-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ROqVli+0FzE2ux4ZnkgSN7MO3o/5ps5+p4pXJu8mo1CwBY1KrQLKVwQ+8IWpzK+l +xTD+o3tib8EiPDPHNqbsA== 0000950131-02-000889.txt : 20020415 0000950131-02-000889.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950131-02-000889 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOUSEHOLD INTERNATIONAL INC CENTRAL INDEX KEY: 0000354964 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 363121988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08198 FILM NUMBER: 02574544 BUSINESS ADDRESS: STREET 1: 2700 SANDERS RD CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 BUSINESS PHONE: 8475645000 MAIL ADDRESS: STREET 1: 2700 SANDERS ROAD CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 10-K405 1 d10k405.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d ) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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 60070 Prospect Heights, Illinois (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (847) 564-5000 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock, $1 par value New York Stock Exchange and Chicago Stock Exchange Series A Junior Participating Preferred Stock Purchase Rights (attached to and transferable only with the Common Stock) New York Stock Exchange 5% Cumulative Preferred Stock New York Stock Exchange $4.50 Cumulative Preferred Stock New York Stock Exchange $4.30 Cumulative Preferred Stock New York Stock Exchange Depositary Shares (each representing one-fortieth share of 8 1/4% Cumulative Preferred Stock, Series 1992-A, no par, $1,000 stated value) New York Stock Exchange Depositary Shares (each representing one-fortieth share of 7.50% Cumulative Preferred Stock, Series 2001-A, no par, $1,000 stated value) New York Stock Exchange Guarantee of 8.25% Preferred Securities of Household Capital Trust I New York Stock Exchange Guarantee of 7.25% Preferred Securities of Household Capital Trust IV New York Stock Exchange Guarantee of 10.00% Preferred Securities of Household Capital Trust V New York Stock Exchange Guarantee of 8.25% Preferred Securities of Household Capital Trust VI New York Stock Exchange Guarantee of 7.50% Preferred Securities of Household Capital Trust VII New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting common stock held by nonaffiliates of the registrant at March 8, 2002 was approximately $27.347 billion. The number of shares of the registrant's common stock outstanding at March 8, 2002 was 456,539,863. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the registrant's 2001 Annual Report to Shareholders for the fiscal year ended December 31, 2001: Parts I, II and IV. Certain portions of the registrant's definitive Proxy Statement for its 2002 Annual Meeting of Stockholders: Part III. ================================================================================ TABLE OF CONTENTS
PART/Item No. Page - ------------- ---- PART I. 3 Item 1. Business.................................................................. 3 General................................................................... 3 Operations................................................................ 4 Funding................................................................... 7 Regulation and Competition................................................ 8 Cautionary Statement on Forward-Looking Statements........................ 10 Item 2. Properties................................................................ 11 Item 3. Legal Proceedings......................................................... 12 Item 4. Submission of Matters to a Vote of Security Holders....................... 12 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 13 Item 6. Selected Financial Data................................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 13 Item 8. Financial Statements and Supplementary Data............................... 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................ 13 PART III. Item 10. Directors and Executive Officers of the Registrant........................ 14 Executive Officers of the Registrant...................................... 14 Item 11. Executive Compensation.................................................... 15 Item 12. Security Ownership of Certain Beneficial Owners and Management............ 15 Item 13. Certain Relationships and Related Transactions............................ 15 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 15 Financial Statements...................................................... 15 Reports on Form 8-K....................................................... 16 Exhibits.................................................................. 16 Schedules................................................................. 17 Signatures.............................................................................. 18 Report of Independent Public Accountants................................................ F-1 Schedule I.............................................................................. F-2
2 PART I. Item 1. Business. General Household International, Inc. (''Household'') is principally a non-operating holding company. Household's subsidiaries primarily provide middle-market consumers with several types of loan products in the United States, the United Kingdom and Canada. Household and its subsidiaries (including the operations of Beneficial Corporation (''Beneficial'') which we acquired in 1998) may also be referred to in this Form 10-K as ''we,'' ''us'' or ''our.'' We offer real estate secured loans, auto finance loans, MasterCard/*/ and Visa/* credit cards, private label credit cards, tax refund anticipation loans, retail installment sales finance loans and other types of unsecured loans, as well as credit and specialty insurance products. At December 31, 2001, we had approximately 32,000 employees and over 50 million active customer accounts. / Household was created as a holding company in 1981 as a result of a shareholder approved restructuring of Household Finance Corporation (''HFC''), which was established in 1878. Our operational focus is on those areas of consumer financial services that we believe offer us the best opportunity to achieve appropriate risk-adjusted returns on our capital. From late 1994 through 1997 we exited from several businesses that were providing insufficient returns on our investment, such as our first mortgage origination and servicing business in the United States and Canada, our individual life and annuity business, our consumer branch banking business, and our student loan business. Since 1997 we have: . strengthened our branch-based consumer lending operation and private label credit card businesses with selected acquisitions, including Transamerica Financial Services Holding Company in 1997 and Beneficial in 1998; . expanded into the United States nonprime auto lending industry, principally with the acquisition of ACC Consumer Finance Corporation in 1997; . repositioned our United States MasterCard and Visa credit card business to de-emphasize undifferentiated credit card programs and focus on co-branded and affinity relationships. In addition, we initiated secured and unsecured credit card programs to target nonprime consumers through the acquisition of Renaissance Holdings, Inc. in 2000; . developed additional distribution channels for our products, such as through the Internet and co-branding opportunities with retail merchants and service providers, and; . created a business to acquire nonconforming mortgage loans originated by unaffiliated third party lenders and to originate loans through third party brokers. This business allows us to access new customers and leverage our origination and servicing capabilities in the United States. 2001 Developments. The following business developments occurred during 2001: . As a result of the adverse economic environment experienced in the United States, we emphasized credit management to mitigate credit losses in the consumer loan products we offer. To accomplish this goal we: - focused on growth in real estate secured loans, which historically have had a lower loss rate as compared to our other loan products; - increased the number of collectors within our business units to 5,000; - reduced "open-to-buy" credit lines of selected customers in our United States MasterCard and Visa credit card business; - strengthened real-time monitoring of account performance and our risk modeling capabilities to better predict future account performance; and - tightened loan underwriting standards by raising required credit scores. - -------- * MasterCard is a registered trademark of MasterCard International, Incorporated and VISA is a registered trademark of VISA USA, Inc. 3 . We continued to take advantage of consolidation in the consumer lending industry by purchasing portfolios of consumer receivables. These portfolio purchases permit us to access additional customers for cross-selling opportunities to facilitate growth. . We expanded our mortgage services business and increased our presence in the United States non-conforming mortgage lending market to take advantage of reduced competition. . We strengthened all of our capital ratios through cash generation of $2.7 billion from our businesses and the issuance of preferred securities. We emphasized our commitment to maintaining our current investment grade ratings. . We continued the diversification of our funding base by issuing real estate secured asset-backed securities and expanding our presence globally with offerings in Japan, Australia and Europe. . We completed the transfer of the receivables and account relationships associated with the Goldfish credit card program in the United Kingdom to our joint venture partner, Centrica. The transfer was made pursuant to a negotiated agreement providing for the orderly termination of this co-branding relationship. . We developed and published responsible lending best practice initiatives to evidence our commitment to ensure that our customers are treated fairly in their relationships with Household. Throughout 2002 we will continue to monitor our business practices and will make modifications, as appropriate, to keep Household as a leader in efforts to eliminate "predatory" lending practices throughout the United States. Consumers residing in the state of California account for 15% of our managed United States receivables. We also have significant concentrations of managed consumer receivables in Florida (7%), New York (7%), Texas (6%), Ohio (5%) and Pennsylvania (5%). No other state accounts for 5% or more of our receivables. Our summary financial information is set forth in our Annual Report to Shareholders (the ''2001 Annual Report''), portions of which are incorporated herein by reference. See Exhibit 13 of this Form 10-K. Our products, operating markets and marketing methods are described under "Operations" below. Financial information and other statistical data provided in this Form 10-K are for the year 2001 or as of December 31, 2001, respectively, unless otherwise noted. Operations Our operations are divided into three reportable segments: Consumer, Credit Card Services, and International. Our Consumer segment includes our consumer lending, mortgage services, retail services and auto finance businesses. Our Credit Card Services segment includes our domestic MasterCard and Visa credit card business. Our International segment includes our foreign operations in the United Kingdom and Canada. Information about businesses or functions that are not significant or involve multiple segments, such as our insurance services, refund lending, direct lending and commercial operations, as well as our corporate and treasury activities, are included under the ''All Other'' caption within our segment disclosure. We monitor our operations and evaluate trends on a managed basis which assumes that securitized receivables have not been sold and are still on our balance sheet. We manage our operations on a managed basis because the receivables that we securitize are subjected to underwriting standards comparable to our owned portfolio, are serviced by operating personnel without regard to ownership and result in a similar credit loss exposure for us. In addition, we fund our operations, review our operating results and make decisions about allocating resources, such as employees and capital, on a managed basis. General Across all reportable segments, we generally serve nonconforming or nonprime consumers. Such customers are individuals who have limited credit histories, modest income, high debt-to-income ratios or have experienced credit problems caused by occasional delinquencies, prior chargeoffs or other credit related actions. These customers generally have higher delinquency and credit loss probabilities and are charged a higher interest rate to compensate us for the additional risk. In our MasterCard and Visa business, our retail services business and our mortgage services business we also serve prime consumers either through co-branding relationships or mortgage brokers. 4 We have taken substantial measures to enhance the profitability and improve operational control of our businesses. We use our centralized underwriting, collection and processing functions to adapt our credit standards and collection efforts to national or regional market conditions. Our underwriting, loan administration and collection functions are supported by highly automated systems and processing facilities. Our centralized collection system is augmented by personalized early collection efforts. Maximizing our technology and otherwise streamlining our operations and reducing our costs has enabled us to improve our efficiency through specialization and economies of scale and allows us to operate more efficiently than most of our competitors. We service each customer with a focus to understand that customer's personal financial needs. We recognize that individuals may not be able to timely meet all of their financial obligations. Our goal is to assist consumers in transitioning through financially difficult times in order to expand that customer's relationship with Household. As a result, our policies are designed to be flexible to maximize the collectibility of our loans while not incurring excessive collection expenses on loans that have a high probability of being ultimately uncollectible. Cross-selling of products, proactive credit management, "hands-on" customer care and targeted product marketing are means we use to retain customers and grow our business. Consumer Our consumer lending business is one of the largest subprime home equity originators in the United States as ranked by Inside B&C Lending. This business has approximately 1,400 branches located in 46 states, 3.2 million open customer accounts, $39.5 billion in managed receivables and 13,000 employees. It is marketed under both the HFC and Beneficial brand names, each of which caters to a slightly different type of customer in the middle-market population. Both brands offer secured and unsecured loan products, such as first and second lien position closed-end mortgage loans, open-end home equity loans, personal non-credit card loans, including personal homeowner loans (a secured high loan-to-value product that we underwrite and treat like an unsecured loan), and sales finance contracts. These products are marketed through our retail branch network, direct mail, telemarketing, strategic alliances and Internet sourced applications and leads. Our mortgage services business purchases nonconforming first and second lien position residential mortgage loans, including open-end home equity loans, from a network of over 200 unaffiliated third party lenders (i.e., correspondents). This business has approximately $18.1 billion in managed receivables, 240,000 active customer accounts and 1,600 employees. These purchases are either "flow" acquisitions (i.e., loan by loan) or "bulk" acquisitions (i.e., pools of loans), and are made based on our specific underwriting guidelines. We offer forward commitments to selected correspondent lenders to strengthen our relationship with these lenders and to create a sustainable growth channel for this business. Decision One Mortgage Company, LLC, a subsidiary of Household, was purchased in 1999 to assist us in understanding the product needs of mortgage brokers and trends in the mortgage lending industry. Through 19 branch locations, Decision One directly originates mortgage loans sourced by mortgage brokers. According to The Nilson Report, our retail services business is the second largest provider of third party private label credit cards in the United States based on managed receivables outstanding. Our retail services business has over 65 active merchant relationships with approximately $11.6 billion in managed receivables, 9.9 million active customer accounts and 2,200 employees. Approximately 32 percent of our retail services receivables are in the furniture industry, 30 percent are in the consumer electronics industry, 16 percent are in the powersports vehicle (snowmobiles, personal watercraft, ATV's and motorcycles) industry and approximately 13 percent are in the home products or home improvement industry. These products are generated through merchant retail locations, merchant catalog and telephone sales, application displays, direct mail and Internet applications. Our auto finance business purchases, from a network of approximately 4,500 active dealer relationships, retail installment contracts of consumers who do not have access to traditional, prime-based lending sources. We also originate and refinance auto loans through direct mail solicitations, alliance partners and the Internet. This business has approximately $6.4 billion in managed receivables and 2,000 employees. Approximately 75% of our auto finance receivables are secured by "used" vehicles versus "new" vehicles. We have focused on the 5 development of Internet options (the HAF Superhighway) for our dealer network to create a mechanism to enable these dealers to process customer applications and receive automated credit decisions in minutes. Coupled with a centralized underwriting and funding business model, we believe the use of the HAF Superhighway will enable our auto finance business to respond more quickly and provide better service than our competitors. Credit Card Services Our Credit Card Services business includes our MasterCard and Visa receivables in the United States, including The GM Card(R), the AFL-CIO Union Plus(R) ("UP") credit card, a Household Bank branded card, and the Orchard Bank card. According to The Nilson Report this business is the eighth largest issuer of MasterCard or Visa credit cards in the United States (based on receivables) with approximately $17.2 billion in managed receivables, 19.9 million customer accounts and 5,000 employees. The GM Card(R), a co-branded credit card issued as part of our alliance with General Motors Corporation ("GM"), enables customers to earn discounts on the purchase or lease of a new GM vehicle. The UP card program with the AFL-CIO provides benefits and services to members of approximately 60 national and international labor unions. The Household Bank and Orchard Bank branded credit cards offer specialized credit card products to consumers underserved by traditional providers or are marketed in conjunction with merchant relationships established through our retail services business. Our MasterCard and Visa business is generated primarily through direct mail, telemarketing, Internet applications, application displays, promotional activity associated with our affinity and co-branding relationships, mass-media advertisement (The GM Card(R)), and merchant relationships sourced through our retail services business. We also cross-sell our credit cards to our existing consumer lending and retail services customers as well as our refund lending customers. Although our relationships with GM and the AFL-CIO enable us to access a proprietary customer base, in accordance with our agreements with these institutions Household owns all receivables originated under the programs and is responsible for all credit and collection decisions as well as the funding for the programs. These programs are not dependent upon any payments, guarantees or credit support from these institutions. As a result, we are not directly dependent upon GM or the AFL-CIO for any specific earnings stream associated with these programs. We believe we have a strong working relationship with GM and the AFL-CIO and we do not anticipate, and are not aware of, any event that has occurred, or is expected to occur in the near term, that would allow the parties to these agreements to terminate their relationship. International Our United Kingdom business is a mid-market consumer lender focusing on customer service through its branch locations, and consumer electronics through its retail finance operations. This business offers secured and unsecured lines of credit, secured and unsecured closed-end loans, retail finance products, insurance products and credit cards (including the GM Card(R) from Vauxhall and marbles(TM), an Internet enabled credit card). We operate in England, Scotland, Wales, Northern Ireland, and the Republic of Ireland. In 2001 we opened an office in Hungary to facilitate the expansion plans of one of our U.K. merchant alliances. We expect to continue our expansion into Central Europe with this alliance in 2002 with operations in the Czech Republic and Poland. Loans held by our United Kingdom operation are originated through a branch network consisting of 155 HFC and 62 Beneficial Finance branches, merchants, direct mail, broker referrals and the Internet. This business has approximately $5.8 billion in managed receivables and 3,800 employees. Our Canadian business was acquired by Household in 1933 and offers consumer real estate secured and unsecured lines of credit, secured and unsecured closed-end loans, insurance products, revolving credit, private label credit cards and retail finance products to middle- to low income families. In addition, through its trust operations, our Canadian business accepts deposits. These products are marketed through 109 branch offices in 10 provinces, direct mail, telemarketing, 95 merchant relationships and the Internet. This business has approximately $1.4 billion in managed receivables, 680,000 customer accounts and 930 employees. 6 All Other Through our insurance services operation, Household offers credit life, credit accident, health and disability, unemployment, property, term life, collateral protection and specialty insurance products to our customers. Such products currently are offered throughout the United States and Canada and are targeted toward those customers typically under-insured by traditional sources. The purchasing of insurance products are never a condition to any credit or loan granted by Household. Insurance is directly written by or reinsured with one or more of our subsidiaries. Our refund lending business is one of the largest providers of consumer tax refund lending in the United States. We have approximately 3,500 tax preparer relationships covering approximately 12,000 outlets (including 9,000 H&R Block locations). We provide loans to customers who are entitled to tax refunds and who electronically file their income tax returns with the Internal Revenue Service. This business is seasonal with most revenues generated in the first three months of each calendar year. The majority of customers who use this product are renters with household incomes of less than $25,000 who are entitled to refunds of greater than $2,000. In 2001 we originated approximately 6.4 million accounts and generated a loan volume of approximately $8.4 billion. Direct lending was formed to find new markets for Household's existing consumer loan and loan-related products, develop new product offerings, and test alternative (i.e., non-branch) distribution channels. The areas of specific focus for direct lending include the Internet, alliance programs with other lenders to provide nonprime/nonconforming products to their customers, direct mail initiatives and non-homeowners. Direct lending has approximately $360 million in managed receivables and 140 employees. Our commercial operations are very limited in scope and are expected to continue to decline. They manage the liquidation of the commercial loan receivables which were part of our commercial lending portfolio that was discontinued in the early 1990's. They also selectively invest in tax advantaged low income housing projects to support community home ownership initiatives while allowing us to obtain federal or state tax benefits. We have approximately $440 million in managed receivables and 15 employees in this group. Funding As a financial services organization, we must have access to funds at competitive rates, terms and conditions to be successful. Household's long-term debt, together with that of HFC, Beneficial, and our Canadian and U.K. subsidiaries, as well as the preferred stock of Household, have been assigned investment grade ratings by all nationally recognized statistical rating organizations that rate such instruments. These organizations have also rated the commercial paper of HFC in their highest rating category. For a detailed listing of the ratings that have been assigned to Household and our significant subsidiaries, see Exhibit 99(b) to this Form 10-K. Although one nationally recognized statistical rating organization recently downgraded the long-term debt of HFC to the corresponding levels of the other agencies, we believe this downgrade will not have any meaningful impact on our ability to fund our operations. We are committed to maintaining our current investment grade ratings. We have funded our operations globally and domestically, using a combination of capital market debt and equity, deposits and securitizations. Although we have in the past utilized our banking subsidiaries as a means to provide deposit funding to support some of our operations, due to recent regulatory requirements for additional capital to support nonprime and subprime lending activities, we do not believe that such sources will be actively utilized in the near term. We do not anticipate that the reduction in the use of our banking subsidiaries as a funding vehicle for our businesses will have any material effect on our operations or our ability to timely fund our operations, or will materially increase the costs associated with our funding. We will continue to fund our operations in the global capital markets, primarily through the use of securitizations, commercial paper, bank lines, medium-term notes and long-term debt. We also will continue to use derivative financial instruments to hedge our currency and interest rate risk exposure. A description of our use of derivative financial instruments, 7 including interest rate swaps, foreign exchange contracts, and other quantitative and qualitative information about our market risk is set forth in our Management's Discussion and Analysis of Financial Condition and Results of Operations ("2001 MD&A") under the caption "Risk Management", and Footnotes 10 and 14 of our consolidated financial statements ("2001 Financial Statements"), included in our 2001 Annual Report which are included in Exhibit 13 to this Form 10-K. We also maintain an investment portfolio which at year-end 2001 was approximately $3.6 billion. Approximately $2.1 billion of such investment securities were held by our insurance subsidiaries. Securitizations and secured financings of consumer receivables have been, and will continue to be, a significant source of our liquidity. During 2001, we securitized approximately $5.5 billion of receivables compared to $7.0 billion in 2000 and $5.2 billion in 1999. We securitize auto finance, MasterCard and Visa credit card, private label credit card and personal non-credit card receivables. In addition, during 2001 and 1999 we issued securities backed by dedicated real estate secured receivables in transactions structured for accounting purposes as secured financings. The aggregate balance of the real estate secured receivables supporting those transactions was $1.6 billion in 2001 and $530 million in 1999. Based on our current investment grade ratings, we have no reason to believe that we will not be able to timely access the securitization and secured funding markets to support our operations. In the securitizations and secured financing transactions, Household sells a dedicated pool of receivables to a wholly-owned bankruptcy remote special purpose entity for cash, which, in turn, assigns the receivables to an unaffiliated trust that is a qualifying special purpose entity under Statement of Financial Accounting Standards No. 125 and/or 140, as applicable. Household continues to service the receivables and receives a servicing fee. In connection with each transaction, we obtain opinions from nationally known law firms that the transfer of the receivables to the special purpose entity qualifies as a "true sale" for legal purposes and that the entity would not be "substantively consolidated" into any bankruptcy estate of the transferor. Generally, in connection with these transactions we utilize credit enhancement to obtain the highest investment grade ratings on the securities to be issued by the securitization trust. Although many forms of enhancement are available, we typically assign loans in excess of the principal balance of the securities to be issued by the trust. Cash flow from this "overcollateralization" and servicing fees to be paid to us in connection with the transaction may be used to reduce the outstanding balance of these securities and/or may be used to fund a cash account that is available to make payments on the securities in the event monthly collections on the receivables are insufficient to pay the investors their contractual return. Therefore, our recourse is limited to our rights to future cash flows and any subordinated interests we may retain. At December 31, 2001, we had $968.2 million in interest-only strip receivables at-risk should these transactions not perform as expected. Based on historical performance, we do not anticipate any material loss due to performance of any securitized or secured funding pool of receivables. The limited operations of each securitization trust are administered by an unaffiliated financial institution and are governed by a trust agreement that limits the trust's permissible activities to those defined in the agreement. The holders of the securities issued by each trust have the right to pledge or transfer their interests. Additional information on our sources and availability of funding are incorporated by reference to the "Liquidity and Capital Resources" and "Asset Securitzations" sections of our 2001 MD&A in the 2001 Annual Report which are included in Exhibit 13 to this Form 10-K. Regulation and Competition Regulation Consumer Lending. Our consumer finance businesses operate in a highly regulated environment. These businesses are subject to laws relating to discrimination in extending credit, use of credit reports, privacy matters, disclosure of credit terms and correction of billing errors. They also are subject to certain regulations and 8 legislation that limit their operations in certain jurisdictions. For example, limitations may be placed on the amount of interest or fees that a loan may bear, the amount that may be borrowed, the types of actions that may be taken to collect or foreclose upon delinquent loans or the information about a customer that may be shared. Our consumer branch lending offices are generally licensed in those jurisdictions in which they operate. Such licenses have limited terms but are renewable, and are revocable for cause. Failure to comply with these laws and regulations may limit the ability of our licensed lenders to collect or enforce loan agreements made with consumers and may cause Household to be liable for damages and penalties. There has been a significant amount of legislative activity, nationally, locally and at the state level, aimed at curbing lending abuses deemed to be "predatory". A predatory loan or lending practice is not a legally defined term and does not have a commonly recognized definition. Most legislative activity in this area targets certain abusive practices such as loan "flipping" (making a loan to refinance another loan where there is no tangible benefit to the borrower), fee "packing" (addition of unnecessary, unwanted and unknown fees to a borrower), "equity stripping" (lending without regard to the borrower's ability to repay or making it impossible for the borrower to refinance with another lender), and outright fraud. Household does not condone or endorse any of these practices. We are working with regulators and consumer groups to create appropriate safeguards to eliminate these abusive practices while allowing middle-market borrowers to continue to have unrestricted access to credit for personal purposes, such as the purchase of homes, automobiles, and consumer goods. As part of this effort we have adopted a set of lending best practice initiatives. These initiatives, which may be modified from time-to-time, are discussed at our corporate web site, www.household.com under the heading "Customer Commitment". Notwithstanding these efforts, it is possible that broad legislative initiatives will be passed which will impose additional costs and rules on our businesses. Although we have the ability to react quickly to new laws and regulations, it is too early to estimate the effect, if any, these activities will have on us in a particular locality or nationally. Banking Institutions. Household has banking institutions that are chartered by either the Office of Thrift Supervision (''OTS'') or the Office of the Comptroller of the Currency ("OCC"). Since deposits maintained at our banking institutions are insured by the Federal Deposit Insurance Corporation ("FDIC"), the FDIC also has jurisdiction over those institutions and is actively involved in reviewing the financial and managerial strength of our banking subsidiaries. Household is also a thrift holding company and is subject to regulation by the OTS. Our banking institutions primarily originate receivables in our MasterCard and Visa credit card business, our private label business and our refund lending business. In addition, our thrift originates certain first mortgage loans. The use of these institutions improves our operational efficiencies as they are able to offer loan products with common characteristics across the United States. Generally, these banking institutions sell the receivables they originate to non-banking affiliates (also subsidiaries of Household) so that Household can manage all of its customers with uniform policies, regardless through which legal entity a loan was made. In addition, this structure allows us to better manage the levels of regulatory capital required to be maintained at these banking institutions. Our banking institutions are subject to capital requirements, regulations and guidelines imposed by the OTS, OCC and FDIC. For example, these institutions are subject to federal regulations concerning their general investment authority as well as their ability to acquire financial institutions, enter into transactions with affiliates and pay dividends. Such regulations also govern the permissible activities and investments of any subsidiary of a bank. We have been advised by the OTS, OCC and FDIC that in accordance with their 2001 Guidance for Subprime Lending Programs, they will impose additional capital requirements on institutions which hold nonprime or subprime assets that will be greater than the historical levels we have maintained at our banking institutions. Household and HFC have agreed with these regulators to maintain the regulatory capital of our institutions at these specified levels. To better manage the capital levels that will be imposed, we have submitted to the OCC an application to merge our three credit card banks into one nationally chartered institution and are evaluating alternatives to reduce the size of our thrift institution. We do not expect that any of these actions will have a material adverse effect on our business or our financial condition. 9 Our banking institutions are also subject to the Federal Deposit Insurance Corporation Improvement Act of 1991 (''FDICIA'') and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (''FIRREA''). Among other things, FDICIA creates a five-tiered system of capital measurement for regulatory purposes, places limits on the ability of depository institutions to acquire brokered deposits, and gives broad powers to federal banking regulators, in particular the FDIC, to require undercapitalized institutions to adopt and implement a capital restoration plan and to restrict or prohibit a number of activities, including the payment of cash dividends, which may impair or threaten the capital adequacy of the insured depository institution. Federal banking regulators may apply corrective measures to an insured depository institution, even if it is adequately capitalized, if such institution is determined to be operating in an unsafe or unsound condition or engaging in an unsafe or unsound activity. In addition, federal banking regulatory agencies have adopted safety and soundness standards governing operational and managerial activities of insured depository institutions and their holding companies regarding internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation. Under FIRREA, the FDIC may assess an affiliated insured depository institution for the estimated losses incurred by the FDIC upon the default of any affiliated insured institution. Our principal United Kingdom subsidiary (HFC Bank plc) is subject to oversight and regulation by the U.K. Financial Services Authority ("FSA"). We have indicated our intent to the FSA to maintain the regulatory capital of this institution at specified levels. We do not anticipate that any capital contribution will be required for our United Kingdom bank in the near term. Insurance. Our credit insurance business is subject to regulatory supervision under the laws of the states in which it operates. Regulations vary from state to state but generally cover licensing of insurance companies, premium and loss rates, dividend restrictions, types of insurance that may be sold, permissible investments, policy reserve requirements, and insurance marketing practices. Competition The consumer financial services industry in which we operate is highly fragmented and intensely competitive. We generally compete with banks, thrifts, insurance companies, credit unions, mortgage lenders and brokers, finance companies, securities brokers and dealers, and other domestic and foreign financial institutions in the United States, Canada and the United Kingdom. We compete by expanding our customer base through portfolio acquisitions or alliance and co-branding opportunities, offering a variety of consumer loan products, maintaining a strong service orientation, aggressively controlling expenses to be a low cost producer, and using data segmentation skills to identify cross-selling opportunities between business units. Cautionary Statement on Forward-Looking Statements Certain matters discussed throughout this Form 10-K or in the information incorporated herein by reference constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make or approve certain statements in future filings with the Securities and Exchange Commission, in press releases, or oral or written presentations by representatives of Household that are not statements of historical fact and may also constitute forward-looking statements. Words such as "believe", "expects", "estimates", "targeted", "anticipates", "goal" and similar expressions are intended to identify forward-looking statements but should not be considered as the only means through which these statements may be made. These matters or statements will relate to our future financial condition, results of operations, plans, objectives, performance or business developments and will involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from that which was expressed or implied by such forward-looking statements. Forward-looking statements are based on our current views and assumptions and speak only as of the date they are made. Household undertakes no obligation to update any forward-looking statement to reflect subsequent circumstances or events. 10 The important factors, many of which are out of our control, which could affect our actual results and could cause our results to vary materially from those expressed in public statements or documents are: . changes in laws and regulations, including attempts by local, state and national regulatory agencies or legislative bodies to control alleged "predatory" lending practices through broad initiatives aimed at lenders operating in the nonprime or subprime consumer market; . increased competition from well-capitalized companies or lenders with access to government sponsored organizations for our consumer segment which may impact the terms, rates, costs, or profits historically included in the loan products we offer or purchase; . changes in accounting policies, practices or standards, as they may be adopted by regulatory agencies and the Financial Accounting Standards Board; . changes in overall economic conditions, including the interest rate environment in which we operate, the capital markets in which we fund our operations, the market values of consumer owned real estate throughout the United States, recession, employment and currency fluctuations; . consumer perception of the availability of credit, including price competition in the market segments we target and the ramifications or ease of filing for personal bankruptcy; . the effectiveness of models or programs to predict loan delinquency or loss and initiatives to improve collections in all business areas; . continued consumer acceptance of our distribution systems and demand for our loan or insurance products; . changes associated with, as well as the difficulty in integrating systems, operational functions and cultures, as applicable, of any organization or portfolio acquired by Household; . a reduction of our short-term debt ratings by any of the nationally recognized statistical rating organizations that rate these instruments to a level that is below our current rating; . the costs, effects and outcomes of regulatory reviews or litigation relating to our nonprime loan receivables or the business practices of any of our business units, including, but not limited to, additional compliance requirements; . the costs, effects and outcomes of any litigation matter that is determined adversely to Household or its businesses; . the ability to attract and retain qualified personnel to support the underwriting, servicing, collection and sales functions of our businesses; and . the inability of Household to manage any or all of the foregoing risks as well as anticipated. Item 2. Properties. Our operations are located throughout the United States, in 10 provinces in Canada and in the United Kingdom with principal facilities located in Anaheim, California; Dallas, Texas; New Castle, Delaware; Brandon, Florida; Jacksonville, Florida; Tampa, Florida; Chesapeake, Virginia; Virginia Beach, Virginia; Elmhurst, Illinois; Hanover, Maryland; Bridgewater, New Jersey; Las Vegas, Nevada; Charlotte, North Carolina; Portland, Oregon; Pomona, California; Prospect Heights, Illinois; Salinas, California; San Diego, California; Wood Dale, Illinois; London, Kentucky; Sioux Falls, South Dakota; North York, Ontario, Canada; Birmingham, United Kingdom and Windsor, Berkshire, United Kingdom. We expect to establish an additional operations center in India in 2002 to support our credit card services business. We do not anticipate the costs for staffing and creating this center will be material to our financial results. Substantially all branch offices, divisional offices, corporate offices, regional processing and regional servicing center space are operated under lease with the exception of the headquarters building for our United Kingdom operations, our processing facility in Tampa, Florida, a credit card processing facility in Las Vegas, Nevada and a facility in London, Kentucky. We believe that such properties are in good condition and meet our current and reasonably anticipated needs. 11 Item 3. Legal Proceedings. We are parties to various legal proceedings resulting from ordinary business activities relating to our current and/or former operations. Certain of these actions are or purport to be class actions seeking damages in very large amounts. These actions assert violations of laws and/or unfair treatment of consumers. Due to the uncertainties in litigation and other factors, we cannot assure you that we will ultimately prevail in each instance. We believe that we have meritorious defenses to these actions and any adverse decision should not materially affect our consolidated financial condition. During the past several years, the press has widely reported certain industry related concerns which may impact us. Some of these involve the amount of litigation instituted against finance and insurance companies operating in the states of Alabama and Mississippi and the large awards obtained from juries in those states. Like other companies in this industry, some of our subsidiaries are involved in a number of lawsuits pending against them in Alabama and Mississippi, many of which relate to the financing of merchandise. The Alabama and Mississippi cases generally allege inadequate disclosure or misrepresentation of financing terms. In many suits, other parties are also named as defendants. Unspecified compensatory and punitive damages are sought. Several of these suits purport to be class actions or have multiple plaintiffs. The judicial climate in Alabama and Mississippi is such that the outcome of all of these cases is unpredictable. Although our subsidiaries believe they have substantive legal defenses to these claims and are prepared to defend each case vigorously, a number of such cases have been settled or otherwise resolved for amounts that in the aggregate are not material to our operations. Appropriate insurance carriers have been notified of each claim, and a number of reservations of rights letters have been received. Certain of these claims have been partially covered by insurance. Household has also been named in purported class actions by consumer groups (such as AARP and ACORN) claiming that our loan products or our lending policies and practices are unfair or misleading to consumers. We do not believe that any of these legal actions has merit or will result in a material financial impact on Household. We do expect, however, that these consumer groups will continue to target Household in the media and with legal actions to pressure Household and the nonprime lending industry into accepting concessions that would more heavily regulate the nonprime lending industry. (See "Regulation and Competition" above.) We have developed and implemented compliance functions to monitor our operations to comply with all applicable laws, rules and regulations. In November 2001, litigation was instituted by California regulators asserting that they believed we had overcharged certain California customers who obtained loans from Household. We confirmed with this regulator that unintentional errors had occurred and entered into a settlement agreement for full refunds of the improper charges as well as a payment to the state in the amount of $8.9 million. The amounts paid pursuant to this agreement, as well as the other conditions we agreed to, did not and will not have a material adverse impact on our financial condition or our business operations. As a result of this incident, we have reviewed our compliance function and implemented certain changes, including requiring that our compliance officer for our consumer lending business report directly to senior management. Although exam reports from other regulatory bodies may, from time-to-time, cite specific issues relating to a specific loan, we do not believe, and we are not aware of, any unaddressed systemic issue affecting our compliance with any state or federal lending laws within any of our businesses. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 12 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. As of March 8, 2002 there were 19,089 record shareholders of Household's common stock. Additional information required by this Item is incorporated by reference to the "Selected Quarterly Financial Data (Unaudited)" and the "Common and Preferred Stock Information" sections of our 2001 Annual Report which are included in Exhibit 13 to this Form 10-K. Item 6. Selected Financial Data. Information required by this Item is incorporated by reference to the "Selected Financial Data and Statistics" section of our 2001 Annual Report which is included in Exhibit 13 to this Form 10-K. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information required by this Item is incorporated by reference to the 2001 MD&A, including the "Glossary of Terms" section of our 2001 Annual Report which is included in Exhibit 13 to this Form 10-K. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Information required by this Item is incorporated by reference to the "Liquidity and Capital Resources", "Asset Securitizations" and "Risk Management" sections of our 2001 MD&A in our 2001 Annual Report which is included in Exhibit 13 to this Form 10-K. Item 8. Financial Statements and Supplementary Data. Our 2001 Financial Statements meet the requirements of Regulation S-X. The 2001 Financial Statements and supplementary financial information specified by Item 302 of Regulation S-K, are incorporated by reference to our 2001 Annual Report and are included in Exhibit 13 to this Form 10-K. In addition, we incorporate by reference the information under the following sections of our 2001 Annual Report which are included in Exhibit 13 to this Form 10-K: "Credit Quality Statistics-Owned Basis," "Credit Quality Statistics-Managed Basis," "Analysis of Credit-Loss_Reserves Activity-Owned Receivables," "Analysis of Credit Loss Reserves Activity-Managed Basis," "Net Interest Margin-2001 Compared to 2000 (Owned Basis)," "Net Interest Margin-2000 Compared to 1999 (Owned Basis)," "Net Interest Margin-2001 compared to 2000 and 1999 (Managed Basis)", and "Selected Quarterly Financial Data (Unaudited)". Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. The Audit Committee of the Board of Directors of Household International, Inc. annually considers and recommends to the Board the selection of Household's independent public accountants. As recommended by Household's Audit Committee, Household's Board of Directors on March 12, 2002 decided to no longer engage Arthur Andersen LLP ("Andersen") as Household's independent public accountants and engaged KPMG LLP to serve as Household's independent public accountants for 2002. The appointment of KPMG LLP will be presented to Household's stockholders for ratification at the 2002 Annual Meeting. Andersen's reports on Household's consolidated financial statements for the two most recent fiscal years ended December 31, 2001 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During Household's two most recent fiscal years and through the date of this Form 10-K, there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Andersen's satisfaction, would have caused them to make reference to the subject matter in connection with their report on Household's consolidated financial statements for such years; and there were no reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K. 13 Household has provided Andersen with a copy of this disclosure. Attached as Exhibit 16 is a copy of Andersen's letter, dated March 13, 2002, stating its agreement with such statements. During Household's two most recent fiscal years and through the date of this Form 10-K, Household did not consult KPMG LLP regarding any of the matters or reportable events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K. PART III. Item 10. Directors and Executive Officers of the Registrant. Executive Officers of the Registrant. The following information on our senior executive policy-making officers is included pursuant to Item 401(b) of Regulation S-K. William F. Aldinger, age 54, joined Household in September 1994 as President and Chief Executive Officer. In May 1996 he was appointed our Chairman and Chief Executive Officer. Mr. Aldinger served as Vice Chairman of Wells Fargo Bank and a Director of several Wells Fargo subsidiaries from 1986 until joining us. Mr. Aldinger is also a director of Household Finance Corporation (one of our subsidiaries), Illinois Tool Works Inc. and MasterCard International, Incorporated. Gary D. Gilmer, age 52, was appointed Vice Chairman--Consumer Lending in 2002 after having served as Group Executive--Consumer Lending since 1998. Mr. Gilmer joined Household Finance Corporation in 1972 and has served in various capacities in our consumer lending, retail services and insurance services businesses, most recently as Managing Director and Chief Executive Officer of our United Kingdom operations. David A. Schoenholz, age 50, was appointed Vice Chairman--Chief Financial Officer in 2002. He has responsibility for our Mortgage Services, Direct Lending and United Kingdom businesses. He was appointed Group Executive--Chief Financial Officer, effective January 2000, having previously served as Executive Vice President--Chief Financial Officer since 1996, Senior Vice President--Chief Financial Officer since 1994, and Vice President--Chief Accounting Officer since 1993. He joined Household in 1985 as Director--Internal Audit. Rocco J. Fabiano, age 45, was appointed Group Executive--Retail Services, Refund Lending, Auto Finance and Insurance Services in January 2002, having joined us in 1997 as a result of our acquisition of ACC Consumer Finance Corporation where he served as Chairman and Chief Executive Officer since 1993. Siddharth N. Mehta, age 43, was appointed Group Executive--Credit Card Services and Canada in 2002. He joined Household in June 1998 as Group Executive--Credit Card Services. Prior to joining Household, Mr. Mehta was Senior Vice President of Boston Consulting Group in Los Angeles and co-leader of Boston Consulting Group Financial Services Practice in the United States. Kenneth M. Harvey, age 41, was appointed Executive Vice President--Chief Information Officer in 2002. He was our Managing Director--Chief Information Officer since 1999, having previously served in various systems and technology areas with Household since 1989. Colin P. Kelly, age 59, was appointed Executive Vice President--Administration in 2002 after having served as Senior Vice President--Administration since January 2000. Mr. Kelly previously acted as our Senior Vice President--Human Resources since 1996, and Vice President--Human Resources since 1988. Mr. Kelly joined Household Finance Corporation in 1965. Kenneth H. Robin, age 55, was appointed Corporate Secretary in 1998 and Senior Vice President--General Counsel in 1996, having previously served as Vice President--General Counsel since 1993. He joined Household in 1989 as Assistant General Counsel--Financial Services. Prior to joining Household, Mr. Robin held various positions in the legal departments of Citicorp and Citibank, N.A. from 1977 to 1989. 14 Sandra L. Derickson, age 47, joined Household as Managing Director--Retail Services in 2000. Prior to joining Household, Mrs. Derickson was employed with GE Capital Services Corp. since 1975, most recently as President and General Manager of GE Capital Auto Financial Services. Adrian L. Hill, age 43, was appointed Managing Director--United Kingdom, in 1998. Mr. Hill began his career with HFC Bank plc in 1989 as Director--Treasury, serving as Chief Financial Officer from 1990 to 1995 and Chief Operating Officer from 1995 until his current appointment. There are no family relationships among our executive officers. The term of office of each named executive officer is at the discretion of the Board of Directors. Additional information required by this Item is incorporated by reference to ''Nominees For Director'' and ''Shares of Household Stock Beneficially Owned by Directors and Executive Officers'' in our definitive Proxy Statement for our 2002 Annual Meeting of Stockholders (the ''2002 Proxy Statement''). Item 11. Executive Compensation. Information required by this Item is incorporated by reference to ''Executive Compensation'', ''Employment Agreements'', ''Savings--Stock Ownership and Pension Plans'', ''Incentive and Stock Option Plans'', and ''Director Compensation'' in our 2002 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information required by this Item is incorporated by reference to ''Shares of Household Stock Beneficially Owned by Directors and Executive Officers'' and ''Security Ownership of Certain Beneficial Owners'' in our 2002 Proxy Statement. Item 13. Certain Relationships and Related Transactions. Information required by this Item is incorporated by reference to ''Incentive and Stock Option Plans'' and ''Employment Agreement with Larry Bangs'' in our 2002 Proxy Statement. PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Financial Statements. The consolidated financial statements listed below, together with an opinion of Arthur Andersen LLP dated January 14, 2002 with respect thereto, are incorporated by reference herein pursuant to Item 8. Financial Statements and Supplementary Data of this Form 10-K. An opinion of Arthur Andersen LLP is also included in this Annual Report on Form 10-K. Household International, Inc. and Subsidiaries: Consolidated Statements of Income for the Three Years Ended December 31, 2001. Consolidated Balance Sheets, December 31, 2001 and 2000. Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2001. Consolidated Statements of Changes in Preferred Stock and Common Shareholders' Equity for the Three Years Ended December 31, 2001. Notes to Consolidated Financial Statements. Report of Independent Public Accountants. Selected Quarterly Financial Data (Unaudited). 15 (b) Reports on Form 8-K. For the three months ended December 31, 2001, Household filed one Current Report on Form 8-K on October 17, 2001. (c) Exhibits. 3(i) Restated Certificate of Incorporation of Household International, Inc. as amended. 3(ii) Bylaws of Household International, Inc. as amended January 30, 2001 (incorporated by reference to Exhibit 3(ii) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 4(a) Rights Agreement dated as of July 9, 1996, between Household International, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K dated July 9, 1996). 4(b) Standard Multiple-Series Indenture Provisions for Senior Debt Securities of Household Finance Corporation dated as of June 1, 1992 (incorporated by reference to Exhibit 4(b) to the Registration Statement on Form S-3 of Household Finance Corporation, No. 33-48854). 4(c) Indenture dated as of December 1, 1993 for Senior Debt Securities between Household Finance Corporation and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4(b) to the Registration Statement on Form S-3 of Household Finance Corporation, No. 33-55561 filed on September 20, 1994). 4(d) The principal amount of debt outstanding under each other instrument defining the rights of Holders of our long-term senior and senior subordinated debt does not exceed 10 percent of our total assets. Household agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each instrument defining the rights of holders of our long-term senior and senior subordinated debt. 10.1 Household International, Inc. 1998 Key Executive Bonus Plan. 10.2 Household International, Inc. Corporate Executive Bonus Plan. 10.3 Household International, Inc. Long-Term Executive Incentive Compensation Plan, as amended. 10.4 Forms of stock option and restricted stock rights agreements under the Household International, Inc. Long-Term Executive Incentive Compensation Plan (incorporated by Reference to Exhibit 10.4 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.5 Household International, Inc. 1996 Long-Term Executive Incentive Compensation Plan, as amended. 10.6 Forms of stock option and restricted stock rights agreements under the Household International, Inc. 1996 Long-Term Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.6 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.7 Household International, Inc. Deferred Fee Plan for Directors (incorporated by reference to Exhibit 10.7 of our Annual Report Form 10-K for the fiscal year ended December 31, 1999). 10.8 Household International, Inc. Deferred Phantom Stock Plan for Directors (incorporated by reference to Exhibit 10.8 of our Annual Report Form 10-K for the fiscal year ended December 31, 1999). 10.9 Household International, Inc. Non-Qualified Deferred Compensation Plan for Executives, as Amended (incorporated by reference to Exhibit 10.9 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
16 10.10 Household International, Inc. Non-Qualified Deferred Compensation Plan for Stock Option Exercises. 10.11 Household International, Inc. Non-Qualified Deferred Compensation Plan for Restricted Stock Rights. 10.12 Executive Employment Agreement between Household International, Inc. and W.F. Aldinger (incorporated by reference to Exhibit 10.10 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 10.13 Executive Employment Agreement between Household International, Inc. and G.D. Gilmer (incorporated by reference to Exhibit 10.12 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 10.14 Executive Employment Agreement between Household International, Inc. and D.A. Schoenholz (incorporated by reference to Exhibit 10.13 of our Annual Report on Form 10-K the fiscal year ended December 31, 1998). 10.15 Executive Employment Agreement between Household International, Inc. and L.N. Bangs (incorporated by reference to Exhibit 10.11 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 10.16 Executive Employment Agreement between Household International, Inc. and R.J. Fabiano (incorporated by reference to Exhibit 10.15 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.17 Executive Employment Agreement between Household International, Inc. and S.N. Mehta (incorporated by reference to Exhibit 10.14 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 10.18 Amended and Restated Supplemental Executive Retirement Plan for W.F. Aldinger (incorporated by reference to Exhibit 10.16 of our Form 10-K for the fiscal year ended December 31, 2000). 10.19 Beneficial Corporation 1990 Non-qualified Stock Option Plan (incorporated by reference to Exhibit 4.4 of Beneficial Corporation's Form S-8 filed on April 23, 1996, File No. 333-02737). 10.20 Amendment to Beneficial Corporation 1990 Non-qualified Stock Option Plan (incorporated by reference to Exhibit 4.2 of Beneficial Corporation's Form S-8 filed July 1, 1998, File No. 333- 58291). 11 Statement of Computation of Earnings per Share. 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 13 Sections of Household International, Inc.'s 2001 Annual Report to Shareholders which are specifically incorporated by reference into the Form 10-K. 16 Letter re change in certifying accountant. 21 List of our subsidiaries. 23 Consent of Arthur Andersen LLP, Certified Public Accountants. 24 Power of Attorney, included on page 18 hereof. 99(a) Annual Report on Form 11-K for the Household International, Inc. Tax Reduction Investment Plan (to be filed by amendment). 99(b) Ratings of Household International, Inc. and its significant subsidiaries.
We will furnish copies of the exhibits referred to above to our stockholders upon receiving a written request therefor. We charge fifteen cents per page for providing these copies. Requests should be made to Household International, Inc., 2700 Sanders Road, Prospect Heights, Illinois 60070, Attention: Corporate Secretary. (d) Schedules. Report of Independent Public Accountants. I--Condensed Financial Information of Registrant. 17 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 on this, the 12th day of March, 2002. HOUSEHOLD INTERNATIONAL, INC. By: /S/ W.F. ALDINGER ---------------------------------- W.F. Aldinger, Chairman and Chief Executive Officer Each person whose signature appears below constitutes and appoints J.W. Blenke and P.D. Schwartz, and each or any of them (with full power to act alone), as his/her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him/her in his/her name, place and stead, in any and all capacities, to sign and file, with the Securities and Exchange Commission, this Form 10-K and any and all amendments and exhibits thereto, and all documents in connection therewith, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that such attorney-in-fact and agent or their substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Household International, Inc. and in the capacities on the 12th day of March, 2002. Signature Title --------- ----- /S/ W.F. ALDINGER Chairman and Chief - ----------------------------- Executive Officer and (W.F. Aldinger) Director (as principal executive officer) /S/ R.J. DARNALL Director - ----------------------------- (R.J. Darnall) /S/ A. DISNEY Director - ----------------------------- (A. Disney) /S/ G.G. DILLON Director - ----------------------------- (G.G. Dillon) /S/ J.A. EDWARDSON Director - ----------------------------- (J.A. Edwardson) /S/ M.J. EVANS Director - ----------------------------- (M.J. Evans) /S/ J.D. FISHBURN Director - ----------------------------- (J.D. Fishburn) 18
Signature Title --------- ----- /S/ C.F. FREIDHEIM, JR. Director - ----------------------------- (C.F. Freidheim, Jr.) /S/ J.H. GILLIAM, JR. Director - ----------------------------- (J.H. Gilliam, Jr.) /S/ L.E. LEVY Director - ----------------------------- (L.E. Levy) /S/ G.A. LORCH Director - ----------------------------- (G.A. Lorch) /S/ J.D. NICHOLS Director - ----------------------------- (J.D. Nichols) /S/ J.B. PITBLADO Director - ----------------------------- (J.B. Pitblado) /S/ L.M. RENDA Director - ----------------------------- (L.M. Renda) /S/ S.J. STEWART Director - ----------------------------- (S.J. Stewart) /S/ L.W. SULLIVAN, M.D. Director - ----------------------------- (L.W. Sullivan, M.D.) /S/ D.A. SCHOENHOLZ Vice - ----------------------------- Chairman--Chief Financial (D.A. Schoenholz) Officer (also the principal financial and accounting officer)
19 EXHIBIT INDEX
Exhibit No. Document Description - ------- -------------------- 3(i) Restated Certificate of Incorporation of Household International, Inc. as amended. 3(ii) Bylaws of Household International, Inc. as amended January 30, 2001 (incorporated by reference to Exhibit 3(ii) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 4(a) Rights Agreement dated as of July 9, 1996, between Household International, Inc. and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K dated July 9, 1996). 4(b) Standard Multiple-Series Indenture Provisions for Senior Debt Securities of Household Finance Corporation dated as of June 1, 1992 (incorporated by reference to Exhibit 4(b) to the Registration Statement on Form S-3 of Household Finance Corporation, No. 33-48854). 4(c) Indenture dated as of December 1, 1993 for Senior Debt Securities between Household Finance Corporation and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4(b) to the Registration Statement on Form S-3 of Household Finance Corporation, No. 33-55561 filed on September 20, 1994). 4(d) The principal amount of debt outstanding under each other instrument defining the rights of holders of our long-term senior and senior subordinated debt does not exceed 10 percent of our total assets. Household agrees to furnish to the Securities and Exchange Commission,upon request, a copy of each instrument defining the rights of holders of our long-term senior and senior subordinated debt. 10.1 Household International, Inc. 1998 Key Executive Bonus Plan. 10.2 Household International, Inc. Corporate Executive Bonus Plan. 10.3 Household International, Inc. Long-Term Executive Incentive Compensation Plan, as amended. 10.4 Forms of stock option and restricted stock rights agreements under the Household International, Inc. Long-Term Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.4 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.5 Household International, Inc. 1996 Long-Term Executive Incentive Compensation Plan, as amended. 10.6 Forms of stock option and restricted stock rights agreements under the Household International, Inc. 1996 Long-Term Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.6 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.7 Household International, Inc. Deferred Fee Plan for Directors (incorporated by reference to Exhibit 10.7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.8 Household International, Inc. Deferred Phantom Stock Plan for Directors (incorporated by reference to Exhibit 10.8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.9 Household International, Inc. Non-Qualified Deferred Compensation Plan for Executives, as amended (incorporated by reference to Exhibit 10.9 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 10.10 Household International, Inc. Non-Qualified Deferred Compensation Plan for Stock Option Exercises. 10.11 Household International, Inc. Non-Qualified Deferred Compensation Plan for Restricted Stock Rights. 10.12 Executive Employment Agreement between Household International, Inc. and W. F. Aldinger (incorporated by reference to Exhibit 10.10 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
20
Exhibit No. Document Description - ------- -------------------- 10.13 Executive Employment Agreement between Household International, Inc. and G. D. Gilmer (incorporated by reference to Exhibit 10.12 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 10.14 Executive Employment Agreement between Household International, Inc. and D. A. Schoenholz (incorporated by reference to Exhibit 10.13 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 10.15 Executive Employment Agreement between Household International, Inc. and L. N. Bangs (incorporated by reference to Exhibit 10.11 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 10.16 Executive Employment Agreement between Household International, Inc. and R.J. Fabiano (incorporated by reference to Exhibit 10.15 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.17 Executive Employment Agreement between Household International, Inc. and S. N. Mehta (incorporated by reference to Exhibit 10.14 of our Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 10.18 Amended and Restated Supplemental Executive Retirement Plan for W. F. Aldinger (incorporated by reference to Exhibit 10.16 of our Form 10-K for the fiscal year ended December 31, 2000). 10.19 Beneficial Corporation 1990 Non-qualified Stock Option Plan (incorporated by reference to Exhibit 4.4 of Beneficial Corporation's Form S-8 filed on April 23, 1996, File No. 333-02737). 10.20 Amendment to Beneficial Corporation 1990 Non-qualified Stock Option Plan (incorporated by reference to Exhibit 4.2 of Beneficial Corporation's Form S-8 filed July 1, 1998, File No. 333-58291). 11 Statement of Computation of Earnings per Share. 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 13 Sections of Household International, Inc.'s 2001 Annual Report to Shareholders which are specifically incorporated by reference into this Form 10-K. 16 Letter re change in certifying accountant. 21 List of our subsidiaries. 23 Consent of Arthur Andersen LLP, Certified Public Accountants. 24 Power of Attorney, included on page 18 of the Form 10-K for the fiscal year ended December 31, 2001. 99(a) Annual Report on Form 11-K for the Household International, Inc. Tax Reduction Investment Plan (to be filed by amendment). 99(b) Ratings of Household International, Inc. and its significant subsidiaries.
