, bankcard and merchant participation receivables. Liquidating Commercial Assets: The fair value of liquidating commercial assets was determined by discounting estimated future cash flows at an estimated market interest rate. The assumptions used in the estimate were consistent with the company's intention to manage this portfolio of assets separately from the Core Business and to dispose of the assets in the normal course of business. The estimated fair value for liquidating commercial assets was below carrying value due to increases in current market discount rates, adjusted for changes in overall market rates, from rates in effect when assets were originated. This change in discount rates impacts all assets regardless of whether any uncertainty exists over collectability of future principal and interest payments. The company believes the relative increase in current market discount rates is due to economic conditions and market perceptions towards the types of commercial assets which the company decided to discontinue in 1991. While these market perceptions improved slightly during 1993, they still remain unfavorable, which has resulted in illiquid and sluggish markets for these assets. Because of these current market conditions, the company currently intends to collect or otherwise dispose of its liquidating commercial assets over several years. The decrease in the difference between estimated fair value and carrying value in 1993 compared to 1992 reflects the belief that current market conditions, while depressed, have improved and will continue to improve over the next several years. Accordingly, the company does not believe that the differential between estimated fair and carrying values for liquidating commercial assets represents a permanent impairment of value. Deposits: The fair value of the company's savings and demand accounts equaled the carrying amount as stipulated in FAS No. 107. The fair value of fixed rate time certificates was estimated by discounting future expected cash flows at interest rates offered by the company on such products at the respective valuation dates. Commercial paper, bank and other borrowings: The fair value of these instruments was determined to approximate existing carrying value because interest rates on these instruments adjust with changes in market interest rates due to their short-term maturity or repricing characteristics. Senior and senior subordinated debt: Quoted market prices where available were used to determine fair value. For those instruments for which quoted market prices were not available, the estimated fair value was computed by discounting future expected cash flows at interest rates offered for similar types of debt instruments. Insurance reserves: The fair value of insurance reserves for periodic payment annuities and guaranteed investment contracts was estimated by discounting future expected cash flows at interest rates offered by the company on such products at December 31, 1993 and 1992. The fair value of other insurance reserves is not required to be determined in accordance with FAS No. 107. The company believes the fair value of such reserves approximates existing carrying value because interest rates on these instruments adjust with changes in market interest rates due to their short-term maturity or repricing characteristics. Interest rate and foreign exchange contracts: Quoted market prices were used to determine fair value of these instruments. See Note 8, "Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk" for a discussion of the nature of these items. Commitments to extend credit and guarantees: These commitments were valued by considering the company's relationship with the counter-party, the creditworthiness of the counterparty and the difference between committed and current interest rates. 52 14. LEASES AND OTHER SIMILAR ARRANGEMENTS The company leases certain offices, buildings and equipment for periods of up to 29 years with various renewal options. The majority of such leases are noncancelable operating leases. Net rental expense under operating leases was $71.1, $72.1 and $69.0 million for 1993, 1992 and 1991, respectively. In the fourth quarter of 1991, the company purchased credit card receivables of approximately $1 billion from CoreStates Financial Corporation. An unaffiliated third party acquired the rights to the account relationships associated with the receivables. The company is entitled to utilize the account relationships under a licensing agreement with the third party. This licensing arrangement is noncancelable and has an initial term expiring in 1998. Net expense under this licensing arrangement was $32.9 million in both 1993 and 1992, and $8.3 million in 1991. Future net minimum lease and other commitments under noncancelable operating lease and licensing arrangements were:
In millions. At December 31, 1993 - -------------------- 1994 $ 90.8 1995 83.8 1996 78.0 1997 73.9 1998 49.6 Thereafter 122.8 ------ Net minimum lease and other commitments $498.9 ======
15. INCENTIVE COMPENSATION AND STOCK OPTION PLANS The company's executive compensation plans provide for issuance of nonqualified stock options and incentive stock options. Stock options permit the holder to purchase, under certain limitations, the company's common stock at a price not less than 100 percent of the market value of the stock on the date the option is granted. At December 31, 1993 shares exercisable under the plans totaled 1,229,002, and shares available for future grants totaled 3,115,992. Common stock data for the plans is summarized as follows:
Shares Number* Price Per Share* - ------ --------- ---------------- Outstanding at December 31, 1990 1,944,086 $ 7.02--$27.69 Granted 840,000 19.94-- 19.94 Exercised (242,382) 7.02-- 25.54 Expired or canceled (94,564) 17.69-- 25.54 --------- -------------- Outstanding at December 31, 1991 2,447,140 8.33-- 27.69 Granted 782,600 25.72-- 25.72 Exercised (298,956) 8.33-- 25.54 Expired or canceled (87,438) 17.69-- 25.72 --------- -------------- Outstanding at December 31, 1992 2,843,346 8.33-- 27.69 Granted 892,305 31.88-- 36.81 Exercised (656,174) 8.33-- 36.81 Expired or canceled (208,875) 19.94-- 31.88 --------- -------------- Outstanding at December 31, 1993 2,870,602 $10.99--$34.38 ========= ==============
*Amounts have been restated to reflect the two-for-one stock split in the form of a 100 percent stock dividend, effective October 15, 1993. 16. EMPLOYEE BENEFIT PLANS The company has several defined benefit pension plans covering substantially all of its employees. Plan benefits are based primarily on years of service. Plan assets primarily consist of common and preferred stocks including those of foreign issuers and corporate and government obligations. At December 31, 1993 plan assets included an investment in the company's common stock and $6.25 convertible preferred stock subject to redemption of $28.3 and $14.2 million, respectively. 53 Pension income for defined benefit plans, primarily due to the over-funded status of the domestic plan, included the following components:
In millions. 1993 1992 1991 - ------------ ------ ------ ------ Service cost--benefits earned during the period $(15.9) $(15.5) $(13.1) Interest cost on projected benefit obligation (29.6) (29.8) (28.7) Actual return on assets 93.4 41.1 115.0 Net amortization and deferral (24.5) 29.9 (44.1) ------ ------ ------ Pension income $ 23.4 $ 25.7 $ 29.1 ====== ====== ======
The funded status of defined benefit pension plans was as follows:
In millions. At December 31 1993 1992 - -------------- ------ ------ Actuarial present value of: Vested benefits obligation $344.5 $305.7 Nonvested benefits obligation 45.4 32.6 ------ ------ Accumulated benefit obligation 389.9 338.3 Effects of anticipated future compensation levels 28.4 27.3 ------ ------ Projected benefit obligation 418.3 365.6 Plan assets at fair value 641.0 586.6 ------ ------ Plan assets in excess of projected benefit obligation $222.7 $221.0 ====== ======
The projected benefit obligation of the foreign benefit plans totaled $46.3 and $40.7 million at December 31, 1993 and 1992, respectively. Plan assets in excess of projected benefit obligation for these plans totaled $10.1 and $12.6 million at December 31, 1993 and 1992, respectively. The 1993 and 1992 projected benefit obligations for the domestic defined benefit plan were determined using an assumed weighted average discount rate of 7.25 and 8.00 percent, respectively, an assumed compensation increase of 3.75 and 4.25 percent, respectively, and an assumed weighted average long-term rate of return on plan assets of 9.50 and 9.75 percent, respectively. At December 31 the excess of plan assets over the projected benefit obligation included the following components:
In millions. 1993 1992 - ------------- ------- ------ Unamortized prior service cost $ (5.1) $ (5.0) Net unrecognized loss from past experience different from assumed and effects of changes in assumptions (60.0) (49.3) Unamortized assets 60.1 72.6 Prepaid pension cost 227.7 202.7 ------ ------ Plan assets in excess of projected benefit obligation $222.7 $221.0 ====== ======
The straight-line method of amortization is used for prior service costs and unrecognized gains and losses. The company also sponsors a defined contribution plan where each participant's contribution is matched by the company up to a maximum of 6 percent of the participant's compensation. For 1993, 1992 and 1991 these costs totaled $15.8, $14.7 and $12.1 million, respectively. The company has several plans which provide medical, dental and life insurance benefits to retirees and eligible dependents. The plans are funded on a pay-as-you-go basis and cover substantially all employees who meet certain age and vested service requirements. The company has instituted dollar limits on its payments under the plans to control the cost of future medical benefits. Effective January 1, 1993 the company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS No. 106"). FAS No. 106 requires the recognition of the expected postretirement costs on an accrual basis, similar to pension 54 accounting. The expected cost of postretirement benefits is required to be recognized over the employees' years of service with the company instead of the period in which the benefits are paid. The company is recognizing the transition obligation, which represents the unfunded and unrecognized accumulated post- retirement benefit obligation at that date over 20 years. The net postretirement benefit cost in 1993 included the following:
In millions. - ------------ Service cost-benefits earned during the period $ (2.5) Interest cost on accumulated postretirement benefit obligation (11.1) Net amortization and deferral (6.5) ------- Net periodic postretirement benefit cost $ (20.1) =======
Through 1992, it had been the company's policy to charge the cost of retiree health care and life insurance benefits to expense when benefits were paid. The cost of these plans totaled $2.9 and $2.5 million in 1992 and 1991, respectively. The cost of plans which cover retirees and eligible dependents outside of the United States is not significant to the company. The actuarial and recorded liabilities for postretirement benefit plans, none of which have been funded, were:
In millions. At December 31, 1993 - -------------------- Actuarial present value of postretirement benefit obligation for: Retirees $119.8 Fully eligible active participants 9.3 Other active participants 23.4 ------ Accumulated postretirement benefit obligation 152.5 Net unrecognized loss from past experience different from assumed and effects of changes in assumptions (14.4) Unamortized liability (123.6) ------ Accrued postretirement benefit obligation $ 14.5 ======
