HSBC FinCorp Restated10Q1 Q2

HSBC Holdings PLC 31 March 2005 PART 2 Reconciliations of our managed basis segment results to managed basis and owned basis consolidated totals are as follows: MANAGED CREDIT ADJUSTMENTS/ BASIS CARD INTER- ALL RECONCILING CONSOLIDATED CONSUMER SERVICES NATIONAL OTHER ITEMS TOTALS ----------------------------------------------------------------------------------------------------- (IN MILLIONS) THREE MONTHS ENDED JUNE 30, 2004 (RESTATED) Net interest income..... $ 1,915 $ 513 $ 196 $ (42) $ - $ 2,582 Fee income.............. 85 335 24 (4) - 440 Other revenues, excluding fee income................ (210) (56) 101 307 (34)(2) 108 Intersegment revenues... 26 6 3 (1) (34)(2) - Provision for credit losses................ 734 319 93 (1) - 1,145 Total costs and expenses.............. 647 284 173 217 - 1,321 Net income.............. 256 120 34 45 (22) 433 Receivables............. 92,196 18,355 11,380 337 - 122,268 Assets.................. 94,799 20,405 12,342 24,471 (8,648)(4) 143,369 --------- --------- --------- --------- --------- ---------- THREE MONTHS ENDED JUNE 30, 2003 (RESTATED) Net interest income..... $ 1,804 $ 472 $ 181 $ 77 $ - $ 2,534 Fee income.............. 79 295 20 1 - 395 Other revenues, excluding fee income................ 176 37 77 643 (40)(2) 893 Intersegment revenues... 30 7 3 - (40)(2) - Provision for credit losses................ 1,183 383 85 3 2(3) 1,656 Total costs and expenses.............. 594 269 127 257 - 1,247 Net income.............. 175 94 44 313 (27) 599 Receivables............. 83,992 17,439 10,186 958 - 112,575 Assets.................. 86,352 20,087 11,172 27,037 (8,822)(4) 135,826 --------- --------- --------- --------- --------- ---------- SIX MONTHS ENDED JUNE 30, 2004 (RESTATED) Net interest income..... $ 3,779 $ 1,041 $ 398 $ (62) $ - $ 5,156 Fee income.............. 179 685 44 (6) - 902 Other revenues, excluding fee income................ (391) (20) 189 657 (67)(2) 368 Intersegment revenues... 48 14 7 (2) (67)(2) - Provision for credit losses................ 1,399 740 188 (2) 1(3) 2,326 Total costs and expenses.............. 1,274 561 345 551 - 2,731 Net income.............. 560 257 62 67 (43) 903 --------- --------- --------- --------- --------- ---------- SIX MONTHS ENDED JUNE 30, 2003 (RESTATED) Net interest income..... $ 3,542 $ 950 $ 360 $ 36 $ - $ 4,888 Fee income.............. 176 621 39 3 - 839 Other revenues, excluding fee income................ 193 95 150 1,226 (77)(2) 1,587 Intersegment revenues... 56 16 6 (1) (77)(2) - Provision for credit losses................ 2,123 775 170 2 3(3) 3,073 Total costs and expenses.............. 1,159 538 265 706 - 2,668 HSBC acquisition related costs incurred by Household............. - - - 198 - 198 Net income.............. 392 222 75 351 (51) 989 Operating net income(1)............. 392 222 75 518 (51) 1,156 --------- --------- --------- --------- --------- ---------- OWNED BASIS SECURITIZATION CONSOLIDATED ADJUSTMENTS TOTALS ------------------------ ----------------------------- (IN MILLIONS) THREE MONTHS ENDED JUNE 30, 2004 (RESTATED) Net interest income..... $ (652)(5) $ 1,930 Fee income.............. (198)(5) 242 Other revenues, excluding fee income................ 702(5) 810 Intersegment revenues... - - Provision for credit losses................ (148)(5) 997 Total costs and expenses.............. - 1,321 Net income.............. - 433 Receivables............. (22,836)(6) 99,432 Assets.................. (22,836)(6) 120,533 ---------- ---------- THREE MONTHS ENDED JUNE 30, 2003 (RESTATED) Net interest income..... $ (720)(5) $ 1,814 Fee income.............. (167)(5) 228 Other revenues, excluding fee income................ 270(5) 1,163 Intersegment revenues... - - Provision for credit losses................ (617)(5) 1,039 Total costs and expenses.............. - 1,247 Net income.............. - 599 Receivables............. (24,268)(6) 88,307 Assets.................. (24,268)(6) 111,558 ---------- ---------- SIX MONTHS ENDED JUNE 30, 2004 (RESTATED) Net interest income..... $ (1,406)(5) $ 3,750 Fee income.............. (395)(5) 507 Other revenues, excluding fee income................ 1,400(5) 1,768 Intersegment revenues... - - Provision for credit losses................ (401)(5) 1,925 Total costs and expenses.............. - 2,731 Net income.............. - 903 ---------- ---------- SIX MONTHS ENDED JUNE 30, 2003 (RESTATED) Net interest income..... $ (1,446)(5) $ 3,442 Fee income.............. (322)(5) 517 Other revenues, excluding fee income................ 744(5) 2,331 Intersegment revenues... - - Provision for credit losses................ (1,024)(5) 2,049 Total costs and expenses.............. - 2,668 HSBC acquisition related costs incurred by Household............. - 198 Net income.............. - 989 Operating net income(1)............. - 1,156 ---------- ---------- 43 --------------- (1) This non-GAAP financial measure is provided for comparison of our operating trends only and should be read in conjunction with our owned basis GAAP financial information. Operating net income excludes $167 million (after-tax) of HSBC acquisition related costs and other merger related items incurred by Household in 2003. See "Basis of Reporting" for additional discussion on the use of non-GAAP financial measures. (2) Eliminates intersegment revenues. (3) Eliminates bad debt recovery sales between operating segments. (4) Eliminates investments in subsidiaries and intercompany borrowings. (5) Reclassifies net interest income, fee income and provision for credit losses relating to securitized receivables to other revenues. (6) Represents receivables serviced with limited recourse. CREDIT QUALITY -------------------------------------------------------------------------------- Subject to receipt of regulatory approvals, we intend to transfer our domestic private label credit card portfolio to HSBC Bank USA. Contingent upon receiving regulatory approval for this asset transfer, we will adopt charge-off and account management guidelines in accordance with the Uniform Retail Credit Classification and Account Management Policy issued by the FFIEC for our entire domestic private label and MasterCard and Visa portfolios. See "Executive Overview" for further discussion. 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 are intended to be adequate but not excessive. While our credit loss reserves are available to absorb losses in the entire portfolio, we specifically consider the credit quality and other risk factors for each of our products. We recognize the different inherent loss characteristics in each of our products as well as customer account management policies and practices and risk management/collection practices. Charge-off policies are also considered when establishing loss reserve requirements to ensure the appropriate reserves exist for products with longer charge-off periods. We also consider key ratios such as reserves to nonperforming loans and reserves as a percent of net charge-offs in developing our loss reserve estimates. Loss reserve estimates are reviewed periodically and adjustments are reported in earnings when they become known. As these estimates are influenced by factors outside of our control, such as consumer payment patterns and economic conditions, there is uncertainty inherent in these estimates, making it reasonably possible that they could change. See Note 4, "Receivables," in the accompanying 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. The following table summarizes owned basis credit losses: JUNE 30, MARCH 31, JUNE 30, 2004 2004 2003 --------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Owned credit loss reserves.................................. $ 3,795 $ 3,753 $ 3,659 Reserves as a percent of: Receivables............................................... 