21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Household International, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the financial statements included in Household International, Inc.'s 2001 annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 14, 2002. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14(d) is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /S/ ARTHUR ANDERSEN LLP Chicago, Illinois January 14, 2002 F-1 SCHEDULE I HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME (In millions)
Year ended December 31 -------------------------- 2001 2000 1999 -------- -------- -------- Equity in earnings of subsidiaries.... $2,058.8 $1,747.9 $1,521.4 Other income.......................... 37.7 34.6 32.5 -------- -------- -------- Total income................... 2,096.5 1,782.5 1,553.9 -------- -------- -------- Expenses: Administrative..................... 151.3 72.7 62.8 Interest........................... 106.7 61.3 50.6 -------- -------- -------- Total expenses................. 258.0 134.0 113.4 -------- -------- -------- Income before income tax benefit...... 1,838.5 1,648.5 1,440.5 Income tax benefit.................... 85.0 52.2 45.9 -------- -------- -------- Net income..................... $1,923.5 $1,700.7 $1,486.4 ======== ======== ======== Total comprehensive income..... $1,405.8 $1,742.9 $1,374.6 ======== ======== ========
See accompanying note to condensed financial statements. F-2 SCHEDULE I (continued) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (In millions)
December 31 ------------------ 2001 2000 --------- -------- Assets Cash........................................................................ $ 1.6 $ -- Investments in and advances to (from) subsidiaries.......................... 10,558.3 9,034.7 Other assets................................................................ 693.2 604.9 --------- -------- Total assets............................................................ $11,253.1 $9,639.6 ========= ======== Liabilities and Shareholders' Equity Commercial paper............................................................ $ -- $ 292.3 Senior debt (with original maturities over one year)........................ 1,179.2 185.0 --------- -------- Total debt.................................................................. 1,179.2 477.3 Other liabilities........................................................... 440.3 371.7 --------- -------- Total liabilities........................................................... 1,619.5 849.0 Company obligated mandatorily redeemable preferred securities of subsidiary trusts*................................................................... 975.0 675.0 Preferred stock............................................................. 455.8 164.4 Common shareholders' equity................................................. 8,202.8 7,951.2 --------- -------- Total liabilities and shareholders' equity.................................. $11,253.1 $9,639.6 ========= ========
- -------- * The sole assets of the trusts are Junior Subordinated Deferrable Interest Notes issued by Household International, Inc. in November 2001, January 2001, June 2000, March 1998 and June 1995, bearing interest at 7.50, 8.25, 10.00, 7.25 and 8.25 percent, respectively, with principal balances of $206.2, $206.2, $309.3, $206.2 and $77.3 million, respectively, and due November 15, 2031, January 30, 2031, June 30, 2030, December 31, 2037 and June 30, 2025, respectively. The $103.1 million Junior Subordinated Deferrable Interest Notes issued in June 1996 were redeemed in December 2001. See accompanying note to condensed financial statements. F-3 SCHEDULE I (continued) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (In millions)
Year ended December 31 ------------------------------- 2001 2000 1999 --------- --------- --------- Cash used in operations Net income.......................................................... $ 1,923.5 $ 1,700.7 $ 1,486.4 Adjustments to reconcile net income to net cash used in operations: Equity in earnings of subsidiaries.............................. (2,058.8) (1,747.9) (1,521.4) Other operating activities...................................... 88.5 (10.5) (11.6) --------- --------- --------- Cash used in operations................................................ (46.8) (57.7) (46.6) --------- --------- --------- Investment in Operations Dividends from subsidiaries......................................... 673.3 648.0 1,160.5 Investment in and advances to (from) subsidiaries, net.............. (686.1) (282.5) 8.7 Other investing activities.......................................... (11.8) (.8) 2.5 --------- --------- --------- Cash provided by (used in) investment operations....................... (24.6) 364.7 1,171.7 --------- --------- --------- Financing and Capital Transactions Net change in commercial paper and bank borrowings.................. (292.3) (105.4) 82.1 Retirement of senior debt........................................... (10.0) -- (89.7) Issuance of senior debt............................................. 985.0 -- 85.6 Shareholders' dividends............................................. (406.6) (358.9) (332.1) Issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts................................... 400.0 300.0 -- Redemption of company obligated mandatorily redeemable preferred securities of subsidiary trusts................................... (100.0) -- -- Issuance of preferred stock......................................... 291.4 -- -- Purchase of treasury stock.......................................... (916.3) (209.3) (915.9) Issuance of common stock............................................ 121.8 64.4 45.0 --------- --------- --------- Cash increase (decrease) from financing and capital transactions....... 73.0 (309.2) (1,125.0) --------- --------- --------- Increase (decrease) in cash............................................ 1.6 (2.2) .1 Cash at January 1...................................................... -- 2.2 2.1 --------- --------- --------- Cash at December 31.................................................... $ 1.6 $ -- $ 2.2 ========= ========= =========
See accompanying note to condensed financial statements. F-4 SCHEDULE I (continued) HOUSEHOLD INTERNATIONAL, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTE TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT The condensed financial statements of Household International, Inc. have been prepared on a parent company unconsolidated basis. In August 2001, Household issued zero-coupon convertible debt securities. The convertible debt securities are due 2021, have a 1 percent yield to maturity and have a principal amount at maturity of approximately $1.2 billion. Household must pay contingent interest on the securities beginning in 2006 if Household's common stock price reaches certain levels. The holders of the securities have the right to require Household to repurchase the securities on various dates beginning in August 2002 and ending in August 2016 or if certain "fundamental changes" as described in the prospectus supplement occur. "Fundamental changes" include, among other things, an exchange offer, liquidation, merger and recapitalization. The holders of the securities may convert each $1,000 of securities, subject to adjustment, into 9.022 shares of Household common stock if Household's stock price reaches $99.87 for 20 trading days in a consecutive 30 trading day period. Household may redeem the securities, in whole or in part, at any time after August 1, 2006. Household has guaranteed payment of certain long-term debt obligations of Household Financial Corporation Limited ("HFCL"), a Canadian subsidiary. The amount of guaranteed debt outstanding at HFCL was $35 million at December 31, 2002 and $.3 billion at December 31, 2000. Household has also guaranteed payment of certain debt obligations (excluding certain deposits) of Household International (U.K.) Limited ("HIUK"). The amount of guaranteed debt outstanding at HIUK was approximately $2.1 at December 31, 2001 and $2.2 billion at December 31, 2000. F-5 EX-3.(I) 3 dex3i.txt RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3(i) RESTATED CERTIFICATE OF INCORPORATION OF HOUSEHOLD INTERNATIONAL, INC. (as amended September 20, 2001) HOUSEHOLD INTERNATIONAL, INC. RESTATED CERTIFICATE OF INCORPORATION INDEX DATE DESCRIPTION - ---- ----------- 9/4/81 Restated Certificate of Incorporation 7/25/84 Certificate of Change of Address of Registered Office and of Registered Agent 5/13/87 Certificate of Amendment (Article VII) 10/14/92 Certificate of Designation, Preferences and Rights of 8-1/4% Cumulative Preferred Stock, Series 1992-A 5/12/93 Certificate of Amendment (Article IV) 9/1/93 Certificate of Designation, Preferences and Rights of 7.35% Cumulative Preferred Stock, Series 1993-A 7/9/96 Certificate of Designations of Series A Junior Participating Preferred Stock 5/14/97 Certificate of Amendment (Article IV) 5/13/98 Certificate of Amendment (Article IV) 6/30/98 Certificate of Designation, Preferences and Rights of 5% Cumulative Preferred Stock 6/30/98 Certificate of Designation, Preferences and Rights of $4.50 Cumulative Preferred Stock 6/30/98 Certificate of Designation, Preferences and Rights of $4.30 Cumulative Preferred Stock 9/20/01 Certificate of Designation, Preferences and Rights of 7.50% Cumulative Preferred Stock, Series 2001-A 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: a. the shares of such series shall be subject to redemption (including redemption through a sinking fund of 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. 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 the 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 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 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 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 on 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 it 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 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); 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 by 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 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 of 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 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 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, 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 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. a. 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 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 Funk if (i) the Corporation is insolvent or would be rendered insolvent by the payment of 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, 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 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. b. 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. c. 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 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 by signed by D. C. Clark, its President, and attested by J. D. Pinkerton, its Secretary, this 4/th/ day of September, 1981. Household International, Inc. By: /s/ D. C. Clark --------------- D. C. Clark President [SEAL] Attest: By: /s/ J. D. Pinkerton --------------- Secretary 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 25/th/ day of July, 1984. THE CORPORATION TRUST COMPANY (Name of Registered Agent) By: Virginia Colwell (Vice-President) ----------------- Attest: Mick Nurman (Assistant Secretary) 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 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 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 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, 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 13/th/ 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 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 9-1/2% Cumulative Preferred Stock, Series 1991-A (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 9-1/2% Cumulative Preferred Stock, Series 1991-A, and all of such shares of 9-1/2% Cumulative Preferred Stock, Series 1991-A, 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 Paul R. Shay, its Secretary, and attested by Susan E. Casey, its Assistant Secretary, this 14/th/ day of March, 1997. HOUSEHOLD INTERNATIONAL, INC. By: /s/ P. R. Shay -------------- Secretary Attest: By: /s/ S. E. Casey --------------- Assistant Secretary 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 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 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 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 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 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. (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 Corporation, and attested by John W. Blenke, Assistant Secretary, this 14/th/ day of October, 1992. HOUSEHOLD INTERNATIONAL, INC. By: /s/ J. Richard Hull --------------------- Senior Vice President-Secretary Attest: /s/ John W. Blenke -------------- Assistant Secretary 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 herein above, 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 12/th/ 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 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 ore 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 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 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 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 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 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, Assistant General Counsel and Assistant Secretary, this 1/st/ 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 CERTIFICATE OF DESIGNATIONS Of SERIES A JUNIOR PARTICIPATING PREFERRED STOCK Of HOUSEHOLD INTERNATIONAL, INC. (Pursuant to Section 151 of the Delaware General Corporation Law) ---------------------------- Household International, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the "Corporation"), hereby certifies that the following resolution was adopted by ----------- the Board of Directors of the Corporation as required by Section 151 of the General Corporation Law at a meeting duly called and held on July 9, 1996: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (hereinafter called the "Board of Directors" or ------------------ the "Board") in accordance with the provisions of the Restated Certificate of ----- Incorporation, the Board hereby creates a series of Preferred Stock, without par value (the "Preferred Stock"), of the Corporation and hereby states the --------------- designation and number of shares, and fixes the relative rights, preferences, and limitations thereof as follows: FURTHER RESOLVED, that pursuant to the authority granted to and vested in the Board in accordance with the provisions of the Restated Certificate of Incorporation, the consent of the holders of Series A 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; but the other provisions of Paragraph --------------- (5) shall be applicable to the Series A Preferred Stock. The holders of the Series A Preferred Stock shall have no right to elect directors per paragraph (6) of Article IV of the Corporation's Restated Certificate of Incorporation, such right hereby being expressly withheld: Series A Junior Participating Preferred Stock: 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 the Series A Preferred Stock shall - ----- be 150,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of -------- shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. Dividends and Distributions. --------------------------- (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, par value $1.00 per share (the "Common Stock"), of the ------------ Corporation, and of any other junior 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) $1 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 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 of Common Stock (by reclassification of otherwise), declared on the Common Stock since the immediately preceding Quarterly Divided 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 the 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 case (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 shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section 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 $1 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) 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, 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 not more tan 60 days prior to the date fixed for the payment thereof. 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 1,000 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 the 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, in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as set forth herein, or as otherwise provided by law, 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. (D) The consent of the holders of Series A 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; but the other ------------- provisions of Paragraph (5) shall be applicable to the Series A Preferred Stock. The holders of the Series A Preferred Stock shall have no right to elect directors pursuant to paragraph (6) of Article IV of the Corporation's Restated Certificate of Incorporation, such right hereby being expressly withheld. 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, or make any other distributions, on 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, 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 junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior 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) redeem or 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 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 subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. Liquidation, Dissolution or Winding Up. Upon any 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 $1,000 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 1,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of 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 distributions made ratably on the Series A Preferred Stock and all 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 the 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 each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 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 the 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 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. Rank. The Series A Preferred Stock shall rank, with respect to the ---- payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. 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 at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf of the Corporation by its Chief Executive Officer or Chief Financial Officer and attested by its Secretary this 9/th/ day of July, 1996. By: /s/ William F. Aldinger Chief Executive Officer or Chief Financial ----------------------- Officer Attest: /s/ Paul R. Shay ------------ Secretary 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 258,155,004 of which 8,155,004 shares shall be Preferred Stock without par value and 250,000,000 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 W. F. Aldinger, its Chairman and Chief Executive Officer and P. R. Shay, Assistant General Counsel and Secretary, this 14/th/ day of May, 1997. HOUSEHOLD INTERNATIONAL, INC. [SEAL] By: /s/ W. F. Aldinger ------------------ Chairman and Chief Executive Officer Attest: /s/ P. R. Shay - -------------- Assistant General Counsel and Secretary 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 758,155,004 of which 8,155,004 shares shall be Preferred Stock without par value and 750,000,000 shares shall be Common Stock of the par value of $1 per share. SECOND: That the number of shares constituting the Series A Junior Participating Preferred Stock is increased to 750,000. THIRD: That the aforesaid amendments of the Restated Certificate of Incorporation of said Corporation, set forth above have 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 W. F. Aldinger, its Chairman and Chief Executive Officer and P. R. Shay, Assistant General Counsel and Corporate Secretary, this 13/th/ day of May, 1998. HOUSEHOLD INTERNATIONAL, INC. [SEAL] By: /s/ W. F. Aldinger ------------------ Chairman and Chief Executive Attest: Officer /s/ P. R. Shay - -------------- Assistant General Counsel and Corporate Secretary HOUSEHOLD INTERNATIONAL, INC. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS Pursuant to Section 151 of the General Corporation Law of the State of Delaware 5% 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 resolution was duly adopted by the Board of Directors of the Corporation pursuant to authority conferred upon the Board of Directors by the provisions of the Restated Certificate of Incorporation, as amended, of the Corporation, and in accordance with Section 141(c) of the General Corporation Law of the State of Delaware. 1. The Board of Directors has on May 13, 1998 adopted the following resolution: "RESOLVED, that the issue of a series of Preferred Stock 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: 5% Cumulative Preferred Stock (1) Number of Shares and Designation. 407,718 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 5% Cumulative Preferred Stock (hereinafter called the "5% Preferred Stock"). (2) Dividends. The holders of shares of the 5% 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 semi-annually in arrears, when and as declared by the Board of Directors of the Corporation, on the last day of June and December in each year to holders of record, in each case, on the last business day of the calendar month next preceding the dividend payment date (and the semi-annual dividend periods shall commence on the first day following each dividend payment date and end on the next succeeding dividend payment date). Dividends on the 5% Preferred Stock for semi-annual dividend periods will be payable at the rate of 5% per annum from the date of original issue. The amount of dividends payable on each share of 5% Preferred Stock for each full semi-annual dividend period shall be computed by dividing the dividend rate by two and applying the dividend rate to each outstanding share. (3) Liquidation Preference. The amount to which shares of 5% Preferred ---------------------- Stock shall be entitled upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, shall be $50.00 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for payment, whether or not earned or declared, and no more. Such amount to be set apart from holders or paid to holders out of the assets of the Corporation before any distribution is made to or set apart for holders of the Corporation's Common Stock. (4) Redemption. (a) The shares of the 5% Preferred Stock shall be ---------- subject to redemption in whole or in part at the option of the Corporation, by vote of the Board of Directors, at $50.00 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for redemption, whether or not earned or declared, and no more. If less than all of the outstanding shares of 5% Preferred Stock are to be redeemed, the shares to be redeemed shall be determined by lot in such usual manner and subject to such regulations as the Board of Directors in its sole discretion shall prescribe. (b) At least 30 days prior to the date fixed for the redemption of shares of the 5% Preferred Stock, a written notice shall be mailed to each holder of record of shares of 5% Preferred Stock to be redeemed in a postage prepaid envelope addressed to such holder at his post office address as shown on the records of the Corporation, notifying such holder of the election of the Corporation to redeem such shares stating the date fixed for redemption thereof (the "redemption date"), and calling upon such holder to surrender to the Corporation on the redemption date at the place designated in such notice his certificate or certificates representing the number of shares specified in such notice of redemption. (c) On or after the redemption date each holder of shares of 5% Preferred Stock to be redeemed shall present and surrender his certificate or certificates for such shares to the Corporation at the place designated in such notice and thereupon the redemption price of such shares shall be paid to or on the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. (d) In case less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (e) From and after the redemption date (unless default shall be made by the Corporation in payment of the redemption price) all dividends on the shares of 5% Preferred Stock designated for redemption in such notice shall cease to accrue, and all rights of the holders thereof as stockholders of the Corporation, except the right to receive the redemption price thereof upon the surrender of certificates representing the same, shall cease and determine and such shares shall not thereafter be transferred (except with the consent of the Corporation) on the books of the Corporation, and such shares shall not be deemed to be outstanding for any purpose whatsoever. (f) At its election, prior to the redemption date, the Corporation may deposit the redemption price of the shares of 5% Preferred Stock called for redemption in trust for the holders thereof with a bank or trust company (having a capital and surplus of not less than $1,000,000) in the City of Chicago, Illinois or in the Borough of Manhattan, City and State of New York or in any other city in which the Corporation at the time shall maintain a transfer agency with respect to such stock, in which case such redemption notice shall state the date of such deposit, shall specify the office of such bank or trust company as the place of payment of the redemption price, and shall call upon such holders to surrender the certificates representing such shares at such place on or after the date fixed in such redemption notice (which shall not be later than the redemption date) against payment of the redemption price. From and after the making of such deposit, the shares of 5% Preferred Stock so designated for redemption shall not be deemed to be outstanding for any purpose whatsoever, and the rights of the holders of such shares shall be limited to the right to receive the redemption price of such shares without interest, upon surrender of the certificates representing the same to the Corporation at said office of such bank or trust company. (g) Any moneys so deposited which shall remain unclaimed by the holders of such 5% Preferred Stock at the end of six years after the redemption date shall be returned by such bank or trust company to the Corporation after which the holders of the 5% Preferred Stock shall have no further interest in such moneys. (5) Shares to be Retired. All shares of 5% 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 5% Preferred Stock. (6) Conversion or Exchange. The holders of shares of 5% 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) Voting Rights. (a) Each holder of 5% Preferred Stock shall be ------------- entitled to one vote for each share held on each matter submitted to a vote of stockholders of the Corporation and, except as otherwise herein or by law provided, the 5% Preferred Stock, the Common Stock of the Corporation, and any other capital stock of the Corporation at the time entitled thereto, shall vote together as one class, except that while the holders of 5% Preferred Stock, voting as a class, are entitled to elect two directors as hereinafter provided, they shall not be entitled to participate with the Common Stock (or any other capital stock as stated above) in the election of any other directors. (b) In case at any time three or more full semi-annual dividends (whether consecutive or not) on the 5% Preferred Stock shall be in arrears, then during the period (the "Class Voting Period") commencing with such time and ending with the time when all arrears in dividends on the 5% Preferred Stock shall have been paid and the full dividend on the 5% Preferred Stock for the then current semi-annual dividend period shall have been declared and paid or set aside for payment, at any meeting of the stockholders of the Corporation held for the election of directors during the Class Voting Period, the holders of 5% Preferred Stock represented in person or by proxy at said meeting shall be entitled, as a class, to the exclusion of the holders of all other classes of stock of the Corporation, to elect two directors of the Corporation, each share of 5% Preferred Stock entitling the holder thereof to one vote. (c) Any director who shall have been elected by holders of 5% Preferred Stock or by any director so elected as herein contemplated, may be removed at any time during a Class Voting Period, either for or without cause, by, and only by, the affirmative votes of the holders of record of a majority of the outstanding shares of 5% Preferred Stock given at a special meeting of such stockholders called for the purpose, and any vacancy thereby created may be filled during such Class Voting Period by the holders of 5% Preferred Stock present in person or represented by proxy at such meeting. Any director to be elected by the Board of Directors of the Corporation to replace a director elected by holders of 5% Preferred Stock or elected by a director as provided for in this sentence shall be elected by the remaining director previously elected by the holders of 5% Preferred Stock. At the end of the Class Voting Period the holders of 5% Preferred Stock shall be automatically divested of all voting power vested in them under this resolution but subject always to the subsequent vesting hereunder of voting power in the holders of 5% Preferred Stock in the event of any similar default or defaults thereafter. (8) Ranking. The 5% Preferred Stock shall rank on a parity with the ------- Corporation's 8-1/4% Cumulative Preferred Stock, Series 1992-A, 7.35% Cumulative Preferred Stock, Series 1993-A, $4.50 Cumulative Preferred Stock and $4.30 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 Corporation's 8-1/4% Cumulative Preferred Stock, Series 1992-A, 7.35% Cumulative Preferred Stock, Series 1993-A, $4.50 Cumulative Preferred Stock and $4.30 Cumulative Preferred Stock as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary. (9) Amendments. While any 5% Preferred Stock is outstanding, the ---------- Corporation shall not alter or change the preferences, special rights or powers of the 5% Preferred Stock so as to adversely affect the 5% Preferred Stock without the affirmative consent (given in writing or at a meeting duly called for the purpose) of the holders of at least two-thirds (2/3rds) of the aggregate number of shares of 5% Preferred Stock then outstanding. "FURTHER RESOLVED, that the Chairman, President, or any Vice President, together with the Secretary or an Assistant Secretary, of the Corporation are hereby authorized and directed to execute, acknowledge, file with the Delaware Secretary of State, and record in New Castle County, Delaware, a Certificate of Designation, Preferences and Rights of the 5% Preferred Stock when such officers of the Corporation shall in their sole discretion consider such action to be necessary or advisable; and "FURTHER RESOLVED, that the form of certificates for the 5% Preferred Stock which form of certificate has been presented to this meeting, and a copy of which the Secretary or an Assistant Secretary is instructed to mark for identification and file with the corporate records, is hereby approved, the facsimile signatures of the officers of the Corporation contained on the certificates are adopted as the valid and binding signatures of the officers so signing, and the proper corporate officers are authorized on behalf of and under the corporate seal of the Corporation to execute and deliver the said certificates in substantially the form presented with such changes therein as may be approved by the officers executing the same, execution thereof to be conclusive evidence of such approval; and "FURTHER RESOLVED, that application be made to the New York Stock Exchange, Inc. (the "Exchange") for listing of the 5% Preferred Stock upon official notice of issuance of the 5% Preferred Stock and that Messrs. J. W. Blenke, P. R. Shay and P. D. Schwartz or any counsel designated by any of the foregoing individuals, be and each hereby are authorized and designated by the Corporation to appear before the Exchange in furtherance of the listing of said 5% Preferred Stock, including authority to file or make any such changes in the said applications or any agreements relevant thereto and to execute any and all documents on behalf of the Corporation as may be necessary or desirable to conform with the requirements for listing; and "FURTHER RESOLVED, that the officers of the Corporation, or any counsel designated thereby, are hereby severally authorized to execute on behalf of the Corporation and file with appropriate authorities such applications, statements, certificates, consents, and other documents as may be necessary for the registration or qualification of the 5% Preferred Stock under the securities laws of the states of the United States in which such securities are required to be registered or qualified, and any actions having previously been taken are hereby authorized, approved and ratified; and "FURTHER RESOLVED, that Harris Trust and Savings Bank ("Harris Bank") is hereby appointed as transfer agent and registrar for the 5% Preferred Stock upon such terms as the officers of the Corporation consider necessary or advisable; and "FURTHER RESOLVED, that for the purpose of the original issue of the shares of 5% Preferred Stock, Harris Bank, as the Corporation's transfer agent and registrar, is authorized and directed to issue and is authorized to register and deliver certificates representing an aggregate of up to 407,718 shares of 5% Preferred Stock of the Corporation all in accordance with instructions from the officers of the Corporation; and "FURTHER RESOLVED, that the 5% Preferred Stock shall be without par value; and "FURTHER RESOLVED, that the officers of the Corporation are hereby authorized and directed on behalf of the Corporation to take and cause to be taken all action necessary or desirable to carry out the terms, implications and intent of these resolutions, and to consummate the transactions contemplated therein." IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation, Preferences and Rights to be signed by David A. Schoenholz, Executive Vice President and Chief Financial Officer of the Corporation, and attested by Patrick D. Schwartz, Associate General Counsel and Assistant Secretary, this 30/th/ day of June, 1998. HOUSEHOLD INTERNATIONAL, INC. By: /s/ David A. Schoenholz ----------------------- Executive Vice President- Chief Financial Officer Attest: /s/ Patrick D. Schwartz - ----------------------- Associate General Counsel and Assistant Secretary HOUSEHOLD INTERNATIONAL, INC. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS Pursuant to Section 151 of the General Corporation Law of the State of Delaware $4.50 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 resolution was duly adopted by the Board of Directors of the Corporation pursuant to authority conferred upon the Board of Directors by the provisions of the Restated Certificate of Incorporation, as amended, of the Corporation, and in accordance with Section 141(c) of the General Corporation Law of the State of Delaware. 1. The Board of Directors has on May 13, 1998 adopted the following resolution: "RESOLVED, that the issue of a series of Preferred Stock 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: $4.50 Cumulative Preferred Stock (1) Number of Shares and Designation. 103,976 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 $4.50 Cumulative Preferred Stock (hereinafter called the "$4.50 Preferred Stock"). (2) Dividends. The holders of shares of the $4.50 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 semi-annually in arrears, when and as declared by the Board of Directors of the Corporation, on the last day of June and December in each year to holders of record, in each case, on the last business day of the calendar month next preceding the dividend payment date (and the semi-annual dividend periods shall commence on the first day following each dividend payment date and end on the next succeeding dividend payment date). Dividends on the $4.50 Preferred Stock for semi-annual dividend periods will be payable at the rate of $4.50 per annum from the date of original issue. The amount of dividends payable on each share of $4.50 Preferred Stock for each full semi-annual dividend period shall be computed by dividing the dividend rate by two and applying the dividend rate to each outstanding share. (3) Liquidation Preference. The amount to which shares of $4.50 ---------------------- Preferred Stock shall be entitled upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, shall be $100.00 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for payment, whether or not earned or declared, and no more. Such amount to be set apart from holders or paid to holders out of the assets of the Corporation before any distribution is made to or set apart for holders of the Corporation's Common Stock. (4) Redemption. (a) The shares of the $4.50 Preferred Stock shall be ---------- subject to redemption in whole or in part at the option of the Corporation, by vote of the Board of Directors, at $103.00 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for redemption, whether or not earned or declared, and no more. If less than all of the outstanding shares of $4.50 Preferred Stock are to be redeemed, the shares to be redeemed shall be determined by lot in such usual manner and subject to such regulations as the Board of Directors in its sole discretion shall prescribe. (b) At least 30 days prior to the date fixed for the redemption of shares of the $4.50 Preferred Stock, a written notice shall be mailed to each holder of record of shares of $4.50 Preferred Stock to be redeemed in a postage prepaid envelope addressed to such holder at his post office address as shown on the records of the Corporation, notifying such holder of the election of the Corporation to redeem such shares stating the date fixed for redemption thereof (the "redemption date"), and calling upon such holder to surrender to the Corporation on the redemption date at the place designated in such notice his certificate or certificates representing the number of shares specified in such notice of redemption. (c) On or after the redemption date each holder of shares of $4.50 Preferred Stock to be redeemed shall present and surrender his certificate or certificates for such shares to the Corporation at the place designated in such notice and thereupon the redemption price of such shares shall be paid to or on the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. (d) In case less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (e) From and after the redemption date (unless default shall be made by the Corporation in payment of the redemption price) all dividends on the shares of $4.50 Preferred Stock designated for redemption in such notice shall cease to accrue, and all rights of the holders thereof as stockholders of the Corporation, except the right to receive the redemption price thereof upon the surrender of certificates representing the same, shall cease and determine and such shares shall not thereafter be transferred (except with the consent of the Corporation) on the books of the Corporation, and such shares shall not be deemed to be outstanding for any purpose whatsoever. (f) At its election, prior to the redemption date, the Corporation may deposit the redemption price of the shares of $4.50 Preferred Stock called for redemption in trust for the holders thereof with a bank or trust company (having a capital and surplus of not less than $1,000,000) in the City of Chicago, Illinois or in the Borough of Manhattan, City and State of New York or in any other city in which the Corporation at the time shall maintain a transfer agency with respect to such stock, in which case such redemption notice shall state the date of such deposit, shall specify the office of such bank or trust company as the place of payment of the redemption price, and shall call upon such holders to surrender the certificates representing such shares at such place on or after the date fixed in such redemption notice (which shall not be later than the redemption date) against payment of the redemption price. From and after the making of such deposit, the shares of $4.50 Preferred Stock so designated for redemption shall not be deemed to be outstanding for any purpose whatsoever, and the rights of the holders of such shares shall be limited to the right to receive the redemption price of such shares without interest, upon surrender of the certificates representing the same to the Corporation at said office of such bank or trust company. (g) Any moneys so deposited which shall remain unclaimed by the holders of such $4.50 Preferred Stock at the end of six years after the redemption date shall be returned by such bank or trust company to the Corporation after which the holders of the $4.50 Preferred Stock shall have no further interest in such moneys. (5) Shares to be Retired. All shares of $4.50 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 $4.50 Preferred Stock. (6) Conversion or Exchange. The holders of shares of $4.50 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) Voting Rights. (a) Each holder of $4.50 Preferred Stock shall be ------------- entitled to one vote for each share held on each matter submitted to a vote of stockholders of the Corporation and, except as otherwise herein or by law provided, the $4.50 Preferred Stock, the Common Stock of the Corporation, and any other capital stock of the Corporation at the time entitled thereto, shall vote together as one class, except that while the holders of $4.50 Preferred Stock, voting as a class, are entitled to elect two directors as hereinafter provided, they shall not be entitled to participate with the Common Stock (or any other capital stock as stated above) in the election of any other directors. (b) In case at any time three or more full semi-annual dividends (whether consecutive or not) on the $4.50 Preferred Stock shall be in arrears, then during the period (the "Class Voting Period") commencing with such time and ending with the time when all arrears in dividends on the $4.50 Preferred Stock shall have been paid and the full dividend on the $4.50 Preferred Stock for the then current semi-annual dividend period shall have been declared and paid or set aside for payment, at any meeting of the stockholders of the Corporation held for the election of directors during the Class Voting Period, the holders of $4.50 Preferred Stock represented in person or by proxy at said meeting shall be entitled, as a class, to the exclusion of the holders of all other classes of stock of the Corporation, to elect two directors of the Corporation, each share of $4.50 Preferred Stock entitling the holder thereof to one vote. (c) Any director who shall have been elected by holders of $4.50 Preferred Stock or by any director so elected as herein contemplated, may be removed at any time during a Class Voting Period, either for or without cause, by, and only by, the affirmative votes of the holders of record of a majority of the outstanding shares of $4.50 Preferred Stock given at a special meeting of such stockholders called for the purpose, and any vacancy thereby created may be filled during such Class Voting Period by the holders of $4.50 Preferred Stock present in person or represented by proxy at such meeting. Any director to be elected by the Board of Directors of the Corporation to replace a director elected by holders of $4.50 Preferred Stock or elected by a director as provided for in this sentence shall be elected by the remaining director previously elected by the holders of $4.50 Preferred Stock. At the end of the Class Voting Period the holders of $4.50 Preferred Stock shall be automatically divested of all voting power vested in them under this resolution but subject always to the subsequent vesting hereunder of voting power in the holders of $4.50 Preferred Stock in the event of any similar default or defaults thereafter. (8) Ranking. The $4.50 Preferred Stock shall rank on a parity with the ------- Corporation's 8-1/4% Cumulative Preferred Stock, Series 1992-A, 7.35% Cumulative Preferred Stock, Series 1993-A, 5% Cumulative Preferred Stock and $4.30 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 Corporation's 8-1/4% Cumulative Preferred Stock, Series 1992-A, 7.35% Cumulative Preferred Stock, Series 1993-A, 5% Cumulative Preferred Stock and $4.30 Cumulative Preferred Stock as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary. (9) Amendments. While any $4.50 Preferred Stock is outstanding, the ---------- Corporation shall not alter or change the preferences, special rights or powers of the $4.50 Preferred Stock so as to adversely affect the $4.50 Preferred Stock without the affirmative consent (given in writing or at a meeting duly called for the purpose) of the holders of at least two-thirds (2/3rds) of the aggregate number of shares of $4.50 Preferred Stock then outstanding. "FURTHER RESOLVED, that the Chairman, President, or any Vice President, together with the Secretary or an Assistant Secretary, of the Corporation are hereby authorized and directed to execute, acknowledge, file with the Delaware Secretary of State, and record in New Castle County, Delaware, a Certificate of Designation, Preferences and Rights of the $4.50 Preferred Stock when such officers of the Corporation shall in their sole discretion consider such action to be necessary or advisable; and "FURTHER RESOLVED, that the form of certificates for the $4.50 Preferred Stock which form of certificate has been presented to this meeting, and a copy of which the Secretary or an Assistant Secretary is instructed to mark for identification and file with the corporate records, is hereby approved, the facsimile signatures of the officers of the Corporation contained on the certificates are adopted as the valid and binding signatures of the officers so signing, and the proper corporate officers are authorized on behalf of and under the corporate seal of the Corporation to execute and deliver the said certificates in substantially the form presented with such changes therein as may be approved by the officers executing the same, execution thereof to be conclusive evidence of such approval; and "FURTHER RESOLVED, that application be made to the New York Stock Exchange, Inc. (the "Exchange") for listing of the $4.50 Preferred Stock upon official notice of issuance of the $4.50 Preferred Stock and that Messrs. J. W. Blenke, P. R. Shay and P. D. Schwartz or any counsel designated by any of the foregoing individuals, be and each hereby are authorized and designated by the Corporation to appear before the Exchange in furtherance of the listing of said $4.50 Preferred Stock, including authority to file or make any such changes in the said applications or any agreements relevant thereto and to execute any and all documents on behalf of the Corporation as may be necessary or desirable to conform with the requirements for listing; and "FURTHER RESOLVED, that the officers of the Corporation, or any counsel designated thereby, are hereby severally authorized to execute on behalf of the Corporation and file with appropriate authorities such applications, statements, certificates, consents, and other documents as may be necessary for the registration or qualification of the $4.50 Preferred Stock under the securities laws of the states of the United States in which such securities are required to be registered or qualified, and any actions having previously been taken are hereby authorized, approved and ratified; and "FURTHER RESOLVED, that Harris Trust and Savings Bank ("Harris Bank") is hereby appointed as transfer agent and registrar for the $4.50 Preferred Stock upon such terms as the officers of the Corporation consider necessary or advisable; and "FURTHER RESOLVED, that for the purpose of the original issue of the shares of $4.50 Preferred Stock, Harris Bank, as the Corporation's transfer agent and registrar, is authorized and directed to issue and is authorized to register and deliver certificates representing an aggregate of up to 103,976 shares of $4.50 Preferred Stock of the Corporation all in accordance with instructions from the officers of the Corporation; and "FURTHER RESOLVED, that the $4.50 Preferred Stock shall be without par value; and "FURTHER RESOLVED, that the officers of the Corporation are hereby authorized and directed on behalf of the Corporation to take and cause to be taken all action necessary or desirable to carry out the terms, implications and intent of these resolutions, and to consummate the transactions contemplated therein." IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation, Preferences and Rights to be signed by David A. Schoenholz, Executive Vice President and Chief Financial Officer of the Corporation, and attested by Patrick D. Schwartz, Associate General Counsel and Assistant Secretary, this 30/th/ day of June, 1998. HOUSEHOLD INTERNATIONAL, INC. By: /s/ David A. Schoenholz ----------------------- Executive Vice President- Chief Financial Officer Attest: /s/ Patrick D. Schwartz - ----------------------- Associate General Counsel and Assistant Secretary HOUSEHOLD INTERNATIONAL, INC. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS Pursuant to Section 151 of the General Corporation Law of the State of Delaware $4.30 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 resolution was duly adopted by the Board of Directors of the Corporation pursuant to authority conferred upon the Board of Directors by the provisions of the Restated Certificate of Incorporation, as amended, of the Corporation, and in accordance with Section 141(c) of the General Corporation Law of the State of Delaware. 1. The Board of Directors has on May 13, 1998 adopted the following resolution: "RESOLVED, that the issue of a series of Preferred Stock 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: $4.30 Cumulative Preferred Stock (1) Number of Shares and Designation. 836,585 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 $4.30 Cumulative Preferred Stock (hereinafter called the "$4.30 Preferred Stock"). (2) Dividends. The holders of shares of the $4.30 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 semi-annually in arrears, when and as declared by the Board of Directors of the Corporation, on the last day of March and September in each year to holders of record, in each case, on the last business day of the calendar month next preceding the dividend payment date (and the semi-annual dividend periods shall commence on the first day following each dividend payment date and end on the next succeeding dividend payment date). Dividends on the $4.30 Preferred Stock for semi-annual dividend periods will be payable at the rate of $4.30 per annum from the date of original issue. The amount of dividends payable on each share of $4.30 Preferred Stock for each full semi-annual dividend period shall be computed by dividing the dividend rate by two and applying the dividend rate to each outstanding share. (3) Liquidation Preference. The amount to which shares of $4.30 ---------------------- Preferred Stock shall be entitled upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, shall be $100.00 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for payment, whether or not earned or declared, and no more. Such amount to be set apart from holders or paid to holders out of the assets of the Corporation before any distribution is made to or set apart for holders of the Corporation's Common Stock. (4) Redemption. (a) The shares of the $4.30 Preferred Stock shall be ---------- subject to redemption in whole or in part at the option of the Corporation, by vote of the Board of Directors, at $100.00 per share, plus an amount equal to all accrued and unpaid dividends, if any, thereon to the date fixed for redemption, whether or not earned or declared, and no more. If less than all of the outstanding shares of $4.30 Preferred Stock are to be redeemed, the shares to be redeemed shall be determined by lot in such usual manner and subject to such regulations as the Board of Directors in its sole discretion shall prescribe. (b) At least 30 days prior to the date fixed for the redemption of shares of the $4.30 Preferred Stock, a written notice shall be mailed to each holder of record of shares of $4.30 Preferred Stock to be redeemed in a postage prepaid envelope addressed to such holder at his post office address as shown on the records of the Corporation, notifying such holder of the election of the Corporation to redeem such shares stating the date fixed for redemption thereof (the "redemption date"), and calling upon such holder to surrender to the Corporation on the redemption date at the place designated in such notice his certificate or certificates representing the number of shares specified in such notice of redemption. (c) On or after the redemption date each holder of shares of $4.30 Preferred Stock to be redeemed shall present and surrender his certificate or certificates for such shares to the Corporation at the place designated in such notice and thereupon the redemption price of such shares shall be paid to or on the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. (d) In case less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (e) From and after the redemption date (unless default shall be made by the Corporation in payment of the redemption price) all dividends on the shares of $4.30 Preferred Stock designated for redemption in such notice shall cease to accrue, and all rights of the holders thereof as stockholders of the Corporation, except the right to receive the redemption price thereof upon the surrender of certificates representing the same, shall cease and determine and such shares shall not thereafter be transferred (except with the consent of the Corporation) on the books of the Corporation, and such shares shall not be deemed to be outstanding for any purpose whatsoever. (f) At its election, prior to the redemption date, the Corporation may deposit the redemption price of the shares of $4.30 Preferred Stock called for redemption in trust for the holders thereof with a bank or trust company (having a capital and surplus of not less than $1,000,000) in the City of Chicago, Illinois or in the Borough of Manhattan, City and State of New York or in any other city in which the Corporation at the time shall maintain a transfer agency with respect to such stock, in which case such redemption notice shall state the date of such deposit, shall specify the office of such bank or trust company as the place of payment of the redemption price, and shall call upon such holders to surrender the certificates representing such shares at such place on or after the date fixed in such redemption notice (which shall not be later than the redemption date) against payment of the redemption price. From and after the making of such deposit, the shares of $4.30 Preferred Stock so designated for redemption shall not be deemed to be outstanding for any purpose whatsoever, and the rights of the holders of such shares shall be limited to the right to receive the redemption price of such shares without interest, upon surrender of the certificates representing the same to the Corporation at said office of such bank or trust company. (g) Any moneys so deposited which shall remain unclaimed by the holders of such $4.30 Preferred Stock at the end of six years after the redemption date shall be returned by such bank or trust company to the Corporation after which the holders of the $4.30 Preferred Stock shall have no further interest in such moneys. (5) Shares to be Retired. All shares of $4.30 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 $4.30 Preferred Stock. (6) Conversion or Exchange. The holders of shares of $4.30 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) Voting Rights. (a) Each holder of $4.30 Preferred Stock shall be ------------- entitled to one vote for each share held on each matter submitted to a vote of stockholders of the Corporation and, except as otherwise herein or by law provided, the $4.30 Preferred Stock, the Common Stock of the Corporation, and any other capital stock of the Corporation at the time entitled thereto, shall vote together as one class, except that while the holders of $4.30 Preferred Stock, voting as a class, are entitled to elect two directors as hereinafter provided, they shall not be entitled to participate with the Common Stock (or any other capital stock as stated above) in the election of any other directors. (b) In case at any time three or more full semi-annual dividends (whether consecutive or not) on the $4.30 Preferred Stock shall be in arrears, then during the period (the "Class Voting Period") commencing with such time and ending with the time when all arrears in dividends on the $4.30 Preferred Stock shall have been paid and the full dividend on the $4.30 Preferred Stock for the then current semi-annual dividend period shall have been declared and paid or set aside for payment, at any meeting of the stockholders of the Corporation held for the election of directors during the Class Voting Period, the holders of $4.30 Preferred Stock represented in person or by proxy at said meeting shall be entitled, as a class, to the exclusion of the holders of all other classes of stock of the Corporation, to elect two directors of the Corporation, each share of $4.30 Preferred Stock entitling the holder thereof to one vote. (c) Any director who shall have been elected by holders of $4.30 Preferred Stock or by any director so elected as herein contemplated, may be removed at any time during a Class Voting Period, either for or without cause, by, and only by, the affirmative votes of the holders of record of a majority of the outstanding shares of $4.30 Preferred Stock given at a special meeting of such stockholders called for the purpose, and any vacancy thereby created may be filled during such Class Voting Period by the holders of $4.30 Preferred Stock present in person or represented by proxy at such meeting. Any director to be elected by the Board of Directors of the Corporation to replace a director elected by holders of $4.30 Preferred Stock or elected by a director as provided for in this sentence shall be elected by the remaining director previously elected by the holders of $4.30 Preferred Stock. At the end of the Class Voting Period the holders of $4.30 Preferred Stock shall be automatically divested of all voting power vested in them under this resolution but subject always to the subsequent vesting hereunder of voting power in the holders of $4.30 Preferred Stock in the event of any similar default or defaults thereafter. (8) Ranking. The $4.30 Preferred Stock shall rank on a parity with the ------- Corporation's 8-1/4% Cumulative Preferred Stock, Series 1992-A, 7.35% Cumulative Preferred Stock, Series 1993-A, $4.50 Cumulative Preferred Stock and 5% 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 Corporation's 8-1/4% Cumulative Preferred Stock, Series 1992-A, 7.35% Cumulative Preferred Stock, Series 1993-A, $4.50 Cumulative Preferred Stock and 5% Cumulative Preferred Stock as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up, whether voluntary or involuntary. (9) Amendments. While any $4.30 Preferred Stock is outstanding, the ---------- Corporation shall not alter or change the preferences, special rights or powers of the $4.30 Preferred Stock so as to adversely affect the $4.30 Preferred Stock without the affirmative consent (given in writing or at a meeting duly called for the purpose) of the holders of at least two-thirds (2/3rds) of the aggregate number of shares of $4.30 Preferred Stock then outstanding. "FURTHER RESOLVED, that the Chairman, President, or any Vice President, together with the Secretary or an Assistant Secretary, of the Corporation are hereby authorized and directed to execute, acknowledge, file with the Delaware Secretary of State, and record in New Castle County, Delaware, a Certificate of Designation, Preferences and Rights of the $4.30 Preferred Stock when such officers of the Corporation shall in their sole discretion consider such action to be necessary or advisable; and "FURTHER RESOLVED, that the form of certificates for the $4.30 Preferred Stock which form of certificate has been presented to this meeting, and a copy of which the Secretary or an Assistant Secretary is instructed to mark for identification and file with the corporate records, is hereby approved, the facsimile signatures of the officers of the Corporation contained on the certificates are adopted as the valid and binding signatures of the officers so signing, and the proper corporate officers are authorized on behalf of and under the corporate seal of the Corporation to execute and deliver the said certificates in substantially the form presented with such changes therein as may be approved by the officers executing the same, execution thereof to be conclusive evidence of such approval; and "FURTHER RESOLVED, that application be made to the New York Stock Exchange, Inc. (the "Exchange") for listing of the $4.30 Preferred Stock upon official notice of issuance of the $4.30 Preferred Stock and that Messrs. J. W. Blenke, P. R. Shay and P. D. Schwartz or any counsel designated by any of the foregoing individuals, be and each hereby are authorized and designated by the Corporation to appear before the Exchange in furtherance of the listing of said $4.30 Preferred Stock, including authority to file or make any such changes in the said applications or any agreements relevant thereto and to execute any and all documents on behalf of the Corporation as may be necessary or desirable to conform with the requirements for listing; and "FURTHER RESOLVED, that the officers of the Corporation, or any counsel designated thereby, are hereby severally authorized to execute on behalf of the Corporation and file with appropriate authorities such applications, statements, certificates, consents, and other documents as may be necessary for the registration or qualification of the $4.30 Preferred Stock under the securities laws of the states of the United States in which such securities are required to be registered or qualified, and any actions having previously been taken are hereby authorized, approved and ratified; and "FURTHER RESOLVED, that Harris Trust and Savings Bank ("Harris Bank") is hereby appointed as transfer agent and registrar for the $4.30 Preferred Stock upon such terms as the officers of the Corporation consider necessary or advisable; and "FURTHER RESOLVED, that for the purpose of the original issue of the shares of $4.30 Preferred Stock, Harris Bank, as the Corporation's transfer agent and registrar, is authorized and directed to issue and is authorized to register and deliver certificates representing an aggregate of up to 836,585 shares of $4.30 Preferred Stock of the Corporation all in accordance with instructions from the officers of the Corporation; and "FURTHER RESOLVED, that the $4.30 Preferred Stock shall be without par value; and "FURTHER RESOLVED, that the officers of the Corporation are hereby authorized and directed on behalf of the Corporation to take and cause to be taken all action necessary or desirable to carry out the terms, implications and intent of these resolutions, and to consummate the transactions contemplated therein." IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation, Preferences and Rights to be signed by David A. Schoenholz, Executive Vice President and Chief Financial Officer of the Corporation, and attested by Patrick D. Schwartz, Associate General Counsel and Assistant Secretary, this 30/th/ day of June, 1998. HOUSEHOLD INTERNATIONAL, INC. By: /s/ David A. Schoenholz ----------------------- Executive Vice President- Chief Financial Officer Attest: /s/ Patrick D. Schwartz - ----------------------- Associate General Counsel and Assistant Secretary HOUSEHOLD INTERNATIONAL, INC. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS Pursuant to Section 151 of the General Corporation Law of the State of Delaware 7.50% Cumulative Preferred Stock, Series 2001-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 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 9, 2001 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 Messrs. W.F. Aldinger, J.B. Pitblado and J.D. Nichols (with any Director able to act as an alternate in the place of any named Director) are hereby designated as the Offering Committee of the Board of Directors. The Offering Committee of the Board of Directors 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 Debt Securities, (ii) 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, (iii) Stock Purchase Contracts, including without limitation, establishing the purchase price therefore, and fixing the powers, rights, preferences, and qualifications, limitations or restrictions thereof or (iv) the Common Stock, provided however, that prior to the issuance of any Stock ---------------- Purchase Contracts or shares of Common Stock by the Offering Committee pursuant to this authority, the Offering Committee shall report the relevant information pertaining to such offering to the Board of Directors; 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 December 31, 2004, unless extended by further action of the Board of Directors of the Corporation; 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 the 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; and "FURTHER RESOLVED, that any Officer is hereby authorized and directed on behalf of the Corporation to take any and all other actions deemed by such Officer to be necessary or advisable with respect to the offer, issuance, and sale of the Securities." 1. The Board of Directors, on May 9, 2001, 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 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 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 any 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. 2. By Unanimous Written Consent, dated as of September 20, 2001, the Offering Committee of the Board of Directors 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 addition to those set forth in the Restated Certificate of Incorporation, as amended, of the Corporation, are hereby fixed as follows: 7.50% Cumulative Preferred Stock, Series 2001-A (1) Number of Shares and Designation. 300,000 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 7.50% Cumulative Preferred Stock, Series 2001-A (hereinafter called the "7.50% Preferred Stock"). (2) Dividends. The holders of shares of the 7.50% 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 last business days of the preceding month (and the quarterly dividend periods shall commence on the first days of January, April, July and October). Dividends on the 7.50% Preferred Stock for quarterly dividend periods will be payable at the rate of 7.50% per annum from the date of original issue applied to the amount of $1,000 per share of 7.50% Preferred Stock. The amount of dividends payable on each share of 7.50% 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 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 7.50% 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 7.50% Preferred Stock shall be subject to redemption in whole or in part at the option of the Corporation on or after September 27, 2006 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. (5) Shares to be Retired. All shares of 7.50% Preferred Stock purchased or redeemed by the Corporation shall be retired and cancelled and shall be restored to the statues 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 7.50% Preferred Stock. (6) Conversion or Exchange. The holders of shares of 7.50% 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 7.50% Preferred Stock shall rank on a parity with the Corporation's 8-1/4% Cumulative Preferred Stock, Series 1992-A, 5% Cumulative Preferred Stock, $4.50 Cumulative Preferred Stock, and $4.30 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 8-1/4% Cumulative Preferred Stock, Series 1992-A, 5% Cumulative Preferred Stock, $4.50 Cumulative Preferred Stock, and $4.30 Cumulative Preferred Stock as to payment of dividends and distribution of assets upon liquidation, dissolution or winding up, whether voluntary or involuntary. (8) Depositary Shares and Depositary. The 7.50% Preferred Stock shall be represented by 12,000,000 depositary shares, as evidenced by depositary receipts, each depositary share representing ownership of one-fortieth of a share of the 7.50% Preferred Stock, and each owner of a depositary share shall be entitled, in proportion to one-fortieth of a share of the 7.50% Preferred Stock represented by the depositary share, to all the rights and preferences of the 7.50% Preferred Stock (including dividend, voting, redemption and liquidation rights). Computershare Trust Company of New York is appointed depositary of the 7.50% Preferred Stock and shall issue the depositary receipts evidencing the depositary shares in accordance with the terms of a deposit agreement to be entered into between the Corporation and such depositary, which agreement is hereby authorized. Computershare Investor Services, LLC is appointed as registrar and transfer agent for the depositary shares. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation, Preferences and Rights to be signed by John W. Blenke Vice President-Corporate Law and Assistant Secretary, and attested by Patrick D. Schwartz, Assistant General Counsel and Assistant Secretary, this 20th day of September, 2001. HOUSEHOLD INTERNATIONAL, INC. By: /s/ John W. Blenke -------------------- John W. Blenke Vice President-Corporate Law & Assistant Secretary Attest: By: /s/ Patrick D. Schwartz ----------------------- Patrick D. Schwartz Assistant Secretary EX-10.1 4 dex101.txt 1998 KEY EXECUTIVE BONUS PLAN EXHIBIT 10.1 HOUSEHOLD INTERNATIONAL 1998 KEY EXECUTIVE BONUS PLAN HOUSEHOLD INTERNATIONAL ----------------------- 1998 KEY EXECUTIVE BONUS PLAN ----------------------------- I. CONCEPT ------- The Household International 1998 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 the return on equity ("ROE") of Household International, Inc. and its consolidated subsidiaries (the "Company") provided, however, that the Compensation Committee of the Board of Directors shall have the discretion to reduce any participant's award based on (1) other financial performance criteria of the Company or of certain subsidiaries or business units of the Company; and (2) on an evaluation of each participant's individual performance. 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 of the Company. Participants will share a bonus pool calculated as a percentage of the net income of the Company as reported in the audited financial statements of the Company, which net income shall be calculated without regard to the bonuses to be paid hereunder. The Compensation Committee will establish the maximum bonus opportunity available to such participant, stated as a percentage of the entire bonus pool. The sum of the individual percentages of the pool assigned to each participant will not exceed 100 percent. Any changes in the key executives participating in the Plan will be made by the Compensation Committee. III. LEVEL OF AWARDS --------------- The bonus pool will equal 5% of the portion of the Company's net income that exceeds the amount of net income that would have resulted if a 12% ROE had been achieved. Thus, unless actual ROE exceeds 12%, the amount of the bonus pool will be zero. For purposes of this Plan, the Company's net income means the consolidated net income of -1- the Company pursuant to its audited financial statements. ROE shall be calculated by taking the amount of net income determined as above, and dividing it by the average common shareholders' equity for the year, excluding any adjustments related to investment securities under FASB 115. Prior to each Plan period (or at a later date as allowed by IRS notice or regulation), the Compensation Committee of the Board of Directors may establish a dollar cap for the bonus pool. In addition, and within that same timeframe, the Compensation Committee will establish the percentage of the bonus pool that will be allocated to each participant. However, no more than 50% of the bonus pool for any Plan year may be allocated to any one participant, and the sum of the bonus pool percentages which are allocated to all participants shall not exceed 100%. Prior to each Plan period (or at a later date as allowed by IRS notice or regulation), the Chief Executive Officer ("CEO") of the Company will recommend for approval by the Compensation Committee the minimum ROE objective that must be met, in order to pay bonuses under this Plan to any participant at that participant's allocated bonus pool percentage level. This minimum ROE objective will not be less than 12%. If the Compensation Committee approves the aforementioned minimum ROE objective, this objective 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. Subject to the Compensation Committee's negative discretion described in the next paragraph, attainment of the minimum ROE objective will entitle the participant to his/her allocated percentage of the bonus pool. The CEO will also recommend for approval by the Compensation Committee certain other financial performance indicators for the Company or one or more subsidiaries or business units and/or individual goals, which may include specific targets for financial performance goals, which the Compensation Committee may, in its sole discretion, take into account solely for purposes of determining whether it should reduce or eliminate the bonus otherwise due to a participant by virtue of the Company having met the participant's minimum ROE objective. The exercise by the Compensation Committee of this negative discretion with respect to one participant may not result in an increase in the amount of bonus payable to another participant. IV. DETERMINATION OF AWARDS ----------------------- A. Approval of Goals/Awards ------------------------ The Compensation Committee of the Board of Directors must approve the minimum ROE objective prior to the beginning of any Plan period for all participants in the Plan (or at a later date as allowed by IRS notice or regulation). This goal will be the sole criteria for measuring performance and determining the bonus for that period. The Compensation Committee will solely determine -2- whether the minimum ROE objective has been satisfied for all participants in the Plan, as well as the total amount of the bonus pool, and prior to payment of any bonus hereunder will certify in writing as to the satisfaction of the minimum ROE objective and the amount of the bonus pool to the Board of Directors of the Company. Notwithstanding anything contained herein to the contrary, the Compensation Committee may, however, at its sole discretion, reduce bonus awards in light of other financial performance indicators, individual performance of the participant, overall business conditions or other circumstances. V. PAYMENT OF AWARDS ----------------- Awards will be paid as soon as practicable at the end of the Plan period, subject to all required tax withholdings. Awards may be paid in cash, shares of the Company'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 have been met, will be pro-rated according to the portion of the Plan period that an incumbent is eligible for the bonus. 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 Company'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 Company'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 -3- 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 Company 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 ROE, or any change in the formula used to calculate the amount of the bonus pool, must be approved by the stockholders of the Company. E. Stockholder Approval -------------------- The Plan shall be submitted to the stockholders of the Company at the 1998 annual meeting of stockholders. If the Plan is not approved by the stockholders by December 31, 1998, 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. -4- EX-10.2 5 dex102.txt CORPORATE EXECUTIVE BONUS PLAN Exhibit 10.2 Household International Corporate Executive Bonus Plan Summary The Household International Executive Bonus Plan is a short-term, annual incentive plan. The purpose of the annual bonus is to place a significant part of pay at risk and reward executives for the achievements of individual, business unit and corporate financial and operational goals. Performance goals and award opportunities will be communicated to plan participants at the beginning of each calendar year. Participation Participation in the Plan will be restricted to key line and staff executives. For purposes of the Plan, participants will be divided into groups. (See attached list). Any changes in the group of executives participating in the Plan will be made by the Chief Executive Officer, subject to the approval of the Compensation Committee in the case of any participant whose base salary must be determined by the Committee. Level of Awards The corporate measurement of performance will include a combination of key measures such as, but not limited to: expense growth, earnings per share, efficiency ratio, return on equity, core receivables growth, revenue growth, equity to managed assets ratio and products per customer ratio. Household's performance will be measured against pre-established minimum, target and maximum levels. Individual performance is also measured and the percentage attributed to any particular performance objective varies by executive and may change from year-to-year as circumstances warrant. Management may reduce bonus awards in light of overall business conditions or other exceptional circumstances. Target/Maximum Awards Target awards will be paid for fully satisfactory financial and individual performance in a given year. The target award percentage for each group will approximate the guideline percentage shown below of the executive's base salary at the end of the plan year. Guideline % of Annual Base Salary Determined by Group Target Bonus Maximum Bonus ----------------------------------------------------------------------- A 100% 200% B 85% 150% C 75% 150% D $62,500 $125,000 E 60% 120% F 60% 90% G 55% 100% H 50% 150% I 50% 125% J 50% 100% K 50% 80% L 40% 80% M $40,000 $80,000 N 40% 60% O $37,500 $93,750 P 30% 60% Q 30% 50% R 25% 50% S 20% 50% T 20% 40% U 20% 30% Detailed information relating to the assignment and weighing of goals is available by individual and is maintained by the business unit and/or corporate. Determination of Awards - ----------------------- A. Financial Performance Awards A portion of each executive's annual bonus will be determined by meeting specific financial performance objectives. An award will be paid out if achieved results are at the pre-established minimum, target or maximum financial results levels. 2 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 that 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 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. The Chief Executive Officer will determine the awards for all participants whose salaries are not determined by the Compensation Committee. The CEO's direct reports, in consultation with their appropriate subordinates, will recommend to the Chief Executive Officer the awards for all other participants. Payment of Awards Awards will be paid as soon as practical at the end of the plan period, subject to all required tax withholdings. Awards may be paid in cash, shares of Household common stock, or some combination thereof. Neither eligible participation in the plan, nor award payments thereunder shall guarantee an employee, any right to continued employment. The plan does not give any employee right or claim to an award under the program. Management reserves the right to change or discontinue the plan at any time. Administrative Matters A. Promotions/New Plan Participants Normally awards will be pro-rated according to the portion of the plan year that an incumbent is eligible for the bonus. B. Effect on Benefits Payments made under this plan shall be included in an employee's income for purposes of determining pension benefits, life insurance, long-term disability, and participation in the TRIP plan. 3 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. 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. This is 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: . Goals should be consistent and supportive of goals reflected in the Company's strategic business plans. . Goals 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. . Goals must be understood and agreed to by both the manager and the subordinate. 4 Setting goals for staff positions is somewhat more difficult than for line-type positions because staff performance is usually not measured numerically and rarely lends itself to quantitative measurement. Staff responsibilities tend to be contributory, interpretive and are more easily measured qualitatively. Frequently, the goals may include completion of specific projects. Non-quantitative goals should clearly state the criteria that will be used for evaluating successful achievement. The results of the goal setting process will be documented in the format of the Executive Bonus Plan Goal Setting Form and approved by the appropriate level of management. 5 Group A - 100% / 200% - --------------------- Director Personal Banking Group Director Business Development Group Director Strategic Acquisitions Managing Director CEO HAF Managing Director Consumer Finance Sales Managing Director HFS Regional General Manager Vice President National Sales Director Group B - 85% / 150% - -------------------- Managing Director-CEO-Canada Group C - 75% / 150% - -------------------- Director Consumer & Dealer Business Development Managing Director Operations Group D - $62,500 / $125,000 - ---------------------------- Director Recovery Services-Backend Vice President Collections Vice President Consumer Collections (Tampa) Group E - 60% / 120% - -------------------- Group Diector Business Development & Marketing Group Director New Business & Client Relations Group F - 60% / 90% - ------------------- Director of Operations UK Group G - 55% / 100% - -------------------- Vice President Affiliated Sales Group H - 50% / 150% - -------------------- National Director Business Development & Client Relations Group I - 50% / 125% - -------------------- Managing Director National Sales Director Group J - 50% / 100% - -------------------- Chief Credit Policy Officer Chief Operating Officer Director Branch Operations Director Sales HH Direct Director Strategic Partnership Division General Manager Group Director Sales Managing Director Equipment Finance Managing Director Operations National Director Sales Finance President - Decision One Regional Director Sales Senior Vice President Finance Senior Vice President Loan Production Senior Vice President Operations 6 Senior Vice President Portfolio Marketing Senior Vice President Real Estate Asset Management Senior Vice President Secondary Marketing Vice President Applications Systems Vice President Marketing Vice President Portfolio Acquisitions & Secondary Marketing Vice President Strategic Sales Group K - 50% / 80% - ------------------- Deputy Managing Director-COO (HRS) Group L - 40% / 80% - ------------------- Chief Financial Officer Canada Director HFC Wholesale Sales Director of Operations, IRES Director Wholesale Acquisitions & Servicing Group Director Sales & Telemarketing Managing Director-Controller HI Vice President Business Development Vice President Corporate Finance Vice President Default Services Vice President Flow Volume & Special Customer Relations Vice President Taxes Vice President Treasurer Vice President Wholesale Servicing Group M - $40,000 / $80,000 - --------------------------- Director Collections Director Collections Affiliates Vice President External Collections-HRSC Group N - 40% / 60% - ------------------- Assistant General Counsel-Litigation Chief Financial & Credit Policy Officer Chief Financial Officer Director Marketing & Risk Director Portfolio Management Director RE Lending Director Strategic Initiatives Group Director Asset Management Group Director Collections Group Director Credit Operations & Loan Servicing Group Director Customer Service Group Director Marketing Group Director Operation Group Director Risk Control Group Director Risk Management Group General Counsel Managing Director/Chief Financial Officer Managing Director Commercial Finance Managing Director Credit Policy & Risk Control Managing Director Insurance Managing Director Networked Systems Managing Director of Marketing (HCS) 7 Managing Director Strategic Initiatives & Partnership Alliances National Director e-Commerce & Enhancement Services National Director Financial Control National Director Marketing Vice President Applications Systems Vice President Chief Financial Officer-HTS Vice President Compensation & HR Administration Vice President Corporate Communications Vice President Corporate Law & Assistant Secretary Vice President Credit Policy Vice President Data Center Operations Vice President Government Relations Vice President Human Resources Vice President Money & Capital Markets Vice President Portfolio Analysis & Customer Management Group O - $37,500 / $93,750 - --------------------------- Vice President Credit Services Group P - 30% / 60% - ------------------- Assistant Controller Chief Financial Officer Director Retail Sales National Director Customer Service Group Q - 30% / 50% - ------------------- Assistant Controller-Accounting Policy Assistant General Counsel Employee Relations Chief Financial Officer/Director Financial Control Chief Financial Officer-UK Director Asset Backed Financing Director Asset Recovery Director e-Commerce Director Fraud Operations Director Processing Services Director Processing Services-Canada Director Retail & Affinity-UK Director Sales Support/MIS Director/Special Project Consultant Director Strategic Partnerships HHD General Counsel Group Director Business Analysis Group Director Customer Relations Management Group Director e-Business Group Director e-Business Operations Group Director Financial Strategy & Analysis Group Director HCS Marketing Group Director Information Management Group Director Profitability National Director Credit Policy, Pricing, Profitability National Director Customer Relations Vice President Audit Vice President Corporate Property Management Vice President Finance & Administration Vice President Items Processing 8 Vice President Portfolio Management Vice President Specialty Finance Group R - 25% / 50% - ------------------- Director Credit Policy (#1) Director Project Control Group Director ARM Group S - F20% / 50% - -------------------- Director Credit Policy Administration Director Customer Care Director REN Risk Control Group T - 20% / 40% - ------------------- Controller Controller-HCS Director ALM Director Commercial Operations Director Corporate Investigations Management Director Corporate Security Management Director Credit Operations Director Credit Policy (#2) Director Dealer Operations Director Insurance Taxation & Counsel Director Portfolio Acquisitions Director Product Development Director Strategy & Development Director Tax Planning & Tax Counsel General Counsel Group Director Business Performance Group Director Human Resources Group Director Marketing Group Director Marketing Strategy Group Director Operations/COO Vice President Benefits Administration & Policy Vice President Consumer Lending Practices Vice President Data Architecture & System Vice President Distributed Systems Vice President HFC Operation Support Vice President Networked Systems Vice President Records Administration Vice President T&D and Communications Group U - 20% / 30% - ------------------- Actuarial Director Assistant to the Chief Information Officer Channel Architect Controller Controller-HRS USA Director Business Planning CWT Director Business Strategies & Analysis Director Business Systems Director Business Treasury Director Business Unit Accounting Director Cash Operations 9 Director Channel Technology Integration Director Communication & Distributed Services Director Compliance Administration Director Consumer Services Director Corporate & Treasury Accounting Director Corporate Purchasing Director CPA Director Credit Risk Director Customer Information Director Customer Service Director Data Center Operations Director e-Commerce Strategy Director e-House Controller Director Federal & State Tax Compliance Director Federal Tax Audit Director Financial Business Analysis Director Government Relations Director Government. Relation. & Regulation. Issues Director HFC Policy & Compliance Support Director HR Data Management & Call Center Director Human Resources Director Information & Decision Analysis Director Intercorporate Risk & Compliance Director Investor Relations Director Item Processing Director Law & Compliance Director Management Reporting & Analysis Director Marketing Director Marketing Communication Director Operational Services Director Operations Support Director Product Development & Marketing Director Reconciliation & Financial Information Systems Director Sales Support & MIS Director Servicing Director Special Project Consultant Director Strategic Alliance Director Technology & Planning Group Director Credit Operations Group Director Customer Service Group Director Human Resources National Quality Assurance Manager Special Project Consultant B Treasurer Vice President Facilities Vice President Financial Control Vice President Government Relations & Public Affairs Vice President Insurance & Risk Finance Vice President Technical Services 10 EX-10.3 6 dex103.txt LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN Exhibit 10.3 HOUSEHOLD INTERNATIONAL LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN AS AMENDED 1. Purpose The purpose of the Household International Long-Term Executive Incentive Compensation Plan (the "Plan") is to further the long-term growth of Household International Inc. ("Household") and its subsidiaries by Strengthening the ability of Household to attract and retain key employees and to provide additional motivation and incentives for the performance of key employees. 2. Administration The Plan shall be administered by the Compensation Committee of Household's Board of Directors (the "Committee"). The Committee shall have such powers to administer the Plan as are delegated to it by the Plan and the Board of Directors, including the power to interpret the Plan and any agreements executed thereunder, to prescribe rules and regulations relating to the Plan, to determine the terms, restrictions, and provisions of any agreement relating to awards granted pursuant to the Plan, and to make all other determinations necessary or advisable for administering the Plan. No member of the Committee shall be eligible to receive any awards under the Plan while a member of the Committee or at any time within one year prior to becoming a member of the Committee. 