-----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, RgQcQz3Odo10iERrpYM9u0/uX2AoO0/1E8Ww71elPFedUCikpcELi+6QmpY8Alw6 8YRPlbNjjApMw+/vXJ3ulw== 0000950131-03-002954.txt : 20030515 0000950131-03-002954.hdr.sgml : 20030515 20030515163209 ACCESSION NUMBER: 0000950131-03-002954 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOUSEHOLD INTERNATIONAL INC CENTRAL INDEX KEY: 0000354964 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 363121988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08198 FILM NUMBER: 03705211 BUSINESS ADDRESS: STREET 1: 2700 SANDERS RD CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 BUSINESS PHONE: 8475645000 MAIL ADDRESS: STREET 1: 2700 SANDERS ROAD CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 10-Q 1 d10q.txt FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 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 86-1052062 (State of Incorporation) (I.R.S. Employer Identification No.) 2700 Sanders Road, Prospect Heights, Illinois 60070 (Address of principal executive offices) (Zip Code) (847) 564-5000 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] At April 30, 2003, there were 50 shares of the registrant's common stock outstanding. The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format. HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES Table of Contents
Page ---- PART I. Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Income (Unaudited) ............ 2 Condensed Consolidated Balance Sheets - March 31, 2003 (Unaudited) and December 31, 2002.................... 3 Condensed Consolidated Statements of Cash Flows (Unaudited) ........ 4 Notes to Interim Condensed Consolidated Financial Statements (Unaudited).............................................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 15 Item 4. Controls and Procedures............................................. 27 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K.................................... 28 Signature ......................................................................... 30 Certification of Chief Executive Officer .......................................... 31 Certification of Principal Financial Officer ...................................... 32
1 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Household International, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------------------------------- March 29 January 1 Three months through through ended (In millions) March 31, 2003 March 28, 2003 March 31, 2002 - -------------------------------------------------------------------------------------------------------- (Successor) (Predecessor) (Predecessor) (Note 2) (Note 2) (Note 2) Finance and other interest income $74.5 $2,470.5 $2,535.7 Interest expense 14.6 897.4 938.8 - -------------------------------------------------------------------------------------------------------- Net interest margin 59.9 1,573.1 1,596.9 Provision for credit losses on owned receivables 33.5 976.1 923.0 - -------------------------------------------------------------------------------------------------------- Net interest margin after provision for credit losses 26.4 597.0 673.9 - -------------------------------------------------------------------------------------------------------- Securitization revenue 8.5 432.6 518.3 Insurance revenue 5.7 171.6 170.1 Investment income 1.3 80.0 46.2 Fee income 8.8 288.3 216.5 Other income 5.1 238.7 188.0 - -------------------------------------------------------------------------------------------------------- Total other revenues 29.4 1,211.2 1,139.1 - -------------------------------------------------------------------------------------------------------- Salaries and fringe benefits 17.3 491.3 445.3 Sales incentives 1.4 37.7 54.1 Occupancy and equipment expense 3.5 97.7 92.2 Other marketing expenses 4.7 138.8 140.4 Other servicing and administrative expenses 9.2 313.7 231.7 Amortization of acquired intangibles 2.0 12.3 19.8 HSBC acquisition related costs incurred by Household -- 198.2 -- Policyholders' benefits 3.0 91.0 84.0 - -------------------------------------------------------------------------------------------------------- Total costs and expenses 41.1 1,380.7 1,067.5 - -------------------------------------------------------------------------------------------------------- Income before income taxes 14.7 427.5 745.5 Income taxes 5.0 181.8 254.5 - -------------------------------------------------------------------------------------------------------- Net income $ 9.7 $ 245.7 $ 491.0 ========================================================================================================
See notes to interim condensed consolidated financial statements. 2 Household International, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------- March 31, December 31, (In millions, except share data) 2003 2002 - ---------------------------------------------------------------------------------------------------- (Unaudited) (Successor) (Predecessor) (Note 2) (Note 2) ASSETS Cash $ 503.2 $ 797.7 Investment securities 7,081.2 7,584.0 Receivables, net 84,327.7 82,050.5 Acquired intangibles, net 1,880.0 386.4 Goodwill 7,036.0 1,122.1 Properties and equipment, net 521.1 535.1 Real estate owned 444.9 427.1 Derivative financial assets 2,523.3 1,863.5 Other assets 3,098.4 3,094.2 - ---------------------------------------------------------------------------------------------------- Total assets $107,415.8 $97,860.6 ==================================================================================================== LIABILITIES AND SHAREHOLDER'S (S') EQUITY Debt: Deposits $ 894.6 $ 821.2 Commercial paper, bank and other borrowings 5,658.9 6,128.3 Senior and senior subordinated debt (with original maturities over one year) 78,104.7 74,776.2 - ---------------------------------------------------------------------------------------------------- Total debt 84,658.2 81,725.7 Insurance policy and claim reserves 1,350.7 1,047.6 Derivative related liabilities 1,489.3 1,183.9 Other liabilities 3,173.5 2,512.3 - ---------------------------------------------------------------------------------------------------- Total liabilities 90,671.7 86,469.5 - ---------------------------------------------------------------------------------------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts* 1,021.9 975.0 Preferred stock 1,100.0 1,193.2 Common shareholder's (s') equity: Common stock, $0.01 and $1.00 par value, 100 and 750,000,000 shares authorized, 50 and 551,811,025 shares issued at March 31, 2003 and December 31, 2002, respectively -- 551.8 Additional paid-in capital 14,658.5 1,911.3 Retained earnings 9.7 9,885.6 Accumulated other comprehensive income (loss) (46.0) (694.9) Less common stock in treasury, 0 and 77,197,686 shares at March 31, 2003 and December 31, 2002, respectively, at cost -- (2,430.9) - ---------------------------------------------------------------------------------------------------- Total common shareholder's (s') equity 14,622.2 9,222.9 - ---------------------------------------------------------------------------------------------------- Total liabilities and shareholder's (s') equity $107,415.8 $97,860.6 ====================================================================================================
* As described in note 8 to the condensed consolidated financial statements, the sole assets of the trusts are Junior Subordinated Deferrable Interest Notes issued by Household International, Inc. in November 2001, January 2001, June 2000, March 1998 and June 1995, bearing interest at 7.50, 8.25, 10.00, 7.25 and 8.25 percent, respectively, and due November 2031, January 2031, June 2030, December 2037 and June 2025, respectively. See notes to interim condensed consolidated financial statements. 3 Household International, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ---------------------------------------------------------------------------------------------------- March 29 January 1 Three months through through ended March 31, March 28, March 31, (In millions) 2003 2003 2002 - ---------------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATIONS (Successor) (Predecessor) (Predecessor) (Note 2) (Note 2) (Note 2) Net income $ 9.7 $ 245.7 $ 491.0 Adjustments to reconcile net income to cash provided by operations: Provision for credit losses on owned receivables 33.5 976.1 923.0 Insurance policy and claim reserves 3.0 47.2 115.8 Depreciation and amortization 4.2 53.5 63.0 Interest-only strip receivables, net change 5.1 36.4 (29.0) Other, net (95.0) 106.0 424.3 - ---------------------------------------------------------------------------------------------------- Cash (used in) provided by operations (39.5) 1,464.9 1,988.1 - ---------------------------------------------------------------------------------------------------- INVESTMENTS IN OPERATIONS Investment securities: Purchased -- (1,046.7) (428.7) Matured 8.0 584.2 147.2 Sold -- 768.4 190.3 Short-term investment securities, net change 546.5 (375.0) (1,375.5) Receivables: Originations, net (382.0) (8,302.3) (9,850.2) Purchases and related premiums (116.8) (129.0) (184.9) Initial and fill-up securitizations (154.2) 7,300.1 8,674.1 Whole loan sales -- 40.7 882.3 Properties and equipment purchased -- (21.6) (57.9) Properties and equipment sold -- 0.1 1.5 - ---------------------------------------------------------------------------------------------------- Cash decrease from investments in operations (98.5) (1,181.1) (2,001.8) - ---------------------------------------------------------------------------------------------------- FINANCING AND CAPITAL TRANSACTIONS Short-term debt and demand deposits, net change 17.0 (513.5) (4,260.8) Time certificates, net change -- 150.3 (367.2) Senior and senior subordinated debt issued -- 4,360.9 7,190.0 Senior and senior subordinated debt retired (53.6) (4,029.8) (2,863.4) Policyholders' benefits paid (1.2) (35.6) (28.2) Cash received from policyholders 2.6 33.1 16.9 Shareholders' dividends (1.8) (141.4) (108.9) Purchase of treasury stock -- (164.1) (100.0) Issuance of common stock -- 62.2 32.0 Redemption of preferred stock -- (114.4) -- Issuance of preferred stock -- -- 387.4 - ---------------------------------------------------------------------------------------------------- Cash decrease from financing and capital transactions (37.0) (392.3) (102.2) - ---------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 4.2 (15.2) 8.6 - ---------------------------------------------------------------------------------------------------- Decrease in cash (170.8) (123.7) (107.3) Cash at beginning of period 674.0 797.7 543.6 - ---------------------------------------------------------------------------------------------------- Cash at end of period $ 503.2 $ 674.0 $ 436.3 ==================================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 70.8 $ 897.2 $ 845.5 Income taxes paid -- 39.6 23.6 - ---------------------------------------------------------------------------------------------------- SUPPLEMENTAL NON-CASH FINANCING AND CAPITAL ACTIVITIES Push-down of purchase price by Parent (Note 2) $ -- $14,658.5 $ -- Exchange of cumulative preferred stock for cumulative preferred stock issued to Parent -- 1,100.0 -- - ----------------------------------------------------------------------------------------------------
See notes to interim condensed consolidated financial statements. 4 Household International, Inc. and Subsidiaries NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Household International, Inc. ("Household") and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Household and its subsidiaries may also be referred to in this Form 10-Q as "we," "us" or "our." These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2002. The chief executive officer and principal financial officer of Household have certified that the information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of Household. These certifications are included as Exhibits 99.2 and 99.3 to this Form 10-Q. The chief executive officer and principal financial officer of Household have also provided certifications as to the effectiveness of our disclosure controls and procedures which are included on pages 31 and 32. 2. MERGER WITH HSBC On March 28, 2003, HSBC Holdings plc ("HSBC") completed its acquisition of Household by way of merger with H2 Acquisition Corporation ("H2"), a wholly-owned subsidiary of HSBC, acquiring 100% of the voting equity interest of Household in a purchase business combination. HSBC believes that the merger offers significant opportunities to extend its business model into countries and territories currently served by HSBC and broadens the product range available to the enlarged customer base. Subsequent to the merger, H2 was renamed "Household International, Inc." Under the terms of the merger agreement, each share of our approximately 476.0 million outstanding common shares at the time of merger was converted into the right to receive, at the holder's election, either 2.675 ordinary shares of HSBC, of nominal value $0.50 each ("HSBC Ordinary Shares"), or 0.535 American depositary shares, each representing an interest in five HSBC Ordinary Shares. Additionally, each of Household's depositary shares representing, respectively, one-fortieth of a share of 8-1/4% cumulative preferred stock, Series 1992-A, one-fortieth of a share of 7.50% cumulative preferred stock, Series 2001-A, one-fortieth of a share of 7.60% cumulative preferred stock, Series 2002-A and one-fortieth of a share of 7-5/8% cumulative preferred stock, Series 2002-B was converted into the right to receive $25 in cash per depositary share, plus accrued and unpaid dividends up to but not including the effective date of the merger which was an aggregate amount of approximately $1.1 billion. In consideration of HSBC transfering sufficient funds to make the payments described above with respect to Household's depositary shares, we issued a new series of 6.5% cumulative preferred stock in the amount of $1.1 billion to HSBC on March 28, 2003. The preferred stock is redeemable by Household at any time after March 31, 2008. Also on March 28, 2003, we called for redemption all the issued and outstanding shares of our 5% Cumulative Preferred Stock, $4.50 Cumulative Preferred Stock and $4.30 Cumulative Preferred Stock totaling $114.4 million. Pursuant to the terms of these issues of preferred stock, we paid a redemption price of $50.00 per share of 5% Cumulative Preferred Stock, $103.00 per share of $4.50 Cumulative Preferred Stock and $100.00 per share of $4.30 Cumulative Preferred Stock, plus, in each case, all dividends accrued and unpaid, whether or not earned or declared, to the redemption date. Additionally, on March 28, 2003, we declared a dividend of $0.8694 per share on Household Common Stock, payable on May 6, 2003 to its holders of record on March 28, 2003. 5 In conjunction with HSBC's acquisition of Household, we incurred acquisition related costs of $198.2 million. Consistent with the guidelines for accounting for business combinations, these costs were expensed in our income statement on March 28, 2003. These costs were comprised of the following: (In millions) - -------------------------------------------------------------------------------- Payments to executives under existing employment agreements $ 97.0 Investment banking, legal and other costs 101.2 - -------------------------------------------------------------------------------- Total $198.2 - -------------------------------------------------------------------------------- In accordance with the guidelines for accounting for business combinations, the purchase price paid by HSBC plus related purchase accounting adjustments have been "pushed-down" and recorded in our financial statements for the period subsequent to March 28, 2003. This has resulted in a new basis of accounting reflecting the fair market value of our assets and liabilities for the "successor" period beginning March 29, 2003. Information for all "predecessor" periods prior to the merger are presented using our historical basis of accounting. Results for the eighty-seven day period ended March 28, 2003 and the three-day period ended March 31, 2003 should not be considered indicative of the results for any future quarters or the year ending December 31, 2003. The purchase price paid by HSBC plus related purchase accounting adjustments was valued at approximately $14.7 billion and is presented as "Additional paid-in capital" in the accompanying condensed consolidated balance sheet. The $14.7 billion purchase price consisted of the following: (In millions) - -------------------------------------------------------------------------------- Value of HSBC ordinary shares issued $14,365.7 Fair value of outstanding Household stock options, net of unearned compensation 111.9 Fair value of outstanding Household restricted stock rights, net of unearned compensation 1.9 Fair value of equity portion of adjustable conversion-rate equity security units 21.0 Acquisition costs incurred by HSBC 158.0 - -------------------------------------------------------------------------------- Total purchase price $14,658.5 ================================================================================ As of the acquisition date, we recorded our assets and liabilities at their estimated fair values. These fair value adjustments resulted in approximately $7.0 billion of goodwill and $1.9 billion of acquired intangibles being recorded (representing $5.9 billion of incremental goodwill and $1.5 billion of incremental acquired intangibles). Additionally, fair value adjustments of approximately $1.2 billion were made to increase assets and approximately $3.0 billion to increase liabilities to fair value. Due to the recent timing of the acquisition, these fair value adjustments represent preliminary estimates and are subject to further adjustment as additional information, appraisals, or other valuation data are obtained. Goodwill has not yet been allocated to our operating units. None of the goodwill is expected to be deductible for tax purposes. Approximately $1.9 billion of acquired intangibles were recorded as part of the allocation of the purchase price. Total acquired intangibles resulting from the merger were comprised of the following: (In millions) - -------------------------------------------------------------------------------- Trademarks, customer lists, and technology $ 200.0 Retail services merchant relationships 235.2 Purchased credit card relationships 1,446.8 - -------------------------------------------------------------------------------- Total acquired intangibles $1,882.0 ================================================================================ The trademarks are not subject to amortization. The remaining acquired intangibles are being amortized on a straight-line basis over their estimated useful lives. These useful lives range from 5 years for technology, customer lists and the retail services merchant relationships to approximately 9 years for certain purchased credit card relationships. 6 3. INVESTMENT SECURITIES Investment securities consisted of the following available-for-sale investments:
March 31, December 31, 2003 2002 - ------------------------------------------------------------------------------------------------ Amortized Fair Amortized Fair (In millions) Cost Value Cost Value - ------------------------------------------------------------------------------------------------ Corporate debt securities $2,092.5 $2,084.2 $2,032.8 $2,110.0 Money market funds 1,409.6 1,409.6 2,177.2 2,177.2 Certificates of deposit 156.6 156.6 167.7 173.0 U.S. government and federal agency debt securities 2,122.0 2,120.7 1,804.4 1,820.8 Marketable equity securities 18.7 19.1 28.6 19.8 Non-government mortgage backed securities 641.3 641.3 660.5 669.0 Other 565.5 564.9 523.8 536.3 - ------------------------------------------------------------------------------------------------ Subtotal 7,006.2 6,996.4 7,395.0 7,506.1 Accrued investment income 84.8 84.8 77.9 77.9 - ------------------------------------------------------------------------------------------------ Total available-for-sale investments $7,091.0 $7,081.2 $7,472.9 $7,584.0 ================================================================================================
4. RECEIVABLES Receivables consisted of the following:
March 31, December 31, (In millions) 2003 2002 - ---------------------------------------------------------------------------------- Real estate secured $ 47,256.6 $ 45,818.5 Auto finance 2,156.2 2,023.8 MasterCard/(1)/ Visa/(1)/ 8,452.5 8,946.5 Private label 11,189.4 11,339.6 Personal non-credit card 13,927.0 13,970.9 Commercial and other 456.7 463.0 - ---------------------------------------------------------------------------------- Total owned receivables 83,438.4 82,562.3 Purchase accounting fair value adjustments 1,773.8 -- Accrued finance charges 1,503.5 1,537.6 Credit loss reserve for owned receivables (3,483.1) (3,332.6) Unearned credit insurance premiums and claims reserves (847.2) (799.0) Interest-only strip receivables 1,109.4 1,147.8 Amounts due and deferred from receivable sales 832.9 934.4 - ---------------------------------------------------------------------------------- Total owned receivables, net 84,327.7 82,050.5 Receivables serviced with limited recourse 24,255.7 24,933.5 - ---------------------------------------------------------------------------------- Total managed receivables, net $108,583.4 $106,984.0 ==================================================================================
/(1)/ MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of VISA USA, Inc. Purchase accounting fair value adjustments represent preliminary adjustments which have been "pushed down" to record our receivables at fair value at the acquisition date and are subject to change. 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 $1,776.2 million at March 31, 2003 and $1,759.5 million at December 31, 2002. Interest-only strip receivables also included fair value mark-to-market adjustments of $0 at March 31, 2003 and an increase of $389.2 million at December 31, 2002. 7 Receivables serviced with limited recourse consisted of the following:
March 31, December 31, (In millions) 2003 2002 - -------------------------------------------------------------------------------------- Real estate secured $ 339.2 $ 456.2 Auto finance 5,226.8 5,418.6 MasterCard/Visa 9,941.8 10,006.1 Private label 3,577.1 3,577.1 Personal non-credit card 5,170.8 5,475.5 - -------------------------------------------------------------------------------------- Total $24,255.7 $24,933.5 ======================================================================================
The combination of receivables owned and receivables serviced with limited recourse, which we consider our managed portfolio, is shown below:
March 31, December 31, (In millions) 2003 2002 - -------------------------------------------------------------------------------------- Real estate secured $ 47,595.8 $ 46,274.7 Auto finance 7,383.0 7,442.4 MasterCard/Visa 18,394.3 18,952.6 Private label 14,766.5 14,916.7 Personal non-credit card 19,097.8 19,446.4 Commercial and other 456.7 463.0 - -------------------------------------------------------------------------------------- Total $107,694.1 $107,495.8 ======================================================================================
5. CREDIT LOSS RESERVES An analysis of credit loss reserves for the three months ended March 31 was as follows:
March 31, March 31, (In millions) 2003 2002 - -------------------------------------------------------------------------------------- Owned receivables: Credit loss reserves at beginning of period $3,332.6 $2,663.1 Provision for credit losses 1,009.6 923.0 Charge-offs (934.3) (778.6) Recoveries 60.4 59.9 Other, net 14.8 9.2 - -------------------------------------------------------------------------------------- Credit loss reserves for owned receivables at March 31 3,483.1 2,876.6 - -------------------------------------------------------------------------------------- Receivables serviced with limited recourse: Credit loss reserves at beginning of period 1,759.5 1,148.3 Provision for credit losses 407.3 439.3 Charge-offs (418.5) (335.9) Recoveries 20.1 23.1 Other, net 7.8 (4.9) - -------------------------------------------------------------------------------------- Credit loss reserves for receivables serviced with limited recourse at March 31 1,776.2 1,269.9 - -------------------------------------------------------------------------------------- Total credit loss reserves for managed receivables at March 31 $5,259.3 $4,146.5 ======================================================================================
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 are intended to be adequate but not excessive. We estimate probable losses for consumer receivables based on delinquency and restructure status and past loss experience. Credit loss reserves take into account whether loans have been restructured, rewritten or are subject to forbearance, credit counseling accommodation, modification, extension or deferment. Our credit loss reserves also take into consideration the loss severity expected based on the underlying collateral, if any, for the loan. Approximately two-thirds of all restructured receivables are secured products which may have less loss severity exposure because of the 8 underlying collateral. In addition, loss reserves on consumer receivables reflect our assessment of portfolio risk factors which may not be fully reflected in the statistical calculation which uses roll rates and migration analysis. Roll rates and migration analysis are techniques used to estimate the likelihood that a loan will progress through the various delinquency buckets and ultimately charge off. Risk factors considered in establishing loss reserves on consumer receivables include recent growth, product mix, bankruptcy trends, geographic concentrations, economic conditions and current levels of charge-offs and delinquencies. HSBC intends, subject to receipt of regulatory and other approvals, to hold our domestic private label credit card receivables within HSBC's U.S. banking subsidiary. As a result, HSBC anticipates regulatory accounting charge-off, loss provisioning and account management guidelines issued by the Federal Financial Institutions Examination Council, or FFIEC, will need to be applied to these receivables. Implementation of such guidelines will result in private label credit card receivables being charged-off at 6 months contractually delinquent (end of the month 60 days after notification for receivables involving a bankruptcy) versus the current practice of generally being charged-off the month following the month in which the account becomes 9 months contractually delinquent (end of the month 90 days after notification for receivables involving a bankruptcy). HSBC's plans for ultimate collection on these receivables will therefore be demonstrably different from the current practice and may require different reserve requirements. As of March 31, 2003, we have not allocated any purchase price adjustment to owned loss reserves in contemplation of this change as the process for movement of our private label card receivables to HSBC's U.S. banking subsidiary has not been finalized and regulatory approval requests have not yet been initiated. We currently estimate that such fair value adjustment, to the extent we proceed with this business plan, would be an increase to owned loss reserves for these private label credit card receivables to reflect the expected impact of the implementation of the regulatory guidelines. We and HSBC are evaluating whether select other products will also be held in the HSBC U.S. banking subsidiary. 6. ACQUIRED INTANGIBLES Acquired intangibles consisted of the following: (In millions) Accumulated Carrying March 31, 2003 Gross Amortization Value - -------------------------------------------------------------------------------- Trademarks, customer lists, and technology $ 200.0 .2 $ 199.8 Retail service merchant relationships 235.2 $ .4 234.8 Purchased credit card relationships 1,446.8 1.4 1,445.4 - -------------------------------------------------------------------------------- Acquired intangibles $1,882.0 $2.0 $1,880.0 ================================================================================ (In millions) Accumulated Carrying December 31, 2002 Gross Amortization Value - -------------------------------------------------------------------------------- Purchased credit card relationships $1,038.6 $670.8 $367.8 Other intangibles 26.5 7.9 18.6 - -------------------------------------------------------------------------------- Acquired intangibles $1,065.1 $678.7 $386.4 ================================================================================ Estimated amortization expense associated with our acquired intangibles for each of the following years is as follows: - -------------------------------------------------------------------------------- (In millions) Year ending December 31, - -------------------------------------------------------------------------------- 2003 $187.1 2004 246.8 2005 246.8 2006 246.8 2007 246.8 - -------------------------------------------------------------------------------- 9 7. INCOME TAXES Our effective tax rate was 34.0 percent for the three-day period ended March 31, 2003 (successor); 42.5 percent for the eighty-seven day period ended March 28, 2003 (predecessor); and 34.1 percent for the first three months of 2002 (predecessor). The effective tax rate for the eighty-seven day period ended March 28, 2003 was adversely impacted by the non-deductibility of certain HSBC acquisition related costs. Excluding acquisition related costs of $198.2 million, which resulted in a $27.3 million tax benefit, our effective tax rate was 33.3 percent for the period ended March 28, 2003. The effective tax rate differs from the statutory federal income tax rate primarily because of the effects of state and local income taxes and tax credits. 8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS We have formed special purpose trusts for the purpose of issuing trust preferred securities. The sole assets of these trusts are Junior Subordinated Deferrable Interest Notes ("Junior Subordinated Notes") issued by Household. The following table summarizes our company obligated mandatorily redeemable preferred securities of subsidiary trusts ("Preferred Securities") and the related Junior Subordinated Notes:
- ------------------------------------------------------------------------------------------------------------------------ Household Capital Household Household Household Household (Dollar amounts are Trust VII Capital Trust VI Capital Trust V Capital Trust IV Capital Trust I 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 2006 January 2006 June 2005 March 2003 June 2000 Stated maturity November 2031 January 2031 June 2030 December 2037 June 2025 - ------------------------------------------------------------------------------------------------------------------------
The Preferred Securities must be redeemed when the Junior Subordinated Notes are paid. The Junior Subordinated Notes have a stated maturity date, but are redeemable by Household, in whole or in part, beginning on the dates indicated above at which time the preferred securities are callable at par ($25 per Preferred Security) plus accrued and unpaid dividends. Dividends on the Preferred Securities are cumulative, payable quarterly in arrears, and are deferrable at Household's option for up to five years. Household cannot pay dividends on its preferred and common stocks during such deferments. The Preferred Securities have a liquidation value of $25 per preferred security. HCT I may elect to extend the maturity of its Preferred Securities to June 2044. Dividends on the Preferred Securities have been classified as interest expense in our statements of income. HCT I, HCT IV, HCT V, HCT VI and HCT VII (collectively, "the Trusts") are wholly owned subsidiaries of Household. Household's obligations with respect to the Junior Subordinated Notes, when considered together with certain undertakings of Household with respect to the Trusts, constitute full and unconditional guarantees by Household of the Trust's obligations under the respective Preferred Securities. The Preferred Securities are classified in our balance sheet as company obligated mandatorily redeemable preferred securities of subsidiary trusts (representing the minority interests in the trusts). 9. FORWARD PURCHASE AGREEMENTS Upon completion of our acquisition by HSBC, our agreements to purchase shares of Household common stock on a forward basis were converted into agreements to purchase HSBC Ordinary Shares on a forward basis. At March 31, 2003, we had agreements to purchase, on a forward basis, approximately 5.3 million HSBC Ordinary Shares at a weighted-average forward price of $17.74 per share. As a result of settlements under our outstanding forward purchase agreements prior to March 29, 2003, we received 2.9 million 10 shares of Household common stock at an average cost of $57.34 per share during the current quarter. On April 30, 2003, we elected to net cash settle all open forward purchase agreements with the counterparty which resulted in a payment of approximately $36.7 million being made to the counterparty. 10. COMPREHENSIVE INCOME Comprehensive income (loss) was ($36.3) million for the three day period ended March 31, 2003 (successor) and $396.3 million for the eighty-seven day period ended March 28, 2003 (predecessor). Comprehensive income was $827.8 million for the quarter ended March 31, 2002 (predecessor). The components of accumulated other comprehensive income (loss) were as follows:
- ------------------------------------------------------------------------------------------- March 31, December 31, (In millions) 2003 2002 - ------------------------------------------------------------------------------------------- Unrealized losses on cash flow hedging instruments $(43.8) $(736.5) Unrealized (losses) gains on investments and interest-only strip receivables (6.6) 319.3 Foreign currency translation adjustments 4.4 (277.7) - ------------------------------------------------------------------------------------------- Accumulated other comprehensive income (loss) $(46.0) $(694.9) ===========================================================================================
11. STOCK-BASED COMPENSATION In 2002, we adopted the fair value method of accounting for our stock option and employee stock purchase plans. We elected to recognize stock compensation cost prospectively for all new awards granted under those plans beginning January 1, 2002 as provided under SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure (an amendment of FASB Statement No. 123)" ("SFAS No. 148"). Prior to 2002, we applied the recognition and measurement provisions of APB No. 25, "Accounting for Stock Issued to Employees" in accounting for those plans. No compensation expense for these plans is reflected in net income for the quarter ended March 31, 2002 as all employee stock options granted prior to January 1, 2002 had an exercise price equal to the market value of the underlying common stock on the date of grant and the purchase price for the shares issued under the employee stock purchase plan was not less than 85 percent of the market price. Because option expense is recognized over the vesting period of the awards, generally four years, compensation expense included in the determination of net income for the predecessor and successor periods in 2003 is less than that which would have been recognized if the fair value method had been applied to all awards since the original effective date of FASB Statement No. 123. In conjunction with the HSBC merger, outstanding stock options and restricted stock rights ("RSRs") granted under our various equity plans were assumed by HSBC and converted into options to purchase or rights to receive ordinary shares of HSBC. Stock options and RSRs which were issued prior to November 2002 vested upon completion of the merger. The employee stock purchase plan was terminated on March 7, 2003 and Household stock was purchased on that date. These shares of Household common stock were converted into HSBC shares at the time of the merger. All rights to HSBC shares were adjusted based upon the agreed-upon merger exchange ratio as described in Note 2. 11 The following table illustrates the effect on net income if the fair value method had been applied to all outstanding and unvested awards in each period.
March 29 January 1 Three months Through through ended March 31, March 28, March 31, 2003 2003 2002 (In millions) (Successor) (Predecessor) (Predecessor) - --------------------------------------------------------------------------------------------------------- Net income, as reported $9.7 $245.7 $491.0 Add stock-based employee compensation expense included in reported net income, net of tax: Stock option and employee stock purchase plans -- 6.6 -- Restricted stock rights -- 11.5 8.5 Deduct stock-based employee compensation expense determined under the fair value method, net of tax: Stock option and employee stock purchase plans -- (52.6) (7.1) Restricted stock rights -- (11.5) (8.5) - --------------------------------------------------------------------------------------------------------- Pro forma net income $9.7 $199.7 $483.9 =========================================================================================================
The pro forma compensation expense included in the table above may not be representative of the actual effects on net income for future years. 12. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued FASB Interpretation Number 46, "Consolidation of Variable Interest Entities" ("Interpretation No. 46"). Interpretation No. 46 clarifies the application of Accounting Research Bulletin Number 51, "Consolidated Financial Statements" to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Qualifying special purpose entities as defined by FASB Statement Number 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" are excluded from the scope of Interpretation No. 46. Interpretation No. 46 applies immediately to all variable interest entities created after January 31, 2003 and is effective for fiscal periods beginning after July 1, 2003 for existing variable interest entities. The adoption of Interpretation No. 46 is currently not expected to have a material impact to our financial position or results of operations. On April 30, 2003, the Financial Accounting Standards Board issued Statement Number 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement Number 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The guidelines are to be applied prospectively. The provisions of SFAS 149 that relate to Statement 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. We do not expect SFAS No. 149 will have a material impact to our financial position or results of operations. The Financial Accounting Standards Board issued Statement Number 150, "Accounting for Financial Instruments with Characteristics of Liabilities, Equity, or Both" ("SFAS No. 150") in the second quarter of 2003. This limited scope statement prescribes changes to the classification of preferred securities of subsidiary trusts and the accounting for forward purchase contracts issued by a company in its own stock. SFAS No. 150 requires all preferred securities of subsidiary trusts to be classified as debt on the consolidated balance sheet and the related dividends as interest expense. Upon adoption of SFAS No. 150, we will be required to reclassify company obligated mandatorily redeemable preferred securities of subsidiary trusts totaling $1,021.9 million to senior and senior subordinated debt. Dividends on these securities are currently reported as interest expense in our consolidated statements of income. SFAS No. 150 also requires that all forward purchase contracts issued by a company in its 12 own stock with alternative settlement methods be recorded as an asset or liability and measured at fair value with changes in fair value recorded in earnings. The statement is effective for financial instruments entered into after May 31, 2003. We do not expect adoption of SFAS No. 150 will have a material impact to our financial position or results of operations. 13. SEGMENT REPORTING We have three reportable segments: Consumer, Credit Card Services and International. Our Consumer segment consists of our consumer lending, mortgage services, retail services and auto finance businesses. Our Credit Card Services segment consists of our domestic MasterCard and Visa credit card business. Our International segment consists of our foreign operations in the United Kingdom and Canada. There has been no change in the basis of our segmentation or in the measurement of segment profit as compared with the presentation in our Annual Report on Form 10-K for the year ended December 31, 2002. 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 revenues. Income statement information included in the table for the three months ended March 31, 2003 combines January 1 through March 28, 2003 (the "predecessor period") and March 29 to March 31, 2003 (the "successor period") in order to present "combined" financial results for the three month period. Fair value adjustments related to purchase accounting and related amortization have been allocated to Corporate, which is included in the "All Other" caption within our segment disclosure. 13 Reportable Segments - Managed Basis
Credit Card Inter- All (In millions) Consumer Services national Other Totals - --------------------------------------------------------------------------------------------------------- Three months ended March 31, 2003 Net interest margin $ 1,738.2 $ 478.6 $ 179.1 $ (37.3) $ 2,358.6 Fee income 105.7 326.3 18.6 1.1 451.7 Other revenues, excluding fee income 8.7 58.0 72.7 367.6 507.0 Intersegment revenues 25.9 8.6 2.6 (.7) 36.4 Provision for credit losses 939.8 391.2 84.9 (.3) 1,415.6 Net income 216.3 127.8 31.2 (95.6) 279.7 Operating net income 216.3 127.8 31.2 71.7//(6)// 447.0 Receivables 80,474.7 17,157.8 9,117.8 943.8 107,694.1 Assets 83,406.1 19,753.6 10,484.6 26,901.9 140,546.2 - --------------------------------------------------------------------------------------------------------- Three months ended March 31, 2002 Net interest margin $ 1,658.2 $ 417.8 $ 153.4 $ 23.8 $ 2,253.2 Fee income 88.6 270.5 10.1 2.7 371.9 Other revenues, excluding fee income 165.4 66.9 53.3 312.2 597.8 Intersegment revenues 35.8 10.0 2.3 (.5) 47.6 Provision for credit losses 921.0 370.6 62.1 33.1 1,386.8 Net income 307.2 77.4 25.8 95.2 505.6 Receivables 76,987.6 16,194.8 7,000.6 994.7 101,177.7 Assets 79,184.6 17,256.2 8,314.8 16,142.2 120,897.8 - --------------------------------------------------------------------------------------------------------- Managed Owned Adjustments/ Basis Basis Reconciling Consolidated Securitization Consolidated (In millions) Items Totals Adjustments Totals - --------------------------------------------------------------------------------------------------------- Three months ended March 31, 2003 Net interest margin $ -- $ 2,358.6 $ (725.6)//(4)// $ 1,633.0 Fee income -- 451.7 (154.6)//(4)// 297.1 Other revenues, excluding fee income (36.4)//(1)// 470.6 472.9//(4)// 943.5 Intersegment revenues (36.4)//(1)// -- -- -- Provision for credit losses 1.3//(2)// 1,416.9 (407.3)//(4)// 1,009.6 Net income (24.3) 255.4 -- 255.4 Operating net income (24.3) 422.7 -- 422.7 Receivables -- 107,694.1 (24,255.7)//(5)// 83,438.4 Assets (8,874.7)//(3)// 131,671.5 (24,255.7)//(5)// 107,415.8 - --------------------------------------------------------------------------------------------------------- Three months ended March 31, 2002 Net interest margin $ -- $ 2,253.2 $ (656.3)//(4)// $ 1,596.9 Fee income -- 371.9 (155.4)//(4)// 216.5 Other revenues, excluding fee income (47.6)//(1)// 550.2 372.4//(4)// 922.6 Intersegment revenues (47.6)//(1)// -- -- -- Provision for credit losses (24.5)//(2)// 1,362.3 (439.3)//(4)// 923.0 Net income (14.6) 491.0 -- 491.0 Receivables -- 101,177.7 (21,583.2)//(5)// 79,594.5 Assets (9,471.9)//(3)// 111,425.9 (21,583.2)//(5)// 89,842.7 - ---------------------------------------------------------------------------------------------------------
//(1)// Eliminates intersegment revenues. //(2)// Eliminates bad debt recovery sales and reclassifies loss reserves between operating segments. //(3)// Eliminates investments in subsidiaries and intercompany borrowings. //(4)// Reclassifies net interest margin, fee income and loss provisions relating to securitized receivables to other revenues. //(5)// Represents receivables serviced with limited recourse. //(6)// Net income excluding acquisition related costs of $170.9 million, after-tax, and $3.6 million of net income related to amortization of purchase accounting adjustments. This is a non-GAAP measurement which is presented for comparison of our operating trends only. 14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Household International, Inc. and Subsidiaries FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------- Combined three months ended Three months ended March 31, March 31, (Dollar amounts are in millions) 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------- Net income $ 255.4//(1)// $ 491.0 Net interest margin 1,633.0 1,596.9 Provision for credit losses on owned receivables 1,009.6 923.0 Owned Basis Ratios: Return on average owned assets 1.02%//(1)// 2.18% Return on average common shareholder's (s') equity 9.8//(1)// 23.5 Net interest margin 7.29//(1)// 7.82 Consumer net charge-off ratio, annualized 4.22 3.61 Reserves as a percentage of net charge-offs 99.6 100.1 Efficiency ratio//(2)// 47.8//(1)// 37.1 Managed Basis Ratios://(3)// Return on average managed assets .82%//(1)// 1.76% Net interest margin 8.30//(1)// 8.74 Consumer net charge-off ratio, annualized 4.75 4.09 Reserves as a percentage of net charge-offs 103.3 100.5 Efficiency ratio//(2)// 41.7//(1)// 31.8 - -----------------------------------------------------------------------------------------------------------------------------
March 31, December 31, (Dollar amounts are in millions) 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------- Owned Basis: Total assets $107,415.8 $ 97,860.6 Receivables 83,438.4 82,562.3 Two-month-and-over contractual delinquency ratio 5.50% 5.34% Reserves as a percentage of receivables 4.17 4.04 Reserves as a percentage of nonperforming loans 92.7 94.5 Managed Basis://(3)// Total assets $131,671.5 $122,794.1 Receivables 107,694.1 107,495.8 Common and preferred equity to managed assets 11.94% 8.48% Tangible shareholder's (s') equity to tangible managed assets//(4)////(5)// 6.98 9.08 Tangible common equity to tangible managed assets//(4)////(6)// 4.79 6.83 Two-month-and-over contractual delinquency ratio 5.36 5.24 Reserves as a percentage of receivables 4.88 4.74 Reserves as a percentage of nonperforming loans 111.3 112.6 - ---------------------------------------------------------------------------------------------------------------------------
//(1)// The following non-GAAP financial information is provided for comparison of our operating trends only and should be read in conjunction with our owned basis GAAP financial information. For 2003, the operating results, percentages and ratios exclude $170.9 million (after-tax) of HSBC acquisition related costs incurred by Household and $3.6 million of net income relating to amortization of preliminary purchase accounting adjustments.