3.82% 4.01% 4.14% Net charge-offs(1)........................................ 98.2 96.7 98.2 Nonperforming loans....................................... 103.0 96.7 94.6 --------------- (1) Quarter-to-date, annualized During the quarter ended June 30, 2004, credit loss reserves increased as the provision for owned credit losses was $32 million greater than net charge-offs reflecting growth in our loan portfolio, partially offset by improved asset quality. In the quarter ended June 30, 2003, provision for owned credit losses was $108 million greater than net charge-offs. Reserve levels at June 30, 2004 reflect the factors discussed above. 44 For securitized receivables, we also record a provision for estimated probable losses that we expect to incur under the recourse provisions. The following table summarizes managed credit loss reserves: JUNE 30, MARCH 31, JUNE 30, 2004 2004 2003 --------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Managed credit loss reserves................................ $5,699 $5,912 $5,639 Reserves as a percent of: Receivables............................................... 4.66% 5.01% 5.01% Net charge-offs(1)........................................ 104.2 102.5 104.9 Nonperforming loans....................................... 122.8 119.8 116.4 --------------- (1) Quarter-to-date, annualized See "Basis of Reporting" for additional discussion on the use of non-GAAP financial measures and "Reconciliations to GAAP Financial Measures" for quantitative reconciliations of the non-GAAP financial measures to the comparable GAAP basis financial measure. DELINQUENCY - OWNED BASIS The following table summarizes two-months-and-over contractual delinquency (as a percent of consumer receivables): JUNE 30, MARCH 31, JUNE 30, 2004 2004 2003 --------------------------------------------------------------------------------------------- Real estate secured......................................... 3.39% 3.87% 4.27% Auto finance................................................ 2.12 1.68 2.49 MasterCard/Visa............................................. 5.83 5.90 5.97 Private label............................................... 5.00 5.38 5.45 Personal non-credit card.................................... 8.92 9.64 9.39 ---- ---- ---- Total....................................................... 4.57% 5.01% 5.38% ==== ==== ==== Total owned delinquency decreased $137 million and 44 basis points compared to the prior quarter. This decrease is consistent with improvements in early delinquency roll rate trends we began to experience in the fourth quarter of 2003 as a result of improvements in the economy and better underwriting, including both improved modeling and improved credit quality of originations. The overall decrease in our real estate secured portfolio reflects receivable growth and improved collection efforts which were partially offset by the seasoning and maturation of the portfolio. The decrease in private label delinquency reflects improved underwriting, collections and credit models. The decrease in personal non-credit card delinquency reflects the positive impact of tightened underwriting and reduced marketing in our branches as well as improved collection efforts. The increase in auto finance delinquency reflects normal seasonal patterns and a temporary impact due to changes in collections. Compared to a year ago, total delinquency decreased $200 million and 81 basis points as all products reported lower delinquency levels. The improvements are generally the result of improvements in the economy and better underwriting. 45 NET CHARGE-OFFS OF CONSUMER RECEIVABLES - OWNED BASIS The following table summarizes net charge-offs of consumer receivables (as a percent, annualized, of average consumer receivables): JUNE 30, MARCH 31, JUNE 30, 2004 2004 2003 --------------------------------------------------------------------------------------------- Real estate secured......................................... 1.04% 1.15% 1.03% Auto finance................................................ 3.05 4.65 5.30 MasterCard/Visa............................................. 9.91 8.66 10.43 Private label............................................... 5.06 5.29 6.41 Personal non-credit card.................................... 10.59 11.17 9.87 ----- ----- ----- Total....................................................... 4.02% 4.17% 4.34% ===== ===== ===== Real estate secured net charge-offs and REO expense as a percent of average real estate secured receivables........ 1.47% 1.63% 1.46% Net charge-offs decreased 15 basis points compared to the quarter ended March 31, 2004 as the lower delinquency levels we have been experiencing due to an improving economy are beginning to have an impact on charge-offs. The decrease in auto finance net charge-offs reflects a normal seasonal pattern related to higher charge-offs in the first quarter. The increase in our MasterCard and Visa portfolio is primarily attributable to seasonal trends and the effect of a lower average receivable level. In addition to economic conditions, the decrease in our personal non-credit card portfolio is a result of improved credit quality and portfolio stabilization. Total net charge-offs for the current quarter decreased from June 2003 net charge-offs levels due to an improving economy and a decrease in the percentage of the portfolio comprised of personal non-credit card receivables, which have a higher net charge-off rate than other products in our portfolio. In addition, auto finance, MasterCard and Visa and private label reported lower net charge-off levels generally as a result of receivable growth and better underwriting, including both improved modeling and improved credit quality of originations. Auto finance net charge-offs also reflect improved used auto prices which resulted in lower loss severities. The increase in our personal non-credit card portfolio reflects maturation of the portfolio as well as reduced originations. OWNED NONPERFORMING ASSETS JUNE 30, MARCH 31, JUNE 30, 2004 2004 2003 --------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Nonaccrual receivables...................................... $2,833 $3,003 $3,021 Accruing consumer receivables 90 or more days delinquent.... 849 876 844 Renegotiated commercial loans............................... 2 2 2 ------ ------ ------ Total nonperforming receivables............................. 3,684 3,881 3,867 Real estate owned........................................... 624 656 486 ------ ------ ------ Total nonperforming assets.................................. $4,308 $4,537 $4,353 ====== ====== ====== Credit loss reserves as a percent of nonperforming receivables............................................... 