3. Grant of Awards; Shares Subject to Plan (a) The Committee may grant any type of award permitted under the terms of the Plan (all such awards in the aggregate being hereinafter referred to as " Awards"). Only employees of Household and its subsidiaries may be selected by the Committee for Awards under the Plan. (b) The maximum number of shares of Common Stock of Household that may be issued under the Plan is 6,017,884 (adjusted to reflect the 2-for-l Common Stock split effected on October 15, 1993), all of which shares may be made subject to Options. The Stock issued pursuant to the Plan may consist of authorized and unissued shares of Household's Common Stock, Common Stock held in Household's treasury or Common Stock purchased on the open market. If any Award granted under the Plan shall terminate or lapse for any reason, any shares of Common Stock subject to such Award shall again be available for the grant of an Award. (c) In the event of corporate changes affecting Household's Common Stock or this Plan or Awards granted thereunder (including, without limiting the generality of the foregoing, 1 stock dividends, stock splits, recapitalizations, reorganizations, mergers, consolidations, or other relevant changes in capitalization), the Board of Directors or the Committee shall make appropriate adjustments in price, number and kind of shares of Common Stock or other consideration subject to such Awards or in the terms of such Awards, which it deems equitable to prevent dilution or enlargement of rights under the Awards. In addition, the Board of Directors or the Committee may from time to time equitably change the aggregate number or remaining number or kind of shares which may be issued under the Plan to reflect any such corporate changes. (d) The Committee may, in its discretion and subject to such rules as it may adopt, permit an employee to satisfy, in whole or in part, withholding tax obligations incurred in connection with Awards: 1) by electing to have Household withhold shares of Household Common Stock (otherwise deliverable to the employee in connection with an Award) in payment for such withholding tax obligation or 2) by delivering shares of Household Common Stock owned by such employee in payment for such withholding tax obligation. 4. Options (a) The Committee may grant any type of statutory or non-statutory Option to purchase shares of Household Common Stock as is permitted by law at the time the Option is granted. The term of the initial grant of each Option shall not be more than ten years and one day from the date of grant and may be exercised at the rate set by the Committee or as stated herein; provided, however, that no Option shall be exercised less than one year from the date of grant, except as provided herein. The Committee may, in its discretion, extend the expiration date of certain Options, other than Options which are intended to qualify as Incentive Stock Options ("ISO") pursuant to Section 422A of the Internal Revenue Code of 1954, as amended (the "Code"), provided no expiration date of any Option may exceed 15 years from the date of the grant of that Option. (b) The per share purchase price of Household Common Stock which may be acquired pursuant to an Option shall be at least 100% of the fair market value of one share of Common Stock of Household on the date on which the Option is granted. Within this limitation such price shall be determined by the Committee. (c) Payment for shares purchased upon the exercise of an Option shall be made in cash or, in the discretion of the Committee, in shares of Common Stock of Household valued at the then fair market value of such shares or by a combination of cash and shares of Common Stock. (d) Each Option granted by the Committee which is intended to qualify as an ISO pursuant to the Code shall comply with the applicable provisions of the Code pertaining to ISOs. The aggregate fair market value (determined as of the time the ISO is granted) of Household Common Stock for which an employee may be granted an ISO in any calendar year (under all plans of Household and subsidiaries) shall not exceed $100,000 plus any unused 2 "limit carryover" for such year, as determined in accordance with Section 422A of the Code. (e) The Committee may, in its discretion and subject to such rules as it may adopt, authorize an extension of credit from Household to an employee holding an award granted under this Plan (including an employee who is an officer or director of Household) to assist the employee in settling withholding tax obligations on Awards. Household may extend or guarantee loans under this provision. Except for existing variable rate loans referred to below, loans will not be made under this provision to assist the employee in paying the exercise price for stock options. Loans extended under the Plan will bear interest, compounded semiannually, at the applicable rate in effect under Section 1274(d) of the Internal Revenue Code (the "Applicable Federal Rate") on the day the loan is made. The Committee may, in its discretion, permit employees with existing variable rate loans made under the Plan, to convert said loans to fixed rate loans which will bear interest, compounded semiannually, at the Applicable Federal Rate in effect on the day the loan is converted; provided, however, that the fixed interest rate will not be set below the rate required to avoid creation of cancellation of indebtedness income for Federal income tax purposes. Payment terms will be established by the Committee and may or may not require periodic payments of interest and/or principal. The term of loans will be established by the Committee, as well as provisions governing the acceleration of maturity upon termination of employment or default. Loans financed or guaranteed by Household will be secured by retention of the issued stock certificates by Household and execution of an agreement with respect to such shares. To the extent necessary to satisfy the provisions of Regulation G or another similar regulatory restriction, other security may be required by the Committee. 5. Stock Appreciation Rights (a) The Committee may grant Stock Appreciation Rights ("SARs") in tandem with the grant of an Option under the Plan or with respect to a previously granted Option under the Plan, except that the Committee may grant SARs in connection with an Option which is an ISO only to the extent that such grant is consistent with the treatment of the Option as an ISO. In either case the number of shares in respect of which SARs are granted by the Committee shall not be greater than the number of shares subject to the related Option. In exchange for the surrender in whole or in part of the right to exercise the related Option, such SAR shall entitle the employee to payment of an amount equal to the appreciation in value of the surrendered Options (the excess of the fair market value of such Stock subject to Options at the time of surrender over their aggregate option price). An SAR granted pursuant to this subsection (a) shall be exercisable to the extent and only to the extent that the related Option is exercisable, but if an SAR is granted with respect to a previously-granted Option, the SAR will not be exercisable for a period of twelve months from the date of grant of such SAR, except as provided herein. No such SAR shall be exercisable except upon surrender of the related Option, and to the extent such Option is surrendered, the shares covered by such Option shall again be available for purposes of the Plan to the extent that payment of such SAR is not made in shares of Stock of Household. The exercise of any Option shall result in the cancellation of any related SAR. An SAR issued in tandem with an ISO may be exercised only when the market price of the Stock subject to the ISO exceeds the exercise price of the ISO. (b) The Committee may also grant units of SARs on a stand-alone basis which are not issued in tandem with Options. The term of each such SAR shall not be more than ten years from the date of grant and may be exercised at the rate set by the Committee or as stated 3 herein; provided, however, that no such SAR shall be exercised less than one year from the date of grant, except as provided herein. The "base price" of each unit of a "stand-alone" SAR shall be at least 100% of the fair market value of one share of Common Stock of Household on the date on which such SAR is granted. Within this limitation the base price shall be determined by the Committee. Each unit of a "stand-alone" SAR entitles the holder, upon exercise, to payment of an amount equal to the difference between the base price of such SAR unit and the fair market value on the date of exercise of a share of Common Stock of Household. (c) At the discretion of the Committee, payment for SARs may be made in cash, in shares of Common Stock of Household valued at their fair market value as of the date of exercise of the SAR, or partly in cash and partly in shares of Common Stock of Household. (d) The Committee may establish a maximum appreciation value payable under an SAR. 6. Transfer of Options and Stock Appreciation Rights; Exercise of Options and Stock Appreciation Rights Following Termination of Employment (a) Options and SARs may not be transferred except by will or the laws of descent and distribution and during the lifetime of the holder may be exercised only by him. If the holder of an Option or SAR shall cease to be an employee of Household or a subsidiary, and unless otherwise provided by the Committee, all rights under such Option or SAR shall immediately terminate, except: (i) in the event of termination of employment of a holder that is subject to Section 10(b) hereof or of a holder who is retirement-eligible under the terms of a pension plan of Household or a subsidiary, the Option or SAR may be exercised within five (5) years of the date of termination of employment. (ii) in the event of termination of employment due to permanent and total disability of a holder who is not retirement-eligible under the terms of a pension plan of Household or a subsidiary, the Option or SAR may be exercised within twelve (12) months following the date of such termination of employment. (iii) in the event of death during employment, the Option or SAR may be exercised by the executor, administrator, or other personal representative of the holder within five (5) years succeeding death if such holder was retirement-eligible under the terms of a pension plan of Household or a subsidiary, or twelve (12) months if such holder was not retirement-eligible under the terms of a pension plan of Household or a subsidiary. 4 (iv) in the event of termination of employment other than as set forth in subsections (i), (ii) or (iii) above, the Option or SAR may be exercised within three (3) months following the date of termination, except for termination for cause. (v) in the event of death of a holder of an Option or SAR following termination of employment, the Option or SAR may be exercised by the executor, administrator, or other personal representative of the holder, notwithstanding the time period specified in (i), (ii), (iii) or (iv) above, within a) twelve (12) months following death or b) the remainder of the period in which the holder was entitled to exercise the Option or SAR, whichever period is longer. If the Committee determines that the termination is for cause, the Option or SAR will not under any circumstances be exercisable following termination of employment. (b) An Option or SAR may not be exercised pursuant to this Section after the expiration of the term of such Option or SAR and may be exercised only to the extent that the holder was entitled to exercise such Option or SAR on the date of termination of employment. 7. Performance Unit Awards and Performance Share Awards (a) The Committee may grant Performance Unit Awards and Performance Share Awards pursuant to this Section 7. The Committee shall establish, with respect to and at the time of grant of each Performance Unit Award or Performance Share Award, a performance period over which the performance of the holder of a Performance Unit Award or Performance Share Award shall be measured. The Committee shall also establish performance levels but subject to such later revisions as the Committee, in its sole judgment, shall deem appropriate to reflect significant, unforeseen events or changes. The Committee in its discretion may also grant Performance Unit Awards and Performance Share Awards to employees following the start of any performance period and may also grant additional Performance Unit Awards and Performance Share Awards to participants after the start of any performance period. (b) Each Performance Unit shall have an initial value of $100 per unit. Each Performance Share shall initially represent one share of Household Common Stock with a value equal to the fair market value of one share of Household Common Stock on the date of grant of the Performance Share Award. As determined by the Committee, the value of Performance Units and the number of shares of Household Common Stock represented by Performance Shares may increase or decrease depending upon the extent to which the performance targets set by the Committee in respect of the holder of the Performance Unit Award or Performance Share Award are achieved. (c) The holder of a Performance Unit Award shall be entitled to receive payment of an amount equal to the value of the Performance Unit Award, based on the achievement of the performance targets for such performance period, as determined by the Committee at the 5 time of settlement of the Performance Unit Award, except that no more than 50% of the Performance Unit Award may be paid in Household Common Stock. (d) The holder of a Performance Share Award shall be entitled to receive a number of shares of Household Common Stock represented by the Performance Share Award, based on the performance targets for such performance period, as determined by the Committee. At the discretion of the Committee, payment for Performance Share Awards may be made in whole or in part in cash, in which case Household shall pay an amount equal to the fair market value of a share of Household Common Stock on the date of settlement for each share of Household Common Stock that would otherwise be delivered to the holder of the Performance Share Award. (e) Payment shall be made in a lump sum or in installments as prescribed by the Committee. If any payment in Household Common Stock is to be made on a deferred basis, the recipient may be entitled, in the discretion of and on terms and conditions established by the Committee, to receive a payment or credit equivalent to any dividend payable with respect to the number of shares of Common Stock which, as of the record date for the dividend, had been awarded or made payable to the recipient but not delivered. If a payment in cash is to be made on a deferred basis, the recipient may be entitled, in the discretion of and on terms and conditions established by the Committee, to be paid interest on the unpaid amount. (f) In the event of (i) death, permanent and total disability, or retirement under the terms of a pension plan of Household or a subsidiary and, unless the Committee in its sole discretion adopts a contrary rule, or (ii) termination in accordance with Section 10(b) hereof, the holder of a Performance Unit Award or Performance Share Award shall receive payment of such Award prorated on the number of elapsed months in the performance period but based on the extent to which performance targets are achieved for the full performance period. Such Performance Unit Award or Performance Share Award shall be payable at the time of payment of all other Performance Unit Awards or Performance Share Awards granted for the same performance period. A holder of a Performance Unit Award or Performance Share Award whose employment terminates for reasons other than those listed in this paragraph will forfeit his rights to any outstanding Performance Unit Award or Performance Share Award. Such forfeiture may be waived in whole or in part by the Committee, in its sole discretion. (g) The Committee may grant Performance Unit Awards or Performance Share Awards in tandem with SARs and Options (including ISOs if such grant is consistent with the treatment of the Option as an ISO). However, to the extent of an exercise or payout of any such Performance Unit Award, Performance Share Award, Option, and/or SAR granted in tandem, the exercise or payout of any unit of such tandem Award shall automatically cancel the corresponding units of such Award. Awards granted to the same individual, whether or not on the same day, will not be considered to be issued in tandem pursuant to this Section unless the Committee designates such Awards as tandem Awards. 6 8. Restricted Stock Rights (a) The Committee from time to time may grant Restricted Stock Rights ("RSRs") to any employee selected by the Committee, which would entitle such employee to receive a stated number of shares of Common Stock of Household, subject to forfeiture of such RSRs if such employee failed to remain continuously an employee of Household or any subsidiary for the period stipulated by the Committee (the "Restricted Period"). (b) RSRs shall be subject to the following restrictions and limitations: (i) The RSRs may not be transferred except by will or the laws of descent and distribution; (ii) Except as otherwise provided in Paragraphs (d) and (e) of this Section 8, the RSRs and the shares subject to such RSRs shall be forfeited and all rights of a grantee of such RSRs and shares shall terminate without any payment of consideration by Household if the employee fails to remain continuously as an employee of Household or any subsidiary for the Restricted Period. A grantee shall not be deemed to have terminated his period of continuous employment with Household or any subsidiary if he leaves the employ of Household or any subsidiary for immediate reemployment with Household or any subsidiary. (c) The holder of RSRs shall not be entitled to any of the rights of a holder of the Common Stock with respect to the shares subject to such RSRs prior to the issuance of such shares pursuant to the Plan. At the Committee's discretion, during the Restricted Period, for each share subject to an RSR, Household will pay the holder an amount in cash equal to the cash dividend declared on a share of Common Stock of Household during the Restricted Period on or about the date Household pays such dividend to its stockholders of record. (d) The Committee in its sole discretion may accelerate the payment of Household Common Stock under RSRs prior to the termination of the Restricted Period if the holder of the RSR has achieved certain performance levels established by the Committee at the time an RSR is granted. The Committee in its sole judgment may revise such performance levels as it deems appropriate to reflect significant, unforeseen events or changes. (e) In the event that the employment of a holder terminates by reason of death or permanent and total disability or as a result of Section 10(b) hereof, such holder shall be entitled to receive the number of shares subject to the RSR multiplied by a fraction (x) the numerator of which shall be the number of full months between the date of grant of 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. A holder of an RSR whose employment terminates for reasons other than those listed in this paragraph will forfeit his rights under any outstanding RSRs. This automatic forfeiture may be waived in whole or in part by the Committee in its sole discretion. 7 (f) When a grantee shall be entitled to receive shares pursuant to an RSR, Household shall issue the appropriate number of shares registered in the name of the grantee. 9. Amendment and Termination of the Plan The Board of Directors or the Committee may amend the Plan or any Award granted thereunder at any time, except as provided in Section 10(d) and that the Board of Directors or the Committee may not, without shareholder approval, and except as permitted by Section 3{c), increase the number of shares of Common Stock of Household which may be issued pursuant to the Plan, change the purchase price of an Option or base price of a "stand-alone" SAR, or make any other amendment to the Plan which is required by law to be approved by the shareholders of Household. The Board of Directors may terminate the Plan at any time except as provided in Section 10(d), but such termination shall not affect Awards previously granted under the Plan. 10. Change in Control (a) In order to protect employees of Household and its subsidiaries who have been granted Awards, if a "Change in Control" occurs, then the Committee, in its sole discretion, may: i. accelerate the time periods for exercising or realizing any Awards, notwithstanding any minimum holding periods set forth in the Plan or established by the Committee at the time of the grant of the Award; ii. provide for the purchase by Household of any Awards in cash equal to the amount that could have been received upon the exercise or realization of such Awards had the Awards been currently exercisable or payable on the day before said cash payment is made; iii. make such adjustments, including the granting of additional Awards, to any outstanding Award as the Committee deems appropriate to reflect the Change in Control; and iv. cause outstanding Awards to be assumed, or new rights substituted therefor, by any corporation that is the successor to Household. (b) Any employee whose position with Household or any of its subsidiaries within twenty-four (24) months after a Change in Control is materially changed (as defined below), shall be deemed to be involuntary terminated without cause from Household and be entitled to exercise or receive the payment of Awards previously granted to him that were outstanding immediately prior to the event causing such termination in accordance with Sections 6(a)(i), 7(f), or 8(e) of the Plan, without any action by the Committee or Board of Directors. 8 (c) For purposes of this Section and to determine the rights of any employee who has an outstanding Award, the term: i. "Change in Control" means a change in the beneficial ownership of Household's common stock or a change in the composition of Household's Board of Directors as a result of any of the following occurrences: (1) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) other than (x) a trustee or other fiduciary of securities held under an employee benefit plan of Household, or (y) the employee or any person acting in concert with the employee becomes a beneficial owner, directly or indirectly, of common stock of Household representing twenty percent (20%) or more of the total voting power of Household's then outstanding common stock; or (2) a tender offer is made for thirty percent (30%) or more of the common stock of Household, which tender offer has not been approved by the Board of Directors of Household. ii. "Materially changed" means the occurrence of one or more of the following events: (1) the termination of the employee, without cause; (2) the employee was assigned to a position of lesser rank or status; (3) the employee's annual target bonus or targeted performance unit awards were reduced and compensation equivalent in aggregate value was not substituted; (4) the employee's annual salary was reduced; (5) the employee's benefits under the Household Retirement Income Plan or any successor tax qualified defined benefit plan were reduced for reasons other than to maintain its tax qualified status and such reductions were not supplemented in the Household Supplemental Retirement Income Plan ("HSRIP"); or the employee's benefits under HSRIP, if applicable, were reduced; (6) the employee's other benefits or perquisites were reduced and such reductions were not uniformly applied with respect to all similarly situated employees; or 9 (7) the employee was reassigned to a geographical area outside of the metropolitan area in which the employee was assigned at the time of the Change in Control. iii. "Cause" means: (1) willful and deliberate misconduct, which is detrimental in a significant way to the interests of Household; (2) death; or (3) inability of the employee, for reasons of disability, to reasonably perform his/her duties for six consecutive calendar months. (d) Notwithstanding anything set forth in Section 9 hereof, with the occurrence of a Change in Control the Plan may not be amended or terminated by the Committee, the Board of Directors or the stockholders of Household. 10 EX-10.5 7 dex105.txt 1996 LONG-TERM EXEC. INCENTIVE COMPENSATION PLAN EXHIBIT 10.5 HOUSEHOLD INTERNATIONAL 1996 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN (as amended November 11, 2001) 1. Purpose ------- The purpose of the Household International 1996 Long-Term Executive Incentive Compensation Plan (the "Plan") is to further the long-term growth of Household International, Inc. and its subsidiaries ("Household") by strengthening the ability of Household to attract and retain employees of outstanding ability, to provide an effective means for employees to acquire and maintain ownership of Household Common Stock, to motivate such employees to achieve long-range performance goals and objectives, and to provide incentive compensation opportunities competitive with those of other major corporations. Household senior executives, in particular, are charged with enhancing shareholder value and except under extraordinary circumstances, will only receive options under this Plan. The options, if granted, to Household senior executives will comprise a significant portion of their total annual compensation. In addition, the Plan provides for the issuance of options to purchase Household Common Stock to non-employee Directors of Household in order to facilitate ownership of Household Common Stock by Directors and to more fully align the interests of Household's Directors with that of its Common stockholders. 2. Administration -------------- The Plan shall be administered by the Compensation Committee of Household's Board of Directors (the "Committee"), a committee of the Board appointed from time to time by the Board consisting solely of two or more non-employee directors, each of whom shall be an "outside director" as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations thereunder and a "disinterested person" as defined in Rule 16b-3 under Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act"). The Committee shall have such powers to administer the Plan as are delegated to it by the Plan and the Board of Directors, including, to the extent permissible under the terms of the Plan, the power to interpret the Plan and any agreements executed thereunder, to prescribe rules and regulations relating to the Plan, to determine the terms, restrictions, and provisions of any agreement relating to awards granted pursuant to the Plan, and to make all other determinations necessary or advisable for administering the Plan. Except as required by Rule 16b-3 (or any successor Rule thereto) with respect to grants of awards to individuals who are subject to Section 16 of the Exchange Act or as otherwise required for compliance with Rule 16b-3 or other applicable law, the Committee -1- may delegate all or any part of its authority under the Plan to any officer of Household. All decisions made by the Committee, or (unless the Committee has specified an appeal process to the contrary) any other person to whom the Committee has delegated authority pursuant to the provisions hereof, shall be final and binding on all persons. 3. Grant of Awards; Shares Subject to Plan --------------------------------------- (a) The Committee may grant any type of award permitted under the terms of the Plan to employees (all such awards in the aggregate being hereinafter referred to as "Awards"). Employees of Household and its subsidiaries may be selected by the Committee for Awards under the Plan. In addition, non-employee Directors of Household will receive options pursuant to the provisions of Section 6. (b) The number of shares of Common Stock of Household that may be issued under the Plan is equal to the sum of the number of shares remaining available under the Household International Long-Term Executive Incentive Compensation Plan (the "1984 Plan") plus 24,000,000, all of which shares may be made subject to options. The shares issued pursuant to an Award may consist of authorized and unissued shares of Household's Common Stock, Common Stock held in Household's treasury or Common Stock purchased on the open market. If any Award granted under the Plan or the 1984 Plan shall terminate or lapse for any reason, any shares of Common Stock subject to such Award shall again be available for grant under the Plan. The maximum number of shares or share equivalents that may be granted through an Award to any one participant in one year is 1,200,000 shares. (c) In the event of corporate changes affecting Household's Common Stock, this Plan or Awards granted to employees and options granted to non-employee Directors hereunder (including, without limiting the generality of the foregoing, stock dividends, stock splits, recapitalizations, reorganizations, mergers, consolidations, or other relevant changes in capitalization), appropriate adjustments in price, number and kind of shares of Common Stock or other consideration subject to such Awards or in the terms of such Awards, shall be made so as to prevent dilution or enlargement of rights under the Awards. In addition, the aggregate number or remaining number or kind of shares which may be issued under the Plan will be adjusted to equitably reflect any such corporate changes. (d) The Committee may, in its discretion and subject to such rules as it may adopt, permit an employee to satisfy, in whole or in part, withholding tax obligations incurred in connection with Awards: (i) by electing to have Household withhold shares of Household Common Stock (otherwise deliverable -2- to the employee in connection with an Award) in payment for the minimum required withholding tax obligation of Household, or (ii) by delivering shares of Household Common Stock owned by such employee in payment for a withholding tax obligation, or (iii) by obtaining an extension of credit from Household in payment for the withholding tax obligation. Any shares of Common Stock delivered by an employee in full or partial payment of withholding tax obligations must have been held by such employee at least six months prior to the date such shares are delivered in payment. (e) The Committee may provide that any Award to employees under the Plan earn dividend equivalents. Such dividend equivalents may be paid currently or may be credited to a participant's account, including during any deferral period. Any crediting of dividend equivalents may be subject to such restrictions and conditions as the Committee may establish, including reinvestment in additional shares or share equivalents. However, the payment of dividend equivalents will not be conditioned upon the employee exercising an option. (f) Except as may be provided in the agreement for any specific employee Award or otherwise limited in this Plan, the Committee may, in its sole discretion, in whole or in part, waive any restrictions or conditions applicable to, or accelerate the vesting of, any Award to an employee. (g) To the extent the Committee deems it necessary, appropriate or desirable to comply with foreign law or practice and to further the purpose of this Plan, the Committee may, without amending this Plan, (i) establish special rules applicable to Awards granted to employees who are foreign nationals, are employed outside the United States, or both, including rules that differ from those set forth in this Plan and (ii) grant Awards to such employees in accordance with those rules. (h) The Committee may, in its discretion and subject to such rules as it may adopt, authorize an extension of credit from Household to an employee holding an award granted under this Plan (including an employee who is an officer or director of Household) to assist the employee in settling withholding tax obligations on Awards. Household may extend or guarantee loans under this provision. Except for existing variable rate loans referred to below, loans will not be made under this provision to assist the employee in paying the exercise price for stock options. Loans extended under the Plan will bear interest, compounded semiannually, at the applicable rate in effect under Section 1274 (d) of the Internal Revenue Code (the "Applicable Federal Rate") on the day the loan is made. The Committee may, in its discretion, permit employees with existing variable rate loans made under the Plan, to convert said loans to fixed rate -3- loans which will bear interest, compounded semiannually, at the Applicable Federal Rate in effect on the day the loan is converted; provided, however, that the fixed interest rate will not be set below the rate required to avoid creation of cancellation of indebtedness income for Federal income tax purposes. Payment terms will be established by the Committee and may or may not require periodic payments of interest and/or principal. The term of loans will be established by the Committee, as well as provisions governing the acceleration of maturity upon termination of employment or default. Loans financed or guaranteed by Household will be secured by retention of the issued stock certificates by Household and execution of an agreement with respect to such shares. To the extent necessary to satisfy the provisions of Regulation G or another similar regulatory restriction, other security may be required by the Committee. 4. Employee Options ---------------- (a) The Committee may grant to employees any type of statutory or non-statutory option to purchase shares of Household Common Stock as is permitted by law at the time the option is granted. The term of the initial grant of each option shall not be more than ten years and one day from the date of grant and may be exercised at the rate set by the Committee or as stated herein; provided, however, that no option shall be exercised less than one year from the date of grant, except as provided herein. The Committee may, in its discretion, extend the expiration date of certain outstanding employee options, provided no expiration date of any option may exceed fifteen years from the date of the grant of that option. (b) The per share purchase price of Household Common Stock which may be acquired pursuant to an employee option shall be at least 100% of the fair market value of one share of Common Stock of Household on the date on which the option is granted. Within this limitation, such price shall be determined by the Committee. (c) Payment for shares purchased upon the exercise of an employee option shall be made in cash or, in the discretion of the Committee, in shares of Common Stock of Household valued at the then fair market value of such shares or by a combination of cash and shares of Common Stock. Any shares of Common Stock surrendered by an employee in full or partial payment of the exercise price of an option must have been held by such employee at least six months prior to the date such shares are surrendered in payment. -4- 5. Transfer of Employee Options; Exercise of Employee Options Following Termination of Employment ------------------------- (a) Options may be exercised only by the employee and shall not be transferable other than by will or the laws of descent and distribution. These restrictions on transferability shall not apply to the extent (i) such restrictions are not at the time required for the Plan to continue to meet the requirements of Rule 16b-3 of the Exchange Act, or any successor Rule, (ii) the Committee has established rules concerning the transferability of employee options and (iii) the agreement relating to an Award so specifies or the holder has received notice from the Office of the Secretary of Household that such restrictions are no longer applicable. If the holder of an option shall cease to be an employee of Household or a subsidiary, and unless otherwise provided by the Committee, all rights under such option shall immediately terminate, except: (i) in the event of termination of employment of a holder to which Section 11(b) hereof applies, or of a holder who is retirement-eligible under the terms of a pension plan of Household or a subsidiary, the option may be exercised within five years of the date of termination of employment or as otherwise provided in the agreement for the Award; (ii) in the event of termination of employment due to permanent and total disability, and the holder is not retirement-eligible under the terms of a pension plan of Household or a subsidiary, the option may be exercised within twelve months following the date of such termination of employment or as otherwise provided in the agreement for the Award; (iii) in the event of death during employment, the option may be exercised by the executor, administrator, or other personal representative of the holder within five years succeeding death if such holder was retirement-eligible under the terms of a pension plan of Household or a subsidiary, or twelve months if such holder was not retirement-eligible under the terms of a pension plan of Household or a subsidiary or as otherwise provided in the agreement for the Award; (iv) except in the event an employee is terminated for cause, following termination of employment other than as set forth in subsections (i), (ii) or (iii) above, the option may be exercised within three months following the date of termination, or prior to the expiration of the option, whichever period is shorter; or (v) in the event of death of a holder of an option following termination of employment, the option may be -5- exercised by the executor, administrator, or other personal representative of the holder, notwithstanding the time period specified in (i), (ii), (iii) or (iv) above, within a) twelve months following death or b) the remainder of the period in which the holder was entitled to exercise the option, whichever period is longer. If the Committee determines that the termination is for cause, the option will not under any circumstances be exercisable following termination of employment. Notwithstanding the foregoing, in the case where the employee is a party to an employment, termination protection or similar agreement with Household or a subsidiary which is in effect at the time of termination of employment that defines "cause" (or words of similar import), the Committee shall not determine such termination of employment to be for "cause" unless a "cause" termination would be permitted under such agreement at that time. (b) An option may not be exercised pursuant to this Section after the expiration of the term of such option and may be exercised only to the extent that the holder was entitled to exercise such option on the date of termination of employment. 6. Non-Employee Director Options ----------------------------- (a) Each non-employee Director of Household will be granted an option for 10,000 shares of Household Common Stock annually on the same date grants are made to employees. In addition, in lieu of cash compensation, non-employee Directors may choose to receive a number of stock options equivalent to 10% of the annual cash compensation they choose to receive in stock options. The Committee will have no discretion to select which non-employee Directors will be granted options or to determine the number of option shares, price, vesting schedule or any other term of the options granted to non-employee Directors. All options granted to non-employee Directors will be non-qualified stock options. (b) The per share purchase price of Common Stock which may be acquired pursuant to a non-employee Director option shall be 100% of the fair market value of one share of Common Stock on the date the option is granted. For purposes of establishing the fair market value of Household's Common Stock on any day under Section 6 of this Plan, such value shall be the average of the highest and lowest sales prices per share of the Common Stock for such date. However, if the Stock Exchange is not open for trading on a given day, the fair market value will be the average of the highest and lowest sales prices per share on the next succeeding business day. (c) Subject to Section 11 of this Plan, each option granted to a non- employee Director vests and shall be fully exercisable -6- beginning six months from the date the option was granted. Each such option expires ten years and one day from the date of the grant. However, if a non-employee Director ceases to be a Director of Household, outstanding vested options are exercisable as follows: (i) in the event service on the Board of Directors terminates due to permanent and total disability, outstanding options may be exercised within twelve months following the date such service terminates or prior to the expiration of the outstanding options, whichever period is shorter; (ii) in the event of death of a non-employee Director whether during service as a Director of Household or after ceasing such service, outstanding options may be exercised by the executor, administrator, or other personal representative of such Director within twelve months after the death of the Director or prior to the expiration of the outstanding options, whichever period is longer; (iii) in the event a non-employee Director's service on the Board of Directors terminates because such Director has reached the mandatory retirement age of 70 (or age 72 if a Director was serving on the Board as of January 1, 1989) or if a non-employee Director retires from the Board prior to reaching the mandatory retirement age but after having served on the Board of Directors continuously for at least fifteen years, outstanding options may be exercised at any time prior to the expiration of the outstanding options; and (iv) in the event service on the Board of Directors terminates other than as set forth in subsections (i), (ii) or (iii) above, outstanding options may be exercised within three months following the date such service terminates or prior to the expiration of the outstanding options, whichever period is shorter. (d) Payment for shares purchased upon exercise of a non-employee Director option shall be made in cash, in shares of Household Common Stock valued at the then fair market value of such shares or by a combination of cash and shares of Common Stock. Any shares of Common Stock delivered in full or partial payment of the exercise price of an option must have been held by such Director at least six months prior to the date such shares are delivered in payment. A non-employee Director may also satisfy, in whole or in part, income tax obligations incurred in connection with the exercise of an option by (i) electing to have Household withhold shares of Common Stock (otherwise deliverable to the Director in connection with the exercise of an option) in payment for such -7- income tax obligation or (ii) by delivering shares of Household Common Stock owned by such Director in payment for such income tax obligation. Any shares of Common Stock delivered in full or partial payment of income tax obligations must have been held by such Director at least six months prior to the date such shares are delivered. (e) Non-employee Director options are not transferable other than by will and the laws of descent and distribution. 7. Restricted Stock Rights ----------------------- (a) Upon such terms as it deems appropriate, the Committee from time to time may grant Restricted Stock Rights ("RSRs") to any employee selected by the Committee, which entitle such employee to receive a stated number of shares of Common Stock of Household. The RSRs are subject to forfeiture if the employee fails to remain continuously employed by Household or any subsidiary for the period(s) stipulated by the Committee (each, a "Restricted Period"). (b) RSRs shall be subject to the following restrictions and limitations: (i) the RSRs may not be transferred except by will or the laws of descent and distribution; and (ii) except as otherwise provided in Paragraphs (d) and (e) of this Section 7, an RSR and the shares subject to an RSR shall be forfeited and all rights of a holder of an RSR shall terminate without any payment of consideration by Household if such employee fails to remain continuously employed by Household or any subsidiary for the Restricted Period. A holder of an RSR shall remain continuously employed if such holder leaves the employ of Household or any subsidiary for immediate reemployment with Household or any subsidiary. (c) Other than as may be specified pursuant to Section 3(e), the holder of an RSR shall not be entitled to any of the rights of a holder of the Common Stock with respect to the shares subject to such RSR prior to the issuance of such shares pursuant to the Plan. (d) The Committee in its sole discretion may accelerate the payment of Household Common Stock under an RSR prior to the termination of the Restricted Period if the holder of an RSR has achieved certain performance levels established by the Committee at the time an RSR is granted. The Committee in its sole judgment may revise such performance levels as it deems appropriate to reflect significant, unforeseen events or changes. (e) In the event that the employment of a holder of an RSR terminates by reason of death or permanent and total disability or as a result of Section 11(b) hereof, such holder shall be -8- entitled to receive the number of shares subject to the RSR multiplied by a fraction (x) the numerator of which shall be the number of full months between the date of grant of each such RSR and the date of such termination of employment, and (y) the denominator of which shall be the number of full months in the respective Restricted Period; provided, however, no fractional share shall be awarded. A holder of an RSR whose employment terminates for reasons other than those listed in this paragraph will forfeit all rights under any outstanding RSR. This automatic forfeiture may be waived in whole or in part by the Committee in its sole discretion. (f) When a holder shall be entitled to receive shares pursuant to an RSR, Household shall issue the appropriate number of shares registered in the name of the holder. 8. Other Stock-Based Awards ------------------------ The Committee may make awards of unrestricted shares of Household Common Stock to eligible employees in recognition of outstanding achievements. 9. Forfeiture ---------- If it is determined that an employee or former employee, while employed by Household or any subsidiary or otherwise associated with Household or any subsidiary as a consultant, advisor or in another similar capacity, engaged at any time in any activity in competition with any activity of Household or any subsidiary or inimical, contrary or harmful to the interests of Household or any subsidiary including, but not limited to: (i) conduct related to the participant's position for which either criminal or civil penalties against the participant may be sought, (ii) violation of Household policies, notwithstanding Household's decision or inability to, or not to, terminate the participant for such violation, (iii) accepting employment with or serving as a consultant, advisor or in any other capacity to an employer that is in competition with or acting against the interests of Household or any subsidiary, including employing or recruiting any present employee of Household or any subsidiary for such competitor, (iv) disclosing or misusing any confidential information or material concerning Household or any subsidiary, or (v) participating in a hostile takeover attempt of Household, then the Committee, in its sole discretion, may cancel any unexpired or unpaid Award at any time. 10. Amendment and Termination of the Plan ------------------------------------- This Plan will expire on May 8, 2006. However, the Board of -9- Directors may terminate the Plan at any time except as provided in Section 11(d), but such termination shall not affect Awards previously granted under the Plan. During the Plan term, the Committee may amend the Plan or any Award granted to an employee under the Plan at any time, except (i) the Plan may not be amended or terminated in the circumstances set forth in Section 11(d), (ii) the Committee may not, without shareholder approval, and except as permitted by Section 3(c), increase the number of shares of Common Stock of Household which may be issued pursuant to the Plan, change the purchase price of an Option, and (iii) the Committee may not make any other amendment to the Plan which is required by law to be approved by the shareholders of Household. Notwithstanding the preceding paragraph, the provisions of Section 6 of the Plan relating to non-employee Directors may not be amended more than once every six months, except to comply with changes to the Code or the rules and regulations thereunder. 11. Change in Control ----------------- (a) In order to protect participants in the Plan who have outstanding Awards in the event there is a "Change in Control" (as defined below), (i) all outstanding Awards will immediately vest or the Restricted Period with respect thereto shall lapse and such Awards shall become exercisable or payable in full notwithstanding any minimum holding period set forth in the Plan or established by the Committee at the time of the grant of the Award, (ii) Household shall require that this Plan, and the Awards issued hereunder, be assumed by the entity causing the Change in Control or the public company parent thereof (the `Acquiror') and, if appropriate, new rights of equal value with substantially similar terms be substituted for such Awards by the Acquiror, and (iii) the Committee, in its sole discretion (notwithstanding any contrary provision in Section 3(f)), may: (i) provide for the purchase by Household or the Acquiror of any Awards in cash equal to the amount that could have been received upon the exercise or realization of such Awards had the Awards been currently exercisable or payable on the day before said cash payment is made; (ii) make such adjustments, including the granting of additional Awards, to any outstanding Award as the Committee deems appropriate to reflect the Change in Control; and (iii) take such other action deemed appropriate by the Committee to ensure that the rights of participants and the Awards are not adversely affected by the Change in Control. -10- (b) Any employee whose position with Household or any of its subsidiaries is "Materially Changed" (as defined below) within twenty-four (24) months after a Change in Control shall be deemed to be involuntarily terminated without "cause" (as defined below) from Household and be entitled to exercise or receive the payment of Awards previously granted to the employee that were outstanding immediately prior to the event causing such termination or were awarded subsequent to the event causing such termination, in each case, in accordance with subsection 5(a)(i) with respect to Options or 7(e) of the Plan with respect to any RSRs with respect to which the Restricted Period has not lapsed, without any action by the Committee or Board of Directors. (c) For purposes of this Section and to determine the rights of any participant who has an outstanding Award, the term: (i) "Change in Control" means: (1) any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose Household or any subsidiary of Household, or any employee benefit plan of Household, or any subsidiary of Household, or any person or entity organized, appointed or established by Household for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of Household, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of Household representing twenty percent (20%) or more of the combined voting power of Household's then outstanding securities; provided, however, that no Change in Control shall be deemed to have occurred as the result of an acquisition of securities of Household by Household which, by reducing the number of voting securities outstanding, increases the direct or indirect beneficial ownership interest of any person to twenty percent (20%) or more of the combined voting power of Household's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such person in Household shall be deemed a Change in Control; and provided further that if the Board of Directors of Household determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of -11- Household representing twenty percent (20%) or more of the combined voting power of Household's then outstanding securities has inadvertently reached that level of ownership interest, and if such person divests as promptly as practicable a sufficient amount of securities of Household so that the person no longer has a direct or indirect beneficial ownership interest in twenty percent (20%) or more of the combined voting power of Household's then outstanding securities, then no Change in Control shall be deemed to have occurred; (2) during any period of two (2) consecutive years (not including any period prior to November 9, 1998) individuals who at the beginning of such two-year period constitute the Board of Directors of Household and any new director or directors (except for any director designated by a person who has entered into an agreement with Household to effect a transaction described in subparagraph (1), above, or subparagraph (3), below) whose election by the Board or nomination for election by Household's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board (such individuals and any such new directors being referred to as the "Incumbent Board"); (3) consummation of (x) an agreement for the sale or disposition of Household or all or substantially all of Household's assets, (y) a plan of merger or consolidation of Household with any other corporation, or (z) a similar transaction or series of transactions involving Household (any transaction described in parts (x) through (z) of this subparagraph (3) being referred to as a "Business Combination"), in each case unless after such a Business Combination (I) the stockholders of Household immediately prior to the Business Combination continue to own, directly or indirectly, more than sixty percent (60%) of the combined voting power of the then -12- outstanding voting securities entitled to vote generally in the election of directors of the new (or continued) entity (including, but not by way of limitation, an entity which as a result of such transaction owns Household, or all or substantially all of Household's former assets either directly or through one or more subsidiaries) immediately after such Business Combination, in substantially the same proportion as their ownership of Household immediately prior to such Business Combination, (II) no person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of Household or of such entity resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of the then combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination, and (III) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; (4) approval by the stockholders of Household of a complete liquidation or dissolution of Household; (5) a tender offer is made for thirty percent (30%) or more of the common stock of Household, which tender offer has not been approved by the Board of Directors of Household; or (6) a solicitation subject to Rule 14a-11 under the Exchange Act (or any successor Rule) relating to the election or removal of 50% or more of the members of the Incumbent Board is made by any person other than Household. (ii) "Materially Changed" means the occurrence of one or more of the following events: (1) the termination of the employee, without -13- cause, and other than by reason of death, permanent and total disability or retirement under the terms of a pension plan of Household or any subsidiary, or termination by the employee within the special 60-day window period which begins 6 months after a Change in Control as provided in the employee's employment agreement; (2) the employee was assigned to a position of lesser rank or status; (3) the employee's annual target bonus or targeted performance unit awards were reduced and compensation equivalent in aggregate value was not substituted; (4) the employee's annual salary was reduced; (5) the employee's benefits under the Household Retirement Income Plan or any successor tax qualified defined benefit plan were reduced for reasons other than to maintain its tax qualified status and such reductions were not supplemented in the Household Supplemental Retirement Income Plan ("HSRIP"); or the employee's benefits under HSRIP, if applicable, were reduced; (6) the employee's other benefits or perquisites were reduced and such reductions were not uniformly applied with respect to all similarly situated employees; or (7) the employee was reassigned to a geographical area outside of the metropolitan area in which the employee was assigned at the time of the Change in Control. (iii) "cause" (1) in the case of an employee who is a party to an employment, termination protection or similar agreement that defines "cause" (or words of similar import), means "cause" (or words of similar import) as defined in such agreement, and (2) in the case of any other employee, means willful and deliberate misconduct, which is detrimental in a significant way to the interests of Household or any subsidiary thereof. -14- (d) Notwithstanding anything set forth in Section 11 hereof, with the occurrence of a Change in Control the Plan may not be amended or terminated by the Committee, the Board of Directors or the stockholders of Household. 12. Miscellaneous ------------- (a) The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments or deliveries of shares of Household Common Stock not yet made or required to be made to a participant by Household, nothing contained herein shall give any rights to a participant that are greater than those of a general creditor of Household. The Committee may permit the deferral of receipt of any shares of Household Common Stock to be issued under a vested Award or exercised Award or authorize the creation of trusts or other plans and arrangements to meet the obligations created under the Plan to deliver shares of Household Common Stock or payments hereunder consistent with the foregoing. (b) With respect to participants subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable provisions of Rule 16b-3 or its successor under the Exchange Act. To the extent any provision of the Plan or action by the Committee or its designee fails to so comply, it shall be deemed null and void. (c) This Plan and each agreement with respect to an Award shall be construed and administered in accordance with the laws of the State of Delaware without giving effect to principles relating to conflict of laws. (d) Neither the adoption of the Plan nor any Award granted hereunder shall confer upon any participant any right to continued employment or service with Household or any subsidiary thereof, nor shall the Plan or any Award interfere in any way with the right of Household or a subsidiary to terminate the employment or relationship of any of the participants at any time. -15- AMENDMENT TO THE HOUSEHOLD INTERNATIONAL, INC. 1996 LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN NOVEMBER 11, 1997 On November 11, 1997 the Household International Board of Directors, upon the recommendation of the Board's Compensation Committee, adopted an amendment to the 1996 Long-Term Executive Incentive Compensation Plan (the "Plan") relating to the transferability of options granted under the Plan. Transferability of Options Granted to Nonemployee Directors and Senior Managers ------ -------- This amendment only applies to Nonemployee Directors and Senior Managers (defined under this amendment as the Chief Executive Officer and employees with a direct reporting relationship to the Chief Executive Officer) who have received or in the future receive options to purchase Household Common Stock under the Plan. This section modifies Plan Section 5(a) as regards the transferability of options granted to Nonemployee Directors and Senior Managers; all other provisions continue to apply. Who is Eligible This provision only applies to Nonemployee Directors and Senior Managers ("Eligible Persons"). Transfer of Options; Minimum Number Options granted under the Plan may be transferred by will or through the laws of descent and distribution. In addition, Eligible Persons may transfer their options only to family members, family trusts, and family partnerships (collectively, "Transferees"). Transferees may not retransfer any options except by will or through the laws of descent and distribution. Any option transferred to a single Transferee must represent the right to purchase a minimum of 100 shares. Which Options May be Transferred Eligible Persons may transfer any option, including vested and unvested portions of any award granted under the Plan. Options granted under previous benefit plans are not covered by this amendment. Exercise Options will vest in accordance with applicable Plan provisions. A Transferee may only exercise vested options, and only as provided in the Plan. -16- Taxation of Options The Eligible Person remains liable for any income tax related to the exercise of transferred options. Income tax will be calculated as of the exercise date. The Eligible Person is solely responsible for tax liability related to any options gifted to a Transferee. Law and Regulation In addition to laws and regulations that apply to the Plan, the Transfer of options must be completed in accordance with securities registration and disclosure regulations applicable at the time of transfer. Eligible Persons and Transferees may be subject to certain waiting periods limiting transfer or exercise. Eligible Persons, or their agents agree to notify the Corporation at least five days before any option they own or control is exercised. -17- EX-10.10 8 dex1010.txt NON-QUALIFIED DEFERRED COMPENSATION PLAN EXHIBIT 10.10 HOUSEHOLD INTERNATIONAL NON-QUALIFIED DEFERRED COMPENSATION PLAN FOR STOCK OPTION EXERCISES Section 1. Purpose. The purpose of this Plan is to provide certain --------- ------- executives of Household International, Inc. (the "Company") and certain of its direct and indirect subsidiaries (the Company and such subsidiaries being referred to as the "Employers") the opportunity to defer receipt of compensation and provide for future savings of compensation earned in connection with the exercise of a Household stock option. The provision of such an opportunity is designed to aid the Company in attracting and retaining as executives persons whose abilities, experience and judgment can contribute to the well-being of the Company. Section 2. Name, Effective Date. The effective date of this plan known --------- -------------------- as the Household International Non-Qualified Deferred Compensation Plan for Stock Option Exercises (the "Plan") is November 15, 1999. Section 3. Eligibility. Any executive of the Employers in Career Band D --------- ----------- or Career Band S who has outstanding stock options for Household International, Inc. Common Stock, $1.00 par value ("Household stock") is eligible to participate in this Plan. Section 4. Deferred Compensation Account. An unfunded deferred --------- ----------------------------- compensation account shall be established for each person who elects to participate in the Plan. Section 5. Amount of Deferral. In the calendar year prior to the --------- ------------------ exercise of a Household stock option on a date at least six months prior to the date the participant intends to exercise the Household stock option, the participant can make an irrevocable election to defer receipt of the stock that would otherwise be paid to the participant upon the exercise of the option. The Household stock deferred will be credited to the participant's deferred compensation account on the date such stock would otherwise be initially issued pursuant to the option exercise. Section 6. Election of Deferral. An election to defer receipt of stock --------- -------------------- due to the exercise of a Household stock option shall be made on forms provided by the Compensation Committee of the Board of Directors of the Company (the "Committee") for that purpose and shall be effective on the date indicated, but not before the date filed with the Committee. In order to have a valid deferral election, the participant who exercises the option must pay for the Household stock option with Household stock which he has held for at least six months. A payment in cash is not permitted. However, any tax withholding must be paid in cash, and not by reducing the Household stock received from the exercise. If a participant has failed to select a deferred distribution date for a deferral or if he terminates employment before such deferred distribution date, then distribution of such deferred compensation account will be made as soon as practicable in the calendar year following the date of the participant's termination of employment. For any deferral attributable to a Household stock option exercise, the earliest deferred distribution date specified by the participant must be at least two years after the year in which the stock option exercise occurred. The election shall be irrevocable upon receipt by the Committee. Section 7. Hypothetical Investment. Each deferred compensation account --------- ----------------------- will be credited with shares of Household stock on the date on which the Household stock option is exercised. No dividends shall be paid on such stock. There is no guarantee a participant's deferred compensation account will increase in value; the account may decrease in value based on the performance of Household stock. Section 8. Payment of Deferral. If a participant elected to defer any --------- ------------------- year's compensation under this Plan to a specific date other than his or her termination of employment, the value of such year's deferred compensation will be payable in stock with only fractional shares paid in cash on the date specified unless it is paid earlier due to termination of employment. The value of a participant's deferred compensation account will be payable in stock with only fractional shares paid in cash as soon as practicable following the end of the year in which a participant terminates employment unless an earlier date is specified by the participant in his election to defer compensation. All deferred amounts to be paid to a participant pursuant to the Plan are to be paid in shares of Household stock with the value of such shares being the fair market value of an equal number of shares of Household stock on the date of payment. For purposes of the Plan, the "fair market value" shall be the average of the high and low sale prices for a share of Household stock as published in The Wall -------- Street Journal for the respective payment date. - -------------- 2 In the event that the participant becomes totally disabled, the Committee, in its absolute discretion, may distribute all or a portion of the participant's deferred compensation account according to a revised payment schedule but it must still be paid in stock. Section 9. Withholding. Subject to the following sentence, there shall --------- ----------- be deducted from all deferrals and payments under this Plan the amount of any taxes required to be withheld by any federal, state or local government unless these amounts are paid in cash by the participant. However, for any taxes required to be withheld by any federal, state or local government in connection with a deferral, these amounts must be paid in cash and not by reducing the shares otherwise credited to the participant's account. The participants and their beneficiaries, distributees, and personal representatives will bear any and all federal, foreign, state, local or other income or other taxes imposed on amounts deferred or paid under this Plan. Section 10. Designation of Beneficiary. A participant may designate a ---------- -------------------------- beneficiary or beneficiaries which shall be effective upon filing written notice with the Committee on the form provided by the Committee for that purpose. If no beneficiary is designated, the beneficiary will be the participant's estate. If more than one beneficiary statement has been filed, the beneficiary or beneficiaries designated in the statement bearing the most recent date will be deemed the valid beneficiary or beneficiaries. Section 11. Death of Participant or Beneficiary. In the event of a ---------- ----------------------------------- participant's death before he has received the full value of his deferred compensation account, the then current value of the participant's deferred compensation account shall be determined and such amount shall be paid to the beneficiary or beneficiaries of the deceased participant as soon as practicable thereafter in stock with only fractional shares paid in cash. If no designated beneficiary has been named or survives the participant, the beneficiary will be the participant's estate. Section 12. Participant's Rights Unsecured. The right of any ---------- ------------------------------ participant or beneficiary to receive payment under the provisions of the Plan shall be an unsecured claim against the general assets of the Company, and any successor company in the event of a merger, consolidation, reorganization or any other event which causes the Company's assets or business to be acquired by another company. No provisions contained in the Plan shall be construed to give any 3 participant or beneficiary at any time a security interest in the deferred compensation account or any other assets of the Company. Section 13. Statement of Account. Statements will be sent to ---------- -------------------- participants following the end of each year as to the value of their deferred compensation accounts as of December 31st of such year. Section 14. Assignability. No right to receive payments hereunder ---------- ------------- shall be transferable or assignable by a participant or a beneficiary. Section 15. Administration of the Plan. The Plan shall be administered ---------- -------------------------- by the Committee. The Committee shall conclusively interpret the provisions of the Plan, decide all claims, and shall make all determinations under the Plan. The Committee shall act by vote or written consent of a majority of its members. The Committee may authorize the appointment of an agent to perform recordkeeping and other administrative duties with respect to the Plan. Section 16. Amendment or Termination of Plan. This Plan may at any time ---------- -------------------------------- or from time to time be amended, modified or terminated by the Committee. No amendment, modification or termination shall, without the consent of a participant, adversely affect such participant's accruals on his prior elections. Rights accrued prior to termination of the Plan will not be canceled by termination of the Plan. Section 17. Governing Law. This Agreement shall be governed by and ---------- -------------- construed in accordance with the laws of the State of Illinois. Section 18. Payment of Certain Costs of the Participant. If a dispute ---------- ------------------------------------------- arises regarding the interpretation or enforcement of this Plan and the participant (or, in the event of his death, his beneficiary) obtains a final judgment in his favor from a court of competent jurisdiction from which no appeal may be taken, whether because the time to do so has expired or otherwise, or his claim is settled by the Company prior to the rendering of such a judgment, all reasonable legal and other professional fees and expenses incurred by the participant in contesting or disputing any such claim or in seeking to obtain or enforce any right or benefit provided for in this Plan or in otherwise pursuing his claim will be promptly paid by the Company with interest thereon at the highest Illinois statutory rate for interest on judgments against private parties from the date of payment thereof by the participant to the date of reimbursement to him by the Company. 4 Section 19. Securities Law. With respect to participants subject to ---------- -------------- Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable provisions of Rule 16b-3 or its successor under the Securities Exchange Act of 1934. To the extent any provision of the Plan or action by the Committee or its designee fails to so comply, it shall be deemed null and void. Section 20. Change in Control. A "Change in Control" shall be deemed ---------- ----------------- to have occurred if: (1) Any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose the Company or any subsidiary of the Company, or any employee benefit plan of the Company, or any subsidiary of the Company, or any person or entity organized, appointed or established by the Company for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities; provided, however, that no Change in Control shall be deemed to have occurred as the result of an acquisition of securities of the Company by the Company which, by reducing the number of voting securities outstanding, increases the direct or indirect beneficial ownership interest of any person to twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Company shall be deemed a Change in Control; and provided further that if the Board of Directors of the Company determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities has inadvertently reached that level of ownership interest, and if such person divests as promptly as practicable a sufficient amount of securities of the Company so that the person no longer has a direct or 5 indirect beneficial ownership interest in twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities, then no Change in Control shall be deemed to have occurred; (2) During any period of two (2) consecutive years (not including any period prior to December 1, 1998) individuals who at the beginning of such two-year period constitute the Board of Directors of the Company and any new director or directors (except for any director designated by a person who has entered into an agreement with the Company to effect a transaction described in subparagraph (1), above, or subparagraph (3), below) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board (such individuals and any such new directors being referred to as the "Incumbent Board"); (3) Consummation of (x) an agreement for the sale or disposition of the Company or all or substantially all of the Company's assets, (y) a plan of merger or consolidation of the Company with any other corporation, or (z) a similar transaction or series of transactions involving the Company (any transaction described in parts (x) through (z) of this subparagraph (3) being referred to as a "Business Combination"), in each case unless after such a Business Combination (I) the stockholders of the Company immediately prior to the Business Combination continue to own, directly or indirectly, more than sixty percent (60%) of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the new (or continued) entity (including, but not by way of limitation, an entity which as a result of such transaction owns the Company, or all or substantially all of the Company's former assets either directly or through one or more subsidiaries) immediately after such Business Combination, in substantially the same proportion as their ownership of the Company immediately prior to such Business Combination, (II) no person (excluding any entity resulting from such Business 6 Combination or any employee benefit plan (or related trust) of the Company or of such entity resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of the then combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination, and (III) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (4) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding any other provision of the Plan, if a Change of Control occurs, then the Company shall create a trust or take such other actions as are appropriate to protect each participant's deferred compensation account. 7 EX-10.11 9 dex1011.txt NON-QUALIFIED DEFERRED COMPENSATION PLAN EXHIBIT 10.11 HOUSEHOLD INTERNATIONAL NON-QUALIFIED DEFERRED COMPENSATION PLAN FOR RESTRICTED STOCK RIGHTS Section 1. Purpose. The purpose of this Plan is to provide certain --------- ------- executives of Household International, Inc. (the "Company") and certain of its direct and indirect subsidiaries (the Company and such subsidiaries being referred to as the "Employers") the opportunity to defer receipt of compensation and provide for future savings of compensation earned in connection with the vesting of Household Restricted Stock Rights. The provision of such an opportunity is designed to aid the Company in attracting and retaining as executives persons whose abilities, experience and judgment can contribute to the well-being of the Company. Section 2. Name, Effective Date. The effective date of this plan known --------- -------------------- as the Household International Non-Qualified Deferred Compensation Plan for Restricted Stock Rights (the "Plan") is September 11, 2001. Section 3. Eligibility. Any executive of the Employers who is a --------- ----------- participant in the 1998 Key Executive Bonus Plan and has outstanding Restricted Stock Rights for Household International, Inc. Common Stock, $1.00 par value ("Household stock") is eligible to participate in this Plan. Section 4. Deferred Compensation Account. An unfunded deferred --------- ----------------------------- compensation account shall be established for each person who elects to participate in the Plan. Section 5. Amount of Deferral. In the calendar year prior to the --------- ------------------ scheduled vesting of Household Restricted Stock Rights on a date at least six months prior to the date the participant's Restricted Stock Rights are scheduled to vest, the participant can make an irrevocable election to defer the right to receive all or a portion of the stock that would otherwise be paid to the participant upon the scheduled vesting of the Restricted Stock Rights. The Household stock as to which an election is made will be credited to the participant's deferred compensation account on the date such stock would otherwise have been initially vested. Section 6. Election of Deferral. An election to defer the right to --------- -------------------- receive stock under this Plan shall be made on forms provided by the Compensation Committee of the Board of Directors of the Company (the "Committee") for that purpose and shall be effective on the date indicated, but not before the date filed with the Committee. If a participant has failed to select a deferred distribution date for a deferral or if he terminates employment before such deferred distribution date, then distribution of such deferred compensation account will be made as soon as practicable in the calendar year following the date of the participant's termination of employment. The earliest deferred distribution date specified by the participant for any deferral under this Plan must be at least two years after the calendar year in which the vesting of Restricted Stock Rights otherwise would have occurred. The election shall be irrevocable upon receipt by the Committee. Section 7. Hypothetical Investment. Each deferred compensation account --------- ----------------------- will be credited with hypothetical shares of Household stock on the date on which the Household Restricted Stock Rights otherwise would have vested. During the deferral period, the deferred compensation account will be credited on each dividend payment date for the Company's Common Stock with additional hypothetical shares of Household stock determined by dividing the aggregate cash dividend which would have been paid if the existing Household stock were actual shares of the Company's Common stock by the fair market value of the Company's Common Stock as of the dividend payment date, computed to four decimal places. For purposes of the Plan, the "fair market value" of one share of the Company's Common Stock shall be the average of the high and low sale prices for a share of such Common Stock for the respective determination date. There is no guarantee a participant's deferred compensation account will increase in value; the account may decrease in value based on the performance of Household stock. Section 8. Payment of Deferral. If a participant elected to defer any --------- ------------------- year's compensation under this Plan to a specific date other than his or her termination of employment, the value of such year's deferred compensation will be payable in stock with only fractional shares paid in cash on the date specified unless it is paid earlier due to termination of employment. The value of a participant's deferred compensation account will be payable in stock with only fractional shares paid in cash as soon as practicable following the end of the year in which a participant terminates employment unless an earlier date is specified by the participant in his deferral 2 election. All deferred amounts to be paid to a participant pursuant to the Plan are to be paid in shares of Household stock with the value of such shares being the fair market value of an equal number of shares of Household stock on the date of payment. In the event that the participant becomes totally disabled, the Committee, in its absolute discretion, may distribute all or a portion of the participant's deferred compensation account according to a revised payment schedule but it must still be paid in stock. Section 9. Withholding. Subject to the following sentence, there shall --------- ----------- be deducted from all deferrals and payments under this Plan the amount of any taxes required to be withheld by any federal, state or local government unless these amounts are paid in cash by the participant. However, for any taxes required to be withheld by any federal, state or local government in connection with a deferral, these amounts must be paid in cash immediately after the vesting date and not by reducing the shares otherwise credited to the participant's account. The participants and their beneficiaries, distributees, and personal representatives will bear any and all federal, foreign, state, local or other income or other taxes imposed on amounts deferred or paid under this Plan. Section 10. Designation of Beneficiary. A participant may designate a ---------- -------------------------- beneficiary or beneficiaries which shall be effective upon filing written notice with the Committee on the form provided by the Committee for that purpose. If no beneficiary is designated, the beneficiary will be the participant's estate. If more than one beneficiary statement has been filed, the beneficiary or beneficiaries designated in the statement bearing the most recent date will be deemed the valid beneficiary or beneficiaries. Section 11. Death of Participant or Beneficiary. In the event of a ---------- ----------------------------------- participant's death before he has received the full value of his deferred compensation account, the then current value of the participant's deferred compensation account shall be determined and such amount shall be paid to the beneficiary or beneficiaries of the deceased participant as soon as practicable thereafter in stock with only fractional shares paid in cash. If no designated beneficiary has been named or survives the participant, the beneficiary will be the participant's estate. Section 12. Participant's Rights Unsecured. The right of any ---------- ------------------------------ participant or beneficiary to receive payment under the provisions of the Plan shall be an unsecured claim against the general 3 assets of the Company, and any successor company in the event of a merger, consolidation, reorganization or any other event which causes the Company's assets or business to be acquired by another company. No provisions contained in the Plan shall be construed to give any participant or beneficiary at any time a security interest in the deferred compensation account or any other assets of the Company. Upon deferral under this Plan, a participant gives up his right to receive stock that otherwise would have been issued as a consequence of vesting of Restricted Stock Rights and receives, instead, the contractual right to an unfunded deferred compensation account equal in value to the value of the stock that otherwise would have been received. Section 13. Statement of Account. Statements will be sent to ---------- -------------------- participants following the end of each year as to the value of their deferred compensation accounts as of December 31st of such year. Section 14. Assignability. No right to receive payments hereunder shall ---------- ------------- be transferable or assignable by a participant or a beneficiary. Section 15. Administration of the Plan. The Plan shall be administered ---------- -------------------------- by the Committee. The Committee shall conclusively interpret the provisions of the Plan, decide all claims, and shall make all determinations under the Plan. The Committee shall act by vote or written consent of a majority of its members. The Committee may authorize the appointment of an agent to perform recordkeeping and other administrative duties with respect to the Plan. Section 16. Amendment or Termination of Plan. This Plan may at any time ---------- -------------------------------- or from time to time be amended, modified or terminated by the Committee. No amendment, modification or termination shall, without the consent of a participant, adversely affect such participant's accruals on his prior elections. Rights accrued prior to termination of the Plan will not be canceled by termination of the Plan. Section 17. Governing Law. This Agreement shall be governed by and ---------- ------------- construed in accordance with the laws of the State of Illinois. Section 18. Payment of Certain Costs of the Participant. If a dispute ---------- ------------------------------------------- arises regarding the interpretation or enforcement of this Plan and the participant (or, in the event of his death, his beneficiary) obtains a final judgment in his favor from a court of competent jurisdiction from which no appeal may be taken, whether because the time to do so has expired or otherwise, or his 4 claim is settled by the Company prior to the rendering of such a judgment, all reasonable legal and other professional fees and expenses incurred by the participant in contesting or disputing any such claim or in seeking to obtain or enforce any right or benefit provided for in this Plan or in otherwise pursuing his claim will be promptly paid by the Company with interest thereon at the highest Illinois statutory rate for interest on judgments against private parties from the date of payment thereof by the participant to the date of reimbursement to him by the Company. Section 19. Securities Law. With respect to participants subject to ---------- -------------- Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable provisions of Rule 16b-3 or its successor under the Securities Exchange Act of 1934. To the extent any provision of the Plan or action by the Committee or its designee fails to so comply, it shall be deemed null and void. Section 20. Change in Control. A "Change in Control " shall be deemed ---------- ----------------- to have occurred if: (1) Any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose the Company or any subsidiary of the Company, or any employee benefit plan of the Company, or any subsidiary of the Company, or any person or entity organized, appointed or established by the Company for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities; provided, however, that no Change in Control shall be deemed to have occurred as the result of an acquisition of securities of the Company by the Company which, by reducing the number of voting securities outstanding, increases the direct or indirect beneficial ownership interest of any person to twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Company shall be deemed a Change in Control; and provided further that if the 5 Board of Directors of the Company determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities has inadvertently reached that level of ownership interest, and if such person divests as promptly as practicable a sufficient amount of securities of the Company so that the person no longer has a direct or indirect beneficial ownership interest in twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities, then no Change in Control shall be deemed to have occurred; (2) During any period of two (2) consecutive years (not including any period prior to December 1, 1998) individuals who at the beginning of such two-year period constitute the Board of Directors of the Company and any new director or directors (except for any director designated by a person who has entered into an agreement with the Company to effect a transaction described in subparagraph (1), above, or subparagraph (3), below) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board (such individuals and any such new directors being referred to as the "Incumbent Board"); (3) Consummation of (x) an agreement for the sale or disposition of the Company or all or substantially all of the Company's assets, (y) a plan of merger or consolidation of the Company with any other corporation, or (z) a similar transaction or series of transactions involving the Company (any transaction described in parts (x) through (z) of this subparagraph (3) being referred to as a "Business Combination"), in each case unless after such a Business Combination (I) the stockholders of the Company immediately prior to the Business Combination continue to own, directly or indirectly, more than sixty percent (60%) of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of 6 the new (or continued) entity (including, but not by way of limitation, an entity which as a result of such transaction owns the Company, or all or substantially all of the Company's former assets either directly or through one or more subsidiaries) immediately after such Business Combination, in substantially the same proportion as their ownership of the Company immediately prior to such Business Combination, (II) no person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or of such entity resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of the then combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination, and (III) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (4) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding any other provision of the Plan, if a Change of Control occurs, then the Company shall create a trust or take such other actions as are appropriate to protect each participant's deferred compensation account. 7 EX-11 10 dex11.txt STATEMENT OF COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (In millions, except per share data.)