- ----------------------------------------------------------------------------------------------------------------------------- Combined three months ended Three months ended March 31, March 31, 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------- Operating net income (in millions) $422.7 $491.0 Return on average owned assets 1.69% 2.18% Return on average common shareholder's (s') equity 17.1 23.5 Owned basis net interest margin 7.26 7.82 Owned basis efficiency ratio 40.7 37.1 Return on average managed assets 1.36 1.76 Managed basis net interest margin 8.27 8.74 Managed basis efficiency ratio 35.5 31.8
//(2)// Ratio of total costs and expenses less policyholders' benefits to net interest margin and other revenues less policyholders' benefits. //(3)// We monitor our operations and evaluate trends on both an owned basis as shown in our financial statements and on a managed basis. Managed basis reporting adjustments assume that securitized receivables have not been sold and are still on our balance sheet. Managed basis information is intended to supplement, and should not be considered a substitute for, owned basis reporting and should be read in conjunction with reported owned basis results. //(4)// Tangible shareholder's (s') equity to tangible managed assets ("TETMA") and tangible common equity to tangible managed assets are non-GAAP financial ratios that are used by certain rating agencies as a measure to evaluate capital adequacy. These ratios may differ from similarly named measures presented by other companies. Because of its long-term subordinated nature and our ability to defer dividends, those rating agencies consider our trust preferred securities as equity in calculating these ratios. Because they include obligations to purchase HSBC ordinary shares in 2006, we include our Adjustable Conversion-Rate Equity Security Units as equity in calculating TETMA. Excluding the impact of "push-down" accounting on our assets and common shareholder's equity, TETMA would have been 8.78% at March 31, 2003. Common and preferred equity to total managed assets, the most directly comparable GAAP financial measure to TETMA, is also presented in our financial highlights. //(5)// Tangible shareholder's (s') equity consists of common shareholder's (s') equity (excluding unrealized gains and losses on investments and cash flow hedging instruments), preferred stock, company obligated mandatorily redeemable preferred securities of subsidiary trust and Adjustable Conversion-Rate Equity Security Units, less acquired intangibles and goodwill. Tangible managed assets represents total managed assets less acquired intangibles, goodwill and derivative financial assets. //(6)// Tangible common equity consists of common shareholder's (s') equity (excluding unrealized gains and losses on investments and cash flow hedging instruments) less acquired intangibles and goodwill. Tangible managed assets represents total managed assets less acquired intangibles, goodwill and derivative financial assets. 15 BASIS OF REPORTING Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements, notes and tables included elsewhere in this report and in the Household International, Inc. Annual Report on Form 10-K for the year ended December 31, 2002 (the "2002 Form 10-K"). Management's discussion and analysis may contain certain statements that may be forward-looking in nature within the meaning of the Private Securities Litigation Reform Act of 1995. Our results may differ materially from those noted in the forward-looking statements. Forward-looking statements are typically identified by words or phrases such as "believe", "expect", "anticipate", "intend", "may", "will", "should", "would" and "could". Forward-looking statements involve risks and uncertainties and are based on current views and assumptions. For a list of important factors that may affect our actual results, see our 2002 Form 10-K. In addition, as a subsidiary of HSBC, we may be affected by decisions made by HSBC or the perception investors, regulators or rating agencies have of HSBC. Such decisions and perceptions may also affect our forward-looking statements. We monitor our operations and evaluate trends on a managed basis which assumes that securitized receivables have not been sold and are still on our balance sheet. We manage our operations on a managed basis because the receivables that we securitize are subjected to underwriting standards comparable to our owned portfolio, are serviced by operating personnel without regard to ownership and result in a similar credit loss exposure for us. In addition, we fund our operations, review our operating results and make decisions about allocating resources such as employees and capital on a managed basis. See Note 13 "Segment Reporting," to the accompanying condensed consolidated financial statements for additional information related to our results on a managed basis. Management's discussion and analysis is presented on an owned basis of reporting unless specifically noted. On an owned basis of reporting, net interest margin, provision for credit losses and fee income resulting from securitized receivables are included as components of securitization revenue. MERGER WITH HSBC On March 28, 2003, HSBC Holdings plc ("HSBC") completed its acquisition of Household by way of merger with H2 Acquisition Corporation ("H2"), a wholly-owned subsidiary of HSBC, in a purchase business combination (see Note 2). Subsequent to the merger, H2 was renamed "Household International, Inc." In accordance with the guidelines for accounting for business combinations, the purchase price paid by HSBC plus related purchase accounting adjustments have been "pushed-down" and recorded in our financial statements for periods subsequent to March 28, 2003, resulting in a new basis of accounting for the "successor" period beginning March 29, 2003. As of the acquisition date, we recorded our assets and liabilities at their estimated fair values. Due to the recent timing of the acquisition, these fair value adjustments represent preliminary estimates and are subject to further adjustment as additional information, appraisals, or other valuation data are obtained. Information for all "predecessor" periods prior to the merger is presented on the historical basis of accounting. To assist in the comparability of our financial results and to make it easier to discuss and understand our results of operations, the following discussion combines the "predecessor period" (January 1 to March 28, 2003) with the "successor period" (March 29 to March 31, 2003) to present "combined" quarterly results for the three months ended March 31, 2003. Our operating results for the quarter ended March 31, 2003 do not reflect or assume any changes to our business as a result of the merger. Though we are still in the early stages of evaluating the impact that the merger may have on our operations, we have identified the following items as near term priorities: . Funding benefits - we currently anticipate using HSBC's available funding to partially fund our operations. This will reduce our reliance on the debt markets. In addition, we anticipate lower funding costs because we are now a subsidiary of HSBC. . Technology integration. 16 . Exporting and using our consumer credit business models and "best practices" into HSBC's operations. . Expanding business opportunities including broader consumer product offerings and leveraging our existing business to business with HSBC's capabilities. . Global processing opportunities. It is too early to quantify the financial impact, if any, these business modifications may have with respect to Household. OPERATIONS SUMMARY Our net income was $255.4 million in the first quarter of 2003 and $491.0 million in the first quarter of 2002. Operating net income (a non-GAAP financial measurement of net income excluding HSBC acquisition related costs incurred by Household of $170.9 million, after-tax, and amortization of purchase accounting adjustments which increased net income by $3.6 million) was $422.7 million in the first quarter of 2003, a 14% decrease from 2002 net income. HSBC acquisition related costs include payments to executives under existing employment contracts and investment banking, legal and other costs relating to our acquisition by HSBC. We believe operating net income is an important measure in evaluating trends for comparative purposes. Although average receivables grew compared to the prior year quarter, our operating results declined due to lower securitization activity in the current quarter, higher credit loss provision due to higher charge-offs, and higher operating expenses to support receivables growth including increased legal and compliance costs. SEGMENT RESULTS - MANAGED BASIS Our Consumer segment reported net income of $216.3 million in the current quarter compared to $307.2 million in the year-ago quarter. Increases in net interest margin and fee income due to higher receivable levels were more than offset by significantly lower other revenues as a result of a decline in receivables securitized during the first quarter of 2003 and the impact of higher securitization levels in 2002 as a result of our liquidity management plans. Net income was also negatively impacted by higher credit loss provision due to higher charge-offs and higher operating expenses. Credit loss provision rose $18.8 million to $939.8 million as a result of increased levels of receivables and higher charge-offs. In the first quarter of 2003, we increased managed loss reserves by recording loss provision greater than charge-offs of $69.6 million compared with $254.7 million in the first quarter of 2002. Higher operating expenses were the result of additional operating costs to support the increased receivable levels and higher compliance costs. Managed receivables grew to $80.5 billion at March 31, 2003, compared to $79.4 billion at December 31, 2002 and $77.0 billion at March 31, 2002. The managed receivable growth related primarily to our real estate secured receivables. Consumer Lending branch growth, however, in the first quarter of 2003 reflected weak sales momentum following our intentional fourth quarter slowdown and higher run-off. Return on average managed assets ("ROMA") was 1.04 percent in the first quarter of 2003, compared to 1.55 percent in the year-ago quarter. The decline in the ratio reflects lower securitization revenue and higher operating expenses. Our Credit Card Services segment reported improved results as net income increased to $127.8 million for the quarter, compared to $77.4 million for the year-ago quarter. The increase was due primarily to increased net interest margin which increased $60.8 million to $478.6 million as a result of higher receivable levels and margin spreads. Net interest margin as a percent of average receivables increased in the quarter as a result of lower funding costs and pricing floors which capped rate reductions on certain variable rate credit card products. Credit loss provision increased $20.6 million as a result of the higher receivable levels and the continued weak economy. In the first quarter of 2003, we increased managed loss reserves by recording loss provision greater than charge-offs of $58.3 million compared with $64.5 million in the first quarter of 2002. Managed receivables were $17.2 billion at March 31, 2003, compared to $18.1 billion at year-end 2002 and $16.2 billion at March 31, 17 2002. The decrease from year-end was due to normal seasonal runoff. ROMA improved to 2.50 percent for the quarter, compared to 1.75 percent for the prior year quarter. Our International segment reported net income of $31.2 million for the first quarter compared to $25.8 million for the year-ago quarter. Net interest margin increased 17 percent to $179.1 million in the first quarter of 2003 due to higher receivable levels. Other revenues, excluding fee income, increased $19.4 million to $72.7 million for the first quarter of 2003 primarily as a result of higher securitization and insurance revenue. Credit loss provision rose $22.8 million to $84.9 million primarily as a result of increased levels of receivables. Managed receivables totaled $9.1 billion at March 31, 2003, compared to $8.8 billion at year-end 2002, and $7.0 billion at March 31, 2002. Compared to the prior periods, all products reported growth. The increase as compared to the prior year quarter was also impacted by favorable translation adjustments of $.9 billion. ROMA was 1.21 percent in the current year quarter and 1.24 percent in the prior year quarter. BALANCE SHEET REVIEW
Increase (decrease) from Increase (decrease) from December 31, 2002 March 31, 2002 March 31, ------------------------ ------------------------ (All dollar amounts are stated in millions) 2003 $ % $ % - ------------------------------------------------------------------------------------------------------------- Real estate secured $47,256.6 $1,438.1 3.1% $1,627.7 3.6% Auto finance 2,156.2 132.4 6.5 (446.7) (17.2) MasterCard/(1)//Visa/(1)/ 8,452.5 (494.0) (5.5) 1,482.3 21.3 Private label 11,189.4 (150.2) (1.3) 501.0 4.7 Personal non-credit card/(2)/ 13,927.0 (43.9) (0.3) 714.0 5.4 Commercial and other 456.7 (6.3) (1.4) (34.4) (7.0) - ------------------------------------------------------------------------------------------------------------- Total owned receivables $83,438.4 $ 876.1 1.1% $3,843.9 4.8% =============================================================================================================
/(1)/ MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of VISA USA, Inc. /(2)/ Personal non-credit card receivables are comprised of the following: March 31, December 31, March 31, (In millions) 2003 2002 2002 - -------------------------------------------------------------------------------- Domestic personal unsecured $ 6,503.5 $ 6,446.5 $ 6,379.2 Union Plus personal unsecured 977.6 1,095.4 1,065.0 Personal homeowner loans 3,974.2 4,143.5 4,055.0 Foreign unsecured 2,471.7 2,285.5 1,713.8 - -------------------------------------------------------------------------------- Total personal non-credit card $13,927.0 $13,970.9 $13,213.0 ================================================================================ Owned receivables of $83.4 billion at March 31, 2003 increased $3.8 billion from a year ago. Growth in dollars of receivables was strongest in our real estate secured portfolio, which increased 4 percent over the year-ago period, despite whole loan sales of $5.4 billion in the second half of 2002. Auto finance receivables decreased $446.7 million to $2.2 billion at March 31, 2003. A strong market driven by a favorable interest rate environment contributed to higher auto finance originations, however, these originations were more than offset by increased securitization activity in 2002. MasterCard and Visa receivables increased $1.5 billion to $8.5 billion at March 31, 2003 despite increased securitization activity in 2002. MasterCard and Visa growth was strongest in our domestic subprime direct mail and UK marbles(TM) portfolios. Private label receivables increased $501.0 million to $11.2 billion as organic growth by existing merchants, strong sales growth by several of our larger merchants and a $.5 billion portfolio acquisition were largely offset by increased securitization activity in 2002. Growth in our branches contributed to the growth in personal non-credit card receivables, but was partially offset through securitization activity in 2002. Compared to December 31, 2002, growth in our real estate secured portfolio due to higher secondary market mortgage acquisitions and in our auto finance portfolio due to lower securitization levels were partially offset by seasonal run-off in our MasterCard and Visa and private label credit card portfolios. 18 Owned consumer two-months-and-over contractual delinquency as a percent of owned consumer receivables was 5.50 percent at March 31, 2003, compared with 5.34 percent at December 31, 2002 and 4.63 percent at March 31, 2002. The annualized consumer owned charge-off ratio in the first quarter of 2003 was 4.22 percent, compared with 3.87 percent in the prior quarter and 3.61 percent in the year-ago quarter. See "Credit Loss Reserves" and "Credit Quality" for further discussion. LIQUIDITY AND CAPITAL RESOURCES The merger with HSBC has improved our access to the capital markets and decreased our funding costs. Following completion of the merger with HSBC, Standard & Poor's upgraded our long-term debt rating to "A" and our short-term debt rating to "A-1"; Moody's Investors Service placed our long-term debt ratings on review for possible upgrade and Fitch Ratings confirmed our debt ratings and removed us from "Ratings Watch Evolving." These revised ratings and actions also apply to our principal borrowing subsidiaries, including Household Finance Corporation ("HFC"). Significant liquidity and capital transactions during the first quarter of 2003, included the following: . We reduced our domestic outstanding commercial paper balance. Outstanding domestic commercial paper at March 31, 2003 was $3.1 billion, a $1.0 billion reduction from December 31, 2002. . We reduced our investment security liquidity portfolio from $3.9 billion at December 31, 2002, of which $2.2 billion was dedicated to our credit card bank, to $3.4 billion at March 31, 2003, of which $1.9 billion was dedicated to our credit card bank. As the maintenance of this portfolio adversely impacts our net interest margin and net income due to the lower return generated by these assets, we plan to reduce the non-bank portion of this portfolio given the increased available liquidity arising from HSBC affiliates and clients. Our insurance subsidiaries held $3.2 billion of investment securities at March 31, 2003 compared with $3.1 billion at December 31, 2002. . We issued $350.0 million of domestic medium-term notes, $1.6 billion in foreign currency-denominated bonds and $2.05 billion of global debt. . We issued $271.2 million of InterNotes(SM) (retail-oriented medium-term notes). . In the first quarter of 2002, we accelerated securitizations which were planned for later in 2002. As a result, initial securitizations in the first quarter of 2003 were lower than prior year levels. The composition of receivables securitized (excluding replenishments of certificateholder interests) was as follows: Three months ended March 31, ------------------- (In millions) 2003 2002 --------------------------------------------------------------------------- MasterCard/Visa $ 320.0 $ 600.0 Auto finance 410.8 425.0 Private label -- 500.0 Personal non-credit card 510.0 902.7 --------------------------------------------------------------------------- Total $1,240.8 $2,427.7 =========================================================================== . We repurchased 2.9 million shares of our common stock, for a total of $164.1 million. . We redeemed outstanding shares of our $4.30, $4.50 and 5.00 percent cumulative preferred stock pursuant to their respective terms. Additionally, the outstanding shares of our 7.625, 7.60, 7.50 and 8.25 percent preferred stock were converted into the right to receive cash from HSBC in an amount equal to their liquidation value, plus accrued and unpaid dividends which was an 19 aggregate amount of $1.1 billion. In consideration of HSBC transfering sufficient funds to make the payments described above with respect to our 7.625, 7.60, 7.50, and 8.25 percent preferred stock, we issued a new series of 6.5% cumulative preferred stock in the amount of $1.1 billion to HSBC on March 28, 2003. Our ratio of tangible shareholders' equity to tangible managed assets ("TETMA") was 6.98 percent at March 31, 2003 compared to 9.08 percent at December 31, 2002. Tangible common equity to tangible managed assets was 4.79 percent at March 31, 2003 compared to 6.83 percent at December 31, 2002. These ratios represent non-GAAP financial ratios that are used by certain rating agencies to evaluate capital adequacy and may differ from similarly named measures presented by other companies. These ratios were negatively impacted by the preliminary purchase accounting adjustments which were "pushed down" to Household which increased goodwill by approximately $5.9 billion, and increased acquired intangibles by approximately $1.5 billion, while increasing common equity by approximately $5.6 billion. Excluding the impact of "push-down" accounting on our assets and common shareholder's equity, TETMA would have been 8.78 percent at March 31, 2003. We are committed to maintaining at least a mid single "A" rating and will be reviewing appropriate capital levels with our rating agencies. Common and preferred equity to total managed assets, the most directly comparable GAAP financial measure to TETMA, was 11.94 percent at March 31, 2003 and 8.48 percent at December 31, 2002. Because of its long-term subordinated nature and our ability to defer dividends, certain rating agencies consider our company obligated mandatorily redeemable preferred securities of subsidiary trusts as equity in calculating TETMA. Because they include obligations to purchase HSBC ordinary shares in 2006, we include our Adjustable Conversion-Rate Equity Security Units as equity in calculating TETMA. Commercial paper, bank and other borrowings decreased to $5.7 billion at March 31, 2003 from $6.1 billion at year-end. Senior and senior subordinated debt (with original maturities over one year) was $78.1 billion at March 31, 2003 and $74.8 billion at December 31, 2002. Approximately $2.6 billion of the increase was due to preliminary purchase accounting adjustments which have been "pushed down" to record our debt at fair value. Our banking subsidiary is subject to the supervision of the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") and is well capitalized at March 31, 2003. On January 30, 2003, we completed the sale of substantially all of the remaining assets and liabilities of Household Bank, f.s.b. (the "Thrift") to a third party at approximately their book value. We subsequently received confirmation from the Office of Thrift Supervision that they terminated the Thrift's existence as a federal savings bank at the close of business on January 30, 2003. Securitizations and Secured Financings Securitizations (which are structured to receive sale treatment under Statement of Financial Accounting Standards No. 140 ("SFAS No. 140") and secured financings (which do not receive sale treatment under SFAS No. 140) of consumer receivables have been, and will continue to be, a source of liquidity for us. Securitizations and secured financings are used to limit our reliance on the unsecured debt markets and often are more cost-effective than alternative funding sources. In a securitization, a designated pool of non-real estate consumer receivables is removed from the balance sheet and transferred to an unaffiliated trust. This unaffiliated trust is a qualifying special purpose entity ("QSPE") as defined by SFAS No. 140 and, therefore, is not consolidated. 