103.0% 96.7% 94.6% Compared to March 31, 2004, the decrease in nonaccrual receivables and total nonperforming assets is primarily attributable to a decrease in our real estate secured portfolio due to improved credit quality and collection efforts. Accruing consumer receivables 90 or more days delinquent includes domestic MasterCard and Visa and private label credit card receivables, consistent with industry practice. 46 ACCOUNT MANAGEMENT POLICIES AND PRACTICES Our policies and practices for the collection of consumer receivables, including our customer account management policies and practices, permit us to reset the contractual delinquency status of an account to current, based on indicia or criteria which, in our judgment, evidence continued payment probability. Such policies and practices vary by product and are designed to manage customer relationships, maximize collection opportunities and avoid foreclosure or repossession if reasonably possible. If the account subsequently experiences payment defaults, it will again become contractually delinquent. As summarized in the tables that follow, in the third quarter of 2003, we implemented certain changes to our restructuring policies. These changes are intended to eliminate and/or streamline exception provisions to our existing policies and are generally effective for receivables originated or acquired after January 1, 2003. Receivables originated or acquired prior to January 1, 2003 generally are not subject to the revised restructure and customer account management policies. However, for ease of administration, in the third quarter of 2003 our mortgage services business elected to adopt uniform policies for all products regardless of the date an account was originated or acquired. Implementation of the uniform policy by mortgage services has the effect of only counting restructures occurring on or after January 1, 2003 in assessing restructure eligibility for purposes of the limitation that no account may be restructured more than four times in a rolling 60 month period. Resetting these counters will not impact the ability of mortgage services to report historical restructure statistics. Other business units may also elect to adopt uniform policies in the future. The changes have not had, and are not expected to have a significant impact on our business model or on our results of operations as these changes are generally being phased in as new receivables are originated or acquired. Approximately two-thirds of all restructured receivables are secured products, which may have less loss severity exposure because of the underlying collateral. Credit loss reserves take into account whether loans have been restructured, rewritten or are subject to forbearance, an external debt management plan, 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 restructuring policies and practices vary by product and are described in the table that follows. The fact that the restructuring criteria may be met for a particular account does not require us to restructure that account, and the extent to which we restructure accounts that are eligible under the criteria will vary depending upon our view of prevailing economic conditions and other factors which may change from period to period. In addition, for some products, accounts may be restructured without receipt of a payment in certain special circumstances (e.g., upon reaffirmation of a debt owed to us in connection with a Chapter 7 bankruptcy proceeding). We use account restructuring as an account and customer management tool in an effort to increase the value of our account relationships, and accordingly, the application of this tool is subject to complexities, variations and changes from time to time. These policies and practices are continually under review and assessment to assure that they meet the goals outlined above, and accordingly, we modify or permit exceptions to these general policies and practices from time to time. In addition, exceptions to these policies and practices may be made in specific situations in response to legal or regulatory agreements or orders. In the policies summarized below, "hardship restructures" and "workout restructures" refer to situations in which the payment and/or interest rate may be modified on a temporary or permanent basis. In each case, the contractual delinquency status is reset to current. "External debt management plans" refers to situations in which consumers receive assistance in negotiating or scheduling debt repayment through public or private agencies such as Consumers Credit Counseling Services. RESTRUCTURING POLICIES AND PRACTICES HISTORICAL RESTRUCTURING FOLLOWING CHANGES IMPLEMENTED IN THE POLICIES AND PRACTICES(1),(2),(3) THIRD QUARTER 2003 AND IN DECEMBER 2004 (1),(3) ---------------------------------------------------------------------------------------------- REAL ESTATE SECURED REAL ESTATE SECURED Real Estate - Overall Real Estate - Overall - Accounts may be restructured upon receipt - An account may be restructured if we of two qualifying payments within the 60 days receive two qualifying payments within the 60 days 47 RESTRUCTURING POLICIES AND PRACTICES HISTORICAL RESTRUCTURING FOLLOWING CHANGES IMPLEMENTED IN THE POLICIES AND PRACTICES(1),(2),(3) THIRD QUARTER 2003 AND IN DECEMBER 2004 (CONTINUED)(1),(3) --------------------------------------------------------------------------------------------------------- preceding the restructure; we may preceding the restructure restructure accounts in hardship, - Accounts will be limited to four restructures in a disaster or strike situations with one rolling 60 month period qualifying payment or no payments - Accounts generally are not eligible for restructure - Accounts that have filed for Chapter 7 until nine months after origination bankruptcy protection may be restructured - Accounts whose borrowers have filed for Chapter 7 upon receipt of a signed reaffirmation bankruptcy protection may be restructured upon receipt agreement of a signed reaffirmation agreement - Accounts subject to a Chapter 13 plan - Accounts whose borrowers are subject to a Chapter 13 filed with a bankruptcy court generally plan filed with a bankruptcy court generally may be require one qualifying payment to be restructured upon receipt of one qualifying payment restructured - Except for bankruptcy reaffirmation and filed Chapter - Except for bankruptcy reaffirmation and 13 plans, accounts will generally not be restructured filed Chapter 13 plans, agreed automatic more than once in a 12 month period payment withdrawal or - Accounts whose borrowers agree to pay by automatic hardship/disaster/strike, accounts are withdrawal are generally restructured upon receipt of generally limited to one restructure one qualifying payment(4) every 12 months - Accounts generally are not eligible for restructure until on books for at least six months REAL ESTATE SECURED REAL ESTATE SECURED Real Estate - Consumer Lending Real Estate - Mortgage Services(5) - Accounts whose borrowers agree to pay by - Accounts will generally not be eligible for automatic withdrawal are generally restructure until nine months after origination and restructured upon receipt of one six months after acquisition qualifying payment AUTO FINANCE AUTO FINANCE - Accounts may generally be extended upon receipt of two - Accounts may be extended if we receive qualifying payments within