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, 1994 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 $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 15, 1995, THERE WERE 96,909,414 SHARES OF REGISTRANT'S COMMON STOCK OUTSTANDING, AND THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $4.1 BILLION. DOCUMENTS INCORPORATED BY REFERENCE CERTAIN PORTIONS OF THE REGISTRANT'S 1994 ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994: PARTS I, II AND IV. CERTAIN PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS 1995 ANNUAL MEETING SCHEDULED TO BE HELD MAY 10, 1995: 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, primarily provides consumer finance and banking services and consumer insurance and investment products. The Company employs approximately 15,500 people and serves approximately 19 million customer accounts in the United States, Canada and the United Kingdom. The Company's operations are divided into two business segments: Finance and Banking and Individual Life Insurance. 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 "1994 Annual Report"), portions of which are incorporated herein by reference. See pages 10, 12 and 21 through 70 of the 1994 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, retail merchants, independent insurance agents and direct mail and telemarketing. 1994 DEVELOPMENTS. For financial reporting purposes, the Company recharacterized its business segment data in 1994. The assets and results of operations relating to that portion of the commercial finance business which the Company had previously discontinued as of December 31, 1991 had been reported in a separate segment called Liquidating Commercial Lines ("LCL"). LCL assets were reduced to approximately $700 million and nonperforming LCL assets were reduced to $205 million at December 31, 1994 compared to $2.1 billion and almost $700 million at December 31, 1991, respectively. As a result of the reduction in total assets and nonperforming assets of these discontinued product lines, the Company eliminated separately reporting the LCL segment in its financial statements. The results of operations of the LCL product lines have been combined with the results of other products in the Finance and Banking segment. Earnings and selected balance sheet data for years prior to 1994 have been reclassified to reflect the combination of LCL into the Finance and Banking segment. During 1994, the Company also began to refocus its emphasis on certain businesses in order to take advantage of its operating efficiencies and competitiveness in the marketplace and initiated a number of measures to reduce costs, including the discontinuation of its first mortgage origination business in the United States; the consolidation of certain of its Canadian operations with certain of its United States operations; the consolidation of certain operations of its private-label and credit card operations and the initiation of a reduction in the Company's workforce by approximately 12 percent. In the fourth quarter of 1994, the Company recorded $14 million in after-tax expenses in connection with these initiatives. In addition, the Company sold its Australian operation in 1994, incurring a $14 million after-tax loss. The Company also sold its retail securities brokerage business, which had no significant effect on 1994 operating results. In 1994 the Company's bankcard operations continued to grow, principally through the continuing success of the GM Cardsm. 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, 1994, there were approximately 7.6 million accounts which had generated approximately $6.8 billion of credit card receivables. During 1994, the Company expanded its 1 3 alliance with General Motors Corporation with the introduction of the GM Card from Vauxhall in the United Kingdom, permitting users to earn rebates toward the purchase of a new Vauxhall vehicle and entered into a new alliance program with Pacific Bell. The Pacific Bell program allows users of the general-purpose credit card to apply a percentage of charges made on such card against their telephone bills. The Company's bankcard operations also expanded into other markets, such as entering into a joint venture with Banco Mexicano. The Company's United Kingdom operation reported higher earnings in 1994, earning $27.7 million compared to $10.3 million in 1993. This was primarily attributable to portfolio growth and lower credit costs. During 1994, the performance of the Company's operation in Canada was impacted by a high cost base in relation to its assets. In the fourth quarter of 1994, the Company began integrating certain portions of the Canadian consumer finance and private-label credit card operations with the Company's U.S. operations in order to improve efficiency. FINANCE AND BANKING Total receivables at December 31, classified by type, consisted of the following (in millions):
1994 1993 1992 --------- --------- --------- First mortgage................ $ 3,490.8 $ 3,534.1 $ 4,513.8 Home equity................... 2,739.0 2,850.9 2,943.6 Other secured................. 676.9 875.4 827.9 Bankcard...................... 4,788.9 4,356.9 3,416.9 Merchant participation........ 2,564.9 2,636.5 2,063.8 Other unsecured............... 5,137.2 4,320.8 3,850.6 --------- --------- --------- Total consumer................ 19,397.7 18,574.6 17,616.6 Equipment financing and other commercial.................. 1,157.9 1,955.8 2,451.7 --------- --------- --------- Total receivables............. $20,555.6 $20,530.4 $20,068.3 ========= ========= =========
CONSUMER OPERATIONS. Household International is primarily a consumer financial services company, with consumer receivables of $19.4 billion, representing approximately 56 percent of total assets at December 31, 1994. 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 consumer receivables are located in the United States. In its consumer lending businesses, the Company competes with banks, thrifts, finance companies and other financial institutions by offering a variety of consumer products, maintaining a strong service orientation and developing innovative marketing programs. 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 several 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, 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 2 4 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 in California now supports HFC's portfolio acquisition business and services acquired consumer credit receivables. The former eastern region RSC in Virginia now principally supports the GM Card. 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 and Nevada 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 a center modeled after the RSCs and RPCs used in the United States. The Canadian operation has two centers similar to the United Kingdom center. The Company has continued to invest in the development of its bankcard, private-label credit card and consumer finance services which have been an important contributor to the Company's growth. During 1994, net income on an operating basis from these businesses increased approximately 24 percent over the prior year-end period, while overall net income was 23 percent higher than in 1993. Since 1988 the Company has increased significantly its portfolio of receivables sold and serviced with limited recourse. This portfolio has grown to approximately $12.5 billion at year-end 1994 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 1994, including replenishments of certificateholders interests, the Company securitized and sold approximately $16.5 billion of receivables. Prior to its discontinuance of the origination of first mortgages, the Company also sold first mortgages with no recourse while retaining the servicing rights associated therewith and also acquired and sold servicing rights for first mortgages. Major consumer business units within the Finance and Banking segment are described below. Household Finance Corporation Household Finance Corporation 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 460 branch lending offices throughout the United States. This business is conducted primarily through state-licensed companies. HFC's operations primarily focus on home equity loans and unsecured credit products 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 network represented approximately 29 percent of total consumer managed receivables at December 31, 1994. Home equity loans, representing approximately 20 percent of total consumer managed receivables at December 31, 1994, have lower chargeoff rates than unsecured credit products. In 1992, HFC launched a new portfolio acquisition business focusing on open-end and closed-end home equity loan products. 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 3 5 standards. This business is an important source of new customers to HFC's direct lending business. HRS believes it is 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. During 1994, the Company began integrating portions of HRS' operations into Household Credit Services in order to reduce costs and better utilize the Company's resources. 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, Household Bank, f.s.b., or one of the other financial institutions affiliated with Household International. Household Credit Services had $10.8 billion of bankcard receivables owned and serviced with limited recourse at December 31, 1994, an increase of $1.9 billion from December 31, 1993. The Company has been rated as 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, the Company established a program with Ameritech Corporation in 1991, General Motors Corporation in 1992 (expanding the relationship with General Motors in 1993 to issue the GM Card from Vauxhall in the United Kingdom), Charles Schwab & Co. in 1993 and Pacific Bell in 1994. The Company also entered into a joint venture with Banco Mexicano in 1994. The Company intends to continue to explore other similar relationships with various entities. 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 operating efficiencies. The Company's focus is to develop a 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. Household Bank, f.s.b. Household Bank, f.s.b. (the "Bank"), a federally chartered savings bank, is engaged in the consumer banking and mortgage business. At December 31, 1994, the Bank's assets totaled $9.4 billion, while total deposits were approximately $7.2 billion. During the fourth quarter of 1994, the Bank acquired approximately $1.2 billion in deposits through the purchase from an unaffiliated thrift institution of 26 consumer bank branches in Illinois. The Company views deposits as a stable and relatively low-cost source of funding. 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. --------------- * VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard International, Incorporated, respectively. 4 6 During 1994, the Bank began to realign the geographic presence of its banking activities by focusing its activities in Illinois. In addition, the Bank discontinued its first mortgage origination business. In early 1995, it entered into agreements to sell its banking operations, including the related deposits, of the East Coast and West Coast regions as well as Ohio. International Operations International operations in Canada and the United Kingdom accounted for approximately 18 percent of consumer owned receivables at December 31, 1994. Due to the similarities of operations and in order to provide the lowest cost services possible, the Company began to integrate certain consumer finance and private-label credit card operations previously conducted in Canada with such business operations in the United States. The Canadian consumer finance business has operated under the HFC tradename. In addition, the Canadian consumer banking business, with 3 branches, operates as Household Trust Company. At December 31, 1994, the Canadian operations had $2.0 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, 1994 and approximately $1.4 billion of 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 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. COMMERCIAL OPERATIONS. Commercial receivables declined by $798 million in 1994. In addition, commercial assets that had previously been reported as LCL assets declined by approximately 55 percent when compared with the level of LCL assets as of December 31, 1993. The former LCL results are now reported together with other results described for the Company's Finance and Banking segment. See "1994 Developments" above. Approximately 4 percent of total managed receivables portfolio at December 31, 1994 consisted of commercial receivables. Since 1974, the commercial finance business of the Company has primarily been operated under Household Commercial Financial Services ("Household Commercial"). The industry in which Household Commercial operates (offering various loan and lease financing for aircraft, other transportation equipment, capital equipment and specialized secured corporate loans, as well as investing in term preferred stocks) is highly competitive and the Company's position in this market is relatively small. A description of Household's credit management policy with respect to commercial receivables is set forth on page 32 of the 1994 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 10,600 independent agents and 1,500 licensed consumer finance and banking employees. These individual products are sold in all states, with the largest concentration in 10 states (California, Delaware, Florida, Illinois, Michigan, New Jersey, New York, Ohio, Pennsylvania and Texas) accounting for 72 percent of premium income in 1994. 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. 5 7 INVESTMENT SECURITIES Investment securities of the Company are principally held by Alexander Hamilton. At December 31, 1994, Alexander Hamilton had $6.7 billion or approximately 74 percent of the Company's $9.0 billion total investment portfolio. The composition of this portfolio is set forth on pages 47 and 48 of the 1994 Annual Report. Approximately 15 percent of the Company's investment securities are also held by the Bank, with the remaining portion of the Company's investment portfolio being held by its other subsidiaries. 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, thrift notes, 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. A portion of the Company's funding base also consists of deposits obtained through its consumer banking business. At December 31, 1994 deposits were $8.4 billion. Due to the previously referenced sales of operations by the Bank, the amount of deposits will decrease by approximately $3.4 billion, which source of funding will be substantially replaced by the issuance of debt instruments in the capital markets. The securitization and sale of consumer receivables continues to be an important source of liquidity for the Company. During 1994 the Company's subsidiaries securitized and sold approximately $4.5 billion of home equity, merchant participation, bankcard and unsecured receivables. In the normal course of its business, the Company enters into a variety of off-balance sheet transactions primarily to manage and reduce its exposure to certain risks, including interest rate and foreign exchange risks. Interest rate swaps are the principal arrangements used by the Company to manage interest rate risk. These swaps synthetically alter the interest rate risk inherent in the various products offered by the Company. The majority of the Company's interest rate swaps are used to synthetically convert floating rate assets to fixed rate, fixed rate debt to floating rate, or floating rate assets or debt from one floating rate index to another. Interest rate swaps are also used to synthetically alter interest rate characteristics on certain receivables that are securitized and serviced with limited recourse. Since the currency with which each of the Company's foreign operations does business is its local currency, the Company also enters into foreign exchange contracts primarily to hedge its investment in such foreign operations. A description of the Company's use of interest rate swaps and foreign exchange contracts is set forth on pages 38 and 39 and 54 through 57 of the 1994 Annual Report. 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 account 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, 6 8 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. 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 and HFC have agreed with the OTS to maintain the regulatory capital of the Bank at certain specified levels. Household Bank (California), 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 adopted 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. 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 streamlined operations, 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 7 9 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 39 states in the United States, 10 provinces in Canada and in the United Kingdom with principal facilities located in Anaheim, California; Chesapeake, Virginia; Elmhurst, Illinois; Farmington Hills, Michigan; Hanover, Maryland; Las Vegas, Nevada; North York, Ontario, Canada; Pomona, California; Prospect Heights, Illinois; Salinas, California; Windsor, Berkshire, United Kingdom and Wood Dale, Illinois. 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; administration buildings in Northbrook, Illinois and Salinas, California and an administrative facility in Las Vegas, Nevada. The Company believes that such properties are in good condition and are adequate to meet its current and reasonably anticipated needs. Household International has invested in property and technological improvements to achieve greater efficiencies in the marketing, servicing and production of its loan products. During 1994 the Company invested $197 million in capital expenditures, compared to $110 million in 1993 and $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. 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 Messrs. Aldinger and Clark is incorporated herein by reference to "Election of Household Directors--Information Regarding Nominees" in Household International's definitive Proxy Statement for its 1995 Annual Meeting of Stockholders scheduled to be held May 10, 1995 (the "1995 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. Lawrence N. Bangs, age 58, was appointed Group Executive-Alexander Hamilton, Household Bank and HFC Bank plc in 1995. Mr. Bangs joined Household in 1959 and has served in various capacities in the Company's U.S. consumer finance operations and United Kingdom operations, most recently as Managing Director and Chief Executive Officer of HFC Bank plc. Robert F. Elliott, age 54, was appointed Group Executive-U.S. Consumer Finance and Canada in 1994. Prior thereto, from April 1993 to September 1994, he was Group Executive-Office of the President and from 1988 to 1993 he was Group Executive-U.S. Consumer Finance and Australia. Mr. Elliott joined Household in 8 10 1964 and has served in various capacities in the Company's consumer finance business during his career with Household. Joseph W. Saunders, age 49, was appointed Group Executive-U.S. BankCard and Household Retail Services, Inc. in 1994, having previously served, from April 1993 to September 1994, as Group Executive-Office of the President and prior thereto as Group Executive-U.S. BankCard and Canada. Prior to joining Household in 1985, Mr. Saunders was Vice President-Credit Card Operations of Bank of America. Antonia Shusta, age 45, resigned on February 10, 1995, from her appointment as Group Executive-U.S. Consumer and Mortgage Banking, Alexander Hamilton and HFC Bank plc, a position she had held since September, 1994. Ms. Shusta joined Household in 1988 as Group Executive-Mortgage Banking and Acquisitions and most recently served from April 1993 to September 1994, as Group Executive-Office of the President. Prior to joining Household, she was employed with Citicorp for 16 years. David A. Schoenholz, age 43, was appointed Senior Vice President-Chief Financial Officer of Household in 1994, having previously served as Vice President-Chief Accounting Officer 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. Glen O. Fick, age 48, was appointed Group Executive-Commercial Finance 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. Richard H. Headlee, age 64, 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. Edgar D. Ancona, age 42, joined Household in 1994 as Vice President-Treasurer. For the previous 17 years he held a variety of treasury and operational positions with Citicorp. David B. Barany, age 51, 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 39, 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 46, 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. Colin P. Kelly, age 52, 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. Theresa F. Kendziorski, age 42, was appointed Vice President-Analysis & Projects in 1995. Since joining Household in 1987, Ms. Kendziorski has served in various capacities within the Company's internal audit department and its banking subsidiary, most recently as President-Midwest Division of Household Bank, f.s.b. Richard J. Kolb, age 42, joined Household in 1995 as Vice President-Controller. Prior to joining Household, Mr. Kolb held a variety of financial positions with Wells Fargo Bank since 1982, most recently serving as Vice President and Group Finance Officer. Michael H. Morgan, age 40, 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 LLP. 9 11 Randall L. Raup, age 41, was appointed Vice President-Strategy and Development in 1995, having most recently served as Vice President-Planning. 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 LLP. Kenneth H. Robin, age 48, 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. 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 15, 1995, was 14,212. Household International common stock is listed on the New York and Chicago Stock Exchanges. During 1994 Household International common stock quarterly results were as follows:
MARKET PRICE (MARKET PRICES ARE STATED IN DOLLARS) DIVIDENDS QUARTER HIGH LOW DECLARED ------- ---- --- --------- 1st 35 5/8 29 $ .30 2nd 36 1/8 28 1/2 .30 3rd 39 3/4 32 7/8 .315 4th 39 1/8 32 3/4 .315
Additional information required by this Item is incorporated by reference to page 12 of Household International's 1994 Annual Report. ITEM 6. SELECTED FINANCIAL DATA. Information required by this Item is incorporated by reference to page 22 of Household International's 1994 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 26 through 39 of Household International's 1994 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 23 through 25 and pages 40 through 70 of Household International's 1994 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 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 1995 Proxy Statement. Also, information on certain Executive Officers appears in Part I of this Annual Report on Form 10-K. 10 12 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 1995 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 1995 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 1995 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 LLP, dated February 3, 1995, appearing on pages 23 through 25 and pages 40 through 70 of Household International's 1994 Annual Report are incorporated herein by reference. An opinion of Arthur Andersen LLP 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, 1994. Balance Sheets, December 31, 1994 and 1993. Statements of Cash Flows for the Three Years Ended December 31, 1994. Statements of Changes in Preferred Stock and Common Shareholders' Equity for the Three Years Ended December 31, 1994. 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, 1994, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission disclosing supplementary financial information for Household International as of and for the years ended December 31, 1993, 1992 and 1991. (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. 3(ii) Bylaws of Household International, as amended September 13, 1994 (incorporated by reference to Exhibit 3(ii) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994).
11 13 4 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 Key Executive Bonus Plan. 10.2 Household International Corporate Executive Bonus Plan. 10.3 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). 10.4 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). 10.5 Forms of stock option, restricted stock rights and performance share award agreements under the Household International Long-Term Executive Incentive Compensation Plan. 10.6 Household International Directors' Retirement Income Plan (incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). 10.7 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). 10.8 Executive Employment Agreement between the Company and W. F. Aldinger (incorporated by reference to Exhibit 10.8 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.9 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 March 31, 1994). 10.10 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 September 30, 1994). 10.11 Executive Employment Agreement between the Company and J. W. Saunders (incorporated by reference to Exhibit 10.10 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.12 Executive Employment Agreement between the Company and R. F. Elliott (incorporated by reference to Exhibit 10.11 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 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 1994 Annual Report to Shareholders. 21 List of Household International subsidiaries. 23 Consent of Arthur Andersen LLP, Certified Public Accountants. 27 Financial Data Schedule. 99(a) Annual Report on Form 11-K for the Household International Tax Reduction Investment Plan (to be filed by amendment).
12 14 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 Statements of Income Information. 13 15 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 24, 1995 By /s/ W. F. ALDINGER ---------------------------------------- W. F. Aldinger, President 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/ W. F. ALDINGER President, Chief --------------------------------------------- Executive (W. F. Aldinger) Officer and Director /s/ D. C. CLARK Chairman of the Board --------------------------------------------- and Director (D. C. Clark) /s/ R. J. DARNALL Director --------------------------------------------- (R. J. Darnall) /s/ G. G. DILLON Director --------------------------------------------- March 24, 1995 (G. G. Dillon) /s/ J. A. EDWARDSON Director --------------------------------------------- (J. A. Edwardson) /s/ M. J. EVANS Director --------------------------------------------- (M. J. Evans) /s/ C. F. FREIDHEIM, JR. Director --------------------------------------------- (C. F. Freidheim, Jr.)
14 16
SIGNATURE TITLE DATE --------------------------------------------- ------------------------- -------------------- /s/ L. E. LEVY Director --------------------------------------------- (L. E. Levy) /s/ G. A. LORCH Director --------------------------------------------- (G. A. Lorch) /s/ J. D. NICHOLS Director --------------------------------------------- (J. D. Nichols) /s/ G. P. OSLER Director --------------------------------------------- (G. P. Osler) /s/ J. B. PITBLADO Director --------------------------------------------- March 24, 1995 (J. B. Pitblado) /s/ A. E. RASMUSSEN Director --------------------------------------------- (A. E. Rasmussen) /s/ S. J. STEWART Director --------------------------------------------- (S. J. Stewart) /s/ L. W. SULLIVAN, M.D. Director --------------------------------------------- (L. W. Sullivan, M.D.) /s/ R. C. TOWER Director --------------------------------------------- (R. C. Tower) /s/ D. A. SCHOENHOLZ Senior Vice President-- --------------------------------------------- Chief Financial Officer (D. A. Schoenholz) (also a principal accounting officer)
15 17 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 1994 annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 3, 1995. 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 LLP Chicago, Illinois February 3, 1995 F-1 18 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 ------------------------------ 1994 1993 1992 ------ ------ ------ Equity in income of subsidiaries............................... $382.5 $326.7 $221.2 Finance and other income....................................... 38.5 36.1 26.1 ------ ------ ------ Total income.............................................. 421.0 362.8 247.3 ------ ------ ------ Expenses: Administrative............................................ 72.2 41.8 20.2 Provision for credit losses............................... (20.5) 19.1 26.6 Interest.................................................. 21.2 25.2 35.7 Income tax benefits....................................... (19.5) (22.0) (26.1) ------ ------ ------ Total expenses............................................ 53.4 64.1 56.4 ------ ------ ------ Net income..................................................... $367.6 $298.7 $190.9 ====== ====== ====== Earnings per common share*: Fully diluted................................................ $ 3.50 $ 2.85 $ 1.93 ====== ====== ====== Primary...................................................... 3.52 2.91 1.97 ====== ====== ======
--------------- * 1992 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 condensed notes to financial statements. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- F-2 19 SCHEDULE III (CONTINUED) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- CONDENSED BALANCE SHEETS (IN MILLIONS)
DECEMBER 31 ---------------------- 1994 1993 -------- -------- Assets: Investments in and advances from subsidiaries..................... $2,754.5 $2,534.2 Finance receivables............................................... 160.7 98.4 Other assets...................................................... 415.0 356.2 -------- -------- Total assets...................................................... $3,330.2 $2,988.8 ======= ======= Liabilities and shareholders' equity: Bank borrowings................................................... $ 100.0 $ 153.8 Senior debt (with original maturities over one year).............. 349.6 200.0 -------- -------- Total debt........................................................ 449.6 353.8 Other liabilities................................................. 357.6 217.4 Convertible preferred stock subject to mandatory redemption....... 2.6 19.3 Preferred stock................................................... 320.0 320.0 Common shareholders' equity....................................... 2,200.4 2,078.3 -------- -------- Total liabilities and shareholders' equity........................ $3,330.2 $2,988.8 ======= =======
See accompanying condensed notes to financial statements. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- F-3 20 SCHEDULE III (CONTINUED) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOWS (IN MILLIONS)
YEAR ENDED DECEMBER 31 ------------------------------- 1994 1993 1992 ------- ------- ------- CASH PROVIDED BY (USED IN) OPERATIONS......................... $ 63.0 $(127.9) $ 28.8 ------- ------- ------- INVESTMENT IN OPERATIONS Dividends from subsidiaries................................... 240.0 100.0 175.3 Investment in and advances to/from subsidiaries, net.......... (221.9) (153.3) (229.3) Investment securities sold (purchased), net................... -- 16.0 (16.0) Finance receivables originated, net of collections............ (41.0) (17.2) 16.3 Purchase of property and equipment............................ (.1) (.2) (.6) ------- ------- ------- Cash decrease from investment in operations................... (23.0) (54.7) (54.3) ------- ------- ------- FINANCING AND CAPITAL TRANSACTIONS Net increase (decrease) in bank borrowings.................... (53.8) 90.7 (133.5) Retirement of debt............................................ (100.0) (100.0) -- Issuance of debt.............................................. 249.6 -- 200.0 Dividends to shareholders..................................... (146.5) (141.3) (124.6) Common stock issued........................................... 13.6 313.3 33.0 Preferred stock issued........................................ -- 100.0 50.0 Preferred stock repurchased................................... -- (80.0) -- ------- ------- ------- Cash increase (decrease) from financing and capital transactions................................................ (37.1) 182.7 24.9 ------- ------- ------- Increase (decrease) in cash................................... 2.9 .1 (.6) Cash at January 1............................................. 1.7 1.6 2.2 ------- ------- ------- CASH AT DECEMBER 31........................................... $ 4.6 $ 1.7 $ 1.6 ======= ======= =======
See accompanying condensed notes to financial statements -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- F-4 21 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):
1994 1993 ------ ------ Other unsecured.......................................... $165.8 $128.8 Credit loss reserve...................................... (5.1) (30.4) ------ ------ Total.......................................... $160.7 $ 98.4 ====== ======
2. SENIOR DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR) Senior debt at December 31 consisted of the following (in millions):
1994 1993 ------ ------ 5.75% notes; due 1994.................................... -- $100.0 7.35% notes; due 1995.................................... $100.0 100.0 Variable interest rate debt; 5.63% to 6.13%; due 1996 and 1997................................................... 250.0 -- Unamortized discount..................................... (.4) -- ------ ------ Total.......................................... $349.6 $200.0 ====== ======
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, 1994 was approximately $947 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, 1994 was approximately $1,150 million. The company has guaranteed payment of a $46 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, 1994 and 1993 the company had outstanding 52,010 and 385,439 shares, respectively, of $6.25 cumulative convertible preferred stock subject to mandatory redemption provisions (the "$6.25 stock"). Each share of $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 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- F-5 22 SCHEDULE III (CONTINUED) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT -- (CONTINUED) in both 1994 and 1993. The company redeemed 2,312 and 2,323 shares for $50 per share in 1994 and 1993, 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, 1994, 242,055 shares of common stock were reserved for conversion of $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):
1994 1993 ------ ------ Authorized -- $1 par value............................................ 150.0 150.0 ===== ===== Issued................................................................ 115.0 113.3 ===== ===== Outstanding........................................................... 96.6 94.4 ===== =====
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- F-6 23 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 (all dollar amounts are stated in millions):
1994 1993 ------ ------ Fixed 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)................................. 100.0 100.0 Flexible rate auction preferred stock: Series B, 400,000 shares.......................................... 40.0 40.0 ------ ------ Total preferred stock............................................. $320.0 $320.0 ====== ======
--------------- (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. No shares were redeemed in 1994. 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. 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. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- F-7 24 SCHEDULE III (CONTINUED) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT -- (CONTINUED) 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. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- F-8 25 SCHEDULE VIII HOUSEHOLD INTERNATIONAL, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1994 -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
1994 1993 1992 ------- ------- ------- (IN MILLIONS) Insurance reserves applicable to receivables: Policy: Balance at January 1....................................... $ 59.2 $ 61.3 $ 83.1 Earned premiums............................................ (152.5) (134.2) (138.6) Net premiums written and reinsurance assumed............... 155.0 131.7 127.8 Other items................................................ 2.7 .4 (11.0) ------- ------- ------- Balance at December 31..................................... 64.4 59.2 61.3 ------- ------- ------- Claims: Balance at January 1....................................... 58.3 52.4 50.6 Provision for claims....................................... 69.2 74.1 77.3 Benefits paid.............................................. (65.8) (67.9) (71.7) Other items................................................ (3.9) (.3) (3.8) ------- ------- ------- Balance at December 31..................................... 57.8 58.3 52.4 ------- ------- ------- Total insurance reserves at December 31.................... $ 122.2 $ 117.5 $ 113.7 ======= ======= =======
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- F-9 26 SCHEDULE X HOUSEHOLD INTERNATIONAL, INC. SUPPLEMENTARY STATEMENTS OF INCOME INFORMATION FOR THE THREE YEARS ENDED DECEMBER 31, 1994 -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
COLUMN B --------------------------- CHARGED TO COSTS COLUMN A AND EXPENSES ------------------------------------------------------------------ --------------------------- ITEM 1994 1993 1992 ------------------------------------------------------------------ ------ ------ ----- (IN MILLIONS) Depreciation and amortization of intangible assets and similar deferrals: Amortization of insurance policy acquisition costs.............. $ 47.8 $ 67.8 $30.3 Amortization of acquired intangibles............................ 91.0 81.0 64.0 ------ ------ ----- Total........................................................ $138.8 $148.8 $94.3 ====== ====== ===== Advertising costs................................................. * * $13.6 ====== ====== =====
--------------- * Represents less than 1 percent of total revenues as reported in the related statements of income. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- F-10 27 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. 3(ii) Bylaws of Household International, as amended September 13, 1994 (incorporated by reference to Exhibit 3(ii) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 4 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 Key Executive Bonus Plan. 10.2 Household International Corporate Executive Bonus Plan. 10.3 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). 10.4 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). 10.5 Forms of stock option, restricted stock rights and performance share award agreements under the Household International Long-Term Executive Incentive Compensation Plan. 10.6 Household International Directors' Retirement Income Plan (incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). 10.7 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). 10.8 Executive Employment Agreement between the Company and W. F. Aldinger (incorporated by reference to Exhibit 10.8 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.9 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 March 31, 1994). 10.10 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 September 30, 1994). 10.11 Executive Employment Agreement between the Company and J. W. Saunders (incorporated by reference to Exhibit 10.10 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994).
28
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGES ----------- ---------------------------------------------------------------------- ------------ 10.12 Executive Employment Agreement between the Company and R. F. Elliott (incorporated by reference to Exhibit 10.11 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 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 1994 Annual Report to Shareholders. 21 List of Household International subsidiaries. 23 Consent of Arthur Andersen LLP, Certified Public Accountants. 27 Financial Data Schedule. 99(a) Annual Report on Form 11-K for the Household International Tax Reduction Investment Plan (to be filed by amendment).
EX-3.I 2 RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3(i) HOUSEHOLD INTERNATIONAL, INC. RESTATED CERTIFICATE OF INCORPORATION INDEX PAGE DATE DESCRIPTION ---- -------- ----------- 2 9/4/81 Restated Certificate of Incorporation 16 7/25/84 Certificate of Change of Address of Registered Office and of Registered Agent 18 11/14/94 Certificate of Elimination for Series A Junior Participating Preferred Stock and Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock 26 5/13/87 Certificate of Amendment (Article VII) 29 7/11/89 Certificate of Elimination for $2.375 Cumulative Convertible Voting Preferred Stock and $2.50 Cumulative Convertible Voting Preferred Stock, Certificate of Designation, Preferences and Rights of $2.375 Cumulative Convertible Voting Preferred Stock (dated 6/25/81) and $2.50 Cumulative Convertible Voting Preferred Stock (dated 6/25/81) 40 11/6/89 Certificate of Designation, Preferences and Rights of 9-1/2% Cumulative Preferred Stock, Series 1989-A 47 7/18/90 Certificate of Designation, Preferences and Rights of Flexible Rate Auction Preferred Stock, Series A and B 88 11/14/94 Certificate of Elimination for 11-1/4% Enhanced Rate Cumulative Preferred Stock and Certificate of Designation, Preferences and Rights of 11-1/4% Enhanced Rate Cumulative Preferred Stock 96 8/5/91 Certificate of Designation, Preferences and Rights of 9-1/2% Cumulative Preferred Stock, Series 1991-A 103 10/14/92 Certificate of Designation, Preferences and Rights of 8-1/4% Cumulative Preferred Stock, Series 1992-A 110 5/12/93 Certificate of Amendment (Article IV) 111 7/13/93 Certificate of Elimination for Flexible Rate Auction Preferred Stock, Series A 112 9/1/93 Certificate of Designation, Preferences and Rights of 7.35% Cumulative Preferred Stock, Series 1993-A - 1 - 2 RESTATED CERTIFICATE OF INCORPORATION OF HOUSEHOLD INTERNATIONAL, INC. This Restated Certificate of Incorporation was duly adopted by the Board of Directors of Household International, Inc. in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware. This Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the Corporation's certificate of incorporation as heretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. The original Certificate of Incorporation was filed with the Secretary of State of Delaware on February 20, 1981. ARTICLE I The name of the corporation is Household International, Inc. ARTICLE II The address of the Corporation's registered office in the State of Delaware is 100 West Tenth Street, Wilmington, Delaware 19899. The name of its registered agent at such address is The Corporation Trust Company, in the county of New Castle. ARTICLE III The Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV The total number of shares that may be issued by the Corporation is 75,655,004 of which 8,155,004 shares shall be Preferred Stock without par value and 67,500,000 shares shall be Common Stock of the par value of $1 per share. The 8,155,004 shares of Preferred Stock may be issued from time to time in one or more series, which may have such designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions (authorizing resolutions) providing for the issue of such shares adopted by the Board of Directors. Without otherwise limiting the generality of the foregoing provision, the Board of Directors is expressly authorized to provide, with respect to each such series, that: - 2 - 3 (a) the shares of such series shall be subject to redemption (including redemption through a sinking fund or analogous fund) at such time or times and at such price or prices as shall be stated in the authorizing resolutions; (b) the holders of the shares of such series shall be entitled to receive dividends at such rates, on such conditions and at such times, payable in preference, or in such relation, to the dividends payable on any other class or classes or of any other series of stock of the Corporation, and cumulative or non-cumulative, all as shall be stated in the authorizing resolutions; (c) the holders of the shares of such series shall be entitled to such rights upon the dissolution, or upon any distribution of the assets, of the Corporation as shall be stated in the authorizing resolutions; (d) the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of stock, or of any series thereof, of the Corporation at such price or prices or at such rate or rates and with such adjustments, all as shall be stated in the authorizing resolutions; (e) the shares of such series shall have such voting powers, full or limited, or no voting powers, as shall be stated in the authorizing resolutions. The following is a statement of the powers, preferences, and rights, and the qualifications, limitations or restrictions thereof, in respect of the Preferred Stock, except such thereof as the Board of Directors is herein authorized to provide for, and in respect of the Common Stock: (1) Except as otherwise provided in authorizing resolutions creating series of Preferred Stock, each share of Preferred Stock shall rank on a parity with each other share of Preferred Stock, regardless of series, in preference to the Common Stock, with respect to the payment of dividends at the respectively designated rates. No dividend shall be declared or paid on the shares of any particular series of Preferred Stock unless at the same time a dividend in like proportion to the respectively designated dividend rates shall be declared or paid on the shares of each other series of Preferred Stock then issued and outstanding ranking prior to or on a parity with such particular series with respect to the payment of dividends. Except as otherwise provided in the authorizing resolutions creating additional series of Preferred Stock, each share of Preferred Stock shall rank on a parity with each other share of Preferred Stock, regardless of series, in preference to the Common Stock, with respect to the distribution of assets according to the amounts to which the shares of the respective series are thereupon entitled. - 3 - 4 (2) The holders of shares of the Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any funds legally available for that purpose, dividends in cash at such respective rates, payable on such dates in each year and in respect of such dividend periods, all as stated in the authorizing resolutions, before any dividends shall be declared or paid or set apart for payment upon the Common Stock. Dividends on the shares of each series of the Preferred Stock shall be cumulative or non-cumulative and, if cumulative, shall be cumulative from such date, all as stated in the authorizing resolutions. At any time after all dividends shall have been paid, as above provided, on the Preferred Stock of all series then outstanding and after, or concurrently with, the declaration and setting aside of a sum for the payment of full dividends on the Preferred Stock of each series then outstanding for the then current dividend period established for such series, then, but not prior thereto, such dividends (payable either in cash, stock, or otherwise) as may be determined by the Board of Directors may be declared and paid on the Common Stock out of any remaining assets legally available for the declaration of dividends and the Preferred Stock shall not be entitled to participate in any such dividends whether payable in cash, stock, or otherwise. No Preferred Stock or Common Stock may be purchased by the Corporation if any Preferred Stock dividends are in arrears, and no Preferred Stock may be redeemed in such case unless all issued and outstanding shares of Preferred Stock are redeemed. (3) The whole or any part of the Preferred Stock, of any one or more series, redeemable pursuant to provisions stated in the respective authorizing resolutions, at the time outstanding, may, at the option of the Board of Directors, be redeemed, in accordance with such authorizing resolutions, at any time or from time to time, by the payment or by making provision for payment of such price or prices per share in the case of every such redemption as shall be stated in such authorizing resolutions, and, in every case, a sum equal to accrued and unpaid dividends, if any, with respect to each such share to be so redeemed, at the rate of the dividends fixed therefor, to the date fixed for redemption. In case of redemption of a part only of any series of the Preferred Stock at the time outstanding, such redemption shall be made by lot or pro rata in such manner as may be prescribed by resolution of the Board of Directors. The Board of Directors shall have full power and authority, subject to the limitations and provisions herein contained and stated in the respective authorizing resolutions, to prescribe the manner in which and the terms and conditions upon which Preferred Stock shall be redeemed from time to time. Notice of the Corporation's intention to redeem Preferred - 4 - 5 Stock, specifying the date of redemption, shall be published in newspapers of general circulation in New York, New York, and Chicago, Illinois, and shall be mailed not less than forty-five nor more than ninety days before the redemption date to the holders of record of such stock to be redeemed at their respective addresses as the same shall appear on the books of the Corporation, and, if less than all the shares owned by any such stockholder are then to be redeemed, the notice shall specify the number of shares thereof which are to be redeemed. If notice shall be given as aforesaid and the funds necessary to redeem such stock shall have been set aside by the Corporation (other than by the trust deposit hereinafter provided for) separate and apart from its other funds for the benefit of the holders of the shares called for redemption, such stock shall be redeemed upon such date of redemption and shall cease to be outstanding; the right to receive dividends thereon shall cease to accrue from and after such date of redemption and all rights of holders of the Preferred Stock so called for redemption shall forthwith on such redemption date cease and terminate except only the right of the holders thereof, upon presentation and surrender of their respective certificates representing said shares, to receive the redemption price therefor but without interest, and the right of conversion, if any. Anything herein contained to the contrary notwithstanding, if notice shall be given as aforesaid and before the redemption date an amount sufficient to redeem the shares so called for redemption shall be deposited in trust to be applied to such redemption with a bank or with bankers authorized to conduct banking business or with a trust company, in the Borough of Manhattan, City of New York, or in the City of Chicago, having a combined capital and surplus of at least $5,000,000, then, from and after the date of such deposit, such shares shall be deemed to be redeemed and to cease to be outstanding, and all rights of the holders of the shares called for redemption, as stockholders of the Corporation, shall cease except (i) the right, upon presentation and surrender of their respective certificates representing said shares, to receive from such bank or bankers or trust company on or after such redemption date the moneys so deposited in trust, but without interest, and (ii) the right of conversion, if any. The Corporation shall be entitled to any interest payable on the funds so deposited. Any redemption funds unclaimed at the end of six years shall be repaid to the Corporation, after which holders of the redeemed shares shall look only to the Corporation for payment of the redemption price, but without interest thereon. (4) In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, the holders of the Preferred Stock shall be entitled to be paid or to have set apart for payment such sum or sums per share as shall be stated in the respective authorizing resolutions, together in - 5 - 6 each case with a sum equal to accrued and unpaid dividends, if any, at the rate of the dividends fixed therefor, to the date fixed for payment of such price or prices, before any distribution or payment shall be made to the holders of the Common Stock. No consolidation or merger of the Corporation with another corporation or corporations and no sale by the Corporation of its assets as an entirety or substantially as an entirety shall be deemed to be a liquidation, dissolution, or winding up of the Corporation within the meaning of this subdivision (4). (5) The Corporation shall not, without the consent (expressed either in writing or by affirmative vote at a meeting called for that purpose) of the holders of two-thirds of the then outstanding Preferred Stock of all series, other than series in respect of which the authorizing resolutions expressly provide that such consent shall not be required: (i) consolidate or merge with another corporation or corporations or sell its assets as an entirety or substantially as an entirety, provided, however, that the purchase for cash, stock, or otherwise by the Corporation of all or any part of the assets, stock or other securities of another corporation or corporations shall not be deemed to be a consolidation or merger; (ii) issue Preferred Stock of any series if there shall be cumulative dividends in arrears on outstanding Preferred Stock, irrespective of series; (iii) increase the authorized amount of the Preferred Stock, or create or issue any class of stock ranking prior to or on a parity with the Preferred Stock, or any series thereof, as to the payment of dividends or the distribution of assets; (iv) adopt any amendment to the Certificate of Incorporation of the Corporation which adversely alters any preference, power, or special right of the Preferred Stock, or of the holders thereof; provided, however, that if any such amendment would adversely alter any preference, power, or special right of one or more but not all of the series of the Preferred Stock or of the holders thereof, then the consent (expressed as above provided) only of the holders of two-thirds of the then outstanding shares of all series so affected, voting as a class, other than series in respect of which the authorizing resolutions expressly provide that such consent shall not be required, shall be required for the adoption of such amendment. (6) In the event that any four quarterly cumulative dividends, whether consecutive or not, upon the Preferred Stock, or any series thereof, shall be in arrears, the holders of - 6 - 7 Preferred Stock of all series, other than series in respect of which the right is expressly withheld by the authorizing resolutions, shall have the right, at the next meeting of stockholders called for the election of directors, to elect one-third of the members of the Board of Directors out of the number fixed by the by-laws, and the holders of such Preferred Stock shall continue to have such right until all unpaid dividends upon the Preferred Stock shall have been paid in full. In the event that any eight quarterly cumulative dividends, whether consecutive or not, upon the Preferred Stock, or any series thereof, shall be in arrears, the holders of Preferred Stock of all series, other than series in respect of which the right is expressly withheld by the authorizing resolutions, shall have the right, at the next meeting of stockholders called for the election of directors, to elect a majority of the members of the Board of Directors out of the numbers fixed by the by-laws, and the holders of such Preferred Stock shall continue to have such right until all unpaid dividends upon the Preferred Stock shall have been paid in full. (7) The holders of the Common Stock shall be entitled to vote at all meetings of the stockholders and, subject to the rights of holders of Preferred Stock to elect directors in accordance with the provisions of the foregoing subdivision (6), shall be entitled to one vote for each share of Common Stock held. ARTICLE V There is hereby created a series of Preferred Stock of the Corporation, such series to be within the class of Preferred Stock authorized by Article IV hereof; to be designated $6.25 Cumulative Convertible Voting Preferred Stock (the "$6.25 Preferred Stock"); to consist of 3,454,635 shares; to have the powers, preferences and rights and the qualifications, limitations and restrictions set forth in, and to be subject to all of the terms and provisions of, Article IV hereof (except to the extent that the same may be inconsistent with this Article V); and to have the following additional powers, preferences, rights, qualifications, limitations, restrictions, terms and provisions: (a) $6.25 per share is fixed as the amount per annum at which the holders of $6.25 Preferred Stock shall be entitled to receive dividends when and as declared by the Board of Directors, such dividends to be paid only from retained earnings of the Corporation; and such dividends shall be cumulative and shall accrue, whether or not earned or declared, from the Issue Date (as hereinafter defined), and shall be payable quarterly on the fifteenth day of January, April, July and October in each year to holders of record on the respective business days next preceding the first days of those months (and the quarterly dividend periods shall commence on the first days of those months); - 7 - 8 provided, however, that as to any shares of $6.25 Preferred Stock issued less than 60 days prior to a dividend payment date, the dividend that would otherwise be payable on such dividend payment date will be payable on the next succeeding dividend payment date; and provided, further, that no dividend shall be declared or paid if (i) the Corporation is insolvent or would be rendered insolvent by payment of such dividend or (ii) the payment of such dividend would impair the Corporation's capital (i.e., the fair market value of the remaining assets of the Corporation would be less than the sum of its liabilities and the liquidation value of any classes and series of its Preferred Stock ranking prior to or on a parity with the $6.25 Preferred Stock). The "Issue Date" shall mean the day on which occurs the merger of Wallace-Murray Corporation, a Delaware corporation, into Household Acquisition Corporation Second, a Delaware corporation, or other subsidiary of the Corporation. An "Anniversary Date" shall mean any anniversary date of the Issue Date. (b) The shares of $6.25 Preferred Stock shall be subject to redemption at the option of the Corporation at any time, and from time to time, in whole or in part, at the redemption price of $50 per share plus the amount of accrued and unpaid dividends, if any, thereon to the date fixed for redemption; provided, however, that no such optional redemption shall be made unless (i) the date fixed for redemption is on or after the fifth Anniversary Date, and (ii) at all times during the twelve-month period terminating on the date on which notice of such redemption is first given, the annualized rate of dividends in respect of the outstanding shares of Common Stock of the Corporation shall have equalled or exceeded the quotient obtained by dividing $6.25 by the conversion rate specified in paragraph (d) hereof (as said conversion rate may have been adjusted pursuant to the provisions of said paragraph). As used herein, the term "annualized rate of dividends" shall mean, as of any particular time, the aggregate per share amount of regular cash dividends (excluding special and extraordinary dividends) paid on shares of the Common Stock of the Corporation generally, in respect of the most recently completed twelve-month period. (c) The amount to which shares of $6.25 Preferred Stock shall be entitled upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, shall be $50 per share, plus the amount of accrued and unpaid dividends, if any, thereon to the date fixed for payment, and no more. (d) The shares of $6.25 Preferred Stock shall be convertible at any time after issue at the option of the record holder thereof, in the manner hereinafter provided, into fully paid and nonassessable shares of Common Stock of the Corporation at the rate of 1.923 shares (adjusted to 2.327 shares as of close of business on April 7, 1989 and 4.654 shares as of close of business on October 15, 1993) of Common Stock for each share of $6.25 Preferred Stock; provided, however, that as to any shares of $6.25 Preferred Stock which shall have been called for - 8 - 9 redemption, the right of conversion shall terminate at the close of business on the fifth full business day prior to the date fixed for redemption. No payment or adjustment shall be made for dividends accrued on any shares of $6.25 Preferred Stock that shall be converted or for dividends on any shares of Common Stock that shall be issuable upon such conversion, but all dividends accrued and unpaid on such shares of $6.25 Preferred Stock up to the dividend payment date immediately preceding the date of conversion shall be payable to the converting shareholder, and no dividend shall be paid upon the shares of Common Stock until the same shall be paid or sufficient funds set apart for the payment thereof. The conversion rate provided for above shall be subject to the following adjustments: (i) In case the Corporation shall declare and pay to the holders of the shares of Common Stock a dividend in shares of Common Stock, the conversion rate in effect immediately prior to the time fixed for the determination of shareholders entitled to such dividend shall be proportionately increased (adjusted to the nearest, or if there shall be no nearest then to the next lower, one-thousandth of a share of Common Stock), such adjustment to become effective immediately after the time fixed for such determination. (ii) In case the Corporation shall subdivide the outstanding shares of Common Stock into a greater number of shares of Common Stock or combine the outstanding shares of Common Stock into a smaller number of shares of Common Stock, the conversion rate in effective immediately prior to such subdivision or combination, as the case may be, shall be proportionately increased or decreased (adjusted to the nearest, or if there shall be no nearest then to the next lower, one-thousandth of a share of Common Stock), as the case may require, such increase or decrease, as the case may be, to become effective when such subdivision or combination becomes effective. (iii) In case of any reclassification or change of outstanding shares of Common Stock of the class issuable upon conversion of the shares of $6.25 Preferred Stock, or in case of any consolidation or merger of the Corporation with or into another corporation, or in case of any sale or conveyance to another corporation of all or substantially all of the property of the Corporation, the holder of each share of $6.25 Preferred Stock then outstanding shall have the right thereafter, so long as his conversion right hereunder shall exist, to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the - 9 - 10 number of shares of Common Stock of the Corporation into which such shares of $6.25 Preferred Stock might have been converted immediately prior to such reclassification, change, consolidation, merger, sale or conveyance, and shall have no other conversion rights under these provisions; provided, however, that effective provision shall be made, in the Articles or Certificate of Incorporation of the resulting, surviving, or successor corporation or otherwise, so that the provisions set forth herein for the protection of the conversion rights of the shares of $6.25 Preferred Stock shall thereafter be applicable, as nearly as reasonably may be, to any such other shares of stock and other securities and property deliverable upon conversion of the shares of $6.25 Preferred Stock remaining outstanding or other convertible preferred shares received by the holders in place thereof; and provided, further, that any such resulting, surviving, or successor corporation shall expressly assume the obligation to deliver, upon the exercise of the conversion privilege, such shares, securities, or property as the holders of the shares of $6.25 Preferred Stock remaining outstanding, or other convertible preferred shares received by the holders in place thereof, shall be entitled to receive pursuant to the provisions hereof, and to make provision for the protection of the conversion right as above provided. In case securities or property other than shares of Common Stock shall be issuable or deliverable upon conversion as aforesaid, then all references in this paragraph shall be deemed to apply, so far as appropriate and as nearly as may be, to such other securities or property. The subdivision or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares of Common Stock (whether with or without par value) shall not be deemed to be a reclassification of the Common Stock of the Corporation for the purposes of this subparagraph (iii). (iv) Unless the holders of shares of the $6.25 Preferred Stock shall be issued subscription rights or warrants on a reasonably equivalent basis, in case the Corporation shall issue to the holders of shares of any class of its capital stock subscription rights or warrants entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Average Market Price (as hereinafter defined) at the time fixed for determination of shareholders entitled to such subscription rights or warrants, the conversion rate in effect immediately prior to the time of said determination shall be increased (adjusted to the nearest, or if there shall be no nearest then to the next lower, one-thousandth of a share of Common Stock) by multiplying said rate by a fraction of which the numerator shall be the sum of the number of shares of Common Stock outstanding at the time of such determination and the number of additional shares of Common - 10 - 11 Stock so offered for subscription or purchase, and of which the denominator shall be the sum of the number of shares of Common Stock outstanding at the time of such determination and the number of shares of Common Stock which the aggregate subscription price of the total number of shares so offered would purchase at the Average Market Price, such adjustment to become effective immediately after the time fixed for such determination; provided, however, that if such subscription rights or warrants shall have a term not exceeding 45 days and if any such subscription rights or warrants expire unexercised, then the conversion rate will be readjusted, effective immediately after the expiration of such term, to the conversion rate which would have obtained if such unexercised subscription rights or warrants had not been issued. For the purposes of any computation under this subparagraph (iv) or subparagraph (v), the "Average Market Price" per share of Common Stock for any time shall be the average of the daily closing prices for the 30 consecutive business days commencing 45 business days before the time in question. The closing price for each day shall be the last sales price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case as recorded on the New York Stock Exchange (or, if the Common Stock is not regularly traded on the New York Stock Exchange, on the principal market or system on which trades in the Common Stock are recorded). (v) Unless the holders of shares of the $6.25 Preferred Stock shall be distributed evidences of indebtedness or other assets on a reasonably equivalent basis, in case the Corporation shall distribute to the holders of the shares of Common Stock evidences of indebtedness of the Corporation or other assets of the Corporation (other than cash dividends to the extent paid from retained earnings, dividends in shares of Common Stock or subscription rights or warrants entitling them to subscribe for or purchase shares of Common Stock, but including securities convertible into capital stock of the Corporation), the conversion rate in effect immediately prior to the time fixed for determination of shareholders entitled to such distribution shall be increased (adjusted to the nearest, or if there shall be no nearest then to the next lower, one-thousandth of a share of Common Stock) by multiplying said rate by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the time of such determination, and of which the denominator shall be the difference between the number of shares of Common Stock outstanding at the time of such determination and a number of shares of Common Stock having an aggregate Average Market Price at the time of such determination equal to the fair value (as determined by the - 11 - 12 Board of Directors of the Corporation in good faith) of the evidences of indebtedness or other assets so distributed, such adjustment to become effective immediately after the time fixed for such determination. Except as provided in the foregoing subparagraphs (i) through (v), there shall be no adjustments to the conversion rate set forth above. In order to convert shares of $6.25 Preferred Stock into shares of Common Stock, the holder thereof shall surrender the certificate or certificates for shares of $6.25 Preferred Stock, duly endorsed to the Corporation or in blank, at the office of any Transfer Agent for the shares of $6.25 Preferred Stock (or such other place as may be designated by the Corporation), and shall give written notice to the Corporation at said office that he elects to convert the same and shall state in writing therein the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued. The Corporation shall, as soon as practicable thereafter, deliver at said office to such holder of shares of $6.25 Preferred Stock or to his nominee or nominees, a certificate or certificates for the number of full shares of Common Stock to which he shall be entitled as aforesaid and shall make appropriate payment in cash for any fractional shares. Shares of $6.25 Preferred Stock shall be deemed to have been converted as of the date of the surrender of such shares for conversion as provided above, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. No fractions of shares of Common Stock shall be issued upon conversion, but in lieu thereof the Corporation shall adjust such fractional interest by payment to the holders of an amount in cash equal (computed to the nearest cent) to the same fraction of the closing price (as defined in subparagraph (iv) above) on the business day immediately preceding such conversion. A number of authorized shares of Common Stock sufficient to provide for the conversion of the shares of $6.25 Preferred Stock outstanding upon the bases hereinbefore provided shall at all times be reserved for such conversion. (e) There shall be a sinking fund (the "Sinking Fund") for the benefit of the shares of $6.25 Preferred Stock. For the purposes of the Sinking Fund, out of any net assets of the Corporation legally available therefor (but only from retained earnings and subject to the provisions of the last sentence of paragraph (2) of Article IV of the Certificate of Incorporation), before any dividends, in cash or property, shall be paid or declared, or any distribution ordered or made on the Common Stock of the Corporation, and before any shares of Common Stock of the - 12 - 13 Corporation shall be purchased, redeemed, or otherwise acquired for value by the Corporation or any subsidiary, the Corporation shall have paid or set aside in cash annually on the day prior to each Anniversary Date commencing with the tenth Anniversary Date, so long as there shall be outstanding any shares of $6.25 Preferred Stock, an amount sufficient to redeem, on the day prior to each such Anniversary Date prior to the thirtieth, 4% of the number of shares of $6.25 Preferred Stock issued on the Issue Date (or such lesser number as remains outstanding) and, on the day prior to the thirtieth Anniversary Date, all such shares of $6.25 Preferred Stock as remain outstanding, at a price of $50 per share plus the amount of accrued and unpaid dividends, if any, thereon to the date so fixed for redemption; provided, however, that there shall be allowed to the Corporation as a credit thereagainst any shares of $6.25 Preferred Stock which the Corporation may have acquired (as a result of the conversion of such shares or otherwise, which it may have redeemed pursuant to paragraph (b) hereof, or which it may have redeemed pursuant to this paragraph (e) (otherwise than through the operation of the Sinking Fund), which have not theretofore been used for the purpose of any such credit or any credit against a redemption of $6.25 Preferred Stock at the Corporation's election as hereinafter in this paragraph (e) provided for and which shares shall have been set aside by the Corporation for the purpose of the Sinking Fund; and provided, further, that no monies shall be paid or set aside for the Sinking Fund if at the day prior to any such Anniversary Date the Corporation is in arrears in respect of a sinking fund obligation under any other series of Preferred Stock ranking prior to or on a parity with the $6.25 Preferred Stock except to the extent that, in the case of any series ranking on a parity with the $6.25 Preferred Stock, provision is made for the payment or setting aside of monies for the Sinking Fund and for the sinking funds of such other series in proportion to the respective aggregate amounts then required to be paid or set aside therefor; and provided, further, that no monies shall be paid or set aside for the Sinking Fund if (i) the Corporation is insolvent or would be rendered insolvent by the payment or setting aside of such monies or (ii) the payment or setting aside of such monies would impair the Corporation's capital (i.e., the fair market value of the remaining assets of the Corporation would be less than the sum of its liabilities and the liquidation value of classes and series of its Preferred Stock ranking prior to or on a parity with the $6.25 Preferred Stock). The Sinking Fund shall be cumulative so that if on the day prior to any such Anniversary Date, the net assets of the Corporation legally available therefor or the retained earnings of the Corporation shall be insufficient to permit any such amount be paid or set aside in full, or if for any other reason such amount shall not have been paid or set aside in full, the amount of the deficiency shall be paid or set aside, but without interest, before any dividend, in cash or property, shall be paid or declared, or any other distribution ordered or made, on the Common Stock of the Corporation, and before any shares of Common Stock of the - 13 - 14 Corporation shall be purchased, redeemed or otherwise acquired for value by the Corporation or by any subsidiary of the Corporation. The Corporation may elect to redeem, on any Sinking Fund redemption date, up to an additional 4% of the number of shares of $6.25 Preferred Stock issued on the Issue Date, at a price of $50 per share plus the amount of accrued and unpaid dividends, if any, thereon to the date fixed for redemption; provided, however, that there shall be allowed to the Corporation as a credit thereagainst any shares of $6.25 Preferred Stock which the Corporation may have acquired or redeemed otherwise than pursuant to paragraph (b) above and this paragraph (e) which have not theretofore been used for the purpose of any such credit or for the purpose of any credit against a redemption of $6.25 Preferred Stock pursuant to the Sinking Fund. Such optional right shall not be cumulative and, if unexercised in a particular year, may not be carried forward to subsequent years. (f) The holders of $6.25 Preferred Stock shall be entitled to vote at all meetings of the stockholders, and at each such meeting shall be entitled to one vote for each share held. (g) To the extent that the Board of Directors is authorized to fix the designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, in respect of additional series of Preferred Stock, none of the preferences or rights of any such additional series as fixed by the Board of Directors shall be prior or superior in any respect to those of the $6.25 Preferred Stock. Without limiting the rights conferred by paragraph (5) of Article IV of the Certificate of Incorporation of the Corporation, the Corporation shall not, without the consent of the holders of two-thirds of the then outstanding shares of $6.25 Preferred Stock, adopt any amendment to the Certificate of Incorporation of the Corporation or take other action, whether by the Board of Directors or stockholders, which adversely alters the preferences, powers and special rights conferred by the provisions of paragraphs (b), d(iv), d(v) or (e) hereof. ARTICLE VI In furtherance, and not in limitation, of the powers conferred by statute, the Board of Directors of the Corporation is expressly authorized: (1) To make, alter, amend and rescind the by-laws of the Corporation. (2) To determine from time to time, whether and to what extent, and at what times and places, and under what conditions and regulations the accounts and books of the Corporation (other than the stock ledger) or any of them shall be open to inspection of the stockholders; and no - 14 - 15 stockholder shall have any right to inspect any account, book or document of the Corporation, except as conferred by statute, unless authorized by a resolution of the stockholders then entitled to vote thereon or the Board of Directors. IN WITNESS WHEREOF, said Household International, Inc. has caused its corporate seal to be hereunto affixed and this certificate to be signed by D. C. Clark, its President, and attested by J. D. Pinkerton, its Secretary, this 4th day of September, 1981. Household International, Inc. By: /s/ D. C. Clark ------------------ President [SEAL] Attest: By: /s/ J. D. Pinkerton ------------------------- Secretary - 15 - 16 CERTIFICATE OF CHANGE OF ADDRESS OF REGISTERED OFFICE AND OF REGISTERED AGENT PURSUANT TO SECTION 134 OF TITLE 8 OF THE DELAWARE CODE To: DEPARTMENT OF STATE Division of Corporations Townsend Building Federal Street Dover, Delaware 19903 Pursuant to the provisions of Section 134 of Title 8 of the Delaware Code, the undersigned Agent for service of process, in order to change the address of the registered office of the corporations for which it is registered agent, hereby certifies that: 1. The name of the agent is: The Corporate Trust Company 2. The address of the old registered office was: 100 West Tenth Street Wilmington, Delaware 19801 3. The address to which the registered office is to be changed is: Corporation Trust Center 1209 Orange Street Wilmington, Delaware 19801 The new address will be effective on July 30, 1984. 