The December 31, 1993 accumulated postretirement benefit obligation was determined using an assumed weighted average discount rate of 7.50 percent and an assumed annual compensation increase of 3.75 percent. A 15 percent annual rate of increase in the gross cost of covered health care benefits is assumed for 1993 and 1994. This rate of increase is assumed to decline by 1 percentage point in each year after 1994. The health care cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate by 1 percentage point would have increased the 1993 net periodic postretirement benefit cost by $1.0 million and the accumulated postretirement benefit obligation at December 31, 1993 by $12.3 million. 17. INCOME TAXES Effective January 1, 1993 the company adopted FAS No. 109. As a result of implementing FAS No. 109, retained earnings for all periods between 1986 and 1992 have been reduced by approximately $63 million from amounts previously reported. The statements of income for those periods subsequent to December 31, 1986 have not been restated as the impact of FAS No. 109 on net income was immaterial to any such year and in total. 55 Total income taxes were allocated as follows:
In millions. 1993 1992 1991 - ------------- ------ ------ ----- Provision for income taxes related to operations $152.0 $87.1 $50.0 Income taxes related to adjustments included in common shareholders' equity: Marketable equity securities and investments available-for-sale 22.1 .5 3.9 Foreign currency translation adjustments 1.1 (12.2) (6.2) Stock options (2.4) (1.1) (.7) ------ ----- ----- Total $172.8 $74.3 $47.0 ====== ===== =====
Provisions for income taxes related to operations were:
In millions. 1993 1992 1991 - ------------ ------ ----- ------ CURRENT United States $170.5 $ 82.9 $126.6 Foreign (12.2) (36.1) 7.5 ------ ------ ------ Total current 158.3 46.8 134.1 ------ ------ ------ DEFERRED United States 6.7 26.5 (61.3) Foreign (13.0) 13.8 (22.8) ------ ------ ------ Total deferred (6.3) 40.3 (84.1) ------ ------ ------ Total income taxes $152.0 $ 87.1 $ 50.0 ====== ====== ======
The significant components of deferred income tax provisions attributable to income from operations were:
In millions. 1993 1992 1991 - ------------ ----- ----- ------ Deferred income tax provision (exclusive of the effects of other components listed below) $ (2.0) $17.8 $(83.0) Adjustment of deferred tax assets and liabilities for enacted changes in tax rates 4.9 -- -- Adjustment of valuation allowance 4.8 2.1 6.2 Change in operating loss carryforwards (14.0) 20.4 (7.3) ------ ----- ------ Deferred income tax provision $ (6.3) $40.3 $(84.1) ====== ===== ======
Loss before income taxes from foreign operations was $19.7, $72.4 and $51.6 million in 1993, 1992 and 1991, respectively. 56 Effective tax rates are analyzed as follows:
1993 1992 1991 ---- ---- ---- Statutory federal income tax rate 35.0% 34.0% 34.0% Increase (decrease) in rate resulting from: State and local taxes, net of federal benefit 2.2 1.4 (.3) Nondeductible dividends on term preferred stocks 1.0 2.6 4.9 Noncurrent tax requirement .5 (2.0) (6.4) Amortization of intangible assets .1 3.2 3.8 Impact of purchase accounting -- (4.5) (5.4) Leveraged lease tax benefits (3.1) (3.6) (1.8) Foreign loss carryforwards (2.4) 3.0 3.2 Dividends received deduction applicable to term preferred stocks (1.4) (2.6) (4.0) Other 1.8 (.2) (3.0) ---- ---- ---- Effective tax rate 33.7% 31.3% 25.0% ==== ==== ====
In accordance with the company's accounting policy, provisions for U.S. income taxes had not been made at December 31, 1993 on $126.1 million of undistributed earnings of foreign subsidiaries. Determination of the amount of unrecognized deferred tax liability related to investments in foreign subsidiaries is not practicable. The company's U.S. savings and loan subsidiary has credit loss reserves for tax purposes that arose in years beginning before December 31, 1987 in the amount of $54.8 million, and its U.S. life insurance subsidiary has a policyholders' surplus account balance of $85.9 million. Because these amounts would become taxable only in the event of certain circumstances which the company does not expect to occur within the foreseeable future, no deferred tax liabilities have been established for these items. The amount of deferred tax liability not recognized totaled $50.6 million at December 31, 1993. At December 31, 1993 the company had net operating loss carryforwards for tax purposes of $173.9 million, of which $5 million expire in 1999, $35.2 million expire in 2000, $28.2 million expire in 2007, $32.6 million expire in 2008 and $72.9 million have no expiration date. The realization of these carryforwards will reduce future income tax payments. The company also had foreign tax credit carryforwards of $11.4 million, of which $2.1 million expire in 1994, $1.7 million expire in 1996, $1.0 million expire in 1997 and $6.6 million expire in 1998 and alternative minimum tax credit carryovers of $6.5 million which have no expiration date. Temporary differences which gave rise to a significant portion of deferred tax assets and liabilities were as follows: In millions.
At December 31 1993 1992 - -------------- ------ ------ DEFERRED TAX LIABILITIES Leveraged lease transactions, net $400.9 $381.6 Insurance policy acquisition costs 132.1 132.6 Pension plan assets 84.9 72.2 Receivables sold 67.2 31.4 Deferred loan origination costs 47.6 36.1 Market value adjustment on investments available-for-sale 23.3 -- Direct financing leases, net 14.4 19.5 Other 45.5 50.4 ------ ------ Total deferred tax liabilities 815.9 723.8 ------ ------ DEFERRED TAX ASSETS Credit loss reserves 272.7 213.1 Insurance reserves 144.5 125.2 Unused tax benefit carryforwards 73.4 108.8 Deferred compensation 17.4 13.6 Other 92.8 52.7 ------ ------ Total deferred tax assets 600.8 513.4 Valuation allowance (65.1) (60.3) ------ ------ Total deferred tax assets, net of valuation allowance 535.7 453.1 ------ ------ Net deferred tax liability at end of year $280.2 $270.7 ====== ======