- ------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 -------------------------- -------------------------- ------------------------- Year ended December 31 Diluted Basic Diluted Basic Diluted Basic - ------------------------------------------------------------------------------------------------------------------ Earnings: Net income $ 1,923.5 $ 1,923.5 $ 1,700.7 $ 1,700.7 $ 1,486.4 $ 1,486.4 Preferred dividends (15.5) (15.5) (9.2) (9.2) (9.2) (9.2) - ------------------------------------------------------------------------------------------------------------------ Earnings available to common shareholders $ 1,908.0 $ 1,908.0 $ 1,691.5 $ 1,691.5 $ 1,477.2 $ 1,477.2 ================================================================================================================== Average shares: Common 462.0 462.0 471.8 471.8 477.0 477.0 Common equivalents 6.1 - 4.4 - 4.8 - - ------------------------------------------------------------------------------------------------------------------ Total 468.1 462.0 476.2 471.8 481.8 477.0 ================================================================================================================== Earnings per common share $ 4.08 $ 4.13 $ 3.55 $ 3.59 $ 3.07 $ 3.10 ==================================================================================================================
EX-12 11 dex12.txt STMT OF COMP OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (All dollar amounts are stated in millions.)
- ---------------------------------------------------------------------------------------------------------------------------- Year ended December 31 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 1,923.5 $ 1,700.7 $ 1,486.4 $ 524.1 $ 940.3 Income taxes 1,015.0 909.8 734.3 428.6 462.2 - ---------------------------------------------------------------------------------------------------------------------------- Income before income taxes 2,938.5 2,610.5 2,220.7 952.7 1,402.5 - ---------------------------------------------------------------------------------------------------------------------------- Fixed charges: Interest expense (1) 4,196.7 3,943.8 2,782.2 2,530.8 2,367.9 Interest portion of rentals (2) 64.4 52.9 45.4 56.8 53.4 - ---------------------------------------------------------------------------------------------------------------------------- Total fixed charges 4,261.1 3,996.7 2,827.6 2,587.6 2,421.3 - ---------------------------------------------------------------------------------------------------------------------------- Total earnings as defined $ 7,199.6 $ 6,607.2 $ 5,048.3 $ 3,540.3 $ 3,823.8 ============================================================================================================================ Ratio of earnings to fixed charges (3) 1.69 1.65 1.79 1.37 1.58 ============================================================================================================================ Preferred stock dividends (4) $ 23.6 $ 14.1 $ 13.8 $ 23.0 $ 25.3 ============================================================================================================================ Ratio of earnings to combined fixed charges and preferred stock dividends (3) 1.68 1.65 1.78 1.36 1.56 ============================================================================================================================
(1) For financial statement purposes, interest expense includes income earned on temporary investment of excess funds, generally resulting from over-subscriptions of commercial paper. (2) Represents one-third of rentals, which approximates the portion representing interest. (3) The 1998 ratios have been negatively impacted by the one-time merger and integration related costs associated with our merger with Beneficial Corporation ("Beneficial"). Excluding Beneficial merger and integration related costs of $751 million after tax, our ratio of earnings to fixed charges was 1.75 percent and our ratio of earnings to combined fixed charges and preferred stock dividends was 1.74 percent. (4) Preferred stock dividends are grossed up to their pre-tax equivalents. EX-13 12 dex13.txt SECTIONS OF 2001 ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 Household International, Inc. and Subsidiaries SELECTED FINANCIAL DATA AND STATISTICS
All dollar amounts except per share data are stated in millions. 2001 2000 1999 1998(1) 1997(1) - ------------------------------------------------------------------------------------------------------------------------------------ Statement of Income Data-Year Ended December 31 Net interest margin and other revenues $ 9,741.9 $ 8,032.0 $ 6,722.5 $ 6,380.0 $ 6,036.2 Provision for credit losses on owned receivables 2,912.9 2,116.9 1,716.4 1,516.8 1,493.0 Operating expenses 3,587.9 3,042.9 2,527.3 2,672.3 2,884.8 Policyholders' benefits 302.6 261.7 258.1 238.2 255.9 Merger and integration related costs -- -- -- 1,000.0 -- Income taxes 1,015.0 909.8 734.3 428.6 462.2 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 1,923.5 $ 1,700.7 $ 1,486.4 $ 524.1(2) $ 940.3 ==================================================================================================================================== Per Common Share Data Basic earnings $ 4.13 $ 3.59 $ 3.10 $ 1.04 $ 1.97 Diluted earnings 4.08 3.55 3.07 1.03(2) 1.93 Dividends declared .85 .74 .68 .60 .54 Book value 19.47 16.88 13.79 12.88 12.81 - ------------------------------------------------------------------------------------------------------------------------------------ Average number of common and common equivalent shares outstanding(3) 468.1 476.2 481.8 496.4 479.1 - ------------------------------------------------------------------------------------------------------------------------------------ Selected Financial Ratios Owned Basis: Return on average owned assets 2.34% 2.44% 2.64% 1.04%(2) 2.03% Return on average common shareholders' equity 24.1(4) 23.4 23.5 8.1(2) 17.3 Total shareholders' equity as a percent of owned assets(5) 10.77(4) 11.46 11.51 12.78 14.13 Net interest margin 7.93 7.75 7.80 7.34 7.16 Efficiency ratio 38.0 39.2 39.1 59.8(2) 49.9 Consumer net charge-off ratio 3.32 3.18 3.67 3.76 3.39 Reserves as a percent of receivables 3.33 3.14 3.36 3.92 4.25 Reserves as a percent of net charge-offs 110.5 109.9 101.1 112.6 126.7 Reserves as a percent of nonperforming loans 91.0 90.2 87.5 100.3 113.2 Common dividend payout ratio 20.8 20.8 22.1 58.3(2) 28.0 Managed Basis:(6) Return on average managed assets 1.89 1.93 1.99 .72(2) 1.38 Tangible shareholders' equity to tangible managed assets(7) 7.87 7.41 6.96 7.11 6.92 Total shareholders' equity as a percent of managed assets(5) 8.73(4) 9.07 8.72 9.31 9.28 Net interest margin 8.50 8.10 8.23 7.86 7.72 Efficiency ratio 34.0 34.2 33.6 50.2(2) 41.0 Consumer net charge-off ratio 3.73 3.64 4.13 4.29 3.84 Reserves as a percent of receivables 3.78 3.65 3.72 3.99 3.99 Reserves as a percent of net charge-offs 110.7 111.1 98.2 94.4 109.8 Reserves as a percent of nonperforming loans 105.0 107.0 100.1 109.5 115.5 - ------------------------------------------------------------------------------------------------------------------------------------
(1) On June 30, 1998, Household merged with Beneficial Corporation ("Beneficial"), a consumer finance holding company. In connection with the merger, Household issued approximately 168.4 million shares of its common stock and three series of preferred stock. The transaction was accounted for as a pooling of interests and, accordingly, the consolidated financial statements for all periods prior to the merger have been restated to include the financial results of Beneficial. (2) Excluding merger and integration related costs of $751.0 million after-tax and the $118.5 million after-tax gain on sale of Beneficial's Canadian operations, net operating income was $1,156.6 million, diluted operating earnings per share was $2.30, the return on average owned assets was 2.29 percent, the return on average common shareholders' equity was 18.2 percent, the owned basis efficiency ratio was 43.5 percent, the dividend payout ratio was 26.1 percent, the return on average managed assets was 1.60 percent and the managed basis efficiency ratio was 37.6 percent. (3) Share repurchases pursuant to our share repurchase program totaled 17.4 million shares ($916.3 million) in 2001, 5.4 million shares ($209.3 million) in 2000 and 16.8 million shares ($712.9 million) in 1999. Shares repurchased to fund various employee benefit programs totaled 5.0 million shares ($203.0 million) in 1999 and 10.5 million shares ($412.0 million) in 1998. (4) On January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities," which requires unrealized gains and losses on cash flow hedging instruments to be recorded in shareholders' equity, net of tax. These unrealized gains and losses represent timing differences and will result in no net economic impact to our earnings. Excluding unrealized gains and losses on cash flow hedging instruments in 2001, return on average common shareholders' equity was 22.9 percent, total shareholders' equity as a percentage of owned assets was 11.56 percent and total shareholders' equity as a percentage of managed assets was 9.37 percent. (5) Total shareholders' equity includes common shareholders' equity, preferred stock and company obligated mandatorily redeemable preferred securities of subsidiary trusts. (6) We monitor our operations and evaluate trends on both an owned basis as shown in our historical financial statements and on a managed basis. Managed basis reporting adjustments assume that securitized receivables have not been sold and are still on our balance sheet. See page 3 for further information on managed basis reporting. (7) Tangible shareholders' equity consists of total shareholders' equity, excluding unrealized gains and losses on investments and cash flow hedging instruments, less acquired intangibles and goodwill. Tangible managed assets represents total managed assets less acquired intangibles and goodwill and derivative assets. (8) In 2001, we sold approximately $1 billion of credit card receivables as a result of discontinuing our participation in the Goldfish credit card program and purchased a $725 million private label portfolio. In 2000, we acquired real estate secured portfolios totaling $3.7 billion. In 1998, we sold $1.9 billion of non-core MasterCard and Visa receivables and also sold Beneficial's German and Canadian operations which had net receivables of $272 million and $775 million, respectively. 1 Household International, Inc. and Subsidiaries SELECTED FINANCIAL DATA AND STATISTICS (CONTINUED)
All dollar amounts except per share data are stated in millions. 2001 2000 1999 1998(1) 1997(1) - ------------------------------------------------------------------------------------------------------------------------ Owned Basis Balance Sheet Data at December 31 Total assets $ 89,416.0 $ 76,706.3 $ 60,749.4 $ 52,892.7 $ 46,817.0 Receivables:(8) Domestic: Real estate secured $ 42,473.8 $ 33,920.0 $ 23,571.7 $ 17,474.1 $ 12,348.5 Auto finance 2,368.9 1,850.6 1,233.5 805.0 487.5 MasterCard/Visa 6,966.7 5,846.9 4,146.6 5,327.8 5,523.4 Private label 9,853.4 8,671.5 8,546.7 8,051.0 7,457.0 Personal non-credit card 11,736.7 9,950.3 7,469.8 5,573.3 5,018.7 Commercial and other 505.2 596.3 804.5 844.0 1,249.6 - ------------------------------------------------------------------------------------------------------------------------ Total domestic $ 73,904.7 $ 60,835.6 $ 45,772.8 $ 38,075.2 $ 32,084.7 - ------------------------------------------------------------------------------------------------------------------------ Foreign: Real estate secured $ 1,383.0 $ 1,259.7 $ 1,090.2 $ 1,218.6 $ 1,437.7 MasterCard/Visa 1,174.5 2,206.7 2,167.8 1,852.4 1,351.3 Private label 1,810.5 1,675.8 1,573.0 1,515.0 1,899.9 Personal non-credit card 1,600.3 1,377.8 1,681.8 1,535.3 1,804.4 Commercial and other 1.7 2.3 3.8 9.4 104.0 - ------------------------------------------------------------------------------------------------------------------------ Total foreign $ 5,970.0 $ 6,522.3 $ 6,516.6 $ 6,130.7 $ 6,597.3 - ------------------------------------------------------------------------------------------------------------------------ Total owned receivables: Real estate secured $ 43,856.8 $ 35,179.7 $ 24,661.9 $ 18,692.7 $ 13,786.2 Auto finance 2,368.9 1,850.6 1,233.5 805.0 487.5 MasterCard/Visa 8,141.2 8,053.6 6,314.4 7,180.2 6,874.7 Private label 11,663.9 10,347.3 10,119.7 9,566.0 9,356.9 Personal non-credit card 13,337.0 11,328.1 9,151.6 7,108.6 6,823.1 Commercial and other 506.9 598.6 808.3 853.4 1,353.6 - ------------------------------------------------------------------------------------------------------------------------ Total owned receivables $ 79,874.7 $ 67,357.9 $ 52,289.4 $ 44,205.9 $ 38,682.0 ======================================================================================================================== Deposits $ 6,562.3 $ 8,676.9 $ 4,980.0 $ 2,105.0 $ 2,344.2 Commercial paper, bank and other borrowings 12,024.3 10,787.9 10,777.8 9,917.9 10,666.1 Senior and senior subordinated debt 56,823.6 45,053.0 34,887.3 30,438.6 23,736.2 Company obligated mandatorily redeemable preferred securities of subsidiary trusts 975.0 675.0 375.0 375.0 175.0 Preferred stock 455.8 164.4 164.4 164.4 264.5 Common shareholders' equity(3) 8,202.8 7,951.2 6,450.9 6,221.4 6,174.0 - ------------------------------------------------------------------------------------------------------------------------ Managed Basis Balance Sheet at December 31(6) Total assets $ 110,364.0 $ 96,955.8 $ 80,188.3 $ 72,594.6 $ 71,295.5 Managed receivables:(8) Real estate secured $ 44,718.6 $ 36,637.5 $ 26,935.5 $ 22,330.1 $ 19,824.8 Auto finance 6,395.5 4,563.3 3,039.8 1,765.3 883.4 MasterCard/Visa 17,395.2 17,583.4 15,793.1 16,610.8 19,211.7 Private label 13,813.9 11,997.3 11,269.7 10,377.5 10,381.9 Personal non-credit card 17,992.6 16,227.3 13,881.9 11,970.6 11,505.1 Commercial and other 506.9 598.6 808.3 853.4 1,353.6 - ------------------------------------------------------------------------------------------------------------------------ Total managed receivables $ 100,822.7 $ 87,607.4 $ 71,728.3 $ 63,907.7 $ 63,160.5 ========================================================================================================================
2 - -------------------------------------------------------------------------------- Household International, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Household International, Inc. ("Household") is principally a non-operating holding company. Through its subsidiaries, Household provides middle-market consumers with real estate secured loans, auto finance loans, MasterCard* and Visa* credit cards, private label credit cards and personal non-credit card loans. We also offer tax refund anticipation loans ("RAL's") in the United States and credit and specialty insurance products in the United States, United Kingdom and Canada. Household may also be referred to in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") as "we", "us", or "our". Our operations are divided into three reportable segments: Consumer, Credit Card Services and International. Our Consumer segment consists of our consumer lending, mortgage services, retail services and auto finance businesses. Our Credit Card Services segment consists of our domestic MasterCard and Visa credit card business. Our International segment consists of our foreign operations in the United Kingdom ("U.K.") and Canada. At December 31, 2001, our owned receivables totaled $79.9 billion. We monitor our operations and evaluate trends on a managed basis which assumes that securitized receivables have not been sold and are still on our balance sheet. We manage our operations on a managed basis because the receivables that we securitize are subjected to underwriting standards comparable to our owned portfolio, are serviced by operating personnel without regard to ownership and result in a similar credit loss exposure for us. In addition, we fund our operations, review our operating results and make decisions about allocating resources such as employees and capital on a managed basis. See "Asset Securitizations" on pages 23 to 24 and Notes 5, "Asset Securitizations," and 21, "Segment Reporting," to the accompanying consolidated financial statements for additional information related to our businesses and our securitizations. The following discussion of our financial condition and results of operations is presented on an owned basis of reporting. On an owned basis of reporting, net interest margin, provision for credit losses and fee income resulting from securitized receivables are included as components of securitization revenue. - -------------------------------------------------------------------------------- Critical Accounting Policies The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. We follow accounting guidance promulgated by the AICPA Accounting and Audit Guide for Finance Companies versus bank regulatory accounting pronouncements as we are not a bank holding company. Based on the specific customer segment we serve, we believe the policies used are appropriate and fairly present the financial position of Household. The significant accounting policies used in preparation of our financial statements are more fully described in Note 1 to the consolidated financial statements on pages 42 to 46. Certain critical accounting policies are complex and involve significant judgment by our management, including the use of estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. As a result, changes in these estimates and assumptions could significantly affect our financial position or our results of operations. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, the following involve a high degree of judgment and complexity in the preparation of our consolidated financial statements: *MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of VISA USA, Inc. 3 Provision and Credit Loss Reserves Provision for credit losses on owned receivables is made in an amount sufficient to maintain credit loss reserves at a level considered adequate to cover probable losses of principal, interest and fees, including late, overlimit and annual fees, in the existing owned portfolio. Probable losses are estimated for consumer receivables based on contractual delinquency and historical loss experience. For commercial loans, probable losses are calculated using estimates of amounts and timing of future cash flows expected to be received on loans. In addition, loss reserves on consumer receivables are maintained to reflect our judgment of portfolio risk factors, such as economic conditions, bankruptcy trends, product mix, geographic concentrations and other similar items. Charge-off and customer account management policies are also considered when establishing loss reserve requirements to ensure appropriate allowances exist for products with longer charge-off periods and for customers benefiting from account management decisions. Loss reserve estimates are reviewed periodically and adjustments are reported in earnings when they become known. The use of different estimates or assumptions could produce different provisions for credit losses. Receivables Sold and Serviced With Limited Recourse and Securitization Revenue Upon sale, securitized 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 includes cash received and the present value estimate of future cash flows to be received over the lives of the sold receivables. Future cash flows are based on estimates of prepayments, the impact of interest rate movements on yields of receivables and securities issued, delinquency of receivables sold, servicing fees and estimated probable losses under the recourse provisions based on historical experience and estimates of expected future performance. These future cash flows are recorded in the form of an interest-only strip receivable. Our interest-only strip receivables are reported at fair value using discounted cash flow estimates as a separate component of receivables, net of our estimate of probable losses under the recourse provisions. Cash flow estimates include estimates of prepayments, the impact of interest rate movements on yields of receivables and securities issued, delinquency of receivables sold, servicing fees and estimated probable losses under the recourse provisions. Unrealized gains and losses are recorded as adjustments to common shareholders' equity in accumulated other comprehensive income, net of income taxes. Any decline in the value of our interest only strip receivable, which is deemed to be other than temporary, is charged against current earnings. The key assumptions used to value interest-only strip receivables represent our best estimate and the use of different estimates or assumptions could produce different financial results. - -------------------------------------------------------------------------------- Financial Condition and Results of Operations Operations Summary . Our net income increased 13 percent in 2001 to $1.9 billion, compared to $1.7 billion in 2000 and $1.5 billion in 1999. Strong revenue growth, driven by significant receivable growth across all businesses, was the key to our improved results in both years. Partially offsetting the revenue growth were higher operating expenses as a result of the receivable growth, increased investments in sales and collection personnel, and higher technology spending. The provision for credit losses also increased in both years as a result of portfolio growth and uncertain economic conditions. Our diluted earnings per share increased 15 percent in 2001 to $4.08, compared to $3.55 in 2000 and $3.07 in 1999. . Owned receivables grew 19 percent to $79.9 billion in 2001. Growth was strongest in our consumer lending and mortgage services businesses, especially in our real estate secured portfolio, and in our auto finance and private label businesses. We anticipate that owned receivable growth for 2002, as a percentage, will be less than 2001 as we remain cautious as a result of the current economic environment and we move to securitize additional receivables to manage our liquidity position. . Our return on average common shareholders' equity ("ROE") was 24.1 percent in 2001, compared to 23.4 percent in 2000 and 23.5 percent in 1999. Our return on average owned assets ("ROA") was 2.34 percent in 2001, compared to 2.44 percent in 2000 and 2.64 percent in 1999. The slight decrease in our ROA in 2001 reflects the shift in our portfolio mix to lower margin, real estate secured receivables which historically have produced lower losses than unsecured products. 4 . Our owned net interest margin was 7.93 percent in 2001, compared to 7.75 percent in 2000 and 7.80 percent in 1999. In 2001, the increase was primarily due to lower funding costs as a result of easing in United States monetary policy during the year. Fed fund rates were reduced 11 times for a total of 475 basis points during 2001. In 2000, the decrease reflects our continuing shift to lower margin real estate secured receivables and higher interest costs due to higher interest rates. In 2002, we expect net interest margin as a percent of receivables to be higher on average than in 2001 as we benefit from the full-year impact of the 2001 rate reductions. We expect some minor contraction late in the year as we believe the Federal Reserve will raise rates. . Our owned consumer charge-off ratio was 3.32 percent in 2001, compared to 3.18 percent in 2000 and 3.67 percent in 1999. Our delinquency ratio was 4.53 percent at December 31, 2001, compared to 4.26 percent at December 31, 2000. Both ratios were negatively affected in 2001 by the weakening economy. We expect the economy to remain weak and total portfolio charge-offs to increase through the first two or three quarters of 2002. We expect the economy to recover slowly and charge-offs to decline modestly in the latter part of the year. . During 2001, we recorded owned loss provision greater than charge-offs of $502.9 million, increasing our owned loss reserves to an all-time high of $2.7 billion. Loss provision reflected our continued receivable growth, recent increases in personal bankruptcy filings and continued uncertainty over the impact of the weakening economy on charge-off and delinquency trends. . Our owned basis efficiency ratio was 38.0 percent in 2001, 39.2 percent in 2000 and 39.1 percent in 1999. The efficiency ratio is the ratio of operating expenses to the sum of our net interest margin and other revenues less policyholders' benefits. The ratios for both years reflect investments in personnel, technology and marketing. In 2001, these additional costs were offset by growth in net revenues. In 2000, the ratio included higher e-commerce costs. Segment Results - Managed Basis The following summarizes operating results for our reportable operating segments for 2001 compared to 2000 and 1999. See Note 21, "Segment Reporting," to the accompanying consolidated financial statements for additional segment information. . Our Consumer segment reported net income of $1.3 billion in 2001, compared to $1.3 billion in 2000 and $1.0 billion in 1999. Net interest margin, fee income and other revenues increased $1.0 billion to $6.6 billion in 2001 as a resuslt of strong receivable growth. The higher revenues were primarily offset by higher credit loss provision and spending. Our credit loss provision rose $.6 billion to $2.6 billion as a result of increased levels of receivables and the weakening economy. During 2001, we recorded managed loss provision greater than charge-offs of $.4 billion to increase loss reserves. Higher salary expenses, including higher sales incentive compensation, were the result of increased receivable levels, additional collectors, and investments in the growth of our businesses. Managed receivables grew to $75.6 billion at year-end 2001, up 20 percent from $63.1 billion in 2000 and $49.4 billion in 1999. The managed receivable growth was driven by solid growth in all products with the strongest growth in our real estate secured receivables. In 2000, in addition to strong organic growth, we took advantage of consolidation in the home equity industry by acquiring two real estate secured portfolios totaling $3.7 billion. Return on average managed assets ("ROMA") was 1.88 percent in 2001, compared to 2.16 percent in 2000 and 2.11 percent in 1999. The decline in the ratios reflect higher loan loss provision and the continued shift in our portfolio to lower margin real estate secured receivables. 5 . Our Credit Card Services segment also reported improved results as net income increased to $367.6 million in 2001, compared to $214.7 million in 2000 and $152.8 million in 1999. These increases were due primarily to increased net interest margin and higher fee income which increased $.5 billion to $2.7 billion from higher levels of receivables. Net interest margin as a percent of average receivables increased sharply in 2001 as a result of lower funding costs and pricing floors on certain variable rate credit card products which capped rate reductions. This growth was partially offset by higher credit loss provision which increased $.1 billion to $1.2 billion and increased operating expenses, particularly salary expenses associated with the higher receivable levels. Marketing expenses were also higher in 2001 as a result of increased marketing initiatives for almost all of our credit card products. Managed receivables grew to $17.2 billion at year-end 2001, compared to $16.0 billion in 2000 and $13.9 billion in 1999. Growth in the AFL-CIO's Union Plus/R/ ("UP") portfolio, our affinity card relationship with the AFL-CIO labor federation, and our nonprime portfolio, which includes both the subprime Renaissance and the near prime Household Bank branded base portfolios, drove the increase in loans. The increase in nonprime receivables reflects the continued benefits of the February 2000 purchase of Renaissance Holdings, Inc. ("Renaissance") for approximately $300 million in common stock and cash. We did, however, deliberately slow the pace of growth in our Renaissance portfolio in early 2001 in anticipation of the weakening economy. Average GM Card(R) receivables increased in both 2001 and 2000 as we continued to benefit from the March 2000 launch of the new GM Card(R). We added over 600,000 new GM Card(R) accounts in both years. We continue to work with GM on initiatives to promote increased card usage and enhance the potential for future growth. Credit card growth in both years was partially offset by attrition in our legacy undifferentiated Household Bank branded portfolio on which we have limited marketing efforts. ROMA improved to 2.11 percent, compared to 1.33 percent in 2000 and 1.01 percent in 1999. . Our International segment reported net income of $204.1 million in 2001, compared to $230.1 million in 2000 and $218.7 million in 1999. Net income in 2001 includes negative foreign exchange impacts of $8.8 million. The decrease in 2001 net income reflects lower net interest margin as a percentage of receivables in the U.K. and higher salaries and occupancy costs associated with our branch expansion efforts. The decline in the net interest margin ratio was due to lower yields on private label receivables and a change in the portfolio mix. These decreases were partially offset by higher insurance revenues and higher other income resulting from payment by Centrica to discontinue our participation in the joint Goldfish credit card program as described below. In 2000, higher revenues as a result of receivable growth were only partially offset by higher salary expense. Managed receivables totaled $7.2 billion at year-end 2001, compared to $7.8 billion in 2000 and $7.6 billion in 1999. In 2001, the strongest growth was in our real estate secured and private label portfolios. This growth was offset by reductions in our MasterCard and Visa portfolio resulting from the discontinuation of the Goldfish program and the related sale of approximately $1.0 billion in receivables. In 2000, the strongest growth was in our MasterCard and Visa portfolio in the United Kingdom. Marbles(TM), our Internet-based credit card that was launched in October 1999, was the primary contributor to the growth. ROMA was 2.36 percent in 2001, compared to 2.71 percent in 2000 and 2.57 percent in 1999. In August 2001, we reached agreement with Centrica, our partner in marketing the Goldfish credit card, to discontinue our participation in the joint credit card program. As part of this agreement, in December 2001, we sold approximately $1.0 billion in credit card receivables to Centrica and received a payment of $72 million from the former joint venture partner which was partially offset by $40 million in costs, including the write-off of our investment in the joint venture as well as other capitalized costs directly related to our exit from the program. We will continue to service the receivables on an interim basis, for a fee, until Centrica's systems and platforms are in place. After the conversion, which we expect in the second half of 2002, we will receive a remaining payment of $50 million. The settlement agreement and ongoing effects will not have a material impact on future earnings. 6 Balance Sheet Review Owned assets totaled $89.4 billion at December 31, 2001 and $76.7 billion at year-end 2000. Owned receivables may vary from period to period depending on the timing and size of securitization transactions. We had initial securitizations of $5.5 billion of receivables in 2001 and $7.0 billion in 2000. We refer to securitized receivables that are serviced for investors and are not on our balance sheet as our off-balance sheet portfolio. Receivables growth has been a key contributor to our 2001 results. The strongest growth was in our real estate secured portfolio. Growth in our owned portfolio is shown in the following table:
Increase (Decrease) Increase (Decrease) All dollar amounts are stated in 2001/2000 in 2000/1999 in millions December 31, 2001 $ % $ % - ----------------------------------------------------------------------------------------------- Owned receivables: Real estate secured $ 43,856.8 $ 8,677.1 25% $ 10,517.8 43% Auto finance 2,368.9 518.3 28 617.1 50 MasterCard/Visa 8,141.2 87.6 1 1,739.2 28 Private label 11,663.9 1,316.6 13 227.6 2 Personal non-credit card (1) 13,337.0 2,008.9 18 2,176.5 24 Commercial and other 506.9 (91.7) (15) (209.7) (26) - ------------------------------------------------------------------------------------------------ Total $ 79,874.7 $ 12,516.8 19% $ 15,068.5 29% ================================================================================================
(1) Personal non-credit card receivables included PHL's of $4.1 billion at December 31, 2001 and $3.0 billion at December 31, 2000. . Real estate secured receivables increased $8.7 billion to $43.9 billion during 2001 as a result of growth in our HFC and Beneficial branches and mortgage services business. During 2001, we increased our branch sales force by almost 750 account executives and increased the focus on training, motivating and retaining our account executives. These efforts, combined with the centralized lead management and point of sale system in our branches, resulted in higher productivity per account executive and were a primary driver of the receivable growth. Reduced competition also contributed to the growth in both our branch and our mortgage service businesses. During 2001, we also tightened underwriting and increased our emphasis on first lien mortgages. Our auto finance business reported strong, but controlled, growth during 2001, increasing receivables by $.5 billion to $2.4 billion at December 31, 2001, while raising cutoff scores and maintaining stringent underwriting criteria. A strong market, larger and more efficient sales force, increased dealer penetration and strong Internet originations also contributed to the growth. During 2001, we also securitized $2.6 billion of auto finance receivables as compared to $1.9 billion in 2000. MasterCard and Visa receivables increased slightly to $8.1 billion during 2001. Our UP portfolio reported strong growth due to new accounts and balance transfers. Our nonprime portfolio, which includes both the subprime Renaissance and the near-prime new Household Bank branded base portfolios, also grew. Growth was offset by the sale of the approximately $1.0 billion Goldfish credit card portfolio in the U.K. and continued attrition, as expected, in our legacy undifferentiated Household Bank branded base portfolio. During 2001, we also securitized $.3 billion (excluding replenishments) of MasterCard and Visa receivables as compared to $2.0 billion in 2000. Private label receivables increased 13 percent to $11.7 billion during 2001. Growth was primarily due to organic growth by existing merchants, but was also attributable to the addition of new merchants and a $725 million portfolio acquisition in the fourth quarter. Focused marketing efforts, including formation of dedicated marketing teams for our larger merchants, and focused use of promotions, especially for our mid-size merchants, contributed to the organic growth. Strong sales growth by several of our larger merchants also contributed to the increase in receivables. During 2001 and 2000, we securitized $.5 billion (excluding replenishments) of private label receivables. 7 Personal non-credit card receivables increased 18 percent due to growth in our domestic consumer finance branches. As mentioned earlier, in 2001, we increased our branch sales force by almost 750 account executives and increased our focus on training, motivating and retaining our account executives. Our centralized lead management and point of sale system and improved customer retention also contributed to our strong branch growth. Personal non-credit card receivables are comprised of the following:
In millions. At December 31 2001 2000 ----------------------------------------------------------------------- Domestic personal unsecured $ 6,547.4 $ 6,180.8 UP personal unsecured 1,067.7 779.9 Personal homeowner loans 4,121.6 2,989.6 Foreign unsecured 1,600.3 1,377.8 ----------------------------------------------------------------------- Total $ 13,337.0 $ 11,328.1 ======================================================================-
Personal unsecured loans (cash loans with no security) are made to customers who do not qualify for a real estate secured or personal homeowner loan ("PHL"). The average personal unsecured loan is approximately $5,000 and 80 percent of the portfolio is closed-end with terms ranging from 12 to 60 months. The UP personal unsecured loans are part of our affinity relationship with the AFL-CIO and are underwritten similar to other personal unsecured loans. The average PHL is approximately $15,000. PHL's typically have terms of 120 or 180 months and are subordinate lien, home equity loans with high (100 percent or more) combined loan-to-value ratios which we underwrite, price and classify as unsecured loans. Because recovery upon foreclosure is unlikely after satisfying senior liens and paying the expenses of foreclosure, we do not consider the collateral as a source for repayment in our underwriting. Historically, these loans have performed better from a credit loss perspective than traditional unsecured loans as consumers are more likely to pay secured loans than unsecured loans in times of financial distress. During 2001, we deliberately slowed growth in the personal unsecured product and emphasized growth in PHL's. During 2001, we also securitized $2.1 billion of personal non-credit card receivables as compared to $2.6 billion in 2000. . We reach our customers through many different distribution channels and our growth strategies vary across product lines. The consumer lending business originates real estate and personal non-credit card products through its retail branch network, direct mail, telemarketing, strategic alliances and Internet applications. The mortgage services business originates and purchases real estate secured volume primarily through brokers and correspondents. Private label credit card volume is generated through merchant promotions, application displays, Internet applications, direct mail and telemarketing. Auto finance loan volume is generated primarily through dealer relationships from which installment contracts are purchased. Additional auto finance volume is generated through direct lending which includes alliance partner referrals, Internet applications and direct mail. MasterCard and Visa loan volume is generated primarily through direct mail, telemarketing, Internet applications, application displays, promotional activity associated with our co-branding and affinity relationships, mass media advertisements (GM Card(R)) and merchant relationships sourced through our retail services business. We also supplement internally-generated receivable growth with portfolio acquisitions. We also are active in cross-selling more products to our existing customers. This opportunity for receivable growth results from our broad product array, recognized brand names, varied distribution channels, and large, diverse customer base. As a result of these cross-selling initiatives, we increased our products per customer by almost 20 percent in 2001. Products per customer is a measurement of the number of products held by an individual customer whose borrowing relationship with Household is considered in good standing. Products include all loan and insurance products. 8 From time to time we offer customers with outstanding personal non-credit card loans who meet our current underwriting standards the opportunity to convert their loans into real estate secured loans. This enables our customers to have access to additional credit at lower interest rates. This also reduces our potential loss exposure and improves our portfolio performance as previously unsecured loans become secured in nature. We converted approximately $400 million of personal non-credit card loans into real estate secured loans in 2001 and $350 million in 2000. It is not our practice to re-write or reclassify any delinquent secured loans (real estate or auto) into personal non-credit card loans. The Internet is also an increasingly important distribution channel and is enabling us to expand into new customer segments, improve delivery in indirect distribution and serve current customers in a more cost-effective manner. Receivables originated via the Internet were $3.3 billion at December 31, 2001, a 450 percent increase over December 31, 2000. At December 31, 2001, over 925,000 accounts were originated or serviced via the Internet. We are currently accepting loan applications via the Internet for all of our products and have the ability to serve our customers entirely on-line or in combination with our other distribution channels. . The owned consumer two-months-and-over contractual delinquency ratio was 4.53 percent at December 31, 2001, compared to 4.26 percent at December 31, 2000. The owned consumer net charge-off ratio was 3.32 percent in 2001, compared to 3.18 percent in 2000 and 3.67 percent in 1999. As expected, delinquency and charge-off ratios increased during 2001. We expect manageable increases in both delinquency and charge-off to continue during the first two or three quarters of 2002 and then decline modestly in the latter part of the year. . Our owned credit loss reserves were $2.7 billion at December 31, 2001, compared to $2.1 billion at December 31, 2000. Credit loss reserves as a percent of owned receivables were 3.33 percent at December 31, 2001, compared to 3.14 percent at year-end 2000. . In connection with our share repurchase program, we repurchased 17.4 million shares of our common stock for a total of $916.3 million during 2001. Since announcing our share repurchase program in March 1999, we have repurchased 39.6 million shares for a total of $1.8 billion. On May 9, 2001, we announced a new two-year $2 billion common stock repurchase program. This new program went into effect on January 1, 2002 and replaced the $2 billion stock repurchase program which expired on December 31, 2001. . Our total shareholders' equity (including company obligated mandatorily redeemable preferred securities of subsidiary trusts and excluding unrealized gains and losses on cash flow hedging instruments in 2001) to owned assets ratio was 11.56 percent at December 31, 2001, compared to 11.46 percent at December 31, 2000. Results of Operations Unless noted otherwise, the following discusses amounts reported in our owned basis statements of income. Net Interest Margin Our net interest margin on an owned basis increased to $5.8 billion in 2001, up from $4.8 billion in 2000 and $3.8 billion in 1999. Growth in average interest-earning assets resulted in higher net interest margin dollars in both years. In 2001, the increase was also due to lower funding costs, partially offset by an ensuing reduction in the rates we charge to our customers. The Federal Reserve reduced interest rates 11 times for a total of 475 basis points during 2001. In 2000, better pricing was partially offset by higher interest costs. In 2000, the Federal Reserve raised interest rates 3 times for a total of 100 basis points. In 2002, we expect net interest margin as a percent of receivables to be higher on average than in 2001 as we benefit from the full-year impact of the 2001 rate reductions. We expect some minor contraction late in the year as we believe the Fed will raise rates. 9 As a percent of average interest-earning assets, net interest margin was 7.93 percent in 2001, 7.75 percent in 2000 and 7.80 percent in 1999. On a percentage basis, net interest margin in both years was impacted by a shift in the portfolio to lower margin real estate secured receivables. In 2001, the impact of this shift was more than offset by lower interest costs. In 2000, higher interest costs also contributed to the decrease in the ratio. Our net interest margin on a managed basis includes finance income earned on our owned receivables as well as on our securitized receivables. This finance income is offset by interest expense on the debt recorded on our balance sheet as well as the contractual rate of return on the instruments issued to investors when the receivables were securitized. Managed basis net interest margin increased to $7.9 billion in 2001, up from $6.5 billion in 2000 and $5.5 billion in 1999. As a percent of average managed interest-earning assets, net interest margin was 8.50 percent in 2001, 8.10 percent in 2000 and 8.23 percent in 1999. Receivable growth contributed to the dollar increases in both years. The increase in the ratio in 2001 was primarily the result of lower interest costs. The decrease in the ratio in 2000 reflects the continued shift in the portfolio to lower margin real estate secured receivables and higher interest costs due to increases in interest rates, partially offset by improved pricing in our MasterCard and Visa portfolio. Net interest margin as a percent of receivables on a managed basis is greater than on an owned basis because auto finance and MasterCard and Visa receivables, which have wider spreads, are a larger portion of the off-balance sheet portfolio than of the owned portfolio, which primarily consists of lower margin real estate secured loans. We are able to adjust our pricing on many of our products, which reduces our exposure to changes in interest rates. During 2001, we benefited from reductions in funding costs, which were greater than the corresponding reduction in pricing. At December 31, 2001 and 2000, we estimated that our after-tax earnings would decline by about $77 and $81 million, respectively, following a gradual 200 basis point increase in interest rates over a twelve month period. See the net interest margin tables on pages 33 to 35 for additional information regarding our owned basis and managed basis net interest margin. Provision for Credit Losses The provision for credit losses includes current period net credit losses and an amount which we believe is sufficient to maintain reserves for losses of principal, interest and fees, including late, overlimit and annual fees, at a level that reflects known and inherent losses in the portfolio. At December 31, 2001, our owned loss reserve was at an all-time high, despite a continued shift in our portfolio mix to real estate secured loans. During 2001, we recorded owned loss provision $502.9 million greater than charge-offs. Loss provision in 2001 reflected our continued receivable growth, recent increases in personal bankruptcy filings, and continued uncertainty over the impact of the weakening economy on charge-off and delinquency trends. Additionally, growth in our receivables and portfolio seasoning ultimately result in a higher dollar loss reserve requirement. Loss provision was $195.5 million greater than charge-offs in 2000, primarily due to receivable growth. Loss provisions are based on an estimate of inherent losses in our loan portfolio. See "Credit Loss Reserves" for further discussion and overall methodology for determining loss provision and loss reserves. The provision for credit losses totaled $2.9 billion in 2001, compared to $2.1 billion in 2000 and $1.7 billion in 1999. Receivables growth in both years and a weakened economy in 2001 contributed to a higher provision. The provision for credit losses may vary from year to year, depending on a variety of factors including the amount of securitizations in a particular period, economic conditions and historical delinquency roll-rates of our loan products and our product vintage analyses. 10 As a percent of average owned receivables, the provision was 4.00 percent, compared to 3.50 percent in 2000 and 3.59 percent in 1999. In 2001, the increase in this ratio reflects higher charge-offs, including bankruptcy charge-offs, and additions to loss reserves, both resulting from the weakening economy. In 2000, the decline in this ratio reflects improved credit quality as secured loans, which have a lower loss experience, represented a larger percentage of our owned portfolio. This decline came in spite of an increase in overall charge-off dollars as a result of receivable growth in the prior year. Run-off of our legacy undifferentiated Household Bank branded MasterCard and Visa portfolio, which had higher loss rates, also contributed to the decline in 2000. See the "Analysis of Credit Loss Reserves Activity" on pages 31 and 32 for additional information regarding our owned basis and managed basis loss reserves. Other Revenues Total other revenues on an owned basis were $3.9 billion in 2001, $3.3 billion in 2000 and $2.9 billion in 1999 and included the following:
In millions. Year ended December 31 2001 2000 1999 - ------------------------------------------------------------------------------- Securitization revenue $ 1,775.6 $ 1,476.6 $ 1,393.5 Insurance revenue 662.4 561.2 534.6 Investment income 167.7 174.2 168.8 Fee income 966.9 825.8 595.5 Other Income 322.5 228.8 223.8 - -------------------------------------------------------------------------------- Total other revenues $ 3,895.1 $ 3,266.6 $ 2,916.2 ================================================================================
Securitization revenue is the result of the securitization of our receivables and includes initial and replenishment gains on sale, net of our estimate of probable credit losses under the recourse provisions, as well as servicing revenue and excess spread. Securitization revenue was $1.8 billion in 2001, compared to $1.5 billion in 2000 and $1.4 billion in 1999. The increases were due to higher average securitized receivables and changes in the mix of receivables included in these transactions. Securitization revenue will vary each year based on the level and mix of receivables securitized in that particular year (which will impact the gross initial gains and related estimated probable credit losses under the recourse provisions) as well as the overall level and mix of previously securitized receivables (which will impact servicing revenue and excess spread). The estimate for probable credit losses for securitized receivables is impacted by the level and mix of current year securitizations because securitized receivables with longer lives may require a higher over-the-life loss provision than receivables securitized with shorter lives depending upon loss estimates and severities. Securitization revenue included the following:
In millions. Year ended December 31 2001 2000 1999 - -------------------------------------------------------------------------------- Net initial gains $ 165.7 $ 170.1 $ 111.1 Net replenishment gains 407.5 328.4 254.1 Servicing revenue and excess spread 1,202.4 978.1 1,028.3 - -------------------------------------------------------------------------------- Total $ 1,775.6 $ 1,476.6 $ 1,393.5 ================================================================================
Certain securitization trusts, such as credit cards, are established at fixed levels and require frequent sales of new receivables into the trust to replace receivable run-off. The change in our interest-only strip receivables, net of the related loss reserve and excluding the mark-to-market adjustment recorded in accumulated other comprehensive income, was $100.6 million in 2001, $59.0 million in 2000 and $34.0 million in 1999. See Note 1, "Summary of Significant Accounting Policies," and Note 5 "Asset Securitizations," to the consolidated financial statements for further information on asset securitizations. Insurance revenue was $662.4 million in 2001, $561.2 million in 2000 and $534.6 million in 1999. The increases reflect increased sales on a larger loan portfolio and improved customer acceptance and retention rates. During 2001, we announced that we will discontinue the sale of single premium credit insurance on real estate secured receivables in favor of offering a fixed monthly premium insurance product. The rollout of this insurance product began in the fourth quarter of 2001 and was substantially completed in the first quarter of 2002. This change is not expected to have a material impact on our results of operations for 2002. 11 Investment income includes interest income on investment securities in the insurance business as well as realized gains and losses from the sale of investment securities. Investment income was $167.7 million in 2001, $174.2 million in 2000 and $168.8 million in 1999. In 2001, the decrease was primarily due to lower interest income, primarily resulting from lower yields, partially offset by higher average investment balances. In 2000, the increase was primarily due to higher interest income, primarily resulting from higher average investment balances and higher yields. Fee income includes revenues from fee-based products such as credit cards. Fee income was $966.9 million in 2001, $825.8 million in 2000 and $595.5 million in 1999. The increases were primarily due to higher credit card fees. Fee income will also vary from year to year depending upon the amount of securitizations in a particular period. See Note 21, "Segment Reporting," to the accompanying consolidated financial statements for additional information on fee income on a managed basis. Other income, which includes revenue from our refund lending business, was $322.5 million in 2001, $228.8 million in 2000 and $223.8 million in 1999. RAL income was $198.3 million in 2001, $132.7 million in 2000 and $130.6 million in 1999. The increase in 2001 also reflects income of $32 million, net of costs directly related to our exit from the Goldfish credit card program, in connection with the agreement with Centrica to discontinue our participation in the program. Costs and Expenses Total costs and expenses increased 18 percent to $3.9 billion in 2001, compared to $3.3 billion in 2000 and $2.8 billion in 1999. Expenses on an owned basis are the same as expenses on a managed basis. Higher expenses were the result of higher receivable levels and increased operating, technology, marketing, and personnel spending directly related to the receivable growth. Acquisitions during the first half of 2000 also contributed to increased expenses over the prior years. Our efficiency ratio was 38.0 percent in 2001, compared to 39.2 percent in 2000 and 39.1 percent in 1999. Total costs and expenses included the following:
In millions. Year ended December 31 2001 2000 1999 - -------------------------------------------------------------------------------------------------- Salaries and fringe benefits $ 1,597.2 $ 1,312.1 $ 1,048.7 Sales incentives 273.2 203.6 145.9 Occupancy and equipment expense 337.4 306.6 270.9 Other marketing expenses 519.3 470.9 370.0 Other servicing and administrative expenses 709.6 589.7 547.9 Amortization of acquired intangibles and goodwill 151.2 160.0 143.9 Policyholders' benefits 302.6 261.7 258.1 - -------------------------------------------------------------------------------------------------- Total costs and expenses $ 3,890.5 $ 3,304.6 $ 2,785.4 ==================================================================================================
Salaries and fringe benefits were $1.6 billion in 2001, $1.3 billion in 2000 and $1.0 billion in 1999. The increases were primarily due to additional staffing at all businesses, including the impact of acquisitions. In 2001, we increased sales, collection, customer service and technology staffing levels at all businesses to support our growth. Branch expansion efforts in the United Kingdom and Canada also contributed to the increase in 2001. In 2000, additional staffing to support growth and collection efforts in our consumer lending business, which contributed to increased recoveries and collections and improved the portfolio performance of our receivables, also contributed to the increase over the prior year. Growth in our credit card business, including the impact of acquisitions, also contributed to the increase in 2000. Sales incentives were $273.2 million in 2001, $203.6 million in 2000 and $145.9 million in 1999. The increases were primarily due to higher sales volumes in our branches. Occupancy and equipment expense was $337.4 million in 2001, $306.6 million in 2000 and $270.9 million in 1999. The increases were primarily due to growth in our support facilities. In 2001, we also added new branches in the United Kingdom and Canada. In 2000, we opened a new call center in Tampa, Florida and acquired other facilities in the first half of the year. These facilities have supported our receivable growth. 12 Other marketing expenses include payments for advertising, direct mail programs and other marketing expenditures. These expenses were $519.3 million in 2001, $470.9 million in 2000 and $370.0 million in 1999. The increases were primarily due to increased credit card marketing initiatives, largely in the U.S. MasterCard and Visa portfolio. Other servicing and administrative expenses were $709.6 million in 2001, $589.7 million in 2000 and $547.9 million in 1999. In 2001, the increase was primarily due to higher collection and consulting expenses, REO and fraud losses, and costs associated with privacy mailings to comply with new legislation. In 2000, the increase was primarily due to e-commerce initiatives and increased costs resulting from the acquisition of Renaissance and two real estate secured loan portfolios. Amortization of acquired intangibles and goodwill was $151.2 million in 2001, $160.0 million in 2000 and $143.9 million in 1999. In 2001, the decrease was attributable to reductions in acquired intangibles. In 2000, the increase was attributable to higher goodwill amortization resulting from the Renaissance acquisition. Upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002, amortization of goodwill recorded in past business combinations ceased. The adoption is expected to increase net income by approximately $45 million, or $.10 per share, annually. Policyholders' benefits were $302.6 million in 2001, $261.7 million in 2000 and $258.1 million in 1999. The increases are consistent with the increase in insurance revenues resulting from increased policy sales. Income taxes. The effective tax rate was 34.5 percent in 2001, 34.9 percent in 2000 and 33.1 percent in 1999. - -------------------------------------------------------------------------------- Credit Quality Delinquency and Charge-offs Our delinquency and net charge-off ratios reflect, among other factors, changes in the mix of loans in our portfolio, the quality of our receivables, the average age of our loans, the success of our collection efforts, bankruptcy trends and general economic conditions. Real estate secured receivables, which have a significantly lower charge-off rate than unsecured receivables, represented 55 percent of our total owned receivables at December 31, 2001 and 52 percent at December 31, 2000. The levels of personal bankruptcies also have a direct effect on the asset quality of our overall portfolio and others in our industry. Our credit and portfolio management procedures focus on risk-based pricing and effective collection efforts for each loan. We have a process which we believe gives us a reasonable basis for predicting the credit quality of new accounts. This process is based on our experience with numerous marketing, credit and risk management tests. We also believe that our frequent and early contact with delinquent customers, as well as policies designed to manage customer relationships, such as reaging delinquent accounts to current in specific situations, are helpful in maximizing customer collections. We have been preparing for an economic slowdown since late 1999. Throughout 2000 and 2001, we emphasized real estate secured loans which historically have a lower loss rate as compared to our other loan products, grew sensibly, tightened underwriting policies, reduced unused credit lines, strengthened risk model capabilities and invested heavily in collections capability by adding over 2,500 collectors. As a result, 2001 charge-off and delinquency performance has been well within our expectations. 13 Our consumer charge-off and nonaccrual policies vary by product as follows:
Product Charge-off Policy Nonaccrual Policy - ------------------------------------------------------------------------------------------------------------------- Real estate Carrying values in excess of net realizable value Interest income accruals are suspended when secured are charged off at the time of foreclosure or when principal or interest payments are more than 3 settlement is reached with the borrower. months contractually past due and resumed when the receivable becomes less than 3 months contractually past due. Auto finance Carrying values in excess of net realizable value Interest income accruals are suspended when are charged off at the earlier of the following: principal or interest payments are more than 2 . the collateral has been repossessed and sold, months contractually past due and resumed when . the collateral has been in our possession the receivable becomes less than 2 months for more than 90 days, or contractually past due. . the loan becomes 150 days contractually delinquent. MasterCard Charged off at 6 months contractually delinquent. Interest accrues until charge-off. and Visa Private label Charged off at 9 months contractually delinquent. Interest accrues until charge-off. Personal non- Charged off at 9 months contractually delinquent Interest income accruals are suspended when credit card and no payment received in 6 months, but in no principal or interest payments are more than 3 event to exceed 12 months. months contractually delinquent. For PHL's, interest income accruals resume if the receivable becomes less than three months contractually past due. For all other personal non-credit card receivables, interest income is recorded as collected.