the 60 days preceding the one qualifying payment within the 60 days extension preceding the extension - Accounts may be extended by no more than three months - Accounts may be extended no more than at a time three months at a time and by no more - Accounts will be limited to four extensions in a than three months in any 12-month period rolling 60 month period, but in no case will an - Extensions are limited to six months over account be extended more than a total of six months the contractual life over the life of the account - Accounts that have filed for Chapter 7 - Accounts will be limited to one extension every six bankruptcy protection may be restructured months upon receipt of a signed reaffirmation - Accounts will not be eligible for extension until on agreement the books for at least six months - Accounts whose borrowers are subject to a - Accounts whose borrowers have filed for Chapter 7 Chapter 13 plan may be restructured upon bankruptcy protection may be restructured upon receipt filing of the plan with a bankruptcy of a signed reaffirmation agreement court - Accounts whose borrowers are subject to a Chapter 13 plan may be restructured upon filing of the plan with a bankruptcy court MASTERCARD AND VISA MASTERCARD AND VISA - Typically, accounts qualify for - Typically, accounts qualify for restructuring if we restructuring if we receive two or three receive two or three qualifying payments qualifying payments 48 RESTRUCTURING POLICIES AND PRACTICES HISTORICAL RESTRUCTURING FOLLOWING CHANGES IMPLEMENTED IN THE POLICIES AND PRACTICES(1),(2),(3) THIRD QUARTER 2003 AND IN DECEMBER 2004 (CONTINUED)(1),(3) --------------------------------------------------------------------------------------------------------- prior to the restructure, but accounts in prior to the restructure, but accounts in approved approved external debt management external debt management programs may generally be programs may generally be restructured restructured upon receipt of one qualifying payment. upon receipt of one qualifying payment - Generally, accounts may be restructured once every six - Generally, accounts may be restructured months once every six months PRIVATE LABEL(6) PRIVATE LABEL(6) - An account may generally be restructured - Accounts originated after October 1, 2002 for certain if we receive one or more qualifying merchants require receipt of two or three qualifying payments, depending upon the merchant payments to be restructured, except accounts in an - Restructuring is limited to once every approved, external debt management program may be six months (or longer, depending upon the restructured upon receipt of one qualifying payment. merchant) for revolving accounts and once - Accounts must be on the books for nine months and we every 12 months for closed-end accounts must receive the equivalent of two qualifying payments within the 60 days preceding the restructure - Accounts are not eligible for subsequent restructure until 12 months after a prior restructure and upon our receipt of three qualifying payments within the 90 days preceding the restructure PERSONAL NON-CREDIT CARD PERSONAL NON-CREDIT CARD - Accounts may be restructured if we - Accounts may be restructured upon receipt of two receive one qualifying payment within the qualifying payments within the 60 days preceding the 60 days preceding the restructure; may restructure restructure accounts in a - Accounts will be limited to one restructure every six hardship/disaster/strike situation with months one qualifying payment or no payments - Accounts will be limited to four restructures in a - If an account has never been more than 90 rolling 60 month period days delinquent, it may be generally - Accounts will not be eligible for restructure until restructured up to three times per year six months after origination - If an account has ever been more than 90 days delinquent, generally it may be restructured with one qualifying payment no more than four times over its life; however, generally the account may thereafter be restructured if two qualifying payments are received - Accounts subject to programs for hardship or strike may require only the receipt of reduced payments in order to be restructured; disaster may be restructured with no payments --------------- (1) We employ account restructuring and other customer account management policies and practices as flexible customer account management tools. In addition to variances in criteria by product, criteria may also vary within a product line (for example, in our private label credit card business, criteria may vary from merchant to merchant). Also, we continually review our product lines and assess restructuring criteria and they are subject to modification or exceptions from time to time. Accordingly, the description of our account restructuring policies or practices provided in this table should be taken only as general guidance to the restructuring approach taken within each product line, and not as assurance that accounts not meeting these criteria will never be restructured, that every account meeting these criteria will in fact be restructured or that these criteria will not change or that exceptions will not be made in individual cases. In addition, in an effort to determine optimal customer account management strategies, management may run more conservative tests on some or all accounts in a product line for fixed periods of time in order to evaluate the impact of alternative policies and practices. 49 (2) For our United Kingdom business, all portfolios have a consistent account restructure policy. An account may be restructured if we receive two or more qualifying payments within two calendar months, limited to one restructure every 12 months, with a lifetime limit of three times. In hardship situations an account may be restructured if a customer makes three consecutive qualifying monthly payments within the last three calendar months. Only one hardship restructure is permitted in the life of a loan. There were no changes to the restructure policies of our United Kingdom business in 2003. (3) Generally, policy changes will not be applied to the entire portfolio on the date of implementation and may be applied to new, or recently originated or acquired accounts. However, for ease of administration, in the third quarter of 2003 our mortgage services business elected to adopt uniform policies for all products regardless of the date an account was originated or acquired. Implementation of the uniform policy has the effect of only counting restructures occurring on or after January 1, 2003 in assessing restructure eligibility for the purpose of the limitation that no account may be restructured more than four times in a rolling 60 month period. Resetting these counters will not impact the ability of mortgage services to report historical restructure statistics. Other business units may also elect to adopt uniform policies. Unless otherwise noted, the revisions to the restructure policies and practices implemented in the third quarter 2003 will generally be applied only to accounts originated or acquired after January 1, 2003 and the historical restructuring policies and practices are effective for all accounts originated or acquired prior to January 1, 2003. The changes have not had, and are not