4. The names of the corporation represented by said agent are set forth on the list annexed to this certificate and made a part hereof by reference. IN WITNESS WHEREOF, said agent has caused this certificate to be signed on its behalf by its Vice-President and Assistant Secretary this 25th day of July, 1984. THE CORPORATION TRUST COMPANY (Name of Registered Agent) By: Virginia Colwell ------------------------- (Vice-President) Attest: Mick Nurman -------------------- (Assistant Secretary) - 16 - 17 PAGE 796 STATE OF DELAWARE - DIVISION OF CORPORATIONS CHANGE OF ADDRESS FILING FOR CORPORATION TRUST AS OF JULY 27, 1984 DOMESTIC 0908612 HOUSEHOLD INTERNATIONAL, INC. 02/21/1981 D DE - 17 - 18 CERTIFICATE OF HOUSEHOLD INTERNATIONAL, INC. UNDER SECTION 151(g) OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE Household International, Inc., a Delaware corporation (hereinafter referred to as the "Corporation"), does hereby certify that the following resolution was duly adopted by the Corporation's Board of Directors: "WHEREAS, no shares of the Corporation's Series A Junior Participating Preferred Stock (the "Junior Preferred") have been issued or are outstanding; "NOW THEREFORE, BE IT RESOLVED, that no shares of the Junior Preferred will be issued pursuant to the terms of the Certificate of Designation, Preferences and Rights for such series of the Corporation's Preferred Stock; and "FURTHER RESOLVED, that the officers of the Corporation are duly authorized to file a certificate with the Secretary of State of the State of Delaware eliminating from the Corporation's Certificate of Incorporation all matters set forth in the Certificate of Designation, Preferences and Rights for the Junior Preferred." Upon the effective date of the filing of this Certificate, it shall eliminate from the Corporation's Certificate of Incorporation all matters set forth in the Certificate of Designation, Preferences and Rights with respect to the Corporation's Series A Junior Participating Preferred Stock, and all of such shares of Series A Junior Participating Preferred Stock shall resume the status of authorized and unissued shares of the Corporation's class of Preferred Stock. IN WITNESS WHEREOF, said Household International, Inc., has caused its corporate seal to be hereunto affixed and this Certificate to be signed by John W. Blenke, its Secretary, and attested by Susan E. Casey, its Assistant Secretary, this 14th day of November, 1994. HOUSEHOLD INTERNATIONAL, INC. By: /s/ J. W. Blenke -------------------- Secretary Attest: By: /s/ S. E. Casey ----------------------- Assistant Secretary - 18 - 19 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of HOUSEHOLD INTERNATIONAL, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware We, D. C. Clark, Chairman of the Board and Chief Executive Officer, and J. D. Pinkerton, Secretary, of Household International, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors by the Restated Certificate of Incorporation of the said Corporation, the said Board of Directors on August 14, 1984 adopted the following resolution creating a series of seven hundred thousand (700,000) shares of Preferred Stock designated as Series A Junior Participating Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Restated Certificate of Incorporation, a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting such series shall be 700,000. Section 2. Dividends and Distributions. (A) The holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the fifteenth day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $25.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares - 19 - 20 of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $1.00 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of share of Common Stock that were outstanding immediately prior to such event. The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in this paragraph (A) immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $25.00 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. - 20 - 21 Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) In the event that any four quarterly cumulative dividends, whether consecutive or not, upon the Series A Preferred Stock shall be in arrears, the holders of preferred stock of the Corporation of all series (including the Series A Preferred Stock), other than series in respect of which the right is expressly withheld by the authorizing resolutions, shall have the right, at the next meeting of stockholders called for the election of directors, to elect one-third of the members of the Board of Directors out of the number fixed by the by-laws, and the holders of such preferred stock shall continue to have such right until all unpaid dividends upon the Series A Preferred Stock shall have been paid in full. In the event that any eight quarterly cumulative dividends, whether consecutive or not, upon the Series A Preferred Stock shall be in arrears, the holders of preferred stock of all series (including the Series A Preferred Stock), other than series in respect of which the right is expressly withheld by the authorizing resolutions, shall have the right, at the next meeting of stockholders called for the election of directors, to elect a majority of the members of the Board of Directors out of the number fixed by the by-laws, and the holders of such preferred stock shall continue to have such right until all unpaid dividends upon the Series A Preferred Stock shall have been paid in full. (D) Except as set forth herein, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. - 21 - 22 Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such - 22 - 23 shares shall upon their cancellation become authorized but unissued shares of preferred stock and may be reissued as part of a new series of preferred stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. Upon any voluntary liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (2) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the - 23 - 24 outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. Section 9. Ranking. The Series A Preferred Stock shall rank junior to all other series of the Corporation's preferred stock outstanding as of August 14, 1984, as to the payment of dividends and the distribution of assets. Section 10. Amendment. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of two-thirds or more of the outstanding shares of Series A Preferred Stock, voting together as a single class. IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do affirm the foregoing as true under the - 24 - 25 penalties of perjury this 17th day of August, 1984. /s/ D. C. Clark ----------------------------- D. C. Clark, Chairman of the Board and Chief Executive Officer /s/ J. D. Pinkerton -------------------------------------- J. D. Pinkerton, Senior Vice President- Administration and Secretary - 25 - 26 HOUSEHOLD INTERNATIONAL, INC. CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION Household International, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify: FIRST: That the Restated Certificate of Incorporation, as heretofore amended, of said Corporation has been further amended by inserting the following as Article VII: ARTICLE VII (1) Elimination of Certain Liability of Directors. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or successor provision, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or amendment to this Section shall not adversely affect any right or protection of a director of the Corporation for any act or occurrence taking place prior to such repeal or amendment. (2) Indemnification and Insurance. (a) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative, or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director, officer, or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation or of a partnership, joint venture, trust, or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability, and loss (including attorneys' fees, judgments, fines, ERISA excise - 26 - 27 taxes, or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that except as provided in paragraph (b) hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition upon delivery to the Corporation of an undertaking to repay all amounts so advanced if it shall ultimately be determined that such person is not entitled to be indemnified under this Section or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to agents of the Corporation with the same scope and effect as the foregoing indemnification of directors, officers, and employees. (b) If a claim under paragraph (a) of this Section is not paid in full by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law and paragraph (a) of this Section for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (c) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of - 27 - 28 its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of this Certificate of Incorporation, bylaw, agreement, contract, vote of stockholders or disinterested directors, or otherwise. (d) The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Section, the Delaware General Corporation Law, or otherwise. SECOND: That the aforesaid amendment of the Restated Certificate of Incorporation of said Corporation, set forth in Paragraph FIRST hereinabove, has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by D. C. Clark, its Chairman of the Board and Chief Executive Officer, and J. D. Pinkerton, its Senior Vice President - Administration and Secretary, this 13th day of May, 1987. HOUSEHOLD INTERNATIONAL, INC. [SEAL] By: /s/ D. C. Clark ---------------------------- Chairman of the Board and Chief Executive Officer Attest: /s/ J. D. Pinkerton ------------------------------- Senior Vice President - Administration and Secretary - 28 - 29 CERTIFICATE OF HOUSEHOLD INTERNATIONAL, INC. UNDER SECTION 151 (g) OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE Household International, Inc., a Delaware corporation (hereinafter referred to as the "Corporation"), does hereby certify that the following resolutions were duly adopted by the Corporation's Board of Directors: "WHEREAS, no shares of the Corporation's $2.375 Cumulative Convertible Voting Preferred Stock (the '$2.375 Preferred Stock') and $2.50 Cumulative Convertible Voting Preferred Stock (the '$2.50 Preferred Stock') are outstanding, it is hereby "RESOLVED, that no shares of $2.375 Preferred Stock and $2.50 Preferred Stock will be issued pursuant to the terms of the Certificate of Designation, Preferences, and Rights of each such series of the Corporation's Preferred Stock. "FURTHER RESOLVED, that the officers of the Corporation are duly authorized to file a certificate with the Secretary of State of Delaware eliminating from the Corporation's Certificate of Incorporation all matters set forth in each Certificate of Designation, Preferences, and Rights for the $2.375 and $2.50 Preferred Stock." Upon the effective date of the filing of this Certificate, it shall eliminate from the Corporation's Certificate of Incorporation all matters set forth in the Certificates of Designation, Preferences, and Rights with respect to the Corporation's $2.375 Cumulative Convertible Voting Preferred Stock and $2.50 Cumulative Convertible Voting Preferred Stock, and all of such shares of $2.375 Cumulative Convertible Preferred Stock and $2.50 Cumulative Convertible Voting Preferred Stock shall resume the status of authorized and unissued shares of the Corporation's Preferred Stock. IN WITNESS WHEREOF, said Household International, Inc. has caused its corporate seal to be hereunto affixed and this Certificate to be signed by J. D. Pinkerton, its Senior Vice President-Administration and Secretary, and attested by R. C. Roselli, its Assistant Secretary, this 11th day of July, 1989. HOUSEHOLD INTERNATIONAL, INC. -------------------------------- By: /s/ J. D. Pinkerton Senior Vice President- Administration and Secretary Attest: By: /s/ R. C. Roselli -------------------- Assistant Secretary - 29 - 30 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF PREFERRED STOCK BY RESOLUTION OF THE BOARD OF DIRECTORS PROVIDING FOR A SERIES OF 512,139 SHARES OF PREFERRED STOCK DESIGNATED $2.375 CUMULATIVE CONVERTIBLE VOTING PREFERRED STOCK We, D.C. Clark, President, and J. D. Pinkerton, Secretary, of Household International Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That pursuant to authority conferred upon the Board of Directors by the Restated Certificate of Incorporation of the said Corporation, the said Board of Directors by unanimous written consent dated June 25, 1981, adopted resolutions providing for the issuance of a series of 512,139 shares of Preferred Stock, which resolutions are as follows: RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Restated Certificate of Incorporation, a series of Preferred Stock of the Corporation be and it hereby is created, such series of Preferred Stock to be designated $2.375 Cumulative Convertible Voting Preferred Stock (the "$2.375 Preferred Stock"), to consist of 512,139 shares; FURTHER RESOLVED, (a) $2.375 per share is fixed as the amount per annum at which the holders of $2.375 Preferred Stock shall be entitled to receive dividends; and such dividends shall be cumulative and shall accrue, whether or not earned or declared, from April 1, 1981, as to all shares issued on or before June 30, 1981, and the first day of the quarterly dividend period during which such shares were issued, as to all shares issued after June 30, 1981, and shall be payable quarterly on the fifteenth days of January, April, July and October in each year (and the quarterly dividend periods shall commence on the first days of those months). (b) The shares of $2.375 Preferred Stock shall be subject to redemption in whole or in part at the redemption price of $50.00 per share. (c) The amount to which shares of $2.375 Preferred Stock shall be entitled upon voluntary liquidation, dissolution, or winding up of the Corporation, shall be $50.00 per share plus the amount of accrued and unpaid dividends, if any, thereon to the date fixed for payment, and no more. The amount to which shares of $2.375 Preferred Stock shall be entitled upon involuntary liquidation, dissolution, or winding up of the Corporation, shall be $30 per share, plus the amount of accrued and unpaid dividends, if any, thereon to the date fixed for payment, and no more. - 30 - 31 (d) The shares of $2.375 Preferred Stock shall be convertible at the option of the record holder thereof, in the manner hereinafter provided, into shares of Common Stock of the Corporation; provided, however, that as to any shares of $2.375 Preferred Stock which shall have been called for redemption, the right of conversion shall terminate at the close of business on the fifth full business day prior to the date fixed for redemption. No payment or adjustment shall be made for dividends accrued on any shares of $2.375 Preferred Stock that shall be converted or for dividends on any shares of Common Stock that shall be issuable upon such conversion, but all dividends accrued and unpaid on such shares of $2.375 Preferred Stock up to the dividend payment date immediately preceding the date of conversion shall constitute a debt of the Corporation payable to the converting shareholder, and no dividend shall be paid upon the shares of Common Stock until such debt shall be paid or sufficient funds set apart for the payment thereof. Shares of $2.375 Preferred Stock may be converted at any time after issue (subject to the above time limitation in the case of a call for redemption), at the option of the record holder thereof, into shares of Common Stock of the Corporation at the rate of two and one-quarter shares of Common Stock for each share of $2.375 Preferred Stock. The conversion rate provided for above shall be subject to the following adjustments: (i) In case the Corporation shall declare and pay to the holders of the shares of Common Stock a dividend in shares of Common Stock, or in securities convertible into shares of Common Stock, the conversion rate in effect immediately prior to the time fixed for the determination of shareholders entitled to such dividend shall be proportionately increased (adjusted to the nearest, or if there shall be no nearest then to the next lower, one-hundredth of a share of Common Stock), such adjustment to become effective immediately after the time fixed for such determination. (ii) In case the Corporation shall subdivide the outstanding shares of Common Stock into a greater number of shares of Common Stock or combine the outstanding shares of Common Stock into a smaller number of shares of Common Stock, the conversion rate in effect immediately prior to such subdivision or combination, as the case may be, shall be proportionately increased or decreased (adjusted to the nearest, or if there shall be no nearest then to the next lower, one-hundredth of a share of Common Stock), as the case may require, such increase or decrease, as the case may be, to become effective when such subdivision or combination becomes effective. (iii) No adjustment of the conversion rate shall be made by reason of the issuance of shares of Common Stock for cash, property, or services. In order to protect the conversion rights of the holders of $2.375 Preferred Stock from dilution, if stock - 31 - 32 warrants, subscription, or other rights are offered to the holders of shares of Common Stock, such rights shall also be offered to the holders of shares of $2.375 Preferred Stock on the basis of the number of shares of Common Stock into which the shares of $2.375 Preferred Stock are then convertible. (iv) In case of any reclassification or change of outstanding shares of Common Stock of the class issuable upon conversion of the shares of $2.375 Preferred Stock, or in the case of any consolidation or merger of the Corporation with or into another corporation, or in case of any sale or conveyance to another corporation of all or substantially all of the property of the Corporation, the holder of each share of $2.375 Preferred Stock then outstanding shall have the right thereafter, so long as his conversion right hereunder shall exist, to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock, of the Corporation into which such shares of $2.375 Preferred Stock might have been converted immediately prior to such reclassification, change, consolidation, merger, sale or conveyance, and shall have no other conversion rights under these provisions; provided, that effective provision shall be made, in the Articles or Certificate of Incorporation of the resulting, surviving, or successor corporation or otherwise, so that the provisions set forth herein for the protection of the conversion rights of the shares of $2.375 Preferred Stock shall thereafter be applicable, as nearly as reasonably may be, to any such other shares of stock and other securities and property deliverable upon conversion of the shares of $2.375 Preferred Stock remaining outstanding or other convertible preferred shares received by the holders in place thereof; and provided, further, that any such resulting, surviving, or successor corporation shall expressly assume the obligation to deliver, upon the exercise of the conversion privilege, such shares, securities, or property as the holders of the shares of $2.375 Preferred Stock remaining outstanding, or other convertible preferred shares received by the holders in place thereof, shall be entitled to receive pursuant to the provisions hereof, and to make provision for the protection of the conversion right as above provided. In case securities or property other than shares of Common Stock shall be issuable or deliverable upon conversion as aforesaid, then all references in this paragraph shall be deemed to apply, so far as appropriate and as nearly as may be, to such other securities or property. The subdivision or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares of Common Stock (whether with or without par value) shall not be deemed to be a reclassification of the Common Stock of the Corporation for the purposes of this subparagraph (iv). In order to convert shares of $2.375 Preferred Stock into shares of Common Stock, the holder thereof shall surrender the certificate or certificates for shares of $2.375 Preferred Stock, duly endorsed to the Corporation or in blank, at the office of - 32 - 33 any Transfer Agent for the shares of $2.375 Preferred Stock (or such other place as may be designated by the Corporation), and shall give written notice to the Corporation at said office that he elects to convert the same and shall state in writing therein the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued. The Corporation shall, as soon as practicable thereafter, deliver at said office to such holder of shares of $2.375 Preferred Stock, or to his nominee or nominees, a certificate or certificates for the number of full shares of Common Stock to which he shall be entitled as aforesaid and make appropriate payment in cash for any fractional shares. Shares of $2.375 Preferred Stock shall be deemed to have been converted as of the date of the surrender of such shares for conversion as provided above, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. A number of authorized shares of Common Stock sufficient to provide for the conversion of the shares of $2.375 Preferred Stock outstanding upon the basis hereinbefore provided shall at all times be reserved for such conversion. (e) Shares of $2.375 Preferred Stock redeemed shall not be reissued. (f) The holders of $2.375 Preferred Stock shall be entitled to vote at all meetings of the stockholders, and at each such meeting shall be entitled to one vote for each share held. (g) To the extent that the Board of Directors is authorized to fix the designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, in respect of additional series of Preferred Stock, none of the preferences or rights of any such additional series as fixed by the Board of Directors shall be prior or superior in any respect to those of the $2.375 Preferred Stock. IN WITNESS WHEREOF, said Household International, Inc. has caused its corporate seal to be hereunto affixed and this certificate to be signed by D. C. Clark, its President, and - 33 - 34 attested by J. D. Pinkerton, its Secretary, this 25th day of June, 1981. Household International, Inc. (SEAL) By: /s/ D. C. Clark ------------------ President ATTEST: By: /s/ J. D. Pinkerton ------------------------ Secretary - 34 - 35 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF PREFERRED STOCK BY RESOLUTION OF THE BOARD OF DIRECTORS PROVIDING FOR A SERIES OF 2,234,045 SHARES OF PREFERRED STOCK DESIGNATED $2.50 CUMULATIVE CONVERTIBLE VOTING PREFERRED STOCK We, D. C. Clark, President, and J. D. Pinkerton, Secretary, of Household International, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That pursuant to authority conferred upon the Board of Directors by the Restated Certificate of Incorporation of the said Corporation, the said Board of Directors by unanimous consent dated June 25, 1981, adopted resolutions providing for the issuance of a series of two million two hundred and thirty-four thousand forty-five (2,234,045) shares of Preferred Stock, which resolutions are as follows: RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Restated Certificate of Incorporation, a series of Preferred Stock of the Corporation be and it hereby is created, such series of Preferred Stock to be designated $2.50 Cumulative Convertible Voting Preferred Stock (the "$2.50 Preferred Stock") and to consist of 2,234,045 shares; and FURTHER RESOLVED, (a) $2.50 per share is fixed as the amount per annum at which the holders of $2.50 Preferred Stock shall be entitled to receive dividends; and such dividends shall be cumulative and shall accrue, whether or not earned or declared, from April 1, 1981, as to all shares issued on or before June 30, 1981, and the first day of the quarterly dividend period during which such shares were issued, as to all shares issued after June 30, 1981, and shall be payable quarterly on the fifteenth days of January, April, July and October in each year (and the quarterly dividend periods shall commence on the first days of those months.). (b) The shares of $2.50 Preferred Stock shall be subject to redemption in whole or in part at the redemption price of $50.00 per share. (c) The amount to which shares of $2.50 Preferred Stock shall be entitled upon voluntary liquidation, dissolution, or winding up of the Corporation, shall be $50.00 per share, plus the amount of accrued and unpaid dividends, if any, thereon to the date fixed for payment, and no more. The amounts to which shares of $2.50 Preferred Stock shall be entitled upon involuntary liquidation, dissolution, or winding up of the Corporation, shall be $18.00 per share, plus the amount - 35 - 36 of accrued and unpaid dividends, if any, thereon to the date fixed for payment, and no more. (d) The shares of $2.50 Preferred Stock shall be convertible at the option of the record holder thereof, in the manner hereinafter provided, into shares of Common Stock of the Corporation; provided, however, that as to any shares of $2.50 Preferred Stock which shall have been called for redemption, the right of conversion shall terminate at the close of business on the fifth full business day prior to the date fixed for redemption. No payment or adjustment shall be made for dividends accrued on any shares of $2.50 Preferred Stock that shall be converted or for dividends on any shares of Common Stock that shall be issuable upon such conversion, but all dividends accrued and unpaid on such shares of $2.50 Preferred Stock up to the dividend payment date immediately preceding the date of conversion shall constitute a debt of the Corporation payable to the converting shareholder, and no dividend shall be paid upon the shares of Common Stock until such debt shall be paid or sufficient funds set apart for the payment thereof. Shares of $2.50 Preferred Stock may be converted at any time after issue (subject to the above time limitation in the case of a call for redemption), at the option of the record holder thereof, into shares of Common Stock of the Corporation at the rate of one and one-half shares of Common Stock for each share of $2.50 Preferred Stock. The conversion rate provided for above shall be subject to the following adjustments: (i) In case the Corporation shall declare and pay to the holders of the shares of Common Stock a dividend in shares of Common Stock, or in securities convertible into shares of Common Stock, the conversion rate in effect immediately prior to the time fixed for the determination of shareholders entitled to such dividend shall be proportionately increased (adjusted to the nearest, or if there shall be no nearest then to the next lower, one-hundredth of a share of Common Stock), such adjustment to become effective immediately after the time fixed for such determination. (ii) In case the Corporation shall subdivide the outstanding shares of Common Stock into a greater number of shares of Common Stock or combine the outstanding shares of Common Stock into a smaller number of shares of Common Stock, the conversion rate in effect immediately prior to such subdivision or combination, as the case may be, shall be proportionately increased or decreased (adjusted to the nearest, or if there shall be no nearest then to the next lower, one-hundredth of a share of Common Stock), as the case may require, such increase or decrease, as the case may be, to become effective when such subdivision or combination becomes effective. (iii) No adjustment of the conversion rate shall be made by - 36 - 37 reason of the issuance of shares of Common Stock for cash, property, or services. In order to protect the conversion rights of the holders of $2.50 Preferred Stock from dilution, if stock warrants, subscription, or other rights are offered to the holders of shares of Common Stock, such rights shall also be offered to the holders of shares of $2.50 Preferred Stock on the basis of the number of shares of Common Stock into which the shares of $2.50 Preferred Stock are then convertible. (iv) In case of any reclassification or change of outstanding shares of Common Stock of the class issuable upon conversion of the shares of $2.50 Preferred Stock, or in case of any consolidation or merger of the Corporation with or into another corporation, or in case of any sale or conveyance to another corporation of all or substantially all of the property of the Corporation, the holder of each share of $2.50 Preferred Stock then outstanding shall have the right thereafter, so long as his conversion right hereunder shall exist, to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock, of the Corporation into which such shares of $2.50 Preferred Stock might have been converted immediately prior to such reclassification, change, consolidation, merger, sale or conveyance, and shall have no other conversion rights under these provisions; provided, that effective provision shall be made, in the Articles or Certificate of Incorporation of the resulting, surviving, or successor corporation or otherwise, so that the provisions set forth herein for the protection of the conversion rights of the shares of $2.50 Preferred Stock shall thereafter be applicable, as nearly as reasonably may be, to any such other shares of stock and other securities and property deliverable upon conversion of the shares of $2.50 Preferred Stock remaining outstanding or other convertible preferred shares received by the holders in place thereof; and provided, further, that any such resulting, surviving, or successor corporation shall expressly assume the obligation to deliver, upon the exercise of the conversion privilege, such shares, securities, or property as the holders of the shares of $2.50 Preferred Stock remaining outstanding, or other convertible preferred shares received by the holders in place thereof, shall be entitled to receive pursuant to the provisions hereof, and to make provision for the protection of the conversion right as above provided. In case securities or property other than shares of Common Stock shall be issuable or deliverable upon conversion as aforesaid, then all references in this paragraph shall be deemed to apply, so far as appropriate and as nearly as may be, to such other securities or property. The subdivision or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares of Common Stock (whether with or without par value) shall not be deemed to be a reclassification of the Common Stock of the Corporation for the purposes of this subparagraph (iv). In order to convert shares of $2.50 Preferred Stock into - 37 - 38 shares of Common Stock, the holder thereof shall surrender the certificate or certificates for shares of $2.50 Preferred Stock, duly endorsed to the Corporation or in blank, at the office of any Transfer Agent for the shares of $2.50 Preferred Stock (or such other place as may be designated by the Corporation), and shall give written notice to the Corporation as said office that he elects to convert the same and shall state in writing therein the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued. The Corporation shall, as soon as practicable thereafter, deliver at said office to such holder of shares of $2.50 Preferred Stock, or to his nominee or nominees, a certificate or certificates for the number of full shares of Common Stock to which he shall be entitled as aforesaid and make appropriate payment in cash for any fractional shares. Shares of $2.50 Preferred Stock shall be deemed to have been converted as of the date of the surrender of such shares for conversion as provided above, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. A number of authorized shares of Common Stock sufficient to provide for the conversion of the shares of $2.50 Preferred Stock outstanding upon the basis hereinbefore provided shall at all times be reserved for such conversion. (e) Shares of $2.50 Preferred Stock redeemed shall not be reissued. (f) The holders of $2.50 Preferred Stock shall be entitled to vote at all meetings of the stockholders, and at each such meeting shall be entitled to one vote for each share held. (g) To the extent that the Board of Directors is authorized to fix the designation, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, in respect of additional series of Preferred Stock, none of the preferences or rights of any such additional series as fixed by the Board of Directors shall be prior or superior in any respect to those of the $2.50 Preferred Stock. IN WITNESS WHEREOF, said Household International, Inc. has caused its corporate seal to be hereunto affixed and this certificate to be signed by D.C. Clark, its President, and - 38 - 39 attested by J.D. Pinkerton, its Secretary, this 25th day of June, 1981. Household International, Inc. (SEAL) By: /s/ D. C. Clark ------------------ President Attest: By: /s/ J. D. Pinkerton -------------------- Secretary - 39 - 40 HOUSEHOLD INTERNATIONAL, INC. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS Pursuant to Section 151 of the General Corporation Law of the State of Delaware 9 1/2% CUMULATIVE PREFERRED STOCK, SERIES 1989-A (Without Par Value) HOUSEHOLD INTERNATIONAL, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), HEREBY CERTIFIES that the following resolutions were duly adopted by the Board of Directors of the Corporation and by the Preferred Stock Committee of the Board of Directors, pursuant to authority conferred upon the Board of Directors by the provisions of the Restated Certificate of Incorporation, as amended, of the Corporation, and pursuant to authority conferred upon the Preferred Stock Committee by the resolutions of the Board of Directors set forth herein and in accordance with Section 141 (c) of the General Corporation Law of the State of Delaware. 1. The Board of Directors on September 12, 1989, adopted the following resolutions designating a Preferred Stock Committee of the Board of Directors and authorizing the Preferred Stock Committee to act on behalf of the Board of Directors (within certain limitations) in connection with the designation, issuance and sale of shares in one or more series of Preferred Stock of the Corporation: "RESOLVED, that a Preferred Stock Committee of the Board of Directors is hereby designated which shall have and may exercise, to the fullest extent permitted by law, the full power and authority of the Board of Directors with respect to the issuance and sale of one or more new series of the Corporation's Preferred Stock without par value (each such series herein referred to as the "New Preferred Stock"), including, without limitation, establishing the purchase price therefor, and fixing the designations and any of the preferences, powers, rights (other than voting powers or voting rights which shall be fixed by the Board of Directors) and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, of such shares of each series of New Preferred Stock, and fixing the number of shares of each series of New Preferred Stock. "FURTHER RESOLVED, that the Committee is authorized to take such additional actions and adopt such additional resolutions as it deems necessary or appropriate for the purpose of authorizing and implementing the issuance, offer, and sale for cash of New Preferred Stock, including, without limiting the generality of the foregoing, the authorization and execution of agreements (including underwriting - 40 - 41 agreements) relating to the offer and sale of New Preferred Stock, authorization and approval of listing applications (including amendments or supplements thereto) for the listing of such New Preferred Stock on a stock exchange, approval of forms of stock certificates and authorization of issuance of New Preferred Stock in uncertificated form, any actions which may be necessary to qualify the offering and sale of New Preferred Stock under Blue Sky Laws of the various states, any necessary filings with the Secretary of the State of Delaware and other jurisdictions, and the appointment of a transfer agent. "FURTHER RESOLVED, that notwithstanding the foregoing resolutions, the Preferred Stock Committee may not authorize the sale of New Preferred Stock for more than $250 million cash consideration in the aggregate, and the power and authority of the Preferred Stock Committee set forth in the preceding resolutions shall expire on September 12, 1990. "FURTHER RESOLVED, that the members of the Preferred Stock Committee shall be D. C. Clark, E. P. Hoffman, and G. P. Osler. In the absence of Mr. Osler, A. E. Rasmussen is designated as an alternate member of the Preferred Stock Committee to serve in his place." 2. The Board of Directors on October 17, 1989, adopted the following resolution pertaining to the voting rights for series of Preferred Stock authorized for issuance by the Preferred Stock Committee of the Board of Directors: "RESOLVED, that holders of each series of the Corporation's Preferred Stock which is authorized by the Preferred Stock Committee of the Board of Directors to be issued and sold pursuant to authority granted to the Preferred Stock Committee by the Board of Directors (each such series herein referred to as the "New Preferred Stock") shall have no voting rights, and their consent shall not be required for taking any corporate action, except as otherwise set forth herein, except as otherwise required by law, and except as otherwise provided by the Board of Directors with respect to any particular series of New Preferred Stock. The consent of the holders of the New Preferred Stock with respect to the matters set forth in sub-sections (i) and (iii) of paragraph (5) of Article IV of the Corporation's Restated Certificate of Incorporation ("Paragraph (5)") shall not be required, except with respect to the creation or issuance of any class of stock ranking prior to or on a parity with the Preferred Stock, or any series thereof, as to the payment of dividends or the distribution of assets; but the other provisions of Paragraph (5) shall be applicable to the New Preferred Stock. The holders of the New Preferred Stock shall have no right to elect directors pursuant to paragraph (6) of - 41 - 42 Article IV of the Corporation's Restated Certificate of Incorporation ("Paragraph (6)"), such right hereby being expressly withheld. In the event that any six quarterly cumulative dividends, whether consecutive or not, upon the New Preferred Stock shall be in arrears, the holders of the New Preferred Stock shall have the right, voting separately as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the New Preferred Stock either as to payment of dividends or the distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and upon which like voting rights have been conferred and are then exercisable, at the next meeting of stockholders called for the election of directors, to elect two members of the Board of Directors. The right of such holders of such shares of the New Preferred Stock, voting separately as a class, to elect (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity) members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on such shares of the New Preferred Stock shall have been paid in full, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent failure to pay dividends of the character above mentioned. Upon any termination of the right of the holders of the New Preferred Stock as a class to elect directors as herein provided, the term of office of all directors so elected shall terminate immediately. If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders voting as a class may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall thereupon be such number as may be provided for in the Corporation's Bylaws irrespective of any increase made pursuant to the provisions of this resolution. Until all unpaid dividends on the New Preferred Stock shall have been paid in full, and in order to permit the holders of the Corporation's $6.25 Cumulative Convertible Voting Preferred Stock, and any other series of Preferred Stock issued by the Corporation having the voting rights set forth in Paragraph (6) to exercise fully the right to elect directors as granted by and provided in Paragraph (6), the number of directors constituting the whole Board of - 42 - 43 Directors of the Corporation shall not be less than seven. If, upon any such arrearage in dividends, the number of directors constituting the whole Board of Directors shall be less than seven, the size of the Board of Directors shall, immediately prior to the next meeting of stockholders called for the election of directors, automatically be increased by such number as shall be necessary to cause the number of directors constituting the whole Board of Directors to be no less than seven. To the extent that the Board of Directors is authorized to fix the designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof in respect of additional series of Preferred Stock, none of the preferences or rights of any such additional series as fixed by the Board of Directors shall rank prior to the New Preferred Stock as to payment of dividends or the distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, without the consent of the holders of two-thirds of the outstanding shares of such series of New Preferred Stock voting as a class. The foregoing voting provisions shall not apply to any series of New Preferred Stock if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of such series of New Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption. On any time in which the holders of New Preferred Stock are entitled to vote, such holders shall be entitled to one vote for each share held." 3. The Preferred Stock Committee of the Board of Directors on November 2, 1989 adopted the following resolution pursuant to authority conferred upon the Preferred Stock Committee of the Board of Directors by the resolution of the Board of Directors set forth in paragraph 1 above of this Certificate of Designation, Preferences and Rights: "RESOLVED, that the issue of a series of Preferred Stock without par value of the Corporation is hereby authorized and the designation, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation, as amended, of the Corporation, are hereby fixed as follows: 9 1/2% CUMULATIVE PREFERRED STOCK, SERIES 1989-A - 43 - 44 (1) Number of Shares and Designation. 750,000 shares of Preferred Stock without par value of the Corporation are hereby constituted as a series of Preferred Stock without par value and designated as 9 1/2% Cumulative Preferred Stock, Series 1989-A (hereinafter called the "Preferred Stock, Series 1989-A"). (2) Dividends. The holders of shares of the Preferred Stock, Series 1989-A, shall be entitled to receive cash dividends, when and as declared by the Board of Directors of the Corporation, out of assets legally available for the purpose, at the rate determined as provided below. Such dividends shall be cumulative from the date of original issue of such shares and shall be payable quarterly in arrears, when and as declared by the Board of Directors of the Corporation, on the fifteenth day of January, April, July and October in each year to holders of record on the respective business days next preceding the first days of those months (and the quarterly dividend periods shall commence on the first days of those months). Dividends on the Preferred Stock, Series 1989-A, for all quarterly dividend periods will be payable at the rate of 9 1/2% per annum applied to the amount of $100 per share of Preferred Stock, Series 1989-A. The amount of dividends payable on each share of Preferred Stock, Series 1989-A, for each full quarterly dividend period shall be computed by dividing the dividend rate by four and applying the dividend rate to the amount of $100 per share. The amount of dividends payable for any dividend period shorter or longer than a full quarterly dividend period shall be computed on the basis of 30-day months and a 360-day year. (3) Liquidation Preference. The amount to which shares of Preferred Stock, Series 1989-A, shall be entitled upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, shall be $100 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for payment, and no more. (4) Redemption. The shares of Preferred Stock, Series 1989-A, shall be subject to redemption in whole or in part at the option of the Corporation on or after November 9, 1994, at the following redemption prices, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for redemption, and no more: $104.75 per share if redeemed on or before November 8, 1995; $103.80 per share if redeemed thereafter and on or before November 8, 1996; $102.85 per share if redeemed thereafter and on or before November 8, 1997; $101.90 per share if redeemed thereafter and on or before November 8, 1998; $100.95 per share if redeemed thereafter and on or before November 8, 1999; $100.00 per share if redeemed thereafter. - 44 - 45 (5) Shares to be Retired. All shares of Preferred Stock, Series 1989-A, purchased or redeemed by the Corporation shall be retired and cancelled and shall be restored to the status of authorized but unissued shares of the class of Preferred Stock without par value, without designated as to series, and may thereafter be issued, but not as shares of Preferred Stock, Series 1989-A. (6) Conversion or Exchange. The holders of shares of Preferred Stock, Series 1989-A, shall not have any rights herein to convert such shares into or exchange such shares for shares of any other series of any class or classes of capital stock (or any other security) of the Corporation. (7) Ranking. The Preferred Stock, Series 1989-A, shall rank on a parity with the Corporation's $6.25 Cumulative Convertible Voting Preferred Stock as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and shall rank prior to the Corporation's Common Stock and Series A Junior Participating Preferred Stock as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and prior to any other series of stock authorized to be issued by the Corporation which ranks junior to the $6.25 Cumulative Convertible Voting Preferred Stock as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary." IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation, Preferences and Rights to be signed by Donald C. Clark, Chairman of the Board and Chief Executive officer of the Corporation, and attested by James D. Pinkerton, - 45 - 46 the Corporation's Senior Vice President-Administration and Secretary, this 6th day of November, 1989. HOUSEHOLD INTERNATIONAL, INC. By: /s/ D. C. Clark --------------------------- Chairman of the Board and Chief Executive Officer Attest: /s/ J. D. Pinkerton -------------------------- Senior Vice President- Administration and Secretary - 46 - 47 HOUSEHOLD INTERNATIONAL, INC. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS Pursuant to Section 141 of the General Corporation Law of the State of Delaware FLEXIBLE RATE AUCTION PREFERRED STOCK, SERIES A AND B (Without Par Value) HOUSEHOLD INTERNATIONAL, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), HEREBY CERTIFIES that the following resolutions were duly adopted by the Board of Directors of the Corporation and by the Preferred Stock Committee of the Board of Directors, pursuant to authority conferred upon the Board of Directors by the provisions of the Restated Certificate of Incorporation, as amended, of the Corporation, and pursuant to authority conferred upon the Preferred Stock Committee by the resolutions of the Board of Directors set forth herein and in accordance with section 141(c) of the General Corporation Law of the State of Delaware. I. The Board of Directors on September 12, 1989, adopted the following resolutions designating a Preferred Stock Committee of the Board of Directors and authorizing the Preferred Stock Committee to act on behalf of the Board of Directors (within certain limitations) in connection with the designation, issuance and sale of shares in one or more series of Preferred Stock of the Corporation: "RESOLVED, that a Preferred Stock Committee of the Board of Directors is hereby designated which shall have and may exercise, to the fullest extent permitted by law, the full power and authority of the Board of Directors with respect to the issuance and sale of one or more new series of the Corporation's Preferred Stock without par value (each such series herein referred to as the "New Preferred Stock"), including, without limitation, establishing the purchase price therefor, and fixing the designations and any of the preferences, powers, rights (other than voting powers or voting rights which shall be fixed by the Board of Directors) and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, of such shares of each series of New Preferred Stock, and fixing the number of shares of each series of New Preferred Stock. "FURTHER RESOLVED, that the Committee is authorized to take such additional actions and adopt such additional resolutions as it deems necessary or appropriate for the purpose of authorizing and implementing the issuance, offer, and sale for cash of New Preferred Stock, including, without limiting the generality of the foregoing, the authorization and execution of agreements (including underwriting - 47 - 48 agreements) relating to the offer and sale of New Preferred Stock, authorization and approval of listing applications (including amendments or supplements thereto) for the listing of such New Preferred Stock on a stock exchange, approval of forms of stock certificates and authorization of issuance of New Preferred Stock in uncertificated form, any actions which may be necessary to qualify the offering and sale of New Preferred Stock under Blue Sky Laws of the various states, any necessary filings with the Secretary of State of Delaware and other jurisdictions, and the appointment of a transfer agent. "FURTHER RESOLVED, that notwithstanding the foregoing resolutions, the Preferred Stock Committee may not authorize the sale of New Preferred Stock for more than $250 million cash consideration in the aggregate, and the power and authority of the Preferred Stock Committee set forth in the preceding resolutions shall expire on September 12, 1990. "FURTHER RESOLVED, that the members of the Preferred Stock Committee shall be D. C. Clark, E. P. Hoffman, and G. P. Osler. In the absence of Mr. Osler, A. E. Rasmussen is designated as an alternate member of the Preferred Stock Committee to serve in his place." II. The Board of Directors on July 10, 1990, adopted the following resolution pertaining to the voting rights which will be applicable to the Flexible Rate Auction Preferred Stock, Series A and B: "RESOLVED, that notwithstanding the resolution of the Board of Directors adopted on October 17, 1989, the holders of any series of Preferred Stock which on or after July 10, 1990, is authorized by the Corporation's Preferred Stock Committee of the Board of Directors to be issued and sold pursuant to authority granted to the Preferred Stock Committee by the Board of Directors (each such series herein referred to as the "New Preferred Stock") shall have no voting rights, and their consent shall not be required for taking any corporate action, except as otherwise set forth herein, except as otherwise required by law, and except as otherwise provided by the Board of Directors with respect to any particular series of New Preferred Stock. The consent of the holders of the New Preferred Stock with respect to the matters set forth in subsections (i) and (iii) of paragraph (5) of Article IV of the Corporation's Restated Certificate of Incorporation ("Paragraph (5)") shall not be required, except with respect to the creation or issuance of any class of stock ranking prior to or on a parity with the Preferred Stock, or any series thereof, as to the payment of dividends or the distribution of assets; but the other provisions of Paragraph (5) shall be applicable to the New Preferred Stock. The holders of the New Preferred Stock shall have no right to elect directors - 48 - 49 pursuant to paragraph (6) of Article IV of the Corporation's Restated Certificate of Incorporation ("Paragraph (6)"), such right hereby being expressly withheld. In the event that any six quarterly cumulative dividends (which shall be deemed to include dividends in respect of a number of non-quarterly dividend periods containing not less than 540 days), whether consecutive or not, upon the New Preferred Stock shall be in arrears, the holders of the New Preferred Stock shall have the right, voting separately as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the New Preferred Stock either as to payment of dividends or the distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and upon which like voting rights have been conferred (which shall include the Corporation's 9-1/2% Cumulative Preferred Stock, Series 1989-A) and are then exercisable, at the next meeting of stockholders called for the election of directors, to elect two members of the Board of Directors. The right of such holders of such shares of the New Preferred Stock, voting separately as a class, to elect (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity) members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on such shares of the New Preferred Stock shall have been paid in full, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent failure to pay dividends of the character above mentioned. Upon any termination of the right of the holders of the New Preferred Stock as a class to elect directors as herein provided, the term of office of all directors so elected shall terminate immediately. If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders voting as a class may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall thereupon be such number as may be provided for in the Corporation's Bylaws irrespective of any increase made pursuant to the provisions of this resolution. Until all unpaid dividends on the New Preferred Stock shall have been paid in full, and in order to permit the holders of the Corporation's $6.25 Cumulative Convertible Voting Preferred Stock, and any other series of Preferred - 49 - 50 Stock issued by the Corporation having the voting rights set forth in Paragraph (6) to exercise fully the right to elect directors as granted by and provided in paragraph (6), the number of directors constituting the whole Board of Directors of the Corporation shall not be less than seven. If, upon any such arrearage in dividends, the number of directors constituting the whole Board of Directors shall be less than seven, the size of the Board of Directors shall, immediately prior to the next meeting of stockholders called for the election of directors, automatically be increased by such number as shall be necessary to cause the number of directors constituting the whole Board of Directors to be no less than seven. To the extent that the Board of Directors is authorized to fix the designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof in respect of additional series of Preferred Stock, none of the preferences or rights of any such additional series as fixed by the Board of Directors shall rank prior to the New Preferred Stock as to payment of dividends or the distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, without the consent of the holders of two-thirds of the outstanding shares of such series of New Preferred Stock voting as a class. The foregoing voting provisions shall not apply to any series of New Preferred Stock if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of such series of New Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption. On any item in which the holders of New Preferred Stock are entitled to vote, such holders shall be entitled to one vote for each share held." III. The Preferred Stock Committee of the Board of Directors on July 18, 1990 adopted the following resolution pursuant to authority conferred upon the Preferred Stock Committee of the Board of Directors by the resolution of the Board of Directors set forth in paragraph I above of this Certificate of Designation, Preferences and Rights: "RESOLVED, that the issue of two series of Preferred Stock without par value of the Corporation is hereby authorized and the designation, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation, as amended, of the Corporation, are hereby fixed as follows: - 50 - 51 PART I 1. Designation; Amount and Series. The two Series of Preferred Stock created hereby shall comprise 750,000 shares designated as "Flexible Rate Auction Preferred Stock" (referred to as the "Flex APS"). The 750,000 shares of the Flex APS shall be issuable in the following Series: 350,000 shares designated "Flexible Rate Auction Preferred Stock, Series A" (the "Series A Flex APS") and 400,000 shares designated "Flexible Rate Auction Preferred Stock, Series B" (the "Series B Flex APS"). Each share of each separate Series of Flex APS shall be identical and equal in all respects to every other share of such Series, and the shares of all of the Series shall, except as expressly provided herein, or as otherwise provided by law, be identical and equal in all respects. 2. Definitions. Unless the context or use indicates another or different meaning or intent, the following terms shall have the following meanings, whether used in the singular or plural: "60-day 'AA' Composite Commercial Paper Rate," on any date, means (i) the interest equivalent of the 60-day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated "Aa" by Moody's or AA by S&P or the equivalent of such rating by another rating agency, as such 60-day rate is made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the Business Day immediately preceding such date, or (ii) in the event that the Federal Reserve Bank of New York does not make available such a rate, then the arithmetic average of the interest equivalent of the 60-day rate on commercial paper placed on behalf of such issuers, as quoted on a discount basis or otherwise by the Commercial Paper Dealers to the Auction Agent for the close of business on the Business Day immediately preceding such date. If any Commercial Paper Dealer does not quote a rate required to determine the 60-day "AA" Composite Commercial Paper Rate, the 60-day "AA" Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the Corporation to provide such rate or rates not being supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or, if the Corporation does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper Dealers. If the Board of Directors of the Corporation, however, shall adjust the number of Dividend Period Days pursuant to the second sentence of paragraph 3(b)(v) in the event of a change in the dividends received deduction minimum holding period contained in the Code, then (i) if the Dividend Period Days shall be less than 70 days, such rate shall be the interest - 51 - 52 equivalent of the 60-day rate on such commercial paper, (ii) if the Dividend Period Days shall be 70 or more days but less than 85 days, such rate shall be the arithmetic average of the interest equivalent of the 60-day and 90-day rates on such commercial paper and (iii) if the Dividend Period Days shall be 85 or more days but less than 99 days, such rate shall be the interest equivalent of the 90-day rate on such commercial paper. For the purposes of such definition, "interest equivalent" means the equivalent yield on a 360-day basis of a discount basis security to an interest bearing security. "Act" shall mean the Securities Act of 1933, as amended. "Applicable 'AA' Composite Commercial Paper Rate" for any Long-Term Dividend Period on any date, shall mean (A) in the case of any Long-Term Dividend Period of less than 70 days, the interest equivalent of the 60-day rate, (B) in the case of any Long-Term Dividend Period of 70 days or more but less than 85 days, the arithmetic average of the interest equivalent of the 60-day and 90-day rates, (C) in the case of any Long-Term Dividend Period of 85 days or more but less than 120 days, the interest equivalent of the 90-day rate, (D) in the case of any Long-Term Dividend Period of 120 days or more but less than 148 days, the arithmetic average of the interest equivalent of the 90-day and 180-day rates, (E) in the case of any Long-Term Dividend Period of 148 days or more but less than 210 days, the interest equivalent of the 180-day rate, (F) in the case of any Long-Term Dividend Period of 210 days or more but less than 238 days, the arithmetic average of the interest equivalent of the 180-day and 270-day rates and (G) in the case of any Long-Term Dividend Period of 238 or more days, the interest equivalent of the 270-day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated "Aa" by Moody's or AA by S&P, or the equivalent of such rating by another rating agency, as made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the Business Day immediately preceding such date or in the event that the Federal Reserve Bank of New York does not make available any such rate, then the arithmetic average of such rates, as quoted on a discount basis or otherwise, by the Commercial Paper Dealers, to the Auction Agent for the close of business on the Business Day next preceding such date. If any Commercial Paper Dealer does not quote a rate required to determine the "AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the Corporation to provide such rate or rates not being supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or, if the Corporation does not - 52 - 53 select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper Dealers. For purposes of this definition, the "interest equivalent" means the equivalent yield on a 360-day basis of a discount-basis security to an interest-bearing security. "Applicable Rate" means the rate per annum established pursuant to paragraph 3(c) hereof at which dividends are payable on a Series for any Auction Dividend Period for such Series. "Applicable Treasury Rate" on any date, with respect to any Series of Flex APS with a Long-Term Dividend Period of one year or more, means the interest equivalent of the rate for direct obligations of the United States Treasury having an original maturity which is equal to, or next lower than, the length of such Long-Term Dividend Period, as published weekly by the Federal Reserve Board in "Federal Reserve Statistical Release H.15 (519)--Selected Interest Rates," or any successor publication by the Federal Reserve Board within five Business Days preceding such date. In the event that the Federal Reserve Board does not publish such weekly per annum interest rate, or if such release is not yet available, the Applicable Treasury Rate will be the arithmetic mean of the secondary market bid rates as of approximately 3:30 p.m., New York City time, on the Business Day next preceding such date of the U.S. Government Securities Dealers obtained by the Auction Agent (in the case of a determination of the Applicable Treasury Rate on any Auction Date) or the Corporation (in the case of a determination of such rate on any other day) for the issue of direct obligations of the United States Treasury, in an aggregate principal amount of at least $1,000,000, with a remaining maturity equal to, or next lower than, the length of such Long-Term Dividend Period. If any U.S. Government Securities Dealer does not quote a rate required to determine the Applicable Treasury Rate, the Applicable Treasury Rate shall be determined on the basis of the quotation or quotations furnished by the remaining U.S. Government Securities Dealer or Dealers or any Substitute U.S. Government Securities Dealer or Dealers selected by the Corporation to provide such rate or rates not being supplied by any U.S. Government Securities Dealer or Dealers, as the case may be, or, if the Corporation does not select any such Substitute U.S. Government Securities Dealer or Dealers, by the remaining U.S. Government Securities Dealer or Dealers; provided that, in the event the Corporation is unable to cause such quotations to be furnished to the Auction Agent (or, if applicable, to the Corporation) by such sources, the Corporation may cause such rates to be furnished to the Auction Agent (or, if applicable, to the Corporation) by such alternative source as the Corporation in good faith deems to be reliable. For purposes of this definition, the "interest equivalent" of a rate stated on a discount basis - 53 - 54 shall be equal to the quotient of (A) the discount rate divided by (B) the difference between 1.00 and the discount rate. "Auction" means each periodic operation of the Auction Procedures. "Auction Agent" means such bank or trust company or other entity which has been appointed as such by a resolution of the Board of Directors of the Corporation. "Auction Date" has the meaning specified in Part II below. "Auction Dividend Period" has the meaning set forth in paragraph 3(b)(vii) below. "Auction Procedures" means the procedures for conducting Auctions set forth in Part II below. "Bid" has the meaning set forth in Part II below. "Board of Directors" means the Board of Directors of the Corporation and any duly authorized committee of the Board of Directors. "Business Day" means a day on which the New York Stock Exchange is open for trading and which is not a day on which banks in New York City are authorized by law to close. "Code" means the Internal Revenue Code of 1986, as amended. "Commercial Paper Dealers" means Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated or, in lieu of any thereof, their respective affiliates or successors. "Common Stock" means the Corporation's common stock, $1.00 par value, and any other shares of stock into which such stock may hereinafter be changed from time to time. "Corporation" means Household International, Inc., a Delaware corporation, or its successor. "Date of Original Issue," with respect to any share of Flex APS, means the date on which the Corporation originally issues such share of Flex APS. "Dividend Payment Date" has the meaning set forth in paragraph 3(b)(vi) below. "Dividend Period Days" has the meaning set forth in paragraph 3(b)(v) below. - 54 - 55 "Dividend Quarter" has the meaning set forth in paragraph 3(b)(vi) below. "Existing Holder" has the meaning set forth in Part II below. "Failure to Deposit" means, with respect to any Series of Flex APS, the failure by the Corporation to irrevocably deposit with the Paying Agent sufficient funds for either the payment of dividends or the redemption price on such Series of Flex APS and to give the Paying Agent irrevocable instructions to apply such funds and, if applicable, the income and proceeds therefrom, to the payment of such dividends or redemption price not later than noon New York City time on the Business Day immediately preceding each Dividend Payment Date or date fixed for redemption with respect to such shares of Flex APS. "Fixed Dividend Period" has the meaning set forth in paragraph 3(b)(i) below. "Flex APS" has the meaning set forth in paragraph 1 above. "Holder" means the holder of shares of the Corporation's Flex APS as the same appears on the Stock Books of the Corporation. "Initial Auction", "Initial Auction Date", "Initial Auction Holders" and "Initial Dividend Period" have the meanings set forth in Part II below. "LIBOR" means, on any date for any Auction Dividend Period, the arithmetic average (rounded to the next higher 1/16 of 1%), computed by the Auction Agent of the following rates per annum or arithmetic averages thereof quoted by each of the principal London offices of the Reference Banks, at which United States dollar deposits in the amount of U.S. $10,000,000 are offered by such Reference Banks (i) in the case of any Auction Dividend Period with Dividend Period Days of less than 30 days, the one-month rate, (ii) in the case of any Auction Dividend Period with Dividend Period Days of 30 days or more but less than 70 days, the two-month rate, (iii) in the case of any Auction Dividend Period with Dividend Period Days of 70 or more days but less than 85 days, the two-month and three-month rates and (iv) in the case of any Auction Dividend Period with Dividend Period Days of 85 or more but less than 98 days or in the case that a Failure to Deposit occurs during a Long-Term Dividend Period, the three-month rate, to leading banks in the London interbank market at approximately 11:00 a.m. (London time) on the first day of such Auction Dividend Period (or Dividend Quarter), or if such day is not a day on which dealings in United States dollars are transacted in the London interbank market, then on the next preceding day on - 55 - 56 which such dealings are transacted in such market. If any Reference Bank does not quote a rate required to determine LIBOR, LIBOR shall be determined on the basis of the quotations furnished by the remaining Reference Bank or Reference Banks and any Substitute Reference Bank or Substitute Reference Banks selected by the Corporation to provide such quotation or quotations not being supplied by any Reference Bank or Reference Banks, as the case may be, or, if the Corporation does not select any Substitute Reference Bank or Substitute Reference Banks, by the remaining Reference Bank or Reference Banks. For each Auction Dividend Period or Dividend Quarter for which the rate is determined with reference to 200% of LIBOR, the Auction Agent will obtain rates from the Reference Banks and determine LIBOR and notify the Corporation of such determination. "Long-Term Dividend Period" has the meaning set forth in paragraph 3(b)(vii) below. "Maximum Applicable Rate," with respect to any Series with a Short-Term Dividend Period, on any Auction Date will be the rate obtained by multiplying the 60-day "AA" Composite Commercial Paper Rate on such Auction Date, and with respect to any Series with a Long-Term Dividend Period, the Maximum Applicable Rate on any Auction Date will be the rate obtained by multiplying the Reference Rate on such Auction Date, by a percentage determined as set forth below based on the credit rating or ratings assigned to the Flex APS by Moody's and S&P (or if Moody's or S&P or both shall not make such rating available, the equivalent of either or both or such ratings by a Substitute Rating Agency or two Substitute Rating Agencies or, in the event that only one such rating shall be available, the percentage will be based on such rating).