Charge-offs may occur sooner for certain consumer receivables involving a bankruptcy. - -------------------------------------------------------------------------------- Our charge-off policies focus on maximizing the amount of cash collected from a customer while not incurring excessive collection expenses on a customer who will likely be ultimately uncollectible. We believe our policies are responsive to the specific needs of the customer segment we serve. Our real estate and auto finance charge-off policies consider customer behavior in that initiation of foreclosure or repossession activities often prompts repayment of delinquent balances. Our collection procedures and charge-off periods, however, are designed to avoid ultimate foreclosure or repossession whenever it is reasonably economically possible. Our MasterCard and Visa charge-off policy is consistent with credit card industry practice. Charge-off periods for our personal non-credit card and private label products were designed to be responsive to our customer needs and may be longer than bank competitors who serve a different market. Our policies have been consistently applied and there have been no significant changes to any of our policies during any of the periods reported. Our loss reserve estimates consider our charge-off policies to ensure appropriate reserves exist for products with longer charge-off lives. We believe our charge-off policies are appropriate and result in proper loss recognition. Our policies for consumer receivables permit reset of the contractual delinquency status of an account to current, subject to certain limits, if a predetermined number of consecutive payments has been received and there is evidence that the reason for the delinquency has been cured. Such reaging policies vary by product and are designed to manage customer relationships and maximize collections. See "Credit Quality Statistics" on pages 29 and 30 for further information regarding owned basis and managed basis delinquency, charge-offs and nonperforming loans. 14 Consumer Two-Month-and-Over Contractual Delinquency Ratios - Owned Basis
2001 Quarter End 2000 Quarter End -------------------------------- ----------------------------------- 4 3 2 1 4 3 2 1 - ------------------------------------------------------------------------------------------------ Real estate secured 2.63% 2.71% 2.59% 2.55% 2.58% 2.71% 2.64% 2.90% Auto finance 2.92 2.43 2.35 1.74 2.46 1.96 1.84 1.90 MasterCard/Visa 5.67 5.22 4.80 5.02 4.90 4.89 4.30 4.17 Private label 5.99 6.57 6.54 5.62 5.60 5.64 5.81 6.03 Personal non-credit card 9.04 8.75 8.79 8.79 7.99 7.77 8.23 9.10 - ------------------------------------------------------------------------------------------------ Total Owned 4.53% 4.58% 4.48% 4.36% 4.26% 4.29% 4.25% 4.58% ================================================================================================
See "Credit Quality Statistics - Managed Basis" on page 30 for additional information regarding our managed basis credit quality. Our consumer delinquency ratios at year-end remained stable compared to the third quarter and increased modestly compared to the prior year. These increases were within our expectations. All products were negatively affected by the weakening economy during the fourth quarter. The increase in auto finance delinquency also reflects historical seasonal trends. These increases were partially offset by decreases in real estate secured delinquency due to improved collections. The sequential quarter comparison benefited from seasonal receivable growth in MasterCard and Visa and private label receivables, as well as a private label portfolio acquisition in the quarter. Additionally, our MasterCard and Visa portfolio was negatively impacted by the December removal of the Goldfish accounts, which had very low delinquency. Compared to a year ago, the weakening economy contributed to higher delinquency ratios in all products. In our real estate secured portfolio, these increases were partially offset by benefits from the growing percentage of loans on which we hold a first lien position as these loans have lower delinquency rates than other loans. Though delinquency in our total MasterCard and Visa portfolio increased over the prior year due in part to the removal of the Goldfish accounts, delinquency in our subprime portfolio improved. During 2001, we improved underwriting selection criteria in our subprime MasterCard and Visa portfolio by building systems which better exclude certain high-risk customers from solicitations. Consumer Net Charge-off Ratios - Owned Basis
2001 Quarter Annualized 2000 Quarter Annualized Full Year --------------------------- Full Year ------------------------------ Full Year 2001 4 3 2 1 2000 4 3 2 1 1999 - ----------------------------------------------------------------------------------------------------------------------------- Real estate secured .52% .64% .51% .48% .43% .42% .39% .39% .44% .48% .51% Auto finance 4.00 4.91 3.72 3.26 3.93 3.29 3.90 2.88 2.90 3.42 3.42 MasterCard/Visa 8.17 7.90 8.28 8.33 8.17 6.55 7.36 5.99 6.32 6.48 7.95 Private label 5.59 6.12 5.94 5.25 5.02 5.34 5.03 5.18 5.46 5.70 5.60 Personal non-credit card 6.81 6.97 7.27 6.84 6.12 7.02 5.82 7.05 7.85 7.64 6.50 - ----------------------------------------------------------------------------------------------------------------------------- Total Owned 3.32% 3.43% 3.43% 3.26% 3.12% 3.18% 2.98% 3.01% 3.27% 3.53% 3.67% =============================================================================================================================
See "Credit Quality Statistics - Managed Basis" on page 30 for additional information regarding our managed basis credit quality. During the fourth quarter, our net charge-off ratios continued to be impacted by the weakening economy. Higher loss severities on repossessed vehicles due to a weak market for used cars and historical seasonal trends also contributed to the increases in our auto finance portfolio. We expect improvement in the used car market in 2002. However, we expect the economy to remain weak and total portfolio charge-offs to increase through the first two or three quarters of 2002. We expect the economy to recover slowly and charge-offs to decline modestly in the latter part of the year. 15 The increases in charge-off ratios for the year also reflect the weakening economy. These increases were partially offset by improved collections in our real estate secured, private label and personal non-credit card portfolios as a direct result of increasing the size of our collection staff, especially in our branch network. The increase in the auto finance ratio was due in part to higher loss severities on repossessed vehicles. The increase in the MasterCard and Visa ratio reflects a higher percentage of subprime receivables in the portfolio. Though subprime charge-off rates declined throughout 2001, these receivables continue to have higher loss rates than other MasterCard and Visa receivables. Our total 2001 net charge-off ratios reflected the positive impact of the growing percentage of real estate secured receivables, which have a lower charge-off ratio than other products, in our portfolio. Assuming 1999 product mix, net charge-offs would have been approximately 45 basis points higher in 2001 and 30 basis points higher in 2000. In 2000, all products, except personal non-credit card loans, reported improved charge-off ratios compared to 1999. Our MasterCard and Visa portfolio reported the strongest improvement in 2000 as a result of significant decreases in charge-off dollars in our legacy undifferentiated Household Bank and GM portfolios and in bankruptcy charge-offs. Charge-off dollars for all products were up in 2000. In February, 1999, the four federal banking regulatory agencies revised their guidelines for classification of credit based on delinquency status and mandated specified timeframes for recognizing losses in consumer loan portfolios. These regulatory policy changes, which apply only to products within our banking subsidiaries and became effective October 1, 2000, did not result in a significant modification to any of our established reaging or charge-off policies. Therefore, the application of the new rules did not have a material impact on our financial statements or the way we manage our businesses. Credit Loss Reserves We maintain credit loss reserves to cover probable losses of principal, interest and fees, including late, overlimit and annual fees. Credit loss reserves are based on a range of estimates and intended to be adequate but not excessive. We estimate losses for consumer receivables based on delinquency status and past loss experience. In addition, we provide loss reserves on consumer receivables to reflect our assessment of portfolio risk factors which may not be fully reflected in the statistical calculation which uses roll rates and migration analysis. These risk factors include bankruptcy trends, recent growth, product mix, economic conditions, and current levels in charge-off and delinquency. While our credit loss reserves are available to absorb losses in the entire portfolio, we specifically consider the credit quality and other risk factors for each of our products, which include real estate secured, auto finance, Master Card and Visa and private label credit cards and personal non-credit cards. We recognize the different inherent loss characteristics and risk management/collection practices in each of these products. Charge-off and customer account management policies are also considered when establishing loss reserve requirements to ensure the appropriate reserves exist for products with longer charge-off periods and for customers benefiting from account management decisions. We also consider key ratios such as reserves to nonperforming loans and reserves as a percentage of charge-offs in developing our loss reserve estimate. Loss reserve estimates are reviewed periodically and adjustments are reported in earnings when they become known. These estimates are influenced by factors outside of our control, such as economic conditions and consumer payment patterns. As a result, there is uncertainty inherent in these estimates, making it reasonably possible that they could change. At December 31, 2001, our owned loss reserve was at an all-time high, despite a continued shift in our portfolio mix to secured loans. During 2001, we recorded owned loss provision $502.9 million greater than charge-offs. Loss provision in 2001 reflected our continued receivable growth, recent increases in personal bankruptcy filings, and continued uncertainty over the impact of the weakening economy on charge-off and delinquency trends. Additionally, growth in our receivables and portfolio seasoning ultimately result in a higher loss reserve requirement. Loss provision was $195.5 million greater than charge-offs in 2000, primarily due to receivable growth. Loss provisions are based on an estimate of inherent losses in our loan portfolio. 16 The following table sets forth owned basis credit loss reserves for the periods indicated:
All dollar amounts are stated in millions. At December 31 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Owned credit loss reserves $ 2,663.1 $ 2,111.9 $ 1,757.0 $ 1,734.2 $ 1,642.1 Reserves as a percent of receivables 3.33% 3.14% 3.36% 3.92% 4.25% Reserves as a percent of net charge-offs 110.5 109.9 101.1 112.6 126.7 Reserves as a percent of nonperforming loans 91.0 90.2 87.5 100.3 113.2 =========================================================================================================================
Reserves as a percentage of receivables in 2001 reflect the impact of the weakened economy, higher levels of delinquency and charge-off, and the continuing uncertainty as to the ultimate impact the weakened economy will have on delinquency and charge-off levels. We began to see evidence of a weakening economy in the first half of the year as delinquencies began to rise and bankruptcy filings increased. This resulted in higher charge-offs beginning in the second quarter. The combination of these risk factors, partially offset by a higher mix of real estate secured receivables, which have lower credit losses, resulted in higher loss provisions in 2001. Over the past five years, our loan portfolio has experienced a dramatic shift in product mix to real estate secured receivables. The trend in reserves as a percentage of receivables from 1997 through 2000 reflects the impact of a growing percentage of secured loans which have lower loss rates than unsecured loans and, beginning in 1999 and continuing into 2000, improving credit quality trends. This trend also benefited in 1999 and 2000 from the continued run-off of our undifferentiated Household Bank branded MasterCard and Visa portfolio. Real estate secured receivables represented 55 percent of our receivables at December 31, 2001 compared to 36 percent at December 31, 1997. The impact of this shift to real estate secured receivables is significant. Holding average receivable mix constant to 1997 levels would have resulted in approximately a $980 million increase in charge-off during 2001 based on 2001 owned charge-off ratios. For securitized receivables, we also record a provision for estimated probable losses that we expect to incur under the recourse provisions. The following table sets forth managed credit loss reserves for the periods indicated:
All dollar amounts are stated in millions. At December 31 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Managed credit loss reserves $ 3,811.4 $ 3,194.2 $ 2,666.6 $ 2,548.1 $ 2,523.0 Reserves as a percent of managed receivables 3.78% 3.65% 3.72% 3.99% 3.99% Reserves as a percent of managed net charge-offs 110.7 111.1 98.2 94.4 109.8 Reserves as a percent of nonperforming loans 105.0 107.0 100.1 109.5 115.5 ==========================================================================================================================
See the "Analysis of Credit Loss Reserves Activity" on pages 31 and 32 for additional information regarding our owned basis and managed basis loss reserves. Geographic Concentrations The state of California accounts for 15 percent of our managed domestic consumer portfolio and is the only state with more than 10 percent of this portfolio. Because of our centralized underwriting collections and processing functions, we can quickly change our credit standards and intensify collection efforts in specific locations. We believe this lowers risks resulting from such geographic concentrations. Our foreign consumer operations located in the United Kingdom and Canada accounted for 6 percent and 1 percent, respectively, of managed consumer receivables at December 31, 2001. 17 Owned Nonperforming Assets
All dollar amounts are stated in millions. At December 31 2001 2000 1999 - -------------------------------------------------------------------------------- Nonaccrual receivables $ 2,079.5 $ 1,678.7 $ 1,444.6 Accruing consumer receivables 90 or more days delinquent 844.1 649.4 550.4 Renegotiated commercial loans 2.1 12.3 12.3 - -------------------------------------------------------------------------------- Total nonperforming receivables 2,925.7 2,340.4 2,007.3 Real estate owned 398.9 337.1 271.5 - -------------------------------------------------------------------------------- Total nonperforming assets $ 3,324.6 $ 2,677.5 $ 2,278.8 ================================================================================
The increase in nonaccrual receivables is attributable to increases in our real estate secured, auto finance and personal non-credit card portfolios. Accruing receivables 90 or more days delinquent includes MasterCard and Visa and private label credit card receivables, consistent with industry practice. The increase in total nonperforming assets is consistent with and attributable to growth in our owned portfolio. - -------------------------------------------------------------------------------- Liquidity and Capital Resources Our subsidiaries use cash to originate loans, purchase loans or investment securities and acquire businesses. Their sources of cash include the collection of receivable balances; maturities or sales of investment securities; proceeds from the issuance of debt and deposits and from the securitization of consumer receivables; and cash provided by operations. The following table summarizes our contractual cash obligations by period due:
In millions. At December 31, 2001 2002 2003 2004 2005 2006 Thereafter Total - ----------------------------------------------------------------------------------------------------------------------- Long-term debt: Time certificates of deposit $ 2,025.5 $ 1,307.3 $1,528.2 $ 837.3 $ 208.1 $ 410.3 $ 6,316.7 Senior and senior subordinated Debt 10,492.5 9,980.0 5,800.9 5,970.0 6,652.0 17,928.2 56,823.6 - ----------------------------------------------------------------------------------------------------------------------- Total long-term debt 12,518.0 11,287.3 7,329.1 6,807.3 6,860.1 18,338.5 63,140.3 - ----------------------------------------------------------------------------------------------------------------------- Operating leases: Minimum rental payments 150.9 128.6 110.7 92.8 82.6 330.0 895.6 Minimum sublease income (21.4) (21.6) (22.0) (22.3) (22.2) (77.7) (187.2) - ----------------------------------------------------------------------------------------------------------------------- Total operating leases 129.5 107.0 88.7 70.5 60.4 252.3 708.4 - ----------------------------------------------------------------------------------------------------------------------- Other Long-Term Obligations: Company obligated mandatorily redeemable preferred securities of subsidiary trust - - - - - 975.0 975.0 - ----------------------------------------------------------------------------------------------------------------------- Total Contractual Obligations $12,647.5 $11,394.3 $7,417.8 $6,877.8 $6,920.5 $19,565.8 $64,823.7 =======================================================================================================================
We also enter into commitments to meet the financing needs of our customers. In most cases, we have the ability to reduce or eliminate these open lines of credit. As a result, the amounts below do not necessarily represent future cash requirements:
In billions. At December 31 2001 - -------------------------------------------------------------------------------- MasterCard and Visa and private label credit cards $ 99.4 Other consumer lines of credit 4.7 - -------------------------------------------------------------------------------- Open lines of credit $ 104.1 ================================================================================
At December 31, 2001, our mortgage services business had commitments with numerous correspondents to purchase up to $1.1 billion of real estate secured receivables, subject to availability based on underwriting guidelines specified by our mortgage services business. These commitments have terms of up to one year and can be renewed upon mutual agreement. 18 In managing capital, we develop targets for the ratio of equity to managed assets based on discussions with rating agencies, reviews of regulatory requirements and competitor capital positions, credit loss reserve strength, risks inherent in the portfolio and projected operating environment, and acquisition objectives. We also specifically consider the level of intangibles arising from completed acquisitions. A primary objective of our capital management is to maintain investment grade ratings from rating agencies in order to have acceptable funding costs as well as greater access to a variety of funding sources. Targets include capital levels against both owned and managed assets. Our targets may change from time to time to accommodate changes in the operating environment or any of the other considerations listed above. Consolidated capital ratios at year end 2001 and 2000 were consistent with our targets. Those ratios, as well as our 2002 target for tangible shareholders' equity to tangible managed assets, are as follows:
At December 31 2001 2000 2002 Targets - --------------------------------------------------------------------------------------------------------- Tangible shareholders' equity to tangible managed assets 7.87% 7.41% 8.00-8.25% Total shareholders' equity as a percent of owned assets 11.56(1) 11.46 Total shareholders' equity as a percent of managed assets 9.37(1) 9.07 - --------------------------------------------------------------------------------------------------------- (1) Excluding the impact of FAS No. 133.
Parent Company Household International, Inc. is the holding or parent company that owns the outstanding stock of its subsidiaries. The parent company's main source of funds is cash received from its subsidiaries in the form of dividends and intercompany borrowings. The parent company received dividends from its subsidiaries of $673 million in 2001 and $648 million in 2000. Dividends from subsidiaries are managed to ensure subsidiaries are adequately capitalized. In addition, the parent company receives cash from third parties by issuing debt, preferred stock and common stock. At December 31, 2001, the parent company had $400 million in committed back-up lines of credit that it can use on short notice. These lines are available either to the parent company or its subsidiary, Household Finance Corporation ("HFC"). None of these back-up lines were drawn upon in 2001. These lines of credit expire in 2003 and do not contain financial material adverse change clauses that could restrict availability. The only financial covenant contained in the terms of the parent company's credit agreements is the maintenance of minimum shareholders' equity of $2.0 billion. The parent company has a number of obligations to meet with its available cash. It must be able to service its debt and meet the capital needs of its subsidiaries. It also must pay dividends on its preferred stock and may pay dividends to its common stockholders. The parent company paid $406.6 million in common and preferred dividends to shareholders in 2001 and $358.9 million in 2000. The parent company anticipates its common stock dividend payout ratio in 2002 to be comparable to prior years. At various times, the parent company will make capital contributions to its subsidiaries to comply with regulatory guidance, support receivable growth, maintain acceptable investment grade ratings at the subsidiary level, or provide funding for long-term facilities and technology improvements. In 2001, the parent company made capital contributions of $50 million to subsidiaries, compared to $550 million in 2000. The primary reasons for the larger contribution in 2000 were to support receivable growth and maintain acceptable investment grade ratings. We expect our subsidiaries will continue to need additional capital contributions in 2002. We anticipate that these amounts will exceed the amounts contributed in prior years. We have been advised by the Office of Thrift Supervision ("OTS"), Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") that in accordance with their 2001 Guidance for Subprime Lending Programs, they will impose additional capital requirements on institutions which hold nonprime or subprime assets which we expect will be greater than the historical levels we have maintained at these subsidiary institutions. We do not believe the additional capital needs of any subsidiary will have a material adverse impact on our financial position or our business operations. 19 In August 2001, the parent company issued zero-coupon convertible debt securities. The convertible debt securities are due 2021, have a 1 percent yield to maturity and have a principal amount at maturity of approximately $1.2 billion. We must pay contingent interest on the securities beginning in 2006 if our common stock price reaches certain levels. The holders of the securities have the right to require us to repurchase the securities on various dates beginning in August 2002 and ending in August 2016 or if certain "fundamental changes" as described in the prospectus supplement occur. "Fundamental changes" include, among other things, an exchange offer, liquidation, merger and recapitalization. The holders of the securities may convert each $1,000 of securities, subject to adjustment, into 9.022 shares of Household common stock if our stock price reaches $99.87 for 20 trading days in a consecutive 30 trading day period. We may redeem the securities, in whole or in part, at any time after August 1, 2006. In September 2001, the parent company issued $300 million of 7.50 percent cumulative preferred stock. In addition, we issued company obligated mandatorily redeemable preferred securities (representing the minority interest in the trust) ("trust preferred securities") of $400 million in 2001 and $300 million in 2000. In December 2001, $100 million of 8.70 percent trust preferred securities were redeemed. During 2001, we repurchased 17.4 million shares of our common stock for a total of $916.3 million. During 2000, 5.4 million shares were repurchased for a total of $209.3 million. On May 9, 2001, we announced a new common stock repurchase program. This new program enables us to repurchase up to an additional $2 billion of our outstanding common shares. This new program went into effect on January 1, 2002 and replaced the $2 billion stock repurchase program which expired on December 31, 2001. Pursuant to these programs, repurchases are made from time to time in the open market depending upon market conditions, other investment opportunities for growth and capital targets. At December 31, 2001, we had agreements to purchase, on a forward basis, approximately 6.5 million shares of our common stock at a weighted-average forward price of $59.14 per share. The agreements have terms of up to one year. These agreements may be settled either physically or on a net basis in shares of our common stock, at our option. Subsidiaries We have three major subsidiaries: HFC, Household Bank, f.s.b. ("the Bank"), and Household Global Funding ("Global"). These subsidiaries use cash to originate loans, purchase loans or investment securities or acquire businesses. Their sources of cash include the collection of receivable balances, maturities or sales of investment securities, proceeds from the issuance of debt and deposits and from the securitization of receivables, capital contributions from the parent company, and cash provided by operations. HFC HFC funds its operations by collecting receivable balances; issuing commercial paper, medium-term debt, and long-term debt primarily to wholesale investors; securitizing consumer receivables; and receiving capital contributions from its parent. HFC domestically markets its commercial paper primarily through an in-house sales force. HFC's outstanding commercial paper totaled $8.8 billion at December 31, 2001 and $8.7 billion at December 31, 2000. HFC actively manages the level of commercial paper outstanding to ensure availability to core investors and proper use of any excess capacity within internally-established targets. HFC markets domestic medium-term notes through investment banks and its in-house sales force. A total of $8.0 billion of domestic medium-term notes were issued in 2001, including $788 million of InterNotesSM, a retail-oriented medium-term note program. In 2000, $9.9 billion of domestic medium-term notes were issued. During 2001, HFC also issued $7.0 billion of U.S. dollar, global long-term debt with a weighted-average original maturity of 8.14 years. Long-term debt issuances in 2000 totaled $4.8 billion and had a weighted-average original maturity of 6.98 years. These long-term issuances lengthened the term of HFC's funding, reduced reliance on commercial paper and securitizations, and preserved liquidity. 20 We issued securities backed by dedicated home equity loan receivables of $1.6 billion in 2001 and $.5 billion in 2000. For accounting purposes, these transactions were structured as secured financings, therefore the receivables and the related debt remain on our balance sheet. At December 31, 2001, closed-end real estate secured receivables totaling $1.7 billion secured $1.5 billion of outstanding debt related to these transactions. At December 31, 2000, closed-end real estate secured receivables totaling $.4 billion secured $.4 billion of outstanding debt. To obtain a broader investment base, HFC periodically issues debt in foreign markets. During 2001, $2.0 billion in notes were issued in these foreign markets, including Euro, Japanese yen and Australian dollar denominated issuances, compared to $2.1 billion in 2000. In order to eliminate future foreign exchange risk, currency swaps were used to convert the notes to U.S. dollars at the time of issuance. HFC had committed back-up lines of credit totaling $10.1 billion at December 31, 2001, of which $400 million was also available to its parent company. None of these back-up lines were drawn upon in 2001. In addition, none of these lines contained a financial material adverse change clause which could restrict availability. HFC's back-up lines expire on various dates through 2005. The most restrictive financial covenant contained in the terms of HFC's credit agreements is the maintenance of minimum shareholder's equity of $3.6 billion. At December 31, 2001, HFC had facilities with commercial and investment banks under which it may securitize up to $12.6 billion of receivables. The conduit facilities are renewable on an annual basis at the banks' option. At December 31, 2001, $10.3 billion of receivables were securitized under these programs. The amount available under the facilities will vary based on the timing and volume of public securitization transactions. We expect to significantly increase the amounts available under these conduit programs in 2002 to protect our ability to operate efficiently in a cautionary capital market. Through existing bank lines, conduit facilities and new debt issuances, we believe we would continue to have more than adequate sources of funds if one or more of these facilities were unable to be renewed. The Bank The Bank funds its operations through collection of receivable balances, contributions of capital and various wholesale funding sources including federal funds borrowings and bank notes. The Bank has also used retail certificates of deposit, domestic and Euro medium-term notes and underwritten senior debt. Additionally, the Bank has historically funded the RAL program under its agreement with HFC. During 2001, the Bank began selling bank notes through an in-house sales force. Bank notes outstanding at year-end were $831 million. The Bank also issued $115 million in retail certificates of deposit in 2001 and $3.2 billion in 2000. The Bank's outstanding deposits totaled $6.8 billion at December 31, 2001 and $7.4 billion at December 31, 2000. The Bank is subject to the capital adequacy guidelines adopted by the OTS and is well capitalized. Although we have utilized the Bank in the past as a means of providing deposit funding to support our operations, due to recent regulatory requirements for additional capital to support nonprime and subprime lending activities, it is doubtful that such sources will be actively utilized in the near term. We have been advised by the OTS, OCC and the FDIC that in accordance with their 2001 Guidance for Subprime Lending Programs, they will impose additional capital requirements on institutions which hold nonprime or subprime assets which we expect will be greater than the historical levels we have maintained at these subsidiary institutions. We have agreed with the OTS to maintain the regulatory capital of the Bank at these levels. We expect to reduce the size of the Bank to better manage the capital requirements for the Bank. We do not expect that any of these actions will have a material adverse effect on our operations, our ability to timely fund our operations, or will materially increase the costs associated with our funding. Global Global includes our foreign subsidiaries in the United Kingdom and Canada. Global's assets were $7.3 billion at year-end 2001 and $7.8 billion at year-end 2000. Consolidated shareholders' equity includes the effect of translating our foreign subsidiaries' assets, liabilities and operating results from their local currency into U.S. dollars. We periodically enter into foreign exchange contracts to hedge portions of our investment in foreign subsidiaries. 21 Each foreign subsidiary conducts its operations using its local currency. While each foreign subsidiary usually borrows funds in its local currency, both our United Kingdom and Canadian subsidiaries have borrowed funds directly in the United States capital markets. This allowed the subsidiaries to achieve a lower cost of funds than that available at that time in their local markets. These borrowings were converted from U.S. dollars to their local currencies using currency swaps at the time of issuance. Net realized gains and losses in foreign currency swap transactions were not material to our results of operations or financial position in any of the years presented. Our United Kingdom operation is funded with wholesale deposits, short and intermediate-term bank lines of credit, long-term debt and securitizations of receivables. Deposits were $490.7 million at December 31, 2001 and $1.7 billion at December 31, 2000. Short-term borrowings at year-end 2001 were $717.4 million compared to $722.3 million a year ago. Long-term debt at year-end 2001 was $2.8 billion compared to $2.4 billion a year earlier. At December 31, 2001, $2.1 billion of the United Kingdom's total debt was guaranteed by the parent company and $1.9 billion was guaranteed by HFC. HFC receives a fee for providing the guarantee. Committed back-up lines of credit for the United Kingdom were approximately $3.1 billion at December 31, 2001 of which $.8 billion was used. These lines have varying maturities through 2007. At December 31, 2001, the UK had facilities with commercial banks under which it may securitize up to $.3 billion of receivables. The conduit facilities are renewable on an annual basis at the banks' option. At December 31, 2001, $.3 billion of receivables were securitized under these programs. The amount available under the facilities will vary based on the timing and volume of public securitization transactions. Through existing bank lines and new debt issuances, we believe we would continue to have more than adequate sources of funds if one or more of these facilities were unable to be renewed. Our Canadian operation is funded with commercial paper, intermediate debt and long-term debt. Intermediate and long-term debt totaled $851.1 million at year-end 2001 compared to $749.2 million a year ago. Committed back-up lines of credit for Canada were approximately $436 million at December 31, 2001. None of these back-up lines were used in 2001. At December 31, 2001, approximately $35 million of the Canadian subsidiary's total debt was guaranteed by the parent company and $1.2 billion was guaranteed by HFC. Both the parent company and HFC receive a fee for providing the guarantees. Investment Ratings As a financial services organization, we must have access to funds at competitive rates, terms and conditions to be successful. At December 31, 2001, the long-term debt of the parent company, HFC, Beneficial and our Canadian and U.K. subsidiaries and the preferred stock of the parent company have been assigned investment grade ratings by all nationally recognized statistical rating organizations that rate such instruments. These organizations have also rated the commercial paper of HFC in their highest rating category. Although one nationally recognized statistical rating organization recently downgraded the long-term debt of HFC to the corresponding levels of the other agencies, we believe this downgrade will not have any meaningful impact on our ability to fund our operations. With our back-up lines of credit and securitization programs, we believe we have sufficient funding capacity to refinance maturing debts and fund our growth. Capital Expenditures We made capital expenditures of $175 million in 2001 and $174 million in 2000. 22 - -------------------------------------------------------------------------------- Asset Securitizations From time to time, we securitize consumer receivables. In a securitization, a designated pool of receivables is removed from the balance sheet and transferred to an unaffiliated trust that is a qualifying special purpose entity ("QSPE") under Statement of Financial Accounting Standards No. 125 and/or 140, as applicable. The QSPE funds its receivable purchase through the issuance of securities to investors, entitling them to receive specified cash flows during the life of the securities. The securities are collateralized by the underlying receivables transferred to the QSPE. Under the terms of the securitizations, we receive annual servicing fees on the outstanding balance of the securitized receivables and the rights to future residual cash flows arising after the investors receive their contractual return. These rights to further residual cash flows are recorded on our balance sheet as interest-only strip receivables, net of our recourse obligation to investors for failure of debtors to pay. Our recourse is limited to our rights to future cash flows and any subordinated interests that we may retain. Securitizations and secured financings of consumer receivables have been, and will continue to be, a source of liquidity for us. We believe the market for securities issued by an investment grade issuer and backed by receivables is a reliable and cost-effective source of funds. Securitizations represented 22 percent of the funding associated with our managed portfolio at December 31, 2001, compared to 24 percent at December 31, 2000 and 28 percent at December 31, 1999. The following table summarizes the composition of receivables securitized (excluding replenishments of certificateholder interests) during the year:
In billions. 2001 2000 1999 - -------------------------------------------------------------------------------- MasterCard/Visa $.3 $2.0 $1.8 Auto finance 2.6 1.9 1.4 Private label .5 .5 .5 Personal non-credit card 2.1 2.6 1.5 - -------------------------------------------------------------------------------- Total $5.5 7.0 $5.2 ================================================================================
Certain securitization trusts, such as credit cards, are established at fixed levels and due to the revolving nature of the underlying receivables require the sale of new receivables into the trust to replace receivable runoff. These replenishments totaled $24.7 billion in 2001, $21.0 billion in 2000 and $20.3 billion in 1999. The following table summarizes the expected amortization of our securitizations by type:
In millions. At December 31, 2001 2002 2003 2004 2005 2006 Thereafter Total - -------------------------------------------------------------------------------------------------------------------------- Real estate secured $ 295.1 $ 304.8 $ 217.9 $ 44.0 - - $ 861.8 Auto finance 1,256.4 1,211.4 712.4 846.4 - - 4,026.6 MasterCard/Visa 4,449.9 1,314.2 1,392.9 2,007.1 $ 89.9 - 9,254.0 Private label 336.5 1,001.8 811.7 - - - 2,150.0 Personal non-credit card 2,238.0 1,219.9 707.0 247.4 136.6 $ 106.7 4,655.6 - -------------------------------------------------------------------------------------------------------------------------- Total $ 8,575.9 $ 5,052.1 $ 3,841.9 $ 3,144.9 $ 226.5 $ 106.7 $ 20,948.0 ==========================================================================================================================
At December 31, 2001, the expected weighted-average remaining life of these transactions was 1.7 years. We issued securities backed by dedicated home equity loan receivables of $1.6 billion in 2001 and $.5 billion in 2000. For accounting purposes, these transactions were structured as secured financings, therefore, the receivables and the related debt remain on our balance sheet. Real estate secured receivables included closed-end real estate secured receivables totaling $1.7 billion at December 31, 2001 and $.4 billion at December 31, 2000 which secured the outstanding debt related to these transactions. 23 The securities issued with our securitizations may payoff sooner than originally scheduled if certain events occur. For MasterCard and Visa, private label, real estate secured and personal non-credit card securitizations, early payoff of the securities begins if the annualized portfolio yield drops below a base rate or if certain other events occur. For certain auto securitizations, early payoff of securities may occur if established delinquency or loss levels are exceeded. We do not presently believe that any early payoff will take place. If early payoff occurred, our funding requirements would increase. These additional requirements could be met through new securitizations, issuance of various types of debt or borrowings under existing back-up lines of credit. We believe we would continue to have more than adequate sources of funds if an early payoff event occurred. At December 31, 2001, HFC and the U.K. had facilities with commercial and investment banks under which they may securitize up to $12.9 billion of receivables. The facilities are renewable on an annual basis at the banks' option. At December 31, 2001, $10.6 billion of receivables were securitized under these programs. The amount available under the facilities will vary based on the timing and volume of public securitization transactions. Through existing bank lines and new debt issuances, we believe we would continue to have more than adequate sources of funds if one or more of these facilities were unable to be renewed. - -------------------------------------------------------------------------------- Risk Management We have a comprehensive program to address potential financial risks, such as liquidity, interest rate, currency and credit risk. The Finance Committee of the Board of Directors sets acceptable limits for each of these risks annually and reviews the limits semi-annually. We maintain an overall risk management strategy that uses a variety of interest rate and currency derivative financial instruments to mitigate our exposure to fluctuations caused by changes in interest rates and currency exchange rates. We manage our exposure to interest rate risk primarily through the use of interest rate swaps, but also use forwards, futures, options, and other risk management instruments. We manage our exposure to currency risk primarily through the use of currency swaps. We do not speculate on interest rate or foreign currency market exposure and we do not use exotic or leveraged derivative financial instruments. Because we are predominantly capital markets funded, our ability to ensure continuous access to these markets and maintain a diversified funding base is important in meeting our funding needs. We have never experienced funding difficulties. Over the past two years, we have worked with a number of investment banks to identify and implement the strategic initiatives required to enhance future market access. Our ability to issue debt at competitive prices is influenced by rating agencies' views of our credit quality, liquidity, capital and earnings. As a result, we maintain close working relationships with each rating agency to secure the highest possible rating on our debt and asset backed securities. Additionally, access to capital markets is dependent upon a well-informed investor base. We maintain a comprehensive, direct marketing program to ensure our investors receive consistent and timely information regarding our financial performance. The ability to fund our operations, however, can be influenced by factors outside of our control such as the events of September 11, 2001 and the Russian financial crisis that occurred in the fall of 1998. In both of these situations, we adjusted our debt issuance plans as the debt markets changed and readily achieved our funding goals. Our contingency funding plans contemplate short and long-term market interruptions resulting from both general market events and Household specific events. Any shortfalls created by these interruptions could be mitigated through access to alternative sources of secured funding, asset sales and/or reductions in receivable growth rates. We currently are not aware of any trends or events that will result in or that are reasonably likely to result in a material change in our liquidity. 24 Interest rate risk is defined as the impact of changes in market interest rates on our earnings. We use simulation models to measure the impact of changes in interest rates on net interest margin. The key assumptions used in these models include expected loan payoff rates, loan volumes and pricing, cash flows from derivative financial instruments and changes in market conditions. These assumptions are based on our best estimates of actual conditions. The models cannot precisely predict the actual impact of changes in interest rates on our earnings because these assumptions are highly uncertain. We validate the accuracy of our models by comparing actual results to those previously predicted by the model. At December 31, 2001, our interest rate risk levels were substantially below those allowed by our existing policy. We estimate that our after-tax earnings would decline by about $77 million at December 31, 2001 and $81 million at December 31, 2000 following a gradual 200 basis point increase in interest rates over a twelve month period and would increase by about $72 million at December 31, 2001 and $78 million at December 31, 2000 following a gradual 200 basis point decrease in interest rates. These estimates include the impact of the derivative positions we have entered into. As a result, the decline in our earnings following a gradual 200 basis point increase would be higher had those derivative positions not been entered into. These estimates also assume we would not take any corrective action to lessen the impact and, therefore, exceed what most likely would occur if rates were to change. We generally fund our assets with liabilities that have similar interest rate features. This initially reduces interest rate risk. Over time, however, customer demand for our receivable products shifts between fixed rate and floating rate products, based on market conditions and preferences. These shifts result in different funding strategies and produce different interest rate risk exposures. We use derivative financial instruments, principally swaps, to manage these exposures, as well as our liquidity position. Generally, we use derivatives that are either effective hedges, of which 92 percent qualify for the short-cut method of accounting under FAS No. 133, or are short-term (less than one year) economic hedges which offset the economic risk inherent in our balance sheet. As a result, we do not believe that using these derivatives will result in a material mark-to-market income adjustment in any period. The primary exposure on our interest rate swap portfolio is credit risk. Credit risk is the risk that the counterparty to a transaction fails to perform according to the terms of the contract. We control the credit (or repayment) risk in derivative instruments through established credit approvals, risk control limits and ongoing monitoring procedures. Counterparty limits have been set and are closely monitored as part of the overall risk management process. These limits ensure that we do not have significant exposure to any individual counterparty. Based on peak exposure at December 31, 2001, substantially all of our derivative counterparties were rated AA- or better. Certain swap agreements require that payments be made to, or received from, the counterparty when the fair value of the agreement reaches a certain level. We have never suffered a loss due to counterparty failure. We also use interest rate futures, interest rate forwards and purchased options to reduce interest rate risk. We use these instruments to hedge interest rate changes on our variable rate assets and liabilities. For example, short-term borrowings expose us to interest rate risk because the interest rate we must pay to others may change faster than the rate we receive from borrowers on the assets our borrowings are funding. Futures, forwards and options are used to fix our interest cost on these borrowings at a desired rate and are held until the interest rate on the variable rate asset or liability changes. We then terminate, or close out, the derivative financial instrument. These terminations are necessary because the date the interest rate changes is usually not the same as the expiration date of the derivative contracts. 25 Foreign currency exchange risk refers to the potential changes in current and future earnings or capital arising from movements in foreign exchange rates. We enter into foreign exchange rate forward contracts and currency swaps to minimize currency risk associated with changes in the value of foreign-denominated assets or liabilities. Currency swaps convert principal and interest payments on debt issued from one currency to another. For example, we may issue Euro-denominated debt and then execute a currency swap to convert the obligation to U.S. dollars. We also have foreign subsidiaries located in the United Kingdom and Canada. Our foreign currency exchange risk on these investments is limited to the unhedged portion of the net investment in our foreign subsidiaries. We periodically enter into foreign exchange contracts to hedge portions of our investments in foreign subsidiaries. At December 31, 2001, we estimate we would experience a decrease in common shareholders' equity, net of tax, of approximately $45.7 million compared to a decrease of approximately $56.8 million, net of tax, at December 31, 2000 as a result of a 10 percent depreciation in our unhedged capital exposure in foreign subsidiaries to the U.S. dollar position. Additionally, we believe that the potential loss in net income associated with a 10 percent adverse change in the British pound/U.S. dollar or Canadian dollar/U.S. dollar exchange rate would not be material to us. See Note 10 to the accompanying consolidated financial statements, "Derivative Financial Instruments and Concentrations of Credit Risk," for additional information related to interest rate risk management and Note 14, "Fair Value of Financial Instruments," for information regarding the fair value of certain financial instruments. 26 Household International, Inc. Glossary of Terms Acquired Intangibles and Goodwill - Intangible assets represent the market value premium attributable to our credit card accounts in excess of the aggregate outstanding managed credit card loans acquired. Goodwill represents the purchase price over the fair value of identifiable assets acquired less liabilities assumed from business combinations. Affinity Credit Card - A MasterCard or Visa account jointly sponsored by the issuer of the card and an organization whose members share a common interest (e.g., the AFL-CIO Union Plus (UP) Credit Card Program). Auto Finance Loans - Closed-end loans secured by a first lien on a vehicle. Co-Branded Credit Card - A MasterCard or Visa account that is jointly sponsored by the issuer of the card and another corporation (e.g., the GM Card(R)). The account holder typically receives some form of added benefit for using the card. Common Dividend Payout Ratio - Dividends declared per common share divided by net income per share. Consumer Net Charge-off Ratio - Net charge-offs of consumer receivables divided by average consumer receivables outstanding. Contractual Delinquency - A method of determining aging of past due accounts based on the status of payments under the loan. Efficiency Ratio - Ratio of operating expenses to net interest margin and other revenues less policyholders' benefits. Fee Income - Income associated with interchange on credit cards and late and other fees from the origination or acquisition of loans. Foreign Exchange Contract - A contract used to minimize our exposure to changes in foreign currency exchange rates. Futures Contract - An exchange-traded contract to buy or sell a stated amount of a financial instrument or index at a specified future date and price. Interchange Fees - Fees received for processing a credit card transaction through the MasterCard or Visa network. Interest-only Strip Receivables - Represent our contractual right to receive interest and other cash flows from our securitization trusts after the investors receive their contractual return. Interest Rate Swap - Contract between two parties to exchange interest payments on a stated principal amount (notional principal) for a specified period. Typically, one party makes fixed rate payments, while the other party makes payments using a variable rate. LIBOR - London Interbank Offered Rate. A widely quoted market rate which is frequently the index used to determine the rate at which we borrow funds. Liquidity - A measure of how quickly we can convert assets to cash or raise additional cash by issuing debt. Managed Basis - Method of reporting whereby net interest margin, other revenues and credit losses on securitized receivables are reported as if those receivables were still held on our balance sheet. Managed Receivables - The sum of receivables on our balance sheet and those that we service for investors as part of our asset securitization program. MasterCard and Visa Receivables - Receivables generated through customer usage of MasterCard and Visa credit cards. Net Interest Margin - Interest income from receivables and noninsurance investment securities reduced by interest expense. Nonaccrual Loans - Loans on which we no longer accrue interest because ultimate collection is unlikely. Nonprime Accounts - Accounts held by individuals who have limited credit histories, modest income, high debt-to-income ratios or have experienced credit problems caused by occasional delinquencies, prior charge-offs or other credit related actions. These customers generally have higher delinquency and credit loss probabilities and are charged a higher interest rate to compensate us for the additional risk. 27 Options - A contract giving the owner the right, but not the obligation, to buy or sell a specified item at a fixed price for a specified period. Owned Receivables - Receivables held on our balance sheet. Personal Homeowner Loan ("PHL") - A real estate loan that has been underwritten and priced as an unsecured loan. These loans are reported as personal non-credit card receivables. Personal Non-Credit Card Receivables - Unsecured lines of credit or closed-end loans made to individuals. Private Label Credit Card - A line of credit made available to customers of retail merchants evidenced by a credit card bearing the merchant's name. Products Per Customer - A measurement of the number of products held by an individual customer whose borrowing relationship with Household is considered in good standing. Products include all loan and insurance products. Real Estate Secured Loan - Closed-end loans and revolving lines of credit secured by first or second liens on residential real estate. Receivables Serviced with Limited Recourse - Receivables we have securitized and for which we have some level of potential loss if defaults occur. Refund Anticipation Loan ("RAL") Program - A cooperative program with H&R Block Tax Services, Inc. and certain of its franchises, along with other independent tax preparers, to provide loans to customers entitled to tax refunds and who electronically file their returns with the Internal Revenue Service. Return on Average Common Shareholders' Equity - Net income less dividends on preferred stock divided by average common shareholders' equity. Return on Average Managed Assets - Net income divided by average managed assets. Return on Average Owned Assets - Net income divided by average owned assets. Risk Adjusted Revenue - Managed net interest margin plus other revenues less managed securitization revenue and managed net charge-offs divided by average managed interest-earning assets. Secured Financing - The process where interests in a dedicated pool of financial assets, such as real estate secured receivables, are sold to investors. Typically, the receivables are transferred to a trust that issues interests that are sold to investors. The receivables and related debt remain on our balance sheet. Securitization - The process where interests in a dedicated pool of financial assets, such as credit card, auto or personal non-credit card receivables, are sold to investors. Typically, the receivables are sold to a trust that issues interests that are sold to investors. The receivables are then removed from our owned basis balance sheet. Securitization Revenue - Includes income associated with the current and prior period securitizations and sales of receivables with limited recourse. Such income includes gains on sales, net of our estimate of probable credit losses under the recourse provisions, servicing income and excess spread relating to those receivables. Tangible Equity to Tangible Managed Assets (TETMA) - Tangible shareholders' equity consists of total shareholders' equity, excluding unrealized gains and losses on investments and cash flow hedging instruments, less acquired intangibles and goodwill. Tangible managed assets represents total managed assets less acquired intangibles and goodwill and derivative assets. Total Shareholders' Equity - Includes company obligated mandatorily redeemable preferred securities of subsidiary trusts, preferred stock and common shareholders' equity. 28 Household International, Inc. and Subsidiaries CREDIT QUALITY STATISTICS - OWNED BASIS
All dollar amounts are stated in millions. At December 31, unless otherwise indicated. 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------- Owned Two-Month-and-Over Contractual Delinquency Ratios Real estate secured 2.63% 2.58% 3.10% 3.95% 3.66% Auto finance 2.92 2.46 2.02 2.90 1.48 MasterCard/Visa 5.67 4.90 3.59 5.09 3.55 Private label 5.99 5.60 6.09 6.03 5.60 Personal non-credit card 9.04 7.99 9.06 8.24 7.55 - --------------------------------------------------------------------------------------------------------- Total consumer 4.53% 4.26% 4.82% 5.31% 4.87% ========================================================================================================= Ratio of Owned Net Charge-offs to Average Owned Receivables for the Year Real estate secured .52% .42% .51% .60% .49% Auto finance 4.00 3.29 3.42 4.11 2.99 MasterCard/Visa 8.17 6.55 7.95 5.90 4.99 Private label 5.59 5.34 5.60 5.52 4.56 Personal non-credit card 6.81 7.02 6.50 6.52 4.88 - --------------------------------------------------------------------------------------------------------- Total consumer 3.32 3.18 3.67 3.76 3.39 Commercial 2.10 2.69 .93 .52 1.66 - --------------------------------------------------------------------------------------------------------- Total 3.31% 3.18% 3.63% 3.69% 3.34% ========================================================================================================= Nonaccrual Owned Receivables Domestic: Real estate secured $ 906.8 $ 685.6 $ 532.5 $ 486.5 $378.4 Auto finance 69.2 45.5 24.9 23.3 - Private label 38.6 47.6 58.1 29.0 25.0 Personal non-credit card 834.4 632.0 545.8 297.9 283.6 Foreign 215.3 226.0 236.7 178.3 189.1 - --------------------------------------------------------------------------------------------------------- Total consumer 2,064.3 1,636.7 1,398.0 1,015.0 876.1 Commercial and other 15.2 42.0 46.6 49.1 62.9 - --------------------------------------------------------------------------------------------------------- Total $2,079.5 $1,678.7 $1,444.6 $1,064.1 $939.0 ========================================================================================================= Accruing Owned Receivables 90 or More Days Delinquent Domestic: MasterCard/Visa $ 352.4 $ 272.0 $ 140.2 $ 264.0 $148.7 Private label 462.2 355.1 386.7 366.6 319.6 Foreign 29.5 22.3 23.5 21.8 31.3 - --------------------------------------------------------------------------------------------------------- Total $ 844.1 $ 649.4 $ 550.4 $ 652.4 $499.6 ========================================================================================================= Real Estate Owned Domestic $ 394.7 $ 333.5 $ 268.1 $ 249.5 $200.0 Foreign 4.2 3.6 3.4 4.4 12.8 - --------------------------------------------------------------------------------------------------------- Total $ 398.9 $ 337.1 $ 271.5 $ 253.9 $212.8 ========================================================================================================= Renegotiated Commercial Loans $ 2.1 $ 12.3 $ 12.3 $ 12.3 $ 12.4 =========================================================================================================
29 Household International, Inc. and Subsidiaries CREDIT QUALITY STATISTICS--MANAGED BASIS All dollar amounts are stated in millions. At December 31, unless otherwise indicated. 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Managed Two-Month-and-Over Contractual Delinquency Ratios Real estate secured 2.68% 2.63% 3.27% 3.67% 3.69% Auto finance 3.16 2.55 2.43 2.29 2.09 MasterCard/Visa 4.10 3.49 2.78 3.75 3.10 Private label 5.48 5.48 5.97 6.20 5.81 Personal non-credit card 8.87 7.97 8.81 7.94 7.81 - --------------------------------------------------------------------------------------------------------------------- Total consumer 4.46% 4.20% 4.66% 4.90% 4.64% ===================================================================================================================== Ratio of Managed Net Charge-offs to Average Managed Receivables for the Year Real estate secured .53% .45% .58% .63% .64% Auto finance 5.31 4.80 4.96 5.39 4.60 MasterCard/Visa 6.63 5.58 6.66 5.95 5.55 Private label 5.18 5.35 5.65 5.65 4.62 Personal non-credit card 6.79 6.97 6.52 6.97 5.48 - --------------------------------------------------------------------------------------------------------------------- Total consumer 3.73 3.64 4.13 4.29 3.84 Commercial 2.10 2.69 .93 .52 1.66 - --------------------------------------------------------------------------------------------------------------------- Total 3.72% 3.63% 4.09% 4.24% 3.80% ===================================================================================================================== Nonaccrual Managed Receivables Domestic: Real estate secured $ 940.8 $ 734.1 $ 626.9 $ 550.8 $ 492.1 Auto finance 201.8 116.2 73.9 40.3 - Private label 38.6 47.6 58.1 29.0 25.0 Personal non-credit card 1,106.3 902.0 828.8 559.5 565.2 Foreign 263.5 270.4 278.3 210.5 219.7 - --------------------------------------------------------------------------------------------------------------------- Total consumer 2,551.0 2,070.3 1,866.0 1,390.1 1,302.0 Commercial and other 15.2 42.0 46.6 49.1 62.9 - --------------------------------------------------------------------------------------------------------------------- Total $ 2,566.2 $ 2,112.3 $ 1,912.6 $ 1,439.2 $ 1,364.9 ===================================================================================================================== Accruing Managed Receivables 90 or More Days Delinquent Domestic: MasterCard/Visa $ 527.4 $ 420.3 $ 286.4 $ 436.2 $ 401.5 Private label 503.2 417.2 430.0 416.6 375.0 Foreign 29.5 22.3 23.5 21.8 31.3 - --------------------------------------------------------------------------------------------------------------------- Total $ 1,060.1 $ 859.8 $ 739.9 $ 874.6 $ 807.8 =====================================================================================================================
30 Household International, Inc. and Subsidiaries ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - OWNED RECEIVABLES
All dollar amounts are stated in millions. 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ Total Owned Credit Loss Reserves at January 1 $ 2,111.9 $ 1,757.0 $ 1,734.2 $ 1,642.1 $ 1,398.4 - ------------------------------------------------------------------------------------------------------------ Provision for Credit Losses 2,912.9 2,116.9 1,716.4 1,516.8 1,493.0 - ------------------------------------------------------------------------------------------------------------ Charge-offs Domestic: Real estate secured (194.0) (123.2) (103.8) (82.8) (46.3) Auto finance (94.3) (61.3) (39.4) (29.7) (6.4) MasterCard/Visa (645.4) (432.1) (477.8) (454.1) (415.8) Private label (590.9) (536.9) (547.7) (471.4) (407.9) Personal non-credit card (893.2) (723.5) (534.6) (464.4) (384.6) Foreign (237.0) (232.7) (233.9) (206.4) (197.6) - ------------------------------------------------------------------------------------------------------------ Total consumer (2,654.8) (2,109.7) (1,937.2) (1,708.8) (1,458.6) Commercial and other (12.2) (17.1) (10.1) (7.5) (26.8) - ------------------------------------------------------------------------------------------------------------ Total owned receivables charged off (2,667.0) (2,126.8) (1,947.3) (1,716.3) (1,485.4) - ------------------------------------------------------------------------------------------------------------ Recoveries Domestic: Real estate secured 4.4 4.7 7.5 2.6 3.0 Auto finance 1.5 1.5 1.2 .8 .3 MasterCard/Visa 52.0 24.9 34.7 33.3 46.9 Private label 60.6 54.0 74.3 56.8 47.4 Personal non-credit card 75.6 62.4 45.3 36.7 38.0 Foreign 62.5 57.5 46.6 43.2 50.9 - ------------------------------------------------------------------------------------------------------------ Total consumer 256.6 205.0 209.6 173.4 186.5 Commercial and other .4 .4 .3 2.2 3.3 - ------------------------------------------------------------------------------------------------------------ Total recoveries on owned receivables 257.0 205.4 209.9 175.6 189.8 Other, net 48.3 159.4 43.8 116.0 46.3 - ------------------------------------------------------------------------------------------------------------ Owned Credit Loss Reserves Domestic: Real estate secured 284.4 172.9 149.2 185.3 172.4 Auto finance 77.3 51.0 39.1 27.8 14.6 MasterCard/Visa 593.4 540.8 304.4 387.7 290.4 Private label 499.4 425.2 487.2 472.5 396.2 Personal non-credit card 1,031.9 734.2 568.9 457.6 499.4 Foreign 137.1 141.6 143.1 142.7 179.2 - ------------------------------------------------------------------------------------------------------------ Total consumer 2,623.5 2,065.7 1,691.9 1,673.6 1,552.2 Commercial and other 39.6 46.2 65.1 60.6 89.9 - ------------------------------------------------------------------------------------------------------------ Total Owned Credit Loss Reserves at December 31 $ 2,663.1 $ 2,111.9 $ 1,757.0 $ 1,734.2 $ 1,642.1 ============================================================================================================ Ratio of Owned Credit Loss Reserves to: Net charge-offs 110.5% 109.9% 101.1% 112.6% 126.7% Receivables: Consumer 3.31 3.10 3.30 3.85 4.12 Commercial 7.12 7.43 7.70 8.34 9.14 - ------------------------------------------------------------------------------------------------------------ Total 3.33% 3.14% 3.36% 3.92% 4.25% ============================================================================================================ Nonperforming Loans: Consumer 90.3% 90.3% 86.9% 99.3% 110.5% Commercial 278.7 85.4 116.8 139.0 200.7 - ------------------------------------------------------------------------------------------------------------ Total 91.0% 90.2% 87.5% 100.3% 113.2% ============================================================================================================
31 Household International, Inc. and Subsidiaries ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - MANAGED RECEIVABLES
All dollar amounts are stated in millions. 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Total Managed Credit Loss Reserves at January 1 $ 3,194.2 $ 2,666.6 $ 2,548.1 $ 2,523.0 $ 2,109.0 - -------------------------------------------------------------------------------------------------------------------- Provision for Credit Losses 4,018.4 3,252.4 2,781.8 2,716.0 2,620.6 - -------------------------------------------------------------------------------------------------------------------- Charge-Offs Domestic: Real estate secured (202.4) (139.9) (134.1) (118.8) (106.3) Auto finance (286.7) (188.4) (120.4) (70.0) (13.6) MasterCard/Visa (1,147.9) (880.7) (1,020.8) (1,166.2) (1,106.7) Private label (640.2) (605.6) (598.3) (544.3) (436.0) Personal non-credit card (1,196.2) (1,030.6) (821.6) (797.9) (639.8) Foreign (282.2) (275.8) (281.4) (250.0) (225.8) - -------------------------------------------------------------------------------------------------------------------- Total consumer (3,755.6) (3,121.0) (2,976.6) (2,947.2) (2,528.2) Commercial and other (12.2) (17.0) (10.0) (7.5) (26.8) - -------------------------------------------------------------------------------------------------------------------- Total managed receivables charged off (3,767.8) (3,138.0) (2,986.6) (2,954.7) (2,555.0) - -------------------------------------------------------------------------------------------------------------------- Recoveries Domestic: Real estate secured 4.4 4.7 7.5 4.4 5.8 Auto finance 4.0 4.0 2.8 2.1 .6 MasterCard/Visa 81.1 49.8 68.4 82.0 94.8 Private label 62.3 57.0 77.0 65.0 50.0 Personal non-credit card 100.9 79.2 61.2 51.6 50.3 Foreign 71.9 69.0 54.1 47.2 52.8 - -------------------------------------------------------------------------------------------------------------------- Total consumer 324.6 263.7 271.0 252.3 254.3 Commercial and other .4 .3 .3 2.2 3.3 - -------------------------------------------------------------------------------------------------------------------- Total recoveries on managed receivables 325.0 264.0 271.3 254.5 257.6 Other, net 41.6 149.2 52.0 9.3 90.8 - -------------------------------------------------------------------------------------------------------------------- Managed Credit Loss Reserves Domestic: Real estate secured 303.8 195.9 172.8 244.1 235.7 Auto finance 448.8 323.8 242.4 133.2 49.7 MasterCard/Visa 901.5 849.0 612.6 689.9 704.9 Private label 630.9 599.4 603.7 541.5 462.1 Personal non-credit card 1,263.6 957.5 761.6 685.5 759.6 Foreign 223.2 222.4 208.4 193.3 221.1 - -------------------------------------------------------------------------------------------------------------------- Total consumer 3,771.8 3,148.0 2,601.5 2,487.5 2,433.1 Commercial and other 39.6 46.2 65.1 60.6 89.9 - -------------------------------------------------------------------------------------------------------------------- Total Managed Credit Loss Reserves at December 31 $ 3,811.4 $ 3,194.2 $ 2,666.6 $ 2,548.1 $ 2,523.0 ==================================================================================================================== Ratio of Managed Credit Loss Reserves to: Net charge-offs 110.7% 111.1% 98.2% 94.4% 109.8% Receivables: Consumer 3.77 3.62 3.68 3.94 3.92 Commercial 7.12 7.43 7.70 8.34 9.14 - -------------------------------------------------------------------------------------------------------------------- Total 3.78% 3.65% 3.72% 3.99% 3.99% ==================================================================================================================== Nonperforming Loans: Consumer 104.5% 107.4% 98.8% 109.0% 113.7% Commercial 278.7 85.4 116.8 139.0 200.7 - -------------------------------------------------------------------------------------------------------------------- Total 105.0% 107.0% 100.1% 109.5% 115.5% ====================================================================================================================
32 Household International, Inc. and Subsidiaries NET INTEREST MARGIN - 2001 COMPARED TO 2000 (OWNED BASIS)
Finance and Interest Income/ Increase/(Decrease) Due to: Average Outstanding (1) Average Rate Interest Expense ------------------------------------ All dollar amounts ----------------------- ------------ ------------------ Volume Rate are stated in millions. 2001 2000 2001 2000 2001 2000 Variance Variance (2) Variance (2) - ------------------------------------------------------------------------------------------------------------------------------------ Receivables: Real estate secured $38,850.4 $30,682.5 11.6% 12.0% $ 4,516.1 $3,684.3 $ 831.8 $ 952.8 $ (121.0) Auto finance 2,319.1 1,818.9 15.3 16.7 354.0 303.6 50.4 78.0 (27.6) MasterCard/Visa 8,138.3 7,126.5 14.5 14.9 1,180.6 1,064.8 115.8 147.5 (31.7) Private label 10,516.4 9,981.7 13.4 14.3 1,405.3 1,432.2 (26.9) 74.4 (101.3) Personal non-credit card 12,486.0 10,194.7 20.2 21.0 2,525.1 2,140.7 384.4 465.9 (81.5) Commercial and other 554.8 693.5 2.3 5.0 13.0 34.7 (21.7) (5.9) (15.8) - ------------------------------------------------------------------------------------------------------------------------------------ Total receivables 72,865.0 60,497.8 13.7 14.3 9,994.1 8,660.3 1,333.8 1,712.8 (379.0) Noninsurance investments 894.1 973.4 3.0 3.5 26.5 34.0 (7.5) (2.6) (4.9) - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets (excluding insurance investments) $73,759.1 $61,471.2 13.6% 14.1% $10,020.6 $8,694.3 $1,326.3 $1,680.7 $ (354.4) Insurance investments 3,006.2 2,733.6 Other assets 5,278.4 5,507.9 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $82,043.7 $69,712.7 ==================================================================================================================================== Debt: Deposits $ 7,953.2 $ 7,757.5 6.3% 6.2% $ 498.6 $ 484.0 $ 14.6 $ 12.3 $ 2.3 Commercial paper 9,221.1 9,828.7 4.1 6.3 376.3 621.2 (244.9) (36.4) (208.5) Bank and other borrowings 2,240.1 2,099.7 3.9 5.5 86.9 116.5 (29.6) 7.4 (37.0) Senior and senior subordinated debt with original maturities over one year 50,018.2 39,387.9 6.4 6.9 3,212.0 2,707.2 504.8 692.0 (187.2) - ------------------------------------------------------------------------------------------------------------------------------------ Total debt $69,432.6 $59,073.8 6.0% 6.7% $4,173.8 $3,928.9 $ 244.9 $ 675.3 $ (430.4) Other liabilities 2,423.8 2,699.8 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 71,856.4 61,773.6 Preferred securities 1,136.9 701.9 Common shareholders' equity 9,050.4 7,237.2 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity $82,043.7 $69,712.7 ==================================================================================================================================== Net Interest Margin - Owned Basis (3)(5) 7.9% 7.8% $5,846.8 $4,765.4 $1,081.4 $ 1,005.4 $ 76.0 ==================================================================================================================================== Interest Spread - Owned Basis (4) 7.6% 7.5% ====================================================================================================================================
(1) Nonaccrual loans are included in average outstanding balances. (2) 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. (3) Represents net interest margin as a percent of average interest-earning assets. (4) Represents the difference between the yield earned on interest-earning assets and the cost of the debt used to fund the assets. (5) The net interest margin analysis includes the following for foreign businesses: 2001 2000 1999 - ------------------------------------------------------------------------------ Average interest-earning assets $ 6,988.7 $ 6,639.1 $ 6,433.3 Average interest-bearing liabilities 5,973.3 5,765.5 5,138.5 Net interest margin 431.2 467.7 494.9 Net interest margin percentage 6.2% 7.0% 7.7% - ------------------------------------------------------------------------------ 33 Household International, Inc. and Subsidiaries NET INTEREST MARGIN - 2000 COMPARED TO 1999 (OWNED BASIS)
Finance and Interest Income/ Increase/(Decrease) Due to: Average Outstanding (1) Average Rate Interest Expense -------------------------------------- All dollar amounts ----------------------- ------------ ------------------- Volume Rate are stated in millions. 2000 1999 2000 1999 2000 1999 Variance Variance (2) Variance (2) - ----------------------------------------------------------------------------------------------------------------------------------- Receivables: Real estate secured $30,682.5 $21,679.1 12.0% 11.6% $3,684.3 $2,513.1 $1,171.2 $ 1,043.7 $ 12.0 Auto finance 1,818.9 1,119.8 16.7 18.6 303.6 207.8 95.8 129.7 (33.9) MasterCard/Visa 7,126.5 6,270.8 14.9 12.3 1,064.8 768.3 296.5 104.8 191.7 Private label 9,981.7 9,486.2 14.3 13.6 1,432.2 1,289.8 142.4 67.4 75.0 Personal non-credit card 10,194.7 8,434.9 21.0 20.2 2,140.7 1,705.4 435.3 355.8 79.5 Commercial and other 693.5 809.6 5.0 8.0 34.7 65.1 (30.4) (9.3) (21.1) - ----------------------------------------------------------------------------------------------------------------------------------- Total receivables 60,497.8 47,800.4 14.3 13.7 8,660.3 6,549.5 2,110.8 1,692.1 303.2 Noninsurance investments 973.4 975.0 3.5 3.4 34.0 33.4 .6 (.1) .7 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets (excluding insurance investments) $61,471.2 $48,775.4 14.1% 13.5% $8,694.3 $6,582.9 $2,111.4 $ 1,713.5 $397.9 Insurance investments 2,733.6 2,596.9 Other assets 5,507.9 4,938.1 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $69,712.7 $56,310.4 =================================================================================================================================== Debt: Deposits $7,757.5 $ 3,037.3 6.2% 5.5% $ 484.0 $ 168.4 $ 315.6 $ 261.7 $ 53.9 Commercial paper 9,828.7 8,620.3 6.3 5.2 621.2 451.7 169.5 63.3 106.2 Bank and other borrowings 2,099.7 1,426.7 5.5 5.0 116.5 70.8 45.7 33.4 12.3 Senior and senior subordinated debt with original maturities over one year 39,387.9 32,954.1 6.9 6.3 2,707.2 2,085.7 621.5 407.2 214.3 - ----------------------------------------------------------------------------------------------------------------------------------- Total debt $59,073.8 $46,038.4 6.7% 6.0% $3,928.9 $2,776.6 $1,152.3 $ 765.6 $386.7 Other liabilities 2,699.8 3,453.3 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 61,773.6 49,491.7 Preferred securities 701.9 539.4 Common shareholders' equity 7,237.2 6,279.3 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $69,712.7 $56,310.4 =================================================================================================================================== Net Interest Margin - Owned Basis (3)(5) 7.8% 7.8% $4,765.4 $3,806.3 $ 959.1 $ 947.9 $ 11.2 =================================================================================================================================== Interest Spread - Owned Basis (4) 7.5% 7.5% ===================================================================================================================================
34 Household International, Inc. and Subsidiaries NET INTEREST MARGIN - 2001 COMPARED TO 2000 AND 1999 (MANAGED BASIS) Net Interest Margin on a Managed Basis As receivables are securitized rather than held in our portfolio, net interest margin is reclassified to securitization revenue. We retain a substantial portion of the profit inherent in the receivables while increasing liquidity. The comparability of net interest margin between periods may be impacted by the level and type of receivables securitized. Net interest margin on a Managed Basis includes finance income earned on our owned receivables as well on our securitized receivables. This finance income is offset by interest expense on the debt recorded on our balance sheet as well as the contractual rate of return on the instruments issued to investors when the receivables were securitized.