57 18. EARNINGS PER COMMON SHARE
1993 1992 1991 FULLY Fully Fully All dollar amounts except per share ------------------- ------------------- ------------------- data are stated in millions. PRIMARY DILUTED Primary Diluted Primary Diluted - ----------------------------------- ------- ------- ------- ------- ------- ------- EARNINGS Net income $298.7 $298.7 $190.9 $190.9 $149.8 $149.8 Preferred dividends (31.1) (28.2) (30.4) (25.3) (28.7) (21.2) ------ ------ ------ ------ ------ ------ Net income available to common shareholders $267.6 $270.5 $160.5 $165.6 $121.1 $128.6 ====== ====== ====== ====== ====== ====== AVERAGE SHARES* Common 91.2 91.2 81.2 81.2 76.6 76.6 Common equivalents .8 3.6 .4 4.8 .4 6.4 ------ ------ ------ ------ ------ ------ Total 92.0 94.8 81.6 86.0 77.0 83.0 ====== ====== ====== ====== ====== ====== Earnings per common share* $ 2.91 $ 2.85 $ 1.97 $ 1.93 $ 1.57 $ 1.55 ====== ====== ====== ====== ====== ======
*Amounts have been restated to reflect the two-for-one stock split in the form of a 100 percent stock dividend, effective October 15, 1993. Common share equivalents assume exercise of stock options, if dilutive. Fully diluted earnings per share computations also assume conversion of dilutive convertible preferred stock into common equivalents. Preferred stock is considered dilutive if its dividend rate per common share assuming conversion is less than primary earnings per share. 19. COMMITMENTS AND CONTINGENT LIABILITIES In the ordinary course of business there are various legal proceedings pending against the company. Management considers that the aggregate liabilities, if any, resulting from such actions would not have a material adverse effect on the consolidated financial position of the company. See Note 8 for a discussion regarding commitments and contingent liabilities related to off-balance sheet financial instruments. See Note 14 for discussion of lease commitments. MANAGEMENT'S REPORT To the Shareholders of Household International, Inc.: Household International is responsible for the preparation, integrity and fair presentation of its published financial statements. The financial statements, presented on pages 52 to 76, have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on judgments and estimates made by management. The company also prepared other information included in the annual report and is responsible for its accuracy and consistency with the financial statements. The financial statements have been audited by the independent accounting firm, Arthur Andersen & Co., who have been given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. The company believes that representations made to the independent auditors during their audit were valid and appropriate. Arthur Andersen & Co.'s audit report is presented below. The company maintains a system of internal controls over the preparation of its published financial statements, which is intended to provide reasonable assurance to the company's board of directors and officers regarding preparation of financial statements presented fairly in conformity with generally accepted accounting principles. The company has long recognized its responsibility for conducting the company's affairs in a manner which is responsive to the interest of employees, shareholders, investors and society in general. This responsibility is included in the statement of policy on ethical standards which provides that the company will fully comply with laws, rules and regulations of every community in which it operates and adhere to the highest ethical standards. Officers, employees and agents of the company are expected and directed to manage the business of the company with complete honesty, candor and integrity. Internal auditors monitor the operation of the internal control system, and actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is composed entirely of directors who are not officers or employees of the company, provides oversight to the financial reporting process. 58 Even effective internal controls, no matter how well designed, have inherent limitations, such as the possibility of human error or of circumvention or overriding of controls, and the consideration of cost in relation to benefit of a control. Further, the effectiveness of an internal control can change with circumstances. Household International periodically assesses its internal controls for adequacy. Based upon these assessments, Household International believes that, in all material respects, its internal controls relating to preparation of financial statements as of December 31, 1993 functioned effectively during the year ended December 31, 1993. /s/ Donald C. Clark Donald C. Clark Chairman of the Board and Chief Executive Officer /s/ David A. Schoenholz David A. Schoenholz Vice President--Chief Accounting Officer February 1, 1994 INDEPENDENT AUDITORS' REPORT To the Shareholders of Household International, Inc.: We have audited the accompanying balance sheets of Household International, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1993 and 1992, and the related statements of income, changes in preferred stock and common shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Household International, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. /s/ Arthur Andersen & Co. Chicago, Illinois February 1, 1994 59 NET INTEREST MARGIN--1993 COMPARED TO 1992 (OWNED BASIS) Household International, Inc. and Subsidiaries All dollar amounts are stated in millions.