Applicable Percentage of Credit Rating 60-day "AA" Composite -------------------------------- Commercial Paper Rate Moody's S&P or Reference Rate ------- --- -------------------------- aa3 or Above AA-or Above 110% a3 to a1 A- to A+ 125% baa3 to baa1 BBB- to BBB+ 175% ba3 to ba1 BB- to BB+ 200% Below ba3 Below BB- 250%
If the ratings for any Series of Flex APS are split between two of the foregoing categories, the lower rating will determine the prevailing rating. The Corporation shall take all reasonable action necessary to enable Moody's and S&P to provide a rating for each Series. If either Moody's or S&P shall not make such rating available or neither Moody's nor S&P shall make such - 56 - 57 a rating available, Goldman, Sachs & Co. or its affiliates and successors, after consultation with the Corporation, shall select a Substitute Rating Agency or two Substitute Rating Agencies, as the case may be. "Minimum Holding Period" has the meaning set forth in paragraph 3(b)(v) below. "Moody's" means Moody's Investors Service, Inc., or its successor, so long as such agency (or successor) is in the business of rating securities of the type of the Flex APS and, if such agency is not in such business, then a Substitute Rating Agency. "Non-Auction Rate" has the meaning set forth in paragraph 3(c)(i) below. "Normal Dividend Payment Date" has the meaning set forth in paragraph 3(b)(ii) below. "Notice of Long-Term Dividend Period" has the meaning set forth in paragraph 3(b)(viii) below. "Notice of Removal" has the meaning set forth in paragraph 3(b)(viii) below. "Notice of Revocation" has the meaning set forth in paragraph 3(b)(viii) below. "Paying Agent" means the Auction Agent unless another bank or trust company has been appointed for such purpose by resolution of the Board of Directors of the Corporation. "Rating Agencies" means Moody's and S&P. "Reference Banks" means Citibank, N.A., Bankers Trust Company and Morgan Guaranty Trust Company of New York, or, in lieu thereof, their respective successors. "Reference Rate" means for Long-Term Dividend Periods (i) from 50 days to less than 270 days, the Applicable "AA" Composite Commercial Paper Rate, (ii) from 270 days to less than one year, the higher of the 270-day Applicable "AA" Composite Commercial Paper Rate and the one-year Applicable Treasury Rate and (iii) of one year or more, the Applicable Treasury Rate. "Securities Depository" means The Depository Trust Company and its successors and assigns or any other securities depository selected by the Corporation which agrees to follow the procedures required to be followed by such securities depository in connection with the Flex APS. "Sell Order" has the meaning set forth in Part II below. - 57 - 58 "Series" means the Series A Flex APS or the Series B Flex APS authorized herein. "Short-Term Dividend Period" has the meaning set forth in paragraph 3(b)(vii) below. "S&P" means Standard & Poor's Corporation, or its successor, so long as such agency (or successor) is in the business of rating securities of the type of the Flex APS and, if such agency is not in such business, then a Substitute Rating Agency. "Stock Books" means the stock transfer books of the Corporation maintained by the Paying Agent. "Substitute Commercial Paper Dealer" means The First Boston Corporation or Shearson Lehman Hutton Inc. or, in lieu of each thereof, their respective affiliates or successors. "Substitute Rating Agency" means a nationally recognized statistical rating organization (as that term is used in the rules and regulations of the Securities Exchange Act of 1934) selected by the Term Selection Agent after consultation with the Corporation, and may include Fitch Investors Service, Inc. and Duff & Phelps, Inc. "Substitute Reference Bank" means the principal London offices of any of The Bank of Tokyo Ltd., The First National Bank of Chicago or Commerebank A.G. or, in lieu thereof, their respective successors, or, if none of such Substitute Reference Banks are engaged in dealings in United States dollars in the London interbank market, then a bank or banks selected by the Corporation, engaged in dealings in United States dollars in the London interbank market. "Substitute U.S. Government Securities Dealer" means Merrill Lynch, Pierce, Fenner & Smith Incorporated or The First Boston Corporation, or their respective affiliates or successors. "Successful Initial Auction" shall have the meaning set forth in Part II below. "Term Selection Agent" means Goldman, Sachs & Co., unless or until another investment banking firm has been appointed as such by a resolution of the Board of Directors of the Corporation. "Unit" with respect to each Series shall mean 1,000 shares of Flex APS of such Series. "U.S. Government Securities Dealer" means Goldman, Sachs & Co., Salomon Brothers Inc. and Morgan Stanley & Co. Incorporated or, in lieu of any thereof, their respective - 58 - 59 affiliates or successors. 3. Dividends. (a) Holders of shares of each Series of Flex APS shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation, out of surplus (as defined in the General Corporation Law of the State of Delaware), or net profits of the Corporation for the fiscal year in which the dividend is declared and/or for the preceding fiscal year, cumulative cash dividends at the applicable dividend rate per annum established or determined as set forth herein, payable on the respective dates set forth below. (b) (i) Dividends on the shares of each Series shall accumulate at the respective rates for such Series (whether or not declared) from the Date of Original Issue. From the Date of Original Issue to but not including July 15, 1993 with respect to the Series A Flex APS and July 15, 1995 with respect to the Series B Flex APS (in each case the "Fixed Dividend Period"), dividends on the Flex APS shall be payable on the fifteenth day of October, January, April, and July in each year commencing on October 15, 1990. (ii) Following the respective Fixed Dividend Period for any Series of Flex APS, dividends on the shares of such Series with a Short-Term Dividend Period shall be payable, except as provided below in this paragraph 3(b), every 49 days on the day following the last day of such Short-Term Dividend Period. Dividends on the shares of each Series with a Long-Term Dividend Period shall be payable, except as provided below in this paragraph 3(b), on the day following the last day of such Long-Term Dividend Period and, if occurring prior to the day following the last day of such Long-Term Dividend Period, on the fifteenth day of the third month after the commencement of such Long-Term Dividend Period and quarterly thereafter on the fifteenth day of each succeeding third month. Each day on which dividends on shares of a Series would be payable as determined as set forth in this clause (ii) but for the provisions set forth below in this paragraph 3(b) is referred to herein as a "Normal Dividend Payment Date." (iii) In the case of dividends payable on the shares of a Series with a Short-Term Dividend Period, if: (A) (I) The Securities Depository shall continue to make available to its members and participants the amounts due as dividends on the shares of such Series in next-day funds on the dates on which such dividends are payable and (II) a Normal Dividend Payment Date for such Series is not a Business Day, or the day next succeeding - 59 - 60 such Normal Dividend Payment Date is not a Business Day, then dividends shall be payable on the first Business Day preceding such Normal Dividend Payment Date that is next succeeded by a Business Day; or (B) (I) The Securities Depository shall make available to its members and participants the amounts due as dividends on the shares of such Series in immediately available funds on the dates on which such dividends are payable (and the Securities Depository shall have so advised the Auction Agent) and (II) a Normal Dividend Payment Date for such Series is not a Business Day, then dividends shall be payable on the first Business Day following such Normal Dividend Payment Date. (iv)In the case of dividends payable on the shares of a Series with a Long-Term Dividend Period, if: (A) (I) The Securities Depository shall continue to make available to its members and participants the amounts due as dividends on the shares of such Series in next-day funds on the dates on which such dividends are payable and (II) a Normal Dividend Payment Date for such Series is not a Business Day, or the day next succeeding such Normal Dividend Payment Date is not a Business Day, then dividends shall be payable on the first Business Day following such Normal Dividend Payment Date that is next succeeded by a Business Day; or (B) (I) The Securities Depository shall make available to its members and participants the amounts due as dividends on the shares of such Series in immediately available funds on the dates on which such dividends are payable (and the Securities Depository shall have so advised the Auction Agent) and (II) a Normal Dividend Payment Date for such Series is not a Business Day, then dividends shall be payable on the first Business Day following such Normal Dividend Payment Date. (v) Notwithstanding the foregoing, if the date on which dividends on the shares of any Series would be payable as determined as set forth in clauses (ii), (iii) or (iv) above is a day that would result in the number of days between successive Auction Dates for such Series (determined by including the first Auction Date and excluding the second Auction Date) not being at least equal to the then current Minimum Holding Period, then dividends on such shares shall be payable, if either clauses (iii)(A) or (iv)(A) above would be - 60 - 61 applicable to such Series, on the first Business Day following such date on which dividends would be so payable that is next succeeded by a Business Day or, if either clauses (iii)(B) or (iv)(B) above would be applicable to such Series, on the first Business Day following such day on which dividends would be so payable, that in either case results in the number of days between such successive Auction Dates for such Series (determined as set forth above) being at least equal to the then current Minimum Holding Period. In addition, notwithstanding the foregoing, in the event of a change in law altering the minimum holding period (the "Minimum Holding Period") required for corporate taxpayers generally to be entitled to the dividends received deduction for federal income tax purposes in respect of dividends (other than extraordinary dividends) paid on preferred stock held by non-affiliated corporations, the Board of Directors of the Corporation may adjust the period of time between Dividend Payment Dates for each Series so as to adjust uniformly the number of days (such number of days without giving effect to the provisions in paragraphs 3(b)(iii) and (iv) being hereinafter referred to as "Dividend Period Days") in Auction Dividend Periods for each Series commencing after the date of such change in law to equal or exceed the then current Minimum Holding Period, provided that the number of Dividend Period Days shall not exceed by more than nine days the length of such then current Minimum Holding Period and shall be evenly divisible by seven, and the maximum number of Dividend Period Days, as adjusted pursuant to this provision, in no event shall exceed 98 days. Upon any such change in the number of Dividend Period Days as a result of a change in law, the Corporation shall mail notice of such change by first-class mail, postage prepaid, to the Auction Agent and the Paying Agent and to each Existing Holder. (vi) Each date on which dividends on the shares of a Series for an Auction Dividend Period shall be payable as determined as set forth in paragraph 3(b)(ii) above shall be referred to herein as a "Dividend Payment Date" for such Series. If applicable, the period from the preceding Dividend Payment Date to the next Dividend Payment Date for any Series with a Long-Term Dividend Period is herein referred to as a "Dividend Quarter." Although any particular Dividend Payment Date for a Series may not occur on the originally scheduled Normal Dividend Payment Date for such Series because of the foregoing provisions, each succeeding Dividend Payment Date for such Series shall be, subject to such provisions, the date determined as set forth in clause (ii) above as if each preceding Dividend Payment Date had occurred on - 61 - 62 the respective originally scheduled Normal Dividend Payment Date. (vii) After the Fixed Dividend Period for each Series, each subsequent Auction Dividend Period for such Series (except for the adjustments for non-Business Days provided in clauses (iii) and (iv) above) shall be 49 days (each such 49-day period, subject to any adjustment as a result of a change in law lengthening the Minimum Holding Period as provided in clause (v) above, being referred to herein as a "Short-Term Dividend Period"), unless as provided in clause (viii) below, the Term Selection Agent specifies that any such subsequent Auction Dividend Period shall be an Auction Dividend Period of any specified number of days greater than a Short-Term Dividend Period and, except as otherwise designated by the Term Selection Agent in the case of the Initial Auction Dividend Period, consisting of a whole number of weeks (each such period being referred to herein as a "Long-Term Dividend Period," and each such Short-Term Dividend Period and Long- Term Dividend Period being referred to herein as an "Auction Dividend Period"). The Initial Auction Dividend Period will commence on July 15, 1993 with respect to the Series A Flex APS, and on July 15, 1995 with respect to the Series B Flex APS. Thereafter, each successive Auction Dividend Period for such Series shall commence on the Dividend Payment Date for the preceding Auction Dividend Period and shall end (i) in the case of any Series with a Short-Term Dividend Period, on the day preceding the next Dividend Payment Date for such Series and (ii) in the case of any Series with a Long-Term Dividend Period, on the day preceding the last Dividend Payment Date for such Long-Term Dividend Period specified by the Term Selection Agent in the related notice of Long-Term Dividend Period. (viii) Not less than 10 and not more than 20 days prior to an Auction Date for any Series and based on the criteria set forth below, the Term Selection Agent may give telephonic and written notice to the Corporation, the Auction Agent, the Paying Agent and the Securities Depository that the next succeeding Auction Dividend Period for such Series will be longer than a Short-Term Dividend Period (a "Notice of Long-Term Dividend Period"). Such notice will specify the next succeeding Auction Dividend Period for such Series as a Long-Term Dividend Period, which may be any period designated by the Term Selection Agent greater than the Short-Term Dividend Period and, except as otherwise designated by the Term Selection Agent in the case of the Initial Auction Dividend Period, consisting of a whole number of weeks, provided that for any Auction occurring after the Initial Auction for any Series, the Term Selection Agent may not give a Notice of Long-Term - 62 - 63 Dividend Period for such Series (and any such notice shall be null and void) unless Sufficient Clearing Bids were made in the last occurring Auction for such Series and full cumulative dividends for all Series payable prior to such date have been paid in full. The Term Selection Agent shall state in each Notice of Long-Term Dividend Period (i) that the next succeeding Auction Dividend Period for such Series shall be a Long-Term Dividend Period, (ii) the term thereof and (iii) whether or not the shares of such Series for such Long-Term Dividend Period will be redeemable at the option of the Corporation and, if they are, the date or dates upon which such shares will be so redeemable, the redemption price (which shall not be less than $100 per share plus an amount equal to accrued and unpaid dividends thereon (whether or not earned or declared) to the date fixed for redemption), and such other terms as may be necessary or appropriate to effect such redemption. The Term Selection Agent may establish a Long-Term Dividend Period for the shares of a Series of Flex APS and the applicable redemption provisions therefor, if the Term Selection Agent determines that such Long-Term Dividend Period and such redemption provisions, in its sole opinion, provides the Corporation with the most favorable financing alternative based upon the following: (i) short-term and long-term market rates and indices of such short-term and long-term rates, (ii) the amounts, maturities and interest or dividend rates on the then outstanding securities of the Corporation or its subsidiaries, (iii) market supply and demand for short-term and long-term securities, (iv) yield curves for short-term and long-term securities comparable to the shares of Flex APS, (v) industry and financial conditions which may affect the shares of Flex APS including the Term Selection Agent's expectations with respect thereto, (vi) current tax laws and administrative interpretations with respect thereto, (vii) the number of shares of Flex APS Outstanding on the next Auction Date and (viii) the number of potential purchasers. Any Notice of Long-Term Dividend Period may be revoked by the Term Selection Agent on or prior to the second Business Day prior to the related Auction by telephonic and written notice (a "Notice of Revocation") to the Corporation, the Auction Agent, the Paying Agent and the Securities Depository, specifying that the Term Selection Agent has determined that because of subsequent changes in any of the foregoing factors, such Long-Term Dividend Period would not result in the most favorable financing alternative for the Corporation, and shall be deemed to have been revoked if on or prior to the second Business Day prior to the related Auction, the Term Selection Agent shall have been removed and the Corporation shall have given written and telephonic notice of such removal ("Notice - 63 - 64 of Removal") to the Auction Agent, the Paying Agent and the Securities Depository. Except with respect to a Notice of Long-Term Dividend Period that is deemed to be revoked, any Long-Term Dividend Period specified by the Term Selection Agent for a Series of Flex APS and any revocation thereof shall be conclusive and binding on the Corporation and the Holders. The Corporation may remove the Term Selection Agent for any Series of Flex APS upon 5 days' written notice. If there is no Term Selection Agent with respect to any Auction Dividend Period, then such Auction Dividend Period shall be a Short-Term Dividend Period. If the Term Selection Agent does not give a Notice of Long-Term Dividend Period with respect to the next succeeding Auction Dividend Period for any Series of Flex APS or gives a Notice of Revocation with respect thereto or such Notice of Long-Term Dividend Period shall be deemed to have been revoked, such next succeeding Auction Dividend Period shall be a Short-Term Dividend Period. In addition, in the event the Term Selection Agent has given a Notice of Long-Term Dividend Period with respect to the next succeeding Auction Dividend Period for any Series of Flex APS and has not given a Notice of Revocation with respect thereto and such Notice of Long-Term Dividend Period shall not have been deemed revoked, but Sufficient Clearing Bids are not made in the related Auction for such Series or such Auction is not held for any reason, such next succeeding Auction Dividend Period shall, notwithstanding such Notice of Long-Term Dividend Period, be a Short-Term Dividend Period and the Term Selection Agent may not again give a Notice of Long-Term Dividend Period (and any such notice shall be null and void) for such Series until Sufficient Clearing Bids have been made in an Auction with respect to a Short-Term Dividend Period for such Series. (ix) Not later than noon New York City time on the Business Day immediately preceding each Dividend Payment Date with respect to which dividends on any shares of Flex APS have been declared, the Corporation shall irrevocably deposit with the Paying Agent sufficient funds for the payment of such dividends and shall give the Paying Agent irrevocable instructions to apply such funds and, if applicable, the income and proceeds therefrom, to the payment of such dividends. (x) Each dividend on the shares of any Series declared by the Board of Directors of the Corporation for an Auction Dividend Period shall be paid to Holders of such shares as such Holders' names appear on the Stock Books on the related record date, which shall be - 64 - 65 the opening of business on the Business Day immediately preceding the Dividend Payment Date for such dividend. Subject to Article IV of the Corporation's Restated Certificate of Incorporation, as amended, dividends on the shares of any Series of Flex APS in arrears may be declared by the Board of Directors and paid on any date fixed by the Board of Directors on such date as is established by the Board of Directors, to Holders of such shares as such Holders' names appear on the Stock Books on the related record date fixed by the Board of Directors which shall not be more than 15 days before the date fixed for the payment of such dividends. (c)(i)(A) The Fixed Dividend Rate for the Fixed Dividend Period for Series A Flex APS shall be 9.25% per annum and for Series B Flex APS shall be 9.50% per annum. The amount of dividends payable on each share of Flex APS for each full quarterly dividend period during the Fixed Dividend Period shall be computed by dividing the Fixed Dividend Rate by four and applying such rate to the amount of $100 per share. The amount of dividends payable for any dividend period shorter or longer than a full quarterly dividend period shall be computed on the basis of 30-day months and a 360-day year. The dividend rate on the shares of each Series for each Auction Dividend Period shall be the rate per annum determined for such Series pursuant to Part II below; provided, however, that in the event that an Auction for any Auction Dividend Period for any Series is not held for any reason (other than as a result of the existence of a Failure to Deposit on the Auction Date for such Auction Dividend Period), the dividend rate on the shares of such Series for such Auction Dividend Period shall be the Non-Auction Rate on the Auction Date with respect to such Auction Dividend Period. The "Non-Auction Rate" for any Series on an Auction Date for such Series shall be the greater of (x) the Applicable Rate in effect for such Series immediately prior to such Auction Date or (y) the Maximum Applicable Rate in effect on such Auction Date for a Short-Term Dividend Period, regardless of whether an Auction is held. The dividend rate on the shares of any Series for any Auction Dividend Period or part thereof determined as set forth in this clause (c) is referred to herein as the "Applicable Rate" for such Series for such Auction Dividend Period or part thereof. (B) In the event a Failure to Deposit occurs prior to the beginning of an Auction Dividend Period and is not cured in accordance with the next succeeding sentence, Auctions for such Series - 65 - 66 will be suspended, until such time as set forth below, and the Applicable Rate for shares of such Series for each Auction Dividend Period (until Auctions are resumed) commencing after such Failure to Deposit shall be equal to 200% of LIBOR on the first day of each such Auction Dividend Period and each such Auction Dividend Period shall be a Short-Term Dividend Period. Any such Failure to Deposit with respect to the shares of any Series shall be deemed cured if by 12:00 noon, New York City time, on the third Business Day next succeeding any such Failure to Deposit, the Corporation shall have deposited with the Auction Agent all accumulated and unpaid dividends on the shares of such Series and shall have deposited any unpaid redemption payments with the Paying Agent, including the full amount of any dividends to be paid with respect to the Auction Dividend Period with respect to which such Failure to Deposit occurred, plus an amount computed by multiplying (i) 200% of the 60-Day "AA" Composite Commercial Paper Rate for the Auction Dividend Period during which such Failure to Deposit occurred on the Dividend Payment Date for such Auction Dividend Period by (ii) a fraction, the numerator of which shall be the number of days for which such Failure to Deposit is not cured in accordance with this sentence (including the day such Failure to Deposit occurs and excluding the day such Failure to Deposit is cured) and the denominator of which shall be 360, and applying the rate obtained against the aggregate liquidation preference of the shares of such Series then Outstanding. (C) In the event a Failure to Deposit occurs during a Long-Term Dividend Period, the Applicable Rate for such Auction Dividend Period shall remain unchanged, and an additional amount computed by multiplying (i) 200% of LIBOR on the date on which such Failure to Deposit occurred by (ii) a fraction, the numerator of which shall be the number of days for which such Failure to Deposit is not cured (including the day such Failure to Deposit occurs and excluding the day such Failure to Deposit is cured) and the denominator of which shall be 360, and applying the rate obtained against accumulated dividends not paid when due, shall accumulate as additional dividends on the shares of such Series of Flex APS. In the event that such Failure to Deposit is not cured prior to the next succeeding Auction Date for shares of such Series, Auctions for such Series shall be suspended, the next succeeding Auction Dividend Period shall be a Short-Term Dividend Period and the Applicable Rate shall be equal to 200% of - 66 - 67 LIBOR on the first day of such Auction Dividend Period. Thereafter until such Failure to Deposit shall have been cured and full and cumulative dividends on the shares of such Series shall have been paid in full or the Board of Directors of the Corporation shall have declared a dividend in such amount and funds sufficient for the payment thereof shall have been irrevocably deposited with the Paying Agent, each subsequent Auction Dividend Period and Applicable Rate for such Series will be determined pursuant to the next preceding paragraph. (D) If prior to an Auction Date for shares of such Series, full and cumulative dividends shall have been paid in full or the Board of Directors of the Corporation shall have declared a dividend in such amount and funds sufficient for the payment thereof shall have been irrevocably deposited with the Paying Agent, Auctions for such Series will resume. (ii) The amount of dividends per share of any Series of the Flex APS payable for each Auction Dividend Period (or for each Dividend Quarter during any Long-Term Dividend Period) for any such Series shall be computed by multiplying the Applicable Rate for each Auction Dividend Period (or Dividend Quarter) by a fraction the numerator of which shall be the number of days in the Auction Dividend Period (or Dividend Quarter) such share was Outstanding and the denominator of which shall be 360 and multiplying the amount so obtained by $100. (d) (i) Notwithstanding paragraph 1 of Article IV of the Corporation's Restated Certificate of Incorporation, dividends on other series of the Corporation's Preferred Stock ranking on a parity with the Flex APS may from time to time be declared or paid on different dates than dividends on the Flex APS are declared or paid. Holders of Flex APS shall not be entitled to any dividends, whether in cash, property or stock, in excess of full cumulative dividends. No interest, or sum if money in lieu of interest, shall be payable in respect of any dividend payment or payments on the shares of Flex APS which may be in arrears. (ii) The Flex APS shall rank on a parity with the Corporation's $6.25 Cumulative Convertible Voting Preferred Stock and 9 1/2% Cumulative Preferred Stock, Series 1989-A, as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and shall rank prior to the Corporation's Common Stock and Series A Junior Participating Preferred Stock as to - 67 - 68 payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and prior to any other series of stock authorized to be issued by the Corporation which ranks junior to the $6.25 Cumulative Convertible Voting Preferred Stock and 9 1/2% Cumulative Preferred Stock, Series 1989-A, as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary. (iii) Any dividend payment made on shares of Flex APS shall first be credited against the dividends accumulated with respect to the earliest period for which dividends have not been paid. (iv) Except in an Auction, the Corporation shall have the right to purchase or otherwise acquire any shares of Flex APS in the open market at any lawful price so long as the Corporation is current in the payment of dividends on the shares of all series of its Preferred Stock. Any shares of Flex APS purchased or otherwise acquired by the Corporation shall not be resold and shall be retired and canceled, and shall be restored to the status of authorized but unissued shares of the class of the Corporation's Preferred Stock without designation as to series, and may thereafter be issued as a new series of Preferred Stock. 4. Liquidation Rights. The amount to which shares of Flex APS shall be entitled upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, shall be $100 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for payment, and no more. 5. Voting Rights. The Holders of the shares of each Series of Flex APS shall have such voting rights as have been established by the Board of Directors of the Corporation. 6. Redemption. During the Fixed Dividend Period for a Series of Flex APS, the Corporation may not redeem the shares of such Series except on the Business Day prior to the Initial Auction Date for such Series, at which time the Corporation may redeem shares of such Series which in the aggregate constitute one or more Units out of funds legally available therefor, in whole or in part, at a redemption price of $100 per share plus an amount equal to accrued and unpaid dividends (whether or not earned or declared) to the date fixed for redemption. Following the Fixed Dividend Period for a Series of Flex APS, the Corporation may redeem shares of Flex APS of such Series, as a whole or in part, in an aggregate amount constituting one or more Units, at $100 per share, plus an amount equal to accrued and unpaid dividends thereon (whether or not earned or declared) to the date fixed for redemption, (i) in the case of a Short-Term - 68 - 69 Dividend Period, on the Dividend Payment Date for such period and (ii) in the case of a Long-Term Dividend Period, on such dates and upon such terms as the Term Selection Agent may specify in the applicable Notice of Long-Term Dividend Period for such Series but in no case may the redemption price for such shares be less than $100 per share. Not later than noon New York City time on the Business Day immediately preceding the date fixed for redemption of any shares of Flex APS, the Corporation shall irrevocably deposit with the Paying Agent sufficient funds for such purpose and shall give the Paying Agent irrevocable instructions to apply such funds and, if applicable, the income and proceeds therefrom, to the redemption of such shares. 7. Restrictions on Transfer. The Flex APS shall be subject to the restrictions on transfer set forth herein, including the Purchaser's Letter attached hereto. Prior to a Successful Initial Auction for Series, shares of such Series will be represented by certificates which will be freely transferable. Thereafter, shares of such Series may be transferred only in Units and, except for deemed sales by the Initial Auction Holders in the Initial Auction, only pursuant to a Bid or a Sell Order placed in an Auction or to or through a Broker-Dealer or to a person that has delivered a signed Purchaser's Letter to the Auction Agent. 8. Additional Agreements. (a) Term Selection Agent. Following the Fixed Dividend Period, the Corporation shall use its best efforts to maintain a Term Selection Agent with respect to the Series A Flex APS and Series B Flex APS to act in accordance with the provisions set forth herein with respect to each such Series. (b) Auction Agent. Following the Fixed Dividend Period, the Corporation shall use its best efforts to maintain an Auction Agent with respect to the Series A Flex APS and Series B Flex APS to act in accordance with the provisions set forth herein with respect to each such Series. PART II AUCTION PROCEDURES 1. Certain Definitions. (a) "Affiliate" shall mean any Person known to the Auction Agent to be controlled by, in control of or under common control with the Corporation. (b) "Agent Member" shall mean the member of the Securities Depository that will act on behalf of a Bidder and is identified as such in such Bidder's Purchaser's Letter. - 69 - 70 (c) "Available Flex APS" shall have the meaning specified in paragraph (a) of Section 4 of this Part II. (d) "Bid" and "Bids" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (e) "Bidder" and "Bidders" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (f) "Broker-Dealer" shall mean any broker-dealer, or other entity permitted by law to perform the functions required of a Broker-Dealer in this Part II, that is a member of, or a participant in, the Securities Depository, and that has been selected by the Corporation and has entered into a Broker-Dealer Agreement with the Auction Agent that remains effective. (g) "Broker-Dealer Agreement" shall mean an agreement between the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the procedures specified in this Part II. (h) "Existing Holder" shall mean a Person who signed a Purchaser's Letter and is listed as the beneficial owner of Flex APS in the records of the Auction Agent. (i) "Hold Order" and "Hold Orders" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (j) "Initial Auction" shall mean the Auction conducted on the Business Day prior to the beginning of the Initial Auction Dividend Period and, if on such date Sufficient Clearing Bids do not exist, then each subsequent Auction up to and including the first Auction at which Sufficient Clearing Bids exist. (k) "Initial Auction Date" shall mean each date upon which an Initial Auction is conducted. (l) "Initial Auction Dividend Period" shall mean the first Auction Dividend Period and each subsequent Auction Dividend Period, if any, that occurs subsequent to an Initial Auction until there shall be a Successful Initial Auction. (m) "Initial Auction Holder" shall have the meaning specified in Section 6 of this Part II. (n) "Maximum Applicable Rate," with respect to a Short-Term Dividend Period, on any Auction Date will be the rate obtained by multiplying the 60-day "AA" Composite Commercial Paper Rate on such Auction Date, and with respect - 70 - 71 to a Long-Term Dividend Period, the Maximum Applicable Rate on any Auction Date will be the rate obtained by multiplying the Reference Rate on such Auction Date, by a percentage determined as set forth below based on the credit ratings assigned to the Flex APS by Moody's and S&P (or if Moody's or S&P or both shall not make such rating available, the equivalent of either or both of such ratings by a Substitute Rating Agency or two Substitute Rating Agencies or, in the event that only one such rating shall be available, the percentage will be based on such rating).