Finance and Interest Average Outstanding(1) Average Rate Income/Interest Expense All dollar amounts are ------------------------------ ------------------ ------------------------------- stated in millions. 2001 2000 1999 2001 2000 1999 2001 2000 1999 - ---------------------- ---------------------------------------------------------------------------------- Receivables: Real estate secured $40,049.6 $32,530.2 $24,574.5 11.6% 12.0% 11.6% $ 4,650.2 $ 3,906.5 $ 2,847.5 Auto finance 5,323.5 3,842.3 2,370.4 17.5 18.3 19.0 929.5 702.5 449.6 MasterCard/Visa 17,282.8 16,111.2 15,295.7 14.3 14.8 13.2 2,470.6 2,392.0 2,025.7 Private label 12,260.6 11,194.2 10,255.9 13.5 14.4 13.6 1,655.8 1,613.5 1,398.7 Personal non-credit card 17,013.8 14,760.8 13,008.6 20.0 20.5 19.6 3,407.8 3,019.5 2,555.8 Commercial and other 554.9 693.5 809.6 2.3 5.0 8.0 13.0 34.7 65.0 -------------------------------------------------------------------------------------------------------------- Total receivables 92,485.2 79,132.2 66,314.7 14.2 14.7 14.1 13,126.9 11,668.7 9,342.3 Noninsurance investments 894.1 973.4 975.0 3.0 3.5 3.4 26.5 34.0 33.4 - ---------------------------------------------------------------------------------------------------------------- Total interest-earning assets (excluding insurance investments) $93,379.3 $80,105.6 $67,289.7 14.1% 14.6% 13.9% $13,153.4 $11,702.7 $ 9,375.7 - ---------------------------------------------------------------------------------------------------------------- Total debt $89,052.8 $71,274.4 $64,552.7 5.9% 7.3% 5.9% $ 5,212.8 $ 5,212.7 $ 3,836.5 - ---------------------------------------------------------------------------------------------------------------- Net Interest Margin - 8.5% 8.1% 8.2% $ 7,940.6 $ 6,490.0 $ 5,539.2 Managed Basis (3) ================================================================================================================ Interest Spread - Managed Basis (4) 8.2% 7.3% 8.0% ================================================================================================================ Increase/(Decrease) Due to: ------------------------------------------------------------------------ 2001 Compared to 2000 2000 Compared to 1999 ---------------------------------- ------------------------------------ Volume Rate Volume Rate Variance Variance(2) Variance(2) Variance Variance(2) Variance(2) ---------------------------------- ------------------------------------ Receivables: Real estate secured $ 743.7 $ 876.8 $ (133.1) $ 1,059.0 $ 955.4 $103.6 Auto finance 227.0 259.9 (32.9) 252.9 269.1 (16.2) MasterCard/Visa 78.6 169.7 (91.1) 366.3 121.1 245.2 Private label 42.3 147.9 (105.6) 214.8 135.3 79.5 Personal non-credit card 388.3 452.4 (64.1) 463.7 358.4 105.3 Commercial and other (21.7) (5.9) (15.8) (30.3) (8.4) (21.9) ----------------------------------------------------------------------------------------------------------- Total receivables 1,458.2 1,900.8 (442.6) 2,326.4 1,873.6 452.8 Noninsurance investments (7.5) (2.6) (4.9) .6 (.1) .7 - ------------------------------------------------------------------------------------------------------------- Total interest-earning assets (excluding insurance investments) $1,450.7 $ 1,882.1 $ (431.4) $ 2,327.0 $ 1,872.3 $454.7 - ------------------------------------------------------------------------------------------------------------- Total debt $ .1 $ 1,156.1 $(1,156.0) $ 1,376.2 $ 834.0 $542.2 - ------------------------------------------------------------------------------------------------------------- Net Interest Margin - $1,450.6 $ 726.0 $ 724.6 $ 950.8 $ 1,038.3 $(87.5) Managed Basis (3) ============================================================================================================= Interest Spread - Managed Basis(4) =============================================================================================================
(1) Nonaccrual loans are included in average outstanding balances. (2) 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. (3) Represents net interest margin as a percent of average interest-earning assets. (4) Represents the difference between the yield earned on interest-earning assets and cost of the debt used to fund the assets. 35 Household International, Inc. and Subsidiaries SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2001 - Three Months Ended 2000 - Three Months Ended All dollar amounts except per share ------------------------------------------------------------------------------------- data are stated in millions. Dec. Sept. June March Dec. Sept. June March - ------------------------------------------------------------------------------------------------------------------------------- Finance and other interest income $2,602.5 $2,536.6 $2,451.2 $2,430.3 $2,415.6 $2,270.4 $2,083.4 $1,924.9 Interest expense 983.4 1,035.2 1,048.4 1,106.8 1,117.0 1,057.2 933.0 821.7 - ------------------------------------------------------------------------------------------------------------------------------- Net interest margin 1,619.1 1,501.4 1,402.8 1,323.5 1,298.6 1,213.2 1,150.4 1,103.2 Provision for credit losses on owned receivables 829.3 722.9 657.1 703.6 574.8 524.4 495.6 522.1 - ------------------------------------------------------------------------------------------------------------------------------- Net interest margin after provision for credit losses 789.8 778.5 745.7 619.9 723.8 688.8 654.8 581.1 - ------------------------------------------------------------------------------------------------------------------------------- Securitization revenue 514.4 454.3 400.6 406.3 394.7 379.9 355.6 346.4 Insurance revenue 175.3 169.2 159.3 158.6 147.7 146.7 131.8 135.0 Investment income 45.8 42.3 37.8 41.8 47.0 43.9 42.5 40.8 Fee income 245.7 250.6 232.7 237.9 234.4 216.2 195.9 179.3 Other income 59.9 51.5 49.4 161.7 33.5 30.1 31.9 133.3 - ------------------------------------------------------------------------------------------------------------------------------- Total other revenues 1,041.1 967.9 879.8 1,006.3 857.3 816.8 757.7 834.8 - ------------------------------------------------------------------------------------------------------------------------------- Salaries and fringe benefits 424.1 408.3 387.2 377.6 355.5 333.0 321.5 302.1 Sales incentives 71.0 74.1 73.6 54.5 50.3 53.1 57.4 42.8 Occupancy and equipment expense 84.1 86.1 83.7 83.5 77.1 78.4 75.6 75.5 Other marketing expenses 128.0 127.1 129.0 135.2 104.3 108.2 125.3 133.1 Other servicing and administrative expenses 172.2 172.3 171.7 193.4 122.8 136.0 144.1 186.8 Amortization of acquired intangibles and goodwill 37.4 37.4 37.5 38.9 38.9 39.0 38.9 43.2 Policyholders' benefits 74.5 77.5 73.1 77.5 63.4 67.1 64.3 66.9 - ------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 991.3 982.8 955.8 960.6 812.3 814.8 827.1 850.4 - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 839.6 763.6 669.7 665.6 768.8 690.8 585.4 565.5 Income taxes 290.7 259.8 230.7 233.8 276.1 239.6 201.5 192.6 - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 548.9 $ 503.8 $ 439.0 $ 431.8 $ 492.7 $ 451.2 $ 383.9 $ 372.9 =============================================================================================================================== Basic earnings per common share $ 1.18 $ 1.09 $ .94 $ .92 $ 1.05 $ .95 $ .80 $ .79 Diluted earnings per common share 1.17 1.07 .93 .91 1.03 .94 .80 .78 Dividends declared .22 .22 .22 .19 .19 .19 .19 .17 Weighted average common and common equivalent shares outstanding 463.2 467.7 469.6 472.0 476.1 477.6 477.0 474.0 - -------------------------------------------------------------------------------------------------------------------------------
36 Household International, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME In millions, except per share data. Year ended December 31 2001 2000 1999 - ------------------------------------------------------------------------------------------------- Finance and other interest income $ 10,020.6 $ 8,694.3 $ 6,582.9 Interest expense 4,173.8 3,928.9 2,776.6 - ------------------------------------------------------------------------------------------------- Net interest margin 5,846.8 4,765.4 3,806.3 Provision for credit losses on owned receivables 2,912.9 2,116.9 1,716.4 - ------------------------------------------------------------------------------------------------- Net interest margin after provision for credit losses 2,933.9 2,648.5 2,089.9 - ------------------------------------------------------------------------------------------------- Securitization revenue 1,775.6 1,476.6 1,393.5 Insurance revenue 662.4 561.2 534.6 Investment income 167.7 174.2 168.8 Fee income 966.9 825.8 595.5 Other income 322.5 228.8 223.8 - ------------------------------------------------------------------------------------------------- Total other revenues 3,895.1 3,266.6 2,916.2 - ------------------------------------------------------------------------------------------------- Salaries and fringe benefits 1,597.2 1,312.1 1,048.7 Sales incentives 273.2 203.6 145.9 Occupancy and equipment expense 337.4 306.6 270.9 Other marketing expenses 519.3 470.9 370.0 Other servicing and administrative expenses 709.6 589.7 547.9 Amortization of acquired intangibles and goodwill 151.2 160.0 143.9 Policyholders' benefits 302.6 261.7 258.1 - ------------------------------------------------------------------------------------------------- Total costs and expenses 3,890.5 3,304.6 2,785.4 - ------------------------------------------------------------------------------------------------- Income before income taxes 2,938.5 2,610.5 2,220.7 Income taxes 1,015.0 909.8 734.3 - ------------------------------------------------------------------------------------------------- Net income $ 1,923.5 $ 1,700.7 $ 1,486.4 ================================================================================================= Earnings Per Common Share Net income $ 1,923.5 $ 1,700.7 $ 1,486.4 Preferred dividends (15.5) (9.2) (9.2) - ------------------------------------------------------------------------------------------------- Earnings available to common shareholders $ 1,908.0 $ 1,691.5 $ 1,477.2 ================================================================================================= Average common shares 462.0 471.8 477.0 Average common and common equivalent shares 468.1 476.2 481.8 - ------------------------------------------------------------------------------------------------- Basic earnings per common share $ 4.13 $ 3.59 $ 3.10 ================================================================================================= Diluted earnings per common share $ 4.08 $ 3.55 $ 3.07 =================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 37 Household International, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
In millions, except share data. At December 31 2001 2000 - --------------------------------------------------------------------------------------------------------- Assets Cash $ 543.6 $ 490.2 Investment securities 3,580.5 3,259.0 Receivables, net 79,263.5 67,161.7 Acquired intangibles and goodwill, net 1,555.3 1,705.7 Properties and equipment, net 531.1 517.6 Real estate owned 398.9 337.1 Other assets 3,543.1 3,235.0 --------------------------------------------------------------------------------------------------- Total assets $ 89,416.0 $ 76,706.3 =================================================================================================== Liabilities and Shareholders' Equity Debt: Deposits $ 6,562.3 $ 8,676.9 Commercial paper, bank and other borrowings 12,024.3 10,787.9 Senior and senior subordinated debt (with original maturities over one year) 56,823.6 45,053.0 --------------------------------------------------------------------------------------------------- Total debt 75,410.2 64,517.8 Insurance policy and claim reserves 1,094.5 1,106.6 Other liabilities 3,277.7 2,291.3 --------------------------------------------------------------------------------------------------- Total liabilities 79,782.4 67,915.7 Company obligated mandatorily redeemable preferred securities of subsidiary trusts* 975.0 675.0 Preferred stock 455.8 164.4 Common shareholders' equity: Common stock, $1.00 par value, 750,000,000 shares authorized; 551,684,740 and 551,100,165 shares issued at December 31, 2001 and 2000, respectively 551.7 551.1 Additional paid-in capital 2,030.0 1,926.0 Retained earnings 9,197.4 7,680.5 Accumulated other comprehensive income (732.4) (214.7) Less common stock in treasury, 94,560,437 and 80,080,506 shares at December 31, 2001 and 2000, respectively, at cost (2,843.9) (1,991.7) --------------------------------------------------------------------------------------------------- Total common shareholders' equity 8,202.8 7,951.2 --------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 89,416.0 $ 76,706.3 ===================================================================================================
* The sole assets of the trusts are Junior Subordinated Deferrable Interest Notes issued by Household International, Inc. in November 2001, January 2001, June 2000, March 1998 and June 1995, bearing interest at 7.50, 8.25, 10.00, 7.25 and 8.25 percent, respectively, with principal balances of $206.2, $206.2, $309.3, $206.2 and $77.3 million, respectively, and due November 15, 2031, January 30, 2031, June 30, 2030, December 31, 2037, and June 30, 2025, respectively. The $103.1 million Junior Subordinated Deferrable Interest Notes issued in June 1996 were redeemed in December 2001. The accompanying notes are an integral part of these consolidated financial statements. 38 Household International, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions. Year ended December 31 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Cash Provided by Operations Net income $ 1,923.5 $ 1,700.7 $ 1,486.4 Adjustments to reconcile net income to net cash provided by operations: Provision for credit losses on owned receivables 2,912.9 2,116.9 1,716.4 Insurance policy and claim reserves 204.2 36.6 76.1 Depreciation and amortization 308.3 301.7 292.1 Deferred income tax provision 38.1 87.0 33.1 Interest-only strip receivables, net change (100.6) (59.0) (34.0) Other, net 231.1 3.7 (316.1) ----------------------------------------------------------------------------------------------------------- Cash provided by operations 5,517.5 4,187.6 3,254.0 - ---------------------------------------------------------------------------------------------------------------- Investments in Operations Investment securities: Purchased (1,744.2) (804.4) (1,431.7) Matured 481.9 451.5 792.5 Sold 686.3 238.4 732.5 Short-term investment securities, net change 255.9 (47.8) (111.1) Receivables: Originations, net (46,324.7) (39,930.6) (32,888.1) Purchases and related premiums (1,577.4) (4,162.8) (2,571.6) Sold 32,293.6 26,919.2 25,249.8 Acquisition of business operations - (87.1) (43.4) Properties and equipment purchased (175.2) (173.8) (139.8) Properties and equipment sold 20.3 16.3 29.1 ----------------------------------------------------------------------------------------------------------- Cash decrease from investments in operations (16,083.5) (17,581.1) (10,381.8) - ---------------------------------------------------------------------------------------------------------------- Financing and Capital Transactions Short-term debt and demand deposits, net change 1,300.9 182.0 839.1 Time certificates, net change (2,118.6) 3,219.7 2,961.6 Senior and senior subordinated debt issued 21,172.0 21,608.3 11,281.3 Senior and senior subordinated debt retired (9,107.0) (11,152.0) (6,870.6) Policyholders' benefits paid (85.7) (117.6) (126.9) Cash received from policyholders 60.4 60.2 63.0 Shareholders' dividends (406.6) (358.9) (332.1) Issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts 400.0 300.0 - Redemption of company obligated mandatorily redeemable preferred securities of subsidiary trusts (100.0) - - Issuance of preferred stock 291.4 - - Purchase of treasury stock (916.3) (209.3) (915.9) Issuance of common stock 121.8 64.4 45.0 ----------------------------------------------------------------------------------------------------------- Cash increase from financing and capital transactions 10,612.3 13,596.8 6,944.5 ----------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 7.1 16.3 (3.5) ----------------------------------------------------------------------------------------------------------- Increase (decrease) in cash 53.4 219.6 (186.8) Cash at January 1 490.2 270.6 457.4 ----------------------------------------------------------------------------------------------------------- Cash at December 31 $ 543.6 $ 490.2 $ 270.6 =========================================================================================================== Supplemental Cash Flow Information: Interest paid $ 4,511.2 $ 3,920.6 $ 2,757.6 Income taxes paid 979.5 689.9 337.6 ----------------------------------------------------------------------------------------------------------- Supplemental Noncash Investing and Financing Activities: Common stock issued for acquisition $ - $ 209.4 $ 15.0 ===========================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 39 Household International, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK AND COMMON SHAREHOLDERS' EQUITY
Common Shareholders' Equity ----------------------------------------------------------------------------- Accumulated Additional Other Common Total Common All amounts except per share data are stated Preferred Common Paid-in Retained Comprehensive Stock in Shareholders' in millions. Stock Stock Capital Earnings Income(1) Treasury Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ 164.4 $ 544.1 $1,652.5 $5,184.4 $ (145.1) $(1,014.5) $ 6,221.4 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 1,486.4 1,486.4 Other comprehensive income, net of tax: Unrealized losses on investments and interest-only strip receivables, net of reclassification adjustment (93.7) (93.7) Foreign currency translation adjustments (18.1) (18.1) - ----------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 1,374.6 Cash dividends: Preferred at stated rates (9.2) (9.2) Common, $.68 per share (322.9) (322.9) Exercise of stock options 6.1 103.0 (51.2) 57.9 Issuance of common stock .2 25.3 19.5 45.0 Purchase of treasury stock (915.9) (915.9) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 164.4 550.4 1,780.8 6,338.7 (256.9) (1,962.1) 6,450.9 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 1,700.7 1,700.7 Other comprehensive income, net of tax: Unrealized gains on investments and interest-only strip receivables, net of reclassification adjustment 95.1 95.1 Foreign currency translation adjustments (52.9) (52.9) - ----------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 1,742.9 Cash dividends: Preferred at stated rates (9.2) (9.2) Common, $.74 per share (349.7) (349.7) Exercise of stock options .5 20.7 30.6 51.8 Issuance of common stock .2 124.5 149.1 273.8 Purchase of treasury stock (209.3) (209.3) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 164.4 551.1 1,926.0 7,680.5 (214.7) (1,991.7) 7,951.2 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 1,923.5 1,923.5 Other comprehensive income, net of tax: Cumulative effect of change in accounting principle (FAS No. 133) (241.4) (241.4) Unrealized losses on cash flow hedging instruments, net of reclassification adjustment (457.7) (457.7) Unrealized gains on investments and interest-only strip receivables, net of reclassification adjustment 199.5 199.5 Foreign currency translation adjustments (18.1) (18.1) - ----------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 1,405.8 Cash dividends: Preferred at stated rates (15.5) (15.5) Common, $.85 per share (391.1) (391.1) Issuance of preferred stock 291.4 - Exercise of stock options .5 31.2 15.2 46.9 Issuance of common stock .1 72.8 48.9 121.8 Purchase of treasury stock (916.3) (916.3) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $ 455.8 $ 551.7 $2,030.0 $9,197.4 $ (732.4) $(2,843.9) $ 8,202.8 ===================================================================================================================================
(1) Accumulated other comprehensive income includes the following:
In millions. At December 31 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------ Unrealized losses on cash flow hedging instruments $ (699.1) - - - Unrealized gains (losses) on investments and interest-only strip receivables: Gross unrealized gains (losses) 351.7 $ 41.6 $ (109.8) $ 34.0 Income tax expense (benefit) 128.4 17.8 (38.5) 11.6 -------------------------------------- Net unrealized gains (losses) 223.3 23.8 (71.3) 22.4 Cumulative adjustments for foreign currency translation adjustments (256.6) (238.5) (185.6) (167.5) -------------------------------------- Total $ (732.4) $(214.7) $ (256.9) $ (145.1) ======================================
The accompanying notes are an integral part of these consolidated financial statements. 40 Household International, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK AND COMMON SHAREHOLDERS' EQUITY (Continued)
Common Stock Preferred ---------------------------------------------- Shares Outstanding Stock Issued In Treasury Net Outstanding - --------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 1,398,279 544,124,170 (60,986,431) 483,137,739 Exercise of common stock options 6,083,549 (791,681) 5,291,868 Issuance of common stock 223,338 1,055,566 1,278,904 Purchase of treasury stock (21,797,066) (21,797,066) - --------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 1,398,279 550,431,057 (82,519,612) 467,911,445 Exercise of common stock options 516,823 1,531,458 2,048,281 Issuance of common stock 152,285 6,321,263 6,473,548 Purchase of treasury stock (5,413,615) (5,413,615) - --------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 1,398,279 551,100,165 (80,080,506) 471,019,659 Issuance of preferred stock 300,000 Exercise of common stock options 548,744 1,466,979 2,015,723 Issuance of common stock 35,831 1,450,484 1,486,315 Purchase of treasury stock (17,397,394) (17,397,394) - --------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 1,698,279 551,684,740 (94,560,437) 457,124,303 =========================================================================================================
Comprehensive Income We adopted FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001. The adoption was accounted for as a cumulative effect of a change in accounting principle. The table below discloses reclassification adjustments and the related tax effects allocated to each component of other comprehensive income (expense) including the adoption of FAS No. 133 and unrealized gains (losses) on cash flow hedging instruments in 2001, unrealized gains (losses) on investments and interest-only strip receivables and foreign currency translation adjustments.
In millions. Tax (Expense) Year ended December 31 Before-Tax Benefit Net-of-Tax - ------------------------------------------------------------------------------------------------------------- 1999 Unrealized gains (losses) on investments and interest-only strip receivables: Net unrealized holding losses arising during the period $(134.4) $ 46.8 $ (87.6) Less: Reclassification adjustment for gains realized in net income (9.4) 3.3 (6.1) --------------------------------------------------------------------------------------------------------- Net unrealized losses on investments and interest-only strip (143.8) 50.1 (93.7) receivables Foreign currency translation adjustments (23.4) 5.3 (18.1) - ------------------------------------------------------------------------------------------------------------ Other comprehensive expense $(167.2) $ 55.4 $(111.8) - ------------------------------------------------------------------------------------------------------------ 2000 Unrealized gains (losses) on investments and interest-only strip receivables: Net unrealized holding gains arising during the period $ 152.2 $ (56.6) $ 95.6 Less: Reclassification adjustment for gains realized in net income (.8) .3 (.5) --------------------------------------------------------------------------------------------------------- Net unrealized gains on investments and interest-only strip receivables 151.4 (56.3) 95.1 Foreign currency translation adjustments (75.3) 22.4 (52.9) - ------------------------------------------------------------------------------------------------------------ Other comprehensive income $ 76.1 $ (33.9) $ 42.2 - ------------------------------------------------------------------------------------------------------------ 2001 Unrealized gains (losses) on cash flow hedging instruments: Cumulative effect of change in accounting principle (FAS No. 133) $ (376.6) $ 135.2 $(241.4) Net losses arising during the period (1,137.0) 408.2 (728.8) Less: Reclassification adjustment for losses realized in net income 422.9 (151.8) 271.1 --------------------------------------------------------------------------------------------------------- Net losses on cash flow hedging instruments (1,090.7) 391.6 (699.1) --------------------------------------------------------------------------------------------------------- Unrealized gains (losses) on investments and interest-only strip receivables: Net unrealized holding gains arising during the period 321.3 (114.5) 206.8 Less: Reclassification adjustment for gains realized in net income (11.2) 3.9 (7.3) --------------------------------------------------------------------------------------------------------- Net unrealized gains on investments and interest-only strip receivables 310.1 (110.6) 199.5 --------------------------------------------------------------------------------------------------------- Foreign currency translation adjustments (28.2) 10.1 (18.1) - ------------------------------------------------------------------------------------------------------------ Other comprehensive expense $ (808.8) $ 291.1 $(517.7) ============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Household International, Inc. and Subsidiaries Notes to Consolidated Financial Statements Household International, Inc. and subsidiaries ("Household") is a leading provider of consumer lending products to middle-market consumers in the United States, United Kingdom and Canada. Household may also be referred to in these notes to the consolidated financial statements as "we," "us" or "our." Our lending products include real estate secured loans, auto finance loans, MasterCard* and Visa* credit cards, private label credit cards and personal non-credit card loans. We also offer tax refund anticipation loans in the United States and credit and specialty insurance in the United States, the United Kingdom and Canada. We have three reportable segments: Consumer, Credit Card Services, and International. Our Consumer segment consists of our branch-based consumer lending, mortgage services, retail services, and auto finance businesses. Our Credit Card Services segment consists of our domestic MasterCard and Visa credit card business. Our International segment consists of our foreign operations in the United Kingdom ("U.K.") and Canada. 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Household International, Inc. and all subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform with the current year's presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Investment Securities We maintain investment portfolios (comprised primarily of debt securities) in both our noninsurance and insurance operations. Our entire investment securities portfolio was classified as available-for-sale at December 31, 2001 and 2000. Available-for-sale investments are intended to be invested for an indefinite period but may be sold in response to events we expect to occur in the foreseeable future. These investments are carried at fair value. Unrealized holding gains and losses on available-for-sale investments are recorded as adjustments to common shareholders' equity in accumulated other comprehensive income, net of income taxes. Any decline in the fair value of investments which is deemed to be other than temporary is charged against current earnings. Cost of investment securities sold is determined using the specific identification method. Interest income earned on the noninsurance investment portfolio is classified in the statements of income in net interest margin. Realized gains and losses from the investment portfolio and investment income from the insurance portfolio are recorded in investment income. Accrued investment income is classified with investment securities. Receivables Receivables are carried at amortized cost. Finance income is recognized using the effective yield method. Premiums and discounts on purchased receivables are recognized as adjustments to the yield of 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. MasterCard and Visa annual fees are netted with direct lending costs, deferred, and amortized on a straight-line basis over one year. Net deferred annual fees related to these receivables totaled $90.3 million at December 31, 2001 and $63.4 million at December 31, 2000. Insurance reserves and unearned premiums 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. 42 Provision and Credit Loss Reserves Provision for credit losses on owned receivables is made in an amount sufficient to maintain credit loss reserves at a level considered adequate to cover probable losses of principal, interest and fees, including late, overlimit and annual fees, in the existing owned portfolio. Probable losses are estimated for consumer receivables based on contractual delinquency status and historical loss experience. For commercial loans, probable losses are calculated using estimates of amounts and timing of future cash flows expected to be received on loans. In addition, loss reserves on consumer receivables are maintained to reflect our judgment of portfolio risk factors, such as economic conditions, bankruptcy trends, product mix, geographic concentrations and other similar items. Charge-off and customer account management policies are also considered when establishing loss reserve requirements to ensure appropriate allowances exist for products with longer charge-off periods and for customers benefiting from account management decisions. Loss reserve estimates are reviewed periodically and adjustments are reported in earnings when they become known. As these estimates are influenced by factors outside our control, such as consumer payment patterns and economic conditions, there is uncertainty inherent in these estimates, making it reasonably possible that they could change. Our charge-off policy for consumer receivables varies by product. Unsecured receivables are written off at the following stages of contractual delinquency: MasterCard and Visa-6 months; private label-9 months; and personal non-credit card-9 months and no payment received in 6 months, but in no event to exceed 12 months. For real estate secured receivables, carrying values in excess of net realizable value are charged off at the time of foreclosure or when settlement is reached with the borrower. For loans secured by automobiles, carrying values in excess of net realizable value are charged off at the earlier of repossession and sale of the collateral, the collateral being in our possession for more than 90 days, or the loan becoming 150 days contractually delinquent. Charge-offs may occur sooner for certain consumer receivables involving a bankruptcy. Our policies for consumer loans permit reset of the contractual delinquency status of an account to current, subject to certain limits, if a predetermined number of consecutive payments has been received and there is evidence that the reason for the delinquency has been cured. Such reaging policies vary by product and are designed to manage customer relationships and ensure maximum collections. Commercial receivables are written off when it becomes apparent that an account is uncollectible. Nonaccrual Loans Nonaccrual loans are loans on which accrual of interest has been suspended. Interest income is suspended on real estate secured, personal non-credit card and commercial loans when principal or interest payments are more than three months contractually past due. For MasterCard and Visa and private label credit card receivables, interest continues to accrue until the receivable is charged off. For auto finance receivables, accrual of interest income is discontinued when payments are more than two months contractually past due. Accrual of income on nonaccrual real estate secured and personal homeowner loans ("PHL's") is resumed if the receivable becomes less than three months contractually delinquent and on auto finance loans when the loan becomes less than two months contractually delinquent. Interest on nonaccrual personal non-credit card receivables other than PHL's is recorded as collected. Accrual of income on nonaccrual commercial loans is resumed if the loan becomes contractually current. Cash payments received on nonaccrual commercial loans are either applied against principal or reported as interest income, according to our judgment as to the collectibility of principal. Receivables Sold and Serviced with Limited Recourse and Securitization Revenue Certain real estate secured, auto finance, MasterCard and Visa, private label and personal non-credit card receivables have been securitized and sold to investors with limited recourse. We have retained the servicing rights to these receivables. Recourse is limited to our rights to future cash flow and any subordinated interest that we may retain. 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 include cash received and the present value estimate of future cash flows to be received over the lives of the sold receivables. Future cash flows are based on estimates of prepayments, the impact of interest rate movements on yields of receivables and securities issued, delinquency of receivables sold, servicing fees and other factors. The resulting gain is also adjusted by a provision for estimated probable losses under the recourse provisions based on historical experience and estimates of expected future performance. Gains on sale net of recourse provisions, servicing income and excess spread relating to securitized receivables are reported in the accompanying consolidated statements of income as securitization revenue. 43 In connection with these transactions, we record an interest-only strip receivable, representing our contractual right to receive interest and other cash flows from our securitization trusts. Our interest-only strip receivables are reported at fair value using discounted cash flow estimates as a separate component of receivables net of our estimate of probable losses under the recourse provisions. Cash flow estimates include estimates of prepayments, the impact of interest rate movements on yields of receivables and securities issued, delinquency of receivables sold, servicing fees and estimated probable losses under the recourse provisions. Unrealized gains and losses are recorded as adjustments to common shareholders' equity in accumulated other comprehensive income, net of income taxes. Our interest-only strip receivables are reviewed for impairment quarterly or earlier if events indicate that the carrying value may not be recovered. Any decline in the fair value of the interest-only strip receivable which is deemed to be other than temporary is charged against current earnings. In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a Replacement of FASB Statement No. 125" ("FAS No. 140"). FAS No. 140 revised the standards for accounting for securitizations and requires certain disclosures. We adopted the nondisclosure related provisions of FAS No. 140 as required on April 1, 2001. The adoption did not have a significant effect on our operations. Properties and Equipment, Net Properties and equipment are recorded at cost, net of accumulated depreciation and amortization. For financial reporting purposes, depreciation is provided on a straight-line basis over the estimated useful lives of the assets which generally range from 3 to 40 years. Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the term of the lease. Maintenance and repairs are expensed as incurred. Repossessed Collateral Real estate owned is valued at the lower of cost or fair value less estimated costs to sell. These values are periodically reviewed and reduced, if necessary. Costs of holding real estate, and related gains and losses on disposition, are credited or charged to operations as incurred as a component of operating expense. Repossessed vehicles, net of loss reserves when applicable, are recorded at the lower of the estimated fair market value or the outstanding receivable balance. Insurance Insurance revenues on revolving credit insurance policies are recognized when billed. Insurance revenues on the remaining insurance contracts are recorded as unearned premiums and recognized into income based on the nature and terms of the underlying contracts. Liabilities for credit insurance policies are based upon estimated settlement amounts for both reported and incurred but not yet reported losses. Liabilities for future benefits on annuity contracts and specialty and corporate owned life insurance products are based on actuarial assumptions as to investment yields, mortality and withdrawals. Acquired Intangibles and Goodwill Acquired intangibles consist of acquired credit card relationships which are amortized on a straight-line basis over their estimated useful lives. These lives vary by portfolio and initially ranged from 4 to 15 years. Goodwill represents the purchase price over the fair value of identifiable assets acquired less liabilities assumed from business combinations and was amortized on a straight-line basis over periods not exceeding 25 years through December 31, 2001. Acquired intangibles are reviewed for impairment using discounted cash flows and goodwill using undiscounted cash flows whenever events indicate that the carrying amounts may not be recoverable. We consider significant and long-term changes in industry and economic conditions to be our primary indicator of potential impairment. Impairment charges, when required, are calculated using discounted cash flows. 44 In July 2001, the FASB issued Statements of Financial Accounting Standards No. 141, "Business Combinations" ("FAS No. 141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS No. 142"). FAS No. 141 eliminated the pooling of interests method of accounting and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. We had no acquisitions during 2001 which were affected by FAS No. 141. FAS No. 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill recorded in past business combinations ceased upon adoption of the statement on January 1, 2002. The adoption is expected to increase net income by approximately $45 million, or $.10 per share, annually. Treasury Stock We account for repurchases of common stock using the cost method with common stock in treasury classified in the balance sheets as a reduction of common shareholders' equity. Treasury stock is reissued at average cost. Derivative Financial Instruments Effective January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133"), as amended. Under FAS No. 133, all derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, we designate the derivative as a fair value hedge, a cash flow hedge, a hedge of a net investment in a foreign operation, or a non-hedging derivative. Fair value hedges include hedges of the fair value of a recognized asset or liability and certain foreign currency hedges. Cash flow hedges include hedges of the variability of cash flows to be received or paid related to a recognized asset or liability and certain foreign currency hedges. Changes in the fair value of derivatives designated as fair value hedges, along with the change in fair value on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of derivatives designated as cash flow hedges, to the extent effective as a hedge, are recorded in accumulated other comprehensive income and reclassified into earnings in the period during which the hedged item affects earnings. Changes in the fair value of derivatives used to hedge our net investment in foreign subsidiaries, to the extent effective as a hedge, are recorded in common shareholders' equity as a component of the cumulative translation adjustment account within accumulated other comprehensive income. Changes in the fair value of derivative instruments not designated as hedging instruments and ineffective portions of changes in the fair value of hedging instruments are recognized in other income in the current period. We formally document all relationships between hedging instruments and hedged items. This documentation includes our risk management objective and strategy for undertaking various hedge transactions, as well as how hedge effectiveness and ineffectiveness will be measured. This process includes linking derivatives to specific assets and liabilities on the balance sheet. We also formally assess, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective hedge, the derivative will continue to be carried on the balance sheet at its fair value, with changes in its fair value recognized in current period earnings. For fair value hedges, the formerly hedged asset or liability will no longer be adjusted for changes in fair value and any previously recorded adjustments to the carrying value of the hedged asset or liability will be amortized in the same manner that the hedged item affects income. For cash flow hedges, amounts previously recorded in accumulated other comprehensive income will be reclassified into income as earnings are impacted by the variability in the cash flows of the hedged item. If the hedging instrument is terminated early, the derivative is removed from the balance sheet. Accounting for the adjustments to the hedged asset or liability or adjustments to accumulated other comprehensive income are the same as described above when a derivative no longer qualifies as an effective hedge. 45 If the hedged asset or liability is sold or extinguished, the derivative will continue to be carried on the balance sheet at its fair value, with changes in its fair value recognized in current period earnings. The hedged item, including previously recorded mark-to-market adjustments, is derecognized immediately as a component of the gain or loss upon disposition. The adoption of FAS No. 133 on January 1, 2001 was accounted for as a cumulative effect of a change in accounting principle. The impact of the adoption was not material to earnings and reduced common shareholders' equity by $241.4 million. The adjustment to common shareholders' equity was recorded as a component of accumulated other comprehensive income and was made to recognize at fair value all derivatives that were designated as cash flow hedging instruments. During 2001, approximately $119 million in derivative losses associated with the transition adjustment were reclassified into earnings. These losses were offset by decreased interest expense associated with the variable cash flows of the hedged items and resulted in no economic impact to our earnings. Derivative gains associated with the transition adjustment reclassified into earnings during 2001 were not material. Foreign Currency Translation We have foreign subsidiaries located in the United Kingdom and Canada. The functional currency for each foreign subsidiary is its local currency. Assets and liabilities of these subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rate of exchange prevailing during the year. Resulting translation adjustments are accumulated in common shareholders' equity as a component of accumulated other comprehensive income. We periodically enter into forward exchange contracts to hedge our investment in foreign subsidiaries. After-tax gains and losses on contracts to hedge foreign currency fluctuations are accumulated in common shareholders' equity as a component of accumulated other comprehensive income. Effects of foreign currency translation in the statements of cash flows are offset against the cumulative foreign currency adjustment, except for the impact on cash. Foreign currency transaction gains and losses are included in income as they occur. Stock-Based Compensation We account for stock option and stock purchase plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In accordance with APB 25, no compensation expense is recognized for stock options issued. Income Taxes Federal income taxes are accounted for utilizing the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Investment tax credits generated by leveraged leases are accounted for using the deferral method. 2. Business Combinations, Acquisitions and Divestitures On February 7, 2000, we purchased all of the outstanding capital stock of Renaissance Holdings, Inc. ("Renaissance"), a privately held issuer of secured and unsecured credit cards to subprime customers, for approximately $300 million of our common stock and cash. The acquisition provided us with an established platform for growing the subprime credit card business and expanding our product offerings to customers and prospects in our other businesses. The acquisition was accounted for as a purchase and, accordingly, Renaissance's operations have been included in our results of operations since February 7, 2000. In August 1999, we acquired all of the outstanding capital stock of Decision One Mortgage Company LLC ("Decision One") for approximately $60 million in common stock and cash. Decision One originates loans through a 30-state broker network and packages them for sale to investors. The acquisition was accounted for as a purchase and, accordingly, earnings from Decision One have been included in our results of operations subsequent to the acquisition date. 46 3. Investment Securities
In millions. At December 31 2001 2000 - -------------------------------------------------------------------------------- Available-For-Sale Investments Corporate debt securities $ 2,054.0 $ 1,873.5 Money market funds 342.3 436.6 Certificates of deposit 259.8 319.2 U.S. government and federal agency debt securities 217.8 173.5 Marketable equity securities 21.2 24.9 Other 638.9 390.3 - -------------------------------------------------------------------------------- Subtotal 3,534.0 3,218.0 Accrued investment income 46.5 41.0 - -------------------------------------------------------------------------------- Total investment securities $ 3,580.5 $ 3,259.0 ================================================================================
Proceeds from the sale of available-for-sale investments totaled approximately $.7 billion in 2001, $.2 billion in 2000 and $.7 billion in 1999. Gross gains of $12.9 million in 2001, $2.2 million in 2000 and $12.1 million in 1999 and gross losses of $1.7 million in 2001, $1.4 million in 2000 and $2.7 million in 1999 were realized on those sales. The gross unrealized gains (losses) on available-for-sale investment securities were as follows:
2001 2000 ----------------------------------------------- --------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------------- Corporate debt securities $ 2,089.5 $ 31.3 $ (66.8) $ 2,054.0 $ 1,948.5 $ 17.4 $ (92.4) $ 1,873.5 Money market funds 342.3 - - 342.3 436.6 - - 436.6 Certificates of deposit 246.1 13.7 - 259.8 319.2 - - 319.2 U.S. government and Federal agency debt Securities 217.0 2.0 (1.2) 217.8 173.7 1.6 (1.8) 173.5 Marketable equity Securities 24.4 - (3.2) 21.2 25.8 - (.9) 24.9 Other 611.6 28.6 (1.3) 638.9 390.1 .6 (.4) 390.3 - -------------------------------------------------------------------------------------------------------------------------- Total available-for-sale Investments $ 3,530.9 $ 75.6 $ (72.5) $ 3,534.0 $ 3,293.9 $ 19.6 $ (95.5) $ 3,218.0 ==========================================================================================================================
See Note 14, "Fair Value of Financial Instruments," for further discussion of the relationship between the fair value of our assets, liabilities and off-balance sheet financial instruments. Contractual maturities of and yields on investments in debt securities were as follows:
U.S. Government and Federal Corporate Debt Securities Agency Debt Securities All dollar amounts are ----------------------------------- --------------------------------- Stated in millions. Amortized Fair Amortized Fair At December 31, 2001 Cost Value Yield(1) Cost Value Yield(1) - --------------------------------------------------------------------------------------------------------- Due within 1 year $ 49.8 $ 50.5 5.1% $ 44.6 $ 44.7 7.6% After 1 but within 5 years 806.7 817.3 5.7 84.6 85.6 5.7 After 5 but within 10 years 392.6 394.2 6.5 64.7 64.7 5.1 After 10 years 840.4 792.0 7.0 23.1 22.8 6.0 - --------------------------------------------------------------------------------------------------------- Total $ 2,089.5 $ 2,054.0 6.4% $ 217.0 $217.8 5.9% =========================================================================================================
(1) Computed by dividing annualized interest by the amortized cost of respective investment securities. 47 4. Receivables
In millions. At December 31 2001 2000 - ----------------------------------------------------------------------------------------------- Real estate secured $ 43,856.8 $ 35,179.7 Auto finance 2,368.9 1,850.6 MasterCard/Visa 8,141.2 8,053.6 Private label 11,663.9 10,347.3 Personal non-credit card 13,337.0 11,328.1 Commercial and other 506.9 598.6 - ----------------------------------------------------------------------------------------------- Total owned receivables 79,874.7 67,357.9 Accrued finance charges 1,559.8 1,302.6 Credit loss reserve for owned receivables (2,663.1) (2,111.9) Unearned credit insurance premiums and claims reserves (895.8) (725.2) Interest-only strip receivables 968.2 636.5 Amounts due and deferred from receivable sales 419.7 701.8 - ----------------------------------------------------------------------------------------------- Total owned receivables, net 79,263.5 67,161.7 Receivables serviced with limited recourse 20,948.0 20,249.5 - ----------------------------------------------------------------------------------------------- Total managed receivables, net $100,211.5 $ 87,411.2 ===============================================================================================
Foreign receivables included in owned receivables were as follows:
United Kingdom Canada In millions. --------------------------------------- ---------------------------------------- At December 31 2001 2000 1999 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------- Real estate secured $ 924.6 $ 857.1 $ 751.0 $ 458.4 $ 402.6 $ 339.2 MasterCard/Visa 1,174.5 2,206.7 2,167.8 - - - Private label 1,284.8 1,234.6 1,145.6 525.7 441.2 427.4 Personal non-credit Card 1,217.5 1,000.3 1,310.8 382.8 377.5 371.0 Commercial and other .3 .8 1.1 1.4 1.5 2.7 - ----------------------------------------------------------------------------------------------------------------- Total $ 4,601.7 $ 5,299.5 $ 5,376.3 $ 1,368.3 $ 1,222.8 $ 1,140.3 =================================================================================================================
Foreign managed receivables represented 7 and 9 percent of total managed receivables at December 31, 2001 and 2000, respectively. The outstanding balance of receivables serviced with limited recourse consisted of the following:
In millions. At December 31 2001 2000 - ------------------------------------------------------------------------------------------------ Real estate secured $ 861.8 $ 1,457.8 Auto finance 4,026.6 2,712.7 MasterCard/Visa 9,254.0 9,529.8 Private label 2,150.0 1,650.0 Personal non-credit card 4,655.6 4,899.2 - ------------------------------------------------------------------------------------------------ Total $ 20,948.0 $ 20,249.5 ================================================================================================
The combination of receivables owned and receivables serviced with limited recourse, which we consider our managed portfolio, is shown below:
In millions. At December 31 2001 2000 - ----------------------------------------------------------------------------------------------- Real estate secured $ 44,718.6 $ 36,637.5 Auto finance 6,395.5 4,563.3 MasterCard/Visa 17,395.2 17,583.4 Private label 13,813.9 11,997.3 Personal non-credit card 17,992.6 16,227.3 Commercial and other 506.9 598.6 - ------------------------------------------------------------------------------------------------ Total $100,822.7 $ 87,607.4 ================================================================================================
48 We maintain facilities with third parties which provide for the securitization of receivables on a revolving basis totaling $12.9 billion, of which $10.6 billion were utilized at December 31, 2001. The amount available under these facilities will vary based on the timing and volume of public securitization transactions. Contractual maturities of owned receivables were as follows:
In millions. There- At December 31, 2001 2002 2003 2004 2005 2006 after Total - --------------------------------------------------------------------------------------------------------------------- Real estate secured $ 11,951.9 $ 8,588.8 $ 6,260.9 $ 4,530.3 $ 3,376.7 $ 9,148.2 $ 43,856.8 Auto finance 38.3 74.5 233.2 559.1 1,039.9 423.9 2,368.9 MasterCard/Visa 939.9 830.1 701.8 639.3 544.3 4,485.8 8,141.2 Private label 5,782.3 2,280.3 701.3 414.2 276.2 2,209.6 11,663.9 Personal non-credit card 3,336.1 2,392.9 1,930.9 1,506.7 1,178.9 2,991.5 13,337.0 Commercial and other 43.6 44.8 58.2 39.9 35.4 285.0 506.9 - --------------------------------------------------------------------------------------------------------------------- Total $ 22,092.1 $ 14,211.4 $ 9,886.3 $ 7,689.5 $ 6,451.4 $ 19,544.0 $ 79,874.7 =====================================================================================================================
A substantial portion of consumer receivables, based on our experience, will be renewed or repaid prior to contractual maturity. The above maturity schedule should not be regarded as a forecast of future cash collections. The ratio of annual cash collections of principal to average principal balances, excluding credit card receivables, approximated 55 percent in 2001 and 58 percent in 2000. 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, 2001 5 years 5 years - --------------------------------------------------------------------------------------------------------------------- Receivables at predetermined interest rates $ 27,241.4 $ 9,985.6 Receivables at floating or adjustable rates 10,997.2 9,558.4 - --------------------------------------------------------------------------------------------------------------------- Total $ 38,238.6 $ 19,544.0 =====================================================================================================================
Nonaccrual owned consumer receivables totaled $2,064.3 million and $1,636.7 million at December 31, 2001 and 2000, respectively, including $215.3 million and $226.0 million, respectively, relating to foreign operations. Interest income that would have been recorded in 2001 and 2000 if such nonaccrual receivables had been current and in accordance with contractual terms was approximately $315.8 million and $260.4 million, respectively, including $34.6 million and $38.2 million, respectively, relating to foreign operations. Interest income that was included in net income for 2001 and 2000, prior to these loans being placed on nonaccrual status, was approximately $173.5 million and $143.9 million, respectively, including $16.4 million and $19.9 million, respectively, relating to foreign operations. For an analysis of reserves for credit losses, see our "Analysis of Credit Loss Reserves Activity" on pages 31 and 32 on an owned and managed basis. Interest-only strip receivables are reported net of our estimate of probable losses under the recourse provisions for receivables serviced with limited recourse. Our estimate of the recourse obligation totaled $1,148.3 million at December 31, 2001 and $1,082.3 million at December 31, 2000. Interest-only strip receivables also included fair value mark-to-market adjustments of $348.6 million at year-end 2001 and $117.5 million at year-end 2000. Amounts due and deferred from receivable sales include certain assets established under the recourse provisions for certain receivable sales, including funds deposited in spread accounts, offset by net customer payments owed to the securitization trustee. Net customer payments owed to the securitization trustee totaled $27.0 million at December 31, 2001 and $61.2 million at December 31, 2000. 49 5. Asset Securitizations We sell auto finance, MasterCard and Visa, private label and personal non-credit card receivables in various securitization transactions. We continue to service and receive servicing fees on the outstanding balance of securitized receivables. We also retain rights to future cash flows arising from the receivables after the investors receive their contractual return. We have also, in certain cases, retained other subordinated interests in these securitizations. These transactions typically result in the recording of an interest-only strip receivable which represents the value of the future residual cash flows from securitized receivables. The investors and the securitization trusts have only limited recourse to our assets for failure of debtors to pay. That recourse is limited to our rights to future cash flow and any subordinated interest we retain. Servicing assets and liabilities are not recognized in conjunction with our securitizations since we receive adequate compensation relative to current market rates to service the receivables sold. See Note 1, "Summary of Significant Accounting Policies," for further discussion on our accounting for interest-only strip receivables. Securitization revenue includes income associated with the current and prior period securitization and sale of receivables with limited recourse. Such income includes gains on sales, net of our estimate of probable credit losses under the recourse provisions, servicing income and excess spread relating to those receivables. Net initial gains, which represent gross initial gains net of our estimate of probable credit losses under the recourse provisions, and the key economic assumptions used in measuring the net initial gains from securitizations completed during the years ended December 31, 2001 and 2000 were as follows:
MasterCard/ Personal Non- Private Auto Visa Credit Card Label Finance Total - ----------------------------------------------------------------------------------------------------- 2001 Net initial gains (in millions) $ 7.3 $ 36.0 $ 13.1 $ 109.3 $ 165.7 Key economic assumptions:(1) Weighted-average life (in years) .38 1.23 .85 2.20 Payment speed 93.59% 52.33% 67.06% 34.20% Expected credit losses (annual rate) 5.08 7.34 5.49 4.79 Discount rate on cash flows 9.00 11.00 10.00 10.00 Cost of funds 6.15 4.24 5.73 4.54 2000 Net initial gains (in millions) $ 43.7 $ 37.5 $ 8.5 $ 80.4 $ 170.1 Key economic assumptions:(1) Weighted-average life (in years) .41 1.28 .93 2.06 Payment speed 92.62% 52.01% 63.97% 35.98% Expected credit losses (annual rate) 5.48 6.87 6.60 5.38 Discount rate on cash flows 9.00 11.00 10.00 10.00 Cost of funds 5.88 6.67 6.36 7.12 - -----------------------------------------------------------------------------------------------------
(1) Weighted-average annual rates for securitizations entered into during the period for securitizations of loans with similar characteristics. Certain securitization trusts, such as credit cards, are established at fixed levels and require frequent sales of new receivables into the trust to replace receivable run-off. These replenishments totaled $24.7 billion in 2001 and $21.0 billion in 2000. Net gains (gross gains less estimated credit losses under the recourse provisions) related to these replenishments were calculated using weighted-average assumptions consistent with those used for calculating gains on initial securitizations and totaled $407.5 million in 2001 and $328.4 million in 2000. 50 Cash flows received from securitization trusts were as follows:
In millions. MasterCard/ Personal Non- Private Auto Real Estate Year ended December 31 Visa Credit Card Label Finance Secured Total - -------------------------------------------------------------------------------------------------------------------------------- 2001 Proceeds from initial securitizations $ 261.1 $2,123.6 $ 500.0 $2,573.9 - $ 5,458.6 Servicing fees received 182.9 90.6 34.9 84.9 $ 12.0 405.3 Other cash flow received on retained interests (1) 789.0 181.1 157.9 111.9 67.5 1,307.4 2000 Proceeds from initial securitizations $1,925.0 $2,637.4 $ 500.0 $1,912.6 - $ 6,975.0 Servicing fees received 179.7 91.3 24.2 60.7 $ 18.5 374.4 Other cash flow received on retained interests (1) 645.5 177.4 57.4 80.4 81.5 1,042.2 - --------------------------------------------------------------------------------------------------------------------------------
(1) Other cash flows include all cash flows from interest-only strip receivables, excluding servicing fees. Our interest-only strip receivables are reported at fair value using discounted cash flow estimates. At December 31, 2001, the sensitivity of the current fair value of the interest-only strip receivables to an immediate 10 percent and 20 percent unfavorable change in assumptions are presented in the table below. These sensitivities are based on assumptions used to value our interest-only strip receivables at December 31, 2001.