Finance and Increase/(Decrease) Average Interest Income/ Due to: Outstanding(2) Average Rate Interest Expense ------------------------------------- ------------------- ------------ ------------------- Volume Rate 1993 1992 1993 1992 1993 1992 Variance Variance(3) Variance(3) -------- -------- ---- ---- -------- -------- -------- ----------- ----------- Finance and Banking Receivables: First mortgage $ 4,037.7 $ 4,750.7 8.5% 9.6% $ 343.5 $ 457.5 $(114.0) $ (64.1) $ (49.9) Home equity 3,177.0 3,584.9 10.6 11.6 336.6 415.1 (78.5) (44.9) (33.6) Other secured 824.6 876.0 10.0 11.1 82.3 97.4 (15.1) (5.5) (9.6) Bankcard 4,200.1 1,835.7 13.1 15.2 549.0 279.2 269.8 314.1 (44.3) Merchant participation 2,244.3 2,261.1 16.6 17.4 372.8 394.2 (21.4) (2.9) (18.5) Other unsecured 4,022.4 3,897.0 17.8 18.7 716.5 729.8 (13.3) 23.0 (36.3) Equipment financing and other 819.6 914.3 5.8 7.0 47.6 63.7 (16.1) (6.2) (9.9) --------- --------- ---- ---- ------- ------- ------- ------- ------- Total finance and banking receivables 19,325.7 18,119.7 12.7 13.4 2,448.3 2,436.9 11.4 213.5 (202.1) Liquidating commercial receivables 1,417.9 1,776.0 8.0 8.3 113.1 147.5 (34.4) (28.7) (5.7) --------- --------- ---- ---- ------- ------- ------- ------- ------- Total receivables 20,743.6 19,895.7 12.3 13.0 2,561.4 2,584.4 (23.0) 184.8 (207.8) Noninsurance investments 2,129.2 2,124.8 6.1 7.2 129.3 152.8 (23.5) .3 (23.8) --------- --------- ---- ---- ------- ------- ------- ------- ------- Total interest--earning assets (excluding insurance investments) 22,872.8 22,020.5 11.8% 12.4% $2,690.7 $2,737.2 $ (46.5) $ 185.1 $(231.6) Insurance investments 6,084.0 5,546.3 Other assets 3,783.1 3,190.9 --------- --------- ---- ---- ------- ------- ------- ------- ------- TOTAL ASSETS $32,739.9 $30,757.7 ========= ========= ==== ==== ======== ======== ======= ======= ======= Debt: Commercial paper $ 3,826.9 $ 3,721.7 3.7% 4.1% $ 142.5 $ 152.3 $ (9.8) $ 4.2 $ (14.0) Bank and other borrowings 1,978.8 1,377.7 5.5 8.1 108.6 110.9 (2.3) 39.5 (41.8) Deposits 7,735.0 7,986.9 4.2 5.8 321.2 462.9 (141.7) (14.2) (127.5) Senior and senior subordinated debt (with original maturities over one year) 9,493.5 9,431.5 6.1 7.4 577.2 694.1 (116.9) (8.8) (108.1) --------- --------- ---- ---- ------- ------- ------- ------- ------- Total debt 23,034.2 22,517.8 5.0% 6.3% $1,149.5 $1,420.2 $(270.7) $ 20.7 $(291.4) Insurance policy and claim reserves 5,684.8 5,140.8 Other liabilities 1,810.0 1,225.5 --------- --------- ---- ---- ------- ------- ------- ------- ------- Total liabilities 30,529.0 28,884.1 Preferred stock 330.7 304.7 Common shareholders' equity 1,880.2 1,568.9 --------- --------- ---- ---- ------- ------- ------- ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $32,739.9 $30,757.7 ========= ========= ==== ==== ======= ======= ======= ======= ======= NET INTEREST MARGIN--OWNED BASIS (1) $1,541.2 $1,317.0 $ 224.2 $ 164.4 $ 59.8 ========= ======== ==== ==== ======== ======== ======= ======= ======= INTEREST SPREAD--OWNED BASIS (4),(5) 6.7% 6.0% ========= ========= ==== ==== ======== ======== ======= ======= =======
(1) Finance and Banking Net Interest Margin on a Managed Basis--As receivables are securitized and sold rather than held in portfolio, net interest income is shifted to securitization income, and the company retains a substantial portion of the profit inherent in the receivable while increasing liquidity. Due to the growing level of securitized receivables, the comparability of net interest margin between periods may be impacted by the level and type of receivables securitized. The following table presents net interest margin on a managed basis. 60 NET INTEREST MARGIN--1993 COMPARED TO 1992 AND 1991 (MANAGED BASIS)
Finance and Interest Income/ Average Outstanding Average Rate Interest Expense ------------------------------- ------------------ ---------------------------- 1993 1992 1991 1993 1992 1991 1993 1992 1991 --------- --------- --------- ---- ---- ---- -------- -------- -------- Total receivables $27,584.2 $24,946.0 $23,969.2 12.5% 13.5% 14.9% $3,450.2 $3,357.5 $3,578.6 Noninsurance investments 2,106.1 2,089.0 2,517.2 6.1 7.3 7.1 129.2 152.6 179.9 --------- --------- --------- ---- ---- ---- -------- -------- -------- Total interest--earning assets (excluding insurance investments) $29,690.3 $27,035.0 $26,486.4 12.0% 13.0% 14.2% $3,579.4 $3,510.1 $3,758.5 --------- --------- --------- ---- ---- ---- -------- -------- -------- Total debt $29,392.0 $26,865.5 $25,713.5 5.0% 6.2% 8.0% $1,457.5 $1,654.9 $2,044.4 --------- --------- --------- ---- ---- ---- -------- -------- -------- Net interest margin--managed basis $2,121.9 $1,855.2 $1,714.1 ========= ========= ========= ==== ==== ==== ======== ======== ======== Interest spread--managed basis 7.1% 6.9% 6.5% ========= ========= ========= ==== ==== ==== ======== ======== ========
61 NET INTEREST MARGIN--1992 COMPARED TO 1991 (OWNED BASIS) Household International, Inc. and Subsidiaries All dollar amounts are stated in millions.
Finance and Increase/(Decrease) Average Interest Income/ Due to: Outstanding(2) Average Rate Interest Expense ------------------------------------ ------------------- ------------ ------------------- Volume Rate 1992 1991 1992 1991 1992 1991 Variance Variance(3) Variance(3) -------- -------- ---- ---- -------- -------- -------- ----------- ----------- Finance and Banking Receivables: First mortgage $ 4,750.7 $ 5,097.4 9.6% 10.9% $ 457.5 $ 554.6 $ (97.1) $ (36.1) $ (61.0) Home equity 3,584.9 3,483.8 11.6 14.1 415.1 492.9 (77.8) 13.9 (91.7) Other secured 876.0 1,058.6 11.1 11.9 97.4 125.5 (28.1) (20.6) (7.5) Bankcard 1,835.7 1,714.3 15.2 18.6 279.2 319.7 (40.5) 21.4 (61.9) Merchant participation 2,261.1 2,675.4 17.4 18.1 394.2 485.5 (91.3) (72.9) (18.4) Other unsecured 3,897.0 3,705.9 18.7 20.2 729.8 748.9 (19.1) 37.4 (56.5) Equipment financing and other 914.3 1,014.9 7.0 8.5 63.7 86.2 (22.5) (8.0) (14.5) --------- --------- ---- ---- -------- -------- ------- ------- ------- Total finance and banking receivables 18,119.7 18,750.3 13.4 15.0 2,436.9 2,813.3 (376.4) (64.9) (311.5) Liquidating commercial receivables 1,776.0 2,094.2 8.3 10.7 147.5 224.2 (76.7) (31.0) (45.7) --------- --------- ---- ---- -------- -------- ------- ------- ------- Total receivables 19,895.7 20,844.5 13.0 14.6 2,584.4 3,037.5 (453.1) (95.9) (357.2) Noninsurance investments 2,124.8 2,567.2 7.2 7.3 152.8 187.4 (34.6) (31.8) (2.8) --------- --------- ---- ---- -------- -------- ------- ------- ------- Total interest--earning assets (excluding insurance investments) 22,020.5 23,411.7 12.4% 13.8% $2,737.2 $3,224.9 $(487.7) $(127.7) $(360.0) Insurance investments 5,546.3 4,567.6 Other assets 3,190.9 2,849.8 --------- --------- ---- ---- -------- -------- ------- ------- ------- TOTAL ASSETS $30,757.7 $30,829.1 ========= ========= ==== ==== ======== ======== ======= ======= ======= Debt: Commercial paper $ 3,721.7 $ 3,778.3 4.1% 6.4% $ 152.3 $ 240.6 $ (88.3) $ (3.5) $ (84.8) Bank and other borrowings 1,377.7 1,759.9 8.1 8.6 110.9 150.6 (39.7) (31.2) (8.5) Deposits 7,986.9 7,734.8 5.8 7.7 462.9 595.1 (132.2) 18.8 (151.0) Senior and senior subordinated debt (with original maturities over one year) 9,431.5 10,193.1 7.4 8.8 694.1 900.6 (206.5) (63.8) (142.7) --------- --------- ---- ---- -------- -------- ------- ------- ------- Total debt 22,517.8 23,466.1 6.3% 8.0% $1,420.2 $1,886.9 $(466.7) $ (79.7) $(387.0) Insurance policy and claim reserves 5,140.8 4,333.3 Other liabilities 1,225.5 1,294.5 --------- --------- ---- ---- -------- -------- ------- ------- ------- Total liabilities 28,884.1 29,093.9 Preferred stock 304.7 252.8 Common shareholders' equity 1,568.9 1,482.4 --------- --------- ---- ---- -------- -------- ------- ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,757.7 $30,829.1 ========= ========= ==== ==== ======== ======== ======= ======= ======= NET INTEREST MARGIN--OWNED BASIS (1) $1,317.0 $1,338.0 $ (21.0) $ (48.0) $ 27.0 ========= ========= ==== ==== ======== ======== ======= ======= ======= INTEREST SPREAD--OWNED BASIS (4),(5) 6.0% 5.7% ========= ========= ==== ==== ======== ======== ======= ======= =======
(2) Nonaccrual loans are included in average outstanding balances. (3) Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total interest variance. (4) As a percent of average interest-earning assets. (5) The net interest margin analysis includes the following for foreign businesses:
1993 1992 1991 -------- -------- -------- Average interest-earning assets $3,650.4 $4,079.5 $4,441.8 Average interest-bearing liabilities 3,600.7 3,742.9 4,019.1 Net interest margin 255.1 293.0 338.7 Interest spread 7.0% 7.2% 7.6% --------- --------- ---------
62 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Household International, Inc. and Subsidiaries 1993--THREE MONTHS ENDED 1992--Three Months Ended All dollar amounts except per share data -------------------------------------- -------------------------------------- are stated in millions. Dec. Sept. June March Dec. Sept. June March - ---------------------------------------- ------ ------ ------ ------- ------ ------ ------ ------ Finance income $628.5 $650.4 $646.4 $636.1 $632.7 $651.5 $651.6 $648.6 Interest income from noninsurance investment securities 27.5 33.8 36.1 31.9 36.9 34.9 37.0 44.0 Interest expense 271.3 279.8 285.9 312.5 325.3 344.2 371.1 379.6 ------ ------ ------ ------ ------ ------ ------ ------ Net interest margin 384.7 404.4 396.6 355.5 344.3 342.2 317.5 313.0 Provision for credit losses on owned receivables 174.7 204.1 183.2 173.8 201.8 159.1 155.4 155.2 ------ ------ ------ ------ ------ ------ ------ ------ Net interest margin after provision for credit losses 210.0 200.3 213.4 181.7 142.5 183.1 162.1 157.8 ------ ------ ------ ------ ------ ------ ------ ------ Securitization and servicing fee income 158.7 109.8 94.4 97.1 125.9 82.2 81.3 86.6 Insurance premiums and contract revenues 72.3 78.6 66.3 71.1 68.9 70.9 69.7 71.7 Investment income 132.3 167.8 135.6 138.3 130.7 141.5 126.4 125.1 Fee income 72.8 80.3 70.7 68.8 64.3 37.5 33.4 29.3 Other income 50.4 35.3 30.6 32.6 14.9 27.4 32.3 23.4 ------ ------ ------ ------ ------ ------ ------ ------ Total other revenues 486.5 471.8 397.6 407.9 404.7 359.5 343.1 336.1 ------ ------ ------ ------ ------ ------ ------ ------ Net interest margin and other revenues 696.5 672.1 611.0 589.6 547.2 542.6 505.2 493.9 ------ ------ ------ ------ ------ ------ ------ ------ Salaries and fringe benefits 164.6 151.4 149.8 149.6 136.3 136.4 136.2 127.0 Operating expenses 256.4 264.9 226.2 216.5 199.0 196.6 180.9 184.6 Policyholders' benefits 133.7 139.5 133.3 132.6 129.1 130.7 127.5 126.6 ------ ------ ------ ------ ------ ------ ------ ------ Total costs and expenses 554.7 555.8 509.3 498.7 464.4 463.7 444.6 438.2 ------ ------ ------ ------ ------ ------ ------ ------ Income before income taxes 141.8 116.3 101.7 90.9 82.8 78.9 60.6 55.7 Income taxes 48.8 40.8 32.1 30.3 23.0 26.3 17.3 20.5 ------ ------ ------ ------ ------ ------ ------ ------ Net income $ 93.0 $ 75.5 $ 69.6 $ 60.6 $ 59.8 $ 52.6 $ 43.3 $ 35.2 ====== ====== ====== ====== ====== ====== ====== ====== Earnings per common share*: Primary $ .90 $ .72 $ .67 $ .62 $ .63 $ .55 $ .45 $ .34 ------ ------ ------ ------ ------ ------ ------ ------ Fully diluted $ .89 $ .71 $ .65 $ .60 $ .61 $ .54 $ .44 $ .34 ------ ------ ------ ------ ------ ------ ------ ------ SEGMENT NET INCOME Finance and Banking $ 91.0 $ 78.8 $ 74.7 $ 58.7 $ 64.8 $ 55.4 $ 46.7 $ 33.7 Individual Life Insurance 10.2 13.5 9.8 11.7 15.4 9.0 7.6 9.7 Corporate (5.7) (6.3) (10.9) (5.6) (16.6) (8.1) (7.6) (5.1) ------ ------ ------ ------ ------ ------ ------ ------ Core Business 95.5 86.0 73.6 64.8 63.6 56.3 46.7 38.3 ------ ------ ------ ------ ------ ------ ------ ------ Liquidating Commercial Lines (2.5) (10.5) (4.0) (4.2) (3.8) (3.7) (3.4) (3.1) ------ ------ ------ ------ ------ ------ ------ ------ Net income $ 93.0 $ 75.5 $ 69.6 $ 60.6 $ 59.8 $ 52.6 $ 43.3 $ 35.2 ====== ====== ====== ====== ====== ====== ====== ======