Applicable Percentage of Credit Rating 60-day "AA" Composite ----------------------------------- Commercial Paper Rate Moody's S&P or Reference Rate ------- ------- ---------------------------- aa3 or Above AA- or Above..... 110% a3 to a1 A- to A+........ 125% baa3 to baa1 BBB- to BBB+.... 175% ba3 to ba1 BB- to BB+....... 200% Below ba3 Below BB-........ 250%
If the ratings are split between two of the foregoing categories, the lower rating will determine the prevailing rating. The Corporation shall take all reasonable action necessary to enable Moody's and S&P to provide a rating for the Flex APS. If either Moody's or S&P shall not make such rating available or neither Moody's nor S&P shall make such a rating available, Goldman, Sachs & Co. or its affiliates and successors, after consultation with the Corporation, shall select a Substitute Rating Agency or two Substitute Rating Agencies, as the case may be. (o) "Order" and "Orders" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (p) "Person" shall mean and include an individual, a partnership, a corporation, a trust, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof. (q) "Potential Holder" shall mean any Person, including any Existing Holder, (i) who shall have executed a Purchaser's Letter and (ii) who may be interested in acquiring Units of Flex APS (or, in the case of an Existing Holder, additional Units of Flex APS). (r) "Purchaser's Letter" shall mean a Purchaser's Letter, the form of which is attached hereto, addressed to the Corporation, the Auction Agent and an Agent Member in which a Person agrees, among other things, to offer to purchase, to offer to sell and/or to sell Units of Flex APS - 71 - 72 as set forth in this Part II, or a similar letter containing substantially the same information and representations, or such other letter as the Board of Directors shall approve. (s) "Sell Order" and "Sell Orders" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (t) "Submission Deadline" shall mean 12:30 P.M., New York City time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the Auction Agent as specified by the Auction Agent from time to time. (u) "Submitted Bid" and "Submitted Bids" shall have the respective meanings specified in paragraph (a) of Section 4 of this Part II. (v) "Submitted Hold Order" and "Submitted Hold Orders" shall have the respective meanings specified in paragraph (a) of Section 4 of this Part II. (w) "Submitted Order" and "Submitted Orders" shall have the respective meanings specified in paragraph (a) of Section 4 of this Part II. (x) "Submitted Sell Order" and "Submitted Sell Orders" shall have the respective meanings specified in paragraph (a) of Section 4 of this Part II. (y) "Successful Initial Auction" shall mean an Initial Auction at which Sufficient Clearing Bids exist. (z) "Sufficient Clearing Bids" shall have the meaning specified in paragraph (a) of Section 4 of this Part II. (aa) "Unit" shall mean 1,000 shares of Flex APS. (bb) "Winning Bid Rate" shall have the meaning specified in paragraph (a) of Section 4 of this Part II. 2. Orders by Existing Holders and Potential Holders. (a) Prior to the Submission Deadline on each Auction Date: (i) each Existing Holder may submit to a Broker-Dealer information as to: (A) the number of outstanding Units, if any, of Flex APS held by such Existing Holder which such Existing Holder desires to continue to hold without regard to the Applicable Rate for the next succeeding Auction Dividend Period; (B) the number of outstanding Units, if any, of Flex APS that such Existing Holder desires to - 72 - 73 continue to hold if the Applicable Rate for the next succeeding Auction Dividend Period shall not be less than the rate per annum specified by such Existing Holder; and/or (C) the number of outstanding Units, if any, of Flex APS held by such Existing Holder which such Existing Holder offers to sell without regard to the Applicable Rate for the next succeeding Auction Dividend Period; and (ii) one or more Broker-Dealers, using lists of Potential Holders, shall in good faith for the purpose of conducting a competitive Auction in a commercially reasonable manner, contact Potential Holders, including Persons that are not Existing Holders, on such lists to determine the number of Units, if any, of Flex APS which each such Potential Holder offers to purchase, provided that the Applicable Rate for the next succeeding Auction Dividend Period shall not be less than the rate per annum specified by such Potential Holder. For the purpose hereof, the communication to a Broker-Dealer of information referred to above is hereinafter referred to as an "Order" and collectively as "Orders" and each Existing Holder and each Potential Holder placing an Order is hereinafter referred to as a "Bidder" and collectively as "Bidders"; an Order containing the information referred to in clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order" and collectively as "Hold Orders"; an Order containing the information referred to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as a "Bid" and collectively as "Bids"; and an Order containing the information referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as a "Sell Order" and collectively as "Sell Orders." (b) (i) A Bid by an Existing Holder shall constitute an irrevocable offer to sell: (A) the number of outstanding Units of Flex APS specified in such Bid if the Applicable Rate determined on such Auction Date shall be less than such specified rate; or (B) such number or a lesser number of outstanding Units of Flex APS to be determined as set forth in subparagraph (a) (iv) of Section 5 of this Part II if the Applicable Rate determined on such Auction Date shall be equal to such specified rate; or (C) a lesser number of outstanding Units of - 73 - 74 Flex APS to be determined as set forth in subparagraph (b) (iii) of Section 5 of this Part II if such specified rate shall be higher than the Maximum Applicable Rate and Sufficient Clearing Bids do not exist. (ii) A Sell Order by an Existing Holder shall constitute an irrevocable offer to sell: (A) the number of outstanding Units of Flex APS specified in such Sell Order; or (B) such number or a lesser number of outstanding Units of Flex APS as set forth in subparagraph (b) (iii) of Section 5 of this Part II if Sufficient Clearing Bids do not exist. (iii) A Bid by a Potential Holder shall constitute an irrevocable offer to purchase. (A) the number of outstanding Units of Flex APS specified in such Bid if the Applicable Rate determined on such Auction Date shall be higher than such specified rate; or (B) such number or a lesser number of outstanding Units of Flex APS as set forth in subparagraph (a) (v) of Section 5 of this Part II if the Applicable Rate determined on Such Auction Date shall be equal to such specified rate. 3. Submission of Orders by Broker-Dealers to Auction Agent. (a) Each Broker-Dealer shall submit in writing to the Auction Agent prior to the Submission Deadline on each Auction Date all Orders obtained by such Broker-Dealer and specifying with respect to each Order: (i) the name of the Bidder placing such Order; (ii) the aggregate number of Units of Flex APS that are the subject of such Order; (iii) to the extent that such Bidder is an Existing Holder: (A) the number of Units, if any, of Flex APS subject to any Hold Order placed by such Existing Holder; (B) the number of Units, if any, of Flex APS subject to any Bid placed by such Existing Holder and the rate specified in such Bid; and (C) the number of Units, if any, of Flex APS subject to any Sell Order placed by such Existing - 74 - 75 Holder; and (iv) to the extent such Bidder is a Potential Holder, the rate specified in such Potential Holder's Bid. (b) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent shall round such rate up to the next highest one thousandth (.001) of 1%. (c) If an Order or Orders covering all of the outstanding Units of Flex APS held by any Existing Holder is not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to have been submitted on behalf of such Existing Holder covering the number of outstanding Units of Flex APS held by such Existing Holder and not subject to Orders submitted to the Auction Agent. (d) If one or more Orders covering in the aggregate more than the number of outstanding Units of Flex APS held by any Existing Holder are submitted to the Auction Agent, such Orders shall be considered valid as follows and in the following order of priority: (i) all Hold Orders shall be considered valid, but only up to and including in the aggregate the number of Units of Flex APS held by such Existing Holder, and, solely for purposes of allocating compensation among the Broker-Dealers submitting Hold Orders, if the number of Units of Flex APS held by such Existing Holder is less than the aggregate number of Units that are the subject of such Existing Holder's Hold Orders, the number of Units subject to each Hold Order shall be reduced pro rata to cover the number of Units of Flex APS held by such Existing Holder; (ii) (A) any Bid shall be considered valid up to and including the excess of the number of outstanding Units of Flex APS held by such Existing Holder over the number of Units of Flex APS subject to any Hold Orders referred to in subparagraph (i) above; (B) subject to clause (A), if more than one Bid with the same rate is submitted on behalf of such Existing Holder and the number of Units of Flex APS subject to such Bids is greater than such excess, such Bids shall be considered valid up to the amount of such excess, and, solely for purposes of allocating compensation among the Broker-Dealers submitting Bids with the same rate, the number of Units of Flex APS subject to each Bid with the same rate shall be reduced pro rata - 75 - 76 to cover the number of Units of Flex APS equal to such excess; (C) subject to clause (A), if more than one Bid with different rates is submitted on behalf of such Existing Holder, such Bid shall be considered valid in the ascending order of their respective rates up to the amount of such excess; and (D) in any such event the number, if any, of such Units subject to Bids not valid under this subparagraph (ii) shall be treated as the subject of a Bid a Potential Holder; and (iii) all Sell Orders shall be considered valid but only up to and including in the aggregate the excess of the number of outstanding Units of Flex APS held by such Existing Holder over the sum of the Units of Flex APS subject to Hold Orders referred to in subparagraph (i) and valid Bids by such Existing Holder referred to in subparagraph (ii) above, provided that if more than one Sell Order is submitted on behalf of any Existing Holder and the number of Units subject to such Sell Orders is greater than such excess, the number of Units subject to such Sell Orders shall be reduced pro rata so that such Sell Orders shall cover the number of Units equal to such excess. (e) If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate and number of Units specified therein. (4) Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate. (a) Not earlier than the Submission Deadline on each Auction Date, the Auction Agent shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and shall determine: (i) the excess of the total number of outstanding Units of Flex APS over the number of outstanding Units of Flex APS that are the subject of Submitted Hold Orders (such excess being hereinafter referred to as the "Available Flex APS"); (ii) from the Submitted Orders whether: (A) the number of outstanding Units of Flex APS that are the subject of Submitted Bids by - 76 - 77 Potential Holders specifying one or more rates equal to or lower than the Maximum Applicable Rate exceeds or is equal to the sum of: (I) the number of outstanding Units of Flex APS that are the subject of Submitted Bids by Existing Holders specifying one or more rates higher than the Maximum Applicable Rate; and (II) the number of outstanding Units of Flex APS that are the subject of Submitted Sell Orders (in the event of such excess or such equality (other than because the sum of the number of Units of Flex APS in clauses (I) and (II) above is zero because all of the outstanding Units of Flex APS are the subject of Submitted Hold Orders), such Submitted Bids in clause (A) above being hereinafter referred to collectively as "Sufficient Clearing Bids"); and (iii) if Sufficient Clearing Bids exist, the lowest rate specified in the Submitted Bids (the "Winning Bid Rate") which if: (A)(I) each Submitted Bid from Existing Holders specifying such lowest rate and (II) all other Submitted Bids from existing Holders specifying lower rates were accepted, thus entitling such Existing Holders to continue to hold the Units of Flex APS that are the subject of such Submitted Bids; and (B)(I) each Submitted Bid from Potential Holders specifying such lowest rate and (II) all other Submitted Bids from Potential Holders specifying lower rates were accepted, thus entitling the Potential Holders to purchase the Units of Flex APS that are the subject of those Submitted Bids, would result in such Existing Holders described in clause (A) continuing to hold an aggregate number of outstanding Units of Flex APS which, when added to the number of outstanding Units of Flex APS to be purchased by such Potential Holders described in clause (B), would equal not less than the Available Flex APS. (b) Promptly after the Auction Agent has made the determinations pursuant to paragraph (a) of this Section 4, the Auction Agent shall advise the Corporation of the Maximum Applicable Rate and, based on such determinations, the Applicable Rate for the next succeeding Auction Dividend - 77 - 78 Period as follows: (i) if Sufficient Clearing Bids exist, that the Applicable Rate for the next succeeding Auction Dividend Period shall be equal to the Winning Bid Rate so determined; (ii) if Sufficient Clearing Bids do not exist (other than because all of the outstanding Units of Flex APS are the subject of Submitted Hold Orders), then (a) if the Term Selection Agent has not given a Notice of Long-Term Dividend Period with respect to the next succeeding Auction Dividend Period or has given a Notice of Revocation with respect thereto or such Notice of Long-Term Dividend Period shall be deemed to have been revoked, the Applicable Rate for such next succeeding Auction Dividend Period shall be the Maximum Applicable Rate on the Auction Date for a Short-Term Dividend Period and (b) if the Term Selection Agent has given a Notice of Long-Term Dividend Period with respect to the next succeeding Auction Dividend Period and has not given a Notice of Revocation with respect thereto and such Notice of Long-Term Dividend Period shall not have been deemed revoked, such next succeeding Auction Dividend Period shall, notwithstanding such Notice of Long-Term Dividend Period, be a Short-Term Dividend Period, and the Applicable Rate for such next succeeding Auction Dividend Period shall be the greatest of (i) the Applicable Rate in effect immediately prior to the applicable Auction, (ii) the Maximum Applicable Rate on the Auction Date for a Short-Term Dividend Period or (iii) the Maximum Applicable Rate on the Auction Date for the specified Long-Term Dividend Period; or (iii) if all the outstanding Units of Flex APS are the subject of Submitted Hold Orders, that the Applicable Rate for the next succeeding Auction Dividend Period shall (1) in the case of a Short-Term Dividend Period, be equal to 59% of the 60-day "AA" Composite Commercial Paper Rate in effect on the date of such Auction, and (2) in the case of a Long-Term Dividend Period, be equal to 59% of the Reference Rate in effect on the date of such Auction. 5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Units. Based on the determinations made pursuant to paragraph (a) of Section 4 of this Part II, the Submitted Bids and Submitted Sell Orders Shall be accepted or rejected and the Auction Agent shall take such other action as set forth below: (a) If Sufficient Clearing Bids have been made, subject to the provisions of paragraphs (c), (d) and (e) of this Section 5, Submitted Bids and Submitted Sell Orders - 78 - 79 shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (i) the Submitted Sell Orders of Existing Holders shall be accepted and the Submitted Bid of each of the Existing Holders specifying any rate that is higher than the Winning Bid Rate shall be rejected, thus requiring each such Existing Holder to sell the Units of Flex APS that are the subject of such Submitted Bid; (ii) the Submitted Bid of each of the Existing Holders specifying any rate that is lower than the Winning Bid rate shall be accepted, thus entitling such Existing Holder to continue to hold the Units of Flex APS that are the subject of each Submitted Bid; (iii) the Submitted Bid of each of the Potential Holders specifying any rate that is lower than the Winning Bid Rate shall be accepted; (iv) the Submitted Bid of each of the Existing Holders specifying a rate that is equal to the Winning Bid Rate shall be accepted, thus entitling each such Existing Holder to continue to hold the Units of Flex APS that are the subject of such Submitted Bid, unless the number of outstanding Units of Flex APS subject to all such Submitted Bids shall be greater than the number of Units of Flex APS ("remaining Units") equal to the excess of the Available Flex APS over the number of Units of Flex APS subject to Submitted Bids described in subparagraphs (ii) and (iii) of this paragraph (a), in which event the Submitted Bids of each such Existing Holder shall be rejected, and each such Existing Holder shall be required to sell Units of Flex APS, but only in an amount equal to the difference between (A) the number of outstanding Units of Flex APS then held by such Existing Holder subject to such Submitted Bid and (B) the number of Units of Flex APS obtained by multiplying the number of remaining Units by a fraction the numerator of which shall be the number of outstanding Units of Flex APS held by such Existing Holder subject to such Submitted Bid and the denominator of which shall be the sum of the number of outstanding Units of Flex APS subject to such Submitted Bids made by all such Existing Holders that specified a rate equal to the Winning Bid Rate; and (v) the Submitted Bid of each of the Potential Holders specifying a rate that is equal to the Winning Bid Rate shall be accepted but only in an amount equal to the number of Units of Flex APS obtained by multiplying the difference between the Available Flex APS and the number of Units of Flex APS subject to Submitted Bids described in subparagraphs (ii), (iii) - 79 - 80 and (iv) of this paragraph (a) by a fraction the numerator of which shall be the number of outstanding Units of Flex APS subject to such Submitted Bid and the denominator of which shall be the sum of the number of outstanding Units of Flex APS subject to such Submitted Bids made by all such Potential Holders that specified a rate equal to the Winning Bid Rate. (b) If Sufficient Clearing Bids have not been made (other than because all of the outstanding Units of Flex APS are subject to Submitted Hold Orders), subject to the provisions of paragraph (c), (d) and (e) of this Section 5, Submitted Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (i) the Submitted Bid of each Existing Holder specifying any rate that is equal to or lower than the Maximum Applicable Rate shall be accepted, thus entitling such Existing Holder to continue to hold the Units of Flex APS that are the subject to such Submitted Bid; (ii) the Submitted Bid of each Potential Holder specifying any rate that is equal to or lower than the Maximum Applicable Rate shall be accepted; and (iii) the Submitted Bids of each Existing Holder specifying any rate that is higher than the Maximum Applicable Rate shall be rejected and the Submitted Sell Orders of each Existing Holder shall be accepted, in both cases only in an amount equal to the difference between (A) the number of outstanding Units of Flex APS then held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and (B) the number of Units of Flex APS obtained by multiplying the difference between the Available Flex APS and the aggregate number of Units of Flex APS subject to Submitted Bids described in subparagraphs (i) and (ii) of this paragraph (b) by a fraction the numerator of which shall be the number of outstanding Units of Flex APS held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and the denominator of which shall be the number of outstanding Units of Flex APS subject to all such Submitted Bids and Submitted Sell Orders. (c) If all of the outstanding Units of Flex APS are the subject of Submitted Hold Orders, all Submitted Bids shall be rejected. (d) If, as a result of the procedures described in paragraph (a) or (b) of this Section 5, any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction - 80 - 81 of a Unit of Flex APS on any Auction Date, the Auction Agent, in such manner as it shall determine in its sole discretion, shall round up or down the number of Units of Flex APS to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date so that the number of Units purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be whole Units of Flex APS. (e) If, as a result to the procedures described in paragraph (a) of this Section 5, any Potential Holder would be entitled or required to purchase less than a whole Unit of Flex APS on any Auction Date, the Auction Agent, in such manner as it shall determine in its sole discretion, shall allocate Units for purchase among Potential Holders so that only whole Units of Flex APS are purchased on such Auction Date by any Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing Units of Flex APS on such Auction Date. (f) Based on the results of each Auction, the Auction Agent shall determine the aggregate number of Units of Flex APS to be purchased and the aggregate number of Units of Flex APS to be sold by Potential Holders and Existing Holders on whose behalf each Broker-Dealer submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to the extent that such aggregate number of Units to be purchased and such aggregate number of Units to be sold differ, determine to which other Broker-Dealer or Broker-Dealers acting for one or more purchasers such Broker-Dealer shall deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or more sellers such Broker-Dealer shall receive, as the case may be, Units of Flex APS. 6. The Initial Auction Date. On the Initial Auction Date, each holder of Flex APS ("Initial Auction Holder") will be deemed to have submitted an order to the Auction Agent to sell all shares of Flex APS then held, at a price of $100 per share, without regard to the Applicable Rate for the Initial Auction Dividend Period. 7. Initial Auction Procedure. (a) In connection with a Successful Initial Auction, the Auction Agent shall mail, within two Business Days of such Initial Auction, a written notice of deemed sale by first class mail, postage prepaid, to each Initial Auction Holder (a "Notice of Deemed Sale"). The Corporation shall provide the Auction Agent with written notice of the information to be contained in the Notice of Deemed Sale at least one day prior to the date the Notice of Deemed Sale is mailed to such Initial Auction Holders. For purposes of the calculation of the date on which notice is given pursuant to this Section 7(a), a Notice of Deemed Sale shall be deemed to be given on the day such notice is first mailed by first class mail, postage prepaid, to such Initial Auction Holders. Each Notice of - 81 - 82 Deemed Sale shall be addressed to the holder at the address of the holder appearing on the stock transfer books maintained by the Auction Agent. Each Notice of Deemed Sale shall include a statement setting forth (i) the deemed sale date, (ii) the number of shares of Flex APS deemed to have been sold, (iii) the deemed sales price (as specified in Section 6), (iv) that the deemed seller shall not be entitled to dividends on such shares after the Initial Auction Date and (v) the place or places (which shall be in the City of New York) where holders may surrender the certificates evidencing such shares of Flex APS and obtain payment of the deemed sales price. (b) In connection with an Initial Auction at which Sufficient Clearing Bids do not exist, the Auction Agent shall mail, within two Business Days of such Initial Auction, a written notice of a failed Initial Auction by first class mail, postage prepaid, to each Initial Auction Holder (a "Notice of Failed Initial Auction"). The Corporation shall provide the Auction Agent with written notice of the information to be contained in the Notice of Failed Initial Auction at least one day prior to the date the Notice of Failed Initial Auction is mailed to such Initial Auction Holders. For the purposes of the calculation of the date on which notice is give pursuant to this Section 7(b), a Notice of Failed Initial Auction shall be deemed to be given on the day such notice is first mailed by first class mail, postage prepaid, to such Initial Auction Holders. Each Notice of Failed Initial Auction shall include a statement setting forth (i) the date of Failed Initial Auction, (ii) that Sufficient Clearing Bids did not exist, (iii) that all Submitted Bids were rejected, (iv) that all shares of Flex APS deemed to have been the subject of Sell Orders pursuant to Section 6 hereof were not sold and shall continue to be held by such Initial Auction Holder of such shares, (v) that the Applicable Rate for the next Auction Dividend Period shall be the Maximum Applicable Rate and (vi) that for the purposes of these Auction Procedures the next succeeding Auction Date shall also be considered an Initial Auction Date, the next succeeding Auction shall also be considered an Initial Auction and the next succeeding Auction Dividend Period shall also be considered an Initial Auction Dividend Period. (c) On or after a Successful Initial Auction, each Initial Auction Holder of shares of Flex APS that were deemed sold shall surrender the certificate or certificates evidencing such shares to the Corporation at any place designated for such surrender in the Notice of Deemed Sale and shall then be entitled to receive payment of the deemed sales price for such shares. (d) Subsequent to a Successful Initial Auction the Paying Agent shall pay the deemed sales price to the Initial Auction Holders upon surrender of certificates representing - 82 - 83 shares of Flex APS. (e) Subsequent to a Successful Initial Auction all rights of the Initial Auction Holders shall cease, except the right to receive the deemed sales price against delivery of the certificates evidencing such shares, but without interest, and the right to receive any accrued and unpaid dividends to and including such Initial Auction Date. The Corporation shall be entitled to receive, from time to time, from the Auction Agent the interest, if any, earned on such monies deposited with the Auction Agent by Bidders who have submitted successful Bids at such Initial Auction, and the holders of such shares shall have no claim to any such interest. With regard to any such funds which are unclaimed by holders of such shares at the end of two years from such deemed sales date, the Auction Agent shall, upon demand, pay over to the Corporation such amount remaining on deposit, and the Auction Agent shall thereupon be relieved of all responsibility to the holders of such shares and the holders of shares of Flex APS so sold shall thereafter be entitled to look only to the Corporation for payment thereof. 8. Miscellaneous.(a) The Board of Directors of the Corporation may interpret the provisions of this paragraph 8 to resolve any inconsistency or ambiguity, remedy any formal defect or make any other change or modification which does not adversely affect the rights of Existing Holders of Flex APS and may in appropriate cases authorize the filing of a Certificate of Correction. (b) So long as the Applicable Rate is based on the results of an Auction, an Existing Holder (i) may sell, transfer or otherwise dispose of Units of Flex APS only pursuant to a Bid or Sell Order in accordance with the procedures described in this Part II or to or through a Broker-Dealer or to a Person that has delivered a signed copy of a Purchaser's Letter to the Auction Agent, provided that in the case of all transfers other than pursuant to Auctions such Existing Holder or its Broker-Dealer advises the Auction Agent of such transfer, and (ii) shall have the ownership of the Units of Flex APS held by it maintained in book entry form by the Securities Depository in the account of its Agent Member, which in turn will maintain records of such Existing Holder's beneficial ownership. (c) The Corporation and its Affiliates shall not submit any Order in any Auction except as set forth in the next sentence. Any Broker-Dealer that is an Affiliate of the Corporation may submit Orders in Auctions but only if such Orders are not for its own account, except that if such affiliated Broker-Dealer holds Units of Flex APS for its own account, it must submit a Sell Order in the next Auction with respect to such Units of Flex APS. (d) Unless the context otherwise requires, all - 83 - 84 references to the Flex APS in Part II hereof are deemed to refer to a single series of the Flex APS. * * * * IN WITNESS WHEREOF, HOUSEHOLD INTERNATIONAL, INC. has caused this Certificate to be made under the seal of the Corporation and signed by David D. Wesselink, its Vice President and Treasurer, and attested by Ronald C. Roselli, its Assistant Secretary, this 18th day of July, 1990. HOUSEHOLD INTERNATIONAL, INC. By: /s/ David D. Wesselink --------------------------- David D. Wesselink Vice President and Treasurer (CORPORATE SEAL) ATTEST: By: /s/ Ronald C. Roselli ------------------------ Ronald C. Roselli Assistant Secretary - 84 - 85 FORM OF PURCHASER'S LETTER Relating to Securities Involving Rate Settings Through Auctions TO BE SUBMITTED TO YOUR BROKER-DEALER WHO WILL THEN DELIVER COPIES ON YOUR BEHALF TO THE RESPECTIVE AUCTION AGENT The Company The Auction Agent A Broker-Dealer An Agent member Other Persons 1. This letter is designed to apply to auctions for publicly or privately offered debt or equity securities ("Securities") of any issuer ("Company") which are described in any final prospectus or other offering materials relating to such Securities as the same may be amended or supplemented (collectively, with respect to the particular Securities concerned, the "Prospectus") and which involve periodic rate settings through auctions ("Auctions"). This letter shall be for the benefit of any Company and of any trust company or auction agent (collectively, "Auction Agent"), broker-dealer, agent member, securities depository or other interested person in connection with any Securities and related Auctions (it being understood that such persons may be required to execute specified agreements and nothing herein shall alter such requirements). The terminology used herein is intended to be general in its application and not to exclude any Securities in respect of which (in the Prospectus or otherwise) alternative terminology is used. 2. We may from time to time offer to purchase, purchase, offer to sell and/or sell Securities of any Company as described in the Prospectus relating thereto. We agree that this letter shall apply to all such purchases, sales and offers and to Securities owned by us. We understand that the dividend/interest rate on Securities may be based from time to time on the results of Auctions as set forth in the Prospectus. 3. We agree that any bid or sell order placed by us shall constitute an irrevocable offer by us to purchase or sell the Securities subject to such bid or sell order, or such lesser amount of Securities as we shall be required to sell or purchase as a result of such Auction, at the applicable price, all as set forth in the Prospectus, and that if we fail to place a bid or sell order with respect to Securities owned by us with a broker-dealer on any auction date, or a broker-dealer to which we communicate a bid or sell order fails to submit such bid or sell order to the Auction Agent concerned, we shall be deemed to have placed a hold order with respect to such Securities as described in the Prospectus. We authorize any broker-dealer that submits a - 85 - 86 bid or sell order as our agent in Auctions to execute contracts for the sale of Securities covered by such bid or sell order. We recognize that the payment by such broker-dealer for Securities purchased on our behalf shall not relieve us of any liability to such broker-dealer for payment for such Securities. 4. We agree that, during the applicable period as described in the Prospectus, dispositions of Securities can be made only in the denominations set forth in the Prospectus and we will sell, transfer or otherwise dispose of any Securities held by us from time to time only pursuant to a bid or sell order placed in an Auction to or through a broker-dealer or, when permitted in the Prospectus, to a person that has signed and delivered or caused to be delivered on its behalf, to the applicable Auction Agent a letter substantially in the form of this letter (or other applicable purchaser's letter), provided that in the case of all transfers other than pursuant to Auctions we or our broker-dealer or our agent member shall advise such Auction Agent of such transfer. We understand that a restrictive legend will be placed on certificates representing the Securities and stop-transfer instructions will be issued to the transfer agent and/or registrar, all as set forth in the Prospectus. We agree to comply with any other transfer restrictions or other related procedures as described in the Prospectus. 5. We agree that, during the applicable period as described in the Prospectus, ownership of Securities shall be represented by a global certificate registered in the name of the applicable securities depository or its nominee, that we will not be entitled to receive any certificate representing the Securities and that our ownership of any Securities will be maintained in book entry form by the securities depository for the account of our agent member, which in turn will maintain records of our beneficial ownership. We authorize and instruct our agent member to disclose to the applicable Auction Agent such information concerning our beneficial ownership of Securities as such Auction Agent shall request. 6. We acknowledge that partial deliveries of Securities purchased in Auctions may be made to us and such deliveries shall constitute good delivery as set forth in the Prospectus. 7. This letter is not a commitment by us to purchase any Securities. 8. This letter supersedes any prior-dated version of this purchaser's letter, and supplements any prior-or post-dated purchaser's letter specific to particular Securities; any recipient of this letter may rely upon it until such recipient has received a signed writing amending or revoking this letter. 9. The descriptions of Auction Procedures set forth in each applicable Prospectus are incorporated by reference herein and, in case of any conflict between this letter and any such description, such description shall control. - 86 - 87 10. Any photocopy or other reproduction of this letter shall be deemed of equal effect as a signed original. 11. Our agent member of Securities depository currently is _____________________________________________________________. 12. Our personnel authorized to place orders with broker-dealers for the purposes set forth in the Prospectus in Auctions currently is/are _____________________________________________, telephone number _____________________________________________. 13. Our tax payer identification number is _____________. 14. In the case of each offer to purchase, purchase, offer to sell or sale by us of Securities not registered under the Securities Act of 1933, as amended (the "Act"), we represent and agree as follows: A. We understand and expressly acknowledge that the Securities have not been and will not be registered under the Act and, accordingly, that the Securities may not be reoffered, resold or otherwise pledged, hypothecated or transferred unless an applicable exemption from the registration requirements of the Act is available. B. We hereby confirm that any purchase of Securities made by us will be for our own account, or for the account of one or more parties for which we are acting as trustee or agent with complete investment discretion and with authority to bind such parties, and not with a view to any public resale or distribution thereof. We and each other party for which we are acting which will acquire Securities will be "accredited investors" within the meaning of Regulation D under the Act with respect to the Securities to be purchased by us or such party, as the case may be, will have previously invested in similar types of instruments and will be able and prepared to bear the economic risk of investing in and holding such Securities. Dated: _____________________ ______________________________ Mailing Address of Purchaser (Name of Purchaser) By: __________________________ Printed Name: ________________ Title: _______________________ - 87 - 88 CERTIFICATE OF HOUSEHOLD INTERNATIONAL, INC. UNDER SECTION 151(g) OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE Household International, Inc., a Delaware corporation (hereinafter referred to as the "Corporation"), does hereby certify that: 1) the Corporation's 11-1/4% Enhanced Rate Cumulative Preferred Stock (the "Preferred Stock") has been redeemed in its entirety and that no shares of the Preferred Stock are outstanding as of the date hereof. 2) the following resolution has been duly adopted by the Corporation's Board of Directors: "RESOLVED, that the officers of the Corporation are duly authorized to file a certificate with the Secretary of State of Delaware eliminating from the Corporation's Certificate of Incorporation all matters set forth in each Certificate of Designation, Preferences and Rights for the Preferred Stock and as permitted by the Certificate of Designation, Preferences and Rights for the Preferred Stock, such shares of Preferred Stock redeemed shall resume the status of authorized and unissued shares of the Corporation's preferred stock." Upon the effective date of the filing of this Certificate, it shall eliminate from the Corporation's Certificate of Incorporation all matters set forth in the Certificate of Designation, Preferences and Rights with respect to the Corporation's 11-1/4% Enhanced Rate Cumulative Preferred Stock, and all of such shares of 11-1/4% Enhanced Rate Cumulative Preferred Stock shall resume the status of authorized and unissued shares of the Corporation's class of Preferred Stock. IN WITNESS WHEREOF, said Household International, Inc., has caused its corporate seal to be hereunto affixed and this Certificate to be signed by John W. Blenke, its Secretary, and attested by Susan E. Casey, its Assistant Secretary, this 14th day of November, 1994. HOUSEHOLD INTERNATIONAL, INC. By: /s/ J. W. Blenke ------------------------ Secretary Attest: By: /s/ S. E. Casey ------------------- Assistant Secretary - 88 - 89 HOUSEHOLD INTERNATIONAL, INC. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS Pursuant to Section 151 of the General Corporation Law of the State of Delaware 11-1/4% ENHANCED RATE CUMULATIVE PREFERRED STOCK (Without Par Value) HOUSEHOLD INTERNATIONAL, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), HEREBY CERTIFIES that the following resolutions were duly adopted by the Board of Directors of the Corporation and by the Preferred Stock Committee of the Board of Directors, pursuant to authority conferred upon the Board of Directors by the provisions of the Restated Certificate of Incorporation, as amended, of the Corporation, and pursuant to authority conferred upon the Preferred Stock Committee by the resolutions of the Board of Directors set forth herein and in accordance with Section 141(c) of the General Corporation Law of the State of Delaware. 1. The Board of Directors has adopted the following resolutions designating a Preferred Stock Committee of the Board of Directors and authorizing the Preferred Stock Committee to act on behalf of the Board of Directors (within certain limitations) in connection with the designation, issuance and sale of shares in one or more series of Preferred Stock of the Corporation: "RESOLVED, that a Preferred Stock Committee of the Board of Directors is hereby designated which shall have and may exercise, to the fullest extent permitted by law, the full power and authority of the Board of Directors with respect to the issuance and sale of one or more new series of the Corporation's Preferred Stock without par value (each such series herein referred to as the "New Preferred Stock"), including, without limitation, establishing the purchase price therefor, and fixing the designations and any of the preferences, powers, rights (other than voting powers or voting rights which shall be fixed by the Board of Directors) and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, of such shares of each series of New Preferred Stock, and fixing the number of shares of each series of New Preferred Stock. "FURTHER RESOLVED, that the Committee is authorized to take such additional actions and adopt such additional resolutions as it deems necessary or appropriate for the purpose of authorizing and implementing the issuance, offer, and sale for cash of New Preferred Stock, including, without limiting the generality of the foregoing, the authorization and execution of agreements (including underwriting - 89 - 90 agreements) relating to the offer and sale of New Preferred Stock, authorization and approval of listing applications (including amendments or supplements thereto) for the listing of such New Preferred Stock on a stock exchange, approval of forms of stock certificates and authorization of issuance of New Preferred Stock in uncertificated form, any actions which may be necessary to qualify the offering and sale of New Preferred Stock under Blue Sky Laws of the various states, any necessary filings with the Secretary of State of Delaware and other jurisdictions, and the appointment of a transfer agent. "FURTHER RESOLVED, that notwithstanding the foregoing resolutions, the Preferred Stock Committee may not authorize the sale of New Preferred Stock for more than $250 million cash consideration in the aggregate, and the power and authority of the Preferred Stock Committee set forth in the preceding resolutions shall expire on September 12, 1991. "FURTHER RESOLVED, that the members of the Preferred Stock Committee shall be D. C. Clark, E. P. Hoffman, and G. P. Osler. In the absence of Mr. Osler, A. E. Rasmussen is designated as an alternate member of the Preferred Stock Committee to serve in his place." 2. The Board of Directors has adopted the following resolution pertaining to the voting rights for series of Preferred Stock authorized for issuance by the Preferred Stock Committee of the Board of Directors: "RESOLVED, that notwithstanding the resolution of the Board of Directors adopted on October 17, 1989, the holders of the Corporation's Flexible Rate Auction Preferred Stock, Series A, and Flexible Rate Auction Preferred Stock, Series B, and any other series of Preferred Stock which on or after July 10, 1990, is authorized by the Preferred Stock Committee of the Board of Directors to be issued and sold pursuant to authority granted to the Preferred Stock Committee by the Board of Directors (each such series herein referred to as the "New Preferred Stock") shall have no voting rights, and their consent shall not be required for taking any corporate action, except as otherwise set forth herein, except as otherwise required by law, and except as otherwise provided by the Board of Directors with respect to any particular series of New Preferred Stock. The consent of the holders of the New Preferred Stock with respect to the matters set forth in sub-sections (i) and (iii) of paragraph (5) of Article IV of the Corporation's Restated Certificate of Incorporation ("Paragraph (5)") shall not be required, except with respect to the creation or issuance of any class of stock ranking prior to or on a parity with the Preferred Stock, or any series thereof, as to the payment of dividends or the distribution of assets; but the other provisions of - 90 - 91 Paragraph (5) shall be applicable to the New Preferred Stock. The holders of the New Preferred Stock shall have no right to elect directors pursuant to paragraph (6) of Article IV of the Corporation's Restated Certificate of Incorporation ("Paragraph (6)"), such right hereby being expressly withheld. In the event that any six quarterly cumulative dividends (which shall be deemed to include dividends in respect of a number of non-quarterly dividend periods containing not less than 540 days), whether consecutive or not, upon the New Preferred Stock shall be in arrears, the holders of the New Preferred Stock shall have the right, voting separately as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the New Preferred Stock either as to payment of dividends or the distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and upon which like voting rights have been conferred (which shall include the Corporation's 9-1/2% Cumulative Preferred Stock, Series 1989-A) and are then exercisable, at the next meeting of stockholders called for the election of directors, to elect two members of the Board of Directors. The right of such holders of such shares of the New Preferred Stock, voting separately as a class, to elect (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity) members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on such shares of the New Preferred Stock shall have been paid in full, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent failure to pay dividends of the character above mentioned. Upon any termination of the right of the holders of the New Preferred Stock as a class to elect directors as herein provided, the term of office of all directors so elected shall terminate immediately. If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders voting as a class may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall thereupon be such number as may be provided for in the Corporation's Bylaws irrespective of any increase made pursuant to the provisions - 91 - 92 of this resolution. Until all unpaid dividends on the New Preferred Stock shall have been paid in full, and in order to permit the holders of the Corporation's $6.25 Cumulative Convertible Voting Preferred Stock, and any other series of Preferred Stock issued by the Corporation having the voting rights set forth in Paragraph (6) to exercise fully the right to elect directors as granted by and provided in paragraph (6), the number of directors constituting the whole Board of Directors of the Corporation shall not be less than seven. If, upon any such arrearage in dividends, the number of directors constituting the whole Board of Directors shall be less than seven, the size of the Board of Directors shall, immediately prior to the next meeting of stockholders called for the election of directors, automatically be increased by such number as shall be necessary to cause the number of directors constituting the whole Board of Directors to be no less than seven. To the extent that the Board of Directors is authorized to fix the designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof in respect of additional series of Preferred Stock, none of the preferences or rights of any such additional series as fixed by the Board of Directors shall rank prior to the New Preferred Stock as to payment of dividends or the distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, without the consent of the holders of two-thirds of the outstanding shares of such series of New Preferred Stock voting as a class. The foregoing voting provisions shall not apply to any series of New Preferred Stock if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of such series of New Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption. On any item in which the holders of New Preferred Stock are entitled to vote, such holders shall be entitled to one vote for each share held." 3. The Preferred Stock Committee of the Board of Directors has adopted the following resolution pursuant to authority conferred upon the Preferred Stock Committee of the Board of Directors by the resolution of the Board of Directors set forth in paragraph 1 above of this Certificate of Designation, Preferences and Rights: - 92 - 93 "RESOLVED, that the issue of a series of Preferred Stock without par value of the Corporation is hereby authorized and the designation, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation, as amended, of the Corporation, are hereby fixed as follows: 11-1/4% ENHANCED RATE CUMULATIVE PREFERRED STOCK (1) Number of Shares and Designation. 450,000 shares of Preferred Stock without par value of the Corporation are hereby constituted as a series of Preferred Stock without par value and designated as 11-1/4% Enhanced Rate Cumulative Preferred Stock (hereinafter called the "Enhanced Rate Preferred Stock"). (2) Dividends. The holders of shares of the Enhanced Rate Preferred Stock shall be entitled to receive cash dividends, when and as declared by the Board of Directors of the Corporation, out of assets legally available for such purpose, at the rate determined as provided below. Such dividends shall be cumulative from the date of original issue of such shares and shall be payable quarterly in arrears, when and as declared by the Board of Directors of the Corporation, on the fifteenth day of January, April, July and October in each year to holders of record on the respective business days next preceding the first days of those months (and the quarterly dividend periods shall commence on the first days of those months). Dividends on the Enhanced Rate Preferred Stock for quarterly dividend periods will be payable at the rate of 11-1/4% per annum from the date of original issue through September 30, 1994, 11-1/2% per annum from October 1, 1994 through September 30, 1995, 11-3/4% per annum from October 1, 1995 through September 30, 1996, 12% per annum from October 1, 1996 through September 30, 1997, and 12-1/8% per annum on or after October 1, 1997, in each case applied to the amount of $100 per share of Enhanced Rate Preferred Stock. The amount of dividends payable on each share of Enhanced Rate Preferred Stock for each full quarterly dividend period shall be computed by dividing the dividend rate by four and applying the dividend rate to the amount of $100 per share. The amount of dividends payable for any dividend period shorter or longer than a full quarterly dividend period shall be computed on the basis of 30-day months and a 360-day year. (3) Liquidation Preference. The amount to which shares of Enhanced Rate Preferred Stock shall be entitled upon - 93 - 94 liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, shall be $100 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for payment, and no more. (4) Redemption. The shares of Enhanced Rate Preferred Stock shall be subject to redemption in whole or in part at the option of the Corporation on or after October 1, 1993, at the following redemption prices, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for redemption, and no more: $102.50 per share if redeemed on or before September 30, 1994; $101.25 per share if redeemed thereafter and on or before September 30, 1995; $100.00 per share if redeemed thereafter. (5) Shares to be Retired. All shares of Enhanced Rate Preferred Stock purchased or redeemed by the Corporation shall be retired and cancelled and shall be restored to the status of authorized but unissued shares of the class of Preferred Stock without par value, without designation as to series, and may thereafter be issued, but not as shares of Enhanced Rate Preferred Stock. (6) Conversion or Exchange. The holders of shares of Enhanced Rate Preferred Stock shall not have any rights herein to convert such shares into or exchange such shares for shares of any other series of any class or classes of capital stock (or any other security) of the Corporation. (7) Ranking. The Enhanced Rate Preferred Stock shall rank on a parity with the Corporation's $6.25 Cumulative Convertible Voting Preferred Stock, 9-1/2% Cumulative Preferred Stock, Series 1989-A, Flexible Rate Auction Preferred Stock, Series A, and Flexible Rate Auction Preferred Stock, Series B as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and shall rank prior to the Corporation's Common Stock and Series A Junior Participating Preferred Stock as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and prior to any other series of stock authorized to be issued by the Corporation which ranks junior to the $6.25 Cumulative Convertible Voting Preferred Stock, 9-1/2% Cumulative Preferred Stock, Series 1989-A, Flexible Rate Auction Preferred Stock, Series A, and Flexible Rate Auction Preferred Stock, Series B as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary." - 94 - 95 IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation, Preferences and Rights to be signed by David D. Wesselink, Vice President and Treasurer of the Corporation, and attested by Ronald C. Roselli, Assistant Secretary, this 9th day of November, 1990. HOUSEHOLD INTERNATIONAL, INC. By: /s/ D. D. Wesselink ----------------------------- Vice President and Treasurer Attest: /s/ R. C. Roselli --------------------- Assistant Secretary - 95 - 96 HOUSEHOLD INTERNATIONAL, INC. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS Pursuant to Section 151 of the General Corporation Law of the State of Delaware 9-1/2% Cumulative Preferred Stock, Series 1991-A (Without Par Value) HOUSEHOLD INTERNATIONAL, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), HEREBY CERTIFIES that the following resolutions were duly adopted by the Board of Directors of the Corporation and by the Preferred Stock Committee of the Board of Directors, pursuant to authority conferred upon the Board of Directors by the provisions of the Restated Certificate of Incorporation, as amended, of the Corporation, and pursuant to authority conferred upon the Preferred Stock Committee by the resolutions of the Board of Directors set forth herein and in accordance with Section 141(c) of the General Corporation Law of the State of Delaware. 1. The Board of Directors has adopted the following resolutions designating a Preferred Stock Committee of the Board of Directors and authorizing the Preferred Stock Committee to act on behalf of the Board of Directors (within certain limitations) in connection with the designation, issuance and sale of shares in one or more series of Preferred Stock of the Corporation: "RESOLVED, that a Preferred Stock Committee of the Board of Directors is hereby designated which shall have and may exercise, to the fullest extent permitted by law, the full power and authority of the Board of Directors with respect to the issuance and sale of one or more new series of the Corporation's Preferred Stock without par value (each such series herein referred to as the "New Preferred Stock"), including, without limitation, establishing the purchase price therefor, and fixing the designations and any of the preferences, powers, rights (other than voting powers or voting rights which shall be fixed by the Board of Directors) and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, of such shares of each series of New Preferred Stock, and fixing the number of shares of each series of New Preferred Stock. "FURTHER RESOLVED, that the Committee is authorized to take such additional actions and adopt such additional resolutions as it deems necessary or appropriate for the purpose of authorizing and implementing the issuance, offer, - 96 - 97 and sale for cash of New Preferred Stock, including, without limiting the generality of the foregoing, the authorization and execution of agreements (including underwriting agreements) relating to the offer and sale of New Preferred Stock, authorization and approval of listing applications (including amendments or supplements thereto) for the listing of such New Preferred Stock on a stock exchange, approval of forms of stock certificates and authorization of issuance of New Preferred Stock in uncertificated form, any actions which may be necessary to qualify the offering and sale of New Preferred Stock under Blue Sky Laws of the various states, any necessary filings with the Secretary of State of Delaware and other jurisdictions, and the appointment of a transfer agent. "FURTHER RESOLVED, that notwithstanding the foregoing resolutions, the Preferred Stock Committee may not authorize the sale of New Preferred Stock for more than $250 million cash consideration in the aggregate, and the power and authority of the Preferred Stock Committee set forth in the preceding resolutions shall expire on September 12, 1991. "FURTHER RESOLVED, that the members of the Preferred Stock Committee shall be D. C. Clark, E. P. Hoffman, and G. P. Osler. In the absence of Mr. Osler, A. E. Rasmussen is designated as an alternate member of the Preferred Stock Committee to serve in his place." 2. The Board of Directors has adopted the following resolution pertaining to the voting rights for series of Preferred Stock authorized for issuance by the Preferred Stock Committee of the Board of Directors: "RESOLVED, that notwithstanding the resolution of the Board of Directors adopted on October 17, 1989, the holders of the Corporation's Flexible Rate Auction Preferred Stock, Series A, and Flexible Rate Auction Preferred Stock, Series B, and any other series of Preferred Stock which on or after July 10, 1990, is authorized by the Preferred Stock Committee of the Board of Directors to be issued and sold pursuant to authority granted to the Preferred Stock Committee by the Board of Directors (each such series herein referred to as the "New Preferred Stock") shall have no voting rights, and their consent shall not be required for taking any corporate action, except as otherwise set forth herein, except as otherwise required by law, and except as otherwise provided by the Board of Directors with respect to any particular series of New Preferred Stock. The consent of the holders of the New Preferred Stock with respect to the matters set forth in sub-sections (i) and (iii) of paragraph (5) of Article IV of the - 97 - 98 Corporation's Restated Certificate of Incorporation ("Paragraph (5)") shall not be required, except with respect to the creation or issuance of any class of stock ranking prior to or on a parity with the Preferred Stock, or any series thereof, as to the payment of dividends or the distribution of assets; but the other provisions of Paragraph (5) shall be applicable to the New Preferred Stock. The holders of the New Preferred Stock shall have no right to elect directors pursuant to paragraph (6) of Article IV of the Corporation's Restated Certificate of Incorporation ("Paragraph (6)"), such right hereby being expressly withheld. In the event that any six quarterly cumulative dividends (which shall be deemed to include dividends in respect of a number of non-quarterly dividend periods containing not less than 540 days), whether consecutive or not, upon the New Preferred Stock shall be in arrears, the holders of the New Preferred Stock shall have the right, voting separately as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the New Preferred Stock either as to payment of dividends or the distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and upon which like voting rights have been conferred (which shall include the Corporation's 9-1/2% Cumulative Preferred Stock, Series 1989-A) and are then exercisable, at the next meeting of stockholders called for the election of directors, to elect two members of the Board of Directors. The right of such holders of such shares of the New Preferred Stock, voting separately as a class, to elect (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity) members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on such shares of the New Preferred Stock shall have been paid in full, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent failure to pay dividends of the character above mentioned. Upon any termination of the right of the holders of the New Preferred Stock as a class to elect directors as herein provided, the term of office of all directors so elected shall terminate immediately. If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders voting as a class may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. Whenever the term - 98 - 99 of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall thereupon be such number as may be provided for in the Corporation's Bylaws irrespective of any increase made pursuant to the provisions of this resolution. Until all unpaid dividends on the New Preferred Stock shall have been paid in full, and in order to permit the holders of the Corporation's $6.25 Cumulative Convertible Voting Preferred Stock, and any other series of Preferred Stock issued by the Corporation having the voting rights set forth in Paragraph (6) to exercise fully the right to elect directors as granted by and provided in paragraph (6), the number of directors constituting the whole Board of Directors of the Corporation shall not be less than seven. If, upon any such arrearage in dividends, the number of directors constituting the whole Board of Directors shall be less than seven, the size of the Board of Directors shall, immediately prior to the next meeting of stockholders called for the election of directors, automatically be increased by such number as shall be necessary to cause the number of directors constituting the whole Board of Directors to be no less than seven. To the extent that the Board of Directors is authorized to fix the designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof in respect of additional series of Preferred Stock, none of the preferences or rights of any such additional series as fixed by the Board of Directors shall rank prior to the New Preferred Stock as to payment of dividends or the distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, without the consent of the holders of two-thirds of the outstanding shares of such series of New Preferred Stock voting as a class. The foregoing voting provisions shall not apply to any series of New Preferred Stock if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of such series of New Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption. On any item in which the holders of New Preferred Stock are entitled to vote, such holders shall be entitled to one vote for each share held." - 99 - 100 3. The Preferred Stock Committee of the Board of Directors has adopted the following resolution pursuant to authority conferred upon the Preferred Stock Committee of the Board of Directors by the resolution of the Board of Directors set forth in paragraph 1 above of this Certificate of Designation, Preferences and Rights: "RESOLVED, that the issue of a series of Preferred Stock without par value of the Corporation is hereby authorized and the designation, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation, as amended, of the Corporation, are hereby fixed as follows: 9-1/2% Cumulative Preferred Stock, Series 1991-A (1) Number of Shares and Designation. 550,000 shares of Preferred Stock without par value of the Corporation are hereby constituted as a series of Preferred Stock without par value and designated as 9-1/2% Cumulative Preferred Stock, Series 1991-A (hereinafter called the "9-1/2% Preferred Stock"). (2) Dividends. The holders of shares of the 9-1/2% Preferred Stock shall be entitled to receive cash dividends, when and as declared by the Board of Directors of the Corporation, out of assets legally available for such purpose, at the rate determined as provided below. Such dividends shall be cumulative from the date of original issue of such shares and shall be payable quarterly in arrears, when and as declared by the Board of Directors of the Corporation, on the fifteenth day of January, April, July and October in each year to holders of record on the respective business days next preceding the first days of those months (and the quarterly dividend periods shall commence on the first days of those months). Dividends on the 9-1/2% Preferred Stock for quarterly dividend periods will be payable at the rate of 9-1/2% per annum from the date of original issue applied to the amount of $100 per share of 9-1/2% Preferred Stock. The amount of dividends payable on each share of 9-1/2% Preferred Stock for each full quarterly dividend period shall be computed by dividing the dividend rate by four and applying the dividend rate to the amount of $100 per share. The amount of dividends payable for any dividend period shorter or longer than a full quarterly dividend period shall be computed on the basis of 30-day months, a 360-day year and the actual number of days elapsed in the period. - 100 - 101 (3) Liquidation Preference. The amount to which shares of 9-1/2% Preferred Stock shall be entitled upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, shall be $100 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for payment, and no more. (4) Redemption. The shares of 9-1/2% Preferred Stock shall be subject to redemption in whole or in part at the option of the Corporation on or after August 13, 1996, at $100 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for redemption, and no more. (5) Shares to be Retired. All shares of 9-1/2% Preferred Stock purchased or redeemed by the Corporation shall be retired and cancelled and shall be restored to the status of authorized but unissued shares of the class of Preferred Stock without par value, without designation as to series, and may thereafter be issued, but not as shares of 9-1/2% Preferred Stock. (6) Conversion or Exchange. The holders of shares of 9-1/2% Preferred Stock shall not have any rights herein to convert such shares into or exchange such shares for shares of any other series of any class or classes of capital stock (or any other security) of the Corporation. (7) Ranking. The 9-1/2% Preferred Stock shall rank on a parity with the Corporation's $6.25 Cumulative Convertible Voting Preferred Stock, 9-1/2% Cumulative Preferred Stock, Series 1989-A, Flexible Rate Auction Preferred Stock, Series A, Flexible Rate Auction Preferred Stock, Series B, and 11-1/4% Enhanced Rate Cumulative Preferred Stock as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and shall rank prior to the Corporation's Common Stock and Series A Junior Participating Preferred Stock as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and prior to any other series of stock authorized to be issued by the Corporation which ranks junior to the $6.25 Cumulative Convertible Voting Preferred Stock, 9-1/2% Cumulative Preferred Stock, Series 1989-A, Flexible Rate Auction Preferred Stock, Series A, Flexible Rate Auction Preferred Stock, Series B and 11-1/4% Enhanced Rate Cumulative Preferred Stock as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary." IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation, Preferences and Rights to be signed - 101 - 102 by David D. Wesselink, Vice President and Treasurer of the Corporation, and attested by Susan Casey, Assistant Secretary, this 5th day of August, 1991. HOUSEHOLD INTERNATIONAL, INC. By: /s/ D. D. Wesselink ---------------------------- Vice President and Treasurer Attest: /s/ S. E. Casey ---------------------- Assistant Secretary - 102 - 103 HOUSEHOLD INTERNATIONAL, INC. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS Pursuant to Section 151 of the General Corporation Law of the State of Delaware 8-1/4% Cumulative Preferred Stock, Series 1992-A (Without Par Value) HOUSEHOLD INTERNATIONAL, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), HEREBY CERTIFIES that the following resolutions were duly adopted by the Board of Directors of the Corporation and by the Preferred Stock Committee of the Board of Directors, pursuant to authority conferred upon the Board of Directors by the provisions of the Restated Certificate of Incorporation, as amended, of the Corporation, and pursuant to authority conferred upon the Preferred Stock Committee by the resolutions of the Board of Directors set forth herein and in accordance with Section 141(c) of the General Corporation Law of the State of Delaware. 1. The Board of Directors has adopted the following resolutions designating a Preferred Stock Committee of the Board of Directors and authorizing the Preferred Stock Committee to act on behalf of the Board of Directors (within certain limitations) in connection with the designation, issuance and sale of shares in one or more series of Preferred Stock of the Corporation: "RESOLVED, that a Preferred Stock Committee of the Board of Directors is hereby designated which shall have and may exercise, to the fullest extent permitted by law, the full power and authority of the Board of Directors with respect to the issuance and sale of one or more new series of the Corporation's Preferred Stock without par value (each such series herein referred to as the "New Preferred Stock"), including, without limitation, establishing the purchase price therefor, and fixing the designations and any of the preferences, powers, rights (other than voting powers or voting rights which shall be fixed by the Board of Directors) and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, of such shares of each series of New Preferred Stock, and fixing the number of shares of each series of New Preferred Stock. "FURTHER RESOLVED, that the Preferred Stock Committee is authorized to take such additional actions and adopt such additional resolutions as it deems necessary or appropriate for the purpose of authorizing and implementing the issuance, offer, and sale for cash of New Preferred Stock, including, without limiting the generality of the foregoing, the authorization and execution of agreements (including - 103 - 104 underwriting agreements) relating to the offer and sale of New Preferred Stock, authorization and approval of listing applications (including amendments or supplements thereto) for the listing of such New Preferred Stock on a stock exchange, approval of forms of stock certificates and authorization of issuance of New Preferred Stock in uncertificated form, any actions which may be necessary to qualify the offering and sale of New Preferred Stock under Blue Sky Laws of the various states, any necessary filings with the Secretary of State of Delaware and other jurisdictions, and the appointment of a transfer agent. "FURTHER RESOLVED, that notwithstanding the foregoing resolutions, the Preferred Stock Committee may not authorize the sale of New Preferred Stock for more than $150 million cash consideration in the aggregate, and the power and authority of the Preferred Stock Committee set forth in the preceding resolutions shall expire on December 31, 1994, unless extended by further action of the Board of Directors of the Corporation. "FURTHER RESOLVED, that the members of the Preferred Stock Committee shall be D. C. Clark, E. P. Hoffman, and G. P. Osler. In the absence of Mr. Osler, A. E. Rasmussen is designated as an alternate member of the Preferred Stock Committee to serve in his place." 2. The Board of Directors has adopted the following resolution pertaining to the voting rights for series of Preferred Stock authorized for issuance by the Preferred Stock Committee of the Board of Directors: "RESOLVED, that holders of each series of the Corporation's New Preferred Stock which is authorized by the Preferred Stock Committee of the Board of Directors shall have no voting rights, and their consent shall not be required for taking any corporate action, except as otherwise set forth herein, or as otherwise required by law, and except as otherwise provided by the Board of Directors with respect to any particular series of New Preferred Stock. The consent of the holders of the New Preferred Stock with respect to the matters set forth in sub-sections (i) and (iii) of paragraph (5) of Article IV of the Corporation's Restated Certificate of Incorporation ("Paragraph (5)") shall not be required, except with respect to the creation or issuance of any class of stock ranking prior to or on a parity with the New Preferred Stock, or any series thereof, as to the payment of dividends or the distribution of assets; but the other provisions of Paragraph (5) shall be applicable to the New Preferred Stock. The holders of the New Preferred Stock shall have no right to elect directors pursuant to paragraph (6) of Article IV of the Corporation's Restated Certificate of - 104 - 105 Incorporation ("Paragraph (6)"), such right hereby being expressly withheld. In the event that any six quarterly cumulative dividends, whether consecutive or not, upon the New Preferred Stock shall be in arrears, the holders of the New Preferred Stock shall have the right, voting separately as a class with holders of shares of any one or more other series of Preferred Stock of the Corporation ranking on a parity with the New Preferred Stock either as to payment of dividends or the distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and upon which like voting rights have been conferred and are then exercisable, at the next meeting of stockholders called for the election of directors, to elect two members of the Board of Directors. The right of such holders of such shares of the New Preferred Stock, voting separately as a class, to elect (together with the holders of shares of any one or more other series of Preferred Stock of the Corporation ranking on such a parity) members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on such shares of the New Preferred Stock shall have been paid in full, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent failure to pay dividends of the character above mentioned. Upon any termination of the right of the holders of the New Preferred Stock as a class to elect directors as herein provided, the term of office of all directors so elected shall terminate immediately. If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders voting as a class may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall thereupon be such number as may be provided for in the Corporation's Bylaws irrespective of any increase made pursuant to the provisions of this resolution. Until all unpaid dividends on the New Preferred Stock shall have been paid in full, and in order to permit the holders of the Corporation's $6.25 Cumulative Convertible Voting Preferred Stock, and any other series of Preferred Stock issued by the Corporation having the voting rights set forth in Paragraph (6) to exercise fully the right to elect - 105 - 106 directors as granted by and provided in Paragraph (6), the number of directors constituting the whole Board of Directors of the Corporation shall not be less than seven. If, upon any such arrearage in dividends, the number of directors constituting the whole Board of Directors shall be less than seven, the size of the Board of Directors shall, immediately prior to the next meeting of stockholders called for the election of directors, automatically be increased by such number as shall be necessary to cause the number of directors constituting the whole Board of Directors to be no less than seven. To the extent that the Board of Directors is authorized to fix the designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof in respect of additional series of Preferred Stock, none of the preferences or rights of any such additional series as fixed by the Board of Directors shall rank prior to the New Preferred Stock as to payment of dividends or the distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, without the consent of the holders of two-thirds of the outstanding shares of such series of New Preferred Stock voting as a class. The foregoing voting provisions shall not apply to any series of New Preferred Stock if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of such series of New Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption. On any item in which the holders of New Preferred Stock are entitled to vote, such holders shall be entitled to one vote for each share held." 3. The Preferred Stock Committee of the Board of Directors has adopted the following resolution pursuant to authority conferred upon the Preferred Stock Committee of the Board of Directors by the resolution of the Board of Directors set forth in paragraph 1 above of this Certificate of Designation, Preferences and Rights: "RESOLVED, that the issue of a series of Preferred Stock without par value of the Corporation is hereby authorized and the designation, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation, as amended, of the Corporation, are hereby - 106 - 107 fixed as follows: 8-1/4% Cumulative Preferred Stock, Series 1992-A (1) Number of Shares and Designation. 50,000 shares of Preferred Stock without par value of the Corporation are hereby constituted as a series of Preferred Stock without par value and designated as 8-1/4% Cumulative Preferred Stock, Series 1992-A (hereinafter called the "8-1/4% Preferred Stock"). (2) Dividends. The holders of shares of the 8-1/4% Preferred Stock shall be entitled to receive cash dividends, when and as declared by the Board of Directors of the Corporation, out of assets legally available for such purpose, at the rate determined as provided below. Such dividends shall be cumulative from the date of original issue of such shares and shall be payable quarterly in arrears, when and as declared by the Board of Directors of the Corporation, on the fifteenth day of January, April, July and October in each year to holders of record on the respective business days next preceding the first days of those months (and the quarterly dividend periods shall commence on the first days of those months). Dividends on the 8-1/4% Preferred Stock for quarterly dividend periods will be payable at the rate of 8-1/4% per annum from the date of original issue applied to the amount of $1,000 per share of 8-1/4% Preferred Stock. The amount of dividends payable on each share of 8-1/4% Preferred Stock for each full quarterly dividend period shall be computed by dividing the dividend rate by four and applying the dividend rate to the amount of $1,000 per share. The amount of dividends payable for any dividend period shorter or longer than a full quarterly dividend period shall be computed on the basis of 30-day months, a 360-day year and the actual number of days elapsed in the period. (3) Liquidation Preference. The amount to which shares of 8-1/4% Preferred Stock shall be entitled upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, shall be $1,000 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for payment, and no more. (4) Redemption. The shares of 8-1/4% Preferred Stock shall be subject to redemption in whole or in part at the option of the Corporation on or after October 15, 2002, at $1,000 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for redemption, and no more. - 107 - 108 (5) Shares to be Retired. All shares of 8-1/4% Preferred Stock purchased or redeemed by the Corporation shall be retired and cancelled and shall be restored to the status of authorized but unissued shares of the class of Preferred Stock without par value, without designation as to series, and may thereafter be issued, but not as shares of 8-1/4% Preferred Stock. (6) Conversion or Exchange. The holders of shares of 8-1/4% Preferred Stock shall not have any rights herein to convert such shares into or exchange such shares for shares of any other series of any class or classes of capital stock (or any other security) of the Corporation. (7) Ranking. The 8-1/4% Preferred Stock shall rank on a parity with the Corporation's $6.25 Cumulative Convertible Voting Preferred Stock, 9-1/2% Cumulative Preferred Stock, Series 1989-A, Flexible Rate Auction Preferred Stock, Series A, Flexible Rate Auction Preferred Stock, Series B, 11-1/4% Enhanced Rate Cumulative Preferred Stock and 9-1/2% Cumulative Preferred Stock, Series 1991-A as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and shall rank prior to the Corporation's Common Stock and Series A Junior Participating Preferred Stock as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and prior to any other series of stock authorized to be issued by the Corporation which ranks junior to the $6.25 Cumulative Convertible Voting Preferred Stock, 9-1/2% Cumulative Preferred Stock, Series 1989-A, Flexible Rate Auction Preferred Stock, Series A, Flexible Rate Auction Preferred Stock, Series B, 11-1/4% Enhanced Rate Cumulative Preferred Stock and 9-1/2% Cumulative Preferred Stock, Series 1991-A as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary." IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation, Preferences and Rights to be signed by J. Richard Hull, Senior Vice President-Secretary of the - 108 - 109 Corporation, and attested by John W. Blenke, Assistant Secretary, this 14th day of October, 1992. HOUSEHOLD INTERNATIONAL, INC. By: /s/ J. Richard Hull ----------------------------- Senior Vice President- Secretary Attest: /s/ John W. Blenke ------------------------ Assistant Secretary - 109 - 110 HOUSEHOLD INTERNATIONAL, INC. CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION Household International, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify: FIRST: That the Restated Certificate of Incorporation, as heretofore amended, of said Corporation has been further amended by deleting, in its entirety, the first paragraph of Article IV thereof and inserting the following as the new first paragraph of Article IV: The total number of shares that may be issued by the Corporation is 158,155,004 of which 8,155,004 shares shall be Preferred Stock without par value and 150,000,000 shares shall be Common Stock of the par value of $1 per share. SECOND: That the aforesaid amendment of the Restated Certificate of Incorporation of said Corporation, set forth in Paragraph FIRST hereinabove, has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by D. C. Clark, its Chairman of the Board and Chief Executive Officer and J. W. Blenke, Assistant General Counsel and Assistant Secretary, this 12th day of May, 1993. HOUSEHOLD INTERNATIONAL, INC. [SEAL] By: /s/ D. C. Clark ------------------------- Chairman of the Board and Chief Executive Officer Attest: /s/ J. W. Blenke ----------------------------- Assistant General Counsel and Assistant Secretary - 110 - 111 CERTIFICATE OF HOUSEHOLD INTERNATIONAL, INC. UNDER SECTION 151(g) OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE Household International, Inc., a Delaware corporation (hereinafter referred to as the "Corporation"), does hereby certify that the following resolution was duly adopted by the Corporation's Board of Directors: "WHEREAS, no shares of the Corporation's Flexible Rate Auction Preferred Stock, Series A (the "Preferred Stock"), are outstanding as of the July 13, 1993, redemption date, it is hereby "RESOLVED, that the officers of the Corporation are duly authorized to file a certificate with the Secretary of State of Delaware eliminating from the Corporation's Certificate of Incorporation all matters set forth in each Certificate of Designation, Preferences and Rights for the Preferred Stock and as permitted by the Certificate of Designation, Preferences and Rights for the Preferred Stock, such shares of Preferred Stock redeemed shall resume the status of authorized and unissued shares of the Corporation's preferred stock." Upon the effective date of the filing of this Certificate, it shall eliminate from the Corporation's Certificate of Incorporation all matters set forth in the Certificate of Designation, Preferences, and Rights with respect to the Corporation's Flexible Rate Auction Preferred Stock, Series A, and all of such shares of Flexible Rate Auction Preferred Stock, Series A, shall resume the status of authorized and unissued shares of the Corporation's Preferred Stock. IN WITNESS WHEREOF, said Household International, Inc., has caused its corporate seal to be hereunto affixed and this Certificate to be signed by J. R. Hull, its Senior Vice President-Secretary and General Counsel, and attested by J. W. Blenke, its Assistant General Counsel and Assistant Secretary, this 13th day of July, 1993. HOUSEHOLD INTERNATIONAL, INC. By: /s/ J. R. Hull ----------------------------- Senior Vice President- Secretary and General Counsel Attest: By: /s/ J. W. Blenke --------------------------------- Assistant General Counsel and Assistant Secretary - 111 - 112 HOUSEHOLD INTERNATIONAL, INC. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS Pursuant to Section 151 of the General Corporation Law of the State of Delaware 7.35% Cumulative Preferred Stock, Series 1993-A (Without Par Value) HOUSEHOLD INTERNATIONAL, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), HEREBY CERTIFIES that the following resolutions were duly adopted by the Board of Directors of the Corporation and by the Offering Committee of the Board of Directors, pursuant to authority conferred upon the Board of Directors by the provisions of the Restated Certificate of Incorporation, as amended, of the Corporation, and pursuant to authority conferred upon the Offering Committee by the resolutions of the Board of Directors set forth herein and in accordance with Section 141(c) of the General Corporation Law of the State of Delaware. 1. The Board of Directors on May 12, 1993 has adopted the following resolutions designating an Offering Committee of the Board of Directors and authorizing the Offering Committee to act on behalf of the Board of Directors (within certain limitations) in connection with the designation, issuance and sale of shares in one or more series of Preferred Stock, without par value, of the Corporation: "FURTHER RESOLVED, that an Offering Committee of the Board of Directors is hereby designated which shall have and may exercise, to the fullest extent permitted by law, the full power and authority of the Board of Directors with respect to the issuance and sale of (i) the Common Stock, (ii) the Debt Securities or (iii) one or more new series of the Corporation's Preferred Stock, including, without limitation, establishing the purchase price therefore, and fixing the designations and any of the preferences, powers, rights (other than voting powers or voting rights which shall be fixed by the Board of Directors) and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, of such shares of each series of Preferred Stock; and "FURTHER RESOLVED, that notwithstanding the foregoing resolutions, the power and authority of the Offering Committee set forth in the preceding resolution shall expire on June 30, 1995, unless extended by further action of the Board of Directors of the Corporation; and "FURTHER RESOLVED, that the members of the Offering Committee shall be D. C. Clark, A. E. Rasmussen and G. P. Osler. In the absence of any of the named directors, any - 112 - 113 current director of the Corporation is designated as an alternate member of the Offering Committee to serve in such named director's place; and "FURTHER RESOLVED, that the Offering Committee is authorized to take such additional actions and adopt such additional resolutions as it deems necessary or appropriate for the purpose of authorizing and implementing the issuance, offer, and sale for cash of Preferred Stock, including, without limiting the generality of the foregoing, the authorization and execution of agreements (including underwriting agreements) relating to the offer and sale of Preferred Stock, approval of forms of stock certificates and authorization of issuance of Preferred Stock in uncertificated form, any actions which may be necessary to qualify the offering and sale of Preferred Stock under Blue Sky Laws of the various states, any necessary filings with the Secretary of State of Delaware and other jurisdictions, and the appointment of a transfer agent; and "FURTHER RESOLVED, that the Offering Committee is hereby empowered, in connection with the issuance and sale of any new series of the Corporation's Preferred Stock, to authorize the issuance and sale of depositary shares and depositary receipts for such depositary shares with respect to any such series of Preferred Stock, and to authorize the appointment of a depositary, registrar, and transfer agent for such depositary shares and depositary receipts, the execution of a depositary agreement, and any additional agreements or actions in connection therewith as the Offering Committee deems necessary or appropriate." 2. The Board of Directors, on May 12, 1993, has adopted the following resolution pertaining to the voting rights for series of Preferred Stock, without par value, authorized for issuance by the Offering Committee of the Board of Directors: "FURTHER RESOLVED, that holders of each series of the Corporation's Preferred Stock which is authorized by the Offering Committee of the Board of Directors shall have no voting rights, and their consent shall not be required for taking any corporate action, except as otherwise set forth herein or as otherwise required by law, and except as otherwise provided by the Board of Directors with respect to any particular series of Preferred Stock: The consent of the holders of the Preferred Stock with respect to the matters set forth in sub-sections (i) and (iii) of paragraph (5) of Article IV of the Corporation's Restated Certificate of Incorporation ("Paragraph (5)") shall not be required, except with respect to the creation or issuance of any class of stock ranking prior to or on a parity with the Preferred Stock, or any series thereof, as to the payment of dividends or the distribution of assets; but the other provisions of Paragraph (5) shall be - 113 - 114 applicable to the Preferred Stock. The holders of the Preferred Stock shall have no right to elect directors pursuant to paragraph (6) of Article IV of the Corporation's Restated Certificate of Incorporation ("Paragraph (6)"), such right hereby being expressly withheld. In the event that any six quarterly cumulative dividends, whether consecutive or not, upon the Preferred Stock shall be in arrears, the holders of the Preferred Stock shall have the right, voting separately as a class with holders of shares of any one or more other series of preferred stock of the Corporation ranking on a parity with the Preferred Stock either as to payment of dividends or the distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and upon which like voting rights have been conferred and are then exercisable, at the next meeting of stockholders called for the election of directors, to elect two members of the Board of Directors. The right of such holders of such shares of the Preferred Stock, voting separately as a class, to elect (together with the holders of shares of any one or more other series of preferred stock of the Corporation ranking on such a parity) members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on such shares of the Preferred Stock shall have been paid in full, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent failure to pay dividends of the character above mentioned. Upon any termination of the right of the holders of the Preferred Stock as a class to elect directors as herein provided, the term of office of all directors so elected shall terminate immediately. If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders voting as a class may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall thereupon be such number as may be provided for in the Corporation's Bylaws irrespective of any increase made pursuant to the provisions of this resolution. Until all unpaid dividends on the Preferred Stock shall have been paid in full, and in order to permit the holders of the Corporation's $6.25 Cumulative Convertible Voting - 114 - 115 Preferred Stock, and any other series of preferred stock issued by the Corporation having the voting rights set forth in Paragraph (6) to exercise fully the right to elect directors as granted by and provided in Paragraph (6), the number of directors constituting the whole Board of Directors of the Corporation shall not be less than seven. If, upon any such arrearage in dividends the number of directors constituting the whole Board of Directors shall be less than seven, the size of the Board of Directors shall, immediately prior to the next meeting of stockholders called for the election of directors, automatically be increased by such number as shall be necessary to cause the number of directors constituting the whole Board of Directors to be no less than seven. To the extent that the Board of Directors is authorized to fix the designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof in respect of additional series of preferred stock, none of the preferences or rights of any such additional series as fixed by the Board of Directors shall rank prior to the Preferred Stock as to payment of dividends or the distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, without the consent of the holders of two-thirds of the outstanding shares of such series of Preferred Stock voting as a class. The foregoing voting provisions shall not apply to any series of Preferred Stock, if at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of such series of Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption. On any item in which the holders of Preferred Stock are entitled to vote, such holders shall be entitled to one vote for each share held." 3. The Offering Committee of the Board of Directors has on August 30, 1993 adopted the following resolution pursuant to authority conferred upon the Offering Committee of the Board of Directors by the resolutions of the Board of Directors set forth in paragraph 1 above of this Certificate of Designation, Preferences and Rights: "RESOLVED, that the issue of a series of Preferred Stock without par value of the Corporation is hereby authorized and the designation, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, in - 115 - 116 addition to those set forth in the Restated Certificate of Incorporation, as amended, of the Corporation, are hereby fixed as follows: 7.35% Cumulative Preferred Stock, Series 1993-A (1) Number of Shares and Designation. 100,000 shares of Preferred Stock without par value of the Corporation are hereby constituted as a series of Preferred Stock without par value and designated as 7.35% Cumulative Preferred Stock, Series 1993-A (hereinafter called the "7.35% Preferred Stock"). (2) Dividends. The holders of shares of the 7.35% Preferred Stock shall be entitled to receive cash dividends, when and as declared by the Board of Directors of the Corporation, out of assets legally available for such purpose, at the rate determined as provided below. Such dividends shall be cumulative from the date of original issue of such shares and shall be payable quarterly in arrears, when and as declared by the Board of Directors of the Corporation, on the fifteenth day of January, April, July and October in each year to holders of record on the respective business days next preceding the first days of those months (and the quarterly dividend periods shall commence on the first days of those months). Dividends on the 7.35% Preferred Stock for quarterly dividend periods will be payable at the rate of 7.35% per annum from the date of original issue applied to the amount of $1,000 per share of 7.35% Preferred Stock. The amount of dividends payable on each share of 7.35% Preferred Stock for each full quarterly dividend period shall be computed by dividing the dividend rate by four and applying the dividend rate to the amount of $1,000 per share. The amount of dividends payable for any dividend period shorter or longer than a full quarterly dividend period shall be computed on the basis of 30-day months, a 360-day year and the actual number of days elapsed in the period. (3) Liquidation Preference. The amount to which shares of 7.35% Preferred Stock shall be entitled upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, shall be $1,000 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for payment, and no more. (4) Redemption. The shares of 7.35% Preferred Stock shall be subject to redemption in whole or in part at the option of the Corporation on or after October 15, 1998 at $1,000 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for - 116 - 117 redemption, and no more. (5) Shares to be Retired. All shares of 7.35% Preferred Stock purchased or redeemed by the Corporation shall be retired and cancelled and shall be restored to the status of authorized but unissued shares of the class of Preferred Stock without par value, without designation as to series, and may thereafter be issued, but not as shares of 7.35% Preferred Stock. (6) Conversion or Exchange. The holders of shares of 7.35% Preferred Stock shall not have any rights herein to convert such shares into or exchange such shares for shares of any other series of any class or classes of capital stock (or any other security) of the Corporation. (7) Ranking. The 7.35% Preferred Stock shall rank on a parity with the Corporation's $6.25 Cumulative Convertible Voting Preferred Stock, 9-1/2% Cumulative Preferred Stock, Series 1989-A, Flexible Rate Auction Preferred Stock, Series B, 11-1/4% Enhanced Rate Cumulative Preferred Stock, 9-1/2% Cumulative Preferred Stock, Series 1991-A and 8-1/4% Cumulative Preferred Stock, Series 1992-A as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and shall rank prior to the Corporation's Common Stock and Series A Junior Participating Preferred Stock as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary, and prior to any other series of stock authorized to be issued by the Corporation which ranks junior to the $6.25 Cumulative Convertible Voting Preferred Stock, 9-1/2% Cumulative Preferred Stock, Series 1989-A, Flexible Rate Auction Preferred Stock, Series B, 11-1/4% Enhanced Rate Cumulative Preferred Stock, 9-1/2% Cumulative Preferred Stock, Series 1991-A and 8-1/4% Cumulative Preferred Stock, Series 1992-A as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary." IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation, Preferences and Rights to be signed by J. Richard Hull, Senior Vice President-Secretary and General Counsel of the Corporation, and attested by John W. Blenke, - 117 - 118 Assistant General Counsel and Assistant Secretary, this 1st day of September, 1993. HOUSEHOLD INTERNATIONAL, INC. By: /s/ J. Richard Hull ---------------------- Senior Vice President- Secretary and General Counsel Attest: /s/ John W. Blenke --------------------------------- Assistant General Counsel and Assistant Secretary - 118 - EX-10.1 3 KEY EXECUTIVE BONUS PLAN 1 EXHIBIT 10.1 HOUSEHOLD INTERNATIONAL KEY EXECUTIVE BONUS PLAN March, 1994 2 HOUSEHOLD INTERNATIONAL KEY EXECUTIVE BONUS PLAN I. CONCEPT The Household International Key Executive Bonus Plan (the "Plan") is a short-term incentive plan that is intended to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and is designed to award "performance based" compensation as determined in accordance with that provision of the Code. Awards will be based solely on (1) the financial performance of Household International, Inc. (the "Corporation") or a subsidiary or business unit thereof as measured by criteria established by the Compensation Committee of the Board of Directors of the Corporation; and (2) on an evaluation of each participant's individual performance against set objective goals established by said Compensation Committee. Performance goals and award opportunities will be determined prior to the beginning of each Plan period (which will generally be a calendar year), or at a later date as allowed by Internal Revenue Service ("IRS") notice or regulation, by the Compensation Committee and will be communicated to each Plan participant. II. PARTICIPATION Participation in the Plan will be restricted to the key executives as set forth on Attachment A hereto (which exhibit may be changed at any time by the Compensation Committee). For purposes of the Plan, participants will be divided into groups which will indicate the maximum bonus opportunity available to such participant. Any changes in the key executives participating in the Plan will be made by the Compensation Committee. III. LEVEL OF AWARDS Prior to each Plan period (or at a later date as allowed by IRS notice or regulation), the Chief Executive Officer ("CEO") of the Corporation will recommend for approval by the Compensation Committee of the Board of Directors the financial performance indicators, including the levels thereof that must be met, in order to pay bonuses to any participant at any level up to the maximum levels for the following Plan period as well as the levels below which no bonuses may be paid under the financial performance portions B-1 3 of this Plan. The CEO will also recommend for approval by the Compensation Committee the percentage of the financial performance based portion of the bonus that will be paid for performance between these parameters. In addition, the CEO will recommend for approval by the Compensation Committee of the Board of Directors certain objective individual goals, including the specific values to be assigned thereto, for each participant in the Plan. The categories for determining financial performance indicators and objective individual goals that may be used for this purpose shall be selected from the list provided on Attachment B hereto. If the Compensation Committee approves the aforementioned financial performance indicators and objective individual goals, these objectives shall be deemed to be established for the applicable participant for the applicable Plan period and shall be deemed to be part of this Plan for said Plan period. Maximum Awards An award will be paid for fully satisfactory financial and individual performance in a given year as solely determined by the Compensation Committee. The award percentage for each group will equal the guideline percentage shown below of the participant's base salary at the end of the Plan period. The table below shows the portions of the bonus that will be determined by financial and individual performance. ----------Guideline % of Annual Base Salary Determined by--------
Financial Individual Maximum Group Performance Performance Bonus* ----- ----------- ----------- ------- A 63.75% 63.75% 127.5%
* The maximum amount that may be awarded to any participant in the Plan (the "Maximum Award") for any Plan period is $2.0 million. IV. DETERMINATION OF AWARDS A. Financial Performance Awards Financial performance of the Corporation and/or a business unit thereof will determine the size of a portion of each individual's annual bonus. As indicated in Section III, the Compensation Committee B-2 4 will approve the financial performance levels required to pay any bonus based on corporate, subsidiary or business unit performance. B. Individual Performance Awards Prior to each Plan period (or at a later date as allowed by IRS notice or regulation), objective goals for individual performance for that period 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 CEO. C. Approval of Goals/Awards The Compensation Committee of the Board of Directors must approve the goals (financial performance and individual objective goals) prior to the beginning of any Plan period for all participants in the Plan. These goals will be the sole criteria for measuring performance and determining the bonus for that period. The Compensation Committee will solely determine whether all goals (financial performance and individual objective goals) have been satisfied for all participants in the Plan, and will certify as to a participants performance against said goals to the Board of Directors of the Corporation. Notwithstanding anything contained herein to the contrary, the Compensation Committee may, however, at its sole discretion, reduce bonus awards in light of overall business conditions or other exceptional circumstances. V. 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 the Corporation's common stock, or some combination thereof at the sole discretion of the Compensation Committee. VI. ADMINISTRATIVE MATTERS A. Position Changes Normally awards, provided the goals therefore have been met, will be pro-rated according to the portion of the Plan period that an incumbent is eligible for the B-3 5 bonus. Notwithstanding the foregoing, however, the Compensation Committee shall have the right to review each individual case and take such action as it deems appropriate consistent with the intent and purposes of this Plan. 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 Corporation's TRIP plan. C. Termination of Employment Normally awards, provided the goals therefore have been met, 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 period. If a participant terminates employment for any other reason prior to the last working day of a Plan period, he will normally forfeit any right to an award for the Plan period. Notwithstanding the foregoing, however, the Compensation Committee shall have the right to review each individual case and take such action as it deems appropriate consistent with the intent and purposes of this Plan. D. Administration of the Plan The Plan shall be administered solely by the Compensation Committee. Any and all determinations made by the Compensation Committee in connection with this Plan shall be final and binding on the Corporation and each participant in the Plan. 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 a right or claim to an award under the Plan. The Compensation Committee reserves the right to change or discontinue the Plan at any time; provided, however, that any new factors used to establish a goal, other than those set forth in Attachment B hereto, or any increase in the Maximum Award permitted under the Plan must be approved by the stockholders of the Corporation. E. Stockholder Approval B-4 6 The Plan shall be submitted to the stockholders of the Corporation at the 1994 annual meeting of stockholders. If the Plan is not approved by the stockholders by December 31, 1994, then this Plan shall be deemed to be null and void and any awards or grants made pursuant hereto shall automatically terminate. Thereafter, this Plan shall again be submitted to the stockholders for approval every fifth (5th) year or as may be required by the applicable provisions of the Code. The Goal Setting Process Before the beginning of the Plan period (or at a later date as allowed by IRS notice or regulation), the Chief Executive Officer of the Corporation will meet with each other participant in the Plan in a goal setting session. The purpose of the session is to discuss areas where individual objective and/or financial performance 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. Guidelines for Setting Goals For the purpose of establishing goals for the Plan period, the following criteria should apply: - They should be consistent and supportive of goals reflected in the Corporation's strategic business plans. - They should be primarily job or task oriented. They must be realistic and achievable yet challenging with built in "stretch" to test individual capabilities. They should clearly specify action, tasks or results to be accomplished as well as a clear understanding of how the accomplishment will be evaluated. - They must be understood and agreed to by both the Chief Executive Officer and the Compensation Committee. The results of the goal setting process will be documented and approved by the Compensation Committee. B-5 7 Attachment A KEY EXECUTIVE BONUS PLAN POSITIONS AND BONUS OPPORTUNITY
Maximum Amount based Group A* on Annual Salary -------- -------------------- Chairman of the Board 127.5% Chief Executive Officer 127.5% President 127.5%
* If any participant holds more than one of the positions noted, the maximum bonus opportunity for that participant shall be the greatest maximum bonus opportunity noted for any of the positions held. 8 Attachment B Financial Performance Indicators* 1) Total Earnings or Net Income. 2) Earnings per share of the Corporation's Common Stock (while giving effect to dilution caused by the issuance of additional shares). 3) Growth of Receivables (owned or managed). 4) Delinquency or Delinquency ratios. 5) Return-on-Equity. 6) Return-on-Assets (owned or managed). 7) Charge-offs or Charge-off ratios. 8) Increase in Assets (owned or managed). 9) Operating Expenses or Operating Expense ratios. 10) Debt-to-Equity ratios. 11) Earnings-to-Fixed Charges Coverage ratios. 12) Price appreciation of the Corporation's Common Stock. 13) Common Stock Total Shareholder Return or Total Shareholder Return Relative to a Defined Marketplace (i.e., peer group of companies or published indices). 14) Common or Total Shareholders Equity ratios. 15) Reserves or Reserve ratios. 16) Commercial Asset Levels or Performance. Objective Individual Goals* 1) Representation at Functions. "Functions" being deemed civic, charitable, governmental or business meetings at which items of interest to the Corporation or its businesses are to be discussed. 2) Succession Management. 9 3) Implement or Introduce New Products and/or Services. 4) Reengineering of Staff and/or Business Unit Functions. 5) Developing and/or Implementing Action Plans/Strategies. 6) Ratings Issued by any Nationally Recognized Statistical Rating Organization or Similar Entity. 7) Such other individual goals deemed appropriate by the Compensation Committee which meet the rules and/or regulations of the applicable provisions of the Code. * As they relate to the Corporation, any subsidiary or business unit thereof, or any product or service offered thereby. EX-10.2 4 CORPORATE EXECUTIVE BONUS PLAN 1 EXHIBIT 10.2 HOUSEHOLD INTERNATIONAL CORPORATE EXECUTIVE BONUS PLAN JANUARY 1995 SUMMARY The Household International Corporate 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 financial and individual performance in a given year. The target award percentage for each group will approximate the guideline percentage shown below of the executive's base salary at the end of the plan year. The table below shows the portions of the target bonus that will be determined by corporate, business unit, and individual performance. 1 2 -----Guideline % of Annual Base Salary Determined by------
Group Target Bonus Maximum Bonus* ----- ------------ -------------- A 65% 100.0% B 50% 75.0% C 40% 60.0% D 35% 52.5% E 30% 45.0% F 20% 30.0%
Detailed information relating to the assignment and weighing of goals is available by individual and is maintained by the business unit and/or corporate. * 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 Various financial results, including ROE, will determine the size of a portion of each individuals's annual bonus. The ROE portion of the award will be paid out if achieved results are at the pre-established minimum, target and maximum ROE levels. B. Individual Performance Awards Early in each plan year, goals for individual performance for that year will be established for each participant. The goals should require the level of performance which is expected of a fully satisfactory incumbent and must be agreed to by the immediate superior. The Compensation Committee of the Board of Directors must approve the goals for those executives whose salaries are determined by the Committee. These goals will be the primary criteria for measuring individual performance and determining the individual performance portion of the bonus for that year. 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 Vice Presidents, in consultation with their appropriate 2 3 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. 3 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. 4 5 Rev. 12/31/94 CORPORATE EXECUTIVE BONUS PLAN POSITIONS Group/Title GROUP A - 65%/100% GROUP EXECUTIVE HCS GROUP EXECUTIVE CONSUMER FINANCE & AUSTRALIA & CANADA GROUP EXECUTIVE US CONSUMER & MORTGAGE BANKING & UK GROUP B - 50%/75% SVP CHIEF FINANCIAL OFFICER GROUP C - 40%/60% CHAIRMAN - AHLIC VP CHIEF INFORMATION OFFICER VP GENERAL COUNSEL VP HUMAN RESOURCES GROUP D - Heads of Major Business Units or Staff Units - 35%/52-1/2% EVP COO HAMILTON INVESTMENTS GROUP EXECUTIVE COMMERCIAL FINANCE PRESIDENT & CEO - AHL GROUP E - Heads of Major Business Segments or Staff Units - 30%/45% ASSISTANT GENERAL COUNSEL & SECRETARY CORPORATE CONTROLLER EVP CHIEF FINANCIAL OFFICER EVP CHIEF MARKETING OFFICER AHL EXECUTIVE DIRECTOR EXECUTIVE DIRECTOR CHIEF INVESTMENT OFFICER EXECUTIVE DIRECTOR CREDIT CYCLE MANAGEMENT EXECUTIVE DIRECTOR-STRATEGIC INITIATIVES & PARTNER. ALLIANCES GROUP VP MARKETING SERVICES MANAGING DIRECTOR AUSTRALIA MANAGING DIRECTOR/CEO-UK MANAGING DIRECTOR HSS MANAGING DIRECTOR USCB PRESIDENT CANADA PRESIDENT CORPORATE FINANCE-HCFS PRESIDENT EQUIPMENT FINANCE-HCFS PRESIDENT HMS PRESIDENT HRSI SVP BRAND MANAGEMENT SVP MANAGING DIRECTOR HFC PROCESSING SERVICES 5 6 SVP MANAGING DIRECTOR HFS SVP OPERATIONS SUPPORT SERVICES VP GOVERNMENTAL RELATIONS VP MONEY & CAPITAL MARKETS VP TAXES VP TREASURER GROUP F - 20%/30% =========================== CORPORATE STAFF DEPARTMENTS: =========================== Controller DEPUTY CONTROLLER-EXTERNAL REPORTING DIRECTOR ANALYSIS/RESEARCH/POLICY DIRECTOR CORPORATE FINANCIAL INFORMATION SYSTEMS DIRECTOR FEDERAL TAX AUDIT DIRECTOR FEDERAL TAX COMPLIANCE DIRECTOR FINANCIAL DATA MANAGEMENT DIRECTOR INTERNAL AUDIT-COMPUTER SYSTEMS DIRECTOR INTERNAL AUDIT-FINANCIAL SERVICES DIRECTOR INTERNAL REPORTING DIRECTOR REGULATORY REPORTING DIRECTOR PLANNING DIRECTOR RISK MANAGEMENT DIRECTOR STATE & LOCAL TAXES DIRECTOR TAX PLANNING & COUNSEL VP AUDIT VP CORPORATE COMMUNICATIONS VP DATA ADMINISTRATION VP PLANNING VP VALUATION & ASSESSMENT SERVICES General Counsel ASSISTANT GENERAL COUNSEL EMPLOYEE RELATIONS ASSISTANT GENERAL COUNSEL LITIGATION GENERAL COUNSEL GENERAL COUNSEL - HAMILTON INVESTMENTS VP FEDERAL GOVERNMENTAL RELATIONS VP STATE GOVERNMENTAL RELATIONS VP GOVERNMENT RELATIONS & PUBLIC AFFAIRS Human Resources DIRECTOR EMPLOYEE COMMUNICATIONS DIRECTOR HUMAN RESOURCES HI DIRECTOR MANAGEMENT DEVELOPMENT & TRAINING-HI VP COMPENSATION & ADMINISTRATION VP BENEFITS & HR POLICY 6 7 Treasury DIRECTOR-ASSET BACKED FINANCINGS DIRECTOR BUSINESS TREASURY SERVICES DIRECTOR STRATEGIC ALLIANCES VP-ALM VP-FINANCE-HI VP FINANCIAL CONTROL TREASURY VP SPECIALTY FINANCE ========================= HOUSEHOLD CREDIT SERVICES: ========================= Household Credit Services CONTROLLER-HCS DIRECTOR BUSINESS ANALYSIS DIRECTOR BUSINESS PLANNING DIRECTOR BUSINESS SYSTEMS-HCS DIRECTOR BUSINESS TREASURY SERVICES DIRECTOR CREDIT SUPPORT SYSTEMS DIRECTOR CUSTOMER SERVICE & CREDIT SERVICES DIRECTOR GM CARD HCS DIRECTOR HBNA PRODUCT DIRECTOR HUMAN RESOURCES DIRECTOR INFORMATION SERVICES DIRECTOR MARKETING HCS DIRECTOR RISK CONTROL DIRECTOR STRATEGIC RISK TECHNOLOGIES EXECUTIVE DIRECTOR MARKETING RISK MANAGEMENT HCS GENERAL MANAGER MEXICO GROUP DIRECTOR FRAUD & OPERATIONS GROUP DIRECTOR INFORMATION SYSTEMS GROUP DIRECTOR NEVADA OPERATIONS GROUP DIRECTOR RISK CONTROL GROUP DIRECTOR-OPERATIONS ENGINEERING NATIONAL DIRECTOR HUMAN RESOURCES HCS OPERATIONS MANAGER VP BUSINESS ANALYSIS VP HCS HRSI DIRECTOR HUMAN RESOURCES-HRSI VP CHIEF COLLECTIONS OFFICER VP CHIEF CREDIT OFFICER VP CHIEF OF MARKETING & SALES HRSI VP CONTROLLER-HRSI VP CREDIT RISK VP DIRECTOR MARKETING 7 8 VP DIRECTOR OF SALES HRSI VP QUALITY CONTROL HRSI ========================================= U.S. CONSUMER FINANCE, AUSTRALIA & CANADA: ========================================= HFC Home Office Staff GROUP FINANCIAL CONTROL OFFICER GROUP HUMAN RESOURCES OFFICER VP COMMUNITY RELATIONS VP CONTROLLER CONSUMER FINANCE VP PLANNING USCF HFC National Processing Center DIRECTOR COLLECTIONS HRSC DIRECTOR OPERATIONS SUPPORT DIRECTOR POLICY/COMPLIANCE/PROJECT CONTROL VP COLLECTIONS USCF VP DIRECTOR OF CREDIT HFC Sales VP DIRECTOR OF SALES VP DIRECTOR OF SALES HSS HFS CHIEF FINANCIAL OFFICER HFS DIRECTOR OF COLLECTIONS REGIONAL OPERATIONS MANAGER VP ACQUISITION FINANCE HFS VP ASSET MANAGEMENT VP DIRECTOR OF CREDIT SERVICES VP DIRECTOR OF SYSTEMS/TECHNOLOGY VP INDIRECT LENDING VP NONPERFORMING ASSETS VP SYSTEMS TECHNOLOGY HCFS SVP COMMERCIAL FINANCE RISK ASSET MANAGEMENT SVP FINANCE & ADMINISTRATION SVP GENERAL COUNSEL HCFS VP REAL ESTATE ADMINISTRATION Australia DIVISION MANAGER-COMMERCIAL 8 9 DIVISION MANAGER-CONSUMER FINANCE DIVISION MANAGER-SMALL BUSINESS FINANCE GROUP FINANCIAL CONTROLLER GROUP MANAGER-CORPORATE ATTORNEY GROUP MANAGER-HUMAN RESOURCES GROUP MANAGER-MARKETING GROUP MANAGER-SYSTEMS AND TECHNOLOGY GROUP MANAGER-TREASURY Canada CHIEF FINANCIAL OFFICER-CANADA* CONTROLLER DEPARTMENT MANAGER STRATEGIC PLANNING DIRECTOR-APPLICATION SYSTEMS DEVELOPMENT* DIRECTOR CREDIT RISK DIRECTOR HUMAN RESOURCES DIRECTOR LAW & COMPLIANCE DIRECTOR RETAIL SALES DIRECTOR TECHNOLOGY & PLANNING* DIRECTOR WHOLESALE SALES EXECUTIVE DIRECTOR PROCESSING SERVICES CANADA* GENERAL MANAGER NATIONAL DIRECTOR COLLECTIONS CANADA REGIONAL SALES MANAGER SCP CONSUMER FINANCE CANADA SVP MERCHANT SERVICES SVP TRUST CANADA* * Position held by expatriate ======================================= U.S. CONSUMER & MORTGAGE BANKING & U.K.: ======================================= Household Bank HB CREDIT RISK OFFICER PRESIDENT HOUSEHOLD BANK VP BUSINESS DEVELOPMENT VP FINANCIAL ADMINISTRATION VP HUMAN RESOURCES BANKING VP MARKET DEVELOPMENT & RISK MANAGEMENT HMS VP ASSET MANAGEMENT VP OPERATIONS & FINANCIAL CONTROL VP MORTGAGE ORIGINATIONS-RETAIL VP SERVICING 9 10 OSS DIRECTOR PAYROLL & HUMAN RESOURCES VP ADMINISTRATIVE SERVICES VP BANK OPERATIONS VP BANK PROPERTY MANAGMENT VP CASH OPERATIONS VP CHIEF FINANCIAL OFFICER OSS VP CORPORATE PROPERTY MANAGEMENT VP FACILITIES VP MARKETING/ PRODUCTION VP PRODUCTION OSS VP SECURITY MANAGEMENT Hamilton Investments SVP DIRECTOR OPERATIONS HFN DIRECTOR BUSINESS SYSTEMS DIRECTOR COMMUNICATIONS SERVICES DIRECTOR DATA CENTER OPERATIONS DIRECTOR DISTRIBUTED INFRASTRUCTURE DIRECTOR HRSI BUSINESS SYSTEMS DIRECTOR STANDARDS & DATA ADMINISTRATION DIRECTOR STRATEGIC PLANNING VP ADMINISTRATION VP ENTERPRISE SYSTEMS VP INFORMATION SERVICES VP SYSTEMS ASSURANCE AHLIC DIRECTOR AFFILIATED MARKETING: HCS, HRSI & CANADA DIRECTOR AGENCIES DIRECTOR/CONTROLLER DIRECTOR FINANCE DIRECTOR HUMAN RESOURCES AHL DIRECTOR INFORCE ADMINISTRATION DIRECTOR PRODUCT DEVELOPMENT DIRECTOR PRODUCT MANAGEMENT DIRECTOR SR INVESTMENT OFFICER DIRECTOR UNDERWRITING & ISSUE AHL EVP CHIEF OPERATING OFFICER AHL EXECUTIVE DIRECTOR ACTUARIAL & PLANNING EXECUTIVE DIRECTOR AFFILIATED MARKETING AHL EXECUTIVE DIRECTOR GENERAL COUNSEL & CORPORATE SECRETARY AHL EXECUTIVE DIRECTOR INFORMATION TECHNOLOGY VP MANAGING DIRECTOR FAHLIC 10 11 U.K. CHIEF FINANCIAL OFFICER DIRECTOR-BANKING SERVICES DIRECTOR-CUSTOMER SERVICE DIRECTOR-GM QUALITY ASSURANCE DIRECTOR PERSONAL BANKING UK* DIRECTOR PRODUCTION PERSONAL BANKING UK* DIRECTOR-COLLECTIONS DIRECTOR-CORPORATE COMMUNICATION DIRECTOR-CREDIT CARD SERVICES DIRECTOR-CREDIT POLICY DIRECTOR-HUMAN RESOURCES DIRECTOR-INFORMATION TECHNOLOGY DIRECTOR-INSURANCE SERVICES DIRECTOR-INTERNAL AUDIT DIRECTOR-LEGAL DIRECTOR-OPERATIONS SUPPORT DIRECTOR-PROPERTY & FACILITIES DIRECTOR-RETAIL SALES DIVISION GENERAL MANAGER FINANCE DIRECTOR-INSURANCE/COMPLIANCE OFFICER GENERAL MANAGER BANK MARKETING GENERAL MANAGER BUSINESS CONTROL GENERAL MANAGER CREDIT CARD MARKETING GROUP FINANCIAL CONTROLLER OPERATIONS DIRECTOR RETAIL SERVICES PERSONNEL OPERATIONS MANAGER SALES DIRECTOR-CENTRAL LENDING SALES DIRECTOR-INSURANCE SALES DIRECTOR-RETAIL SALES SERVICE & TECHNOLOGY MANAGER TECHNOLOGY PLANNING MANAGER TRAINING & DEVELOPMENT MANAGER TREASURY MANAGER * Position held by expatriate. 11 EX-10.5 5 FORMS OF STOCK OPTION 1 EXHIBIT 10.5 HOUSEHOLD INTERNATIONAL NOTICE OF STOCK OPTIONS AND GRANT AGREEMENT February 1, 1994 NAME SOCIAL SECURITY NUMBER ADDRESS On February 1, 1994, 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 February 1, 1994 Option Price Per Share $33.375 # of Shares Granted #
Enclosed for your signature are two(2) copies of the Stock Option Agreement which state the terms and conditions under which these options were granted. Please retain one copy for your files and return one signed copy of the Agreement by April 15, 1994, using the attached pre-addressed envelope, to: HOUSEHOLD INTERNATIONAL, INC. ATTN: OFFICE OF THE SECRETARY, 3N 2700 SANDERS ROAD PROSPECT HEIGHTS, IL 60070 Sincerely, 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 FOR SENIOR MANAGEMENT TEAM 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 3 during the lifetime of the Employee only by the Employee 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 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 at any time before the expiration date of the option; (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, 4 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 to the extent permitted by the Incentive Plan and is subject to the provisions of the Incentive Plan. 5 HOUSEHOLD INTERNATIONAL NOTICE OF RESTRICTED STOCK RIGHTS AGREEMENT February 1, 1994 NAME SOCIAL SECURITY NUMBER ADDRESS On February 1, 1994, 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 February 1, 1994 # of Shares Granted #
Enclosed for your signature are two(2) copies of the Restricted Stock Rights Agreement which state the terms and conditions under which these rights were granted. Please retain one copy for your files and return one signed copy of the Agreement by April 15, 1994, using the attached pre-addressed envelope, to: HOUSEHOLD INTERNATIONAL, INC. ATTN: OFFICE OF THE SECRETARY, 3N 2700 SANDERS ROAD PROSPECT HEIGHTS, IL 60070 Sincerely, John W. Blenke Secretary __________________________________ ___________________ Employee's Signature Date 6 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 either (1) 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; and provided further, the Compensation Committee, in its sole discretion, may determine that full vesting is appropriate under the circumstances or (2) 100% of the shares subject to RSRs on his or her last day of employment if retirement occurs on or after age 65, 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 7 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. 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 or his or her estate or administrator, as deemed appropriate by the Company. 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 as additional income, less applicable taxes, 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. Any and all taxes required to be withheld by the Company as a result of the issuance of any shares pursuant to the RSRs shall be the sole responsibility of the Employee. 7. 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. 8. 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. 8 HOUSEHOLD INTERNATIONAL NOTICE OF PERFORMANCE SHARE AWARD AGREEMENT February 1, 1994 NAME SOCIAL SECURITY NUMBER ADDRESS On February 1, 1994, the Compensation Committee of Household's Board of Directors granted you a performance share award under the Household International Long-Term Executive Incentive Compensation Plan as follows: Date of Award February 1, 1994 Price Per Share $33.375 # of Shares #
Enclosed for your signature are two (2) copies of the Performance Share Award Agreement which state the terms and conditions under which these shares were awarded. Please retain one copy for your files and return one signed copy of the Agreement using the attached pre-addressed envelope. Sincerely, John W. Blenke Secretary __________________________________ ___________________ Employee's Signature Date 9 HOUSEHOLD INTERNATIONAL, INC. HOUSEHOLD INTERNATIONAL LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN ------ PERFORMANCE SHARE AWARD AGREEMENT THIS AGREEMENT, dated February 1, 1994, 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 Performance Share Awards (the PSAs"), for a period of five (5) years from the date hereof (the "Restricted Period"), and provided the performance condition in the following paragraph is met, 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. The PSA shares will vest from the date of this Agreement according to the following schedule: 25% on the third anniversary if a performance unit award payment is made with respect to the award granted for the three-year cycle 1994-1996, 25% on the fourth anniversary if a performance unit award payment is made with respect to the award granted in the three-year cycle 1995-1997, 50% on the fifth anniversary if a performance unit award payment is made with respect to the award granted for the three-year cycle 1996-1998. A holder of PSAs who fails to remain continuously as an Employee of the Company or any subsidiary until some or all of the PSAs become vested in accordance with the preceding sentence will forfeit all such unvested shares and the rights of a holder of such shares without any payment of consideration by the Company, unless otherwise provided in his or her Employment Agreement or unless the Compensation Committee has waived this condition. 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. 3. The PSAs may not be transferred except by will or the laws of descent and distribution. 4. As PSA shares vest, an Employee shall be entitled to receive the shares and the Company shall issue the appropriate number of shares registered in the name of the Employee or his or her estate or administrator, as deemed appropriate by the Company. 10 5. The holder of PSAs shall not be entitled to any of the rights of a holder of the Common Stock with respect to the shares subject to such PSAs prior to the issuance of such shares pursuant to the Plan. However, during the Restricted Period, for each share subject to an PSA, 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, provided, however, that any such dividends will be held by the Company without interest, until the Performance Condition has been satisfied or the Performance Condition has been waived by the Compensation Committee in its sole discretion. At that time, all past and future amounts attributable to dividends paid or payable to holders of the Common Stock shall be paid to the Employee by the Company as additional income, less applicable taxes. 6. Any and all taxes required to be withheld by the Company as a result of the issuance of any shares pursuant to the PSAs shall be the sole responsibility of the Employee. 7. 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. 8. Anything herein to the contrary notwithstanding, this PSA 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-12 6 COMPUTATION OF RATIO OF EARNINGS 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 1994 1993 1992 1991 1990 ---------------------- ----- ----- ----- ----- ---- Income from continuing operations $ 367.6 $ 298.7 $ 190.9 $ 149.8 $ 235.3 Income taxes 160.7 152.0 87.1 50.0 113.4 -------- -------- -------- -------- -------- Fixed charges: Interest expense (1) 1,250.3 1,155.5 1,431.5 1,905.4 2,028.4 Interest portion of rentals (2) 35.5 33.6 35.3 35.1 30.9 Capitalized interest -- -- -- 1.0 -- -------- -------- -------- -------- -------- Total fixed charges 1,285.8 1,189.1 1,466.8 1,941.5 2,059.3 -------- -------- -------- -------- -------- Capitalized interest -- -- -- (1.0) -- -------- -------- -------- -------- -------- Total earnings as defined $1,814.1 $1,639.8 $1,744.8 $2,140.3 $2,408.0 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 1.41 1.38 1.19 1.10 1.17 ======== ======== ======== ======== ======== Preferred stock dividends (3) $ 40.9 $ 46.9 $ 44.3 $ 38.3 $ 29.8 ======== ======== ======== ======== ======== Ratio of earnings to combined fixed charges and preferred stock dividends 1.37 1.33 1.15 1.08 1.15 ======== ======== ======== ======== ========
(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 30.4%, 33.7%, 31.3%, 25.0% and 32.5% for the years ended December 31, 1994, 1993, 1992, 1991 and 1990. EX-13 7 MATERIAL INCORPORATED BY REFERENCE/ANNUAL REPORT 1 EXHIBIT 13 CORPORATE PROFILE
As of December 31, 1994 Products HOUSEHOLD FINANCE $11.0 billion in receivables owned or serviced Home equity credit lines, unsecured credit lines, 460 branch offices, 2 processing centers secured and unsecured closed-end loans, Ever Yours(TM) 1.3 million customer accounts home equity loans for seniors, Alexander Hamilton 39 states insurance products, purchased portfolio servicing through Household Financial Services(1) HOUSEHOLD FINANCIAL CORPORATION (CANADA) $2.6 billion in receivables owned or serviced Secured and unsecured credit lines, conventional 43 offices, 2 processing centers loans, first and second mortgages, deposit products, 615,000 customer accounts private-label credit cards, Alexander Hamilton 10 provinces in Canada insurance products HOUSEHOLD CREDIT SERVICES $10.9 billion in receivables owned or serviced Credit card accounts featuring both standard and 3 processing centers Gold VISA and MasterCard, the GM Card, the Ameritech 11.4 million customer accounts Complete Card, the Charles Schwab VISA, the Pacific 50 states Bell VISA, the JCB Card, the Banco Mexicano/United Airlines Mileage Plus(R) cards, revolving lines of credit, Alexander Hamilton insurance products HOUSEHOLD RETAIL SERVICES $2.7 billion in receivables owned or serviced Private-label revolving credit cards, closed-end 2 processing centers sales contracts, Alexander Hamilton insurance 1.7 million active customer accounts products, marketing services 50 states and Puerto Rico HOUSEHOLD BANK(2) $6.6 billion in deposits Checking, savings and money market accounts; $1.8 billion in receivables owned or serviced certificates of deposit; IRAs; Alexander Hamilton 185 branches credit life insurance products; real estate secured 1.2 million customer accounts loans; unsecured personal loans; student loans; 7 states youth savings accounts; credit cards and business banking products and services HFC BANK PLC (UNITED KINGDOM) $1.7 billion in Full service consumer bank offering fixed term and receivables owned or serviced revolving unsecured and secured loans, credit cards 150 offices, 1 processing center (the GM Card issued through relationship with 824,000 customer accounts Vauxhall Motors), Hamilton England, Scotland and Wales insurance products ALEXANDER HAMILTON LIFE $7.6 billion in managed assets Universal life, term, and annuity products through 1.6 million customer accounts through independent agents and financial institutions; 10,551 independent agents and 1,509 licensed credit life, disability, and specialty insurance Household employees products through Household business units 50 states, Canada and the United Kingdom HOUSEHOLD COMMERCIAL $1.1 billion in owned assets Tax-benefited investments, asset management services U.S. and International and joint ventures in corporate finance and real estate
(1) Household Financial Services establishes relationships with other financial institutions to acquire and service consumer loans. At December 31, 1994 its serviced receivables totaled almost $2.0 billion, representing 440,000 accounts. (2) In February 1995 Household entered into agreements to sell 89 branches and approximately $3 billion of related deposits in Maryland, Virginia and California. These sales are expected to close by mid-1995. 10 2 COMMON AND PREFERRED STOCK INFORMATION COMMON STOCK Household International 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 two-for-one stock split effected in the form of a 100 percent 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.