MasterCard/ Personal Non- Private Auto Real Estate Dollar amounts are stated in millions. Visa Credit Card Label Finance Secured - --------------------------------------------------------------------------------------------------------------------------- Carrying value (fair value) of interest-only strip Receivables $ 267.2 $ 335.4 $ 55.1 $ 285.7 $ 24.8 Weighted-average life (in years) .57 1.19 .79 1.87 1.53 Payment speed assumption (annual rate) 83.82% 45.62% 69.66% 38.90% 25.95% Impact on fair value of 10% adverse change $ (22.2) $ (23.2) $ (5.4) $ (26.2) $ (1.4) Impact on fair value of 20% adverse change (41.6) (45.7) (9.2) (59.9) (2.8) Expected credit losses (annual rate) 5.21% 7.41% 5.49% 6.83% 1.55% Impact on fair value of 10% adverse change $ (23.0) $ (36.5) $ (8.4) $ (25.1) $ (1.4) Impact on fair value of 20% adverse change (46.0) (72.9) (16.9) (50.1) (2.7) Discount rate on residual cash flows (annual rate) 9.00% 11.00% 10.00% 10.00% 13.00% Impact on fair value of 10% adverse change $ (3.0) $ (3.0) $ (0.3) $ (6.9) $ (0.5) Impact on fair value of 20% adverse change (6.1) (6.0) (0.7) (13.6) (1.0) Variable returns to investors (annual rate) 5.09% 3.53% 4.62% 5.42% 3.58% Impact on fair value of 10% adverse change $ (23.3) $ (19.3) $ (7.5) $ (0.2) $ (3.3) Impact on fair value of 20% adverse change (46.6) (38.1) (14.9) (0.3) (6.5) - -------------------------------------------------------------------------------------------------------------------------
These sensitivities are hypothetical and should not be considered to be predictive of future performance. As the figures indicate, the change in fair value based on a 10 percent variation in assumptions cannot necessarily be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the residual cash flow is calculated independently from any change in another assumption. In reality, changes in one factor may contribute to changes in another (for example, increases in market interest rates may result in lower prepayments) which might magnify or counteract the sensitivities. Furthermore, the estimated fair values as disclosed should not be considered indicative of future earnings on these assets. Static pool credit losses are calculated by summing actual and projected future credit losses and dividing them by the original balance of each pool of asset. Due to the short term revolving nature of MasterCard and Visa, personal non-credit card and private label receivables, the weighted-average percentage of static pool credit losses is not considered to be materially different from the weighted-average charge-off assumptions used in determining the fair value of our interest-only strip receivables in the table above. At December 31, 2001, static pool credit losses for auto finance loans securitized in 2001 were estimated to be 10.0 percent and for auto finance loans securitized in 2000 were estimated to be 11.0 percent. 51 Receivables information by product including delinquency and net charge-offs for our managed and serviced with limited recourse portfolios were as follows:
2001 2000 ------------------------------- ----------------------------- In millions Receivables Delinquent Receivables Delinquent At December 31 Outstanding Receivables Outstanding Receivables - -------------------------------------------------------------------------------------------------------------------- Managed receivables: Real estate secured $ 44,718.6 2.68% $ 36,637.5 2.63% Auto finance 6,395.5 3.16 4,563.3 2.55 MasterCard/Visa 17,395.2 4.10 17,583.4 3.49 Private label 13,813.9 5.48 11,997.3 5.48 Personal non-credit card 17,992.6 8.87 16,227.3 7.97 - -------------------------------------------------------------------------------------------------------------------- Total consumer 100,315.8 4.46 87,008.8 4.20 Commercial and other 506.9 1.58 598.6 2.10 - -------------------------------------------------------------------------------------------------------------------- Total managed receivables $100,822.7 4.44% $ 87,607.4 4.18% - -------------------------------------------------------------------------------------------------------------------- Receivables serviced with limited recourse: Real estate secured $ (861.8) 5.00% $ (1,457.8) 4.01% Auto finance (4,026.6) 3.29 (2,712.7) 2.61 MasterCard/Visa (9,254.0) 2.73 (9,529.8) 2.30 Private label (2,150.0) 2.69 (1,650.0) 4.72 Personal non-credit card (4,655.6) 8.36 (4,899.2) 7.90 - -------------------------------------------------------------------------------------------------------------------- Total receivables serviced with limited recourse (20,948.0) 4.18 (20,249.5) 4.02 - -------------------------------------------------------------------------------------------------------------------- Owned consumer receivables $ 79,874.7 4.53% $ 67,357.9 4.26% ====================================================================================================================
2001 2000 --------------------------------- ------------------------------- In millions Average Net Average Net At December 31 Receivables Charge-offs Receivables Charge-offs - -------------------------------------------------------------------------------------------------------------------- Managed receivables: Real estate secured $ 40,049.6 .53% $ 32,530.2 .45% Auto finance 5,323.5 5.31 3,842.3 4.80 MasterCard/Visa 17,282.8 6.63 16,111.2 5.58 Private label 12,260.6 5.18 11,194.2 5.35 Personal non-credit card 17,013.8 6.79 14,760.8 6.97 - -------------------------------------------------------------------------------------------------------------------- Total consumer 91,930.3 3.73 78,438.7 3.64 Commercial and other 554.9 2.10 693.5 2.69 - -------------------------------------------------------------------------------------------------------------------- Total managed receivables $ 92,485.2 3.72% $ 79,132.2 3.63% - -------------------------------------------------------------------------------------------------------------------- Receivables serviced with limited recourse: Real estate secured $ (1,199.2) .70% $ (1,847.6) .90% Auto finance (3,004.4) 6.32 (2,023.5) 6.16 MasterCard/Visa (9,144.6) 5.27 (8,984.7) 4.81 Private label (1,744.2) 2.72 (1,212.5) 5.42 Personal non-credit card (4,527.8) 6.74 (4,566.1) 6.86 - -------------------------------------------------------------------------------------------------------------------- Total receivables serviced with limited recourse (19,620.2) 5.26 (18,634.4) 5.11 - -------------------------------------------------------------------------------------------------------------------- Owned consumer receivables $ 72,865.0 3.32% $ 60,497.8 3.18% ====================================================================================================================
We issued securities backed by dedicated home equity loan receivables of $1.6 billion in 2001 and $.5 billion in 2000. For accounting purposes, these transactions were structured as secured financings, therefore, the receivables and the related debt remain on our balance sheet. Real estate receivables included closed-end real estate secured receivables totaling $1.7 billion at December 31, 2001 and $.4 billion at December 31, 2000 which secured the outstanding debt related to these transactions. 6. Properties and Equipment, Net
In millions. Depreciable At December 31 2001 2000 Life - -------------------------------------------------------------------------------------------------------------------- Land $ 8.1 $ 8.1 - Buildings and improvements 574.7 519.6 10 - 40 years Furniture and equipment 878.4 844.5 3 - 10 - -------------------------------------------------------------------------------------------------------------------- Total 1,461.2 1,372.2 Accumulated depreciation and amortization 930.1 854.6 - -------------------------------------------------------------------------------------------------------------------- Properties and equipment, net $ 531.1 $ 517.6 ====================================================================================================================
52 Depreciation and amortization expense totaled $139.7 million in 2001, $135.8 million in 2000 and $130.4 million in 1999. 7. Deposits
2001 2000 ---------------------------------- --------------------------- Weighted- Weighted- All dollar amounts are stated in millions. Average Average At December 31 Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------------------------- Domestic Time certificates $ 6,000.7 6.8% $ 6,925.3 6.7% Savings accounts 33.7 2.1 25.0 2.9 Demand accounts 36.3 .4 14.6 2.1 - ------------------------------------------------------------------------------------------------------------------- Total domestic deposits 6,070.7 6.7 6,964.9 6.7 - ------------------------------------------------------------------------------------------------------------------- Foreign Time certificates 316.0 5.7 1,529.5 6.1 Savings accounts 54.1 3.1 56.2 3.2 Demand accounts 121.5 3.9 126.3 5.1 - ------------------------------------------------------------------------------------------------------------------- Total foreign deposits 491.6 5.0 1,712.0 5.9 - ------------------------------------------------------------------------------------------------------------------- Total deposits $ 6,562.3 6.6% $ 8,676.9 6.5% ===================================================================================================================
At December 31, 2001, domestic time certificates included carrying value adjustments totaling $24.7 million relating to derivative financial instruments. Average deposits and related weighted-average interest rates were as follows:
2001 2000 1999 ------------------------ ---------------------- ------------------------ All dollar amounts are Weighted- Weighted- Weighted- stated in millions. Average Average Average Average Average Average Year ended December 31 Deposits Rate Deposits Rate Deposits Rate - ------------------------------------------------------------------------------------------------------------------------ Domestic Time certificates $ 6,468.5 6.5% $ 6,278.4 6.7% $1,857.0 6.1% Savings and demand accounts 119.7 .6 53.2 1.5 12.1 1.4 - ------------------------------------------------------------------------------------------------------------------------ Total domestic deposits 6,588.2 6.4 6,331.6 6.6 1,869.1 6.1 - ------------------------------------------------------------------------------------------------------------------------ Foreign Time certificates 1,172.8 5.7 1,243.7 4.5 967.7 4.8 Savings and demand accounts 192.2 4.5 182.2 4.5 200.5 4.4 - ------------------------------------------------------------------------------------------------------------------------ Total foreign deposits 1,365.0 5.5 1,425.9 4.5 1,168.2 4.7 - ------------------------------------------------------------------------------------------------------------------------ Total deposits $ 7,953.2 6.3% $ 7,757.5 6.2% $3,037.3 5.5% ========================================================================================================================
Interest expense on total deposits was $498.6 million in 2001, $484.0 million in 2000 and $168.4 million in 1999. Interest expense on domestic deposits was $423.7 million in 2001, $419.7 million in 2000 and $113.4 million in 1999. Maturities of time certificates in amounts of $100,000 or more were:
All dollar amounts are stated in millions. At December 31, 2001 Domestic Foreign Total - -------------------------------------------------------------------------------------------------------------------- 3 months or less $ 29.0 $ 211.0 $ 240.0 Over 3 months through 6 months 17.9 30.2 48.1 Over 6 months through 12 months 41.9 39.3 81.2 Over 12 months 143.3 35.4 178.7 - -------------------------------------------------------------------------------------------------------------------- Total $ 232.1 $ 315.9 $ 548.0 ====================================================================================================================
Contractual maturities of time certificates within each interest rate range were as follows:
All dollar amounts are stated in millions. There- At December 31, 2001 2002 2003 2004 2005 2006 after Total - -------------------------------------------------------------------------------------------------------------------- Interest Rate Less-than 4.00% $ 71.8 $ 28.7 - - - - $ 100.5 4.00% - 5.99% 427.9 187.9 $ 123.4 $ 16.5 $ 18.5 $ 46.8 821.0 6.00% - 7.99% 1,525.8 1,090.7 1,404.8 820.8 189.6 363.5 5,395.2 - -------------------------------------------------------------------------------------------------------------------- Total $ 2,025.5 $ 1,307.3 $ 1,528.2 $ 837.3 $ 208.1 $ 410.3 $ 6,316.7 ====================================================================================================================
53 8. Commercial Paper, Bank and Other Borrowings
Bank and All dollar amounts are stated in millions. Commercial Other At December 31 Paper Borrowings Total - ---------------------------------------------------------------------------------------------------------------------- 2001 Balance $ 9,141.2 $ 2,883.1 $ 12,024.3 Highest aggregate month-end balance 13,926.4 Average borrowings 9,221.1 2,240.1 11,461.2 Weighted-average interest rate: At year-end 2.0% 2.6% 2.2% Paid during year 4.1 3.9 4.0 - ---------------------------------------------------------------------------------------------------------------------- 2000 Balance $ 9,371.5 $ 1,416.4 $ 10,787.9 Highest aggregate month-end balance 12,581.6 Average borrowings 9,828.7 2,099.7 11,928.4 Weighted-average interest rate: At year-end 6.6% 6.6% 6.6% Paid during year 6.3 5.5 6.2 - ----------------------------------------------------------------------------------------------------------------------- 1999 Balance $ 8,822.2 $ 1,955.6 $ 10,777.8 Highest aggregate month-end balance 11,454.6 Average borrowings 8,620.3 1,426.7 10,047.0 Weighted-average interest rate: At year-end 5.6% 5.6% 5.6% Paid during year 5.2 5.0 5.2 - ----------------------------------------------------------------------------------------------------------------------
Outstanding balances at December 31, 2001, 2000 and 1999 included commercial paper obligations of foreign subsidiaries of $374.7 million, $360.9 million and $359.4 million, respectively, and bank and other borrowings of $713.6 million, $722.3 million and $903.1 million, respectively. Interest expense for commercial paper, bank and other borrowings totaled $463.2 million, $737.7 million and $522.5 million for 2001, 2000 and 1999, respectively. We maintain various bank credit agreements primarily to support commercial paper borrowings. At December 31, 2001 and 2000, we had committed back-up lines and other bank lines of $13.6 billion and $13.0 billion, respectively, of which $12.8 billion and $12.3 billion, respectively, were unused. Formal credit lines are reviewed annually and expire at various dates from 2002 to 2006. Borrowings under these lines generally are available at a surcharge over LIBOR. None of these lines contain material adverse change clauses which could restrict availability. Annual commitment fee requirements to support availability of these lines at December 31, 2001 totaled $10.7 million. 9. Senior and Senior Subordinated Debt (With Original Maturities Over One Year)
All dollar amounts are stated in millions. At December 31 2001 2000 - ---------------------------------------------------------------------------------------------------------------------- Senior Debt Zero-coupon convertible debt securities; due 2021 $ 1,004.2 - 3.50% to 4.99%; due 2002 to 2009 1,679.4 $ 11.5 5.00% to 6.49%; due 2002 to 2013 13,223.6 10,169.2 6.50% to 6.99%; due 2002 to 2013 8,368.1 4,203.6 7.00% to 7.49%; due 2002 to 2023 4,679.5 4,959.3 7.50% to 7.99%; due 2002 to 2019 4,695.3 4,173.5 8.00% to 8.99%; due 2002 to 2010 3,711.9 3,892.5 9.00% and greater; due 2001 - 253.3 Variable interest rate debt; 1.89% to 3.53%; due 2002 to 2034 19,383.1 17,244.2 Senior Subordinated Debt 6.50% to 8.45%; due 2002 to 2003 179.1 259.7 Unamortized discount (100.6) (113.8) - ---------------------------------------------------------------------------------------------------------------------- Total senior and senior subordinated debt $ 56,823.6 $ 45,053.0 ======================================================================================================================
Senior and senior subordinated debt included $1.5 billion of debt secured by $1.7 billion of real estate secured receivables at December 31, 2001. At December 31, 2000, senior and senior subordinated debt included $.4 billion of debt secured by $.4 billion of real estate secured receivables. 54 At December 31, 2001, senior and senior subordinated debt also included carrying value adjustments totaling $391.1 million relating to derivative financial instruments and a foreign currency translation adjustment of $(356.6) million relating to our foreign denominated debt. Weighted-average interest rates were 5.1 and 6.9 percent at December 31, 2001 and 2000, respectively. Interest expense for senior and senior subordinated debt was $3,212.0 million, $2,707.2 million and $2,085.7 million for 2001, 2000 and 1999, respectively. The most restrictive financial covenant contained in the terms of our debt agreements are the maintenance of a minimum shareholders' equity of $2.0 billion for Household International, Inc., and the maintenance of a minimum shareholder's equity of $3.6 billion for Household Finance Corporation ("HFC"), a wholly owned subsidiary of Household. Debt denominated in a foreign currency is included in the applicable rate category based on the effective U.S. dollar equivalent rate as summarized in Note 10. In August 2001, the parent company issued zero-coupon convertible debt securities. The convertible debt securities are due 2021, have a 1 percent yield to maturity and have a principal amount at maturity of approximately $1.2 billion. We must pay contingent interest on the securities beginning in 2006 if our common stock price reaches certain levels. The holders of the securities have the right to require us to repurchase the securities on various dates beginning in August 2002 and ending in August 2016 or if certain "fundamental changes" as described in the prospectus supplement occur. "Fundamental changes" include, among other things, an exchange offer, liquidation, merger and recapitalization. The holders of the securities may convert each $1,000 of securities, subject to adjustment, into 9.022 shares of Household common stock if our stock price reaches $99.87 for 20 trading days in a consecutive 30 trading day period. We may redeem the securities, in whole or in part, at any time after August 1, 2006. Maturities of senior and senior subordinated debt were: In millions. At December 31, 2001 - -------------------------------------------------------------------------------- 2002 $ 10,492.5 2003 9,980.0 2004 5,800.9 2005 5,970.0 2006 6,652.0 Thereafter 17,928.2 - -------------------------------------------------------------------------------- Total $ 56,823.6 ================================================================================
10. Derivative Financial Instruments and Concentrations of Credit Risk In the normal course of business and in connection with our asset/liability management program, we enter into various transactions involving derivative financial instruments. These instruments primarily are used to manage our exposure to fluctuations in interest rates and currency exchange rates. We do not serve as a financial intermediary to make markets in any derivative financial instruments. We have a comprehensive program to address potential financial risks such as liquidity, interest rate, currency and credit risk. The Finance Committee of the Board of Directors sets acceptable limits for each of these risks annually and reviews the limits semiannually. For further information on our strategies for managing interest rate and foreign exchange rate risk, see the "Risk Management" section within our Management's Discussion and Analysis of Financial Condition and Results of Operations. 55 Objectives for Holding Derivative Financial Instruments We generally fund our assets with liabilities that have similar interest rate features. Over time, however, customer demand for our receivable products shifts between fixed rate and floating rate products, based on market conditions and preferences. These shifts result in different funding strategies and produce different interest rate risk exposures. We maintain an overall risk management strategy that uses a variety of interest rate and currency derivative financial instruments to mitigate our exposure to fluctuations caused by changes in interest rates and currency exchange rates. We manage our exposure to interest rate risk primarily through the use of interest rate swaps, but also use forwards, futures, options, and other risk management instruments. We manage our exposure to currency risk primarily through the use of currency swaps. We do not speculate on interest rate or foreign currency market exposure and we do not use exotic or leveraged derivative financial instruments. 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 majority of our interest rate swaps are used to manage our exposure to changes in interest rates by converting floating rate assets or debt to fixed rate or by converting fixed rate assets or debt to floating rate. We have also entered into currency swaps to convert both principal and interest payments on debt issued from one currency to the appropriate functional currency. Forwards and futures are agreements between two parties, committing one to sell and the other to buy a specific quantity of an instrument on some future date. The parties agree to buy or sell at a specified price in the future, and their profit or loss is determined by the difference between the arranged price and the level of the spot price when the contract is settled. We have both interest rate and foreign exchange rate forward contracts and interest rate futures contracts. We use foreign exchange rate forward contracts to reduce our exposure to foreign currency exchange risk. Interest rate forward and futures contracts are used to hedge resets of interest rates on our floating rate assets and liabilities. 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. We use caps to limit the risk associated with an increase in rates and floors to limit the risk associated with a decrease in rates. Market and Credit Risk By utilizing derivative financial instruments, we are exposed to varying degrees of credit and market risk. Market risk is the possibility that a change in interest rates or foreign exchange rates will cause a financial instrument to decrease in value or become more costly to settle. We mitigate this risk by establishing limits for positions and other controls. 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. We control the credit (or repayment) risk in derivative instruments through established credit approvals, risk control limits and ongoing monitoring procedures. Our exposure to credit risk for futures is limited as these contracts are traded on organized exchanges. Each day, changes in futures contract values are settled in cash. In contrast, swap agreements and forward contracts have credit risk relating to the performance of the counterparty. Additionally, certain swap agreements require that payments be made to, or received from, the counterparty when the fair value of the agreement reaches a certain level. Derivative financial instruments are generally expressed in terms of notional principal or contract amounts which are much larger than the amounts potentially at risk for nonpayment by counterparties. We have never suffered a loss due to counterparty failure. 56 Fair Value and Cash Flow Hedges To manage our exposure to changes in interest rates, we enter into interest rate swap agreements and currency swaps which have been designated as fair value or cash flow hedges under FAS No. 133. The critical terms of interest rate swaps are designed to match those of the hedged items, enabling the application of the shortcut method of accounting as defined by FAS No. 133 for 92 percent of the notional amounts of such interest rate swaps. To the extent that the critical terms of the hedged item and the derivative are not identical, hedge ineffectiveness is reported in earnings during the current period as a component of other income. Although the critical terms of currency swaps are designed to match those of the hedged items, FAS No. 133 does not allow shortcut method accounting for this type of hedge. Therefore, there may be minimal ineffectiveness which is reported in current period earnings. Fair value hedges include interest rate swaps which convert our fixed rate debt or assets to variable rate debt or assets and currency swaps which convert debt issued from one currency into pay variable debt of the appropriate functional currency. Hedge ineffectiveness associated with fair value hedges was a gain of $.1 million, net of tax, in 2001 and was recorded as other income. During 2001, all of our fair value hedges were associated with debt. At December 31, 2001, we had recorded fair value adjustments for open fair value hedges which decreased the carrying value of our debt by $85.7 million. Cash flow hedges include interest rate swaps which convert our variable rate debt or assets to fixed rate debt or assets and currency swaps which convert debt issued from one currency into pay fixed debt of the appropriate functional currency. At December 31, 2001, we had $699.1 million of losses on derivative instruments designated as cash flow hedges, net of taxes, in accumulated other comprehensive income. We expect $392 million of currently unrealized net losses, after taxes, will be reclassified to earnings within one year, however, these unrealized losses will be offset by decreased interest expense associated with the variable cash flows of the hedged items and will result in no net economic impact to our earnings. Hedge ineffectiveness associated with cash flow hedges reported in 2001 in the other income line was immaterial. At December 31, 2001, $97.2 million of derivative instruments, at fair value, were recorded in other assets and $1,615.4 million in other liabilities. Deferred gains resulting from termination of derivatives were $551.7 million and $44.1 million and deferred losses from termination of derivatives were $72.1 million and $63.0 million at December 31, 2001 and 2000, respectively. Amortization of net deferred gains totaled $43.6 million in 2001 and $14.8 million in 2000. The weighted-average amortization period associated with the deferred gains was 6.2 years and 5.1 years at December 31, 2001 and 2000, respectively. The weighted-average amortization period for the deferred losses was 5.3 years and 5.8 years at December 31, 2001 and 2000, respectively. At December 31, 2001, net deferred gains and losses increased the carrying value of our deposits and senior and senior subordinated debt by $24.7 million and $476.8 million, respectively, and decreased accumulated other comprehensive income by $21.9 million. Hedges of Net Investments in Foreign Operations We use forward-exchange contracts to hedge our net investments in foreign operations. The purpose of these hedges is to protect against adverse movements in exchange rates. For the year ended December 31, 2001, $8.9 million of net gains, net of tax, related to these derivatives were included in accumulated other comprehensive income. Non-Qualifying Hedging Activities We use forward rate agreements, interest rate caps, exchange traded futures, and some interest rate swaps which were not designated as hedges under FAS No. 133. These financial instruments are economic hedges that are not linked to specific assets and liabilities that appear on our balance sheet and do not qualify for hedge accounting. The primary purpose of these derivatives is to minimize our exposure to changes in interest rates. During 2001, we recognized $.2 million, net of tax, in net fair value losses on derivatives which were not designated as hedges. These losses were reported as other income. 57 Derivative Financial Instruments The following table summarizes derivative financial instrument activity in 2001, 2000 and 1999:
Exchange Traded Non-Exchange Traded ----------------------------------------------------- ------------------------- Interest Rate Futures Contracts Options --------------------------- ------------------------ Interest Currency In millions. Purchased Sold Purchased Written Rate Swaps Swaps - -------------------------------------------------------------------------------------------------------------- 1999 Notional amount, 1998 $ 70.0 - $ 544.0 - $ 13,715.6 $ 4,406.3 New contracts 5,743.0 $ (4,725.0) 1,158.0 $ (50.0) 18,734.2 2,070.2 Matured or expired contracts (1,013.0) 25.0 (949.0) - (2,894.5) (723.8) Terminated contracts - - - - (1,796.4) (80.0) In-substance maturities (1) (4,700.0) 4,700.0 (50.0) 50.0 - - - -------------------------------------------------------------------------------------------------------------- Notional amount, 1999 $ 100.0 $ - $ 703.0 $ - $ 27,758.9 $ 5,672.7 ============================================================================================================== Fair value, 1999 (2) $ (.1) $ - $ - $ - $ (125.3) $ (319.2) - -------------------------------------------------------------------------------------------------------------- 2000 Notional amount, 1999 $ 100.0 - $ 703.0 - $ 27,758.9 $ 5,672.7 New contracts 21,715.0 $(20,321.0) 1,300.0 $ (300.0) 15,451.0 3,047.4 Matured or expired contracts (1,494.0) - (1,403.0) - (13,733.0) (767.2) Terminated contracts - - (600.0) 300.0 (3,768.6) (655.0) In-substance maturities (1) (20,321.0) 20,321.0 - - - - - -------------------------------------------------------------------------------------------------------------- Notional amount, 2000 $ - $ - $ - $ - $ 25,708.3 $ 7,297.9 ============================================================================================================== Fair value, 2000 (2) $ - $ - $ - $ - $ 258.8 $ (532.9) - -------------------------------------------------------------------------------------------------------------- 2001 Notional amount, 2000 - - - - $ 25,708.3 $ 7,297.9 New contracts $ 36,675.0 $(22,706.0) $ 4,750.0 - 22,259.0 2,481.6 Matured or expired contracts (21,850.0) 300.0 - - (7,651.3) (919.5) Terminated contracts - - (2,750.0) - (9,832.7) (165.6) In-substance maturities (1) (13,406.0) 13,406.0 - - - - - -------------------------------------------------------------------------------------------------------------- Notional amount, 2001 $ 1,419.0 $ (9,000.0) $ 2,000.0 $ - $ 30,483.3 $ 8,694.4 ============================================================================================================== Fair value, 2001 (2): Fair value hedges - - - - $ (152.9) $ 67.2 Cash flow hedges - - - - (348.1) (1,084.6) Non-hedging derivatives $ .4 $ (3.4) $ .4 - 3.4 - - -------------------------------------------------------------------------------------------------------------- Total $ .4 $ (3.4) $ .4 $ - $ (497.6) $(1,017.4) ==============================================================================================================
Non-Exchange Traded ----------------------------------------------------------------- Foreign Exchange Interest Rate Rate Contracts Forward Contracts ------------------------ ------------------------ Caps and In millions. Purchased Sold Purchased Sold Floors - -------------------------------------------------------------------------------------------------- 1999 Notional amount, 1998 $ 9.8 $ (1,249.9) $ 2,261.9 $ (87.0) $ 3,037.8 New contracts 2,089.9 (1,479.3) 6,946.7 (1,242.0) 2,089.4 Matured or expired contracts (116.6) 171.5 (5,759.4) 666.4 (442.1) Terminated contracts (18.8) 13.8 (207.7) 593.4 (1,231.1) In-substance maturities (1) (1,846.2) 1,846.2 - - - - ------------------------------------------------------------------------------------------------ Notional amount, 1999 $ 118.1 $ (697.7) $ 3,241.5 $ (69.2) $ 3,454.0 ================================================================================================ Fair value, 1999 (2) $ .5 $ 4.9 $ 6.4 $ - $ 4.8 - ------------------------------------------------------------------------------------------------ 2000 Notional amount, 1999 $ 118.1 $ (697.7) $ 3,241.5 $ (69.2) $ 3,454.0 New contracts 1,828.9 (1,798.3) 4,158.3 (163.1) 2,550.6 Matured or expired contracts (85.6) 398.6 (6,818.5) 232.3 (3,019.7) Terminated contracts - - (133.4) - (309.4) In-substance maturities (1) (1,852.3) 1,852.3 - - - - ------------------------------------------------------------------------------------------------ Notional amount, 2000 $ 9.1 $ (245.1) $ 447.9 $ - $ 2,675.5 ================================================================================================ Fair value, 2000 (2) $ .3 $ (2.8) $ (.3) $ - $ (2.7) - ------------------------------------------------------------------------------------------------ 2001 Notional amount, 2000 $ 9.1 $ (245.1) $ 447.9 - $ 2,675.5 New contracts 9,347.4 (10,325.0) 2,074.5 - 3,481.8 Matured or expired contracts (51.3) 172.5 (1,991.4) - (2,297.7) Terminated contracts - - (31.4) - (847.0) In-substance maturities (1) (9,196.1) 9,196.1 - - - - ------------------------------------------------------------------------------------------------ Notional amount, 2001 $ 109.1 $ (1,201.5) $ 499.6 $ - $ 3,012.6 ================================================================================================ Fair value, 2001 (2): Fair value hedges - - - - - Cash flow hedges $ 2.5 $ (1.3) - - - Non-hedging derivatives - - $ (1.6) - $ (.2) - ------------------------------------------------------------------------------------------------ Total $ 2.5 $ (1.3) $ (1.6) $ - $ (.2) ================================================================================================
(1) Represent contracts terminated as the market execution technique of closing the transaction either (a) just prior to maturity to avoid delivery of the underlying instrument or (b) at the maturity of the underlying items being hedged. (2) (Bracketed) unbracketed amounts represent amounts to be (paid) received by us had these positions been closed out at the respective balance sheet date. Bracketed amounts do not necessarily represent risk of loss as the fair value of the derivative financial instrument and the items being hedged must be evaluated together. See Note 14, "Fair Value of Financial Instruments," for further discussion of the relationship between the fair value of our assets and liabilities. 58 We operate in three functional currencies, the U.S. dollar, the British pound and the Canadian dollar. The U.S. dollar is the functional currency for exchange-traded interest rate futures contracts and options. Non-exchange traded instruments are restated in U.S. dollars by country as follows:
Foreign Exchange Interest Rate Interest Rate Contracts Forward Contracts Other Risk Rate Currency ---------------------------- ----------------------- Management In millions. Swaps Swaps Purchased Sold Purchased Sold Instruments - ----------------------------------------------------------------------------------------------------------------------------- 1999 United States $ 25,916.7 $ 4,258.2 $ 113.0 $ (697.7) - - $ 2,701.5 Canada 374.1 223.0 5.1 - $ 245.5 $(67.6) - United Kingdom 1,468.1 1,191.5 - - 2,996.0 (1.6) 752.5 - ----------------------------------------------------------------------------------------------------------------------------- $ 27,758.9 $ 5,672.7 $ 118.1 $ (697.7) $ 3,241.5 $(69.2) $ 3,454.0 ============================================================================================================================= 2000 United States $ 23,734.5 $ 5,751.6 $ 6.7 $ (245.1) - - $ 2,352.9 Canada 274.8 121.0 2.4 - $ 313.5 - - United Kingdom 1,699.0 1,425.3 - - 134.4 - 322.6 - ----------------------------------------------------------------------------------------------------------------------------- $ 25,708.3 $ 7,297.9 $ 9.1 $ (245.1) $ 447.9 - $ 2,675.5 ============================================================================================================================= 2001 United States $ 28,405.2 $ 7,259.8 $ 109.1 $ (1,199.5) - - $ 2,989.9 Canada 287.5 - - (2.0) $ 499.6 - - United Kingdom 1,790.6 1,434.6 - - - - 22.7 - ----------------------------------------------------------------------------------------------------------------------------- $ 30,483.3 $ 8,694.4 $ 109.1 $ (1,201.5) $ 499.6 - $ 3,012.6 =============================================================================================================================
The table below reflects the items hedged using interest rate swaps at December 31, 2001. The critical terms of the interest rate swap have been designed to match those of the related asset or liability.
In millions. - ----------------------------------------------------------------------------------------------------------------------- Investment securities $ 16.8 Commercial paper, bank and other borrowings 618.2 Senior and senior subordinated debt 29,848.3 - ----------------------------------------------------------------------------------------------------------------------- Total items hedged using interest rate swaps $ 30,483.3 =======================================================================================================================
The following table summarizes the maturities and related weighted-average receive/pay rates of interest rate swaps outstanding at December 31, 2001:
All dollar amounts are stated in millions. 2002 2003 2004 2005 2006 2007 Thereafter Total - -------------------------------------------------------------------------------------------------------------------------------- Pay a fixed rate/receive a floating rate: Notional value $ 9,955.7 $ 8,228.7 $ 763.1 $1,040.2 $ - $ - $ - $19,987.7 Weighted-average receive rate 2.18% 2.44% 2.91% 3.62% - - - 2.39% Weighted-average pay rate 5.47 4.99 5.20 6.02 - - - 5.29 Pay a floating rate/receive a fixed rate: Notional value $ 95.7 - $ 10.2 $ 247.5 $ 140.5 $1,479.2 $8,522.5 $10,495.6 Weighted-average receive rate 6.69% - 4.96% 5.91% 5.88% 7.45% 6.67% 6.75% Weighted-average pay rate 2.09 - 2.04 2.60 2.18 3.92 3.32 3.36 - -------------------------------------------------------------------------------------------------------------------------------- Total notional value $10,051.4 $ 8,228.7 $ 773.3 $1,287.7 $ 140.5 $1,479.2 $8,522.5 $30,483.3 ================================================================================================================================ Total weighted-average rates on swaps: Receive rate 2.23% 2.44% 2.93% 4.06% 5.88% 7.45% 6.67% 3.89% Pay rate 5.44 4.99 5.15 5.37 2.18 3.92 3.32 4.63 - --------------------------------------------------------------------------------------------------------------------------------
The floating rates that we pay or receive are based on spot rates from independent market sources for the index contained in each interest rate swap contract, which generally are based on either 1-, 3- or 6-month LIBOR. These current floating rates are different than the floating rates in effect when the contracts were initiated. Changes in spot rates impact the variable rate information disclosed above. However, these changes in spot rates also impact the interest rate on the underlying assets or liabilities. We use derivative financial instruments to hedge the interest rate inherent in balance sheet assets and liabilities, which manages the volatility of net interest margin resulting from changes in interest rates on the underlying hedged items. Had we not utilized these instruments, owned net interest margin would have increased by 13 basis points in 2001, decreased by 5 basis points in 2000 and increased by 1 basis point in 1999. 59 Concentrations of Credit Risk A concentration of credit risk is defined as a significant credit exposure with an individual or group engaged in similar activities or affected similarly by economic conditions. Because we primarily lend to consumers, we do not have receivables from any industry group that equal or exceed 10 percent of total managed receivables at December 31, 2001 and 2000. We lend nationwide, with the following geographic areas comprising more than 10 percent of total managed domestic receivables at December 31, 2001: California-15 percent; Southwest (AZ, AR, LA, NM, OK, TX)-11 percent; Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)-22 percent; Middle Atlantic (DE, DC, MD, NJ, PA, VA, WV)-14 percent; Northeast (CT, ME, MA, NH, NY, RI, VT)-11 percent; and Southeast (AL, FL, GA, KY, MS, NC, SC, TN)-18 percent. 11. Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts The following table summarizes our company obligated mandatorily redeemable preferred securities of subsidiary trusts ("Preferred Securities") and the related Junior Subordinated Notes:
- ------------------------------------------------------------------------------------------------------------------------------------ Household Capital Household Capital Household Capital Household Capital Household Capital All dollar amounts Trust VII Trust VI Trust V Trust IV Trust I are stated in millions. ("HCT VII") ("HCT VI") ("HCT V") ("HCT IV") ("HCT I") - ------------------------------------------------------------------------------------------------------------------------------------ Preferred Securities: Interest rate 7.50% 8.25% 10.00% 7.25% 8.25% Face value $200 $200 $300 $200 $75 Issue date November 2001 January 2001 June 2000 March 1998 June 1995 Junior Subordinated Notes: Principal balance $206.2 $206.2 $309.3 $206.2 $77.3 Redeemable by Issuer November 8, 2006 January 30, 2006 June 8, 2005 March 19, 2003 June 30, 2000 Stated maturity November 15, 2031 January 30, 2031 June 30, 2030 December 31, 2037 June 30, 2025 - ------------------------------------------------------------------------------------------------------------------------------------
The Preferred Securities are classified in our balance sheet as company obligated mandatorily redeemable preferred securities of subsidiary trusts (representing the minority interests in the trusts) at their face and redemption amount of $975 million at December 31, 2001 and $675 million at December 31, 2000. Household Capital Trust II was redeemed for $100 million in December 2001. The Preferred Securities must be redeemed when the Junior Subordinated Notes are paid. The Junior Subordinated Notes have a stated maturity date, but are redeemable by Household, in whole or in part, beginning on the dates indicated above at which time the Preferred Securities are callable at par ($25 per Preferred Security) plus accrued and unpaid dividends. Dividends on the Preferred Securities are cumulative, payable quarterly in arrears, and are deferrable at Household's option for up to five years. Household cannot pay dividends on its preferred and common stocks during such deferments. The Preferred Securities have a liquidation value of $25 per preferred security. HCT I, HCT IV, HCT V, HCT VI and HCT VII (collectively, "the Trusts") are wholly owned subsidiaries of Household. Household's obligations with respect to the Junior Subordinated Notes, when considered together with certain undertakings of Household with respect to the Trusts, constitute full and unconditional guarantees by Household of the Trust's obligations under the respective Preferred Securities. 12. Preferred Stock
All dollar amounts are stated in millions. At December 31 2001 2000 - -------------------------------------------------------------------------------------------------- 7.50% Preferred Stock, 12,000,000 depositary shares (1) $ 291.4 - $4.30 Preferred Stock, 836,585 shares 83.6 $ 83.6 $4.50 Preferred Stock, 103,976 shares 10.4 10.4 5.00% Preferred Stock, 407,718 shares 20.4 20.4 8.25% Preferred Stock, Series 1992-A, 2,000,000 depositary shares (1) 50.0 50.0 - -------------------------------------------------------------------------------------------------- Total preferred stock $ 455.8 $ 164.4 ================================================================================================== (1) Depositary share represents 1/40 share of preferred stock.