expected to have a significant impact on our business model or results of operations as these changes are generally being phased in as receivables are originated or acquired. (4) Our mortgage services business implemented this policy for all accounts effective March 1, 2004. (5) Prior to January 1, 2003, accounts that had made at least six qualifying payments during the life of the loan and that agreed to pay by automatic withdrawal were generally restructured with one qualifying payment. (6) For our Canadian business, private label is limited to one restructure every four months. For private label accounts in our Canadian business originated or acquired after January 1, 2003, two qualifying payments must be received, the account must be on the books for at least six months, at least six months must have elapsed since the last restructure, and there may be no more than four restructures in a rolling 60 month period. In addition to our restructuring policies and practices, we employ other customer account management techniques, which we typically use on a more limited basis, that are similarly designed to manage customer relationships, maximize collection opportunities and avoid foreclosure or repossession if reasonably possible. These additional customer account management techniques include, at our discretion, actions such as extended payment arrangements, approved external debt management plans, forbearance, modifications, loan rewrites and/or deferment pending a change in circumstances. We typically use these customer account management techniques with individual borrowers in transitional situations, usually involving borrower hardship circumstances or temporary setbacks that are expected to affect the borrower's ability to pay the contractually specified amount for some period of time. These actions vary by product and are under continual review and assessment to determine that they meet the goals outlined above. For example, under a forbearance agreement, we may agree not to take certain collection or credit agency reporting actions with respect to missed payments, often in return for the borrower's agreeing to pay us an extra amount in connection with making future payments. In some cases, these additional customer account management techniques may involve us agreeing to lower the contractual payment amount and/or reduce the periodic interest rate. When we use a customer account management technique, we may treat the account as being contractually current and will not reflect it as a delinquent account in our delinquency statistics. However, if the account subsequently experiences payment defaults, it will again become contractually delinquent. We generally consider loan rewrites to involve an extension of a new loan, and such new loans are not reflected in our delinquency or restructuring statistics. The tables below summarize approximate restructuring statistics in our managed basis domestic portfolio. We report our restructuring statistics on a managed basis only because the receivables that we securitize are subject to underwriting standards comparable to our owned portfolio, are serviced and collected without regard to ownership and result in a similar credit loss exposure for us. As previously reported, in prior periods we used certain assumptions and estimates to compile our restructure statistics. We also stated that we continue to enhance our ability to capture and segment restructure data across all business units. In the tables that follow, the restructure statistics presented for June 30, 2004 have been compiled using enhanced systemic counters and refined assumptions and estimates. As a result of the systems enhancements, for June 30, 2004 and subsequent periods we exclude from our reported statistics loans that had been reported as contractually delinquent that have been reset to a current status because we have determined that the loan should not have been considered delinquent (e.g., payment application processing errors). Statistics reported for all periods prior to June 30, 2004 include such loans. When comparing restructuring statistics from different periods, the fact that our restructure policies and practices will 50 change over time, that exceptions are made to those policies and practices, and that our data capture methodologies have been enhanced, should be taken into account. Further, to the best of our knowledge, most of our competitors do not disclose account restructuring, reaging, loan rewriting, forbearance, modification, deferment or extended payment information comparable to the information we have disclosed, and the lack of such disclosure by other lenders may limit the ability to draw meaningful conclusions about our business based solely on data or information regarding account restructuring statistics or policies. TOTAL RESTRUCTURED BY RESTRUCTURE PERIOD - DOMESTIC PORTFOLIO(1) (MANAGED BASIS) JUNE 30, MARCH 31, JUNE 30, 2004 2004 2003 --------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Never restructured.......................................... 86.1% 84.7% 83.7% Restructured: Restructured in the last 6 months......................... 4.8 6.2 7.2 Restructured in the last 7-12 months...................... 4.0 3.9 3.8 Previously restructured beyond 12 months.................. 5.1 5.2 5.3 ------- ------- ------- Total ever restructured(2)................................ 13.9 15.3 16.3 ------- ------- ------- Total....................................................... 100.0% 100.0% 100.0% ======= ======= ======= TOTAL RESTRUCTURED BY PRODUCT - DOMESTIC PORTFOLIO(1) (MANAGED BASIS) Real estate secured......................................... $ 8,885 $ 9,506 $ 9,225 Auto finance................................................ 1,304 1,255 1,360 MasterCard/Visa............................................. 639 505 580 Private label............................................... 830 990 1,146 Personal non-credit card.................................... 3,727 3,913 4,202 ------- ------- ------- Total....................................................... $15,385 $16,169 $16,513 ======= ======= ======= (AS A PERCENT OF MANAGED RECEIVABLES) Real estate secured......................................... 16.5% 18.9% 19.2% Auto finance................................................ 14.0 13.9 17.3 MasterCard/Visa............................................. 3.6 2.8 3.5 Private label............................................... 5.6 7.0 8.3 Personal non-credit card.................................... 25.0 26.3 26.8 ------- ------- ------- Total(2).................................................... 