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. At the time of sale, an interest-only strip receivable is recorded, representing the present value of the cash flows we expect to receive over the life of the securitized receivables, net of estimated credit losses. Under the terms of the securitizations, we receive annual servicing fees on the outstanding balance of the securitized receivables and the rights to future residual cash flows on the sold receivables after the investors receive their contractual return. Cash flows related to the interest-only strip receivables and servicing the receivables are collected over the life of the underlying securitized receivables. 20 In a secured financing, a designated pool of receivables, typically real estate secured, are conveyed to a wholly owned limited purpose subsidiary which in turn transfers the receivables to a trust which sells interests to investors. Repayment of the debt issued by the trust is secured by the receivables transferred. The transactions are structured as secured financings under SFAS No. 140. Therefore, the receivables and the underlying debt of the trust remain on our balance sheet. We do not recognize a gain in a secured financing transaction. Because the receivables and the debt remain on our balance sheet, revenues and expenses are reported consistently with our owned balance sheet portfolio. Using this source of funding results in similar cash flows as issuing debt through alternative funding sources. As of March 31, 2003, closed-end real estate secured receivables totaling $7.8 billion secured $6.7 billion of outstanding debt related to these transactions. At December 31, 2002, closed-end real estate secured receivables totaling $8.5 billion secured $7.5 billion of outstanding debt related to these transactions. Our securitized receivables totaled $24.3 billion at March 31, 2003, compared to $24.9 billion at December 31, 2002. We believe the market for securities backed by receivables is a reliable, efficient and cost-effective source of funds. At March 31, 2003, securitizations structured as sales represented 22 percent and secured financings represented 6 percent of the funding associated with our managed portfolio. At December 31, 2002, securitizations structured as sales represented 23 percent and secured financings represented 7 percent of the funding associated with our managed portfolio. 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 2 percent from the prior-year quarter to $1.6 billion in the first quarter of 2003. The increase was primarily due to receivables growth and lower funding costs. Net interest margin as a percent of average interest-earning assets, annualized, was 7.29 percent in the first quarter of 2003 and 7.82 percent in the year-ago quarter. The decrease in 2003 was attributable to lower yields on our receivables due to repricings and to our liquidity-related investment portfolio which was substantially increased after the first quarter of 2002 and has lower yields than our receivable portfolio. This decrease was partially offset by lower funding costs. 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 5 percent from the prior-year quarter to $2.4 billion in the first quarter of 2003 due to higher receivable levels and lower funding costs. Net interest margin as a percent of average managed interest-earning assets, annualized, was 8.30 percent in the current quarter, compared to 8.74 percent in the year-ago quarter. The decrease in 2003 was attributable to lower yields on our receivables due to repricings and to our liquidity-related investment portfolio which was substantially increased after the first quarter of 2002 and has lower yields than our receivable portfolio. This decrease was partially offset by lower fundings costs. Net interest margin as a percent of receivables on a managed basis is greater than on an owned basis because the managed basis portfolio includes relatively more unsecured loans, which have higher yields. Provision for credit losses The provision for credit losses for receivables totaled $1.0 billion for the first quarter of 2003, compared to $923.0 million in the prior-year quarter. The provision as a percent of average owned receivables, annualized, was 4.85 percent in the first quarter of 2003, compared to 4.62 percent in the first quarter of 2002. Receivables growth, increases in personal bankruptcy filings, higher delinquencies and the weak economy contributed to the higher provision. We recorded owned loss provision greater than charge-offs of $135.7 million during the first quarter. The provision for credit losses 21 may vary from quarter to quarter, depending on the product mix and credit quality of loans in our portfolio. See Note 5, "Credit Loss Reserves" to the accompanying condensed consolidated financial statements for further discussion of factors affecting the provision for credit losses. Other revenues Total other revenues on an owned basis were $1.2 billion in the first quarter of 2003 and $1.1 billion in the first quarter of 2002 and included the following: Combined Three months Three months ended ended March 31, March 31, (In millions) 2003 2002 - -------------------------------------------------------------------------------- Securitization revenue $ 441.1 $ 518.3 Insurance revenue 177.3 170.1 Investment income 81.3 46.2 Fee income 297.1 216.5 Other income 243.8 188.0 - -------------------------------------------------------------------------------- Total other revenues $1,240.6 $1,139.1 ================================================================================ 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 $441.1 million in the first quarter of 2003, compared to $518.3 million in the prior-year quarter. The decrease was due to decreases in the level of receivables securitized during the first quarter of 2003 and lower excess spread. Securitization levels in the first quarter of 2002 were higher as a result of our decision to accelerate the timing of securitization activity planned for later in 2002. Securitization revenue will vary each period based on the level and mix of receivables securitized in that particular period (which will impact the gross initial gains and related estimated probable credit losses under the recourse provisions). It is also affected by the overall level and mix of previously securitized receivables (which will impact servicing revenue and excess spread). The estimate for probable credit losses for securitized receivables is also impacted by the level and mix of current period securitizations because, depending upon loss estimates and severities, securitized receivables with longer lives may result in higher over-the-life losses than receivables securitized with shorter lives. Securitization revenue included the following: Combined Three months Three months ended ended March 31, March 31, (In millions) 2003 2002 - -------------------------------------------------------------------------------- Net initial gains $ 35.3 $ 74.4 Net replenishment gains 136.9 124.2 Servicing revenue and excess spread 268.9 319.7 - -------------------------------------------------------------------------------- Total $441.1 $518.3 ================================================================================ Our interest-only strip receivables, net of the related loss reserve and excluding the mark-to-market adjustment recorded in accumulated other comprehensive income (loss), decreased $41.5 million in the first quarter of 2003 and increased $29.0 million in the year-ago period. Insurance revenue was $177.3 million in the first quarter of 2003 compared to $170.1 million in the year-ago period. The increase reflected increased sales in our United Kingdom subsidiary. Investment income, which includes interest income on investment securities in the insurance business as well as realized gains and losses from the sale of investment securities, was $81.3 million in the first quarter of 2003, compared to $46.2 million in the year-ago period. The increase was primarily due to 22 higher realized gains from securities sales. Gains from security sales totaled $38.0 million in the first quarter of 2003 compared with $1.1 million in the year-ago period. Fee income, which includes revenues from fee-based products such as credit cards, was $297.1 million in the first quarter of 2003 compared to $216.5 million in the year-ago period. The increase was due to higher levels of credit card fees from both credit card businesses. See Note 13, "Segment Reporting," to the accompanying condensed consolidated financial statements for additional information on fee income on a managed basis. Other income, which includes revenue from our tax refund lending business, was $243.8 million in the first quarter of 2003, compared to $188.0 million in the prior-year period. Higher revenues from our seasonal tax refund lending business and our mortgage operations drove the increase in other income. Expenses Total costs and expenses for the first quarter of 2003 were $1.4 billion compared to $1.1 billion in the comparable prior-year period. Excluding HSBC acquisition related costs, costs and expenses were $1.2 billion in the first quarter of 2003. Our owned basis efficiency ratio was 47.8 percent in the first quarter of 2003 compared to 37.1 percent in the comparable prior-year period. Excluding the acquisition related costs, our owned basis efficiency ratio was 40.7 percent in the first quarter of 2003. Total costs and expenses included the following: Combined Three months Three months ended ended March 31, March 31, (In millions) 2003 2002 - -------------------------------------------------------------------------------- Salaries and fringe benefits $ 508.6 $ 445.3 Sales incentives 39.1 54.1 Occupancy and equipment expense 101.2 92.2 Other marketing expenses 143.5 140.4 Other servicing and administrative expenses 322.9 231.7 Amortization of acquired intangibles 14.3 19.8 HSBC acquisition related costs incurred by Household 198.2 -- Policyholders' benefits 94.0 84.0 - ------------------------------------------------------------------------------- Total costs and expenses $1,421.8 $1,067.5 =============================================================================== Salaries and fringe benefits for the first quarter of 2003 were $508.6 million compared to $445.3 million in the first quarter of 2002. The increase was primarily due to additional staffing as well as higher employee benefit expenses. Sales incentives for the first quarter of 2003 were $39.1 million compared to $54.1 million in the comparable prior-year period. The decrease was due to lower new loan volume in our branches and a reduction in the number of account executives. Occupancy and equipment expense for the first quarter of 2003 was $101.2 million compared to $92.2 million in the comparable prior-year period. The increase was primarily the result of higher repairs and occupancy maintenance costs. Other marketing expenses of $143.5 million for the first quarter of 2003 were comparable to $140.4 million in the same prior-year period. Other servicing and administrative expenses for the first quarter of 2003 were $322.9 million compared to $231.7 million in the comparable prior-year period. The increase was primarily due to higher legal and compliance costs. Higher collection expenses also contributed to the increase. 23 Amortization of acquired intangibles for the first quarter of 2003 was $14.3 million compared to $19.8 million in the comparable prior-year period. The decrease was primarily attributable to acquired intangibles which were fully amortized in 2002. HSBC acquisition related costs incurred by Household for the first quarter of 2003 were $198.2 million. HSBC acquisition related costs include payments to executives under existing employment contracts and investment banking, legal and other costs relating to our acquisition by HSBC. Policyholders' benefits for the first quarter of 2003 were $94.0 million compared to $84.0 million in the comparable prior-year period. The increase reflects higher sales in our United Kingdom subsidiary and higher loss rates. 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 probable losses for consumer receivables based on delinquency and restructure status and past loss experience. Credit loss reserves take into account whether loans have been restructured, re-written or are subject to forbearance, credit counseling accommodation, modification, extension, or deferment. Our credit loss reserves also take into consideration the loss severity expected based on the underlying collateral, if any, for the loan. Our consumer credit management policies focus on product type and specific portfolio risk factors. Our consumer credit portfolio is diversified by product and geographic location. See Note 4, "Receivables" in the accompanying condensed consolidated financial statements for receivables by product type and Note 5, "Credit Loss Reserves," for our credit loss reserve methodology and an analysis of changes in the credit loss reserves for the current and prior year quarter. The following table sets forth owned basis credit loss reserves for the periods indicated:
March 31, December 31, March 31, (All dollar amounts are stated in millions) 2003 2002 2002 - ---------------------------------------------------------------------------------- Owned credit loss reserves $3,483.1 $3,332.6 $2,876.6 Reserves as a percent of: Receivables 4.17% 4.04% 3.61% Net charge-offs /(1)/ 99.6 106.5 100.1 Nonperforming loans 92.7 94.5 95.1 ==================================================================================
/(1)/ Quarter-to-date, annualized Reserves as a percentage of receivables at March 31, 2003 reflect the impact of the weak economy, higher delinquency levels, and the continuing uncertainty as to the ultimate impact the weakened economy will have on charge-off and delinquency levels. For securitized receivables, we also record a provision for estimated probable losses that we expect to incur under the recourse provisions. The following table sets forth managed credit loss reserves for the periods indicated:
March 31, December 31, March 31, (All dollar amounts are stated in millions) 2003 2002 2002 - ---------------------------------------------------------------------------------- Managed credit loss reserves $5,259.3 $5,092.1 $4,146.5 Reserves as a percent of: Receivables 4.88% 4.74% 4.10% Net charge-offs /(1)/ 103.3 113.8 100.5 Nonperforming loans 111.3 112.6 108.3 ==================================================================================
/(1)/ Quarter-to-date, annualized 24 CREDIT QUALITY HSBC intends, subject to receipt of regulatory and other approvals, to hold our domestic private label credit card receivables within HSBC's U.S. banking subsidiary. As a result, HSBC anticipates regulatory accounting charge-off, loss provisioning and account management guidelines issued by the Federal Financial Institutions Examination Council, or FFIEC, will need to be applied to these receivables. Implementation of such guidelines will result in private label credit card receivables being charged-off at 6 months contractually delinquent (end of the month 60 days after notification for receivables involving a bankruptcy) versus the current practice of generally being charged-off the month following the month in which the account becomes 9 months contractually delinquent (end of month 90 days after notification for receivables involving a bankruptcy). HSBC's plans for ultimate collection on these receivables will therefore be demonstrably different from the current practice and may require different reserve requirements. As of March 31, 2003, we have not allocated any purchase price adjustment to owned loss reserves in contemplation of this change as the process for movement of private label card receivables to HSBC's U.S. banking subsidiary has not been finalized and regulatory approval requests have not yet been initiated. We currently estimate that such fair value adjustment, to the extent we proceed with this business plan, would be an increase to owned loss reserves for these private label credit card receivables to reflect the expected impact of the implementation of the regulatory guidelines. We and HSBC are evaluating whether select other products will also be held in the HSBC U.S. banking subsidiary. Delinquency - Owned Basis Two-Months-and-Over Contractual Delinquency (as a percent of consumer receivables): March 31, December 31, March 31, 2003 2002 (1) 2002 (1) - ------------------------------------------------------------------------------ Real estate secured 4.15% 3.91% 2.88% Auto finance 2.75 3.96 2.04 MasterCard/Visa 6.87 5.97 6.54 Private label 6.06 6.36 6.33 Personal non-credit card 9.23 8.95 8.78 - ------------------------------------------------------------------------------ Total Owned 5.50% 5.34% 4.63% ============================================================================== Total owned delinquency increased compared to the prior quarter. The increase in our real estate secured portfolio reflects the seasoning and maturation of the portfolio, the impact of first payment default repurchases from previous loan sales, and higher levels of receivables in the process of foreclosure. The increase in MasterCard and Visa delinquency reflects lower levels of receivables due to normal seasonal run-off. These increases were partially offset by lower auto finance delinquency consistent with historical seasonal trends and lower private label delinquency. Compared to a year ago, higher levels of new bankruptcy filings and continued softness of the economy, including higher unemployment, caused the overall rise in the delinquency ratio. A major contributor to the higher real estate secured delinquency ratio was reduced growth in the portfolio due to loan sales and reduced originations, especially in the fourth quarter of 2002. (1) Owned two-months-and-over contractual delinquency for personal non-credit card in prior periods was overstated due to a calculation error. The correct percentages are included in the table above. The managed two-months-and-over contractual delinquency ratios reported for prior periods were correct. The tables below set out the previously reported and actual owned two-months-and-over contractual delinquency ratio for total owned receivables, including personal non-credit card, for each of the specified dates:
December 31, 2002 September 30, 2002 June 30, 2002 March 31, 2002 - -------------------------------------------------------------------------------------------------------------- As As As As previously previously previously previously reported Actual reported Actual reported Actual reported Actual - -------------------------------------------------------------------------------------------------------------- Real estate secured 3.91% 3.91% 3.22% 3.22% 2.78% 2.78% 2.88% 2.88% Auto finance 3.96 3.96 3.33 3.33 2.99 2.99 2.04 2.04 MasterCard/Visa 5.97 5.97 6.36 6.36 6.13 6.13 6.54 6.54 Private label 6.36 6.36 6.84 6.84 6.19 6.19 6.33 6.33 Personal non-credit card 10.31 8.95 9.18 8.38 9.12 8.69 9.60 8.78 - -------------------------------------------------------------------------------------------------------------- Total Owned 5.57% 5.34% 5.01% 4.87% 4.61% 4.53% 4.77% 4.63% ============================================================================================================== Total Managed 5.24% 5.24% 4.82% 4.82% 4.53% 4.53% 4.63% 4.63% ==============================================================================================================