60 Dividends on the 7.50 percent preferred stock are cumulative and payable quarterly. We may, at our option, redeem in whole or in part the 7.50 percent preferred stock on any date after September 26, 2006, for $25 per depositary share plus accrued and unpaid dividends. This stock has a liquidation value of $25 per depositary share. Dividends on the $4.30 preferred stock are cumulative and payable semiannually. We may, at our option, redeem in whole or in part the $4.30 preferred stock for $100 per share plus accrued and unpaid dividends. This stock has a liquidation value of $100 per share plus accrued and unpaid dividends in the event of an involuntary liquidation or $100 in the event of a voluntary liquidation. Dividends on the $4.50 preferred stock are cumulative and payable semiannually. We may, at our option, redeem in whole or in part the $4.50 preferred stock for $103 per share plus accrued and unpaid dividends. This stock has a liquidation value of $100 per share. Dividends on the 5.00 percent preferred stock are cumulative and payable semiannually. We may, at our option, redeem in whole or in part the 5.00 percent preferred stock for $50 per share plus accrued and unpaid dividends. This stock has a liquidation value of $50 per share. Dividends on the 8.25 percent preferred stock, Series 1992-A, are cumulative and payable quarterly. We may, at our option, redeem in whole or in part the 8.25 percent preferred stock, Series 1992-A, on any date after October 15, 2002, for $25 per depositary share plus accrued and unpaid dividends. This stock has a liquidation value of $25 per depositary share. Holders of all issues of preferred stock are entitled to payment before any capital distribution is made to common shareholders. The holders of the $4.30, $4.50 and 5.00 percent preferred stocks will be entitled to vote with the holders of our common stock on all matters. Each issue of preferred stock is also entitled to vote, as a class separate from our common stock, to elect two directors if dividends for a specified period shall be in arrears, until the dividends in arrears are paid in full. Household's Board of Directors has adopted a resolution creating an Offering Committee of the Board with the power to authorize the issuance and sale of one or more series of preferred stock. The Offering Committee has the authority to determine the particular designations, powers, preferences and relative, participating, optional or other special rights (other than voting rights which shall be fixed by the Board of Directors) and qualifications, limitations or restrictions of such issuance. At December 31, 2001, up to 8.2 million shares of preferred stock were authorized for issuance. 13. Forward Purchase Agreements and Junior Preferred Share Purchase Rights At December 31, 2001, we had agreements to purchase, on a forward basis, approximately 6.5 million shares of our common stock at a weighted-average forward price of $59.14 per share. The agreements have terms of up to one year. These agreements may be settled either physically or on a net basis in shares of our common stock, at our option. We account for these agreements in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company's Own Stock". As a result, we initially measure these forward contracts at fair value and report them as permanent equity. Subsequent changes in their fair value are not recognized. 61 In 1996, Household issued one preferred share purchase right (a "Right") for each outstanding share of common stock of the company. Under certain conditions, each Right may be exercised to purchase one three-thousandth of a share of a new series of junior participating preferred stock at an exercise price of $100 per one three-thousandth of a share, subject to further adjustment. The Rights may be exercised only after the earlier of: (a) a public announcement that a party or an associated group acquired 15 percent or more of Household's common stock and (b) ten business days (or later date as determined by the Board of Directors of Household) after a party or an associated group initiates or announces its intention to make an offer to acquire 15 percent or more of Household's common stock. The Rights, which cannot vote or receive dividends, expire on July 31, 2006, and may be redeemed by Household at a price of $.0033 per Right at any time prior to expiration or acquisition of 15 percent of Household's common stock. 14. Fair Value of Financial Instruments We have estimated the fair value of our financial instruments in accordance with Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("FAS No. 107"). Fair value estimates, methods and assumptions set forth below for our financial instruments are made solely to comply with the requirements of FAS No. 107 and should be read in conjunction with the financial statements and notes in this Annual Report. A significant portion of our financial instruments do not have a quoted market price. For these items, fair values were estimated by discounting estimated future cash flows at estimated current market discount rates. Assumptions used to estimate future cash flows are consistent with management's assessments regarding ultimate collectibility of assets and related interest and with estimates of product lives and repricing characteristics used in our asset/liability management process. All assumptions are based on historical experience adjusted for future expectations. Assumptions used to determine fair values for financial instruments for which no active market exists are inherently judgmental and changes in these assumptions could significantly affect fair value calculations. As required under generally accepted accounting principles, a number of other assets recorded on the balance sheets (such as acquired credit card relationships) and other intangible assets not recorded on the balance sheets (such as the value of consumer lending relationships for originated receivables and the franchise values of our business units) are not considered financial instruments and, accordingly, are not valued for purposes of this disclosure. We believe there is substantial value associated with these assets based on current market conditions and historical experience. Accordingly, the estimated fair value of financial instruments, as disclosed, does not fully represent our entire value, nor the changes in our entire value. The following is a summary of the carrying value and estimated fair value of our financial instruments:
2001 2000 ------------------------------------ ----------------------------------- Estimated Estimated In millions. Carrying Fair Carrying Fair At December 31 Value Value Difference Value Value Difference - ---------------------------------------------- ----------- ----------- ---------- ----------- ----------- ------------ Assets: Cash $ 543.6 $ 543.6 - $ 490.2 $ 490.2 - Investment securities 3,580.5 3,580.5 - 3,259.0 3,259.0 - Receivables 79,263.5 81,219.0 $ 1,955.5 67,161.7 67,672.4 $ 510.7 - ----------------------------------------------------------------------------------------------------------------------- Total 83,387.6 85,343.1 1,955.5 70,910.9 71,421.6 510.7 - ----------------------------------------------------------------------------------------------------------------------- Liabilities: Deposits (6,562.3) (6,838.9) (276.6) (8,676.9) (8,691.9) (15.0) Commercial paper, bank and other borrowings (12,024.3) (12,024.3) - (10,787.9) (10,787.9) - Senior and senior subordinated debt (56,823.6) (58,326.9) (1,503.3) (45,053.0) (44,637.8) 415.2 Insurance reserves (1,094.5) (1,345.9) (251.4) (1,106.6) (1,336.8) (230.2) - ----------------------------------------------------------------------------------------------------------------------- Total (76,504.7) (78,536.0) (2,031.3) (65,624.4) (65,454.4) 170.0 - ----------------------------------------------------------------------------------------------------------------------- Other: Derivative financial instruments (1,518.2) (1,518.2) - 80.1 (279.6) (359.7) Commitments to extend credit and guarantees - 51.6 51.6 - 48.9 48.9 - ----------------------------------------------------------------------------------------------------------------------- Total (1,518.2) (1,466.6) 51.6 80.1 (230.7) (310.8) - ----------------------------------------------------------------------------------------------------------------------- Total $ 5,364.7 $ 5,340.5 $ (24.2) $ 5,366.6 $ 5,736.5 $ 369.9 =======================================================================================================================
62 Cash: Carrying value approximates fair value due to cash's liquid nature. Investment securities: Investment securities are classified as available-for- sale and are carried at fair value on the balance sheets. Fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Receivables: The fair value of adjustable rate receivables approximates carrying value because interest rates on these receivables adjust with changing market interest rates. The fair value of fixed rate consumer receivables was estimated by discounting future expected cash flows at interest rates which approximate the rates that would achieve a similar return on assets with comparable risk characteristics. Receivables also includes our interest-only strip receivables. The interest-only strip receivables are carried at fair value on our balance sheets. Fair value is based on an estimate of the present value of future cash flows associated with securitizations of certain real estate secured, auto finance, MasterCard and Visa, private label and personal non-credit card receivables. Deposits: The fair value of our savings and demand accounts equaled the carrying amount as stipulated in FAS No. 107. The fair value of gross fixed rate time certificates was estimated by discounting future expected cash flows at interest rates that we offer on such products at the respective valuation dates. Commercial paper, bank and other borrowings: The fair value of these instruments approximates existing carrying value because interest rates on these instruments adjust with changes in market interest rates due to their short-term maturity or repricing characteristics. Senior and senior subordinated debt: The estimated fair value of our gross fixed rate debt instruments was determined using either quoted market prices or by discounting future expected cash flows at interest rates offered for similar types of debt instruments. Carrying value is typically used to estimate the fair value of floating rate debt. Insurance reserves: The fair value of insurance reserves for periodic payment annuities was estimated by discounting future expected cash flows at estimated market interest rates at December 31, 2001 and 2000. The fair value of other insurance reserves is not required to be determined in accordance with FAS No. 107. Derivative financial instruments: As of January 1, 2001, all derivative financial instruments are carried at fair value on the balance sheet. Where practical, quoted market prices were used to determine fair value of these instruments. For non-exchange traded contracts, fair value was determined using accepted and established valuation methods (including input from independent third parties) which consider the terms of the contracts and market expectations on the valuation date for forward interest rates (for interest rate contracts) or forward foreign currency exchange rates (for foreign exchange contracts). We enter into foreign exchange contracts to hedge our exposure to currency risk on foreign denominated debt. We also enter into interest rate contracts to hedge our exposure to interest rate risk on assets and liabilities, including debt. As a result, decreases/increases in the fair value of derivative financial instruments which have been designated as effective hedges are offset by a corresponding increase/decrease in the fair value of the individual asset or liability being hedged. See Note 10, "Derivative Financial Instruments and Concentrations of Credit Risk," for additional discussion of the nature of these items. Commitments to extend credit and guarantees: These commitments were valued by considering our relationship with the counterparty, the creditworthiness of the counterparty and the difference between committed and current interest rates. 63 15. Leases We lease certain offices, buildings and equipment for periods of up to 25 years. The leases expire at various dates through 2019 and have various renewal options. The office space leases generally require us to pay certain operating expenses. Net rental expense under operating leases was $124.9 million in 2001, $107.6 million in 2000 and $89.4 million in 1999. We have a lease obligation on a former office complex which has been subleased through 2010, the end of the lease period. The sublessee has assumed our future rental obligations on this lease. Future net minimum lease commitments under noncancelable operating lease arrangements were:
Minimum Minimum In millions. Rental Sublease At December 31, 2001 Payments Income Net - ----------------------------------------------------------------------------------------- 2002 $ 150.9 $ 21.4 $ 129.5 2003 128.6 21.6 107.0 2004 110.7 22.0 88.7 2005 92.8 22.3 70.5 2006 82.6 22.2 60.4 Thereafter 330.0 77.7 252.3 - ----------------------------------------------------------------------------------------- Net minimum lease commitments $ 895.6 $ 187.2 $ 708.4 =========================================================================================
16. Incentive Compensation and Stock Option Plans Household's executive compensation plans provide for issuance of nonqualified stock options and restricted stock rights ("RSR's"). Stock options permit the holder to purchase, under certain limitations, Household's common stock at the market value of the stock on the date the option is granted. Employee stock options generally vest equally over four years and expire 10 years from the date of grant. RSR's entitle an employee to receive a stated number of shares of Household's common stock if the employee satisfies the conditions set by the Compensation Committee for the award. A total of 4.3 million and 4.0 million RSR's were outstanding at December 31, 2001 and 2000, respectively. Total compensation cost recognized for RSR's was $45.4 million, $24.4 million and $12.4 million in 2001, 2000 and 1999, respectively. Shares of our common stock reserved for stock plans were 34.9 million at December 31, 2001 and 38.9 million at December 31, 2000. Non-employee directors annually receive options to purchase shares of Household's common stock at the stock's fair market value on the day the option is granted. Director options have a term of ten years and one day, fully vest six months from the date granted, and once vested are exercisable at any time during the option term. Common stock data for the stock option plans is summarized as follows:
2001 2000 1999 - ----------------------------------------------------------- ------------------------------- --------------------------- Weighted- Weighted- Weighted- Average Average Average Price per Price per Price per Shares Share Shares Share Shares Share - ----------------------------------------------------------------------------------------------------------------------- Outstanding at beginning Of year 16,687,142 $ 31.09 16,068,326 $ 26.30 21,600,569 $ 21.14 Granted 3,080,400 57.16 2,812,469 48.80 2,311,500 44.78 Exercised (2,015,723) 17.26 (2,056,064) 12.89 (7,805,549) 17.48 Expired or canceled (1,535) 28.22 (137,589) 36.84 (38,194) 31.45 - ----------------------------------------------------------------------------------------------------------------------- Outstanding at end Of year 17,750,284 $ 37.19 16,687,142 $ 31.09 16,068,326 $ 26.30 ======================================================================================================================= Exercisable at end of year 11,502,384 $ 29.44 11,134,642 $ 24.10 11,023,619 $ 19.64 ======================================================================================================================= Weighted-average fair value of options granted $ 18.25 $ 19.65 $ 19.65 =======================================================================================================================
64 The following table summarizes information about stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable ---------------------------------------------------- ---------------------------------------- Range of Number Weighted-Average Weighted-Average Number Weighted-Average Exercise Prices Outstanding Remaining Life Exercise Price Outstanding Exercise Price - ------------------------ ------------ ---------------- ---------------- ---------------- ---------------------- $ 6.65 - $ 10.00 303,089 .54 years $ 8.25 303,089 $ 8.25 $ 10.01 - $ 20.00 4,000,974 2.85 years 14.28 4,000,225 14.27 $ 20.01 - $ 30.00 491,185 5.46 years 24.02 489,959 24.01 $ 30.01 - $ 40.00 4,887,188 6.13 years 36.12 4,367,938 36.07 $ 40.01 - $ 50.00 4,957,448 8.28 years 47.33 2,318,673 46.83 $ 50.01 - $ 57.16 3,110,400 9.84 years 57.10 22,500 51.38 - --------------------------------------------------------------------------------------------------------------------------
Household maintains an Employee Stock Purchase Plan (the "ESPP"). The ESPP provides a means for employees to purchase shares of Household's common stock at 85 percent of the lesser of its market price at the beginning or end of a one-year subscription period. We account for options and shares issued under the ESPP in accordance with APB 25, pursuant to which no compensation cost has been recognized. Had compensation cost been determined consistent with FAS No. 123, "Accounting for Stock-Based Compensation," our net income and earnings per share, on a pro forma basis, would have been as follows:
2001 2000 1999 In millions, except per share data. ----------------------------- ------------------------- ----------------------- Year ended December 31 Diluted Basic Diluted Basic Diluted Basic - -------------------------------------------------------------------------------------------------------------------------- Earnings available to common shareholders: As reported $ 1,908.0 $ 1,908.0 $1,691.5 $1,691.5 $ 1,477.2 $ 1,477.2 Pro forma 1,880.1 1,880.1 1,670.5 1,670.5 1,460.7 1,460.7 Earnings per share: As reported $ 4.08 $ 4.13 $ 3.55 $ 3.59 $ 3.07 $ 3.10 Pro forma 4.02 4.07 3.51 3.54 3.03 3.06 - --------------------------------------------------------------------------------------------------------------------------
The pro forma compensation expense included in the table above may not be representative of the actual effects on net income for future years. The fair value of each option granted was estimated as of the date of grant using the Black-Scholes option pricing model and the following weighted-average assumptions:
2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- Risk-free interest rate 3.62% 5.74% 5.84% Expected dividend yield 1.44 1.49 1.65 Expected life 5 years 5 years 5 years Expected volatility 34.3% 42.8% 46.9% - --------------------------------------------------------------------------------------------------------------------------
The Black-Scholes model uses different assumptions that can significantly effect the fair value of the options. As a result, the derived fair value estimates cannot be substantiated by comparison to independent markets. 17. Employee Benefit Plans Household sponsors several defined benefit pension plans covering substantially all of its U.S. and non-U.S. employees. At December 31, 2001, plan assets included an investment in 1,112,546 shares of Household's common stock with a fair value of $64.5 million. 65 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 2001 2000 1999 - --------------------------------------------------------------------------------------------- Service cost - benefits earned during the period $(26.9) $(22.6) $(28.7) Interest cost on projected benefit obligation (37.4) (33.2) (31.0) Expected return on assets 101.6 87.9 80.4 Amortization of transition asset .9 1.4 1.2 Recognized gains (losses) - (.2) 4.1 - --------------------------------------------------------------------------------------------- Pension income $ 38.2 $ 33.3 $ 26.0 =============================================================================================
The assumptions used in determining the benefit obligation and pension income of the domestic defined benefit plans at December 31 are as follows:
2001 2000 1999 - ------------------------------------------------------------------------------------------ Discount rate 7.5% 8.25% 8.0% Salary increase assumption 4.0 4.0 4.0 Expected long-term rate of return on plan assets 10.0 10.0 10.0 - ------------------------------------------------------------------------------------------
A reconciliation of beginning and ending balances of the projected benefit obligation of the defined benefit pension plans is as follows: In millions. Year ended December 31 2001 2000 - ------------------------------------------------------------------------------- Benefit obligation at beginning of year $555.1 $547.9 Service cost 26.9 22.6 Interest cost 37.4 33.2 Actuarial losses 112.0 14.9 Foreign currency exchange rate changes (3.2) (4.4) Plan amendments 9.2 .2 Benefits paid (59.6) (59.3) - ------------------------------------------------------------------------------- Benefit obligation at end of year $677.8 $555.1 =============================================================================== A reconciliation of beginning and ending balances of the fair value of plan assets associated with the defined benefit pension plans is as follows: In millions. Year ended December 31 2001 2000 - ------------------------------------------------------------------------------- Fair value of plan assets at beginning of year $1,058.8 $ 926.5 Actual return on plan assets (136.6) 195.4 Foreign currency exchange rate changes (3.5) (4.8) Employer contributions .7 1.0 Benefits paid (59.6) (59.3) - ------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 859.8 $1,058.8 =============================================================================== The funded status of defined benefit pension plans was as follows: In millions. At December 31 2001 2000 - ------------------------------------------------------------------------------- Funded status $ 182.0 $ 503.7 Unrecognized net actuarial loss (gain) 257.5 (98.1) Unamortized prior service cost 3.7 (6.1) - ------------------------------------------------------------------------------- Prepaid pension cost $ 443.2 $ 399.5 =============================================================================== We also sponsor a non-qualified supplemental retirement plan. This plan, which is unfunded, provides eligible employees defined pension benefits outside the qualified retirement plan based on average earnings, years of service and age at retirement. At December 31, 2001 and 2000, the projected benefit obligation was $41.5 million and $28.6 million, respectively. Pension expense related to the supplemental retirement plan was $10.0 million, $5.1 million and $7.2 million in 2001, 2000 and 1999, respectively. 66 We also sponsor various 401(k) savings plans and profit sharing plans for employees meeting certain eligibility requirements. Under these plans, each participant's contribution is matched by the company in Household common stock up to a maximum of 6 percent of the participant's compensation. For 2001, 2000 and 1999, total expense for these plans was $56.7 million, $47.0 million and $39.1 million, respectively. We have several plans which provide medical, dental and life insurance benefits to retirees and eligible dependents. These plans cover substantially all employees who meet certain age and vested service requirements. We have instituted dollar limits on our payments under the plans to control the cost of future medical benefits. The net postretirement benefit cost included the following:
In millions. Year ended December 31 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Service cost-benefits earned during the period $ (3.2) $ (3.4) $ (4.3) Interest cost on accumulated postretirement benefit obligation (11.1) (10.3) (9.4) Amortization of transition obligation (6.6) (6.7) (6.3) Amortization of prior service cost 1.7 1.4 1.7 Recognized actuarial gain 3.1 2.8 1.2 - ---------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost $ (16.1) $ (16.2) $ (17.1) ================================================================================================================
A reconciliation of the beginning and ending balances of the accumulated postretirement benefit obligation is as follows:
In millions. Year ended December 31 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Benefit obligation at beginning of year $ 161.0 $ 160.5 Service cost 3.2 3.4 Interest cost 11.1 10.3 Foreign currency exchange rate changes (.4) - Actuarial losses (gains) 29.4 (9.1) Plan amendments - 4.7 Benefits paid (7.5) (8.8) - ------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 196.8 $ 161.0 ===================================================================================================================
Our postretirement benefit plans are funded on a pay-as-you-go basis. A reconciliation of the components of the accrued postretirement benefit obligation is as follows:
In millions. At December 31 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Funded status $ 196.8 $ 161.0 Unamortized prior service cost 17.2 18.1 Unrecognized net actuarial gain 31.4 72.1 Unamortized transition obligation (75.0) (80.6) - ------------------------------------------------------------------------------------------------------------------- Accrued postretirement benefit obligation $ 170.4 $ 170.6 ===================================================================================================================
The assumptions used in determining the benefit obligation and cost of such plans at December 31 are as follows:
2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ Discount rate 7.5% 8.25% 8.0% Salary increase assumption 4.0 4.0 4.0 - ------------------------------------------------------------------------------------------------------------------
A 9.8 percent annual rate of increase in the gross cost of covered health care benefits was assumed for 2002. This rate of increase is assumed to decline gradually to 5.35 percent in 2008. 67 Assumed health care cost trend rates have an effect on the amounts reported for health care plans. A one-percentage point change in assumed health care cost trend rates would increase (decrease) service and interest costs and the postretirement benefit obligation as follows:
One Percent One Percent In millions. Increase Decrease - ----------------------------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ .6 $ (.6) Effect on postretirement benefit obligation 8.1 (7.6) =============================================================================================================================
18. Income Taxes Total income taxes were:
In millions. Year ended December 31 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- Provision for income taxes related to operations $1,015.0 $ 909.8 $ 734.3 Income taxes related to adjustments included in common shareholders' equity: Unrealized gain (loss) on investments, net 110.6 56.3 (50.1) Unrealized losses on cash flow hedging instruments (391.6) - - Foreign currency translation adjustments (10.1) (22.4) (5.3) Exercise of stock based compensation (35.5) (23.5) (89.1) - ----------------------------------------------------------------------------------------------------------------------------- Total $ 688.4 $ 920.2 $ 589.8 =============================================================================================================================
Provisions for income taxes related to operations were:
In millions. Year ended December 31 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- Current United States $ 907.1 $ 710.8 $ 633.8 Foreign 69.8 112.0 67.4 - ----------------------------------------------------------------------------------------------------------------------------- Total current 976.9 822.8 701.2 - ----------------------------------------------------------------------------------------------------------------------------- Deferred United States 40.3 93.4 32.3 Foreign (2.2) (6.4) .8 - ----------------------------------------------------------------------------------------------------------------------------- Total deferred 38.1 87.0 33.1 - ----------------------------------------------------------------------------------------------------------------------------- Total income taxes $1,015.0 $ 909.8 $ 734.3 =============================================================================================================================
The significant components of deferred income tax provisions attributable to income from operations were:
In millions. Year ended December 31 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- Deferred income tax provision $ 33.1 $ 89.6 $ 17.3 Adjustment of valuation allowance (11.8) (8.4) 20.7 Change in operating loss carryforwards 16.8 5.8 (4.9) - ----------------------------------------------------------------------------------------------------------------------------- Deferred income tax provision $ 38.1 $ 87.0 $ 33.1 =============================================================================================================================
Income before income taxes were:
In millions. Year ended December 31 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- United States $2,660.6 $2,273.8 $1,930.7 Foreign 277.9 336.7 290.0 - ----------------------------------------------------------------------------------------------------------------------------- Total income before income taxes $2,938.5 $2,610.5 $2,220.7 =============================================================================================================================
68
Effective tax rates are analyzed as follows: Year ended December 31 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% Increase (decrease) in rate resulting from: State and local taxes, net of federal benefit 2.8 2.6 2.4 Tax credits (2.5) (1.5) (.9) Other (.8) (1.2) (3.4) - --------------------------------------------------------------------------------------------------------------------- Effective tax rate 34.5% 34.9% 33.1% =====================================================================================================================
Provision for U.S. income taxes had not been made at December 31, 2001 and 2000 on $267.5 million and $300.6 million, respectively, of undistributed earnings of foreign subsidiaries. Determination of the amount of unrecognized deferred tax liability related to investments in foreign subsidiaries is not practicable. In addition, provision for U.S. income taxes had not been made at December 31, 2001 on $80.1 million of undistributed earnings of life insurance subsidiaries accumulated as policyholders' surplus under tax laws in effect prior to 1984. If this amount were distributed, the additional income tax payable would be approximately $28 million. Our U.S. savings and loan subsidiary has credit loss reserves for tax purposes that arose in years beginning before December 31, 1987 in the amount of $55.3 million. The amount of deferred tax liability on the aforementioned credit loss reserves not recognized totaled $20.5 million at December 31, 2001. Because these amounts would become taxable only in the event of certain circumstances which we do not expect to occur within the foreseeable future, no deferred tax liability has been established for these items. At December 31, 2001, we had net operating loss carryforwards for tax purposes of $11.3 million, of which $1.7 million expire in 2004; $2.4 million expire in 2005; $2.1 million expire in 2006; and $5.1 million expire in 2019. We also had foreign tax credit carryforwards of $.5 million which expire in 2004. Temporary differences which gave rise to a significant portion of deferred tax assets and liabilities were as follows:
In millions. At December 31 2001 2000 - ------------------------------------------------------------------------------------------------------------- Deferred Tax Liabilities Receivables sold $ 837.7 $ 822.2 Leveraged lease transactions, net 393.9 385.4 Deferred loan origination costs 172.4 93.4 Pension plan assets 154.2 142.5 Fee income 147.3 78.3 Other 222.0 237.9 - ------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities $ 1,927.5 $ 1,759.7 - ------------------------------------------------------------------------------------------------------------- Deferred Tax Assets Credit loss reserves $ 1,208.8 $ 1,128.3 Market value adjustments 277.4 - Other 389.6 337.9 - ------------------------------------------------------------------------------------------------------------- Total deferred tax assets 1,875.8 1,466.2 Valuation allowance (.5) (12.3) - ------------------------------------------------------------------------------------------------------------- Total deferred tax assets net of valuation allowance 1,875.3 1,453.9 - ------------------------------------------------------------------------------------------------------------- Net deferred tax liability $ 52.2 $ 305.8 =============================================================================================================
The deferred tax asset valuation allowance relates entirely to foreign tax credit carryforwards. Due to the limited carryforward period and limitations under U.S. tax laws with respect to foreign tax credit utilization, management believes it is more likely than not that the deferred tax asset will not be realized. The current period net change in the valuation allowance reflects the current utilization of prior carryforwards. A 100 percent valuation allowance has been established relating to the remaining carryforwards available. 69 19. Earnings Per Common Share
2001 2000 1999 In millions, except per share data. ----------------------- ------------------------- ------------------------ Year ended December 31 Diluted Basic Diluted Basic Diluted Basic - ---------------------------------------------------------------------------------------------------------------------------- Earnings Net income $ 1,923.5 $ 1,923.5 $ 1,700.7 $ 1,700.7 $ 1,486.4 $ 1,486.4 Preferred dividends (15.5) (15.5) (9.2) (9.2) (9.2) (9.2) - ---------------------------------------------------------------------------------------------------------------------------- Earnings available to Common shareholders $ 1,908.0 $ 1,908.0 $ 1,691.5 $ 1,691.5 $ 1,477.2 $ 1,477.2 ============================================================================================================================ Average Shares Common 462.0 462.0 471.8 471.8 477.0 477.0 Common equivalents 6.1 - 4.4 - 4.8 - - ---------------------------------------------------------------------------------------------------------------------------- Total 468.1 462.0 476.2 471.8 481.8 477.0 ============================================================================================================================ Earnings per common share $ 4.08 $ 4.13 $ 3.55 $ 3.59 $ 3.07 $ 3.10 ============================================================================================================================
20. Commitments and Contingent Liabilities In the ordinary course of business there are various legal proceedings pending against us. Management believes the aggregate liability, if any, resulting from such actions would not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, as the ultimate resolution of these proceedings is influenced by factors that are outside of our control, it is reasonably possible our estimated liability under these proceedings may change. See Note 15 for discussion of lease commitments. 21. Segment Reporting We have three reportable segments: Consumer, Credit Card Services, and International. Our segments are managed separately and are characterized by different middle-market consumer lending products, origination processes, and locations. Our Consumer segment consists of our consumer lending, mortgage services, retail services, and auto finance businesses. Our Credit Card Services segment consists of our domestic MasterCard and Visa credit card business. Our International segment consists of our foreign operations in the United Kingdom ("U.K.") and Canada. The Consumer segment provides real estate secured, automobile secured and personal non-credit card loans. Loans are offered with both revolving and closed-end terms and with fixed or variable interest rates. Loans are originated through branch locations, correspondents, mortgage brokers, direct mail, telemarketing, independent merchants or automobile dealers. The Credit Card Services segment offers MasterCard and Visa credit cards throughout the United States primarily via strategic affinity and co-branding relationships, direct mail, and our branch network to subprime customers. The International segment offers secured and unsecured lines of credit and secured and unsecured closed-end loans primarily in the United Kingdom and Canada. In addition, the United Kingdom operation offers MasterCard and Visa credit cards and credit insurance in connection with all loan products. We also cross sell our credit cards to existing real estate secured, private label and tax services customers. All segments offer products and service customers through the Internet. The All Other caption includes our insurance and tax services and commercial businesses, as well as our corporate and treasury activities, each of which falls below the quantitative threshold tests under Statement of Financial Accounting Standards No. 131 for determining reportable segments. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. For segment reporting purposes, intersegment transactions have not been eliminated. We generally account for transactions between segments as if they were with third parties. We evaluate performance and allocate resources based on income from operations after income taxes and returns on equity and managed assets. We allocate resources and provide information to management for decision making on a managed basis. Therefore, an adjustment is required to reconcile the managed financial information to our reported financial information in our consolidated financial statements. This adjustment reclassifies net interest margin, fee income and loss provision into securitization revenue. Certain segment information previously presented on an owned basis has been restated to a managed basis. 70 Reportable Segments - Managed Basis
In millions. Credit Card Managed Basis Consumer Services International All Other Totals - ------------------------------------------------------------------------------------------------------------- For the year ended December 31, 2001: Net interest margin $ 5,829.0 $ 1,556.1 $ 592.5 $ (37.0) $ 7,940.6 Fee income 368.5 1,182.8 60.5 6.7 1,618.5 Other revenues (1) 357.5 99.4 209.5 553.6 1,220.0 Intersegment revenues 190.4 38.2 8.4 (2.7) 234.3 Provision for credit losses 2,550.3 1,167.3 226.9 72.3 4,016.7 Depreciation and amortization 64.5 110.8 23.7 109.3 308.3 Income tax expense (benefit) 840.5 232.6 65.2 (36.8) 1,101.5 Segment net income (loss) 1,327.7 367.6 204.1 173.7 2,073.1 Receivables 75,640.8 17,178.5 7,157.5 845.9 100,822.7 Total segment assets 78,698.8 18,875.3 8,375.2 14,116.7 120,066.0 Expenditures for long-lived assets (7) 17.0 4.5 27.8 125.9 175.2 - ------------------------------------------------------------------------------------------------------------- For the year ended December 31, 2000: Net interest margin $ 4,851.6 $ 1,222.8 $ 594.1 $ (178.5) $ 6,490.0 Fee income 348.6 1,055.2 61.0 5.6 1,470.4 Other revenues (1) 401.7 114.3 244.6 414.7 1,175.3 Intersegment revenues 192.0 32.7 5.2 - 229.9 Provision for credit losses 1,978.4 1,066.2 233.6 (27.4) 3,250.8 Depreciation and amortization 78.4 123.5 20.2 79.6 301.7 Income tax expense (benefit) 796.5 142.6 98.6 (43.1) 994.6 Segment net income (loss) 1,271.3 214.7 230.1 131.3 1,847.4 Receivables 63,067.0 15,977.3 7,847.0 716.1 87,604.4 Total segment assets 65,822.3 17,713.9 9,017.5 14,164.3 106,718.0 Expenditures for long-lived assets (7) 29.1 283.1 37.7 100.5 450.4 - ------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1999: Net interest margin $ 4,043.3 $ 1,020.4 $ 614.0 $ (138.5) $ 5,539.2 Fee income 350.6 797.5 54.1 3.3 1,205.5 Other revenues (1) 207.4 63.8 184.0 474.5 929.7 Intersegment revenues 124.0 17.2 3.4 - 144.6 Provision for credit losses 1,598.6 912.4 247.7 (.4) 2,758.3 Depreciation and amortization 80.8 108.4 17.5 67.7 274.4 Income tax expense (benefit) 625.6 100.2 59.4 10.6 795.8 Segment net income (loss) 991.5 152.8 218.7 230.0 1,593.0 Receivables 49,399.0 13,854.8 7,618.8 855.7 71,728.3 Total segment assets 51,840.1 15,489.7 8,846.0 14,000.7 90,176.5 Expenditures for long-lived assets (7) 78.9 5.8 45.6 64.4 194.7 - -------------------------------------------------------------------------------------------------------------
Managed Owned Adjustments/ Basis Basis In millions. Reconciling Consolidated Securitization Consolidated Managed Basis Items Totals Adjustments Totals - -------------------------------------------------------------------------------------------------------- For the year ended December 31, 2001: Net interest margin - $ 7,940.6 $ (2,093.8) (6) $ 5,846.8 Fee income - 1,618.5 (651.6) (6) 966.9 Other revenues (1) $ (234.3) (2) 985.7 1,639.9 (6) 2,625.6 Intersegment revenues (234.3) (2) - - - Provision for credit losses 1.7 (3) 4,018.4 (1,105.5) (6) 2,912.9 Depreciation and amortization - 308.3 - 308.3 Income tax expense (benefit) (86.5) (4) 1,015.0 - 1,015.0 Segment net income (loss) (149.6) 1,923.5 - 1,923.5 Receivables - 100,822.7 (20,948.0) (8) 79,874.7 Total segment assets (9,702.0) (5) 110,364.0 (20,948.0) (8) 89,416.0 Expenditures for long-lived assets (7) - 175.2 - 175.2 - -------------------------------------------------------------------------------------------------------- For the year ended December 31, 2000: Net interest margin - $ 6,490.0 $ (1,724.6) (6) $ 4,765.4 Fee income - 1,470.4 (644.6) (6) 825.8 Other revenues (1) $ (229.9) (2) 945.4 1,233.7 (6) 2,179.1 Intersegment revenues (229.9) (2) - - - Provision for credit losses 1.6 (3) 3,252.4 (1,135.5) (6) 2,116.9 Depreciation and amortization - 301.7 - 301.7 Income tax expense (benefit) (84.8) (4) 909.8 - 909.8 Segment net income (loss) (146.7) 1,700.7 - 1,700.7 Receivables - 87,607.4 (20,249.5) (8) 67,357.9 Total segment assets (9,762.2) (5) 96,955.8 (20,249.5) (8) 76,706.3 Expenditures for long-lived assets (7) - 450.4 - 450.4 - -------------------------------------------------------------------------------------------------------- For the year ended December 31, 1999: Net interest margin - $ 5,539.2 $ (1,732.9) (6) $ 3,806.3 Fee income - 1,205.5 (610.0) (6) 595.5 Other revenues (1) $ (144.6) (2) 785.1 1,277.5 (6) 2,062.6 Intersegment revenues (144.6) (2) - - - Provision for credit losses 23.5 (3) 2,781.8 (1,065.4) (6) 1,716.4 Depreciation and amortization - 274.4 - 274.4 Income tax expense (benefit) (61.5) (4) 734.3 - 734.3 Segment net income (loss) (106.6) 1,486.4 - 1,486.4 Receivables - 71,728.3 (19,438.9) (8) 52,289.4 Total segment assets (9,988.2) (5) 80,188.3 (19,438.9) (8) 60,749.4 Expenditures for long-lived assets (7) - 194.7 - 194.7 - --------------------------------------------------------------------------------------------------------
(1) Net of policyholder benefits and excluding fees. (2) Eliminates intersegment revenues. (3) Eliminates bad debt recovery sales between operating segments. (4) Tax benefit associated with items comprising adjustments/reconciling items. (5) Eliminates investments in subsidiaries and intercompany borrowings. (6) Reclassifies net interest margin fee income and loss provisions relating to securitized receivables to other revenues. (7) Includes goodwill associated with purchase business combinations and capital expenditures. (8) Represents receivables serviced with limited recourse. 71 Managed Receivables The following summarizes our managed receivables, which includes both our owned receivables and receivables serviced with limited recourse.
In millions. At December 31 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------ Real estate secured $ 44,718.6 $ 36,637.5 $ 26,935.5 Auto finance 6,395.5 4,563.3 3,039.8 MasterCard/Visa 17,395.2 17,583.4 15,793.1 Private label 13,813.9 11,997.3 11,269.7 Personal non-credit card 17,992.6 16,227.3 13,881.9 Commercial and other 506.9 598.6 808.3 - ------------------------------------------------------------------------------------------------------------ Total $ 100,822.7 $ 87,607.4 $ 71,728.3 ============================================================================================================
Geographic Data The following summarizes our owned basis assets, revenues and income before income taxes by material country:
Identifiable Assets Long-Lived Assets (1) ---------------------------------------- --------------------------------- In millions. 2001 2000 1999 2001 2000 1999 - ---------------------------------------------------------------------------------------------- United States $82,221.0 $68,917.7 $52,886.9 $1,988.1 $2,107.2 $1,310.2 United Kingdom 5,709.6 6,401.3 6,486.6 93.1 109.6 91.7 Canada 1,379.4 1,246.6 1,188.2 5.2 6.5 5.8 Other 106.0 140.7 187.7 - - .2 - ---------------------------------------------------------------------------------------------- Total $89,416.0 $76,706.3 $60,749.4 $2,086.4 $2,223.3 $1,407.9 ==============================================================================================
(1) Includes properties and equipment, net of accumulated depreciation, and goodwill, net of accumulated amortization.
Revenues Income Before Income Taxes --------------------------------------- ----------------------------------- In millions. 2001 2000 1999 2001 2000 1999 - ---------------------------------------------------------------------------------------------- United States $12,661.4 $10,683.5 $8,290.5 $2,660.6 $2,273.1 $1,930.7 United Kingdom 1,014.4 1,059.9 995.0 206.4 274.1 223.9 Canada 220.2 194.4 178.2 48.4 41.3 39.4 Other 19.7 23.1 35.4 23.1 22.0 26.7 - ---------------------------------------------------------------------------------------------- Total $13,915.7 $11,960.9 $9,499.1 $2,938.5 $2,610.5 $2,220.7 ==============================================================================================
72 Management's Report To the Shareholders of Household International, Inc. Household International's management is responsible for the preparation, integrity and fair presentation of its published financial statements. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on judgments and estimates made by management. Management also prepared other information included in the annual report and is responsible for its accuracy and consistency with the financial statements. The consolidated financial statements have been audited by an independent accounting firm, Arthur Andersen LLP, which has been given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the Board of Directors and committees of the board. Management believes that representations made to the independent auditors during their audit were valid and appropriate. Management maintains a system of internal controls over the preparation of its published financial statements. These controls are designed to provide reasonable assurance to the company's Board of Directors and officers that the financial statements have been fairly presented in accordance with generally accepted accounting principles. The Board, operating through its audit committee which is composed entirely of non-executive directors, provides oversight to the financial reporting process. Internal auditors monitor the operation of the internal control system and actions are taken by management to respond to deficiencies as they are identified. Even effective internal controls, no matter how well designed, have inherent limitations, such as the possibility of human error or of circumvention or overriding of controls, and the consideration of cost in relation to benefit of a control. Further, the effectiveness of an internal control can change with circumstances. Household International's management periodically assesses the internal controls for adequacy. Based upon these assessments, Household International's management believes that, in all material respects, its internal controls relating to preparation of consolidated financial statements as of December 31, 2001 functioned effectively during the year ended December 31, 2001. Management has long recognized its responsibility for conducting the company's affairs in a manner which is responsive to the interest of employees, shareholders, investors and society in general. This responsibility is included in the statement of policy on ethical standards which provides that the company will fully comply with laws, rules and regulations of every community in which it operates and adhere to the highest ethical standards. Officers, employees and agents of the company are expected and directed to manage the business of the company with complete honesty, candor and integrity. /s/ William F. Aldinger /s/ David A. Schoenholz William F. Aldinger David A. Schoenholz Chairman and Vice Chairman - Chief Executive Officer Chief Financial Officer January 14, 2002 73 Report of Independent Public Accountants To the Shareholders of Household International, Inc. We have audited the accompanying consolidated balance sheets of Household International, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in preferred stock and common shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of Household International Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Household International, Inc. and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP /s/ Arthur Andersen LLP Chicago, Illinois January 14, 2002 74 Household International, Inc. and Subsidiaries Common and Preferred Stock Information Household International common stock is listed on the New York and Chicago stock exchanges. We also have unlisted trading privileges on the Boston, Pacific and Philadelphia stock exchanges. Call and put options are traded on the American Stock Exchange, Pacific Stock Exchange and Chicago Board of Options Exchange.
Dividends Declared ------------------ Stock Ticker Symbol 2001 2000 Features Redemption Features - ------------------------------------------------------------------------------------------------------------------------ Common HI $ .85 $ .74 Quarterly dividend N/A rate increased to $.22 effective 7/15/01 - ------------------------------------------------------------------------------------------------------------------------ 5% Cumulative Preferred HI + PRM $2.50 $2.50 Nonconvertible Redeemable at our option - ------------------------------------------------------------------------------------------------------------------------ $4.50 Cumulative Preferred HI + PRN $4.50 $4.50 Nonconvertible Redeemable at our option - ------------------------------------------------------------------------------------------------------------------------ $4.30 Cumulative Preferred HI + PRO $4.30 $4.30 Nonconvertible Redeemable at our option - ------------------------------------------------------------------------------------------------------------------------ 8 1/4% Cumulative Preferred, Series 1992-A HI + PRZ $2.0625 $2.0625 Nonconvertible Cannot be redeemed prior to Depositary Shares 10/16/2002. Redeemable at our representing 1/40 share option after 10/15/2002 in of 8 1/4% Cumulative whole or in part at $25.00 Preferred Stock, per depositary share plus Series 1992-A accrued and unpaid dividends. - ------------------------------------------------------------------------------------------------------------------------ 7.50% Cumulative Preferred, Series 2001-A HI + PRS $0.4896 N/A Nonconvertible Cannot be redeemed prior to Depositary Shares 9/27/2006. Redeemable at our representing 1/40 share option after 9/26/2006 in of 7.50% Cumulative whole or in part at $25.00 Preferred Stock, per depositary share plus accrued Series 2001-A/1/ and unpaid dividends. - ------------------------------------------------------------------------------------------------------------------------
Net Shares Outstanding Shareholders of Record 2001 Market Price 2000 Market Price ------------------------- ---------------------- ------------------ ------------------- Stock 2001 2000 2001 2000 High Low High Low - -------------------------------------------------------------------------------------------------------------------------- Common 457,124,303 471,019,659 19,226 19,468 $69.98 $48.00 $57.44 $29.50 5% Cumulative Preferred 407,718 407,718 1,183 1,254 41.50 30.00 37.00 29.00 $4.50 Cumulative Preferred 103,976 103,976 242 269 66.20 56.75 65.25 50.00 $4.30 Cumulative Preferred 836,585 836,585 513 542 63.00 53.25 62.63 50.00 8 1/4% Cumulative Preferred, Series 1992-A 2,000,000 2,000,000 201 228 27.50 24.50 26.63 25.25 7.50% Cumulative Preferred, Series 2001-A/1/ 12,000,000 N/A 15 N/A 25.87 23.00 - - - -------------------------------------------------------------------------------------------------------------------------- /1/Issued September 27, 2001.
75 Household International, Inc. and Subsidiaries Common and Preferred Stock Information (continued)
Year ended December 31, unless otherwise indicated 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Market Value Share of Common Stock (High-Low prices on NYSE) First Quarter 62.00-52.00 39.19-29.50 46.69-38.69 47.79-37.71 36.08-28.33 Second Quarter 69.98-57.45 48.19-37.63 52.31-42.00 52.56-41.67 39.15-26.21 Third Quarter 69.49-48.00 57.44-41.00 50.19-36.19 53.69-35.25 43.33-36.15 Fourth Quarter 61.40-51.29 56.94-43.88 48.00-35.81 40.50-23.00 43.21-36.13 Yearly range 69.98-48.00 57.44-29.50 52.31-35.81 53.69-23.00 43.33-26.21 Year-end close 57.94 55.00 37.25 39.63 42.54 Composite common shares traded 563,070,100 408,751,400 390,575,200 454,878,500 302,551,200 Average daily volume 2,270,444 1,622,029 1,549,902 1,805,073 1,195,854 - ------------------------------------------------------------------------------------------------------------------------------------ Shares Outstanding at December 31 Common 457,124,303 471,019,659 467,911,445 483,137,739 485,351,517 5% Cumulative Preferred/2/ 407,718 407,718 407,718 407,718 - $4.50 Cumulative Preferred/2/ 103,976 103,976 103,976 103,976 - $4.30 Cumulative Preferred/2/ 836,585 836,585 836,585 836,585 - 8 1/4% Cumulative Preferred, Series 1992-A/1/ 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 7.50% Cumulative Preferred, Series 2001-A/1, 3/ 12,000,000 - - - - 7.35% Preferred, Series 1993-A/1/ - - - - 4,000,000 - ------------------------------------------------------------------------------------------------------------------------------------ Shareholders of Record at December 31 Common 19,226 19,468 19,991 20,584 10,239 5% Cumulative Preferred/2/ 1,183 1,254 1,363 1,329 - $4.50 Cumulative Preferred/2/ 242 269 288 283 - $4.30 Cumulative Preferred/2/ 513 542 592 380 - 8 1/4% Cumulative Preferred, Series 1992-A/1/ 201 228 258 309 356 7.50% Cumulative Preferred, Series 2001-A/1, 3/ 15 - - - - 7.35% Preferred, Series 1993-A/1/ - - - - 247 - ------------------------------------------------------------------------------------------------------------------------------------ Total 21,380 21,761 22,492 22,885 10,842 ====================================================================================================================================
/1/ Per depositary share. /2/ The 5%, $4.50 and $4.30 Cumulative Preferred Stock was issued by Household to replace Beneficial preferred stock outstanding at the time of the merger. The information presented for these preferred shares is for the period subsequent to the merger. /3/ Issued September 27, 2001. 76 EX-16 13 dex16.txt LETTER RE CHANGES IN CERTIFYING ACCOUNTANTS EXHIBIT 16 Office of the Chief Accountant Securities and Exchange Commission 450 Fifth Street, N. W. Washington, D.C. 20549 March 13, 2002 Dear Sir/Madam: We have read the first four (4) paragraphs of Item 9 included in the Form 10-K for the fiscal year ended December 31, 2001, of Household International, Inc., to be filed with the Securities and Exchange Commission and are in agreement with the statements contained therein. Very truly yours, /s/ Arthur Andersen LLP ----------------------- Arthur Andersen LLP cc: William F. Aldinger, Chairman and CEO, Household International, Inc. EX-21 14 dex21.txt LIST OF OUR SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF HOUSEHOLD INTERNATIONAL, INC. As of December 31, 2001, 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. SUBSIDIARIES/AFFILIATES OF REGISTRANT
- --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Business Name and Address(1) State of % of Voting Shares, - ---------------------------- --------- Part. Interests, Incorporation Voting Trust Certs. ------------- Captal - --------------------------------------------------------------------------------------------------------------- Household Investment Funding, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Aviation, LLC Delaware N/A - --------------------------------------------------------------------------------------------------------------- Hamilton Investments, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Craig-Hallum Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Credit Services (III),Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Renaissance Bankcard Services Oregon 100% - --------------------------------------------------------------------------------------------------------------- Renaissance Bankcard Services of Kentucky Kentucky 100% - --------------------------------------------------------------------------------------------------------------- Household Bank, f.s.b. California 100% - --------------------------------------------------------------------------------------------------------------- HB Receivables Corporation Nevada 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Retail Services, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- HHTS, Inc. Illinois 100% - --------------------------------------------------------------------------------------------------------------- Household Bank (SB), N.A. United States 100% - --------------------------------------------------------------------------------------------------------------- Household Affinity Funding Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Service Corporation of Illinois, Inc. Illinois 100% - --------------------------------------------------------------------------------------------------------------- Household Insurance Services, Inc. Illinois 100% - --------------------------------------------------------------------------------------------------------------- Housekey Financial Corporation Illinois 100% - --------------------------------------------------------------------------------------------------------------- Household Mortgage Services, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Service Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Service Corporation of Delaware Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Capital Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Finance Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- HRSI Funding, Inc. II Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Affinity Funding Corporation II Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Receivables Funding, Inc. III Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Receivables Acquisition Company II Delaware 100% - --------------------------------------------------------------------------------------------------------------- HGF Leasing, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Finance Co. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Loan Corporation of Kentucky Kentucky 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Credit Corp. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Guaranty and Indemnity Insurance Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- Bencharge Credit Service Holding Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Credit Services Northeast, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Payroll Services, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Credit Services of Connecticut Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Credit Services of Mississippi Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Credit Services of South Carolina Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Credit Services Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Alabama Inc. Alabama 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Arizona Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial California Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Colorado Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Commercial Holding Corp. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Commercial Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Finance Leasing Corp. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Leasing Group, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Neil Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Silliman Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Connecticut Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Consumer Discount Co. Pennsylvania 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Delaware Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Discount Co. of Virginia Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Finance Co. of West Virginia Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Finance Services, Inc. Kansas 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Florida Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Florida Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Georgia Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Hawaii Inc. Delaware 100% - ---------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- Beneficial Idaho Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Illinois Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Income Tax Service Holding Co., Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Tax Masters Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Indiana Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Investment Co. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Credit Services of New York, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial New York Inc. New York 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Homeowner Service Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Iowa Inc. Iowa 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Kansas Inc. Kansas 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Kentucky Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Land Company, Inc. New Jersey 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Loan & Thrift Co. Minnesota 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Louisiana Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Maine Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Management Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Management Institute, Inc. New York 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Management Corporation of America Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Franchise Company Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Business Credit Corp. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mark Holding Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Trademark Co. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Management Headquarters, Inc. New Jersey 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Facilities Corporation New Jersey 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Maryland Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Massachusetts Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Michigan Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mississippi Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Missouri, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Montana Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Holding Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Excess Servicing Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Home Mortgage Loan Corp. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Arizona Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Colorado Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Connecticut Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Georgia Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Idaho Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Indiana Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Kansas, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Louisiana Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Maryland Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Massachusetts Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Mississippi Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Missouri, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Nevada Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of New Hampshire Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Oklahoma Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Rhode Island Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of South Carolina Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Texas Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Utah Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of Virginia Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Co. of North Carolina Delaware 100% - --------------------------------------------------------------------------------------------------------------- Decision One Mortgage Company, LLC North Carolina 100% - --------------------------------------------------------------------------------------------------------------- Beneficial National Bank USA Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Service Corporation of New Jersey Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Nebraska Inc. Nebraska 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Nevada Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial New Hampshire Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial New Jersey Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial New Mexico Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial North Carolina Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Oklahoma Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Oregon Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Real Estate Company,Inc. New Jersey 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Rhode Island Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial South Carolina Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial South Dakota Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Systems Development Corp Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Technology Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Tennessee Inc. Tennessee 100% - ---------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- Beneficial Texas Inc. Texas 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Utah Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Vermont Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Virginia Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Washington Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial West Virginia, Inc. West Virginia 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Wisconsin Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Wyoming Inc. Wyoming 100% - --------------------------------------------------------------------------------------------------------------- Benevest Group Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Benevest Service Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- Benevest Services, Inc. Washington 100% - --------------------------------------------------------------------------------------------------------------- Benevest Escrow Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- BMC Holding Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Mortgage Services, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Bon Secour Properties Inc. Alabama 100% - --------------------------------------------------------------------------------------------------------------- Capital Financial Services Inc. Nevada 100% - --------------------------------------------------------------------------------------------------------------- Harbour Island Inc. Florida 100% - --------------------------------------------------------------------------------------------------------------- Harbour Island Venture One, Inc. Florida 100% - --------------------------------------------------------------------------------------------------------------- Harbour Island Venture Three, Inc. Florida 100% - --------------------------------------------------------------------------------------------------------------- Harbour Island Venture Four, Inc. Florida 100% - --------------------------------------------------------------------------------------------------------------- Tampa Island Transit Company, Inc. Florida 100% - --------------------------------------------------------------------------------------------------------------- Personal Mortgage Holding Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- Personal Mortgage Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Southern Trust Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- Southwest Beneficial Finance, Inc. Illinois 100% - --------------------------------------------------------------------------------------------------------------- Wasco Properties, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Real Estate Joint Venture, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Alabama Properties Delaware 100% - --------------------------------------------------------------------------------------------------------------- HFC Card Funding Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- HFC Funding Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- HFC Revolving Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- HFS Funding Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Acquisition Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- HFTA Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Pacific Agency, Inc. Nevada 100% - --------------------------------------------------------------------------------------------------------------- HFTA Consumer Discount Company Pennsylvania 100% - --------------------------------------------------------------------------------------------------------------- HFTA First Financial Corporation California 100% - --------------------------------------------------------------------------------------------------------------- HFTA Second Corporation Alabama 100% - --------------------------------------------------------------------------------------------------------------- HFTA Third Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- HFTA Fourth Corporation Minnesota 100% - --------------------------------------------------------------------------------------------------------------- HFTA Fifth Corporation Nevada 100% - --------------------------------------------------------------------------------------------------------------- HFTA Sixth Corporation Nevada 100% - --------------------------------------------------------------------------------------------------------------- HFTA Seventh Corporation New Jersey 100% - --------------------------------------------------------------------------------------------------------------- HFTA Eighth Corporation Ohio 100% - --------------------------------------------------------------------------------------------------------------- HFTA Ninth Corporation West Virginia 100% - --------------------------------------------------------------------------------------------------------------- HFTA Tenth Corporation Washington 100% - --------------------------------------------------------------------------------------------------------------- Household Finance Corp. of Hawaii Hawaii 100% - --------------------------------------------------------------------------------------------------------------- Pacific Finance Loans California 100% - --------------------------------------------------------------------------------------------------------------- Household Automotive Finance Corp. Delaware 100% - --------------------------------------------------------------------------------------------------------------- ACC Funding Corp. Delaware 100% - --------------------------------------------------------------------------------------------------------------- ACC Receivables Corp. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Automotive Credit Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- OFL A Receivables Corp. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Auto Receivables Corporation Nevada 100% - --------------------------------------------------------------------------------------------------------------- Household Bank (Nevada), N.A. United States 100% - --------------------------------------------------------------------------------------------------------------- Household Card Funding Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Receivables Funding Corporation Nevada 100% - --------------------------------------------------------------------------------------------------------------- Household Receivables Funding Corporation II Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Receivables Funding, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Capital Markets, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Card Services, Inc. Nevada 100% - --------------------------------------------------------------------------------------------------------------- Household Consumer Loan Corporation Nevada 100% - --------------------------------------------------------------------------------------------------------------- Household Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Credit Services, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Renaissance Recovery Services, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Credit Services of Mexico, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Financial Services, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Group, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- N Q Pension Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Loan Corp. of Kentucky Kentucky 100% - --------------------------------------------------------------------------------------------------------------- Household Company of Maine Maine 100% - --------------------------------------------------------------------------------------------------------------- Household Life Insurance Co. of Arizona Arizona 100% - ---------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- Household Insurance Group Holding Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Life Insurance Company of Delaware Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Insurance Agency, Inc. Michigan 100% - --------------------------------------------------------------------------------------------------------------- Household Insurance Agency, Inc. Nevada 100% - --------------------------------------------------------------------------------------------------------------- Wesco Insurance Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- Southwest Texas General Agency, Inc. Texas 100% - --------------------------------------------------------------------------------------------------------------- Service General Insurance Company Ohio 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Ohio Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Service Management Corporation Ohio 100% - --------------------------------------------------------------------------------------------------------------- B.I.G. Insurance Agency, Inc. Ohio 100% - --------------------------------------------------------------------------------------------------------------- BFC Agency, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- BFC Insurance Agency of Nevada Nevada 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Direct, Inc. New Jersey 100% - --------------------------------------------------------------------------------------------------------------- Household Insurance Group, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Service Administrators, Inc. (USA) Colorado 100% - --------------------------------------------------------------------------------------------------------------- Household Life Insurance Company Michigan 100% - --------------------------------------------------------------------------------------------------------------- First Central National Life Insurance Company of New York New York 100% - --------------------------------------------------------------------------------------------------------------- Arcadia Insurance Administrators, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- AHLIC Investment Holdings Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Cal Pacific Services, Inc. California 100% - --------------------------------------------------------------------------------------------------------------- HFS Investments, Inc. Nevada 100% - --------------------------------------------------------------------------------------------------------------- JV Mortgage Capital, Inc. Delaware 50% - --------------------------------------------------------------------------------------------------------------- JV Mortgage Capital, L.P. Delaware 50.5% - --------------------------------------------------------------------------------------------------------------- JV Mortgage Capital Consumer Discount Company Pennsylvania 100% - --------------------------------------------------------------------------------------------------------------- Household Business Services, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Financial Network Alliance, L.L.P. Illinois 50% - --------------------------------------------------------------------------------------------------------------- FNA Consumer Discount Company Pennsylvania 100% - --------------------------------------------------------------------------------------------------------------- Household Commercial Financial Services, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- The Generra Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- Business Realty Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Business Lakeview, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Capital Graphics, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- CPI Enterprises Delaware 100% - --------------------------------------------------------------------------------------------------------------- HCFS Business Equipment Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- HFC Commercial Realty, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- PPSG Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- G.C. Center, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Com Realty, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Lighthouse Property Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household OPEB I, Inc. Illinois 100% - --------------------------------------------------------------------------------------------------------------- HFC Leasing, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- First HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Second HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Valley Properties Corporation Tennessee 100% - --------------------------------------------------------------------------------------------------------------- Fifth HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Sixth HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Seventh HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Eighth HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Tenth HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Eleventh HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Thirteenth HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Fourteenth HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Seventeenth HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Nineteenth HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Twenty second HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Twenty sixth HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Beaver Valley, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Hull 752 Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Hull 753 Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Third HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Macray Corporation California 100% - --------------------------------------------------------------------------------------------------------------- Fourth HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Pargen Corporation California 100% - --------------------------------------------------------------------------------------------------------------- Fifteenth HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Hull Fifty Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- HFC Retail Credit Services, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Capital Investment Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Old K & B Corporation Michigan 94.4% - --------------------------------------------------------------------------------------------------------------- Household Commercial of California, Inc. California 100% - --------------------------------------------------------------------------------------------------------------- Night Watch FSC, Ltd. Bermuda 100% - --------------------------------------------------------------------------------------------------------------- Amstelveen FSC, Ltd. Bermuda 100% - --------------------------------------------------------------------------------------------------------------- Overseas Leasing Two FSC, Ltd. Bermuda 100% - ---------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- Overseas Leasing Four FSC, Ltd. Bermuda 100% - --------------------------------------------------------------------------------------------------------------- Overseas Leasing Five FSC, Ltd. Bermuda 100% - --------------------------------------------------------------------------------------------------------------- Real Estate Collateral Management Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- OLC, Inc. Rhode Island 100% - --------------------------------------------------------------------------------------------------------------- OPI, Inc. Virginia 100% - --------------------------------------------------------------------------------------------------------------- Household Finance Consumer Discount Company Pennsylvania 100% - --------------------------------------------------------------------------------------------------------------- Household Finance Corporation II Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Finance Corporation of Alabama Alabama 100% - --------------------------------------------------------------------------------------------------------------- Household Finance Corporation of California Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Finance Corporation of Nevada Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Finance Realty Corporation of New York Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Finance Corporation of West Virginia West Virginia 100% - --------------------------------------------------------------------------------------------------------------- Household Finance Industrial Loan Company Washington 100% - --------------------------------------------------------------------------------------------------------------- Household Finance Industrial Loan Company of Iowa Iowa 100% - --------------------------------------------------------------------------------------------------------------- Household Finance Realty Corporation of Nevada Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Finance Corporation III Delaware 100% - --------------------------------------------------------------------------------------------------------------- HFC Agency of Connecticut, Inc. Connecticut 100% - --------------------------------------------------------------------------------------------------------------- HFC Agency of Michigan, Inc. Michigan 100% - --------------------------------------------------------------------------------------------------------------- HFC Agency of Missouri, Inc. Missouri 100% - --------------------------------------------------------------------------------------------------------------- Household Realty Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Overseas Leasing One FSC, Ltd. Bermuda 100% - --------------------------------------------------------------------------------------------------------------- Household Retail Services, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- HRSI Funding, Inc. Nevada 100% - --------------------------------------------------------------------------------------------------------------- Household Financial Center Inc. Tennessee 100% - --------------------------------------------------------------------------------------------------------------- Household Industrial Finance Company Minnesota 100% - --------------------------------------------------------------------------------------------------------------- Household Industrial Loan Co. of Kentucky Kentucky 100% - --------------------------------------------------------------------------------------------------------------- Household Recovery Services Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Relocation Management, Inc. Illinois 100% - --------------------------------------------------------------------------------------------------------------- Household Servicing, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Mortgage One Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Mortgage Two Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Sixty First HFC Leasing Corporation Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Pooling Corporation Nevada 100% - --------------------------------------------------------------------------------------------------------------- Household Receivables Acquisition Company Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household REIT Corporation Nevada 100% - --------------------------------------------------------------------------------------------------------------- Household Financial Group, Ltd. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Global Funding, Inc. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Overseas Limited England 100% - --------------------------------------------------------------------------------------------------------------- Household International Netherlands B.V. Netherlands 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Premium Services Limited England 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Limited England 100% - --------------------------------------------------------------------------------------------------------------- Extracard Corp. Delaware 100% - --------------------------------------------------------------------------------------------------------------- Household Ireland (Holdings), Limited Delaware 100% - --------------------------------------------------------------------------------------------------------------- BFC Ireland (Holdings) Limited Ireland 100% - --------------------------------------------------------------------------------------------------------------- BFC Insurance (Life) Limited Ireland 100% - --------------------------------------------------------------------------------------------------------------- BFC Management Services Limited Ireland 100% - --------------------------------------------------------------------------------------------------------------- BFC Insurance Limited Ireland 100% - --------------------------------------------------------------------------------------------------------------- BFC Reinsurance Limited Ireland 100% - --------------------------------------------------------------------------------------------------------------- Household International (U.K.) Limited England 100% - --------------------------------------------------------------------------------------------------------------- D.L.R.S. Limited England 100% - --------------------------------------------------------------------------------------------------------------- HFC Bank plc England 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Financial Services Limited England 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Leasing Limited England 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Trust Investments Limited England 100% - --------------------------------------------------------------------------------------------------------------- Beneficial Trust Nominees Limited England 100% - --------------------------------------------------------------------------------------------------------------- Endeavour Personal Finance Limited England 100% - --------------------------------------------------------------------------------------------------------------- Security Trust Limited England 100% - --------------------------------------------------------------------------------------------------------------- Sterling Credit Limited England 100% - --------------------------------------------------------------------------------------------------------------- Sterling Credit Management Limited England 100% - --------------------------------------------------------------------------------------------------------------- The Loan Corporation Limited England 100% - --------------------------------------------------------------------------------------------------------------- HFC Pension Plan (Ireland) Limited Ireland 100% - --------------------------------------------------------------------------------------------------------------- Hamilton Financial Planning Services Ltd. England 100% - --------------------------------------------------------------------------------------------------------------- Hamilton Insurance Company Limited England 100% - --------------------------------------------------------------------------------------------------------------- Hamilton Life Assurance Company Limited England 100% - --------------------------------------------------------------------------------------------------------------- HFC Pension Plan Limited England 100% - --------------------------------------------------------------------------------------------------------------- Household Funding plc England 100% - --------------------------------------------------------------------------------------------------------------- Household Investments Limited England 100% - --------------------------------------------------------------------------------------------------------------- Household Leasing Limited England 100% - --------------------------------------------------------------------------------------------------------------- Household Management Corporation Limited England and Wales 100% - --------------------------------------------------------------------------------------------------------------- Household Financial Corporation Limited Ontario 100% - --------------------------------------------------------------------------------------------------------------- Household Realty Corporation (1997) Limited British Columbia 100% - ---------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- Household Finance Corporation of Canada Canada 100% - --------------------------------------------------------------------------------------------------------------- Household Realty Corporation Limited Ontario 100% - --------------------------------------------------------------------------------------------------------------- Household Trust Company Canada 100% - --------------------------------------------------------------------------------------------------------------- Household Financial Corporation Inc. Ontario 100% - --------------------------------------------------------------------------------------------------------------- Household Reinsurance Ltd. Bermuda 100% - ---------------------------------------------------------------------------------------------------------------
(1) The business address for Household International and Household Finance Corporation and its subsidiaries is 2700 Sanders Road, Prospect Heights, Illinois 60070. The business address for Household Bank, f.s.b. and its subsidiaries is 2700 Sanders Road, Prospect Heights, Illinois 60070. The business address for Household's United Kingdom subsidiaries is North Street, Winkfield, Windsor, Berkshire SL4 4TD UNITED KINGDOM. The business address for Household's Canadian subsidiaries is 101 Duncan Mill Road, Suite 500, North York, Ontario M3B 1Z3 CANADA. The business address for Household's insurance subsidiaries is 200 Somerset Corporate Boulevard, Suite 100, Bridgewater, New Jersey 08807. The business address for Household Bank, N.A. is 1441 Schilling Place, Salinas, California 93901. The business address for Household's Automotive subsidiaries is 11452 El Camino Real, Suite 400, San Diego, California 92130. EX-23 15 dex23.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- Household International, Inc.: As independent public accountants, we hereby consent to the incorporation of our report dated January 14, 2002, included in this Annual Report on Form 10-K of Household International, Inc. for the year ended December 31, 2001, into the Company's previously filed Registration Statements No. 2-86383, No. 33-21343, No. 2-97495, No. 33-45454, No. 33-45455, No. 33-52211, No. 33-58727, No. 333-00397, No. 33-44066, No. 333-03673, No. 333-39639, No. 333-58287, No. 333-58289, No. 333-58291, No. 333-47073, No. 333-36589, No. 333-30600, No. 333-50000, No. 333-70794, No. 333-71198 and No. 333-83474 on Form S-8 and Registration Statements No. 333-60510, No. 333-65679, and No. 333-01025 on Form S-3. It should be noted that we have not audited any financial statements of the company subsequent to Decemebr 31, 2001 or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen Chicago, Illinois March 13, 2002 EX-99.(B) 16 dex99b.txt RATINGS OF HOUSEHOLD INTL, INC. & ITS SUBSIDIARIES EXHIBIT 99(b) HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES DEBT AND PREFERRED STOCK SECURITIES RATINGS OF THE COMPANY AND ITS SIGNIFICANT SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------ Standard Moody's & Poor's Investors Corporation Service Fitch, Inc. - ------------------------------------------------------------------------------------------------------------ Household International, Inc. Senior debt A A3 A Commercial paper A-1 P-2 F-1 Preferred stock BBB+ Baa2 A- - ------------------------------------------------------------------------------------------------------------ Household Finance Corporation Senior debt A A2 A Senior subordinated debt A- A3 A- Commercial paper A-1 P-1 F-1 - ------------------------------------------------------------------------------------------------------------ Household Bank, f.s.b. Senior debt A A2 A Subordinated debt A- A3 A- Certificates of deposit (long/short-term) A/A-1 A2/P-1 A+/F-1 Thrift notes A-1 P-1 F-1 - ------------------------------------------------------------------------------------------------------------ HFC Bank plc Senior debt A A2 A+ Commercial paper A-1 P-1 NR - ------------------------------------------------------------------------------------------------------------
NR Not rated -----END PRIVACY-ENHANCED MESSAGE-----