13.9% 15.3% 16.3% ======= ======= ======= --------------- (1) Excludes foreign businesses, commercial and other. (2) Total including foreign businesses was 13.0 percent at June 30, 2004, 14.4 percent at March 31, 2004, and 15.3 percent at June 30, 2003. The amount of domestic and foreign managed receivables in forbearance, modification, rewrites or other account management techniques for which we have reset delinquency and that is not included in the restructured or delinquency statistics was approximately $.5 billion or .4 percent of managed receivables at June 30, 2004, $1.0 billion or .8 percent of managed receivables at March 31, 2004 and $1.1 billion or 1.0 percent of managed receivables at June 30, 2003. For periods prior to June 30, 2004, all credit card approved consumer credit counseling accommodations are included in the reported statistics. As a result of 51 our systems enhancements, we are now able to segregate which credit card approved consumer credit counseling accommodations included resetting the contractual delinquency status to current after January 1, 2003. Such accounts are included in the June 30, 2004 restructure statistics in the table above. Credit card credit counseling accommodations that did not include resetting contractual delinquency status are not reported in the table above or the June 30, 2004 statistics in this paragraph. LIQUIDITY AND CAPITAL RESOURCES -------------------------------------------------------------------------------- The funding synergies resulting from our merger with HSBC have allowed us to reduce our reliance on traditional sources to fund our growth. We continue to focus on balancing our use of affiliate and third-party funding sources to minimize funding expense while maximizing liquidity. As discussed below, we decreased third-party debt and initial securitization levels during the first six months of 2004 as we used proceeds from the sale of real estate secured receivables to HSBC Bank USA and debt issued to affiliates to assist in the funding of our businesses. Because we are now a subsidiary of HSBC, our credit spreads relative to Treasuries have tightened. We recognized cash funding expense savings, primarily as a result of these tightened credit spreads and lower costs due to shortening the maturity of our liabilities primarily through increased issuance of commercial paper, in excess of $140 million for the first six months of 2004 and less than $30 million for the prior-year period compared to the funding costs we would have incurred using average spreads from the first half of 2002. It is anticipated that these tightened credit spreads and other funding synergies will eventually enable HSBC to realize annual cash funding expense savings, including external fee savings, in excess of $1 billion per year as our existing term debt matures over the course of the next few years. The portion of these savings to be realized by Household will depend in large part upon the amount and timing of the proposed domestic private label credit card portfolio transfer to HSBC Bank USA and other initiatives between Household and HSBC subsidiaries. SECURITIES totaled $6.9 billion at June 30, 2004 and $11.1 billion at December 31, 2003. Included in the June 30, 2004 balance was $2.6 billion dedicated to our credit card bank and $3.1 billion held by our insurance subsidiaries. Included in the December 31, 2003 balance was $2.4 billion dedicated to our credit card bank and $3.1 billion held by our insurance subsidiaries. Our securities balance at December 31, 2003 was unusually high as a result of the cash received from the $2.8 billion real estate secured loan sale to HSBC Bank USA on December 31, 2003 as well as excess liquidity. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS totaled $10.3 billion at June 30, 2004 and $9.1 billion at December 31, 2003. Included in this total was outstanding Euro commercial paper sold to customers of HSBC of $3.4 billion at June 30, 2004 and $2.8 billion at December 31, 2003. 52 DUE TO AFFILIATES and other HSBC related funding are summarized in the following table: JUNE 30, DECEMBER 31, 2004 2003 ------------------------------------------------------------------------------------- (IN BILLIONS) Debt issued to HSBC subsidiaries: Domestic short-term borrowings......................... $ - $ 2.6 Drawings on bank lines in the U.K. .................... 4.7 3.4 Term debt.............................................. 3.8 1.3 Preferred securities issued by Household Capital Trust VIII.................................................. .3 .3 ----- ----- Total debt issued to HSBC subsidiaries................. 8.8 7.6 ----- ----- Debt issued to HSBC clients: Euro commercial paper.................................. 3.4 2.8 Term debt.............................................. .7 .4 ----- ----- Total debt issued to HSBC clients...................... 4.1 3.2 Preferred stock issued to HSBC.............................. 1.1 1.1 Real estate secured receivable activity with HSBC Bank USA: Cash received on sales (cumulative).................... 3.7 2.8 Direct purchases from correspondents (cumulative)...... 1.5 - ----- ----- Total real estate secured receivable activity with HSBC Bank USA....................................................... 5.2 2.8 ----- ----- Total HSBC related funding.................................. $19.2 $14.7 ===== ===== Proceeds from the December 2003 sale of $2.8 billion of real estate secured loans to HSBC Bank USA, which at year-end 2003 had been temporarily held as securities available for sale, were used to pay-down domestic short-term borrowings in the first quarter of 2004. Proceeds from the March 2004 real estate secured receivable sale were used to pay-down commercial paper balances which had been used as temporary funding in the first quarter of 2004 and to fund various debt maturities. As of June 30, 2004, we had revolving credit facilities with HSBC of $2.5 billion domestically and $7.5 billion in the U.K. There have been no draws on the domestic line. We also had derivative contracts with a notional value of $58.7 billion, or approximately 83 percent of total derivative contracts, outstanding with HSBC affiliates. In July, an additional $4.0 billion credit facility was provided by an HSBC affiliate in Geneva to allow temporary increases in commercial paper issuance to help give greater flexibility in managing liquidity surrounding the contemplated private label credit card sale. LONG TERM DEBT (with original maturities over one year) decreased to $78.3 billion at June 30, 2004 from $79.6 billion at December 31, 2003. Significant issuances during the first six months of 2004 included the following: - $2.3 billion of domestic medium-term notes - $1.3 billion of foreign currency-denominated bonds (including $.3 billion which was issued to customers of HSBC) - $.7 billion of InterNotes(SM) (retail-oriented medium-term notes) - $1.3 billion of global debt - $1.7 billion of securities backed by home equity loans. For accounting purposes, these transactions were structured as secured financings. 53 SELECTED CAPITAL RATIOS are summarized in the following table: JUNE 30, DECEMBER 31, 2004 2003 --------------------------------------------------------------------------------------- (RESTATED) (RESTATED) TETMA(1).................................................... 7.81% 7.03% TETMA + Owned Reserves(1)................................... 10.69 9.89 Tangible common equity to tangible managed assets(1)........ 5.79 5.04 Common and preferred equity to owned assets................. 15.33 14.69 Excluding purchase accounting adjustments: TETMA(1).................................................. 9.65 8.94 TETMA + Owned Reserves(1)................................. 12.54 11.81 Tangible common equity to tangible managed assets(1)...... 