December 31, 2001 September 30, 2001 June 30, 2001 March 31, 2001 - -------------------------------------------------------------------------------------------------------------- As As As As previously previously previously previously reported Actual reported Actual reported Actual reported Actual - -------------------------------------------------------------------------------------------------------------- Real estate secured 2.63% 2.63% 2.71% 2.71% 2.59% 2.59% 2.55% 2.55% Auto finance 2.92 2.92 2.43 2.43 2.35 2.35 1.74 1.74 MasterCard/Visa 5.67 5.67 5.22 5.22 4.80 4.80 5.02 5.02 Private label 5.99 5.99 6.57 6.57 6.54 6.54 5.62 5.62 Personal non-credit card 9.04 8.44 8.75 8.38 8.79 8.47 8.79 8.46 - -------------------------------------------------------------------------------------------------------------- Total Owned 4.53% 4.43% 4.58% 4.52% 4.48% 4.43% 4.36% 4.30% ============================================================================================================== Total Managed 4.46% 4.46% 4.43% 4.43% 4.27% 4.27% 4.25% 4.25% ==============================================================================================================
25 Net Charge-offs of Consumer Receivables - Owned Basis Net Charge-offs of Consumer Receivables (as a percent, annualized, of average consumer receivables):
March 31, December 31, March 31, 2003 2002 2002 - ---------------------------------------------------------------------------------------------- Real estate secured 1.12% 1.10% .65% Auto finance 7.71 8.50 5.63 MasterCard/Visa 9.26 9.02 9.73 Private label 6.27 6.35 6.25 Personal non-credit card 9.04 7.74 7.71 - ---------------------------------------------------------------------------------------------- Total Owned 4.22% 3.87% 3.61% ============================================================================================== Real estate charge-offs and REO expense as a percent of average real estate secured receivables 1.52% 1.47% 1.05% ==============================================================================================
The weakened economy drove the increase in charge-off ratios over both the previous and prior year quarters. Compared to the previous quarter, the decrease in auto finance charge-offs reflects improved delinquency in certain older vintages. Compared to the prior year quarter, the increase in the charge-off ratio was primarily attributable to the weakened economy and higher bankruptcy filings. Charge-offs in our personal non-credit card portfolio increased more than most other products because our typical personal non-credit card customer is less resilient and, therefore, more exposed to the recent economic downturn. OWNED NONPERFORMING ASSETS
March 31, December 31, March 31, (In millions) 2003 2002(1) 2002(1) - -------------------------------------------------------------------------------------------------- Nonaccrual receivables $2,880.3 $2,665.9 $2,185.0 Accruing consumer receivables 90 or more days delinquent 877.9 860.7 839.3 Renegotiated commercial loans 1.4 1.3 1.3 - -------------------------------------------------------------------------------------------------- Total nonperforming receivables 3,759.6 3,527.9 3,025.6 Real estate owned 444.9 427.1 459.4 - -------------------------------------------------------------------------------------------------- Total nonperforming assets $4,204.5 $3,955.0 $3,485.0 ================================================================================================== Credit loss reserves as a percent of nonperforming receivables 92.7% 94.5% 95.1% ==================================================================================================
(1) Nonaccrual receivables, total nonperforming receivables and total nonperforming assets for personal non-credit card in prior periods were overstated due to a calculation error. As a result, credit loss reserves as a percentage of nonperforming receivables was understated in those periods. The correct amounts are included in the table above. The managed nonperforming assets statistics reported for prior periods were correct. The tables below set out the previously reported and actual owned nonperforming assets statistics for total owned receivables, including personal non-credit card, for each of the specified dates:
(in Millions) December 31, 2002 September 30, 2002 June 30, 2002 March 31, 2002 - ----------------------------------------------------------------------------------------------------------------------------- As As As As previously previously previously previously reported Actual reported Actual reported Actual reported Actual - ----------------------------------------------------------------------------------------------------------------------------- Nonaccrual receivables $2,811.9 $2,665.9 $2,569.5 $2,484.5 $2,356.4 $2,316.4 $2,261.0 $2,185.0 Accruing consumer receivables 90 or more days delinquent 860.7 860.7 824.2 824.2 750.6 750.6 839.3 839.3 Renegotiated commercial loans 1.3 1.3 1.3 1.3 1.4 1.4 1.3 1.3 - ------------------------------------------------------------------------------------------------------------------------------- Total nonperforming receivables 3,673.9 3,527.9 3,395.0 3,310.0 3,108.4 3,068.4 3,101.6 3,025.6 Real estate owned 427.1 427.1 451.1 451.1 456.7 456.7 459.4 459.4 - ------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $4,101.0 $3,955.0 $3,846.1 $3,761.1 $3,565.1 $3,525.1 $3,561.0 $3,485.0 =============================================================================================================================== Credit loss reserves as a percent of nonperforming receivables 90.7% 94.5% 92.1% 94.5% 96.0% 97.2% 92.7% 95.1% =============================================================================================================================== (in Millions) December 31, 2001 September 30, 2001 June 30, 2001 March 31, 2001 - ----------------------------------------------------------------------------------------------------------------------------- As As As As previously previously previously previously reported Actual reported Actual reported Actual reported Actual - ----------------------------------------------------------------------------------------------------------------------------- Nonaccrual receivables $2,079.5 $2,027.5 $2,009.6 $1,979.6 $1,855.2 $1,832.2 $1,825.1 $1,803.1 Accruing consumer receivables 90 or more days delinquent 844.1 844.1 806.6 806.6 743.6 743.6 669.3 669.3 Renegotiated commercial loans 2.1 2.1 -- -- 12.3 12.3 12.3 12.3 - ------------------------------------------------------------------------------------------------------------------------------- Total nonperforming receivables 2,925.7 2,873.7 2,816.2 2,786.2 2,611.1 2,588.1 2,506.7 2,484.7 Real estate owned 398.9 398.9 363.0 363.0 365.2 365.2 350.2 350.2 - ------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $3,324.6 $3,272.6 $3,179.2 $3,149.2 $2,976.3 $2,953.3 $2,856.9 $2,834.9 =============================================================================================================================== Credit loss reserves as a percent of nonperforming receivables 91.0% 92.7% 87.9% 88.9% 91.0% 91.8% 91.1% 91.9% ===============================================================================================================================
RESTRUCTURE STATISTICS - MANAGED BASIS The tables below summarize restructuring statistics in our managed basis domestic portfolio.
Total Restructured by Restructure Period - Domestic March 31, December 31, March 31, Portfolio/(1)/ (Managed Basis) 2003 2002 2002 - ---------------------------------------------------------------------------------------------- Never restructured 83.3% 84.4% 82.8% Restructured: Restructured in the last 6 months 7.5 6.5 8.6 Restructured in the last 7-12 months 3.6 4.1 4.6 Previously restructured beyond 12 months 5.6 5.0 4.0 - ---------------------------------------------------------------------------------------------- Total ever restructured 16.7 15.6 17.2 - ---------------------------------------------------------------------------------------------- Total 100.0% 100.0% 100.0% ==============================================================================================
26
Total Restructured by Product - Domestic Portfolio/(1)/ March 31, December 31, March 31, (Managed Basis) 2003 2002 2002 - ---------------------------------------------------------------------------------------------- (In millions) Real estate secured $ 9,163.4 $ 8,473.2 $ 8,880.6 Auto finance 1,247.7 1,242.9 1,005.6 MasterCard/Visa 549.2 540.8 526.3 Private label 1,225.8 1,255.4 1,269.2 Personal non-credit card 4,127.5 3,768.1 4,288.6 - ---------------------------------------------------------------------------------------------- Total $16,313.6 $15,280.4 $15,970.3 ============================================================================================== (As a percent of managed receivables) Real estate secured 20.0% 19.0% 19.8% Auto finance 16.9 16.7 15.2 MasterCard/Visa 3.4 3.2 3.5 Private label 9.6 9.7 10.9 Personal non-credit card 25.8 23.0 27.6 - ---------------------------------------------------------------------------------------------- Total (2) 16.7% 15.6% 17.2% ==============================================================================================
/(1)/ Excludes foreign businesses and commercial and other. Amounts also include accounts as to which the delinquency status has been reset to current for reasons other than restructuring (e.g. correcting the misapplication of a timely payment). /(2)/ Total including foreign businesses was 15.8 percent at March 31, 2003, 14.8 percent at December 31, 2002 and 16.4 percent at March 31, 2002. The amount of managed receivables in forbearance, modification, Credit Card Services consumer credit counseling accommodations, rewrites or other account management techniques for which we have reset delinquency and that is not included in the restructured statistics above was approximately $1.0 billion or ..93 percent of managed receivables at March 31, 2003, $900 million or .84 percent of managed receivables at December 31, 2002 and approximately $600 million or .59 percent of managed receivables at March 31, 2002. Item 4. Controls and Procedures We maintain a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Our Board of Directors, operating through its audit committee which is composed entirely of independent outside directors, provides oversight to our financial reporting process. Within the 90-day period prior to the date of this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Principal Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to Household International, Inc. (including its consolidated subsidiaries) required to be included in this quarterly report on Form 10-Q. There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date that we carried out our evaluation. 27 PART II. Other Information Omitted. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 2 Agreement and Plan of Merger by and among HSBC Holdings plc, Household International, Inc. and H2 Acquisition Corporation dated as of November 14, 2002 (incorporated by reference to Annex A of our definitive Proxy Statement on Schedule 14A filed with the Commission on February 26, 2003). 3(i) Amended and restated Certificate of Incorporation of Household International, Inc., as amended. 3(ii) Bylaws of Household International, Inc., as amended. 10.7(a) 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). 10.7(b) Amendment of Household International, Inc. Deferred Fee Plan for Directors, dated May 5, 2003. 10.8(a) 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). 10.8(b) Amendment of Household International, Inc. Deferred Phantom Stock Plan for Directors, dated May 5, 2003. 10.9(a) 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). 10.9(b) Third Amendment of Household International, Inc. Non-Qualified Deferred Compensation Plan for Executives, dated May 5, 2003. 10.10(a) Household International, Inc. Non-Qualified Deferred Compensation Plan for Stock Option Exercises (incorporated by reference to Exhibit 10.10 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2001). 10.10(b) First Amendment of Household International, Inc. Non-Qualified Deferred Compensation Plan for Stock Option Exercises, dated May 5, 2003. 10.11(a) Household International, Inc. Non-Qualified Deferred Compensation Plan for Restricted Stock Rights (incorporated by reference to Exhibit 10.11 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002). 28 10.11(b) Second Amendment of Household International, Inc. Non-Qualified Deferred Compensation Plan for Restricted Stock Rights, dated May 5, 2003. 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 99.1 Debt and Preferred Stock Securities Ratings. 99.2 Certification of Chief Executive Officer. 99.3 Certification of Principal Financial Officer. (b) Reports on Form 8-K During the first quarter of 2003, the Registrant filed the following Current Reports on Form 8-K: . Report filed January 16, 2003 with respect to the press release pertaining to the financial results of Household International, Inc. for the quarter and year ended December 31, 2002. . Report filed January 21, 2003 with respect to presentations made by representatives of Household International, Inc. . Report filed March 19, 2003 with respect to a press release announcing Household International, Inc. had agreed to the entry by the Securities and Exchange Commission ("SEC") of a cease-and-desist order relating to certain of Household's disclosures about its restructuring and other account management policies and related amendment to its Annual Report on Form 10-K/A for the year ended December 31, 2001. . Report filed March 28, 2003 with respect to press releases announcing the following: . the stockholders approval of the proposed acquisition of Household by HSBC Holdings plc . The redemption of all the issued and outstanding shares of its 5%, $4.50 and $4.30 cumulative preferred stocks. . Report filed March 28, 2003 with respect to a press release announcing completion of the merger of Household International, Inc. and a wholly-owned subsidiary of HSBC Holdings plc. 29 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOUSEHOLD INTERNATIONAL, INC. (Registrant) Date: May 15, 2003 By: /s/ David A. Schoenholz ---------------------------------------------- David A. Schoenholz President and Chief Operating Officer (also as principal financial officer) and on behalf of Household International, Inc. 30 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, William F. Aldinger, Chairman and Chief Executive Officer of Household International, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Household International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ William F. Aldinger ------------------------------------ William F. Aldinger Chairman and Chief Executive Officer 31 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, David A. Schoenholz, President and Chief Operating Officer (as the Principal Financial Officer) of Household International, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Household International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ David A. Schoenholz ------------------------------------- David A. Schoenholz President and Chief Operating Officer 32 Exhibit Index 2 Agreement and Plan of Merger by and among HSBC Holdings plc, Household International, Inc. and H2 Acquisition Corporation dated as of November 14, 2002 (incorporated by reference to Annex A of our definitive Proxy Statement on Schedule 14A filed with the Commission on February 26, 2003). 3(i) Amended and restated Certificate of Incorporation of Household International, Inc., as amended. 3(ii) Bylaws of Household International, Inc., as amended. 10.7(a) 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). 10.7(b) Amendment of Household International, Inc. Deferred Fee Plan for Directors, dated May 5, 2003. 10.8(a) 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). 10.8(b) Amendment of Household International, Inc. Deferred Phantom Stock Plan for Directors, dated May 5, 2003. 10.9(a) 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). 10.9(b) Third Amendment of Household International, Inc. Non-Qualified Deferred Compensation Plan for Executives, dated May 5, 2003. 10.10(a) Household International, Inc. Non-Qualified Deferred Compensation Plan for Stock Option Exercises (incorporated by reference to Exhibit 10.10 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2001). 10.10(b) First Amendment of Household International, Inc. Non-Qualified Deferred Compensation Plan for Stock Option Exercises, dated May 5, 2003. 10.11(a) Household International, Inc. Non-Qualified Deferred Compensation Plan for Restricted Stock Rights (incorporated by reference to Exhibit 10.11 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002). 10.11(b) Second Amendment of Household International, Inc. Non-Qualified Deferred Compensation Plan for Restricted Stock Rights, dated May 5, 2003. 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 99.1 Debt and Preferred Stock Securities Ratings. 99.2 Certification of Chief Executive Officer. 99.3 Certification of Principal Financial Officer. 33 EX-3.(I) 3 dex3i.txt RESTATED CERTIFICATE OF INCORPORATION OF HOUSEHOLD INTERNATIONAL, INC. EXHIBIT 3(i) CERTIFICATE OF MERGER of HOUSEHOLD INTERNATIONAL. INC. with and into H2 ACQUISTION CORPORATI0N ------------------------------------------- Pursuant to Section 251 of the General Corporation Law of the State of Delaware ------------------------------------------- H2 Acquisition Corporation. a Delaware corporation ("H21"), does hereby certify: FIRST: That the name and state of incorporation of each of the constituent corporations of the merger are as follows: Name State of Incorporation ---- ---------------------- Household International, Inc. Delaware H2 Acquisition Corporation Delaware SECOND: That an Agreement and Plan of Merger {the "Merger Agreement"), dated as of November 14, 2002, by and among HSBC Holdings plc, Household International, Inc. ("Household") and H2 has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with the requirements of Section 251 of the Delaware General Corporation Law. THIRD: The name of the surviving corporation of the merger is "H2 Acquisition Corporation" (the "Surviving Corporation"), which will change its name to "Household International. Inc." as provided in Article FOURTH hereof. FOURTH: Article I of the Amended and Restated Certificate of Incorporation of H2 is hereby amended to read in its entirety as follows; "The name of the corporation is Household International, Inc. (hereinafter referred to as the "Corporation"). Except for such amendment, the Restated Certificate of Incorporation of the Surviving Corporation shall be the Amended and Restated Certificate of Incorporation ofH2. FIFTH: That the executed Merger Agreement is on file at the office of the Surviving Corporation, the address of which is 2700 Sanders Road, Prospect Heights, illinois 60070. SIXTH: That a copy of the Merger Agreement will be furnished by the Surviving Corporation, on request and without cost, to any stockholder of any constituent corporation. SEVENTH: This Certificate of Merger shall become effective at 5:02 p.m., Eastern Standard Time, on March 28, 2003. * * * IN WITNESS WHEREOF, the undersigned duly executed this Certificate of Merger as of the 28th day of March 2003. H2 ACQUISITION CORPORATION By: /S/ Paul L. Lee ---------------------------------------- Paul L. Lee Vice President, Secretary and Treasurer CERTIFICATE OF DESIGNATIONS OF SERIES A CUMULATIVE PREFERRED STOCK OF H2 ACQUISITION CORPORATION -------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ----------------- H2 Acquisition Corporation a Delaware corporation (the "Corporation"), in accordance with the provisions of Section 151 (g) of the Delaware General Corporation Law, hereby certifies on March 26, 2003 as follows: FIRST: The Amended and Restated Certificate of Incorporation of the Corporation authorizes the issuance by the Board of Directors (the "Board") of the Corporation of up to 1100 shares of preferred stock (the "Preferred Stock"), par value $0.01 per share, in one or more series, and further authorizes the Board to determine the designations, preferences, rights and qualifications, limitations or restrictions granted to or imposed upon any such series of Preferred Stock. SECOND: On March 26, 2003, the Board adopted the following resolution authorizing the creation and issuance of a series of said Preferred Stock to be known as "Series A Cumulative Preferred Stock": RESOLVED, that pursuant to the authority vested in the Board in accordance with thc provisions of its Amended and Restated Certificate of Incorporation, a series of the class of authorized preferred stock (the "Preferred Stock"), par value $0.01 per share, of the Corporation be, and hereby is created, and that the designation and amount thereof and the voting powers, preferences and relative, participating. optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof (in addition to the powers, designations, preferences and relative, participating. optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Corporation's Amended and Restated Certificate of Incorporation that are applicable to the Preferred Stock), are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as the "Series A Cumulative Preferred Stock" ("Series A Preferred Stock") and the number of shares constituting such series shall be one thousand one hundred (1,100), which number may be decreased by the Board of Directors (the "Board") of the Corporation without a vote of stockholders; provided, however, that such number may not be decreased below the number of then currently outstanding shares of Series A Preferred Stock. Section 2. Dividends and Distributions. (a) The holders of shares of Series A Preferred Stock in preference to the holders of shares of the Corporation's common stock (the "Common Stock") par value $0.01 per share, and to any other capital stock of the Corporation ranking junior to Series A Preferred Stock as to payment of dividends, shall be entitled to receive, when, as and if declared by the Board out of funds of the Corporation legally available for the payment of dividends, cumulative dividends at, an annual rate of 6.5% of the Redemption Price (as defined in Section 4(a)) per share, and no more. Dividends payable in respect of the outstanding shares of Series A Preferred Stock shall I begin to accrue and be cumulative from the respective dates of original issue of such shares (which dates shall be reflected on the certificates evidencing the same), and shall be payable in quarterly payments on January 15, April 15, July 15 and October 15 {or, if any such day is not a Business Day (as defined in Section 8) the Business Day preceding such day) in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date") for each of the fiscal quarters ended March 31, June 30, September 30 and December 31, respectively, commencing in respect of each share of Series A Preferred Stock on July 15, 2003. (b) The amount of dividends payable shall be determined on the basis of twelve 30-day months and a 36O-day year. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accumulated 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 may fix a record date (a "Regular Record Date") for the determination of holders (the "Registered Holders") of shares of Series A Preferred Stock entitled to receive payment of a dividend declared thereon, which record date shall be no more than 60 days nor I less than ten days prior to the date fixed for the payment thereof. Any dividend declared by the Board as payable and punctually paid on a Quarterly Dividend Payment Date will be paid to Registered Holders. All cash payments shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. (c) If any applicable dividend payment or redemption payment is not made on a Quarterly Dividend Payment Date or the date set for such redemption, respectively, thereafter the Series A Preferred Stock shall accrue additional dividends in respect of all such dividend payments and redemption payments that are past due and unpaid (such amount, the "Arrearage"). Such additional dividends in respect of any Arrearage shall be deemed to accumulate from day to day whether or not earned or declared until the Arrearage is paid, shall be calculated as of such successive Quarterly Dividend Payment Date and shall constitute an additional Arrearage from and after any Quarterly Dividend Payment Date to the extent not paid on such Quarterly Dividend Payment Date. References in any Section herein to dividends that have accumulated or that have been deemed to have accumulated with respect to the Series A Preferred Stock shall include the amount, if any, of any Arrearage together with any dividends accumulated or deemed to have accumulated on such Arrearage pursuant to the immediately preceding two sentences. Additional dividends in respect of any Arrearage may be declared and paid at any time, in whole or in part, without reference to any regular Quarterly Dividend Payment Date, to the Registered Holders as they appear on the stock record books of the Corporation `on such record date as may be fixed by the Board of Directors (which record date shall be no more than 60 days nor less than ten days prior to the corresponding payment date). (d) The holders of shares of Series A Preferred Stock shall not be entitled toreceive any dividends or other distributions in respect of such shares of Series A Preferred Stock except as provided for hereby. Section 3. Restrictive Covenants: Voting Rights. (a) So long as any shares of Series A Preferred Stock shall be outstanding and unless the consent or approval of a greater number of shares shall then be required by law, without first obtaining the consent or approval of the holders of a majority of the number of then- outstanding shares of Series A Preferred Stock, given in person or by proxy at a meeting at which the holders of such shares shall be entitled to vote separately as a class, or by written consent, the Corporation shall not: (i) (A) authorize or create any class or series, or any shares of any class or series, of capital stock of the Corporation having any preference or priority (either as to dividends or upon redemption, liquidation, dissolution, or winding up) over Series A Preferred Stock ("Senior Stock") or (B) issues shares of Senior Stock; provided however, that no such vote shall be required with respect to the authorization or creation by the Corporation of one or more classes and/or series of Senior Stock if the proceeds of the Corporation's issuance of such Senior Stock are sufficient, and are used, to redeem all outstanding shares of Series A Preferred Stock concurrently with the issuance of such Senior Stock; (ii) (A) authorize or create any class or series, or any shares of any class or series, of capital stock of the Corporation ranking on a parity (either as to dividends or upon redemption, liquidation, dissolution or winding up) with the Series A Preferred Stock ("Parity Stock") or (B) issue shares of Parity Stock; provided, however, that no such vote shall be required with respect to the authorization, creation or issuance by the Corporation of one or more classes and/or series of Parity Stock if the proceeds of the Corporation's issuance of such Parity Stock are sufficient, and are used to redeem all outstanding shares of Series A Preferred Stock congruently with the issuance of such Parity Stock; (iii) reclassify, convert or exchange any shares of any capital stock of the Corporation into shares of Senior Stock or Parity Stock; (iv) authorize any security exchangeable for, convertible into, or evidencing the right to purchase any shares of Senior Stock or Parity Stock; or (v) amend alter or repeal the Corporation's Amended and Restated Certificate of Incorporation, as it may be amended from time to time, or the Corporation's By-Laws, as they may be amended from time to time, to alter or change the powers, designations, preferences, rights and qualifications, limitations or restrictions of Series A Preferred Stock or any Senior Stock or Parity Stock so as to affect Series A Preferred Stock in any material adverse respect. (b) The holders of the Series A Preferred Stock shall be entitled to one vote for each share of Series A Preferred Stock voting together with the holders of Common Stock as a single class, at all meetings of holders of shares of Common Stock (and written actions in lieu of meetings) (i) at which any resolution is proposed to (A) effect the voluntary liquidation, dissolution or winding up of the Corporation. or (B) the sale, lease, conveyance or exchange of all or substantially all of the assets, property or business of the Corporation; or (ii) if the Corporation shall have failed to pay in full all cash dividends due and payable on a Quarterly Dividend Payment Date (whether or not declared by the Board) including any Arrearage; provided in the case of clause (i) above, the holders of the Series A Preferred Stock will be entitled to vote only on any resolution that is proposed to effect the voluntary liquidation, dissolution or winding up of the Corporation, or the sale, lease, conveyance or exchange of all or substantially all of the assets, property or business of the Corporation. (c) With respect to all matters to be voted on at meetings of holders of shares of Common Stock (and written actions in lieu of meetings) and not specifically covered by Section 3(b) above, the holders of Series A Preferred Stock shall be entitled to vote with the holders of Common Stock, and shall have such vote so that the holders of Series A Preferred Stock, in the aggregate, hold 15% of the voting power with respect to such matters. (d) Except as otherwise expressly provided hereby, or as required by law, the holders of shares of Series A Preferred Stock shall have no voting rights and their consent shall not be required for the taking of any corporate action. Section 4. Redemption. (a) The Corporation may at its option redeem, in whole or in part, the shares of Series A Preferred Stock on or after March 31, 2008, but only out of funds legally available therefor, by paying therefor in cash $1,000,000 per share (the "Redemption Price") plus an amount equal to all accumulated dividends and any Arrearage thereon, to the date of redemption. If less than all outstanding shares of Series A Preferred Stock are to be redeemed, the Corporation shall redeem shares pro rata among the holders thereof in accordance with the respective numbers of shares of Series A Preferred Stock held by each of them. (b) In order to facilitate the redemption of shares of Series A Preferred Stock pursuant to Section 4(a), the Board may fix a record date for the determination of the holders of shares of Series A Preferred Stock to be redeemed. not more than 60 days or less than 10 days prior to the date fixed for such redemption. Notice of any redemption of shares of Series A Preferred Stock pursuant to Section 4(a) shall specify a date and procedures for such redemption and shall be mailed not less than 10 nor more than 60 days prior to such date fixed for redemption to each holder Registered Holder at such Registered Holder's address as it appears on the transfer books of the Corporation. (c) From and after the date of any redemption effected by the Corporation pursuant to Sections 4(a), all dividends on shares of Series A Preferred Stock thereby called for redemption shall cease to accrue and all rights of the holders thereof as holders of Series A Preferred Stock shall, with respect to shares thereby called for redemption, cease and terminate- Any interest allowed on moneys which shall have been Set Apart for Payment (as defined in Section 8) prior to the date of redemption for the payment of the Redemption Price (or any accumulated dividends and any Arrearage thereon) shall be paid to the Corporation. Any moneys so deposited which shall remain unclaimed by the holders of such Series A Preferred Stock at the end of two years after the redemption date shall to the fullest extent permitted by law become the property of, and be paid by such bank or trust company to, the Corporation. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock redeemed purchased or otherwise acquired by the Corporation or any Subsidiary (as defined in Section 8) of the Corporation in any. manner whatsoever shall become authorized but unissued shares of Preferred Stock, par value $0.0 I per share, of the Corporation and may be reissued as part of another class or series of Preferred Stock, subject to the conditions or restrictions on authorizing or creating any class or series. or any shares of any class or series, set forth in Section 3(a). Section 6. Liquidation, Dissolution or Winding Up (a) If the Corporation sha1lliquidate, dissolve or wind up, whether pursuant to federal bankruptcy laws, state laws or otherwise, no distribution shall be made (i) to the holders of shares of Junior Stock or Common Stock, unless prior thereto the holders of shares of Series A Preferred Stock shall have received $1.000,000 per share plus an amount equal to all accumulated dividends and any Arrearage thereon to the date of such payment or (ii) to the holders of shares of Parity Stock. except distributions made ratably on Series A Preferred Stock and all such Parity Stock in proportion to the total amounts which the holders of, all such shares are entitled upon such liquidation, dissolution or Winding up of the Corporation. (b) Neither the consolidation, merger or other business combination of the Corporation with or into any other Person (as defined in Section 8) or Persons, nor the sale, lease, exchange or conveyance of all or any part of the property, assets or business of the Corporation to a Person Or Persons other than the holders of Junior Stock shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 6. Section 7. Rank Series A Preferred Stock will rank, with respect to dividends and upon distribution of assets in liquidation, dissolution or winding up, prior to the Common Stock. Section 8. Definitions. As used herein, the following terms shall have the meanings indicated. "Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. "Person" means any individual, partnership, corporation, limited liability company, unincorporated organization trust or joint venture. or a governmental agency or political subdivision thereof. "Set Apart for Payment" means, when used with respect to funds of the Corporation to be used to effect any redemption of shares of Series A Preferred Stock, that funds of the Corporation sufficient to satisfy such payment of redemption shall have been irrevocably deposited with a bank or trust company doing business in the Borough of Manhattan in the City of New York and having a capital and surplus of at least $50 million in trust for the exclusive benefit of the holders of the shares of Series A Preferred Stock to be redeemed and that such funds will be payable from and after the date of redemption to holders of Series A Preferred Stock who surrender their certificates representing such stock in accordance with the notice of redemption provided pursuant to Section 4(b). "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 500/0 of the total voting power of shares of Voting Stock (as defined below) is at the time owned or controlled directly or indirectly by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (A) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (B) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the board of directors of such Person. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed in its name and on its behalf and affirmed, under penalties of perjury on the date first written above by a duly authorized officer of the Corporation. H2 ACQUISITION CORPORATION By: /S/ Paul L. Lee ------------------------------------------------ Paul L. Lee Vice President, Secretary and Treasurer CERTIFICATE OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF H2 ACQUISITION CORPORATION Paul L Lee, being the Vice-President. Secretary and Treasurer ofH2 Acquisition Corporation, a Delaware corporation (the "Corporation") does hereby certify as follows: 1. That the Corporation filed its original Certificate of Incorporation (the "Original Certificate" with the Delaware Secretary of State of the State on November 13,2002, and an Amended and Restated Certificate of Incorporation (the "First Amendment") with the Delaware Secretary of State of the State on March 24,2003 (the Original Certificate, as amended by the First Amendment, being hereinafter referred to as the "Certificate"). 2. That the Board of Directors of the Corporation, pursuant to Sections 141, 242 and 245 of the Delaware General Corporation Law (the "DGCL") adopted resolutions authorizing the Corporation to amend and restate the Certificate and adopt the Amended and Restated Certificate of Incorporation (the "Restated Certificate") attached hereto as Exhibit A. 3. That the sole holder of the Corporation's issued and outstanding capital stock approved and adopted the Restated Certificate in accordance with Sections 228, 242 and 245 of the DGCL. IN WITNESS WHEREOF, the undersigned, being the Vice-President, Secretary and Treasurer herein above named, for the purpose of the amending and restating the Certificate and adopting the Restated Certificate pursuant to the DGCL, under penalties of perjury, does hereby declare and certify that this is the act and deed of the Corporation and the facts stated herein are true, and accordingly has hereunto signed this certificate this 27th day of March 2003. By: /S/ Paul L. Lee ------------------------------------------- Paul L. Lee Vice President, Secretary and Treasurer EXHIBIT A AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF H2 ACQUISITION CORPORATION ------------------------------------------------- March 27 2003 ------------------------------------------------- Article I The name of the corporation is H2 Acquisition Corporation (hereinafter referred to as the "Corporation"). Article II The registered office of the Corporation is to be located at 1209 Orange Street, in the City of Wilmington, in the County of New Castle, in the State of Delaware. The name of its registered agent at that address is The Corporation Trust Company. Article III The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. Article IV (1) The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 1200 shares, of which 100 shares, par value $0.01, shall be of a class designated "common stock", and 1100 shares, par value $0.01 per share, shall be of a class designated "preferred stock". (2) The common stock of the Corporation shall be subject to the express terms of the preferred stock and any series thereof. Each share of common stock shall have the right to cast on vote for each share for the election of directors and on all other matters upon which stockholders are entitled to vote. (3) The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this Article IV, to provided for the issuance from time to time in one or more series of any number of shares of preferred stock, and, by filing a certificate pursuant to the Delaware General Corporation Law (the "Preferred Stock Designation"), to establish the number of shares to be included in each series, and to fix the designations, relative rights, preferences, qualifications and limitations of the shares of each such series. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (i) the designation of the series, which may be by distinguishing number, letter or title; (ii) the number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the Preferred Stock Designation) increase or decrease (but not below the number of shares thereof them outstanding); (iii) the voting rights, if any, of the holders of shares of the series; (iv) shall be cumulative or noncumulative and the dividend rate of the series, and the preferences, if any, over any other series (or of any other series over such series) with respect to dividends; (v) dates at which dividends, if any, shall be payable; (vi) the redemption rights and price or prices, if any, for shares of the series; (vii) the amounts payable on, and the preferences, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the affairs of the Corporation; (viii) the terms and amount of any purchase, retirement or sinking fund provided for the purchase or redemption of shares of the series; (ix) whether the shares of the series shall be convertible into or exchangeable for shares of any other class or series, or any other security, of the Corporation or any other corporation, and, if so, the specification of such other class or series of such other security, the conversion or exchange price or prices or rate or rates, any adjustments thereof, the date or dates at which such shares shall be convertible or exchangeable and all other terms and conditions upon which such conversion or exchange may be made; (x) whether the issuance of additional shares of preferred stock shall be subject to restrictions as to issuance, or as to the powers, preferences or other rights of any other series; (xi) the right of the shares of such series to the benefit of conditions and restrictions upon the creation of indebtedness of the Corporation or any subsidiary of the Corporation, upon the issue of any additional stock (including additional shares of such series or any other series) and upon the payment of dividends or the making of other distributions on, and the purchase, redemption or other acquisition by the Corporation or any subsidiary of any outstanding stock of the Corporation; and (xii) such other powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof as the Board of Directors shall determine. The holders of preferred stock shall not have any preemptive rights except to the extent such rights shall be specifically provided for in the resolution or resolutions providing for the issuance thereof adopted by the Board of Directors. Article V The name and address of the incorporator is as follows: Brandon W. Gardner Cleary, Gottlieb, Steen & Hamilton One Liberty Plaza New York, New York 10006 Article VI Names of the persons constituting the initial Board of Directors of the Corporation are as follows: Youseef A. Nasr 452 Fifth Ave., 10th Floor New York, NY 10018 Paul L. Lee 452 Fifth Ave., 7t Floor New York, NY 10018 Article VII The following provisions are inserted for the management of the business and for the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: (1) The number of directors of the Corporation shall be such as from time to time shall be fixed by, or in the manner provided in, the by-laws. Election of directors need not be by ballot unless the by-laws so provide. (2) The Board of Directors shall have powers without the assent or vote of the stockholders to make, alter, amend, change, add to or repeal the by-laws of the Corporation; to fix and vary the amount to be served for any proper purpose; to authorize and cause to be executed mortgages and liens upon all or any part of the property of the Corporation; to determine the use and disposition of any surplus or net profits; and to fix the times for the declaration and payment of dividends. (3) The directors in their discretion may submit any contract or act for approval or ratification at any annual meeting of the stockholders or at any meeting of the stockholders called for the purpose of considering any such act or contract, and any contract or act that shall be approved or be ratified by the vote of the holders of a majority of the stock of the Corporation which is represented in person or by proxy at such meeting and entitled to vote thereat (provided that a lawful quorum of stockholders be there represented in person or by proxy) shall be as valid and as binding upon the Corporation and upon all the stockholders as though it had been approved or ratified by every stockholder of the Corporation, whether or not the contract or act would otherwise be open to legal attack because of directors' interest, or of any other reason. (4) In addition to the powers and authorities hereinbefore or by statue expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation; subject, nevertheless, to the provisions of the statutes of Delaware, of this certificate, and to any by-laws from time to time made by the stockholders; provided, however, that no by-laws so made shall invalidate any prior act of the directors which would have been valid if such by-law had not been made. Article VIII The Corporation shall, to the full extend permitted by Section 145 of the Delaware General Corporation Law, as amended from time to time, indemnify all persons whom it may indemnify pursuant thereto. Article IX Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware, may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of section 271 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. Article X The Corporation reserves the right to amend, alter, change or repeal any provisions contained in this certificate of incorporation in the manner now or hereafter prescribed by law, and all rights and powers conferred herein on stockholders, directors and officers are subject to this reserved power. Article XI The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by paragraph (7) of subsection (b) of Section 102 of the General Corporation Law of the State of Delaware, as the same may be amended or supplemented. EX-3.