*Amounts have been restated to reflect the two-for-one stock split in the form of a stock dividend, effective October 15, 1993. FOURTH QUARTER RESULTS Net income for the 1993 fourth quarter was $93 million, up 23 percent from the third quarter and up 56 percent from the prior year fourth quarter. The improvement over the third quarter resulted from improved earnings in the bankcard business, partially offset by lower results in the Canadian and consumer banking operations. The bankcard business benefited from higher revenues associated with seasonality and a larger managed portfolio. Canada was impacted by charges taken in connection with a strategic assessment of the Canadian operations and additional loss provision reflected in the fourth quarter. Earnings in the quarter also benefited from lower losses in the Liquidating Commercial Lines segment due to reduced credit losses. The increase in the company's earnings over the prior year quarter is attributable to improvements in the Finance and Banking segment, led by higher earnings in the bankcard, domestic consumer finance and United Kingdom operations. Net interest margin declined 5 percent in the quarter primarily due to lower average balances of owned receivables and lower yields on several products. The level of earning assets is dependent on the timing of securitizations and sales of receivables. The company securitized and sold approximately $1.8 billion of receivables during the quarter, including $1.2 billion of GM Card receivables. 63 The provision for credit losses on owned receivables declined by $29 million in the fourth quarter of 1993 compared to the third quarter due to lower loss provision on liquidating commercial receivables. The third quarter amount reflected the disposition of the company's largest problem loan. The decrease compared to the prior year quarter was primarily due to a $15 million general corporate loss reserve recorded in the 1992 period and overall improvement in the credit quality of the consumer receivables portfolio. Securitization and servicing fee income rose 45 percent and 26 percent from 1993 third quarter and 1992 fourth quarter amounts due to higher amounts of receivables sold and serviced with limited recourse outstanding. Investment income fell 21 percent primarily due to higher gains resulting from the sale of investments classified in the available-for-sale portfolios in the third quarter of 1993 compared to the fourth quarter. The lower level of fee income in the fourth quarter primarily related to the reclassification of interchange and other fee income associated with GM Card receivables to securitization and servicing fee income upon securitizations and sales of the receivables. Other income increased in the fourth quarter over the previous quarter and the prior year fourth quarter due to increased income on the company's 25 percent equity investment in a commercial joint venture and prepayment fees received upon the payoff of commercial assets. Total costs and expenses in the 1993 fourth quarter were flat compared to the prior quarter but up substantially from the 1992 fourth quarter due to growth in the managed credit card portfolio. Finance and Banking operating expenses (which include salaries and fringe benefits and other operating expenses) as a percent of average receivables owned or serviced, annualized, were 3.40 percent in the 1993 fourth quarter compared to 3.56 percent in the 1993 third quarter and 3.49 percent in the fourth quarter of 1992. The effective tax rate in the 1993 fourth quarter was essentially flat compared to the previous quarter and up from 28 percent in the prior year. The lower tax rate in the prior year was primarily due to the effect of favorable state tax legislation which was enacted in 1992. EX-21 9 EXHIBIT 21 1 Exhibit 21 SUBSIDIARIES OF HOUSEHOLD INTERNATIONAL, INC. - --------------------------------------------- As of December 31, 1993 the following subsidiaries were directly or indirectly owned by the Registrant. Certain subsidiaries which in the aggregate do not constitute significant subsidiaries may be omitted.
% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ Hamilton Investments, Inc. Delaware 100% Alpha Source Asset Management, Inc. Delaware 100% Craig-Hallum Corporation Delaware 100% Craig-Hallum, Inc. Minnesota 100% ProValue Investments, Inc. Delaware 100% Household Bank, f.s.b U.S. 100% Household Affinity Funding Corporation Delaware 100% Household Bank (SB), N.A. U.S. 100% Household Home Title Services, Inc. California 100% Household Investment Services, Inc. California 100% Household Insurance Services, Inc. Illinois 100% Housekey Financial Corporation California 100% Associations Service Corporation Indiana 100% Household Mortgage Services, Inc. Delaware 100% Security Investment Corporation Maryland 100% Household Credit Services, Inc. Delaware 100% Household Finance Corporation Delaware 100% HFC Funding Corporation Delaware 100% HFS Funding Corporation Delaware 100% Household Bank (Nevada), N.A. U.S. 100% Household Card Services, Inc. Nevada 100% Household Bank (Illinois), N.A. U.S. 100% Household Finance Receivables Corporation I Delaware 100% Household Finance Receivables Corporation II Delaware 100% Household Financial Services, Inc. Delaware 100% Household Group, Inc. Delaware 100% Alexander Hamilton Insurance Company of America Illinois 100% Alexander Hamilton Life Insurance Company of America Michigan 100% Alexander Hamilton Capital Management, Inc. Michigan 100% Alexander Hamilton Insurance Agency, Inc. Michigan 100%