Dividends Declared Ticker -------------------- Stock Symbol 1994 1993 Features Redemption Features ------------------------------------------------------------------------------------------------------------------ Common HI $1.23 $1.18 Quarterly dividend rate N/A increased to $.315 effective 10/15/94 ------------------------------------------------------------------------------------------------------------------ $6.25 Preferred HI+PRD $6.25 $6.25 Convertible into Common Mandatory sinking fund Stock at rate of 4.654 redemption began in 1991 shares of common per (See Note 8, Page 58) share of preferred ------------------------------------------------------------------------------------------------------------------ 9 1/2% Preferred, HI+PRA $2.375 $2.375 Nonconvertible Cannot be redeemed Series 1989-A prior to 11/9/94. Redeemable at company's option on or after 11/9/94 in whole or in part: Depositary Shares $26.1875-11/9/94-11/8/95 representing 1/4 $25.9500-11/9/95-11/8/96 share of 9 1/2% $25.7125-11/9/96-11/8/97 Preferred Stock, $25.4750-11/9/97-11/8/98 Series 1989-A $25.2375-11/9/98-11/8/99 $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 company's option after Depositary Shares 8/13/96 in whole or in representing 1/10 part at $10.00 share of 9 1/2% Preferred Stock, Series 1991-A ------------------------------------------------------------------------------------------------------------------ 8 1/4% Preferred, HI+PRZ $2.0625 $2.0625 Nonconvertible Cannot be redeemed prior to Series 1992-A 10/15/02. Redeemable at company's option after 10/15/02 in Depositary Shares whole or in part at $25.00 representing 1/40 share of 8 1/4% Preferred Stock, Series 1992-A ------------------------------------------------------------------------------------------------------------------ 7.35% Preferred, HI+PRJ $1.8375 $.581875* Nonconvertible Cannot be redeemed prior to Series 1993-A 10/15/98. Redeemable at company's option after 10/15/98 in Depositary Shares whole or in part at $25.00 representing 1/40 share of 7.35% Preferred Stock, Series 1993-A ------------------------------------------------------------------------------------------------------------------ Flexible Rate N/A $9.50 $9.50 Nonconvertible Redeemable at the option of Auction Dividend rate fixed at the company at the end of Preferred, Series B 9 1/2% until 7/15/95; the fixed dividend period set by auction and at certain times procedures thereafter thereafter at a price of $100 per share plus an amount equal to accrued and unpaid dividends to the redemption date. ------------------------------------------------------------------------------------------------------------------
(*) Partial Payment Period
Shareholders Shares Outstanding of Record 1994 Market Price 1993 Market Price ------------------------------------------------------------------------------------------ Stock 1994 1993 1994 1993 High Low High Low ---------------------------------------------------------------------------------------------------------------------------- Common 96,602,598 94,448,132 14,379 14,632 39 3/4 28 1/2 40 3/8 26 7/8 $6.25 Preferred 52,010 385,439 408 641 178 144 1/4 186 134 1/2 9 1/2% Preferred, Series 1989-A (Per Depositary Share) 3,000,000 3,000,000 535 591 27 3/4 25 1/8 28 1/2 26 1/4 9 1/2% Preferred, Series 1991-A (Per Depositary Share) 5,500,000 5,500,000 895 939 11 3/8 10 11 5/8 10 1/2 8 1/4% Preferred, Series 1992-A (Per Depositary Share) 2,000,000 2,000,000 518 512 27 1/4 22 1/4 28 23 7/8 7.35% Preferred, Series 1993-A (Per Depositary Share) 4,000,000 4,000,000 343 305 25 1/2 20 1/4 25 3/4 24 5/8 Flexible Rate Auction Preferred, Series B 400,000 400,000 4 4 N/A N/A N/A N/A ----------------------------------------------------------------------------------------------------------------------------
12 3 ----------------------------------------------------------------- FINANCIAL SECTION CONTENTS Selected Financial Data & Statistics 22 Analysis of Credit Loss Reserves Activity-- Owned Receivables 23 Analysis of Credit Loss Reserves Activity-- Managed Receivables 24 Other Credit Quality Statistics 25 Management's Discussion & Analysis 26 Statements of Income 40 Balance Sheets 41 Statements of Cash Flows 42 Statements of Changes in Preferred Stock & Common Shareholders' Equity 43 Business Segment Data 44 Notes to Financial Statements 45 Management's Report 67 Independent Auditors' Report 67 Net Interest Margin--1994 Compared to 1993 68 Net Interest Margin--1993 Compared to 1992 69 Selected Quarterly Financial Data (Unaudited) 70 Community Investments 71 Corporate Information 72
21 4 SELECTED FINANCIAL DATA AND STATISTICS
Household International, Inc. and Subsidiaries All dollar amounts except per share data are stated in millions. 1994 1993 1992 1991 1990 ------------------------------------------------------------------------------------------------------------------- STATEMENT OF INCOME DATA--YEAR ENDED DECEMBER 31 Net interest margin and other revenues $ 3,360.6 $ 3,305.0 $ 2,760.4 $ 2,707.0 $ 2,293.8 Provision for credit losses on owned receivables 606.8 735.8 671.5 843.2 463.7 Operating expenses 1,761.1 1,579.4 1,297.0 1,191.8 1,099.4 Policyholders' benefits 464.4 539.1 513.9 472.2 382.0 Income taxes 160.7 152.0 87.1 50.0 113.4 ---------------------------------------------------------------------------------------------------------------- Net income $ 367.6 $ 298.7 $ 190.9 $ 149.8 $ 235.3 ================================================================================================================ PER SHARE DATA (1) Earnings per common share: Primary $ 3.52 $ 2.91 $ 1.97 $ 1.57 $ 3.03 Fully diluted 3.50 2.85 1.93 1.55 2.88 Dividends declared per common share 1.23 1.18 1.15 1.12 1.09 Book value per common share (2),(3) 22.78 22.01 18.65 18.38 17.89 ---------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA AT DECEMBER 31 Total assets $34,338.4 $32,961.5 $31,128.4 $29,982.3 $29,454.7 ---------------------------------------------------------------------------------------------------------------- Receivables (4): Owned (5),(6) $20,555.6 $20,530.4 $20,068.3 $19,404.5 $20,776.2 Serviced with limited recourse 12,495.1 9,827.8 7,946.3 7,068.8 4,635.0 ---------------------------------------------------------------------------------------------------------------- Managed 33,050.7 30,358.2 28,014.6 26,473.3 25,411.2 Receivables serviced with no recourse 17,752.2 15,229.4 11,406.7 7,820.2 4,201.1 ---------------------------------------------------------------------------------------------------------------- Receivables owned or serviced $50,802.9 $45,587.6 $39,421.3 $34,293.5 $29,612.3 ================================================================================================================ Deposits $ 8,439.0 $ 7,516.1 $ 8,030.3 $ 7,969.6 $ 6,938.0 Total other debt 14,646.2 14,755.9 14,267.7 13,936.9 15,442.1 Convertible preferred stock 2.6 19.3 36.0 54.4 74.0 Preferred stock 320.0 320.0 300.0 250.0 195.0 Common shareholders' equity (2),(3) 2,200.4 2,078.3 1,545.6 1,462.1 1,281.1 ---------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL RATIOS (7) Total shareholders' equity as a percent of owned assets (2),(3),(8) 7.34% 7.28% 5.93% 5.71% 5.01% Total dividends to net income 39.9 47.3 65.3 76.8 41.3 Return on average common shareholders' equity (2),(3) 16.0 14.2 10.7 8.5 18.0 Return on average owned assets 1.08 .91 .62 .49 .82 Efficiency ratio (9) 60.8 57.1 57.7 53.3 57.5 ----------------------------------------------------------------------------------------------------------------
(1)1992 and prior 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, 1994 and 1993, book value per common share was $23.85 and $21.58, respectively; common shareholders' equity was $2,304.0 and $2,037.8 million, respectively; and total shareholders' equity as a percent of owned assets was 7.64 and 7.15 percent, respectively. The 1994 return on average common shareholders' equity was 15.7 percent before the market value adjustment. 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 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)The company reassessed the significance to its financial reporting of its Liquidating Commercial Lines ("LCL") and Corporate segments in 1994. In recognition of the significant 1994 decline in the level of LCL assets, a reduced risk posture for these remaining assets and the relative financial insignificance of the Corporate segment to the company's operations, the LCL and Corporate segments have been combined with the Finance and Banking segment. To better analyze financial condition and results of operations and related trends, earnings and selected balance sheet data for years prior to 1994 have been reclassified to reflect this combination. See further discussion in Management's Discussion and Analysis on page 26. (5)Including liquidating commercial receivables of $1,189.9, $1,619.0, $1,846.6 and $2,263.8 million at December 31, 1993, 1992, 1991 and 1990, respectively. (6)Excludes reserves, accrued finance charges, and amounts due and deferred from sales of receivables. (7)See pages 23 through 25 for selected credit quality tables and statistics. (8)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 7.35, 7.33, 6.04, 5.89, and 5.26 percent at December 31, 1994, 1993, 1992, 1991 and 1990, respectively. (9)Ratio of salaries and fringe benefits and other operating expenses to net interest margin and other revenues less policyholders' benefits. Excluding the impact of the nonrecurring charges discussed on page 27 of Management's Discussion and Analysis, the 1994 efficiency ratio would have been 59.2 percent. 22 5 ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--OWNED RECEIVABLES
Household International, Inc. and Subsidiaries All dollar amounts are stated in millions. 1994 1993 1992 1991 1990 ---------------------------------------------------------------------------------------------------------------- Total Credit Loss Reserves for Owned Receivables at January 1 $ 621.9 $ 564.1 $ 611.4 $ 364.7 $ 299.0 ---------------------------------------------------------------------------------------------------------------- PROVISION FOR CREDIT LOSSES--OWNED RECEIVABLES 606.8 735.8 671.5 843.2 463.7 ---------------------------------------------------------------------------------------------------------------- OWNED RECEIVABLES CHARGED OFF Domestic: First Mortgage (10.3) (13.5) (7.2) (7.5) (1.6) Home equity (37.2) (36.2) (37.2) (30.1) (12.7) Other secured (2.5) (10.8) (6.0) (1.8) (2.8) Bankcard (204.4) (172.4) (129.5) (103.4) (82.5) Merchant participation (101.9) (88.5) (95.5) (100.5) (77.8) Other unsecured (202.8) (205.7) (202.5) (176.1) (131.4) Foreign (123.6) (162.9) (234.6) (219.5) (99.4) ---------------------------------------------------------------------------------------------------------------- Total consumer (682.7) (690.0) (712.5) (638.9) (408.2) Equipment financing and other commercial (77.4) (122.8) (60.8) (71.4) (42.1) ---------------------------------------------------------------------------------------------------------------- Total (760.1) (812.8) (773.3) (710.3) (450.3) ---------------------------------------------------------------------------------------------------------------- RECOVERIES ON OWNED RECEIVABLES Domestic: First mortgage 2.9 2.6 2.2 1.7 .1 Home equity 1.5 1.2 .6 .4 .4 Other secured -- .4 .2 -- .9 Bankcard 17.6 12.5 10.5 10.2 7.4 Merchant participation 23.6 19.4 15.3 15.1 14.1 Other unsecured 39.5 38.8 35.8 30.1 24.1 Foreign 30.5 26.5 22.0 15.7 10.3 ---------------------------------------------------------------------------------------------------------------- Total consumer 115.6 101.4 86.6 73.2 57.3 Equipment financing and other commercial 1.2 1.2 .2 -- .1 ---------------------------------------------------------------------------------------------------------------- Total 116.8 102.6 86.8 73.2 57.4 ---------------------------------------------------------------------------------------------------------------- Credit loss reserves on receivables purchased, net (30.2) 1.6 (19.1) 42.3 (16.4) Other, net (9.2) 30.6 (13.2) (1.7) 11.3 TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES Domestic: First mortgage 5.1 4.1 6.0 7.3 7.2 Home equity 20.1 16.9 12.4 14.2 6.0 Other secured 1.8 8.0 6.5 3.3 -- Bankcard 125.6 122.7 60.7 67.4 21.6 Merchant participation 65.0 70.2 65.4 54.0 58.1 Other unsecured 141.7 129.3 111.6 129.1 86.6 Foreign 43.6 56.7 70.5 92.4 92.0 ---------------------------------------------------------------------------------------------------------------- Total consumer 402.9 407.9 333.1 367.7 271.5 Equipment financing and other commercial(1) 143.1 189.0 216.0 243.7 93.2 Unallocated corporate -- 25.0 15.0 -- -- ---------------------------------------------------------------------------------------------------------------- TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES AT DECEMBER 31 $ 546.0 $ 621.9 $ 564.1 $ 611.4 $ 364.7 ================================================================================================================ RATIO OF CREDIT LOSS RESERVES TO OWNED RECEIVABLES Consumer 2.08% 2.20% 1.89% 2.22% 1.55% Commercial 12.36 9.66 8.81 8.66 2.82 ---------------------------------------------------------------------------------------------------------------- Total(2) 2.66% 3.03% 2.81% 3.15% 1.76% ================================================================================================================ RATIO OF CREDIT LOSS RESERVES TO NONPERFORMING OWNED LOANS Consumer 80.3% 74.9% 48.6% 44.9% 34.3% Commercial 103.9 71.6 47.2 52.5 50.2 ---------------------------------------------------------------------------------------------------------------- Total(2) 85.4% 76.9% 49.4% 47.7% 37.3% ================================================================================================================
(1) Includes reserves of $172.9, $203.3, $228.7 and $73.0 million in 1993, 1992, 1991 and 1990, respectively, on owned receivables previously classified as liquidating commercial receivables. (2) 1993 and 1992 amounts include the unallocated corporate credit loss reserve. 23 6 ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY--MANAGED RECEIVABLES Household International, Inc. and Subsidiaries All dollar amounts are stated in millions. 1994 1993 1992 1991 1990 --------------------------------------------------------------------------------------------------------------------- TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT JANUARY 1 $ 844.7 $ 724.8 $ 702.3 $ 389.3 $ 305.1 --------------------------------------------------------------------------------------------------------------------- PROVISION FOR CREDIT LOSSES--MANAGED RECEIVABLES 969.8 1,016.8 922.6 984.9 489.3 --------------------------------------------------------------------------------------------------------------------- MANAGED RECEIVABLES CHARGED OFF Domestic: First mortgage (10.3) (13.5) (7.2) (7.5) (1.6) Home equity (82.6) (75.3) (59.2) (42.0) (14.9) Other secured (2.5) (10.8) (6.0) (1.8) (2.8) Bankcard (401.1) (284.6) (237.6) (147.7) (82.5) Merchant participation (123.0) (113.5) (109.5) (102.0) (77.8) Other unsecured (202.8) (222.3) (248.9) (197.7) (131.4) Foreign (123.6) (162.9) (234.6) (219.5) (99.4) --------------------------------------------------------------------------------------------------------------------- Total consumer (945.9) (882.9) (903.0) (718.2) (410.4) Equipment financing and other commercial (77.4) (122.8) (60.8) (71.4) (42.1) --------------------------------------------------------------------------------------------------------------------- Total (1,023.3) (1,005.7) (963.8) (789.6) (452.5) --------------------------------------------------------------------------------------------------------------------- RECOVERIES ON MANAGED RECEIVABLES Domestic: First mortgage 2.9 2.6 2.2 1.7 .1 Home equity 1.5 1.2 .6 .4 .4 Other secured -- .4 .2 -- .9 Bankcard 25.7 15.8 13.3 11.0 7.4 Merchant participation 25.4 20.9 15.8 15.1 14.1 Other unsecured 39.5 38.8 35.8 30.1 24.1 Foreign 30.5 26.5 22.0 15.7 10.3 --------------------------------------------------------------------------------------------------------------------- Total consumer 125.5 106.2 89.9 74.0 57.3 Equipment financing and other commercial 1.2 1.2 .2 -- .1 --------------------------------------------------------------------------------------------------------------------- Total 126.7 107.4 90.1 74.0 57.4 --------------------------------------------------------------------------------------------------------------------- Credit loss reserves on receivables purchased, net (30.2) (.5) (19.1) 42.3 (16.4) Other, net (5.2) 1.9 (7.3) 1.4 6.4 TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES Domestic: First mortgage 5.1 4.1 6.0 7.3 7.2 Home equity 97.8 75.5 54.4 33.9 13.2 Other secured 1.8 8.0 6.5 3.3 -- Bankcard 317.9 274.6 126.5 93.6 32.8 Merchant participation 117.9 82.5 87.0 68.1 58.1 Other unsecured 141.7 129.3 142.9 160.0 92.8 Foreign 57.2 56.7 70.5 92.4 92.0 --------------------------------------------------------------------------------------------------------------------- Total consumer 739.4 630.7 493.8 458.6 296.1 Equipment financing and other commercial(1) 143.1 189.0 216.0 243.7 93.2 Unallocated corporate -- 25.0 15.0 -- -- --------------------------------------------------------------------------------------------------------------------- TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT DECEMBER 31 $ 882.5 $ 844.7 $ 724.8 $ 702.3 $ 389.3 ======================================================================================================================= RATIO OF CREDIT LOSS RESERVES TO MANAGED RECEIVABLES Consumer 2.32% 2.22% 1.93% 1.94% 1.34% Commercial 12.36 9.66 8.81 8.66 2.82 ---------------------------------------------------------------------------------------------------------------------- Total (2) 2.67% 2.78% 2.59% 2.65% 1.53% ====================================================================================================================== RATIO OF CREDIT LOSS RESERVES TO NONPERFORMING MANAGED LOANS Consumer 103.6% 86.5% 55.2% 45.6% 33.9% Commercial 103.9 71.6 47.2 52.5 50.2 --------------------------------------------------------------------------------------------------------------------- Total (2) 103.6% 85.0% 53.6% 47.8% 36.8% =====================================================================================================================
(1) Includes reserves of $172.9, $203.3, $228.7 and $73.0 million in 1993, 1992, 1991 and 1990, respectively, on managed receivables previously classified as liquidating commercial receivables. (2) 1993 and 1992 amounts include the unallocated corporate credit loss reserve. 24 7 OTHER CREDIT QUALITY STATISTICS Household International, Inc. and Subsidiaries All dollar amounts are stated in millions.
1994 1993 1992 1991 1990 ---------------------------------------------------------------------------------------------------------------- NONACCRUAL MANAGED RECEIVABLES AT DECEMBER 31(1) First mortgage $ 38.6 $ 25.6 $ 26.4 $ 25.1 $ 40.4 Home equity 143.0 155.5 230.2 234.7 159.5 Other secured 9.5 20.5 12.9 23.2 13.1 Merchant participation 36.8 21.7 20.8 12.4 17.0 Other unsecured 147.2 153.5 173.7 194.8 156.8 Equipment financing and other commercial(2) 95.9 235.2 259.2 257.6 157.6 ---------------------------------------------------------------------------------------------------------------- Domestic 471.0 612.0 723.2 747.8 544.4 Foreign 110.5 145.4 219.9 306.9 291.3 ---------------------------------------------------------------------------------------------------------------- Total $581.5 $757.4 $943.1 $1,054.7 $835.7 ================================================================================================================ RENEGOTIATED COMMERCIAL LOANS AT DECEMBER 31(3) $ 41.8 $ 28.7 $198.4 $ 206.4 $ 27.9 ---------------------------------------------------------------------------------------------------------------- REAL ESTATE OWNED AT DECEMBER 31 Domestic(4) $138.7 $367.2 $374.1 $ 341.3 $145.9 Foreign 44.1 58.3 73.0 83.6 28.6 ---------------------------------------------------------------------------------------------------------------- Total $182.8 $425.5 $447.1 $ 424.9 $174.5 ================================================================================================================ OTHER ASSETS ACQUIRED THROUGH FORECLOSURE AT DECEMBER 31(5) $ 51.7 $ 82.9 $102.6 $ 21.5 -- ---------------------------------------------------------------------------------------------------------------- ACCRUING MANAGED RECEIVABLES 90 OR MORE DAYS DELINQUENT AT DECEMBER 31(6) Domestic $220.7 $197.0 $196.3 $ 180.0 $165.4 Foreign 7.5 10.3 14.1 27.9 30.1 ---------------------------------------------------------------------------------------------------------------- Total $228.2 $207.3 $210.4 $ 207.9 $195.5 ================================================================================================================ DELINQUENCY ON MANAGED CONSUMER RECEIVABLES AT DECEMBER 31(7) First mortgage 1.93% 1.42% 1.08% 1.16% 1.19% Home equity 2.64 3.16 4.05 4.83 3.94 Other secured 1.08 1.38 2.71 5.35 4.77 Bankcard 2.30 2.41 2.70 4.39 3.20 Merchant participation 4.87 5.01 6.34 6.40 6.78 Other unsecured 5.06 6.63 7.77 8.62 8.69 ---------------------------------------------------------------------------------------------------------------- Domestic 2.98 3.28 3.89 4.79 4.14 Foreign 4.08 5.82 8.08 10.22 9.09 ---------------------------------------------------------------------------------------------------------------- Total 3.11% 3.58% 4.48% 5.72% 5.08% ================================================================================================================ RATIO OF NET CHARGEOFFS TO AVERAGE MANAGED RECEIVABLES(8) First mortgage .32% .35% .12% .15% .08% Home equity 1.12 1.00 .87 .67 .26 Other secured .41 1.79 1.04 .29 .19 Bankcard 3.98 3.84 5.69 4.87 4.00 Merchant participation 4.00 4.32 4.49 4.11 3.15 Other unsecured 4.53 6.10 7.21 5.78 4.37 ---------------------------------------------------------------------------------------------------------------- Domestic 2.84 2.75 2.98 2.35 1.64 Foreign 2.44 3.88 5.51 4.99 2.13 ---------------------------------------------------------------------------------------------------------------- Total consumer 2.79 2.90 3.38 2.83 1.77 ---------------------------------------------------------------------------------------------------------------- Equipment financing and other commercial 4.27 5.43 2.25 2.30 1.26 ---------------------------------------------------------------------------------------------------------------- Total 2.87% 3.10% 3.28% 2.75% 1.66% ================================================================================================================
(1) Excludes bankcard and private-label credit card receivables, consistent with industry practice. (2) Includes nonaccrual receivables of $228.7, $259.2, $257.6 and $157.6 million in 1993, 1992, 1991 and 1990, respectively, previously classified as liquidating commercial receivables. (3) Includes renegotiated commercial loans of $28.7, $196.8, $202.6 and $27.9 million in 1993, 1992, 1991 and 1990, respectively, previously classified as liquidating commercial receivables. (4) Includes real estate owned previously referred to as liquidating commercial assets of $256.6, $249.6, $237.5 and $116.2 million for 1993, 1992, 1991 and 1990, respectively. (5) Relates to domestic commercial receivables. (6) Includes bankcard and private-label credit card receivables. There were no commercial loans that were 90 days or more past due which remained on accrual status. (7) Delinquency is defined as consumer receivables which are two months or more contractually past due. (8) For the year. 25 8 MANAGEMENT'S DISCUSSION AND ANALYSIS Household International, Inc. and Subsidiaries BUSINESS SEGMENT DATA As described below, the company recharacterized its business segment data in 1994. As of December 31, 1991, Household International decided to withdraw from the higher-risk portion of its commercial finance business by discontinuing selected product lines. The assets and results of operations related to these product lines were reported in prior years in a separate segment called Liquidating Commercial Lines (''LCL''). The assets were separately managed and had a risk profile that was significantly higher than the company's Finance and Banking receivables. LCL assets of approximately $2.1 billion at December 31, 1991 and $1.6 billion at December 31, 1993 have been reduced to about $700 million at December 31, 1994. Nonperforming LCL assets of nearly $700 million at December 31, 1991 and $514 million at December 31, 1993 have been reduced to $205 million at December 31, 1994. Credit loss reserves as a percent of nonperforming LCL loans at December 31, 1994 were 94.9 percent. In 1994 commercial real estate properties totaling approximately $120 million were sold at net book value. In addition, in the fourth quarter the company formed a joint venture, maintaining a 50 percent ownership interest, and entered into an agreement to sell to the venture on a non-recourse basis performing commercial receivables with a net book value of $398 million, $193 million of which were previously classified as LCL assets. These assets have been separately disclosed as Assets Pending Sale in the accompanying Balance Sheet at December 31, 1994. The joint venture received commitments for third-party, non-recourse financing to complete the transaction, which is scheduled to close in the first quarter of 1995. Because of the reduced size and potential loss exposure of these discontinued product lines, the company eliminated reporting the separate LCL segment in the accompanying financial statements. Results of operations of these discontinued product lines have been combined with the results of the Finance and Banking segment. Because of the relative financial insignificance of activities of the company's Corporate segment and because these activities now relate predominantly to Finance and Banking operations, the Corporate segment also has been combined with the Finance and Banking segment. These reclassifications streamline reporting results of operations and more accurately reflect the company's business. To better analyze financial condition and results of operations and related trends, earnings and selected balance sheet data for years prior to 1994 have been reclassified to reflect the combination of LCL and Corporate activities into the Finance and Banking segment. The company's results of operations are now reported in two segments--Finance and Banking and Individual Life Insurance. Net income and assets of these segments were as follows:
In millions. Year ended December 31 1994 1993 1992 ------------------------------------------------------------------------------------------------------------ NET INCOME Finance and Banking $ 316.5 $ 253.5 $ 149.2 Individual Life Insurance 51.1 45.2 41.7 ------------------------------------------------------------------------------------------------------------ Total $ 367.6 $ 298.7 $ 190.9 ============================================================================================================ ASSETS Finance and Banking $26,897.0 $26,002.5 $25,202.2 Individual Life Insurance 7,441.4 6,959.0 5,926.2 ------------------------------------------------------------------------------------------------------------ Total $34,338.4 $32,961.5 $31,128.4 ============================================================================================================
Pro forma segment information, assuming such reclassifications had not been made, were as follows:
In millions. Year ended December 31 1994 1993 1992 ------------------------------------------------------------------------------------------------------------ NET INCOME Finance and Banking $ 330.3 $ 303.2 $ 200.6 Liquidating Commercial Lines (7.2) (21.2) (14.0) Corporate (6.6) (28.5) (37.4) ------------------------------------------------------------------------------------------------------------ Subtotal 316.5 253.5 149.2 Individual Life Insurance 51.1 45.2 41.7 ------------------------------------------------------------------------------------------------------------ Total* $ 367.6 $ 298.7 $ 190.9 ============================================================================================================ ASSETS Finance and Banking $26,076.4 $24,362.5 $23,315.3 Liquidating Commercial Lines 699.3 1,555.7 1,851.2 Corporate 121.3 84.3 35.7 ------------------------------------------------------------------------------------------------------------ Subtotal 26,897.0 26,002.5 25,202.2 Individual Life Insurance 7,441.4 6,959.0 5,926.2 ------------------------------------------------------------------------------------------------------------ Total $34,338.4 $32,961.5 $31,128.4 ============================================================================================================
*Core earnings, as previously defined, included operating results of the Finance and Banking, Individual Life Insurance and Corporate segments. Such earnings were $374.8, $319.9 and $204.9 million for 1994, 1993 and 1992, respectively. 26 9 CONSOLIDATED OVERVIEW OPERATIONS SUMMARY Net income in 1994 was a record $367.6 million, a 23 percent increase over 1993 net income of $298.7 million. Net income in 1993 was 56 percent higher than 1992 earnings of $190.9 million. Fully diluted earnings per share were a record $3.50 in 1994, up 23 percent from $2.85 in 1993, which were up 48 percent from $1.93 in 1992. Several businesses increased 1994 earnings over 1993 and 1992: The bankcard business has grown substantially since 1992 as a result of an alliance entered into with General Motors Corporation (''GM'') to issue a co-branded credit card, the GM Card. Private-label credit card earnings increased primarily due to growth in receivables and improved efficiency. Improvement in domestic consumer finance earnings was driven by lower credit costs and growth in receivables. United Kingdom profits improved primarily due to lower credit losses and portfolio growth and higher fee income resulting from the launch of the GM Card from Vauxhall in January 1994. The commercial business (which includes operations of the former LCL segment) experienced improved operating results in 1994 compared to 1993 and 1992 primarily due to lower credit costs and real estate owned expenses. Mortgage banking earnings were significantly lower than 1993 and 1992 due to lower originations and narrower spreads. To focus on its more profitable businesses, the company discontinued its domestic traditional first mortgage origination business in the fourth quarter. See the Overview section for the Finance and Banking segment on page 29 for further discussion of these operations. The company sold its Australian subsidiary as of December 31, 1994. In the fourth quarter the company recorded an after-tax loss on sale of $14 million. The company's efficiency ratio (which is defined as the ratio of salaries and fringe benefits and other operating expenses to net interest margin and other revenues less policyholders' benefits) was 60.8 percent compared to 57.1 and 57.7 percent in 1993 and 1992, respectively. The increase primarily was due to programs undertaken in 1994, including marketing initiatives and technology and infrastructure expenditures, to promote and support growth. Expenses in 1994 also included costs associated with the launch of the GM Card from Vauxhall in the United Kingdom and with the initial phase of a restructuring of the Canadian operation. In addition, in the fourth quarter of 1994 the company made decisions designed to improve operating efficiency which will benefit future years. These decisions included discontinuing the domestic traditional first mortgage origination business; consolidating some processing operations; and reducing staff, particularly in consumer and mortgage banking and related support operations. These decisions will reduce the company's workforce by approximately 2,000, or 12 percent. The company recorded nonrecurring costs of approximately $14 million after tax in connection with these decisions. The efficiency ratio, excluding the fourth quarter nonrecurring costs and the loss on sale of the Australian subsidiary, was 59.2 percent. BALANCE SHEET REVIEW Owned assets totaled $34.3 billion at December 31, 1994, up 4 percent from year-end 1993. The increase primarily was due to a 10 percent increase in unsecured receivables. Managed consumer receivables (owned receivables plus those serviced with limited recourse) grew 12 percent in 1994. Excluding the first mortgage portfolio, the consumer portfolio grew 14 percent. The majority of the growth occurred in unsecured products, primarily domestic unsecured consumer finance receivables, which grew 30 percent; bankcards, which were up 22 percent; private-label credit cards, which grew 16 percent; and credit cards and unsecured loans in the United Kingdom, which increased 59 percent. Offsetting the increased demand for unsecured products were lower originations of first mortgage receivables as a result of rising interest rates during 1994, which significantly decreased the demand for refinancings. The home equity receivable portfolio was flat due to the continued liquidation of an acquired domestic portfolio, which offset new retail originations, as well as runoff experienced in the Canadian portfolio. Consumer two-months-and-over contractual delinquency (''delinquency'') continued to decline throughout the year due to strict credit standards and an improving economy. Total consumer delinquency as a percent of managed consumer receivables was 3.11 percent at December 31, 1994, down significantly from 3.58 percent at December 31, 1993. The chargeoff ratio for the managed consumer portfolio was 2.79 percent compared to 2.90 percent in 1993. In connection with the combination of the former LCL and Corporate segments with the Finance and Banking segment, the company allocated the previously reported corporate credit loss reserve that had been established in 1992 and 1993 among its various Finance and Banking receivable products. The ratio of total managed credit loss reserves, including unallocated amounts, to nonperforming loans for all managed consumer and commercial products increased to 103.6% at December 31, 1994 from 85.0% at December 31, 1993. See page 32 for discussion of credit loss reserve adequacy. In the fourth quarter of 1994 the company acquired 26 consumer bank branches located in Illinois. As part of the purchase, the company assumed approximately $1.2 billion in customer deposits. Subsequent to year end, the company entered into agreements to sell its branch networks and deposits in Maryland, Virginia and California. These sales are expected to close by mid-1995. The ratio of common and preferred shareholders' equity (including convertible preferred stock) to total assets was 7.35 percent, compared to 7.33 percent at December 31, 1993. These ratios were affected by Statement of Financial Accounting Standards No. 115, ''Accounting for Certain Investments in Debt and Equity Securities'' (''FAS No. 115'') which requires that unrealized gains and losses on certain debt and equity securities be recorded as an adjustment to shareholders' equity. The rise in interest rates during 1994 resulted in a net unrealized loss at year-end in the company's available-for-sale investment portfolio and a reduction in shareholders' equity of 27 10 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) $103.6 million. While FAS No. 115 provides for the adjustment of certain debt and equity securities to fair value, it does not allow for a corresponding adjustment for a change in related liabilities. Therefore, the unrealized loss does not reflect the total change in the economic value of shareholders' equity due to higher interest rates. The company believes that the change in fair value of liabilities should offset a significant amount of the reduction in the fair value of its investment portfolio. Excluding the effect of the FAS No. 115 component of shareholders' equity, the ratio of common and preferred shareholders' equity (including convertible preferred stock) to total assets was 7.65 percent at December 31, 1994, up from 7.21 percent at December 31, 1993. FINANCE AND BANKING
STATEMENTS OF INCOME All dollar amounts are stated in millions. Year ended December 31 1994 1993 1992 -------------------------------------------------------------------------------------------------------- Finance income $ 2,642.3 $ 2,561.4 $ 2,584.4 Interest income from noninsurance investment securities 131.9 129.3 152.8 Interest expense 1,237.0 1,140.2 1,407.3 -------------------------------------------------------------------------------------------------------- Net interest margin 1,537.2 1,550.5 1,329.9 Provision for credit losses on owned receivables 606.8 735.8 671.5 -------------------------------------------------------------------------------------------------------- Net interest margin after provision for credit losses 930.4 814.7 658.4 -------------------------------------------------------------------------------------------------------- Securitization and servicing fee income 733.9 460.0 376.0 Insurance premiums and contract revenues 184.6 160.4 169.9 Investment income 20.3 33.6 42.0 Fee income 250.5 292.6 164.5 Other income 48.3 148.9 98.0 -------------------------------------------------------------------------------------------------------- Total other revenues 1,237.6 1,095.5 850.4 -------------------------------------------------------------------------------------------------------- Salaries and fringe benefits 631.4 590.2 512.7 Other operating expenses 1,012.4 858.3 695.1 Policyholders' benefits 75.5 82.2 86.2 -------------------------------------------------------------------------------------------------------- Total costs and expenses 1,719.3 1,530.7 1,294.0 -------------------------------------------------------------------------------------------------------- Income before income taxes 448.7 379.5 214.8 Income taxes 132.2 126.0 65.6 -------------------------------------------------------------------------------------------------------- Net income $ 316.5 $ 253.5 $ 149.2 ======================================================================================================== End-of-period receivables: Owned $20,555.6 $20,530.4 $20,068.3 Serviced with limited recourse 12,495.1 9,827.8 7,946.3 -------------------------------------------------------------------------------------------------------- Managed receivables 33,050.7 30,358.2 28,014.6 Serviced with no recourse 17,752.2 15,229.4 11,406.7 -------------------------------------------------------------------------------------------------------- Receivables owned or serviced $50,802.9 $45,587.6 $39,421.3 ======================================================================================================== Average receivables: Owned $21,011.2 $20,743.6 $19,895.7 Serviced with limited recourse 10,200.7 8,258.4 6,826.3 -------------------------------------------------------------------------------------------------------- Average managed receivables 31,211.9 29,002.0 26,722.0 Serviced with no recourse 17,030.7 13,021.8 9,208.4 -------------------------------------------------------------------------------------------------------- Average receivables owned or serviced $48,242.6 $42,023.8 $35,930.4 ======================================================================================================== End-of-period deposits $ 8,439.0 $ 7,516.1 $ 8,030.3 -------------------------------------------------------------------------------------------------------- Return on owned assets 1.18% .96% .60% -------------------------------------------------------------------------------------------------------- Net interest margin to average interest-earning assets 6.56 6.79 6.05 --------------------------------------------------------------------------------------------------------
28 11 OVERVIEW Domestic Finance and Banking earnings increased to $294.2 million from $256.5 million in 1993 primarily due to improved operating results in the credit card, consumer finance and commercial businesses, partially offset by reduced earnings in the mortgage banking operation. Credit card results continued to benefit from the alliance entered into in 1992 with GM to issue the GM Card. GM Card managed receivables totaled $6.8 billion and the number of accounts totaled 7.6 million at December 31, 1994, compared to $4.9 and $1.8 billion in receivables and 5.9 and 2.7 million accounts in 1993 and 1992, respectively. GM Card managed receivable growth generated higher interest margins and substantial fee income, offset somewhat by higher operating expenses related to servicing. Private-label credit card earnings increased primarily due to growth in the managed portfolio and improved efficiency. Consumer finance earnings increased primarily due to higher net interest margin and lower credit costs. Servicing fee income also increased as a result of an unsecured consumer loan portfolio which the company began servicing without recourse in the third quarter of 1993. Operating results of the commercial business improved over the prior year primarily due to lower credit costs, write-downs and net expenses for real estate owned. Operating results for 1993 reflected the resolution of the company's largest nonaccrual commercial loan. The company reached a cash settlement on this loan in 1993 which resulted in a higher-than-anticipated chargeoff. See page 26 for pro forma results of the former LCL segment. The rising interest rate environment in the U.S. in 1994 compared to 1993 caused significantly lower earnings in the mortgage banking business due to narrower spreads and fewer originations. Mortgage banking operating results for 1993 were negatively impacted by high mortgage loan prepayments and by write-downs of capitalized servicing rights resulting from prepayments in the servicing portfolio. The company discontinued its traditional first mortgage origination business in the fourth quarter of 1994 and may pursue the sale of servicing rights related to first mortgage loans. Foreign operating results improved in 1994, primarily due to the United Kingdom operation which earned $27.7 million, compared to $10.3 million in 1993 and a loss of $45.9 million in 1992. Higher earnings were primarily due to portfolio growth, higher interchange fee income and lower credit costs. Portfolio growth and fee income benefited from the expansion of the company's alliance with GM to the United Kingdom in early 1994. The Canadian operation reported a loss in 1994 which was smaller than the previous two years. Operating results continued to be negatively impacted by low receivable levels and a high cost base. In the third quarter the company sold its retail securities brokerage business. This sale did not significantly impact operating results for 1994. RECEIVABLES Managed consumer receivables increased 12 percent in 1994. See Balance Sheet Review on page 27 for further discussion. Owned consumer receivables were $19.4 billion at December 31, 1994, up 4 percent compared to $18.6 billion at December 31, 1993. Changes in owned receivables from period to period may vary depending on the timing and significance of securitization transactions. The company securitized and sold with limited recourse approximately $4.5 billion of receivables during both 1994 and 1993. PRO FORMA MANAGED INCOME DATA Since 1989 securitizations and sales of consumer receivables have been, and will continue to be, 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, 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 profitability on a managed basis as well as on the historical owned basis. 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 1994 and 1993 are presented on the following page. 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 a historical owned basis. 29 12 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
PRO FORMA MANAGED FINANCE AND BANKING STATEMENTS OF INCOME All dollar amounts are stated in millions. Year ended December 31 AS A PERCENT OF AVERAGE AS A PERCENT OF AVERAGE MANAGED INTEREST- MANAGED INTEREST- 1994 EARNING ASSETS 1993 EARNING ASSETS ----------------------------------------------------------------------------------------------------------------------------- Finance income $ 3,897.2 11.59% $ 3,563.3 11.45% Interest income from noninsurance investment securities 131.9 .39 129.3 .42 Interest expense 1,769.3 5.26 1,531.3 4.92 ----------------------------------------------------------------------------------------------------------------------------- Net interest margin 2,259.8 6.72 2,161.3 6.95 Provision for credit losses 969.8 2.88 1,016.8 3.27 ----------------------------------------------------------------------------------------------------------------------------- Net interest margin after provision for credit losses 1,290.0 3.84 1,144.5 3.68 ----------------------------------------------------------------------------------------------------------------------------- Servicing fee income 78.4 .23 24.0 .08 Insurance premiums and contract revenues 184.6 .55 160.4 .51 Investment income 20.3 .06 33.6 .11 Fee income 546.4 1.62 398.8 1.28 Other income 48.3 .15 148.9 .48 ----------------------------------------------------------------------------------------------------------------------------- Total other revenues 878.0 2.61 765.7 2.46 ----------------------------------------------------------------------------------------------------------------------------- Salaries and fringe benefits 631.4 1.88 590.2 1.90 Other operating expenses 1,012.4 3.01 858.3 2.76 Policyholders' benefits 75.5 .22 82.2 .26 ----------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 1,719.3 5.11 1,530.7 4.92 ----------------------------------------------------------------------------------------------------------------------------- Income before income taxes 448.7 1.34 379.5 1.22 Income taxes 132.2 .40 126.0 .41 ----------------------------------------------------------------------------------------------------------------------------- Net income $ 316.5 .94% $ 253.5 .81% ============================================================================================================================= Average managed receivables $31,211.9 $29,002.0 Average noninsurance investments 2,424.4 2,106.1 ------------------------------------------------------------------------------------------------------------------------------ Average managed interest-earning assets $33,636.3 $31,108.1 ==============================================================================================================================
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 managed statements of income ("Managed Basis"). NET INTEREST MARGIN Net interest margin on a Managed Basis increased 5 percent in 1994 due to higher levels of managed interest-earning assets and a shift in product mix towards higher-yielding receivables, partially offset by higher funding costs. The net interest margin percentage on a Managed Basis decreased from 6.95 percent in 1993 to 6.72 percent in 1994. This decrease was attributable to higher funding costs, narrower spreads on variable rate products, and the impact of slower repricing of the company's prime-based assets compared to variable rate liabilities which reprice on different indices. These factors were partially offset by the shift in product mix towards higher-yielding receivables. See pages 38 and 39 for a discussion of the company's interest rate risk management policy and pages 68 and 69 for an analysis of the company's Owned Basis net interest margin. PROVISION FOR CREDIT LOSSES The provision for credit losses for receivables on an Owned Basis totaled $606.8 million, down 18 percent from $735.8 million in 1993 and down 10 percent from 1992's level. The level of provision for credit losses on an Owned Basis declined due to securitizations and sales of receivables, as provision related to the securitized receivables was transferred to securitization and servicing fee income. The provision for credit losses for receivables on a Managed Basis totaled $969.8 million in 1994, a decrease of 5 percent from 1993. As a percent of average managed interest-earning assets, the provision decreased from 3.27 percent in 1993 to 2.88 percent, reflecting the underlying improvement in the credit quality of the commercial portfolio and in the managed consumer portfolio which experienced lower delinquency and chargeoffs in 1994 compared to 1993. In addition, the 1993 provision reflected a chargeoff recognized in connection with the cash settlement of the company's largest commercial credit exposure at the time. See the credit quality section on pages 32 through 35 for further discussion of factors affecting the provision for credit losses. 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 primarily to the servicing of unsecured and first mortgage loans. 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 1994 due to higher levels of securitized receivables outstanding and an increase in fee income from securitized credit card receivables. The components of securitization income are reclassified to the appropriate line in the statements of income on a Managed Basis. Servicing fee income increased in 1994 primarily due to an unsecured consumer loan portfolio which the company began servicing in the third quarter of 1993. This portfolio totaled 30 13 $692.5 million at December 31, 1994. Servicing fee income also increased in 1994 due to servicing receivable growth and the lesser impact of write-downs of servicing rights. Average receivables serviced with no recourse increased to $17.0 billion in 1994, up from $13.0 billion in 1993 and $9.2 billion in 1992. The portfolio of loans serviced for others continued to grow due to sales of originated first mortgages to investors, with servicing rights retained, prior to the decision in the fourth quarter to stop originating this product. Insurance premiums and contract revenues of $184.6 million were up from $160.4 million in 1993 and $169.9 million in 1992. The increase was due to higher sales volumes of specialty and credit insurance in the domestic and United Kingdom operations. Investment income of $20.3 million in 1994 declined compared to both 1993 and 1992 due to lower gains from fewer sales of available-for-sale investments. Fee income on an Owned Basis includes revenues from fee-based products such as bankcards, consumer banking deposits and private-label credit cards. Fee income was $250.5 million, down from $292.6 million in 1993 but up from $164.5 million in 1992. The decrease from 1993 was due to lower interchange fees as a result of the increase in the amount of securitizations of GM Card receivables during 1994. Fee income on securitized receivables is transferred to securitization income upon sale. Securitizations and sales of GM Card receivables began in the second quarter of 1993. The increase over 1992 was primarily due to interchange and other fees related 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, increased from $398.8 million in 1993 to $546.4 million in 1994. This increase was due to the significant increase in interchange income related to GM Card receivables that have been securitized and sold with limited recourse. Other income in 1994 was down due primarily to the loss on the sale of the company's Australian and retail securities brokerage subsidiaries; trading losses in 1994, as a result of rising interest rates, compared to gains in 1993; and lower gains on asset dispositions. EXPENSES Salaries and fringe benefits were $631.4 million, compared to $590.2 million in 1993. The increase primarily was due to servicing requirements of the larger credit card portfolio. The number of employees for the Finance and Banking segment at December 31, 1994 was approximately 14,900, down from the prior year primarily due to the decisions to improve the operating efficiency of certain businesses as discussed on page 27. Other operating expenses were up 18 percent over 1993. Operating expenses increased primarily due to marketing initiatives and infrastructure expenditures as well as increased costs associated with the launch of the GM Card from Vauxhall in the United Kingdom and with the initial phase of a restructuring of the Canadian operation. Operating expenses also increased due to nonrecurring costs of $22.6 million recorded in the fourth quarter as described earlier. The effective tax rate in 1994 was 29.5 percent compared to 33.2 percent in 1993 and 30.5 percent in 1992. The 1994 effective tax rate reflected the favorable resolution of several prior year state tax issues and the recognition of U.S. tax benefits of accumulated losses of the Australian subsidiary upon its disposition. CREDIT MANAGEMENT POLICIES The company's receivable 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 on an individual transaction basis and is also evaluated based on overall risk factors. See Note 3, "Receivables" 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 using a statistical analysis of historical delinquency and chargeoff levels. Credit loss reserves are based on these statistical estimates and additional reserves to reflect management's judgment of portfolio risk factors. These risk factors include overall economic conditions, regional considerations and current trends in growth, underwriting or collection practices and changes in product mix which might not be appropriately considered in historical statistical experience. 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 preestablished 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. 31 14 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) The company's domestic consumer businesses lend funds nationwide, with California accounting for 21 percent of total domestic managed consumer receivables. It is the only state with receivables in excess of 10 percent of domestic managed consumer receivables. The company's foreign consumer operations, located in Canada and the United Kingdom, accounted for 6 and 5 percent, respectively, of managed consumer receivables at December 31, 1994. Due to its centralized underwriting, collection and processing functions, the company is able to quickly revise underwriting standards and intensify collection efforts for specific geographic locations. COMMERCIAL Commercial loans are underwritten based upon specific criteria by product, including financial characteristics of the borrower, value of underlying collateral, economic conditions and pricing. All financing commitments in excess of $1 million must be approved by an investment committee consisting of senior management. The company's ongoing credit monitoring process evaluates the financial and operating performance of all borrowers. As part of this process, the company administers an asset classification policy which requires all assets to be formally reviewed and assigned a rating on a quarterly basis. This policy utilizes a process similar to that used by banking regulatory authorities and specifically addresses the need for chargeoffs. The conclusions of the monitoring process are reported to senior management on a quarterly basis. The adequacy of the credit loss reserves is evaluated quarterly based upon the ongoing credit monitoring process and evaluation of the probability of future losses in the portfolio as a whole given its geographic and industry diversification, historical loss experience and the potential impact on the portfolio of existing and future economic conditions. Substantially all commercial credit losses have related to assets of the former LCL segment. Commercial loans are placed on nonaccrual status 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, if appropriate, reduced. LOSS RESERVES The level of reserves for credit losses is maintained in accordance with the above-mentioned credit risk policy. See Note 1, "Summary of Significant Accounting Policies" on page 45 in the accompanying financial statements for further description of the basis for establishing such reserves. Because of different loss characteristics of various product lines, 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 23 through 25. While management allocates reserves, including those in excess of statistical requirements, among the company's various products, all credit loss reserves are considered to be available to cover total loan losses. As disclosed on page 24, the company's total managed credit loss reserves increased to $882.5 million from $844.7 million at December 31, 1993. The ratio of credit loss reserves to total managed receivables was 2.67 percent, down slightly from 2.78 percent at December 31, 1993 due primarily to improved credit quality in the company's consumer and commercial portfolios. The ratio of total credit loss reserves to total managed nonperforming loans increased to 103.6 percent from 85.0 percent at December 31, 1993 as the company continued to remain cautious about the economies in which it operates. Managed consumer credit loss reserves increased 17 percent compared to a year ago, while managed consumer receivables grew 12 percent. The ratio of managed consumer credit loss reserves to managed consumer delinquency increased to 74.5 percent from 62.0 percent at December 31, 1993. Despite the continued decline in managed consumer delinquency, the company strengthened credit loss reserves related to credit card and other unsecured receivables due to growth in these products which, historically, have higher chargeoff rates than secured products. Credit loss reserves for commercial loans decreased during 1994 consistent with the decline in the level of commercial loans. Reserve coverage for nonperforming commercial loans increased as the ratio of commercial credit loss reserves to nonperforming commercial loans rose from 71.6 percent at December 31, 1993 to 103.9 percent. The company's commercial loan portfolio was reduced by $798 million in 1994 due to repayments and the anticipated transfer without recourse of $398 million of commercial loans to a joint venture as described previously. CREDIT QUALITY During 1994 the company experienced improved credit quality in virtually all product categories in both the foreign and domestic operations. These improvements were a result of better economic conditions and a higher quality of recently originated receivables. Delinquency at year-end 1994 fell below the year-ago level. Chargeoffs in 1994 were also below the prior year. Nonperforming consumer and commercial assets also declined during the year due to a stabilized real estate market and the disposition of several nonperforming commercial assets. Delinquency and chargeoff statistics continued to be impacted by the shift in product mix toward unsecured receivables. Because other unsecured, merchant participation and bankcard receivables have higher delinquency and chargeoff rates than first mortgages, this change in product mix has the effect of increasing the overall delinquency and chargeoff statistics of the company's portfolio compared to a portfolio of predominantly secured products. In addition, credit quality statistics 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 be better than expected and industry averages. 32 15 CONSUMER 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.
TWO-MONTHS-AND-OVER CONTRACTUAL DELINQUENCY (as a percent of managed consumer receivables) 1994 Quarter End 1993 Quarter End ----------------------------- ---------------------------- 4 3 2 1 4 3 2 1 ------------------------------------------------------------------------------------------------ DOMESTIC First mortgage 1.93% 1.66% 1.68% 2.31% 1.42% 1.21% 1.15% 1.27% Home equity 2.64 2.67 2.75 3.10 3.16 3.38 3.20 3.46 Other secured 1.08 1.71 2.64 1.62 1.38 1.83 3.20 2.80 Bankcard 2.30 2.40 2.34 2.41 2.41 2.57 2.47 2.58 Merchant participation 4.87 5.03 4.53 5.02 5.01 5.43 5.73 6.36 Other unsecured 5.06 5.43 6.01 6.48 6.63 7.23 7.46 7.53 ------------------------------------------------------------------------------------------------- Total domestic 2.98 3.07 3.10 3.37 3.28 3.50 3.46 3.68 ------------------------------------------------------------------------------------------------- FOREIGN Canada 3.95 3.57 3.83 4.14 4.65 5.11 5.61 6.00 United Kingdom 4.24 4.71 5.27 5.99 6.74 7.34 8.37 9.31 Australia -- 6.84 7.43 7.98 8.93 9.59 10.95 12.06 ------------------------------------------------------------------------------------------------- Total foreign 4.08 4.34 4.78 5.25 5.82 6.32 7.06 7.68 ------------------------------------------------------------------------------------------------- Total 3.11% 3.24% 3.32% 3.61% 3.58% 3.85% 3.93% 4.24% =================================================================================================
Delinquency as a percent of managed consumer receivables fell 13.1 percent in 1994. The decline from both the prior year and prior quarter was driven by improvements in the foreign operations and domestic unsecured products. DOMESTIC CONSUMER DELINQUENCY First mortgage delinquency was impacted by the company's decision to extend payment terms in the first quarter of 1994 for customers affected by the January California earthquake. This caused a 27 basis point increase in first mortgage delinquency at December 31, 1994. The company believes the ultimate exposure on the impacted first mortgage receivables is small. Improvements in the home equity and other unsecured receivable portfolios were primarily due to improved economic conditions and growth of higher quality receivables which were recently underwritten. Vintage analyses of home equity and other unsecured receivables continued to demonstrate the favorable performance of these receivables. A new credit scoring system implemented in 1994 for these products has allowed the company to access a wider customer base with no significant change to the risk posture of the receivables. Bankcard delinquency improved compared to the prior quarter and December 31, 1993. Improvement in the non-GM Card portfolio was offset by the anticipated increase in delinquent GM Card receivables resulting from the aging of this portfolio. The GM Card program has exhibited better-than-average delinquency experience, and the company anticipates that delinquency in this portfolio will stabilize in 1995. The company believes that, although further reductions are possible, the overall declining delinquency trend had begun to stabilize. Future changes in delinquency will depend on economic conditions in the regional areas where the company operates, the composition of the managed receivable base, and the continued maturation of the GM Card portfolio. FOREIGN CONSUMER DELINQUENCY Foreign delinquency improved significantly from the prior year primarily due to a decrease in United Kingdom delinquency, which benefited from the issuance of the GM Card from Vauxhall beginning in early 1994, as new accounts were added to the receivables base but had only a small impact on delinquency. Excluding the impact of the GM Card from Vauxhall, the United Kingdom and total foreign delinquency ratio still improved compared to both the prior quarter and prior year. Improvements in both the Canadian and United Kingdom operations were primarily due to the quality of recently underwritten receivables resulting from strict underwriting standards. Further improvement will depend on the extent and timing of improvement in economic conditions in the foreign countries where the company operates. 33 16 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) CHARGEOFFS Chargeoffs decreased in 1994 primarily as a result of improved delinquency trends. The following table presents chargeoffs on a full year and quarterly basis by product.
NET CHARGEOFFS OF CONSUMER RECEIVABLES (as a percent of average managed consumer receivables) 1994 Quarter Annualized 1993 Quarter Annualized ----------------------- ----------------------- Full year Full year Full year 1994 4 3 2 1 1993 4 3 2 1 1992 ------------------------------------------------------------------------------------------------------------------------------- DOMESTIC First mortgage .32% .13% .43% .28% .46% .35% .21% .59% .40% .20% .12% Home equity 1.12 .92 1.00 1.37 1.20 1.00 1.17 .87 .98 .98 .87 Other secured .41 .46 .99 .15 .05 1.79 .64 3.11 3.51 (.07) 1.04 Bankcard 3.98 4.03 3.82 3.88 4.22 3.84 3.99 3.78 3.43 4.20 5.69 Merchant participation 4.00 4.31 3.91 3.83 3.91 4.32 4.26 4.44 4.02 4.57 4.49 Other unsecured 4.53 3.63 4.36 5.10 5.26 6.10 5.41 5.99 6.62 6.42 7.21 ------------------------------------------------------------------------------------------------------------------------------- Total domestic 2.84 2.73 2.76 2.91 2.97 2.75 2.82 2.78 2.66 2.75 2.98 ------------------------------------------------------------------------------------------------------------------------------- FOREIGN Canada 2.17 1.63 1.82 2.43 2.89 3.16 3.86 2.83 2.83 3.18 3.84 United Kingdom 2.77 2.88 2.77 2.48 2.96 5.22 4.07 4.62 5.55 6.72 9.13 Australia 2.61 1.83 2.24 3.72 2.74 3.77 3.77 2.61 3.38 5.21 3.33 ------------------------------------------------------------------------------------------------------------------------------- Total foreign 2.44 2.14 2.23 2.59 2.90 3.88 3.92 3.38 3.73 4.46 5.51 ------------------------------------------------------------------------------------------------------------------------------- Total 2.79% 2.65% 2.69% 2.87% 2.96% 2.90% 2.96% 2.86% 2.81% 2.99% 3.38% ===============================================================================================================================
Net chargeoffs as a percent of average managed consumer receivables were 2.79 percent, down from 2.90 percent in 1993, driven by improvements in the foreign operations and domestic other unsecured receivables. Domestic net chargeoffs were 2.84 percent for the year, compared to 2.75 percent in 1993. The year-over-year increase was primarily due to the anticipated increase in bankcard chargeoffs in the GM Card portfolio, which was partially offset by improvements in the non-GM Card and other unsecured portfolios. The improvement in the other unsecured portfolio was due to the favorable performance of recently underwritten receivables. The merchant participation chargeoff ratio for the year improved compared to the prior year primarily due to growth in receivables resulting from new merchant programs. Foreign net chargeoffs declined significantly in 1994, driven by improvements in both the United Kingdom and Canadian operations due to improving economies and strict underwriting standards. The foreign chargeoff ratio also benefited from growth of the GM Card from Vauxhall which was introduced in the United Kingdom in early 1994 and which has experienced minimal chargeoffs to date. Excluding the impact of GM Card from Vauxhall receivables originated in the United Kingdom, the foreign chargeoff ratio improved in the fourth quarter and for the year. Chargeoffs are a lagging indicator of credit quality and generally reflect prior delinquency trends. Growth associated with the domestic GM Card portfolio has resulted in a shift in product mix toward unsecured receivables, which have higher chargeoff rates than secured receivables. Although GM Card chargeoffs increased during the year, the company anticipates they will stabilize as the portfolio continues to mature. The company also expects further improvement in other domestic products and in the foreign operations. However, future changes in net chargeoffs may be impacted by factors such as a shift in product mix toward unsecured receivables, economic conditions and the impact of personal bankruptcies. 34 17
NONPERFORMING CONSUMER ASSETS Dec. 31, Sept. 30, Dec. 31, Dec. 31, All dollar amounts are stated in millions. 1994 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------------------- Nonaccrual managed consumer receivables $485.6 $489.1 $522.2 $ 683.9 Accruing managed consumer receivables 90 or more days delinquent 228.2 225.3 207.3 210.4 --------------------------------------------------------------------------------------------------------------------------------- Total nonperforming managed consumer receivables 713.8 714.4 729.5 894.3 Real estate owned 115.2 153.4 168.9 197.5 --------------------------------------------------------------------------------------------------------------------------------- Total nonperforming consumer assets $829.0 $867.8 $898.4 $1,091.8 ================================================================================================================================= Credit loss reserves for managed consumer receivables as a percent of nonperforming managed consumer receivables 103.6% 94.4% 86.5% 55.2% Nonperforming managed consumer receivables as a percent of total managed consumer receivables 2.2 2.3 2.6 3.5 ---------------------------------------------------------------------------------------------------------------------------------
Consumer real estate owned declined due to improvements in the domestic consumer finance and Canadian operations.