(II) 4 dex3ii.txt BYLAWS OF HOUSEHOLD INTERNATIONAL, AS AMENDED EXHIBIT 3(ii) HOUSEHOLD INTERNATIONAL, INC. Bylaws ---------- (As in effect May 14, 2003) - -------------------------------------------------------------------------------- BYLAWS OF HOUSEHOLD INTERNATIONAL, INC. - -------------------------------------------------------------------------------- ARTICLE I. DEFINITIONS, PLACES OF MEETINGS. SECTION l. Definitions. When used herein, "Board" shall mean the Board of Directors of this Corporation, and "Chairman" shall mean Chairman of the Board of Directors. SECTION 2. Places of Meetings of Stockholders and Directors. Unless the Board shall fix another place for the holding of the meeting, meetings of stockholders and of the Board shall be held at the Corporation's headquarters, Prospect Heights, Cook County, Illinois, or at such other place specified by the person or persons calling the meeting. ARTICLE II. STOCKHOLDERS MEETINGS. SECTION l. Annual Meeting of Stockholders. The annual meeting of stockholders shall be held on such date and at such time as is fixed by the Board. Any previously scheduled annual meeting of stockholders may be postponed by resolution of the Board of Directors upon public announcement given prior to the date previously scheduled for such annual meeting of stockholders. SECTION 2. Special Meetings. CALL. Special meetings of the stockholders may be called at any time by the Chief Executive Officer or a majority of the Board of Directors. Any previously scheduled special meeting of stockholders may be postponed by resolution of the Board of Directors upon notice to the stockholders given prior to the date previously scheduled for such special meeting of stockholders. REQUISITES OF CALL. A call for a special meeting of stockholders shall be in writing, filed with the Secretary, and shall specify the time and place of holding such meeting and the purpose or purposes for which it is called. SECTION 3. Notice of Meetings. Written notice of a meeting of stockholders setting forth the place, date, and hour of the meeting and the purpose or purposes for which the meeting is -2- called shall be mailed not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at the meeting. SECTION 4. Quorum and Adjournments. At any meeting of stockholders, the holders of a majority of all the outstanding shares entitled to vote, present in person or by proxy, shall constitute a quorum for the transaction of business, and a majority of such quorum shall prevail except as otherwise required by law, the Certificate of Incorporation, or the bylaws. If the stockholders necessary for a quorum shall fail to be present at the time and place fixed for any meeting, the holders of a majority of the shares entitled to vote who are present in person or by proxy may adjourn the meeting from time to time, until a quorum is present, provided, however, that any stockholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the Chairman of the meeting. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. SECTION 5. Polls. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery of the State of Delaware upon application by a stockholder shall determine otherwise. ARTICLE III. BOARD OF DIRECTORS. SECTION l. General Powers. The business and affairs of this Corporation shall be managed under the direction of the Board. NUMBER. The number of directors shall be fixed from time to time by resolution of the Board. TENURE. The directors shall be elected at the annual meeting of stockholders, except as provided in Section 5 of this Article III, and each director shall hold office until his successor is elected and qualified or until his earlier resignation or removal. SECTION 2. Regular Meetings of the Board. Regular meetings of the Board shall be held at such times and places as the Board may fix. No notice shall be required. -3- SECTION 3. Special Meetings of the Board. Special meetings of the Board shall be held whenever called by the Chairman of the Board or Chief Executive Officer or any four or more directors. At least twenty-four hours written notice or oral notice of each special meeting shall be given to each director. If mailed, notice must be deposited in the United States mail at least seventy-two hours before the meeting. SECTION 4. Quorum. A majority of the members of the Board if the total number is odd or one-half thereof if the total number is even shall constitute a quorum for the transaction of business, but if at any meeting of the Board there is less than a quorum the majority of those present may adjourn the meeting from time to time until a quorum is present. At any such adjourned meeting, a quorum being present, any business may be transacted which might have been transacted at the original meeting. Except as otherwise provided by law, the Certificate of Incorporation, or the bylaws, all actions of the Board shall be decided by vote of a majority of those present. SECTION 5. Vacancies. When any vacancy occurs among the Board, the remaining members of the Board may elect a director to fill each such vacancy at any regular meeting of the Board, or at a special meeting called for that purpose. A director elected to fill a vacancy shall serve for the unexpired portion of the term of his predecessor in office. SECTION 6. Removal of Directors. Any director may be removed either with or without cause, at any time, by a vote of the holders of a majority of the shares of the Corporation at any meeting of stockholders called for that purpose. SECTION 7. Committees. The Board may, by resolution passed by a majority of the entire Board, designate one or more committees of directors which to the extent provided in the resolution shall have and may exercise powers and authority of the Board in the management of the business and affairs of the Corporation. SECTION 8. Action of the Board. Except as otherwise provided by law, corporate action to be taken by the Board shall mean such action at a meeting of the Board. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board consent in writing to a resolution authorizing the action. The resolution and the written consents thereto shall be filed with the minutes of the proceedings of the Board. Any one or more members of the Board may participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute -4- presence in person at a meeting. ARTICLE IV. OFFICERS. SECTION 1. Officers. The Policy Making Officers of the Corporation shall be appointed by the Board of Directors at the next meeting of the Board following the Annual Meeting of Stockholders. The Board of Directors shall also appoint General Officers to manage the day-to-day business functions of the Corporation. Policy Making Officers shall have the authority to appoint other Assistant Officers to assist in the ministerial aspects of their area of responsibilities. The Policy Making Officers of the Corporation shall be the Chairman of the Board, the Chief Executive Officer, the Chief Operating Officer (if any), the Chief Financial Officer (if any), the President (if any), any Vice Chairman (if any), any Senior Executive Vice President, any Executive Vice President or Group Executive, the General Counsel (if any) and the Chief Accounting Officer (if any). The General Officers of the Corporation shall be any Senior Vice President, any Vice President, any Managing Director, the Controller (if any), the Treasurer and the Secretary. Any person holding the title of Chairman or Chief Executive Officer shall be a director of the Corporation. The Board may from time to time designate, employ, or appoint such other officers and assistant officers, agents, employees, counsel, and attorneys at law or in fact as it shall deem desirable for such periods and on such terms as it may deem advisable, and such persons shall have such titles, only such power and authority, and perform such duties as the Board may determine. SECTION 2. Duties of Chairman of the Board. The Chairman shall sign and issue, jointly with the President (if any), all reports to the stockholders and shall preside at all meetings of stockholders and of the Board. He shall, in general, perform duties incident to the office of Chairman as may be prescribed by the Board. SECTION 3. Duties of Chief Executive Officer. At the next meeting of the Board following the Annual Meeting of Stockholders, or other meeting at which Policy Making Officers are or may be elected, the Board shall designate the Chairman or the President (if any) as the Chief Executive Officer of the Corporation. The Chief Executive Officer shall have general authority over all matters relating to the business and affairs of the Corporation subject to the control and direction of the Board. In the absence or inability of the Chief Executive Officer to act, the Chair of -5- the Executive Committee of the Board shall perform the duties of the Chief Executive Officer. SECTION 4. Duties of President. The President, if one is appointed by the Board, shall, in general, perform all duties incident to the office of President and shall perform such other duties as may be prescribed by the Board. In the absence or inability of the Chairman, or the Chair of the Executive Committee in accordance with Section 3 above, to act, the President shall perform the duties of the Chairman and Chief Executive Officer for such time period as required. SECTION 5. Duties of a Vice Chairman. A Vice Chairman, if one is appointed by the Board, shall, in general, perform all duties incident to the office of a Vice Chairman and shall perform such other duties as may be prescribed by the Board. In the absence or inability of the President or the Chair of the Executive Committee to act as the Chief Executive Officer in accordance with Sections 3 and 4 above, the most senior Vice Chairman, as designated by the Chairman, shall perform the duties of the Chief Executive Officer and Chairman for such time period as required. SECTION 6. Duties of Senior Executive Vice Presidents, Executive Vice Presidents, Group Executives and Senior Vice Presidents. Each Senior Executive Vice President, Executive Vice President, Group Executive and Senior Vice President shall have such powers and perform such duties as may be prescribed by the Chief Executive Officer of the Corporation or the Board. The order of seniority, if any, among the Senior Executive Vice Presidents, Executive Vice Presidents, Group Executives and Senior Vice Presidents shall be as designated from time to time by the Chief Executive Officer of the Corporation. In the absence or inability of any Vice Chairman to act as the Chief Executive Officer as may be required in accordance with Section 5 above, the senior of the Senior Executive Vice Presidents, Executive Vice Presidents, Group Executives and Senior Vice Presidents, if one has been so designated, shall perform the duties of the Chief Executive Officer and Chairman for such time period as required. SECTION 7. Duties of Secretary. The Secretary shall record the proceedings of meetings of the stockholders and directors, give notices of meetings, and shall, in general, perform all duties incident to the office of Secretary and such other duties as may be prescribed by the Board. SECTION 8. Duties of Treasurer. The Treasurer shall have custody of all funds, securities, evidences of indebtedness, and other similar property of the Corporation, and shall, in general, perform all duties incident to the office of Treasurer and such other duties as may be prescribed by the Board. -6- ARTICLE V. STOCK AND STOCK CERTIFICATES. SECTION 1. Transfers. Shares of stock shall be transferable on the books of the Corporation only by the person named in the certificate or by an attorney, lawfully constituted in writing, and upon surrender of the certificate therefor. Every person becoming a stockholder by such transfer shall, in proportion to his shares, succeed to all rights of the prior holder of such shares. SECTION 2. Stock Certificates. The certificates of stock of the Corporation shall be numbered and shall be entered in the books of the Corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by the President or Vice President and the Secretary or Treasurer. Every certificate shall have noted thereon any information required to be set forth by the applicable law. If the Corporation has a transfer agent or an assistant transfer agent or a transfer clerk acting on its behalf and a registrar, the signature of any such officer may be a facsimile. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signatures shall have been used thereon had not ceased to be such officer or officers of the Corporation. SECTION 3. Fixing Record Date. (A) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. (B) If no record date is fixed: (1) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders -7- shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (2) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. SECTION 4. Registered Shareholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the law. SECTION 5. Lost Certificates. Any person claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact and advertise the same in such manner as the Board may require, and the Board may, in its discretion, require the owner of the lost or destroyed certificate, or his legal representative, to give the Corporation a bond, sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss of any such certificate. A new certificate of the same tenor and for the same number of shares as the one alleged to be lost or destroyed may be issued without requiring any bond when, in the judgment of the Board, it is proper so to do. ARTICLE VI. EMERGENCY BYLAWS. SECTION l. When Operative. Notwithstanding any different provision in the preceding Articles of the bylaws or in the Certificate of Incorporation, the emergency bylaws provided in this Article VI shall be operative during any emergency resulting from an attack on the United States or on a locality in which the Corporation conducts its business or customarily holds meetings of its Board or its stockholders, or during any nuclear or atomic disaster, or during the existence of any catastrophe, or other similar emergency condition, as a result of which a quorum of the Board or a standing committee thereof cannot readily be convened for action. SECTION 2. Board Meetings. During any such emergency, a meeting of the Board may be called by any director or, if necessary, by any officer who is not a director. The meeting shall be held at such time and place, within or without Cook County, Illinois, specified by the person calling the meeting and -8- in the notice of the meeting which shall be given to such of the directors as it may be feasible to reach at the time and by such means as may be feasible at the time, including publication or radio. Such advance notice shall be given as, in the judgment of the person calling the meeting, circumstances permit. Two directors shall constitute a quorum for the transaction of business. To the extent required to constitute a quorum at the meeting, the officers present shall be deemed, in order of rank and within the same rank in order of seniority, directors for the meeting. SECTION 3. Amendments to Emergency Bylaws. These emergency bylaws may be amended, either before or during any emergency, to make any further or different provision that may be practical and necessary for the circumstances of the emergency. ARTICLE VII. CONSENTS TO CORPORATE ACTION. SECTION 1. Action by Written Consent. Unless otherwise provided in the Certificate of Incorporation, any action which is required to be or may be taken at any annual or special meeting of stockholders of the Corporation, subject to the provisions of Sections (2) and (3) of this Article VII, may be taken without a meeting, without prior notice and without a vote if a consent in writing, setting forth the action so taken, shall have been signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or to take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided, however, that prompt notice of the taking of the corporate action without a meeting and by less than unanimous written consent shall be given to those stockholders who have not consented in writing. SECTION 2. Determination of Record Date for Action by Written Consent. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting shall be fixed by the Board of Directors of the Corporation. Any stockholder seeking to have the stockholders authorize or take corporate action by written consent without a meeting shall, by written notice to the Secretary, request the Board of Directors to fix a record date. Upon receipt of such a request, the Secretary shall, as promptly as practicable, call a special meeting of the Board of Directors to be held as promptly as practicable. At such meeting, the Board of Directors shall fix a record date as provided in Section 213(b) (or its successor provision) of the Delaware General Corporation Law; that record date, however, shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board nor more than 15 days from the date of the receipt of the -9- stockholder's request. Should the Board fail to fix a record date as provided for in this Section 2, then the record date shall be the day on which the first written consent is duly delivered pursuant to Section 213(b) (or its successor provision) of the Delaware General Corporation Law, or, if prior action is required by the Board with respect to such matter, the record date shall be at the close of business on the day on which the Board adopts the resolution taking such action. SECTION 3. Procedures for Written Consent. In the event of the delivery to the Corporation of a written consent or consents purporting to represent the requisite voting power to authorize or take corporate action and/or related revocations, the Secretary of the Corporation shall provide for the safekeeping of such consents and revocations. ARTICLE VIII. MISCELLANEOUS PROVISIONS. SECTION l. Waiver of Notice. Whenever notice is required to be given, a written waiver thereof signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 2. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. SECTION 3. Fiscal Year. The Fiscal Year of the Corporation shall be the calendar year. SECTION 4. Records. The Bylaws and the proceedings of all meetings of the stockholders and the Board shall be recorded in appropriate minute books provided for the purpose. The minutes of each meeting shall be signed by the Secretary or other officer appointed to act as Secretary of the meeting. SECTION 5. Amendments. The Bylaws may be added to, amended, altered or repealed at any regular meeting of the Board, by a vote of a majority of the total number of the directors, or at any meeting of stockholders, duly called and held, by a majority of the stock represented at such meeting. -10- ARTICLE IX. INDEMNIFICATION AND INSURANCE. SECTION 1. Indemnification. 