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% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ Alexander Hamilton Life Insurance Co. of America Arizona 100% First Alexander Hamilton Life Insurance Co. New York 100% Hamilton National Life Insurance Company Michigan 100% Cal-Pacific Services, Inc. California 100% Household Business Services, Inc. Delaware 100% Household Capital Markets, Inc. Delaware 100% Household Commercial Financial Services, Inc. Delaware 100% Business Realty Inc. Delaware 100% Business Lakeview, Inc. Delaware 100% Capital Graphics, Inc. Delaware 100% HCFS Business Equipment Corporation Delaware 100% HFC Commercial Realty, Inc. Delaware 100% Center Realty, Inc. Delaware 100% Com Realty, Inc. Delaware 100% G.C. Center, Inc. Delaware 100% Land of Lincoln Builders, Inc. Illinois 100% HFC Leasing, Inc. Delaware 100% First HFC Leasing Corporation Delaware 100% Second HFC Leasing Corporation Delaware 100% Valley Properties Corporation Tennessee 100% Fifth HFC Leasing Corporation Delaware 100% Sixth HFC Leasing Corporation Delaware 100% Seventh HFC Leasing Corporation Delaware 100% Eighth HFC Leasing Corporation Delaware 100% Tenth HFC Leasing Corporation Delaware 100% Eleventh HFC Leasing Corporation Delaware 100% Thirteenth HFC Leasing Corporation Delaware 100% Fourteenth HFC Leasing Corporation Delaware 100% Seventeenth HFC Leasing Corporation Delaware 100% Nineteenth HFC Leasing Corporation Delaware 100% Twenty-second HFC Leasing Corporation Delaware 100% Twenty-sixth HFC Leasing Corporation Delaware 100% Beaver Valley, Inc. Delaware 100% Hull 752 Corporation Delaware 100% Hull 753 Corporation Delaware 100% Third HFC Leasing Corporation Delaware 100% Macray Corporation California 100% Fourth HFC Leasing Corporation Delaware 100% Pargen Corporation California 100% Fifteenth HFC Leasing Corporation Delaware 100% Hull Fifty Corporation Delaware 100%
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% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ Household Capital Investment Corporation Delaware 100% B&K Corporation Michigan 94% Household Commercial of California, Inc. California 100% Amstelveen FSC Ltd. Bermuda 99% Night Watch FSC Ltd. Bermuda 100% Overseas Leasing Two FSC, Ltd. Bermuda 99% Overseas Leasing Four FSC, Ltd. Bermuda 99% Overseas Leasing Five FSC, Ltd. Bermuda 99% Omni Products International, Inc. Rhode Island 100% Omni World Trading Company H.K. Ltd. Hong Kong 99% OPI, Inc. Virginia 100% Household Finance Consumer Discount Company Pennsylvania 100% Household Finance Corporation II Delaware 100% Household Finance Corporation of Alabama Alabama 100% Household Finance Corporation of California Delaware 100% Household Finance Corporation of Nevada Delaware 100% Household Finance Realty Corporation of New York Delaware 100% Household Finance Industrial Loan Company Washington 100% Household Finance Realty Corporation of Nevada Delaware 100% Household Finance Corporation III Delaware 100% Household Realty Corporation Delaware 100% Overseas Leasing One FSC, Ltd. Bermuda 100% Household Retail Services, Inc. Delaware 100% HRSI Funding, Inc. Nevada 100% Household Financial Center Inc. Tennessee 100% Household Group Australia, Inc. Delaware 100% HFC of Australia, Ltd. Victoria 100% HFC Financial Services, Ltd. NewSouthWales 100% BFC Finance Limited Victoria 100% East Rock Finance Corporation Pty. Ltd. Victoria 100% Heritage General Insurance Ltd. NewSouthWales 100% Heritage Life Insurance Ltd. NewSouthWales 100% HFC Leasing Ltd. NewSouthWales 100% Household Building Society Tasmania 100% Inter City Lease Management Pty. Ltd. NewSouthWales 100% KeyJade Pty. Ltd. NewSouthWales 100% Household Industrial Finance Company Minnesota 100% Household Industrial Loan Co. of Kentucky Kentucky 100% Household Insurance Agency, Inc. Nevada 100% Household Recovery Services Corporation Delaware 100% Household Relocation Management, Inc. Illinois 100% Mortgage One Corporation Delaware 100% Mortgage Two Corporation Delaware 100%
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% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent - --------------------- --------- ------ Sixty-First HFC Leasing Corporation Delaware 100% Household Bank, N.A. U.S. 100% Household Receivables Funding Corporation Nevada 100% Household Receivables Funding Corporation II Delaware 100% Household Receivables Funding, Inc. Delaware 100% Household Financial Group, Ltd. Delaware 100% Household Global Funding, Inc. Delaware 78% Household International (U.K.) Limited U.K. 100% D.L.R.S. Limited Cheshire 100% HFC Bank plc U.K. 100% Hamilton Life Assurance Co. Limited U.K. 100% Hamilton Insurance Co. Limited U.K. 100% Hamilton Financial Planning Services Limited U.K. 100% HFC Pension Plan Limited England 100% Household Funding Limited U.K. 100% Household Investments Limited England/Wales 100% Household Leasing Limited England 100% Household Management Corporation Limited England/Wales 100% Household Overseas Limited England 100% Household International Netherlands, B.V. Netherlands 100% Household Financial Corporation Limited Ontario 100% Auto League of North America Limited Canada 100% HFC of Canada Canada 100% Household Realty Corporation Limited Ontario 100% Household Trust Company Canada 100% Merchant Retail Services Limited Ontario 100% Household Reinsurance Ltd. Bermuda 100% Land of Lincoln Real Estate, Ltd. Illinois 100%
- 4 - EX-23 10 EXHIBIT 23 1 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Household International, Inc.: As independent public accountants, we hereby consent to the incorporation of our report dated February 1, 1994, included in this annual report on Form 10-K of Household International, Inc. for the year ended December 31, 1993, into the Company's previously filed Registration Statements No. 2-56044, No. 2-64260, No. 2-86383, No. 33-21343, No. 2-97495, No. 33-45454, and No. 33-45455 on Form S-8 and Registration Statements No. 33-50619, No. 33-58130 and No. 33-62842 on Form S-3. /s/ ARTHUR ANDERSEN & CO. Chicago, Illinois March 25, 1994 -----END PRIVACY-ENHANCED MESSAGE-----