NONPERFORMING COMMERCIAL ASSETS* Dec. 31, Sept. 30, Dec. 31, Dec. 31, All dollar amounts are stated in millions. 1994 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------------------- Real estate nonaccrual $ 36.9 $ 48.5 $ 54.8 $ 80.7 Other nonaccrual 59.0 74.4 180.4 178.5 --------------------------------------------------------------------------------------------------------------------------------- Total nonaccrual commercial loans 95.9 122.9 235.2 259.2 Renegotiated 41.8 44.9 28.7 198.4 --------------------------------------------------------------------------------------------------------------------------------- Total nonperforming commercial loans 137.7 167.8 263.9 457.6 Real estate owned 67.6 241.7 256.6 249.6 Other assets acquired through foreclosure 51.7 58.1 82.9 102.6 --------------------------------------------------------------------------------------------------------------------------------- Total nonperforming commercial assets $257.0 $467.6 $603.4 $809.8 ================================================================================================================================= Credit loss reserves for commercial loans as a percent of nonperforming commercial loans 103.9% 104.6% 71.6% 47.2% ---------------------------------------------------------------------------------------------------------------------------------
*Includes nonperforming assets of the former LCL segment and nonperforming assets related to continuing commercial activities. Nonperforming commercial assets decreased 57 percent during 1994 to $257.0 million. Nonaccrual loans at December 31, 1994 were down 59 percent compared to the December 31, 1993 level, while renegotiated loans increased by $13.1 million during the year. Real estate owned declined 72 percent compared to the third quarter and 74 percent compared to the prior year. The decrease in real estate owned was primarily due to sales of properties totaling approximately $120 million. Net operating income on all commercial real estate properties in 1994 was $21.1 million, up from $17.7 and $8.5 million in 1993 and 1992, respectively. Commercial real estate write-downs and carrying costs on all commercial real estate properties were $7.6 million in 1994, compared to $30.8 and $25.8 million in 1993 and 1992, respectively. Other assets acquired through foreclosure consisted of aircraft acquired in 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 assets declined during 1994 primarily as a result of cash settlements received from previous borrowers. 35 18 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) INDIVIDUAL LIFE INSURANCE
STATEMENTS OF INCOME All dollar amounts are stated in millions. Year ended December 31 1994 1993 1992 ----------------------------------------------------------------------------------------------------------- Investment and other income $ 494.1 $ 540.4 $ 481.7 Contract revenues 97.4 127.9 111.3 ----------------------------------------------------------------------------------------------------------- Total revenues 591.5 668.3 593.0 Costs and expenses: Policyholders' benefits 388.9 456.9 427.7 Operating expenses 123.0 140.2 102.1 Income taxes 28.5 26.0 21.5 ----------------------------------------------------------------------------------------------------------- Net income $ 51.1 $ 45.2 $ 41.7 =========================================================================================================== Sales $ 936.6 $ 652.2 $ 736.3 ----------------------------------------------------------------------------------------------------------- Life insurance in-force 36,560.4 32,371.6 28,390.4 ----------------------------------------------------------------------------------------------------------- Return on assets .71% .72% .73% -----------------------------------------------------------------------------------------------------------
Investment securities for the Individual Life Insurance segment totaled $6.7 billion, up 5 percent from $6.4 billion at December 31, 1993. This portfolio represented 74 percent of the company's total investment portfolio at December 31, 1994. During 1994 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 both December 31, 1994 and 1993. Commercial real estate loans totaled approximately 1 percent of Individual Life Insurance segment investments at December 31, 1994. There were no significant nonaccrual or renegotiated loans and no commercial real estate acquired in foreclosure in this portfolio. 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 32. At December 31, 1994 the fair value of the insurance held-to-maturity investment portfolio was 99 percent of the amortized cost, compared to 108 percent at December 31, 1993. The decrease in fair value over carrying value during 1994 was the result of the rising interest rate environment. 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 investment portfolio at December 31, 1994 which would materially impact current or future earnings or the capital position of the company. The company continually monitors the fair value of its available-for-sale investment portfolio in light of market interest rate conditions and may sell securities in an attempt to maximize its capital position. Investment and other income was $494.1 million in 1994, a 9 percent decrease from 1993 but a 3 percent increase from 1992. The decrease from 1993 primarily was due to lower gains on sales of available-for-sale investments. These investments were sold consistent with preestablished interest rate strategies. The decrease in investment income was also the result of lower yields on investments, as higher-yielding securities were sold, called or matured in 1993 and replaced with lower-yielding investments prior to the rise in interest rates which commenced in early 1994, partially offset by a larger investment portfolio. In the third quarter of 1994 the company sold a line of life insurance business and, as a result, reduced both contract revenues and policyholders' benefits by $47.8 million. This represented the amount of claim reserves on the policies which were sold to the new insurer. Excluding the impact of this transaction, contract revenues increased over both 1993 and 1992 due to higher levels of insurance in-force. Also, excluding the impact of this transaction, policyholders' benefits decreased compared to 1993 due to lower interest credited to policyholders, but increased over 1992 due to increased life insurance and annuity contracts. Operating expenses for 1994 were $123.0 million compared with $140.2 and $102.1 million in 1993 and 1992, respectively. The decrease from 1993 was primarily due to lower amortization of deferred insurance policy acquisition costs ("DAC"). Amortization rates for DAC are based on estimated lifetime gross profits and periodically adjusted as required by generally accepted accounting principles. 36 19 LIQUIDITY AND CAPITAL RESOURCES The company continued to strengthen its capital and liquidity position in 1994. The ratio of common and preferred shareholders' equity, including convertible preferred stock, to total assets was 7.35 percent, compared to 7.33 percent at December 31, 1993. This ratio increased slightly despite the impact of FAS No. 115, which resulted in the reduction of shareholders' equity of $103.6 million at December 31, 1994 versus an increase in shareholders' equity of $40.5 million at December 31, 1993. Excluding the impact of FAS No. 115, common and preferred equity increased 10 percent over the prior year and the ratio of common and preferred shareholders' equity, including convertible preferred stock, to total assets increased from 7.21 percent at December 31, 1993 to 7.65 percent at December 31, 1994. The company issued approximately $14 million of common stock through employee stock ownership and dividend reinvestment plans in 1994. From year-end 1990 to year-end 1994, common and preferred equity increased 63 percent while owned assets grew 17 percent. PARENT COMPANY The parent 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. The company received dividends of $240.0 and $100.0 million from its subsidiaries in 1994 and 1993, respectively. Funds received by the parent company are disbursed to shareholders and creditors or returned to subsidiaries as capital or advances under intercorporate agreements. In 1994 and 1993, respectively, the company paid $146.5 and $141.3 million of dividends to shareholders and made capital contributions of approximately $216 and $135 million to its subsidiaries. The company's double leverage ratio was 1.10 and 1.05 at December 31, 1994 and 1993, respectively. The increase in this ratio was primarily due to the impact of FAS No. 115, which caused a $144.1 million reduction in shareholders' equity during 1994. Excluding the impact of FAS No. 115, the double leverage ratio was 1.05 compared to 1.07 at December 31, 1993. SUBSIDIARIES The major usage of cash by the company's subsidiaries is the origination or purchase of receivables or investment securities. 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, medium- and long-term debt and through securitizations and sales of consumer receivables. At December 31, 1994 outstanding commercial paper of HFC was $3.3 billion compared to $3.7 billion at December 31, 1993. HFC markets its commercial paper through an in-house sales force, directly reaching more than 200 investors. HFC also markets medium-term notes through investment banks and its in-house sales force and issued a total of $2.9 billion in 1994. During 1994 HFC also issued $800 million of intermediate- and long-term debt to the public through investment banks and brokerage houses. To facilitate liquidity, HFC had committed backup lines of credit totaling $3.9 billion at December 31, 1994, none of which contained a material adverse change clause which could restrict availability. HFC's debt to equity ratio was 5.9 to 1 at December 31, 1994 compared to 6.2 at December 31, 1993. This ratio was also affected by FAS No. 115. Excluding the impact of FAS No. 115 on HFC's equity, HFC's debt to equity ratio was 5.6 to 1, compared to 6.3 at December 31, 1993. The company's subsidiary, Household Bank, f.s.b. ("the Bank") is funded primarily by customer deposits. The Bank also utilizes advances from the Federal Home Loan Bank, Federal funds borrowings, repurchase agreements, brokered deposits, bank and other capital market borrowings, and securitizations and sales of credit card receivables. The Bank had approximately $6 billion of available funding under advance and borrowing agreements at December 31, 1994. The company views core deposits as a stable and relatively low-cost source of funding even in uncertain financial markets. In the fourth quarter of 1994 the company assumed from an unaffiliated thrift institution approximately $1.2 billion in customer deposits through the purchase of 26 consumer bank branch facilities in Illinois. The Bank initiated a re-engineering effort in the fourth quarter, and has chosen to focus its banking activities on the Midwest. Subsequent to year end, the company signed sale agreements to sell 89 branches in Maryland, Virginia and California. These sales would initially reduce retail deposits by approximately $3 billion. The company has adequate liquidity to replace this deposit funding. Deposits, including time certificates and savings and demand accounts, totaled $8.4 and $7.5 billion for the company at December 31, 1994 and 1993, respectively. Deposits represented 86 and 79 percent of the Bank's total borrowings at December 31, 1994 and 1993, respectively. In 1992 the Office of Thrift Supervision ("OTS") adopted a rule which classifies savings associations based on capital ratios. At December 31, 1994 the core, tangible and risk-based capital ratio levels for a "well capitalized" institution were 5.0, 1.5 and 10.0 percent, respectively. The Bank's ratios for each of these categories at December 31, 1994 were 5.7, 5.2 and 13.8 percent, respectively. 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, 1994 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. 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 1994 these subsidiaries securitized and sold approximately $4.3 billion of home equity, bankcard and merchant participation receivables compared to $4.5 billion in 1993. 37 20 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) The company's life insurance subsidiary, Alexander Hamilton Life Insurance Company of America ("Alexander Hamilton"), plans for capital needs based on target leverage ratios. The target leverage ratios are based on Alexander Hamilton's statutory financial position. At the end of 1994 Alexander Hamilton's estimated risk-based capital ratios, as defined statutorily, were consistent with their target. Alexander Hamilton has received an A+ (Superior) rating from A.M. Best Company and 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 the insurance subsidiary can be funded through its own operations. The company had investments in foreign subsidiaries of $378.7 million at December 31, 1994. Total assets of foreign subsidiaries were $4.1 billion at year-end 1994. The company enters into foreign exchange contracts to hedge its investment in foreign subsidiaries. Foreign currency translation adjustments, net of gains and losses on contracts used to hedge foreign currency fluctuations, totaled net gains of $9.1 million in 1994 and net losses of $14.1 million in 1993, and are included as a component of shareholders' equity. The functional currency for each subsidiary is its local currency. While each foreign subsidiary primarily borrows funds in local currency, in 1994 and 1993 the United Kingdom and Canadian subsidiaries borrowed funds directly in the United States capital market. These borrowings were converted to their local currencies using foreign currency swaps, allowing the subsidiaries to achieve 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 1994 or 1993. Household Global Funding, Inc. ("Global") was established in 1989 to consolidate ownership of the company's Canadian and United Kingdom financial services businesses. During 1994 Global replaced $36 million of its preferred stock with debt. The Canadian operation is funded with retail deposits, commercial paper and intermediate- and long-term debt. Deposits were $1.1 and $1.0 billion at December 31, 1994 and 1993, respectively. Intermediate- and long-term debt totaled $616 million at year-end 1994 compared with $574 million a year ago. Committed backup lines of credit for Canada were approximately $400 million compared to approximately $420 million at December 31, 1993. The company has guaranteed payment of the debt obligations of its Canadian subsidiary. In addition, the Canadian operation sold with no recourse first mortgage portfolios totaling $115.1 million during 1994 compared to $419.0 million in 1993. The United Kingdom operation is funded with deposits and short- and intermediate-term bank lines of credit. Deposits at year-end 1994 were $504 million compared to $426 million a year earlier. Borrowings from bank lines of credit at year-end 1994 were $631 million compared to $621 million a year ago. The company has guaranteed payment of all debt obligations, except for certain deposits, of its United Kingdom subsidiary. During 1994 the United Kingdom operation completed its first securitization and sale of other unsecured receivables totaling $241.0 million. RISK MANAGEMENT The company has a comprehensive program which addresses the management and diversification of financial risk, such as interest rate, funding, liquidity, counterparty 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 6 percent of the company's expected full-year net interest margin on a managed basis can be at risk to an immediate 200 basis point increase or decrease in interest rates for 12 months, assuming no additional interest rate risk management actions are taken. Limits also apply beyond the initial 12-month period. Historically, the company has managed its interest rate risk to levels substantially below those allowed by this policy. The company, whenever possible, funds its assets with liability instruments of similar interest rate sensitivity, thereby reducing structural interest rate risk. Over time, customer demand for the company's receivable products shifts from fixed rate to floating rate, and vice versa, based on market conditions and preferences. These shifts result in different funding strategies and produce different interest rate exposures. To manage these exposures, as well as its liquidity position, the company may use derivatives to synthetically alter assets/liabilities. The company does not use any exotic or leveraged derivatives. The company does not serve as a financial intermediary to make markets in any off-balance sheet financial instruments. At December 31, 1994 the company managed approximately $20.6 billion of domestic receivables with variable interest rates, including floating rate credit card, home equity and other unsecured products. To manage liquidity to acceptable levels, these receivables have been funded with short-term debt, and to a greater extent, by longer-duration liabilities. This situation exposes the company to interest rate risk. The company utilizes derivatives, primarily interest rate swaps, to synthetically alter its exposure to interest rate risk while still controlling liquidity risk. Interest rate swaps also are used to synthetically alter the company's exposure to basis risk, or the risk due to the difference in movement of market rate indices on which assets and liabili- ties are priced (primarily prime and LIBOR, respectively). Synthetic alteration and hedge transactions are specifically designated to particular assets/liabilities or off-balance sheet items of a similar characteristic. Specific assets or liabilities synthetically altered/hedged may consist of groups of individually small dollar homogeneous items. While the notional amount of the company's interest rate swap 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 interest rate swap 38 21 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 interest rate differential determined by reference to the notional amount. Certain interest rate swap agreements entered into by the company require that payments be made to or received from the counterparty when the market value of the agreement reaches a predetermined level. This serves to minimize the company's counterparty risk. Counterparty limits have been established and are closely monitored as part of the overall risk management process. These limits ensure that the company does not have significant exposure to any individual counterparty. Based on estimated peak exposure at December 31, 1994 approximately 99 percent of the company's derivative instrument counterparties were rated A- or better, and 78 percent were rated AA- or better. The company has never suffered a loss due to counterparty failure. The company also utilizes exchange traded U.S. dollar interest rate futures and purchased put and call options to hedge the resets of interest rates on the company's variable rate assets and liabilities. For example, short-term borrowings expose the company to interest rate risk. The hedges used reduce that risk, and at the inception of the contract, the company designates these futures and options as hedges. The contracts are held until the applicable variable rate asset or liability reset occurs, at which time the contracts are terminated. These terminations are necessary to close out the contract, as the date the rate resets usually does not coincide with the exchange's contract expiration date. During the past three years the company utilized forward interest rate contracts primarily to lock in interest rates on committed but unfunded first mortgage loans or first mortgage loans held for sale to the secondary market. While attempting to eliminate structural interest rate risk, the company stays abreast of the market to reduce funding costs and occasionally attempts to benefit from profit opportunities available in short-term interest rate movements. This is done principally using exchange traded futures and options and liquid fixed income securities. 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 or loss from these trading activities has not been material to the company. In late 1994, the company discontinued its trading activities and hedged its open positions. See Note 7, "Derivative Financial Instruments and Other Financial Instruments with Off-Balance Sheet Risk" in the accompanying financial statements for additional information related to interest rate risk management. In the accompanying financial statements, Note 11, "Fair Value of Financial Instruments" provides information regarding the fair value of certain financial instruments. During 1994 the company invested $197 million in capital expenditures, up compared to the prior year level of $110 million. The increase was primarily due to the construction of a new credit card facility and development of a comprehensive customer service computer system for the domestic consumer finance business. Capital expenditures are expected to be lower in 1995. 39 22 STATEMENTS OF INCOME
Household International, Inc. and Subsidiaries In millions, except per share data. Year ended December 31 1994 1993 1992 ------------------------------------------------------------------------------------------------------------------------------ Finance income $2,642.3 $2,561.4 $2,584.4 Interest income from noninsurance investment securities 131.9 129.3 152.8 Interest expense 1,242.7 1,149.5 1,420.2 ------------------------------------------------------------------------------------------------------------------------------ Net interest margin 1,531.5 1,541.2 1,317.0 Provision for credit losses on owned receivables 606.8 735.8 671.5 ------------------------------------------------------------------------------------------------------------------------------ Net interest margin after provision for credit losses 924.7 805.4 645.5 ------------------------------------------------------------------------------------------------------------------------------ Securitization and servicing fee income 733.9 460.0 376.0 Insurance premiums and contract revenues 282.0 288.3 281.2 Investment income 514.4 574.0 523.7 Fee income 250.5 292.6 164.5 Other income 48.3 148.9 98.0 ------------------------------------------------------------------------------------------------------------------------------ Total other revenues 1,829.1 1,763.8 1,443.4 ------------------------------------------------------------------------------------------------------------------------------ Salaries and fringe benefits 656.6 615.4 535.9 Other operating expenses 1,104.5 964.0 761.1 Policyholders' benefits 464.4 539.1 513.9 ------------------------------------------------------------------------------------------------------------------------------ Total costs and expenses 2,225.5 2,118.5 1,810.9 ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 528.3 450.7 278.0 Income taxes 160.7 152.0 87.1 ------------------------------------------------------------------------------------------------------------------------------ Net income $ 367.6 $ 298.7 $ 190.9 ============================================================================================================================== EARNINGS PER COMMON SHARE* Net income $ 367.6 $ 298.7 $ 190.9 Preferred dividends (27.6) (28.2) (25.3) ------------------------------------------------------------------------------------------------------------------------------ Earnings available to common shareholders $ 340.0 $ 270.5 $ 165.6 ============================================================================================================================== Average common and common equivalent shares 97.2 94.8 86.0 ------------------------------------------------------------------------------------------------------------------------------ Fully diluted earnings per common share $ 3.50 $ 2.85 $ 1.93 ------------------------------------------------------------------------------------------------------------------------------ Primary earnings per common share $ 3.52 $ 2.91 $ 1.97 ------------------------------------------------------------------------------------------------------------------------------
* 1992 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. 40 23 BALANCE SHEETS
Household International, Inc. and Subsidiaries In millions. At December 31 1994 1993 ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash $ 541.2 $ 317.4 Investment securities (fair value of $8,961.2 and $9,045.5) 9,004.5 8,795.1 Receivables, net 20,778.3 20,589.2 Assets pending sale 398.3 -- Deferred insurance policy acquisition costs 621.4 381.6 Acquired intangibles 649.9 473.4 Properties and equipment 512.0 434.3 Assets acquired through foreclosure 234.5 508.4 Other assets 1,598.3 1,462.1 ---------------------------------------------------------------------------------------------------------------------------------- Total assets $34,338.4 $32,961.5 ================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Debt: Deposits $ 8,439.0 $ 7,516.1 Commercial paper, bank and other borrowings 4,372.1 5,642.1 Senior and senior subordinated debt (with original maturities over one year) 10,274.1 9,113.8 ---------------------------------------------------------------------------------------------------------------------------------- Total debt 23,085.2 22,272.0 Insurance policy and claim reserves 6,715.8 6,064.2 Other liabilities 2,014.4 2,207.7 ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 31,815.4 30,543.9 Convertible preferred stock subject to mandatory redemption 2.6 19.3 Preferred stock* 320.0 320.0 Common shareholders' equity* 2,200.4 2,078.3 ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $34,338.4 $32,961.5 ==================================================================================================================================
*See the Statements of Changes in Preferred Stock and Common Shareholders' Equity on page 43 for number of shares issued and outstanding. The accompanying notes are an integral part of these financial statements. 41 24 STATEMENTS OF CASH FLOWS
Household International, Inc. and Subsidiaries In millions. Year ended December 31 1994 1993 1992 ------------------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATIONS Net income $ 367.6 $ 298.7 $ 190.9 Adjustments to reconcile net income to net cash provided by operations: Provision for credit losses on owned receivables 606.8 735.8 671.5 Insurance policy and claim reserves 240.2 226.7 161.8 Depreciation and amortization 243.3 243.1 176.1 Net realized (gains) losses from sales of assets 41.3 29.3 (15.3) Deferred insurance policy acquisition costs (94.7) (86.6) (85.2) Deferred income tax provision (1.2) (6.3) 40.3 Other, net 356.8 264.1 (187.2) ------------------------------------------------------------------------------------------------------------------------------- Cash provided by operations 1,760.1 1,704.8 952.9 ------------------------------------------------------------------------------------------------------------------------------- INVESTMENTS IN OPERATIONS Investment securities: Purchased (3,245.1) (4,053.1) (3,633.9) Matured 918.2 1,270.9 1,382.2 Sold 1,963.2 1,992.2 2,107.6 Short-term investment securities, net change (320.9) (154.2) 607.7 Receivables, excluding bankcard: Originated or purchased (12,186.4) (10,218.4) (10,719.8) Collected 7,517.7 7,784.6 7,597.7 Sold 3,211.4 2,351.8 2,599.9 Bankcard receivables: Originated or collected, net (14,321.3) (8,729.8) (4,216.5) Purchased -- -- (195.1) Sold 13,735.1 7,483.2 2,389.2 Acquisition of banking organizations: Assets acquired, net (101.3) (53.5) (64.3) Deposits and other liabilities assumed, net 1,158.7 362.0 525.9 Acquisition of businesses, net (145.6) -- (26.2) Properties and equipment purchased (196.9) (110.2) (90.4) Properties and equipment sold 9.8 8.2 4.0 ------------------------------------------------------------------------------------------------------------------------------- Cash decrease from investments in operations (2,003.4) (2,066.3) (1,732.0) ------------------------------------------------------------------------------------------------------------------------------- FINANCING AND CAPITAL TRANSACTIONS Short-term debt, net change (1,112.5) 590.0 1,707.9 Time certificates accepted 3,372.6 2,340.9 3,081.5 Time certificates paid (3,429.9) (3,320.8) (3,739.3) Senior and senior subordinated debt issued 4,511.4 2,765.0 2,862.0 Senior and senior subordinated debt retired (3,164.8) (2,645.3) (3,594.8) Policyholders' benefits paid (559.0) (341.2) (349.6) Cash received from policyholders 966.6 859.7 895.3 Shareholders' dividends (146.5) (141.3) (124.6) Issuance of preferred stock -- 100.0 50.0 Repurchase of preferred stock -- (80.0) -- Issuance of common stock 13.6 313.3 33.0 ------------------------------------------------------------------------------------------------------------------------------- Cash increase from financing and capital transactions 451.5 440.3 821.4 Effect of exchange rate changes on cash 15.6 (17.2) (14.4) ------------------------------------------------------------------------------------------------------------------------------- Increase in cash 223.8 61.6 27.9 Cash at January 1 317.4 255.8 227.9 ------------------------------------------------------------------------------------------------------------------------------- Cash at December 31 $ 541.2 $ 317.4 $ 255.8 =============================================================================================================================== Supplemental cash flow information: Interest paid $1,249.8 $1,188.2 $1,493.6 =============================================================================================================================== Income taxes paid $ 185.2 $ 128.8 $ 100.9 ===============================================================================================================================
The accompanying notes are an integral part of these financial statements. 42 25 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 Other(1) Equity ------------------------------------------------------------------------------------------------------------------------------------ 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 (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 (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 44.5 44.5 ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 320.0 113.3 337.3 2,176.3 (548.6) 2,078.3 Net income 367.6 367.6 Cash dividends--preferred, at stated rates (28.5) (28.5) Cash dividends--common, $1.23 per share (118.0) (118.0) Foreign currency translation adjustments 9.1 9.1 Conversion of preferred stock 1.5 15.4 16.9 Exercise of stock options .2 5.3 5.5 Issuance of common stock 4.1 9.5 13.6 Unrealized loss on investments, net (144.1) (144.1) ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 $320.0 $115.0 $362.1 $2,397.4 $(674.1) $2,200.4 ===================================================================================================================================
(1)At December 31, 1994, 1993, 1992 and 1991 items in the other column include cumulative adjustments for: foreign currency translation adjustments of $(123.6), $(132.7), $(118.6) and $(81.1) million, respectively; common stock in treasury of $(446.9), $(456.4), $(681.9) and $(713.8) million, respectively; and unrealized gains (losses) on marketable equity securities and available-for-sale investments of $(103.6), $40.5, $(4.0) and $(3.1) million, respectively. 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 (loss) on available-for-sale investments at December 31, 1994 and 1993 of $(292.4) and $152.8 million, respectively, is recorded net of income taxes (benefit) of $(57.5) and $22.1 million, respectively and, for certain available-for-sale investments of the life insurance operation, related unrealized deferred insurance policy acquisition cost adjustments of $(131.3) and $90.2 million, respectively.
Common Stock(2) ------------------------------------------------------- Nonconvertible Net Shares Preferred Stock Issued In Treasury Outstanding ------------------------------------------------------------------------------------------------------------------------------------ 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 Exercise of common stock options 213,962 213,962 Conversion of $6.25 preferred stock 1,540,756 1,540,756 Issuance of common stock 399,748 399,748 ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 1,850,000 115,008,739 (18,406,141) 96,602,598 ===================================================================================================================================
(2) At December 31, 1994 and 1993 the company had authorized 150 million shares of $1 par value common stock. The accompanying notes are an integral part of these financial statements. 43 26 BUSINESS SEGMENT DATA
Household International, Inc. and Subsidiaries Revenues Operating Profit Net Income In millions. ---------------------------- -------------------------- --------------------------- Year ended December 31 1994 1993 1992 1994 1993 1992 1994 1993 1992 ----------------------------------------------------------------------------------------------------------------------------------- Finance and Banking $4,011.8 $3,786.2 $3,587.6 $448.7 $379.5 $214.8 $316.5 $253.5 $149.2 Individual Life Insurance 591.5 668.3 593.0 79.6 71.2 63.2 51.1 45.2 41.7 ----------------------------------------------------------------------------------------------------------------------------------- Total $4,603.3 $4,454.5 $4,180.6 $528.3 $450.7 $278.0 $367.6 $298.7 $190.9 ===================================================================================================================================
PRESENTATION OF INCOME DATA The company reassessed the significance of its Liquidating Commercial Lines ("LCL") and Corporate segments in 1994. In recognition of the significant 1994 decline in the level of LCL assets, a reduced risk posture for these assets and the relative financial insignificance of the Corporate segment to the company's operations, the LCL and Corporate segments have been combined with the Finance and Banking segment. To better analyze financial condition and results of operations and related trends, earnings and selected balance sheet data for years prior to 1994 have been reclassified to reflect this combination. See further discussion in Management's Discussion and Analysis on page 26. Operating profit represents income before income taxes but includes 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 underlying regulatory and business requirements.
Identifiable Assets In millions. ------------------------------------------ At December 31 1994 1993 1992 ---------------------------------------------------------------------------------------------------------- Finance and Banking $26,897.0 $26,002.5 $25,202.2 Individual Life Insurance 7,441.4 6,959.0 5,926.2 ---------------------------------------------------------------------------------------------------------- Total $34,338.4 $32,961.5 $31,128.4 ==========================================================================================================
PRESENTATION OF BUSINESS SEGMENT DATA The Finance and Banking segment consists of the following types of loans: first mortgages, home equity, other secured, bankcards, merchant participation, other unsecured, equipment and other commercial loans and leases, as well as credit and specialty insurance. In addition, the Finance and Banking segment includes discontinued commercial product lines, consisting of commercial real estate, acquisition finance and other loans, and other commercial assets being liquidated. The Individual Life Insurance segment provides ordinary life, universal life and annuity insurance products. GEOGRAPHIC AREA Household International, Inc. and Subsidiaries
Identifiable Assets Revenues Operating Profit ------------------------------------ ---------------------------------- ----------------------------- In millions. 1994 1993 1992 1994 1993 1992 1994 1993 1992 ----------------------------------------------------------------------------------------------------------------------------------- United States $30,153.7 $28,800.5 $26,912.1 $3,968.9 $3,833.9 $3,435.6 $512.5 $472.1 $362.1 United Kingdom 1,835.8 1,494.1 1,402.7 322.0 273.7 346.5 30.8 13.0 (47.7) Canada 2,348.9 2,247.3 2,358.7 239.1 275.4 309.5 (16.9) (33.8) (38.7) Australia -- 419.6 454.9 73.3 71.5 89.0 1.9 (.6) 2.3 ---------------------------------------------------------------------------------------------------------------------------------- Total $34,338.4 $32,961.5 $31,128.4 $4,603.3 $4,454.5 $4,180.6 $528.3 $450.7 $278.0 ==================================================================================================================================
44 27 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. 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 investments 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 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). Any decline in the fair value of available-for-sale or held-to-maturity investments which is deemed to be other than temporary is 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 fair value with changes in this value recorded in current earnings. The company periodically sells receivables from its home equity, bankcard, merchant participation and other unsecured 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 fair value. Finance income is recognized 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 $9.4 and $9.0 million at December 31, 1994 and 1993, 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 when 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. NONACCRUAL LOANS Nonaccrual loans are loans on which accrual of interest has been suspended. Interest income is suspended on all loans when principal or interest payments are more than three months contractually past due, except for 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, 1994 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, merchant participation and other unsecured receivables have been securitized and sold to investors with limited recourse. The servicing rights to these receivables have been retained by the company. Upon sale, the receivables are removed from the balance sheet, and a gain on sale is recognized for the difference between the carrying value of the receivables and the adjusted sales proceeds. The adjusted sales proceeds are based on a present value estimate of future cash flows to be received over the lives of the receivables. Future cash flows are based on 45 28 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Household International, Inc. and Subsidiaries 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 In the fourth quarter of 1994 the company discontinued its domestic traditional first mortgage origination business. Prior to that, certain first mortgage receivables had been originated and sold to investors with servicing rights retained by the company. Excess servicing rights of $20 and $32 million were recorded at December 31, 1994 and 1993, 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 1994, 1993 and 1992. The company also purchased first mortgage receivable servicing rights, referred to as purchased mortgage servicing rights ("PMSRs"). PMSRs totaled $190.4 and $180.4 million at December 31, 1994 and 1993, 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 7 years in 1994, and 8 years in both 1993 and 1992. The company periodically evaluates the carrying value of its servicing rights on a disaggregated pool basis 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 PMSRs 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. Deferred insurance policy acquisition costs are adjusted for unrealized gains or losses on available-for-sale investments on the same basis as if the gains or losses were realized. The 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 and core deposit 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 both 1994 and 1993, and 8 years in 1992. 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 reissued is removed from the accounts at average cost. INTEREST RATE CONTRACTS The nature and composition of the company's assets and liabilities and off-balance sheet items expose the company to interest rate risk. The company enters into a variety of interest rate contracts in the management of its interest rate exposure and in its trading activities. Interest rate swaps are the principal vehicle used to manage interest rate risk; however, interest rate futures, options, caps and floors, and forward contracts also are utilized. Interest rate swaps are designated, and effective, as synthetic alterations of specific assets or liabilities (or specific groups of assets or liabilities) and off-balance sheet items. The interest rate differential to be paid or received on these contracts is accrued and included in net interest margin in the statements of income. The related accrual is classified as other liabilities on the accompanying balance sheets. Interest rate futures, forwards, options, caps and floors used in hedging the company's exposure to interest rate fluctuations are designated, and effective, as hedges of balance sheet items. Anticipatory hedges are designated, and effective, as hedges of identified transactions which are probable to occur. During 1994, 1993 and 1992 the company's use of anticipatory hedges was insignificant. If interest rate contracts are terminated early, the realized gains and losses are deferred and amortized over the life of the hedged items as adjustments to net interest margin in the statements of income. These deferred gains and losses are 46 29 recorded on the accompanying balance sheets as adjustments of the carrying amount of the hedged items. Interest rate contracts not used in the company's trading activities are recorded at amortized cost. Interest rate contracts used in the company's trading activities are carried at fair value. Changes in fair value are included in other income. FOREIGN CURRENCY TRANSLATION Foreign subsidiary assets and liabilities are located in the United Kingdom and Canada. The functional currency for each subsidiary is its local currency. 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 using 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. 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. 2. INVESTMENT SECURITIES
1994 1993 ---------------------------- ----------------------------- In millions. Carrying Carrying At December 31 Value Fair Value Value Fair Value -------------------------------------------------------------------------------------------------------------------------------- TRADING INVESTMENTS Government securities and other $ 17.3 $ 17.3 $ 108.8 $ 108.8 -------------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE INVESTMENTS Marketable equity securities 60.3 60.3 84.8 84.8 Corporate debt securities 2,595.9 2,595.9 2,099.7 2,099.7 Government debt securities 379.3 379.3 536.3 536.3 Mortgage-backed securities 1,755.6 1,755.6 1,983.9 1,983.9 Other 209.3 209.3 295.2 295.2 -------------------------------------------------------------------------------------------------------------------------------- Subtotal 5,000.4 5,000.4 4,999.9 4,999.9 -------------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY INVESTMENTS Corporate debt securities 1,906.1 1,897.2 1,852.3 2,049.4 Government debt securities 34.4 30.9 34.5 36.7 Mortgage-backed securities 1,136.5 1,116.8 882.1 928.1 Mortgage loans on real estate 161.9 158.5 222.4 226.0 Policy loans 72.7 72.7 81.6 81.6 Other 549.9 542.1 494.6 496.1 -------------------------------------------------------------------------------------------------------------------------------- Subtotal 3,861.5 3,818.2 3,567.5 3,817.9 -------------------------------------------------------------------------------------------------------------------------------- Accrued investment income 125.3 125.3 118.9 118.9 -------------------------------------------------------------------------------------------------------------------------------- Total investment securities $9,004.5 $8,961.2 $8,795.1 $9,045.5 ================================================================================================================================
The company's insurance subsidiaries held $7.0 and $6.7 billion of the investment securities at December 31, 1994 and 1993, 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 practice. Included in the company's earnings for 1994, 1993 and 1992 were changes in net unrealized holding gains (losses) of $(.4), $1.3 and $(3.3) million, respectively, from trading investments. Proceeds from the sale of available-for-sale investments totaled approximately $2.0 billion in 1994 and $1.2 billion in both 1993 and 1992. Gross gains of $35.5, $49.7 and $31.1 million and gross losses of $25.7, $7.9 and $21.9 million in 1994, 1993 and 1992, respectively, were realized on those sales. There were no investments transferred from held-to-maturity to available-for-sale in 1994. The amortized cost of held-to- maturity investments transferred to available-for-sale in 1993 47 30 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Household International, Inc. and Subsidiaries was $3.7 billion. There were no sales of held-to-maturity investments in 1994. Proceeds from sales of held-to-maturity investments were $834.3 and $871.4 million in 1993 and 1992, 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 million of sales proceeds in 1992 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 and $35.4 million and gross losses of $9.6 and $15.9 million were realized on sales of held-to-maturity investments in 1993 and 1992, respectively. The gross unrealized gains (losses) of investment securities were as follows:
1994 1993 ----------------------------------------------- -------------------------------------------- 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 $ 63.1 $ 1.7 $ (4.5) $ 60.3 $ 80.7 $ 5.9 $ (1.8) $ 84.8 Corporate debt securities 2,771.6 3.7 (179.4) 2,595.9 2,013.0 95.9 (9.2) 2,099.7 Government debt securities 394.6 .2 (15.5) 379.3 531.9 6.3 (1.9) 536.3 Mortgage-backed securities 1,853.9 5.2 (103.5) 1,755.6 1,926.3 63.2 (5.6) 1,983.9 Other 209.6 -- (.3) 209.3 295.2 -- -- 295.2 ----------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale investments $5,292.8 $10.8 $(303.2) $5,000.4 $4,847.1 $171.3 $(18.5) $4,999.9 =================================================================================================================================== HELD-TO-MATURITY INVESTMENTS Corporate debt securities $1,906.1 $33.8 $ (42.7) $1,897.2 $1,852.3 $202.9 $(5.8) $2,049.4 Government debt securities 34.4 .1 (3.6) 30.9 34.5 2.2 -- 36.7 Mortgage-backed securities 1,136.5 15.5 (35.2) 1,116.8 882.1 48.5 (2.5) 928.1 Mortgage loans on real estate 161.9 1.8 (5.2) 158.5 222.4 6.2 (2.6) 226.0 Policy loans 72.7 -- -- 72.7 81.6 -- -- 81.6 Other 549.9 .2 (8.0) 542.1 494.6 1.5 -- 496.1 ----------------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity investments $3,861.5 $51.4 $ (94.7) $3,818.2 $3,567.5 $261.3 $(10.9) $3,817.9 ===================================================================================================================================
See Note 11, "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, 1994 the company did not hold any debt or equity securities from a single issuer that exceeded 10 percent of the company's total shareholders' equity. 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, 1994 Cost Value Yield* Cost Value Yield* Cost Value Yield* -------------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE INVESTMENTS Due within 1 year $ 400.3 $ 400.3 5.36% $200.9 $199.9 5.54% $ 136.2 $ 136.2 4.36% After 1 but within 5 years 462.9 434.9 6.78 35.7 34.5 6.98 142.2 131.5 6.12 After 5 but within 10 years 1,489.0 1,390.8 7.77 93.1 83.4 5.93 181.6 166.1 6.46 After 10 years 419.4 369.9 7.63 64.9 61.5 7.51 1,535.0 1,462.6 6.67 -------------------------------------------------------------------------------------------------------------------------------- Total $2,771.6 $2,595.9 7.23% $394.6 $379.3 6.09% $1,995.0 $1,896.4 6.46% ================================================================================================================================ HELD-TO-MATURITY INVESTMENTS Due within 1 year $103.8 $104.5 10.65% $2.8 $ 2.8 4.79% $ 16.3 $16.4 7.91% After 1 but within 5 years 247.3 250.0 8.97 11.0 10.0 5.55 224.0 208.1 7.10 After 5 but within 10 years 586.1 586.6 8.70 .8 .8 10.53 402.3 386.4 6.52 After 10 years 968.9 956.1 8.75 19.8 17.3 7.07 602.4 606.7 8.27 -------------------------------------------------------------------------------------------------------------------------------- Total $1,906.1 $1,897.2 8.87% $ 34.4 $ 30.9 6.48% $1,245.0 $1,217.6 7.49% ================================================================================================================================
* Computed by dividing annualized interest by the amortized cost of the respective investment securities. 48 31 HOUSEHOLD INTERNATIONAL--1994 FINANCIALS--PAGE 49 3. RECEIVABLES
In millions. At December 31 1994 1993 --------------------------------------------------------------------------------------------------------- First mortgage $ 3,490.8 $ 3,534.1 Home equity 2,739.0 2,850.9 Other secured 676.9 875.4 Bankcard 4,788.9 4,356.9 Merchant participation 2,564.9 2,636.5 Other unsecured 5,137.2 4,320.8 Equipment financing and other commercial 1,157.9 1,955.8 --------------------------------------------------------------------------------------------------------- Total receivables owned 20,555.6 20,530.4 Accrued finance charges 305.0 261.0 Credit loss reserve for owned receivables (546.0) (621.9) Unearned credit insurance premiums and claims reserves (122.2) (117.5) Amounts due and deferred from receivables sales 922.4 760.0 Reserve for receivables serviced with limited recourse (336.5) (222.8) --------------------------------------------------------------------------------------------------------- Total receivables owned, net 20,778.3 20,589.2 Receivables serviced with limited recourse 12,495.1 9,827.8 Receivables serviced with no recourse 17,752.2 15,229.4 --------------------------------------------------------------------------------------------------------- Total receivables owned or serviced, net $51,025.6 $45,646.4 =========================================================================================================
Foreign receivables included in receivables owned were as follows:
1994 1993 ----------------------- ------------------------------------ In millions. UNITED United At December 31 CANADA KINGDOM Canada Kingdom Australia ----------------------------------------------------------------------------------------------------------------- First mortgage $ 996.7 $ 4.4 $ 789.3 $ 54.1 -- Home equity 303.8 141.3 384.5 127.0 $ 76.6 Other secured 54.2 -- 71.4 -- 161.1 Bankcard -- 330.2 -- -- -- Merchant participation 283.6 438.0 225.9 356.2 30.7 Other unsecured 406.4 532.1 394.2 613.8 106.6 ----------------------------------------------------------------------------------------------------------------- Total $2,044.7 $1,446.0 $1,865.3 $1,151.1 $375.0 =================================================================================================================
Advances from the Federal Home Loan Bank and other borrowings of the company's banking subsidiary were secured by first mortgage receivables totaling approximately $.8 billion at December 31, 1994. Receivables held for trade, which are first mortgage loans that were originated or purchased with the intent to be resold, totaled $25.1 and $661.7 million at December 31, 1994 and 1993, respectively. The company has securitized and sold certain receivables which it services with limited recourse. Securitizations and sales of receivables, including replenishments of certificate holder interests, were as follows:
In millions. Year ended December 31 1994 1993 1992 -------------------------------------------------------------------------------------------------- Home equity $ 1,418.6 $1,667.5 $1,986.4 Bankcard 13,735.1 7,563.2 2,335.6 Merchant participation 1,093.6 213.6 484.9 Other unsecured 241.0 -- -- -------------------------------------------------------------------------------------------------- Total $16,488.3 $9,444.3 $4,806.9 ==================================================================================================
49 32 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Household International, Inc. and Subsidiaries The outstanding balance of receivables serviced with limited recourse consisted of the following:
In millions. At December 31 1994 1993 ---------------------------------------------------------------------------------------------------- First mortgage $ 168.4 -- Home equity 4,906.2 $5,029.5 Bankcard 6,311.3 4,485.7 Merchant participation 868.2 312.6 Other unsecured 241.0 -- ---------------------------------------------------------------------------------------------------- Total $12,495.1 $9,827.8 ====================================================================================================
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 1994 1993 ----------------------------------------------------------------------------------------------------- First mortgage $ 3,659.2 $ 3,534.1 Home equity 7,645.2 7,880.4 Other secured 676.9 875.4 Bankcard 11,100.2 8,842.6 Merchant participation 3,433.1 2,949.1 Other unsecured 5,378.2 4,320.8 Equipment financing and other commercial 1,157.9 1,955.8 ----------------------------------------------------------------------------------------------------- Receivables managed $33,050.7 $30,358.2 =====================================================================================================
For certain securitizations, wholly-owned subsidiaries were created (HFC Revolving Corporation, HRSI Funding, Inc., HFS Funding Corporation, Household Finance Receivables Corporation II, Household Receivables Funding Corporation, Household Receivables Funding Corporation II, Household Affinity Funding Corporation and HFC Funding Corporation) for the limited purpose of consummating such transactions. The amount due and deferred from receivables sales of $922.4 million at December 31, 1994 included unamortized excess servicing assets and funds established pursuant to the recourse provisions and holdback reserves for certain sales totaling $798.1 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 $123.9 million at December 31, 1994. 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 $336.5 million at December 31, 1994 and represent the company's best estimate of probable losses on receivables serviced with limited recourse. Contractual maturities of owned receivables were as follows:
In millions. At December 31, 1994 1995 1996 1997 1998 1999 Thereafter Total ----------------------------------------------------------------------------------------------------------------- First mortgage $ 345.2 $ 139.1 $ 210.2 $ 155.1 $ 338.0 $2,303.2 $ 3,490.8 Home equity 711.0 323.0 213.2 181.7 133.0 1,177.1 2,739.0 Other secured 111.2 53.6 122.3 83.9 43.6 262.3 676.9 Bankcard 1,464.1 745.4 575.1 445.1 345.0 1,214.2 4,788.9 Merchant participation 1,351.9 673.9 361.9 116.0 15.3 45.9 2,564.9 Other unsecured 1,928.7 929.4 594.0 383.0 271.1 1,031.0 5,137.2 Equipment financing and other commercial 84.6 137.2 151.1 96.5 91.6 596.9 1,157.9 ----------------------------------------------------------------------------------------------------------------- Total $5,996.7 $3,001.6 $2,227.8 $1,461.3 $1,237.6 $6,630.6 $20,555.6 ==================================================================================================================
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 49 and 46 percent in 1994 and 1993, respectively. 50 33 The following table summarizes contractual maturities of owned receivables due after one year by repricing characteristic:
Over 1 In millions. But Within Over At December 31, 1994 5 years 5 Years --------------------------------------------------------------------------------------------------------- Receivables at predetermined interest rates $3,588.3 $2,190.6 Receivables at floating or adjustable rates 4,340.0 4,440.0 --------------------------------------------------------------------------------------------------------- Total $7,928.3 $6,630.6 =========================================================================================================
Nonaccrual owned receivables totaled $462.0 million at December 31, 1994 including $110.5 million relating to foreign operations. Interest income that would have been recorded in 1994 if such nonaccrual receivables had been current and in accordance with contractual terms was approximately $69 million, including $18 million relating to foreign operations. Interest income that was included in net income for 1994 on those receivables was approximately $28 million, including $8 million relating to foreign operations. Renegotiated commercial loans at December 31, 1994 totaled $41.8 million. The company recorded $1.2 million of interest earned on such loans in 1994. Had the loans been performing in accordance with their original terms, interest income in 1994 would have been approximately $2 million higher. There were $.5 million of commitments at December 31, 1994 to lend additional funds to borrowers whose loans were renegotiated. For further information on nonperforming assets, see page 35 and Other Credit Quality Statistics on page 25. For an analysis of reserves for credit losses, see pages 23 and 24. 4. DEPOSITS
All dollar amounts are stated in millions 1994 1993 At December 31 ------------------------ --------------------------- WEIGHTED Weighted AMOUNT AVERAGE RATE Amount Average Rate --------------------------------------------------------------------------------------------------------------------- DOMESTIC Time certificates $3,454.6 4.5% $3,094.4 3.6% Savings accounts 2,447.8 3.3 2,287.9 2.9 Demand accounts 947.0 .9 702.9 1.0 --------------------------------------------------------------------------------------------------------------------- Total domestic deposits 6,849.4 3.6 6,085.2 3.0 --------------------------------------------------------------------------------------------------------------------- FOREIGN Time certificates 1,268.4 7.3 1,157.8 8.2 Savings accounts 303.6 5.0 268.5 5.5 Demand accounts 17.6 5.8 4.6 3.7 --------------------------------------------------------------------------------------------------------------------- Total foreign deposits 1,589.6 6.9 1,430.9 7.7 --------------------------------------------------------------------------------------------------------------------- Total deposits $8,439.0 4.2% $7,516.1 3.9% =====================================================================================================================
Average deposits and related weighted average interest rates for 1994, 1993 and 1992 were as follows:
1994 1993 1992 -------------------------- ------------------------- ------------------------- 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 $3,151.5 4.2% $3,368.3 3.9% $3,952.1 5.8% Savings and demand accounts 3,009.0 2.5 2,875.9 2.5 2,687.9 3.0 ------------------------------------------------------------------------------------------------------------------------------ Total domestic deposits 6,160.5 3.4 6,244.2 3.3 6,640.0 4.7 ------------------------------------------------------------------------------------------------------------------------------ FOREIGN Time certificates 1,195.6 7.2 1,278.5 8.2 1,122.2 10.7 Savings and demand accounts 312.0 5.3 212.3 5.8 224.7 10.1 ------------------------------------------------------------------------------------------------------------------------------ Total foreign deposits 1,507.6 6.8 1,490.8 7.9 1,346.9 10.6 ------------------------------------------------------------------------------------------------------------------------------ Total deposits $7,668.1 4.1% $7,735.0 4.2% $7,986.9 5.8% ==============================================================================================================================
51 34 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Household International, Inc. and Subsidiaries Interest expense on deposits was $312.1, $321.2 and $462.9 million for 1994, 1993 and 1992, respectively. Interest expense on domestic deposits was $209.1, $203.9 and $309.3 million for 1994, 1993 and 1992, respectively. Maturities of time certificates in amounts of $100,000 or more were:
In millions. At December 31, 1994 Domestic Foreign Total ---------------------------------------------------------------------------------------------------------- 3 months or less $ .7 $146.6 $147.3 Over 3 months through 6 months 100.4 56.2 156.6 Over 6 months through 12 months 70.6 4.1 74.7 Over 12 months 127.0 8.5 135.5 ---------------------------------------------------------------------------------------------------------- Total $298.7 $215.4 $514.1 ==========================================================================================================
Contractual maturities of time certificates within each interest rate range were as follows:
In millions. At December 31, 1994 1995 1996 1997 1998 1999 Thereafter Total ----------------------------------------------------------------------------------------------------------------------------- INTEREST RATE <4.00% $ 695.9 $ 63.0 $ 6.0 $ .1 $ .1 -- $ 765.1 4.00%-- 5.99% 1,140.9 477.5 125.6 73.1 81.6 $ 22.3 1,921.0 6.00%-- 7.99% 510.0 226.6 92.8 34.8 160.5 63.6 1,088.3 8.00%-- 9.99% 164.9 143.2 395.0 26.3 60.3 56.9 846.6 10.00%--13.99% 82.6 17.4 -- 1.5 .1 .4 102.0 ------------------------------------------------------------------------------------------------------------------------------ Total $2,594.3 $927.7 $619.4 $135.8 $302.6 $143.2 $4,723.0 ==============================================================================================================================
5. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS
All dollar amounts are stated in millions. Bank and Commercial Other At December 31 Paper* Borrowings Total -------------------------------------------------------------------------------------------------------------- 1994 Balance $3,598.0 $ 774.1 $4,372.1 Highest aggregate month-end balance -- -- 6,172.0 Average borrowings 4,316.4 1,321.1 5,637.5 Weighted average interest rate: At year end 6.2% 8.0% 6.5% Paid during year 4.4 7.6 5.2 -------------------------------------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------------------------------------
*Included in outstanding balances at year-end 1994, 1993 and 1992 were commercial paper obligations of foreign subsidiaries of $331.4, $583.3 and $487.6 million, respectively. 52 35 Interest expense for commercial paper, bank and other borrowings totaled $292.2, $251.1 and $263.2 million for 1994, 1993 and 1992, respectively. The company maintains various bank credit agreements primarily to support commercial paper borrowings. At December 31, 1994 the company had total bank credit agreements of $5.6 billion, of which $4.8 billion were unused. Formal credit lines are reviewed annually, and revolving credit agreements expire at various dates from 1995 to 1999. 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, 1994 totaled $7.2 million. 6. SENIOR AND SENIOR SUBORDINATED DEBT (WITH ORIGINAL MATURITIES OVER ONE YEAR)
In millions. At December 31 1994 1993 ------------------------------------------------------------------------------------------------ SENIOR DEBT 3.75% to 7.49%; due 1995 to 2005 $ 1,888.8 $1,706.3 7.5% to 7.99%; due 1995 to 2004 1,552.6 1,627.9 8.0% to 8.99%; due 1995 to 2004 1,545.2 1,162.3 9.0% to 9.99%; due 1995 to 2001 941.3 1,477.7 10.0% and greater; due 1995 to 2001 293.6 344.8 Variable interest rate debt; 3.26% to 6.69%; due 1995 to 2015 3,120.5 1,778.5 SENIOR SUBORDINATED DEBT 6.5% to 9.63%; due 2000 to 2003 685.0 685.0 10.13% to 11.15%; due 1996 to 1998 215.0 215.0 PREFERRED STOCK OF SUBSIDIARIES Household Finance Corporation 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 shares in 1993 -- 36.0 Unamortized discount (67.9) (19.7) ------------------------------------------------------------------------------------------------- Total senior and senior subordinated debt $10,274.1 $9,113.8 =================================================================================================
*Depositary share represents 1/3000 share of preferred stock. Weighted average interest rates, excluding the impact of interest rate swap agreements, were 7.4, 7.5 and 8.1 percent at December 31, 1994, 1993 and 1992, respectively. Interest expense for senior and senior subordinated debt, including the impact of interest rate swap agreements, was $638.4, $577.2 and $694.1 million for 1994, 1993 and 1992, respectively. The dividends on the preferred stock of subsidiaries have been classified in the statements of income as interest expense. Maturities of senior and senior subordinated debt were:
In millions. At December 31, 1994 -------------------------------------------- 1995 $ 1,922.8 1996 2,216.9 1997 1,693.0 1998 631.4 1999 1,277.0 Thereafter 2,533.0 -------------------------------------------- Total $10,274.1 ============================================
At December 31, 1994 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. 53 36 Notes to Financial Statements (Continued) Household International, Inc. and Subsidiaries 7. DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In connection with its asset/liability management program and in the normal course of business, the company enters into various transactions involving derivative and other off-balance sheet financial instruments. These instruments primarily are used to manage the company's exposure to fluctuations in interest rates and foreign exchange rates. The company does not serve as a financial intermediary to make markets in any derivative financial instruments. For further information on the company's strategies for managing interest rate and foreign exchange rate risk, see Liquidity and Capital Resources on pages 38 and 39. The financial instruments used by the company, which include interest rate contracts and foreign exchange rate contracts, as well as off-balance sheet financial instruments such as 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 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 derivative instrument counterparty. 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. MARKET RISK Market risk is the possibility that a change in interest rates or foreign exchange rates will cause a financial instrument to decrease in value or become more costly to settle. The company mitigates this risk by establishing limits for positions and other controls. INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS The following tables summarize the activity in interest rate and foreign exchange contracts for 1994, 1993 and 1992:
Exchange Traded ---------------------------------------------------------------------- ----------------- Interest Rate Futures Contracts Options ---------------------------- ----------------------- Interest In millions. Purchased Sold Purchased Written Rate Swaps ----------------------------------------------------------------------------------------------------------------------------- HEDGING/SYNTHETIC ALTERATION INSTRUMENTS 1992 Notional amount, 1991 -- $ (5.0) $ 87.5 $ (1.0) $ 6,837.5 New contracts $ 9,242.0 (8,623.0) 1,166.1 (1,220.1) 7,925.7 Matured or expired contracts (1,485.0) 1,036.0 (129.5) 182.5 (3,315.3) Terminated contracts -- -- -- -- (1,029.6) In-substance maturities(1) (7,587.0) 7,587.0 (1,024.1) 1,024.1 -- ----------------------------------------------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1992 $ 170.0 $ (5.0) $ 100.0 $ (14.5) $ 10,418.3 ============================================================================================================================= Fair value, 1992(2) -- $ (.2) $ (.3) $ (.1) $ 118.0 ----------------------------------------------------------------------------------------------------------------------------- 1993 Notional amount, 1992 $ 170.0 $ (5.0) $ 100.0 $ (14.5) $ 10,418.3 New contracts 6,950.7 (4,405.7) 3,019.2 (3,267.5) 8,866.5 Matured or expired contracts (2,750.0) -- (1,432.2) 1,605.8 (3,384.5) Terminated contracts (475.0) 475.0 -- -- (920.5) In-substance maturities(1) (3,895.7) 3,895.7 (1,617.4) 1,606.2 -- ----------------------------------------------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1993 -- $ (40.0) $ 69.6 $ (70.0) $ 14,979.8 ============================================================================================================================= Fair value, 1993(2) -- $ .1 -- -- $ 299.8 ----------------------------------------------------------------------------------------------------------------------------- 1994 Notional amount, 1993 -- $ (40.0) $ 69.6 $ (70.0) $ 14,979.8 New contracts $ 11,380.5 (12,132.8) 8,867.9 (5,707.5) 10,013.5 Matured or expired contracts -- -- (3,150.0) -- (4,704.6) Terminated contracts (63.5) 759.8 -- -- (2,455.7) In-substance maturities(1) (11,317.0) 11,317.0 (5,787.5) 5,777.5 -- ----------------------------------------------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1994 -- $ (96.0) -- -- $ 17,833.0 ============================================================================================================================= Fair value, 1994(2) -- $ .8 -- -- $ (498.7) -----------------------------------------------------------------------------------------------------------------------------
Non Exchange Traded ------------------------------------------------------------------ Foreign Exchange Interest Rate Rate Contracts Forward Contracts Other Risk -------------------- --------------------- Management In millions. Purchased Sold Purchased Sold Instruments -------------------------------------------------------------------------------------------------------------------------- HEDGING/SYNTHETIC ALTERATION INSTRUMENTS 1992 Notional amount, 1991 $ 417.2 $ (75.0) $ 656.3 $ (121.0) $ 434.0 New contracts 6,294.8 (7,027.4) 3,236.3 (4,361.2) 124.8 Matured or expired contracts (632.1) 628.9 (1,262.6) 1,832.0 (123.4) Terminated contracts (869.0) 869.0 (310.5) -- (.1) In-substance maturities(1) (5,064.5) 5,064.5 (2,092.3) 2,092.3 -- --------------------------------------------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1992 $ 146.4 $ (540.0) $ 227.2 $ (557.9) $ 435.3 =========================================================================================================================== Fair value, 1992(2) $ 3.9 $ .4 $ (1.7) $ (2.7) $ .9 --------------------------------------------------------------------------------------------------------------------------- 1993 Notional amount, 1992 $ 146.4 $ (540.0) $ 227.2 $ (557.9) $ 435.3 New contracts 6,929.9 (7,098.6) 4,968.2 (3,997.1) 1,203.1 Matured or expired contracts (956.4) 932.5 (1,994.5) 772.9 (222.1) Terminated contracts (944.2) 944.2 (100.1) 103.6 -- In-substance maturities(1) (5,034.8) 5,036.3 (2,561.0) 2,819.2 -- --------------------------------------------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1993 $ 140.9 $ (725.6) $ 539.8 $ (859.3) $ 1,416.3 =========================================================================================================================== Fair value, 1993(2) -- $ .1 $ (.2) $ (.9) $ 49.3 --------------------------------------------------------------------------------------------------------------------------- 1994 Notional amount, 1993 $ 140.9 $ (725.6) $ 539.8 $ (859.3) $ 1,416.3 New contracts 3,702.1 (3,738.6) 5,468.8 (3,818.0) 1,917.0 Matured or expired contracts (31.3) 15.7 (2,524.8) 2,475.6 (1,590.1) Terminated contracts (582.8) 580.2 (538.1) 51.3 (130.5) In-substance maturities(1) (3,156.2) 3,097.5 (2,009.6) 2,009.6 -- --------------------------------------------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1994 $ 72.7 $ (770.8) $ 936.1 $ (140.8) $ 1,612.7 =========================================================================================================================== Fair value, 1994(2) $ (.4) $ 6.3 $ 1.1 $ (.2) $ 78.5 ---------------------------------------------------------------------------------------------------------------------------
54 37
Exchange Traded -------------------------------------------------------------------- Interest Rate Futures Contracts Options ---------------------------- ------------------------------ In millions. Purchased Sold Purchased Written ------------------------------------------------------------------------------------------------------------------ TRADING INSTRUMENTS(3) Notional amount, 1991 $ 4,508.5 $(3,303.0) $ 875.1 $ (5,895.2) Net change (2,059.3) 456.0 1,813.0 (4,710.4) ------------------------------------------------------------------------------------------------------------------ NOTIONAL AMOUNT, 1992 $ 2,449.2 $(2,847.0) $ 2,688.1 $(10,605.6) ================================================================================================================== Fair value, 1992(2) $ .9 $ (.9) $ 1.4 $ (5.9) ------------------------------------------------------------------------------------------------------------------ Notional amount, 1992 $ 2,449.2 $(2,847.0) $ 2,688.1 $(10,605.6) Net change (2,117.2) 1,970.0 7,020.9 (5,840.5) ------------------------------------------------------------------------------------------------------------------ NOTIONAL AMOUNT, 1993 $ 332.0 $ (877.0) $ 9,709.0 $(16,446.1) ================================================================================================================== Fair value, 1993(2) $ 45.1 $ (45.8) $ 2.8 $ (2.0) ------------------------------------------------------------------------------------------------------------------ Notional amount, 1993 $ 332.0 $ (877.0) $ 9,709.0 $(16,446.1) Net change 2,660.0 257.0 (9,709.0) 15,976.1 ------------------------------------------------------------------------------------------------------------------ NOTIONAL AMOUNT, 1994 $ 2,992.0 $ (620.0) -- $ (470.0) ================================================================================================================== Fair value, 1994(2) $ (2.2) $ 1.1 -- $ 1.4 ------------------------------------------------------------------------------------------------------------------ Average fair value, 1994 (2.8) 2.7 $ 2.8 (2.5) ------------------------------------------------------------------------------------------------------------------
Non Exchange Traded ------------------------------------------------------------ Interest Rate Forward Contracts Other Risk Interest -------------------------- Management In millions. Rate Swaps Purchased Sold Instruments --------------------------------------------------------------------------------------------------------------------- TRADING INSTRUMENTS(3) Notional amount, 1991 $ 100.0 $ 21.0 -- $ 505.3 Net change -- 240.0 $(261.0) 294.7 --------------------------------------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1992 $ 100.0 $ 261.0 $(261.0) $ 800.0 ===================================================================================================================== Fair value, 1992(2) $ (.3) $ 232.7 $(232.9) -- --------------------------------------------------------------------------------------------------------------------- Notional amount, 1992 $ 100.0 $ 261.0 $(261.0) $ 800.0 Net change -- (250.5) 203.2 (300.0) --------------------------------------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1993 $ 100.0 $ 10.5 $ (57.8) $ 500.0 ===================================================================================================================== Fair value, 1993(2) $ 0.6 -- -- -- --------------------------------------------------------------------------------------------------------------------- Notional amount, 1993 $ 100.0 $ 10.5 $ (57.8) $ 500.0 Net change (100.0) 36.5 10.8 (700.0) --------------------------------------------------------------------------------------------------------------------- NOTIONAL AMOUNT, 1994 -- $ 47.0 $ (47.0) $(200.0) ===================================================================================================================== Fair value, 1994(2) -- $ .3 $ (.3) $ (.3) --------------------------------------------------------------------------------------------------------------------- Average fair value, 1994 $ (1.0) -- (.1) (.1) ---------------------------------------------------------------------------------------------------------------------
(1) Represent contracts terminated as the market execution technique of closing the transaction either (a) just prior to maturity to avoid delivery of the underlying instrument, or (b) at the maturity of the underlying item being hedged. (2) (Bracketed) unbracketed amounts represent amounts to be (paid) received by the company had these positions been closed out at the respective balance sheet date. Bracketed amounts do not necessarily represent risk of loss for hedging instruments, as the fair value of the hedging instrument and the items being hedged must be evaluated together. See Note 11, "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. (3) The results of trading activities were immaterial to the financial results of the company for 1994, 1993 and 1992. In late 1994, the company decided to discontinue its trading activities and hedged its open 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 primarily enters into interest rate swap transactions to synthetically alter balance sheet items. These transactions are specifically designated to a particular asset/liability, off-balance sheet item or anticipated transaction of a similar characteristic. Specific assets or liabilities may consist of groups of individually small dollar homogeneous assets or liabilities of similar economic characteristics. Credit and market risk exists with respect to these instruments. The following table reflects the items so altered at December 31, 1994: In millions. Investment securities, held-to-maturity $ 195.0 Receivables: Home equity 1,050.9 Bankcard 2,390.5 Merchant participation 450.0 Other unsecured 425.0 ----------------------------------------------------------------------------- Total receivables owned 4,316.4 Deposits 2,463.5 Commercial paper, bank and other borrowings 1,362.4 Senior and senior subordinated debt 5,945.7 Receivables serviced with limited recourse 3,550.0 ----------------------------------------------------------------------------- Total items synthetically altered with interest rate swaps $17,833.0 =============================================================================
Note: In all instances, the notional amount is less than the carrying value of the related asset/liability or off-balance sheet item. The company manages its exposure to interest rate risk primarily through the use of interest rate swaps. These swaps synthetically alter the interest rate risk inherent in balance sheet assets, liabilities or off-balance sheet items. The majority of the company's interest rate swaps are used to convert floating rate assets to fixed rate, fixed rate debt to floating rate, or floating rate assets or debt from one floating rate index to another. Occasionally, interest rate swaps are used to convert fixed rate assets to a floating rate. Interest rate swaps are also used to synthetically alter interest rate characteristics on certain receivables that are sold and serviced with limited recourse. These off-balance sheet items expose the company to the same interest rate risk as on-balance sheet items. Interest rate swaps are used to synthetically alter the interest rate provisions of the securitization transaction whereby the underlying receivables pay a fixed (floating) rate and the pass-through rate to the investor is floating 55 38 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Household International, Inc. and Subsidiaries (fixed). Further, in other transactions the underlying receivables reprice on one index while the pass-through rate reprices on another index. See Note 3, "Receivables" for additional information on securitizations and sales of receivables. The following table summarizes the maturities and related weighted average receive/pay rates of interest rate swaps outstanding at December 31, 1994:
All dollar amounts are stated in millions. 1995 1996 1997 1998 1999 2000 Thereafter Total ----------------------------------------------------------------------------------------------------------------------------------- Pay a fixed rate/receive a floating rate: Notional value $ 204.8 $ 424.2 $ 31.3 -- $ 48.5 $ 20.0 -- $ 728.8 Weighted average receive rate 6.09% 6.14% 6.00% -- 7.39% 5.33% -- 6.18% Weighted average pay rate 8.26 6.92 7.15 -- 7.38 9.66 -- 7.41 Pay a floating rate/receive a fixed rate: Notional value $1,795.7 $2,056.3 $1,621.2 $672.4 $1,839.2 $340.0 $2,794.7 $11,119.5 Weighted average receive rate 5.26% 6.33% 6.06% 5.69% 6.87% 6.29% 7.14% 6.37% Weighted average pay rate 6.10 6.36 6.14 6.32 6.14 5.60 5.83 6.09 Pay a floating rate/receive a different floating rate: Notional value $3,954.9 $ 804.6 $ 578.7 -- $ 646.5 -- -- $ 5,984.7 Weighted average receive rate 5.74% 5.27% 6.17% -- 6.02% -- -- 5.75% Weighted average pay rate 6.19 5.82 5.91 -- 5.84 -- -- 6.08 ----------------------------------------------------------------------------------------------------------------------------------- Total notional value $5,955.4 $3,285.1 $2,231.2 $672.4 $2,534.2 $360.0 $2,794.7 $17,833.0 =================================================================================================================================== Total weighted average rates on swaps: Receive rate 5.61% 6.05% 6.09% 5.69% 6.66% 6.24% 7.14% 6.15% ----------------------------------------------------------------------------------------------------------------------------------- Pay rate 6.24 6.30 6.09 6.32 6.08 5.83 5.83 6.14 -----------------------------------------------------------------------------------------------------------------------------------
The floating rates paid or received by the company are based on spot rates from independent market sources for the index contained in each interest rate swap contract, which generally are based on either 3- or 6-month LIBOR. These current floating rates are different than the floating rates in effect when the contracts were initiated. Changes in spot rates impact the variable rate information disclosed above. However, these changes in spot rates have impacted in the past, and will impact in the future, the interest rate on the underlying assets or liabilities. Hedging/synthetic alteration instruments are used by the company to manage the volatility of net interest margin resulting from changes in interest rates on the underlying hedged/synthetically altered items. Without the use of these instruments, net interest margin would have declined by 54, 91 and 50 basis points in 1994, 1993 and 1992, respectively. Forwards and futures are agreements between two parties, committing one to sell and the other to buy a specific quantity of an instrument on some future date. The parties agree to buy or sell at a specified price in the future, and their profit or loss is determined by the difference between the arranged price and the level of the spot price when the contract is settled. The company has both interest rate and foreign exchange rate forward contracts and interest rate futures contracts. Foreign exchange contracts are utilized by the company to reduce exposure in its foreign operations to fluctuations in exchange rates. Interest rate forward and futures contracts are used to hedge resets of interest rates on the company's floating rate assets and liabilities. Interest rate forward and interest rate futures contracts also are used in the company's trading activities. For futures used in both hedging and trading activities, the company's exposure to credit risk is limited, as these contracts are traded on organized exchanges. Each day, changes in contract values are settled in cash. In contrast, forward contracts used in both hedging and trading activities have credit risk relating to the performance of the counterparty. These instruments also are subject to market risk. Cash requirements for forward contracts include the receipt or payment of cash upon the sale or purchase of the instrument. Purchased options grant the purchaser the right, but not the obligation, to either purchase or sell a financial instrument at a specified price within a specified period. The seller of the option has written a contract which creates an obligation to either sell or purchase the financial instrument at the agreed-upon price if, and when, the purchaser exercises the option. The company uses options, both written and purchased, for its trading activities. 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 are limited to the premium paid, which is included in the balance sheets in other assets. Other risk management instruments used in the company's hedging and trading activities 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 are limited to the premium paid which is recorded on the balance sheets in other assets. Deferred gains of $10.4 and $10.2 million and deferred losses of $60.5 and $22.5 million from hedging/synthetic alteration instruments were recorded on the balance sheets at December 31, 1994 and 1993, respectively. The weighted average amortization period associated with the deferred gains was 2.8 and 3.8 years at December 31, 1994 and 1993, respectively. The weighted average amortization period for the deferred losses was 3.3 and 4.0 years at December 31, 1994 and 1993, respectively. At December 31, 1994 the accrued interest, unamortized 56 39 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 $80.7 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, and as a result, the amounts below do not necessarily represent future cash requirements. The company's significant commitments and guarantees consisted of the following:
In millions. At December 31 1994 1993 -------------------------------------------------------------------------------------------------------------------- Bank and private-label credit cards $74,339.3 $43,164.0 Other consumer lines of credit 3,523.0 2,771.8 Other loan commitments and guarantees 391.9 3,121.1 --------------------------------------------------------------------------------------------------------------------
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 $161.2 million and $1.7 billion at December 31, 1994 and 1993, respectively. The company also had commitments to sell loans and mortgage-backed securities of approximately $61.4 million and $1.0 billion at December 31, 1994 and 1993, respectively. Commercial loan commitments, including working capital lines and letters of credit, totaled $25 and $153 million at December 31, 1994 and 1993, 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 $144 and $146 million at December 31, 1994 and 1993, respectively, for the payment of principal and interest on municipal industrial development bonds. The guarantees expire from 1995 through 1997. The company has security interests in underlying properties for these guarantees, with an average collateral value of 112 percent of the guarantees at both December 31, 1994 and 1993. 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, 1994 and 1993. The company lends nationwide; the following geographic areas comprised more than 10 percent of total managed domestic receivables at December 31, 1994: California -21 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) -12 percent and Southeast (AL, FL, GA, KY, MS, NC, SC, TN) -13 percent. 57 40 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Household International, Inc. and Subsidiaries 8. CONVERTIBLE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION The company had 52,010 and 385,439 shares of $6.25 cumulative convertible preferred stock subject to mandatory redemption provisions (the "$6.25 stock") outstanding at December 31, 1994 and 1993, respectively. Each share of $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 1994 and 1993. The company redeemed 2,312 and 2,323 shares for $50 per share in 1994 and 1993, 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, 1994, 242,055 shares of common stock were reserved for conversion of $6.25 stock. 9. PREFERRED STOCK
In millions. At December 31 1994 1993 --------------------------------------------------------------------------------------------- FIXED 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) 100.0 100.0 FLEXIBLE RATE AUCTION PREFERRED STOCK Series B, 400,000 shares 40.0 40.0 --------------------------------------------------------------------------------------------- Total preferred stock $320.0 $320.0 =============================================================================================
(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. No shares were redeemed in 1994. 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. 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. 58 41 10. 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. 11. 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"). Financial instruments include cash, receivables, investments, debt, insurance reserves related to periodic payment annuities and guaranteed investment contracts and off-balance sheet financial instruments. Financial instruments specifically exclude leases and other insurance reserves, as required by FAS No. 107. FAS No. 107 also requires that the fair value of certain deposits be equated to the carrying value. Additionally, a number of other assets recorded on the balance sheets (such as core deposit intangibles and acquired credit card relationships) and other intangible assets not recorded in the balance sheets (such as the value of consumer lending relationships for originated receivables and the franchise values of the company's business units) are not considered financial instruments and, accordingly, are not valued for purposes of this disclosure. The company believes there is substantial value associated with these assets based on current market conditions and historical experience. Accordingly, the estimated fair value of financial instruments, as disclosed, does not fully represent the entire value, nor the changes in the entire value, of the company. Approximately 25 percent in both 1994 and 1993 of the fair value of financial instruments disclosed was 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 collectibility of assets and related interest and with estimates of product lives and repricing characteristics used in the company's asset/liability management process. All assumptions are based on historical experience adjusted for future expectations. Assumptions used to determine fair values for financial instruments for which no active market exists are inherently judgmental and changes in these assumptions could significantly affect fair value calculations. The following is a summary of the carrying value and estimated fair value of the company's financial instruments:
1994 1993 ---------------------------------- ----------------------------------- Estimated Estimated In millions. Carrying Fair Carrying Fair At December 31 Value Value Difference Value Value Difference ------------------------------------------------------------------------------------------------------------------------------ Cash $ 541 $ 541 -- $ 317 $ 317 -- Investment securities 9,005 8,961 $(44) 8,795 9,046 $251 Receivables 20,778 21,267 489 20,589 21,113 524 Assets pending sale 398 398 -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------ Subtotal 30,722 31,167 445 29,701 30,476 775 ------------------------------------------------------------------------------------------------------------------------------ Deposits (8,439) (8,444) (5) (7,516) (7,638) (122) Commercial paper, bank and other borrowings (4,372) (4,372) -- (5,642) (5,642) -- Senior and senior subordinated debt (10,274) (10,234) 40 (9,114) (9,574) (460) Insurance reserves (6,716) (6,755) (39) (6,064) (6,434) (370) ------------------------------------------------------------------------------------------------------------------------------ Subtotal (29,801) (29,805) (4) (28,336) (29,288) (952) ------------------------------------------------------------------------------------------------------------------------------ Interest rate and foreign exchange contracts 65 (413) (478) 78 349 271 Commitments to extend credit and guarantees -- 35 35 -- 36 36 ------------------------------------------------------------------------------------------------------------------------------ Subtotal 65 (378) (443) 78 385 307 ------------------------------------------------------------------------------------------------------------------------------ Total $ 986 $ 984 $ (2) $ 1,443 $ 1,573 $130 ==============================================================================================================================
59 42 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Household International, Inc. and Subsidiaries The fair value in excess of the carrying value (the "Difference") declined from $130 million at December 31, 1993 to $(2) million at December 31, 1994, a decrease of $132 million. The relationship between the rise in the overall interest rate environment from year-end 1993 to year-end 1994 and the repricing characteristics of the company's financial instruments was the most significant factor in causing the decline in the Difference. The company believes that in the rising interest rate environment of 1994 the Difference for the company's nonfinancial instruments, especially core deposits which provide stable, low-cost funding and insurance reserves of interest-sensitive products ($5.4 billion), would increase and therefore offset a portion of the decline in the total Difference. 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 value for investment securities. 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 receivables results in a disclosed fair value that is less than amounts the company believes could be currently realizable on a sale of these receivables. These receivables are relatively insensitive to changes in overall market interest rates and therefore have additional value compared to alternative uses of funds. The fair value of commercial receivables was determined by discounting estimated future cash flows at estimated market interest rates. The fair value of consumer receivables included an estimate, on a present value basis, of future excess servicing cash flows associated with securitizations and sales of certain home equity, bankcard, merchant participation and other unsecured receivables. Assets pending sale: In the fourth quarter of 1994 the company entered into an agreement to sell these assets at net book value to a third party, as described on page 26 of Management's Discussion and Analysis. Accordingly, estimated fair value was the carrying value at December 31, 1994. 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, 1994 and 1993. The fair value of other insurance reserves is not required to be determined in accordance with FAS No. 107. Interest rate and foreign exchange contracts: Where practical, quoted market prices were used to determine fair value of these instruments. For non exchange traded contracts, fair value was determined through the use of accepted and established valuation methods (including input from independent third parties) which consider the terms of the contracts and market expectations on the valuation date for forward interest rates (for interest rate contracts) or forward foreign currency exchange rates (for foreign exchange contracts). See Note 7, "Derivative Financial Instruments and Other Financial Instruments with Off-Balance Sheet Risk" for a discussion of the nature of these items. Commitments to extend credit and guarantees: These commitments were valued by considering the company's relationship with the counterparty, the creditworthiness of the counterparty and the difference between committed and current interest rates. 60 43 12. LEASES The company leases certain offices, buildings and equipment for periods of up to 21 years with various renewal options. The majority of such leases are noncancelable operating leases. Net rental expense under operating leases was $58.1, $71.1 and $72.1 million for 1994, 1993 and 1992, respectively. Future net minimum lease commitments under noncancelable operating lease arrangements were:
In millions. At December 31, 1994 ----------------------------------------------------------------------------- 1995 $ 51.8 1996 43.1 1997 38.1 1998 32.7 1999 26.6 Thereafter 82.6 ----------------------------------------------------------------------------- Net minimum lease commitments $274.9 =============================================================================
13. 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, 1994 there were 1,644,716 shares exercisable under the plans and 2,073,250 shares available for future grants. Common stock data for the plans is summarized as follows:
Shares Number* Price Per Share* -------------------------------------------------------------------------------------------------------- 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 Granted 1,155,792 33.19--38.06 Exercised (215,562) 10.99--31.88 Expired or canceled (113,074) 11.14--33.38 -------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1994 3,697,758 $15.06--38.06 ========================================================================================================
*1992 and prior 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. 61 44 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Household International, Inc. and Subsidiaries 14. 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, 1994 plan assets included an investment in the company's common stock of $46.7 million. Pension income for defined benefit plans, primarily due to the overfunded status of the domestic plan, included the following components:
In millions. Year ended December 31 1994 1993 1992 ---------------------------------------------------------------------------------------------------- Service cost--benefits earned during the period $(19.0) $(15.9) $(15.5) Interest cost on projected benefit obligation (30.5) (29.6) (29.8) Actual return on assets 3.9 93.4 41.1 Net amortization and deferral 66.6 (24.5) 29.9 ---------------------------------------------------------------------------------------------------- Pension income $ 21.0 $ 23.4 $ 25.7 ====================================================================================================
The funded status of defined benefit pension plans was as follows:
In millions. At December 31 1994 1993 ---------------------------------------------------------------------------------------- Actuarial present value of: Vested benefits obligation $320.7 $344.5 Nonvested benefits obligation 40.0 45.4 ---------------------------------------------------------------------------------------- Accumulated benefit obligation 360.7 389.9 Effects of anticipated future compensation levels 30.4 28.4 ---------------------------------------------------------------------------------------- Projected benefit obligation 391.1 418.3 Plan assets at fair value 602.8 641.0 ---------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation $211.7 $222.7 ========================================================================================
The projected benefit obligation of the foreign benefit plans totaled $40.2 and $46.3 million at December 31, 1994 and 1993, respectively. Plan assets in excess of projected benefit obligation for these plans totaled $12.4 and $10.1 million at December 31, 1994 and 1993, respectively. The 1994 and 1993 projected benefit obligations for the domestic defined benefit plan were determined using an assumed weighted average discount rate of 8.25 and 7.25 percent, respectively; an assumed compensation increase of 4.75 and 3.75 percent, respectively; and an assumed weighted average long-term rate of return on plan assets of 10.0 and 9.5 percent, respectively. At December 31 the excess of plan assets over the projected benefit obligation included the following components:
In millions. 1994 1993 ---------------------------------------------------------------------------------------- Unamortized prior service cost $(4 .0) $(5.1) Net unrecognized loss from past experience different from assumed and effects of changes in assumptions (89 .9) (60.0) Unamortized assets 55.1 60.1 Prepaid pension cost 250 .5 227.7 ---------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation $211.7 $222.7 ========================================================================================
62 45 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 1994, 1993 and 1992 these costs totaled $16.5, $15.8 and $14.7 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 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 postretirement benefit obligation at that date over 20 years. At December 31 the net postretirement benefit cost included the following:
In millions. 1994 1993 ------------------------------------------------------------------------------------------------------ Service cost-benefits earned during the period $ (2.8) $ (2.5) Interest cost on accumulated postretirement benefit obligation (11.4) (11.1) Net amortization and deferral (6.5) (6.5) ------------------------------------------------------------------------------------------------------ Net periodic postretirement benefit cost $(20.7) $(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 million in 1992. 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 1994 1993 ------------------------------------------------------------------------------------------------------ Actuarial present value of postretirement benefit obligation for: Retirees $ 85.5 $119.8 Fully eligible active participants 11.6 9.3 Other active participants 26.6 23.4 ------------------------------------------------------------------------------------------------------ Accumulated postretirement benefit obligation 123.7 152.5 Net unrecognized gain (loss) from past experience different from assumed and effects of changes in assumptions 26.2 (14.4) Unamortized liability (117.1) (123.6) ------------------------------------------------------------------------------------------------------ Accrued postretirement benefit obligation $ 32.8 $ 14.5 ======================================================================================================
In 1994 the company established a special purpose corporation to hold certain investments designated as available to satisfy its postretirement benefit obligations. These assets, with a carrying value of $63 million at December 31, 1994, remain general assets of the company and have not been used to reduce the accumulated postretirement benefit obligation described above. The December 31, 1994 and 1993 accumulated postretirement benefit obligation was determined using an assumed weighted average discount rate of 8.5 and 7.5 percent, respectively, and an assumed annual compensation increase of 4.75 and 3.75 percent, respectively. A 14.2 and 15.0 percent annual rate of increase in the gross cost of covered health care benefits was assumed for 1995 and 1994, respectively. This rate of increase is assumed to decline by 1 percentage point in each year after 1995. The health care cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate by 1 percent would have increased both the 1994 and 1993 net periodic postretirement benefit cost by $1.0 million and the accumulated postretirement benefit obligation at December 31, 1994 and 1993 by $8.5 and $12.3 million, respectively. 63 46 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Household International. Inc, and Subsidiaries
15. INCOME TAXES Total income taxes were allocated as follows: In millions. Year ended December 31 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------- Provision for income taxes related to operations $160.7 $152.0 $ 87.1 Income taxes related to adjustments included in common shareholders' equity: Unrealized gain (loss) on investments, net (79.6) 22.1 .5 Foreign currency translation adjustments (4.7) 1.1 (12.2) Exercise of stock options (.9) (2.4) (1.1) --------------------------------------------------------------------------------------------------------------------- Total $ 75.5 $172.8 $74.3 ===================================================================================================================== Provisions for income taxes related to operations were: In millions. Year ended December 31 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------- CURRENT United States $155.8 $170.5 $ 82.9 Foreign 6.1 (12.2) (36.1) --------------------------------------------------------------------------------------------------------------------- Total current 161.9 158.3 46.8 --------------------------------------------------------------------------------------------------------------------- DEFERRED United States 8.3 6.7 26.5 Foreign (9.5) (13.0) 13.8 --------------------------------------------------------------------------------------------------------------------- Total deferred (1.2) (6.3) 40.3 --------------------------------------------------------------------------------------------------------------------- Total income taxes $160.7 $152.0 $ 87.1 ===================================================================================================================== The significant components of deferred income tax provisions attributable to income from operations were: In millions. Year ended December 31 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------- Deferred income tax provision (exclusive of the effects of other components listed below) $ 13.8 $ (2.0) $ 17.8 Adjustment of deferred tax assets and liabilities for enacted changes in tax rates -- 4.9 -- Adjustment of valuation allowance (20.3) 4.8 2.1 Change in operating loss carryforwards 5.3 (14.0) 20.4 --------------------------------------------------------------------------------------------------------------------- Deferred income tax provision $ (1.2) $ (6.3) $ 40.3 ===================================================================================================================== Income (loss) before income taxes from foreign operations was $21.7, $(19.7) and $(72.4) million in 1994, 1993 and 1992, respectively. Effective tax rates are analyzed as follows: Year ended December 31 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 34.0% Increase (decrease) in rate resulting from: Amortization of intangible assets 2.2 .1 3.2 State and local taxes, net of federal benefit 1.1 2.2 1.4 Nondeductible dividends on term preferred stocks .6 1.0 2.6 Leveraged lease tax benefits (2.9) (3.1) (3.6) Foreign loss carryforwards (2.3) (2.4) 3.0 Sale of foreign subsidiary (1.7) -- -- Noncurrent tax requirement (1.4) .5 (2.0) Dividends received deduction applicable to term preferred stocks (1.0) (1.4) (2.6) Impact of purchase accounting -- -- (4.5) Other .8 1.8 (.2) --------------------------------------------------------------------------------------------------------------------- Effective tax rate 30.4% 33.7% 31.3% =====================================================================================================================
64 47 In accordance with the company's accounting policy, provisions for U.S. income taxes had not been made at December 31, 1994 on $139.8 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 $55.3 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 $50.8 million at December 31, 1994. At December 31, 1994 the company had net operating loss carryforwards for tax purposes of $135.4 million, of which $4.8 million expire in 1999; $26.7 million expire in 2000; $10.5 million expire in 2001; $28.2 million expire in 2007; $26.7 million expire in 2008; $21.2 million expire in 2009; and $17.3 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 $6.3 million, of which $1.0 million expire in 1997 and $5.3 million expire in 1998, and alternative minimum tax credit carryovers of $5.5 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 1994 1993 --------------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES Leveraged lease transactions, net $395.8 $400.9 Insurance policy acquisition costs 126.9 132.1 Receivables sold 108.3 67.2 Pension plan assets 92.8 84.9 Deferred loan origination costs 56.4 47.6 Other 98.4 83.2 --------------------------------------------------------------------------------------------------- Total deferred tax liabilities 878.6 815.9 --------------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS Credit loss reserves 325.9 272.7 Insurance reserves 164.1 144.5 Unused tax benefit carryforwards 58.9 73.4 Market value adjustments 37.5 -- Other 125.4 110.2 --------------------------------------------------------------------------------------------------- Total deferred tax assets 711.8 600.8 Valuation allowance (44.8) (65.1) --------------------------------------------------------------------------------------------------- Total deferred tax assets, net of valuation allowance 667.0 535.7 --------------------------------------------------------------------------------------------------- Net deferred tax liability at end of year $211.6 $280.2 ===================================================================================================
65 48 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Household International, Inc. and Subsidiaries 16. EARNINGS PER COMMON SHARE
1994 1993 1992 ----------------- ---------------- ----------------- Fully Fully Fully In millions, except per share data. Primary Diluted Primary Diluted Primary Diluted ---------------------------------------------------------------------------------------------------- EARNINGS Net income $367.6 $367.6 $298.7 $298.7 $190.9 $190.9 Preferred dividends (28.5) (27.6) (31.1) (28.2) (30.4) (25.3) ---------------------------------------------------------------------------------------------------- Net income available to common shareholders $339.1 $340.0 $267.6 $270.5 $160.5 $165.6 ===================================================================================================== AVERAGE SHARES* Common 95.5 95.5 91.2 91.2 81.2 81.2 Common equivalents .8 1.7 .8 3.6 .4 4.8 ---------------------------------------------------------------------------------------------------- Total 96.3 97.2 92.0 94.8 81.6 86.0 ===================================================================================================== Earnings per common share* $ 3.52 $ 3.50 $ 2.91 $ 2.85 $ 1.97 $ 1.93 =====================================================================================================
* 1992 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. 17. COMMITMENTS AND CONTINGENT LIABILITIES In the ordinary course of business there are various legal proceedings pending against the company. Management believes the aggregate liabilities, if any, resulting from such actions would not have a material adverse effect on the consolidated financial position of the company. See Note 7 for a discussion regarding commitments and contingent liabilities related to off-balance sheet financial instruments. See Note 12 for discussion of lease commitments. 66 49 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 40 to 66, 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 an independent accounting firm, Arthur Andersen LLP, which has been given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the Board of Directors and committees of the board. The company believes that representations made to the independent auditors during their audit were valid and appropriate. Arthur Andersen LLP'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. 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, 1994 functioned effectively during the year ended December 31, 1994. Donald C. Clark Chairman of the Board William F. Aldinger President and Chief Executive Officer David A. Schoenholz Senior Vice President-- Chief Financial Officer February 3, 1995 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, 1994 and 1993, 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, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois February 3, 1995 67 50 NET INTEREST MARGIN--1994 COMPARED TO 1993 (OWNED BASIS)
Finance and Increase/(Decrease) Household International, Inc. Interest Income/ Due to: and Subsidiaries Average Outstanding(2) Average Rate Interest Expense ---------------------------------- All dollar amounts are stated ---------------------- -------------- ---------------- Volume Rate in millions. 1994 1993 1994 1993 1994 1993 Variance Variance(3) Variance(3) ------------------------------------------------------------------------------------------------------------------------------- Receivables: First mortgage $ 3,249.0 $ 4,037.7 7.7% 8.5% $ 250.3 $ 343.5 $(93.2) $(62.8) $(30.4) Home equity 3,109.2 3,177.0 11.8 10.6 365.7 336.6 29.1 (7.3) 36.4 Other secured 838.4 824.6 7.9 10.0 66.5 82.3 (15.8) 1.4 (17.2) Bankcard 4,437.7 4,200.1 13.3 13.1 590.1 549.0 41.1 31.5 9.6 Merchant participation 2,803.7 2,244.3 15.2 16.6 425.8 372.8 53.0 87.0 (34.0) Other unsecured 4,788.2 4,022.4 17.2 17.8 821.6 716.5 105.1 132.1 (27.0) Equipment financing and other commercial 1,785.0 2,237.5 6.9 7.2 122.3 160.7 (38.4) (31.3) (7.1) ============================================================================================================================= Total receivables $21,011.2 $20,743.6 12.6% 12.3% $2,642.3 $2,561.4 $ 80.9 $ 33.2 $ 47.7 Noninsurance investments 2,424.4 2,129.2 5.4 6.1 131.9 129.3 2.6 16.9 (14.3) ============================================================================================================================= Total interest-earning assets (excluding insurance investments) $23,435.6 $22,872.8 11.8% 11.8% $2,774.2 $2,690.7 $ 83.5 $ 66.5 $ 17.0 Insurance investments 6,793.5 6,084.0 Other assets 3,862.3 3,783.1 ------------------------------------------------------------------------------------------------------------------------------- Total Assets $34,091.4 $32,739.9 =============================================================================================================================== Debt: Commercial paper $ 4,316.4 $ 3,826.9 4.4% 3.7% $ 191.2 $ 142.5 $ 48.7 $ 19.6 $ 29.1 Bank and other borrowings 1,321.1 1,978.8 7.6 5.5 101.0 108.6 (7.6) (42.6) 35.0 Deposits 7,668.1 7,735.0 4.1 4.2 312.1 321.2 (9.1) (2.8) (6.3) Senior and senior subordinated debt (with original maturities over one year) 10,206.6 9,493.5 6.3 6.1 638.4 577.2 61.2 41.8 19.4 ============================================================================================================================== Total debt $23,512.2 $23,034.2 5.3% 5.0% $1,242.7 $1,149.5 $ 93.2 $24.3 $ 68.9 Insurance policy and claim reserves 6,409.1 5,684.8 Other liabilities 1,724.4 1,810.0 ------------------------------------------------------------------------------------------------------------------------------- Total liabilities 31,645.7 30,529.0 Preferred stock 330.7 330.7 Common shareholders' equity 2,115.0 1,880.2 ------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $34,091.4 $32,739.9 =============================================================================================================================== NET INTEREST MARGIN--OWNED BASIS(1) $1,531.5 $1,541.2 $(9.7) $42.2 $(51.9) =============================================================================================================================== INTEREST SPREAD--OWNED BASIS(4),(5) 6.5% 6.7% ===============================================================================================================================
(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. ------------------------------------------------------------------------------ NET INTEREST MARGIN--1994 COMPARED TO 1993 AND 1992 (MANAGED BASIS)
Finance and Interest Average Outstanding Average Rate Income/Interest Expense --------------------------------- -------------------- --------------------------- 1994 1993 1992 1994 1993 1992 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------------- Total receivables $31,211.9 $29,002.0 $26,722.0 12.5% 12.3% 13.1% $3,897.2 $3,563.3 $3,505.0 Noninsurance investments 2,424.4 2,106.1 2,089.0 5.4 6.1 7.3 131.9 129.3 152.8 --------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets (excluding insurance investments) 33,636.3 31,108.1 28,811.0 12.0 11.9 12.7 4,029.1 3,692.6 3,657.8 --------------------------------------------------------------------------------------------------------------------------- Total debt $33,613.4 $30,613.7 $28,657.5 5.3% 5.0% 6.3% $1,769.3 $1,531.3 $1,792.4 --------------------------------------------------------------------------------------------------------------------------- Net interest margin--managed basis $2,259.8 $2,161.3 $1,865.4 ============================================================================================================================ Interest spread--managed basis(4) 6.7% 6.9% 6.5% ============================================================================================================================
68 51 NET INTEREST MARGIN--1993 COMPARED TO 1992 (OWNED BASIS)
Finance and Increase/(Decrease) Household International, Inc. Average Interest Income/ Due to: and Subsidiaries Outstanding(2) Average Rate Interest Expense -------------------------------------------- All dollar amounts are ------------------ ------------ ---------------- Volume Rate stated in millions 1993 1992 1993 1992 1993 1992 Variance Variance(3) Variance(3) --------------------------------------------------------------------------------------------------------------------------------- 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 commercial 2,237.5 2,690.3 7.2 7.9 160.7 211.2 (50.5) (34.9) (15.6) =================================================================================================================================== Total receivables $20,743.6 $19,895.7 12.3% 13.0% $2,561.4 $2,584.4 $(23.0) $107.6 $(130.6) 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) $103.5 $(150.0) 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) 4.6 (121.5) =================================================================================================================================== Total debt $23,034.2 $22,517.8 5.0% 6.3% $1,149.5 $1,420.2 $(270.7) $ 31.9 $ (302.6) 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 $71.6 $152.6 =================================================================================================================================== INTEREST SPREAD--OWNED BASIS(4),(5) 6.7% 6.0% ===================================================================================================================================
(2) Nonaccrual loans are included in average outstanding balances. (3) Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total interest variance. For total receivables, total interest-earning assets and total debt, the rate and volume variances are calculated based on the relative weighting of the individual components comprising these totals. These totals do not represent an arithmetic sum of the individual components. (4) As a percent of average interest-earning assets. (5) The net interest margin analysis includes the following for foreign businesses:
1994 1993 1992 ------------------------------------------------------------------------------ Average interest-earning assets $4,044.8 $3,650.4 $4,079.5 Average interest-bearing liabilities 3,905.7 3,600.7 3,742.9 Net interest margin 261.0 255.1 293.0 Interest spread 6.5% 7.0% 7.2% ------------------------------------------------------------------------------
69 52 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Household International, Inc. and Subsidiaries 1994--THREE MONTHS ENDED 1993--Three Months Ended All dollar amounts except per share data are ---------------------------- -------------------------------- stated in millions. Dec. Sept. June March Dec. Sept. June March ------------------------------------------------------------------------------------------------------------------------------- Finance Income $696.7 $677.6 $651.9 $616.1 $628.5 $650.4 $646.4 $636.1 Interest income from noninsurance investment securities 41.2 29.8 29.2 31.7 27.5 33.8 36.1 31.9 Interest expense 364.1 327.0 294.2 257.4 271.3 279.8 285.9 312.5 ------------------------------------------------------------------------------------------------------------------------------- Net interest margin 373.8 380.4 386.9 390.4 384.7 404.4 396.6 355.5 Provision for credit losses on owned receivables 104.6 173.3 154.8 174.1 174.7 204.1 183.2 173.8 ------------------------------------------------------------------------------------------------------------------------------- Net interest margin after provision for credit losses 269.2 207.1 232.1 216.3 210.0 200.3 213.4 181.7 ------------------------------------------------------------------------------------------------------------------------------- Securitization and servicing fee income 213.0 183.8 166.1 171.0 158.7 109.8 94.4 97.1 Insurance premiums and contract revenues 85.9 36.1 79.4 80.6 72.3 78.6 66.3 71.1 Investment income 126.3 128.7 120.9 138.5 132.3 167.8 135.6 138.3 Fee income 56.6 65.1 66.0 62.8 72.8 80.3 70.7 68.8 Other income (19.9) 21.6 18.7 27.9 50.4 35.3 30.6 32.6 ------------------------------------------------------------------------------------------------------------------------------- Total other revenues 461.9 435.3 451.1 480.8 486.5 471.8 397.6 407.9 ------------------------------------------------------------------------------------------------------------------------------- Salaries and fringe benefits 159.6 165.3 167.4 164.3 164.6 151.4 149.8 149.6 Other operating expenses 304.8 254.7 261.9 283.1 256.4 264.9 226.2 216.5 Policyholders' benefits 120.5 84.7 129.1 130.1 133.7 139.5 133.3 132.6 ------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 584.9 504.7 558.4 577.5 554.7 555.8 509.3 498.7 ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 146.2 137.7 124.8 119.6 141.8 116.3 101.7 90.9 Income taxes 35.2 43.2 40.3 42.0 48.8 40.8 32.1 30.3 ------------------------------------------------------------------------------------------------------------------------------- Net income $111.0 $ 94.5 $ 84.5 $ 77.6 $ 93.0 $ 75.5 $ 69.6 $ 60.6 =============================================================================================================================== Earnings per common share: Primary $ 1.07 $ .90 $ .81 $ .74 $ .90 $ .72 $ .67 $ .62 ------------------------------------------------------------------------------------------------------------------------------- Fully diluted 1.07 .90 .80 .73 .89 .71 .65 .60 ------------------------------------------------------------------------------------------------------------------------------- SEGMENT NET INCOME Finance and Banking $ 99.6 $ 77.1 $ 73.9 $ 65.9 $ 82.8 $ 62.0 $ 59.8 $ 48.9 Individual Life Insurance 11.4 17.4 10.6 11.7 10.2 13.5 9.8 11.7 ------------------------------------------------------------------------------------------------------------------------------- Net income $111.0 $ 94.5 $ 84.5 $ 77.6 $ 93.0 $ 75.5 $ 69.6 $ 60.6 ===============================================================================================================================
FOURTH QUARTER RESULTS Net income for the 1994 fourth quarter was $111.0 million, up 17 percent from the third quarter and up 19 percent from the prior year fourth quarter. The company recorded a $14 million after-tax loss on the sale of its Australian subsidiary and incurred expenses of $14 million after tax to restructure and streamline various operations. These items were substantially offset by the effect of lower loss provision due to improved credit quality and higher securitization income from the sale of private-label credit card receivables. Fourth quarter net income also benefited from continued strong growth in the domestic consumer finance and private-label credit card operations. The increase in the company's net income over the prior year quarter was attributable to increased earnings in its credit card, domestic consumer finance and United Kingdom businesses as well as lower losses in Canada, offset by lower earnings in the mortgage banking operation. Net interest margin declined slightly in the quarter primarily due to higher funding costs. The provision for credit losses on owned receivables declined by 40 percent compared to the third quarter of 1994 and the fourth quarter of 1993. This provision is affected by the significance of securitizations and sales of receivables in a particular period, as the provision related to securitized receivables is transferred to securitization and servicing fee income. The company securitized and sold approximately $2.3 billion of receivables in the fourth quarter compared to $1.0 billion in the third quarter. The fourth quarter provision also benefited from improved credit quality, sharp reductions in commercial receivables, and overall strong performance of the consumer and commercial portfolios. Securitization and servicing fee income rose 16 and 34 percent from the 1994 third quarter and 1993 fourth quarter amounts, respectively, due to higher amounts of receivables sold and serviced with limited recourse outstanding, gains associated with the securitization and sale of receivables in the quarter and increased fee income on securitized GM Card receivables. Insurance premiums and contract revenues were up in the quarter due to the sale of a line of life insurance in the third quarter which reduced these revenues and related policyholders benefits by $47.8 million during that period. The lower amount of fee income in the fourth quarter primarily related to the reclassification of fee income associated with GM Card receivables to securitization and servicing fee income when these assets were securitized and sold. Other income decreased compared to the previous quarter due to the loss on the sale of the Australian subsidiary, and was down compared to the prior year fourth quarter due to prepayment fees on commercial assets and income on the company's 25 percent equity investment in a commercial joint venture recorded in the prior year quarter. Other expenses were up compared to the third quarter primarily due to the restructuring charges incurred in the fourth quarter. The company's efficiency ratio was 64.9 percent in the 1994 fourth quarter, up from 57.5 percent in the third quarter and 57.1 percent from the 1993 fourth quarter. Excluding the non-recurring restructuring charges and the loss on sale of the Australian operation, the efficiency ratio was 58.5 percent for the quarter. The effective tax rate in the 1994 fourth quarter was 24.1 percent, down from 31.4 percent in the third quarter due to tax benefits associated with the sale of the Australian subsidiary. 70 EX-21 8 HOUSEHOLD INT'L SUBSIDIARIES 1 Exhibit 21 SUBSIDIARIES OF HOUSEHOLD INTERNATIONAL, INC. As of December 31, 1994, 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 Home Title Services, Inc. II Maryland 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 Commercial Canada Inc. Canada 100% Household Credit Services, Inc. Delaware 100% Household Finance Corporation Delaware 100% HFC Funding Corporation Delaware 100% HFC Revolving Corporation Delaware 100% HFS Funding Corporation Delaware 100% Household Bank (Nevada), 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 Capital Markets, Inc. Delaware 100% Household Card Services, Inc. Nevada 100% Household Bank (Illinois), N.A. U.S. 100% Household Credit Services of Mexico, Inc. Delaware 100% Household Finance Receivables Corporation II Delaware 100% Household Financial Services, Inc. Delaware 100% Household Group, Inc. Delaware 100% Alexander Hamilton Life Insurance Company of America Michigan 100%
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% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent --------------------- --------- ------ Alexander Hamilton Capital Management, Inc. Michigan 100% Alexander Hamilton Insurance Agency, Inc. Michigan 100% Alexander Hamilton Life Insurance Co. of Arizona Arizona 100% First Alexander Hamilton Life Insurance Co. New York 100% Hamilton National Life Insurance Company Michigan 100% Alexander Hamilton Insurance Company of America Michigan 100% Cal-Pacific Services, Inc. California 100% Household Business Services, 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% Color Prelude Inc. Delaware 100% First Source Financial, Inc. Delaware 100% HCFS Business Equipment Corporation Delaware 100% HCFS Corp Finance Venture, Inc. Delaware 100% HFC Commercial Realty, Inc. Delaware 100% Cast Iron Building Corporation Delaware 100% Center Realty, Inc. Delaware 100% Com Realty, Inc. Delaware 100% Lighthouse Property Corporation Delaware 100% MRP General, Inc. Delaware 100% G.C. Center, Inc. Delaware 100% Household OPEB I, Inc. Illinois 100% Land of Lincoln Builders, Inc. Illinois 100% PPSG Corporation Delaware 100% Steward's Glenn Corporation Delaware 100% HFC Leasing, Inc. Delaware 100% First HFC Leasing Corporation Delaware 100% Second HFC Leasing Corporation Delaware 100% Valley Properties Corporation Tennessee 100% Fifth HFC Leasing Corporation Delaware 100% Sixth HFC Leasing Corporation Delaware 100% Seventh HFC Leasing Corporation Delaware 100% Eighth HFC Leasing Corporation Delaware 100% Tenth HFC Leasing Corporation Delaware 100% Eleventh HFC Leasing Corporation Delaware 100%
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% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent --------------------- --------- ------ 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% Household Capital Investment Corporation Delaware 100% B&K Corporation Michigan 94% Household Commercial of California, Inc. California 100% Overseas Leasing Two FSC, Ltd. Bermuda 99% Overseas Leasing Four FSC, Ltd. Bermuda 99% Overseas Leasing Five FSC, Ltd. Bermuda 99% Household Real Estate Equities, Inc. Delaware 100% SPG General, Inc. Delaware 100% OLC, Inc. Rhode Island 100% OPI, Inc. Virginia 100% The Generra Company Delaware 80% 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 of Iowa Iowa 100% Household Finance Realty Corporation of Nevada Delaware 100% Household Finance Corporation III Delaware 100% Amstelveen FSC, Ltd. Bermuda 99% Night Watch FSC, Ltd. Bermuda 100% Household Realty Corporation Delaware 100% Overseas Leasing One FSC, Ltd. Bermuda 100% Household Retail Services, Inc. Delaware 100% HRSI Funding, Inc. Nevada 100%
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% Voting Stock Organized Owned Under By Names of Subsidiaries Laws of: Parent --------------------- --------- ------ Household Financial Center Inc. Tennessee 100% Household Group Australia, Inc. Delaware 100% HFC of Australia, Ltd. Victoria 100% Household Financial Services, Ltd. New South Wales 100% BFC Finance Limited Victoria 100% Eastrock Finance Corporation Pty. Ltd. Victoria 100% Heritage General Insurance Limited New South Wales 100% Heritage Life Insurance Ltd. New South Wales 100% HFC Leasing Ltd. New South Wales 100% Household Building Society Tasmania 100% InterCity Lease Management Pty. Ltd. New South Wales 100% HFC Australia Deposits Pty Limited New South Wales 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% Sixty-First HFC Leasing Corporation Delaware 100% Household Bank (California), N.A. U.S. 100% Household Financial Group, Ltd. Delaware 100% Household Global Funding, Inc. Delaware 78% Household International (U.K.) Limited England 100% D.L.R.S. Limited Cheshire 100% HFC Bank plc England 100% Hamilton Life Assurance Co. Limited England 100% Hamilton Insurance Company Limited England 100% Hamilton Financial Planning Services Limited England 100% HFC Pension Plan Limited England 100% Household Funding Limited England 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% Household Finance Corporation of Canada Canada 100% Household Realty Corporation Limited Ontario 100% Household Trust Company Canada 100% Merchant Retail Services Limited Ontario 100% Household Mexico, Inc. Delaware 100% Household Reinsurance Ltd. Bermuda 100%
- 4 - EX-23 9 CONSENT OF ARTHUR ANDERSEN LLP 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 3, 1995, included in this annual report on Form 10-K of Household International, Inc. for the year ended December 31, 1994, into the Company's previously filed Registration Statements No. 2-86383, No. 33-21343, No. 2-97495, No. 33-45454, No. 33-45455, and No. 33-52211 on Form S-8 and Registration Statements No. 33-57249, No. 33-50619, No. 33-62842, No. 33-56599, and No. 33-50351 on Form S-3. Arthur Andersen LLP Chicago, Illinois March 24, 1995 EX-27 10 FINANCIAL DATA SCHEDULE
5 THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND ITS SUBSIDIARIES IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL STATEMENTS PREVIOUSLY FILED WITH THE SECURITIES & EXCHANGE COMMISSION. 1,000 YEAR DEC-31-1994 DEC-31-1994 541,200 9,004,500 20,555,600 882,500 0 0 999,100 487,100 34,338,400 0 10,274,100 115,000 2,600 320,000 2,085,400 34,338,400 0 4,603,300 0 2,225,500 0 606,800 1,242,700 528,300 160,700 367,600 0 0 0 367,600 3.52 3.50