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 Section 2 of this Article IX, 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 any 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. SECTION 2. Determination of Right to Indemnification. If a claim under Section 1 of this Article 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 -11- 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 Section 1 of this Article 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. SECTION 3. Advances. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of these Bylaws, agreement, contract, vote of stockholders or disinterested directors, or otherwise. SECTION 4. Insurance. 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 Article, the Delaware General Corporation Law, or otherwise. -12- EX-10.7(B) 5 dex107b.txt AMENDMENT OF HOUSEHOLD INTERNATIONAL, INC. DEFERRED FEE PLAN FOR DIRECTORS EXHIBIT 10.7(b) AMENDMENT OF HOUSEHOLD INTERNATIONAL DEFERRED FEE PLAN FOR DIRECTORS WHEREAS, Household International, Inc. (the "Company") maintains the Household International Deferred Fee Plan for Directors (the "Plan"); and WHEREAS, the Plan has been amended on September 8, 1997 and September 1, 1999 and further amendment of the Plan is now deemed desirable; NOW, THEREFORE, pursuant to the power reserved to the Company under Section 18 of the Plan and resolutions adopted by the Board of Directors of the Company on November 12, 2002, the Plan is hereby amended, effective as of March 28, 2003, in the following particulars: 1. By adding the following new sentence at the end of Section 5 of the Plan "No deferral elections are permitted after March 28, 2003." 2. By substituting the following for paragraph (2) of Section 7 of the Plan: "(2) if the compensation is to be placed in the Stock Component, the amount elected to be deferred will be used to purchase units of Company Stock using the fair market value of such Company Stock on the date the compensation would otherwise be paid. For purposes of the Plan, the "fair market value" of one share or unit of Company Stock shall be the closing price on the London Stock Exchange of a share of such stock for the trading date preceding the respective determination date. The units of Company Stock have been converted from units of Household International, Inc. common stock to a right to receive HSBC Holdings plc ordinary shares and therefore Company Stock refers to either common stock of Household or ordinary shares of HSBC as appropriate. The Cash Component will be credited on each dividend payment date for the Company Stock with the aggregate cash dividend which would have been paid if the existing Company Stock were actual shares of the Company Stock." 3. By substituting the following two sentences for the fourth sentence of Section 9 of the Plan: "Deferred compensation and interest or dividends (including appreciation or loss) thereon will be payable in cash from the Cash Component or shares of Company Stock from the Stock Component either in a lump sum or in such number of quarterly or annual installments as the participant chooses, subject to the participant's right to change such method of distribution no 1 later than twelve months prior to the first date deferred compensation is to be paid. A participant may choose to receive an equivalent number of HSBC American depositary shares instead of Company Stock and any fraction of a share will be paid in cash." HOUSEHOLD INTERNATIONAL, INC. By: -------------------------------- George A. Lorch Chair, Compensation Committee Dated: May 5, 2003 (Corporate Seal) ATTEST: By: ------------------------------ Kenneth H. Robin Secretary 2 EX-10.8(B) 6 dex108b.txt AMENDMENT OF HOUSEHOLD INTERNATIONAL, INC. DEFERRED PHANTOM STOCK PLAN EXHIBIT 10.8(b) AMENDMENT OF HOUSEHOLD INTERNATIONAL DEFERRED PHANTOM STOCK PLAN FOR DIRECTORS WHEREAS, Household International, Inc. (the "Company") maintains the Household International Deferred Phantom Stock Plan for Directors (the "Plan"); and WHEREAS, the Plan has been amended on January 9, 1996, July 9, 1996, January 14, 1997, September 8, 1997, and September 1, 1999 and further amendment of the Plan is now deemed desirable; NOW, THEREFORE, pursuant to the power reserved to the Company under Section 16 of the Plan and resolutions adopted by the Board of Directors of the Company on November 12, 2002, the Plan is hereby amended, effective as of March 28, 2003, in the following particulars. 1. By adding the following new sentence at the end of Section 3 of the Plan: "After March 28, 2003, there will be no additional deferrals of phantom stock units." 2. By substituting the following for Section 6 of the Plan: "Section 6. Investment. The Account of each participant will have both a Stock Component and a Cash Component. Under the Plan, the units of phantom Household International, Inc. common stock credited to a participant's Account have been changed to a right to receive HSBC Holdings plc ordinary shares and comprise the Stock Component of the Account. Reference to Company Stock means either the Household common stock or the HSBC ordinary shares as appropriate. During the deferred period, the Cash Component of the Account will be credited on each dividend payment date for the Company Stock with the aggregate cash dividend which would have been paid if the existing Company Stock deemed to be credited to the Stock Component of the participant's Account were actual shares of Company Stock (the "Stock Dividend"). These Stock Dividends will be invested in the Cash Component of the Account at a rate equal to the United States five-year treasury rate plus HFC's borrowing spread over that rate on the first day of each calendar quarter in which such interest is credited to the participant's Account with interest compounded quarterly." 3. By substituting the following four sentences for the second sentence of Section 7 of the Plan: "Except as provided in the following sentences of this Section 7, all deferred amounts to be paid to a participant pursuant to the Plan are to be paid in shares of Company Stock with the value of the Company Stock being the fair market value of an equal number of shares of Company Stock on the date of payment. For purposes of the Plan, the "fair market value" of one share or unit of Company Stock shall be the closing price on the London Stock Exchange of a share of such stock for the trading date preceding the respective determination date. A fraction of a share and the amounts invested in the Cash Component of the Account will be paid in cash. A participant may choose to receive an equivalent number of HSBC American depositary shares instead of Company Stock and any fraction of a share will be paid in cash." 4. By substituting the following sentence for the third sentence of Section 8 of the Plan: "Deferred Company Stock and dividends (including appreciation or loss) thereon will be payable either in a lump sum or in such number of quarterly or annual installments as the participant chooses up to a maximum ten-year period, subject to the participant's right to change such method of distribution no later than twelve months prior to the first date deferred Company Stock and dividends are to be paid." HOUSEHOLD INTERNATIONAL, INC. By --------------------------------- George A. Lorch Chair, Compensation Committee Dated: May 5, 2003 ATTEST: - ----------------------------- Kenneth H. Robin Secretary (CORPORATE SEAL) EX-10.9(B) 7 dex109b.txt THIRD AMENDMENT OF HOUSEHOLD INTL. INC. NON-QUALIFIED DEFERRED COMP. PLAN EXHIBIT 10.9(b) THIRD AMENDMENT OF THE HOUSEHOLD INTERNATIONAL NON-QUALIFIED DEFERRED COMPENSATION PLAN WHEREAS, Household International, Inc. (the "Company") maintains the Household International Non-Qualified Deferred Compensation Plan (the "Plan"); and WHEREAS, the Plan has been amended and further amendment of the Plan is now considered desirable; NOW, THEREFORE, pursuant to the power reserved to the Compensation Committee of the Company under Section 17 of the Plan and resolutions adopted by the Board of Directors of the Company on November 12, 2002, the Plan be and is amended, effective as of March 28, 2003, by substituting the following for Section 7 of the Plan: "Section 7. Investment. Each deferred compensation account will be credited with earnings and/or losses from the date on which deferred compensation would initially have been payable until the date of payment. Any amounts that are deferred after March 28, 2003 will be deemed invested in Fund B, the Treasury Fund. This Fund B shall be credited with interest at a rate equal to the United States five-year treasury rate plus HFC's borrowing spread over that rate on the first day of each calendar quarter with interest compounded quarterly. Prior to March 28, 2003, a participant could elect to have his deferred compensation account be a deemed investment in either Fund A or Fund B. Fund A was known as the Household International, Inc. Common Stock Fund and the value of this Fund A was measured by Household International, Inc. common shares, but the value of Fund A is now measured by HSBC Holdings plc ordinary shares and is known as the Company Stock Fund. Deferred compensation accounts that were invested in Fund A, the Company Stock Fund, can remain so invested but any future dividends on Company Stock attributable to that Fund A will be invested in Fund B. "The participant can change his or her investment election as to the amount already credited to his account from Fund A to Fund B, but not vice versa, on a quarterly basis by filing an appropriate election form with the Committee prior to the first day of the quarter in which the election is to be effective. There is no guarantee a participant's deferred compensation account invested in Fund A will increase; amounts may decrease based on the performance of Fund A." HOUSEHOLD INTERNATIONAL, INC. By ------------------------------ George A. Lorch Chair, Compensation Committee Dated: May 5, 2003 ATTEST: - ------------------------ Kenneth H. Robin Secretary (CORPORATE SEAL) EX-10.10(B) 8 dex1010b.txt FIRST AMENDMENT OF HOUSEHOLD INT., INC. NON-QUALIFIED DEFERRED COMP. PLAN EXHIBIT 10.10(b) FIRST AMENDMENT OF HOUSEHOLD INTERNATIONAL NON-QUALIFIED DEFERRED COMPENSATION PLAN FOR STOCK OPTION EXERCISES WHEREAS, Household International, Inc. (the "Company") maintains the Household International Non-Qualified Deferred Compensation Plan for Stock Option Exercises (the "Plan"); and WHEREAS, amendment of the Plan is now considered desirable; NOW, THEREFORE, pursuant to the power reserved to the Compensation Committee of the Company under Section 16 of the Plan and resolutions adopted by the Board of Directors of the Company on November 12, 2002, the Plan is hereby amended, effective as of March 28, 2003, in the following particulars: 1. By adding the following new sentence at the end of Section 5 of the Plan: "No deferral elections are permitted after March 28, 2003." 2. By substituting the following for Section 7 of the Plan: "Section 7. Investment. Each deferred compensation account was credited with shares of Household stock on the date on which the Household stock option was exercised. The shares of Household stock have been changed to a right to receive HSBC Holdings plc ordinary shares and therefore Company Stock refers to either the Household stock or the HSBC ordinary shares as appropriate. No dividends have been or will be paid on such Company 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 the Company Stock." 3. By substituting the following three sentences for the third and fourth sentences of Section 8 of the Plan: "All deferred amounts to be paid to a participant in stock pursuant to the Plan are to be paid in shares of Company Stock with the value of such shares being the fair market value of an equal number of shares of Company Stock on the date of payment. For purposes of the Plan, the "fair market value" shall be the closing price on the London Stock Exchange of a share of Company Stock for the trading date preceding the respective determination date. A participant may choose to receive an equivalent number of HSBC American depositary shares instead of Company Stock and any fraction of a share of Company Stock will be paid in cash." HOUSEHOLD INTERNATIONAL, INC. By ------------------------------ George A. Lorch Chair, Compensation Committee Dated: May 5, 2003 ATTEST: - ------------------------ Kenneth H. Robin Secretary (CORPORATE SEAL) EX-10.11(B) 9 dex1011b.txt SECOND AMENDMENT OF HOUSEHOLD INT., INC. NON-QUALIFIED DEFERRED COMP. PLAN EXHIBIT 10.11(b) SECOND AMENDMENT OF HOUSEHOLD INTERNATIONAL NON-QUALIFIED DEFERRED COMPENSATION PLAN FOR RESTRICTED STOCK RIGHTS WHEREAS, Household International, Inc. (the "Company") maintains the Household International Non-Qualified Deferred Compensation Plan for Restricted Stock Rights (the "Plan"); and WHEREAS, the Plan has been amended and further amendment of the Plan is now considered desirable; NOW, THEREFORE, pursuant to the power reserved to the Compensation Committee of the Company under Section 16 of the Plan and resolutions adopted by the Board of Directors of the Company on November 12, 2002, the Plan is hereby amended, effective as of March 28, 2003, in the following particulars: 1. By adding the following new sentence at the end of Section 5 of the Plan: "No deferral elections are permitted after March 28, 2003." 2. By substituting the following for Sections 7 and 8 of the Plan: "Section 7. Investment. The deferred compensation account of each participant shall have both a Stock Component and a Treasury Fund Component. The Stock Component of each deferred compensation account was credited with shares of Household International, Inc. common stock on the date on which the Household Restricted Stock Rights otherwise would have vested. This investment in Household common stock was later changed to a right to receive HSBC Holdings plc ordinary shares (both the Household common stock and the HSBC ordinary shares being referred to herein as "Company Stock"). Unless the participant has made or makes an election otherwise as outlined below, during the deferral period the Treasury Fund Component of his deferred compensation account will be credited on each dividend payment date for the Company Stock with the aggregate cash dividend which would have been paid if the existing Company Stock deemed to be credited to the Stock Component of his deferred compensation account were actual shares of the Company Stock (the "Stock Dividend"). These Stock Dividends credited to the deferred compensation account will be deemed invested in the Treasury Fund which shall be credited with interest at a rate equal to the United States five-year treasury rate plus HFC's borrowing spread over that rate on the first day of each calendar quarter with interest compounded quarterly. A participant was permitted to make an election prior to October 1, 2002 to receive in cash Stock Dividends attributable to shares of Company Stock deemed to be credited to the participant's deferred compensation account. Due to the change in the investment of Stock Dividends, a participant will now be given the opportunity to make an election prior to June 1, 2003 to receive, in cash, Stock Dividends attributable to shares of Company Stock deemed to be credited to the participant's deferred compensation account pursuant to a deferral election made on or before March 28, 2003 ("Prior Deferrals"). This new one-time election will apply only to Stock Dividends payable on or after January 1, 2004 with respect to such Prior Deferrals. Cash payments of any Stock Dividends will be disbursed with the regular payroll processed following each dividend payment date on the Company Stock, less the amount of any taxes required to be withheld by any federal, state or local government. 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 Company 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 a fraction of a share and the amounts invested in the Treasury Fund 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 a fraction of a share and the amounts invested in the Treasury Fund 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 election. All deferred amounts to be paid to a participant in stock pursuant to the Plan are to be paid in shares of Company Stock with the value of such shares being the fair market value of an equal number of shares of Company Stock on the date of payment. For purposes of the Plan, the "fair market value" of one share of Company Stock shall be the closing price on the London Stock Exchange of a share of such stock for the trading date preceding the respective determination date. A participant may choose to receive an equivalent number of HSBC American depositary shares instead of Company Stock and any fraction of a share will be paid in cash. "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, except for a fraction of a share and the amounts invested in the Treasury Fund, distribution must still be paid in Company Stock or HSBC American depositary shares as selected by the participant." HOUSEHOLD INTERNATIONAL, INC. By ------------------------------ George A. Lorch Chair, Compensation Committee Dated: May 5, 2003 ATTEST: - ------------------------ Kenneth H. Robin Secretary (CORPORATE SEAL) EX-12 10 dex12.txt STATEMENT OF COMPUTATION OF RATIO OF EARINGS 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
- ----------------------------------------------------------------------------------------- March 29 January 1 Three months through through ended March 31, March 28, March 31, (In millions) 2003 2003 2002 - ----------------------------------------------------------------------------------------- (Successor) (Predecessor) (Predecessor) Net income $ 9.7 $ 245.7 $ 491.0 Income taxes 5.0 181.8 254.5 - ----------------------------------------------------------------------------------------- Income before income taxes 14.7 427.5 745.5 - ----------------------------------------------------------------------------------------- Fixed charges: Interest expense (1) 14.6 898.1 937.2 Interest portion of rentals (2) 0.6 18.2 16.4 - ----------------------------------------------------------------------------------------- Total fixed charges 15.2 916.3 953.6 - ----------------------------------------------------------------------------------------- Total earnings as defined $29.9 $1,343.8 $1,699.1 ========================================================================================= Ratio of earnings to fixed charges (4) 1.97 1.47 1.78 Preferred stock dividends (3) $ 1.1 $ 32.3 $ 12.9 Ratio of earnings to combined fixed charges and preferred stock dividends (4) 1.83 1.42 1.76 - -----------------------------------------------------------------------------------------
(1) For financial statement purposes, interest expense includes income earned on temporary investment of excess funds, generally resulting from over-subscriptions of commercial paper. (2) Represents one-third of rentals, which approximates the portion representing interest. (3) Preferred stock dividends are grossed up to their pretax equivalents. (4) The 2003 ratio for the eighty-seven day period ending March 28, 2003, has been negatively impacted by $170.9 million (after-tax) of HSBC acquisition related costs incurred by Household. Excluding this item, our ratio of earnings to fixed charges would have been 1.69 percent for the eighty-seven day period ended March 28, 2003 (predecessor), and our ratio of earnings to combined fixed charges and preferred stock dividends would have been 1.64 percent for the eighty-seven day period ended March 28, 2003 (predecessor). These non-GAAP financial ratios are provided for comparison of our operating trends only. EX-99.1 11 dex991.txt DEBT AND PREFERRED STOCK SECURITIES RATINGS EXHIBIT 99.1 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES DEBT AND PREFERRED STOCK SECURITIES RATINGS Standard Moody's & Poor's Investors Corporation Service Fitch, Inc. - -------------------------------------------------------------------------------- At March 31, 2003 - -------------------------------------------------------------------------------- Household International, Inc. Senior debt A A3 A 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 HFC Bank plc Senior debt A A2 A Commercial paper A-1 P-1 NR - -------------------------------------------------------------------------------- NR - Not rated EX-99.2 12 dex992.txt CERTIFICATION OF CEO EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Household International, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William F. Aldinger, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ William F. Aldinger ------------------------------------ William F. Aldinger Chairman and Chief Executive Officer May 15, 2003 EX-99.3 13 dex993.txt CERTIFICATION OF PRESIDENT AND CHIEF OPERATIING OFFICER EXHIBIT 99.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Household International, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report"), I, David A. Schoenholz, President and Chief Operating Officer (as Principal Financial Officer) of the Company, certify, pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ David A. Schoenholz ---------------------------------------- David A. Schoenholz President and Chief Operating Officer May 15, 2003 -----END PRIVACY-ENHANCED MESSAGE-----