7.67 6.98 --------------- (1) TETMA, TETMA + Owned Reserves and tangible common equity to tangible managed assets represent non-GAAP financial ratios that are used by Household management and certain rating agencies to evaluate capital adequacy and may differ from similarly named measures presented by other companies. See "Basis of Reporting" for additional discussion on the use of non-GAAP financial measures and "Reconciliations to GAAP Financial Measures" for quantitative reconciliations to the equivalent GAAP basis financial measure. In April 2004, Fitch Ratings revised our Rating Outlook to Positive from Stable and raised our Support Rating to "1" from "2". In addition, Fitch affirmed our "A" senior long-term and "F1" commercial paper ratings. We are committed to maintaining at least a mid-single "A" rating and as part of that effort will continue to review appropriate capital levels with our rating agencies. SECURITIZATIONS AND SECURED FINANCINGS Securitizations (which are structured to receive sale treatment under Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a Replacement of FASB Statement No. 125," ("SFAS No. 140")) and secured financings (which do not receive sale treatment under SFAS No. 140) of consumer receivables 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 receivables transferred to the QSPE serve as collateral for the securities. 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. 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. 54 Receivables securitized (excluding replenishments of certificateholder interests) are summarized in the following table: THREE MONTHS ENDED JUNE 30 2004 2003 --------------------------------------------------------------------------- (IN MILLIONS) Auto finance................................................ $300 $ 596 MasterCard/Visa............................................. 500 - Private label............................................... 190 250 Personal non-credit card.................................... - 305 ---- ------ Total....................................................... $990 $1,151 ==== ====== SIX MONTHS ENDED JUNE 30 2004 2003 ----------------------------------------------------------------------------- (IN MILLIONS) Auto finance................................................ $ 300 $1,007 MasterCard/Visa............................................. 550 320 Private label............................................... 190 250 Personal non-credit card.................................... - 815 ------ ------ Total....................................................... $1,040 $2,392 ====== ====== Securitization levels were much lower in the first half of 2004 as we used funding from HSBC, including proceeds from receivable sales to HSBC Bank USA, to assist in the funding of our operations. Our securitized receivables totaled $22.8 billion at June 30, 2004, compared to $26.2 billion at December 31, 2003. As of June 30, 2004, closed-end real estate secured receivables totaling $7.9 billion secured $6.0 billion of outstanding debt related to securitization transactions which were structured as secured financings. At December 31, 2003, closed-end real estate secured receivables totaling $8.0 billion secured $6.7 billion of outstanding debt related to secured financing transactions. Securitizations structured as sales represented 19 percent of the funding associated with our managed portfolio at June 30, 2004 and 21 percent at December 31, 2003. Secured financings represented 5 percent of the funding associated with our managed portfolio at June 30, 2004 and 5 percent at December 31, 2003. We believe the market for securities backed by receivables is a reliable, efficient and cost-effective source of funds. Securitizations and secured financings of consumer receivables have been, and will continue to be, a source of our funding and liquidity. Under U.K. GAAP as reported by HSBC, our securitizations are treated as secured financings. In order to align our accounting treatment with that of HSBC under U.K. GAAP, we intend to structure all new funding utilizing receivables as collateral as secured financings beginning in the third quarter of 2004. However, because existing public private label and MasterCard and Visa credit card transactions were structured as sales to revolving trusts that require replenishments to support previously issued securities, receivables of each of these asset types will continue to be sold to these trusts and the resulting replenishment gains recorded until the revolving periods end, the last of which is expected to occur in 2007. In addition, we may continue to replenish at reduced levels, certain non-public personal non-credit card and MasterCard/Visa securities issued to conduits and record the resulting replenishment gains for a short period of time in order to manage liquidity. Since our securitized receivables have varying lives, it will take several years for these receivables to pay-off and the related interest-only strip receivables to be reduced to zero. The termination of sale treatment on new collateralized funding activity will reduce our reported net income under U.S. GAAP. There will be no impact, however, on cash received from operations or on U.K. GAAP reported results. 2004 FUNDING STRATEGY Our current estimated domestic funding needs and sources for 2004 are summarized in the table that follows. Because we cannot predict with any degree of certainty the timing as to when or if approval will be received for our proposed transfer of our domestic private label credit card receivables 55 to HSBC Bank USA, such transfer is not contemplated in the following 2004 funding plan. If the proposed transfer does occur, our external funding needs will decrease. ACTUAL ESTIMATED JAN. 1 JULY 1 ESTIMATED THROUGH THROUGH FULL YEAR JUNE 30, 2004 DEC. 31, 2004 2004 ----------------------------------------------------------------------------------------------------- (IN BILLIONS) FUNDING NEEDS: Net asset growth..................................... $ 4 $ 9 - 10 $13 - 14 Commercial paper, term debt and securitization maturities......................................... 17 11 - 12 28 - 29 Other................................................ - 2 - 3 2 - 3 --- -------- -------- Total funding needs, including growth..................... $21 $22 - 25 $43 - 46 === ======== ======== FUNDING SOURCES: External funding, including HSBC clients................ $18 $20 - 22 $38 - 40 HSBC and HSBC subsidiaries.............................. 3 2 - 3 5 - 6 --- -------- -------- Total funding sources................................... $21 $22 - 25 $43 - 46 === ======== ======== RISK MANAGEMENT -------------------------------------------------------------------------------- LIQUIDITY RISK There have been no significant changes in our approach to liquidity risk since December 31, 2003. INTEREST RATE AND CURRENCY RISK HSBC has certain limits and benchmarks that serve as guidelines in determining appropriate levels of interest rate risk. One such limit is expressed in terms of the Present Value of a Basis Point ("PVBP"), which reflects the change in value of the balance sheet for a one basis point movement in all interest rates. Our PVBP limit as of June 30, 2004 was $3 million, which includes risk associated with hedging instruments. Thus, for a one basis point change in interest rates, the policy dictates that the value of the balance sheet shall not increase or decrease by more than $3.0 million. As of June 30, 2004, we had a PVBP position of $.2 million reflecting the impact of a one basis point increase in interest rates. Our total PVBP position was $.7 million at December 31, 2003 which does not change as a result of the loss of hedge accounting. We also monitor the impact that an immediate hypothetical 100 basis points parallel increase or decrease in interest rates would have on our domestic net interest income. The following table summarizes such estimated impact: JUNE 30, DECEMBER 31, 2004 2003 ------------------------------------------------------------------------------------- (IN MILLIONS) Decrease in net interest income following an immediate hypothetical 100 basis points parallel rise in interest rates..................................................... $338 $358 Increase in net interest income following an immediate hypothetical 100 basis points parallel fall in interest rates..................................................... $351 $369 These estimates include both the net interest income impact of the derivative positions we have entered into which are considered to be effective hedges under SFAS 133 and the impact of economic hedges of certain underlying debt instruments which do not qualify for hedge accounting as previously discussed, as if they were effective hedges under SFAS 133. These estimates also assume we would not take any corrective actions in response to interest rate movements and, therefore, exceed what most likely would occur if rates were to change by the amount indicated. This approach best reflects the economic risks inherent in our balance sheet. Despite the loss of hedge accounting for certain underlying debt instruments as discussed above, the interest rate derivative positions hedging specific debt issues remain effective economic transactions. At inception, each hedge was 56 structured to match the critical terms of the underlying debt. The validity of these financial structures and the effectiveness of corresponding economic hedges has been subsequently confirmed by an independent third party. From March 29, 2003 through June 30, 2004, the daily change in price of a substantial number of these derivative instruments which do not qualify for hedge accounting under SFAS 133 correlated highly with the change in price of the underlying debt. In this analysis, there is no intent to manage or otherwise alter existing derivative contracts meaning that at maturity of the derivative and the underlying debt instrument, no net value remains, unlike a portfolio with a focus on trading. Thus the treatment of all hedges as if they were effective under SFAS 133 remains the most effective way of depicting the impact of interest rate changes. Nevertheless, we have calculated a sensitivity to a 100 basis point immediate rise and fall in interest rates at December 31, 2004 which considers the loss of hedge accounting. See our 2004 Form 10-K for the results of this sensitivity analysis. COUNTERPARTY CREDIT RISK At June 30, 2004, we had derivative contracts with a notional value of approximately $70.9 billion, including $58.7 billion outstanding with HSBC affiliates. Most swap agreements, both with third parties and affiliates, require that payments be made to, or received from, the counterparty when the fair value of the agreement reaches a certain level. Generally, third-party swap counterparties provide collateral in the form of cash which are recorded in our balance sheet as other assets or derivative related liabilities and totaled $.3 billion at June 30, 2004. Affiliate swap counterparties generally provide collateral in the form of securities which are not recorded on our balance sheet and totaled $.4 billion at June 30, 2004. There have been no significant changes in our approach to managing counterparty credit risk since December 31, 2003. 57 HOUSEHOLD INTERNATIONAL, INC. RECONCILIATIONS TO GAAP FINANCIAL MEASURES THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ----------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2004 2003 2004 2003 --------------------------------------------------------------------------------------------------------------- (RESTATED) (RESTATED) (RESTATED) (RESTATED) (DOLLARS ARE IN MILLIONS) RETURN ON AVERAGE ASSETS: Net income.................................................. $ 433 $ 599 $ 903 $ 989 HSBC acquisition related costs and other merger related items incurred by Household, after-tax.................... - - - 167 -------- -------- -------- -------- Operating net income........................................ $ 433 $ 599 $ 903 $ 1,156 ======== ======== ======== ======== Average assets: Owned basis............................................... $117,467 $110,360 $118,428 $105,399 Serviced with limited recourse............................ 23,568 24,080 24,422 24,118 -------- -------- -------- -------- Managed basis............................................. $141,035 $134,440 $142,850 $129,517 ======== ======== ======== ======== Return on average owned assets.............................. 1.47% 2.17% 1.52% 1.88% Return on average owned assets, operating basis............. 1.47 2.17 1.52 2.19 Return on average managed assets............................ 1.23 1.78 1.26 1.53 Return on average managed assets, operating basis........... 1.23 1.78 1.26 1.79 RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY: Net income.................................................. $ 433 $ 599 $ 903 $ 989 Dividends on preferred stock................................ (18) (18) (36) (40) -------- -------- -------- -------- Net income available to common shareholders................. 415 581 867 949 HSBC acquisition related costs and other merger related items incurred by Household............................... - - - 167 -------- -------- -------- -------- Operating net income available to common shareholders....... $ 415 $ 581 $ 867 $ 1,116 ======== ======== ======== ======== Average common shareholder's equity......................... $ 17,160 $ 15,094 $ 16,903 $ 12,321 Return on average common shareholder's equity............... 9.7% 15.4% 10.3% 15.4% Return on average common shareholder's equity, operating basis..................................................... 9.7 15.4 10.3 18.1 NET INTEREST INCOME: Net interest income: Owned basis............................................... $ 1,930 $ 1,814 $ 3,750 $ 3,442 Serviced with limited recourse............................ 652 720 1,406 1,446 -------- -------- -------- -------- Managed basis............................................. $ 2,582 $ 2,534 $ 5,156 $ 4,888 ======== ======== ======== ======== Average interest-earning assets: Owned basis............................................... $101,238 $ 91,396 $100,457 $ 90,480 Serviced with limited recourse............................ 23,568 24,080 24,422 24,118 -------- -------- -------- -------- Managed basis............................................. $124,806 $115,476 $124,879 $114,598 ======== ======== ======== ======== Owned basis net interest margin............................. 7.63% 7.94% 7.47% 7.61% Managed basis net interest margin........................... 8.28 8.78 8.26 8.53 MANAGED BASIS RISK ADJUSTED REVENUE: Net interest income......................................... $ 2,582 $ 2,534 $ 5,156 $ 4,888 Other revenues, excluding securitization revenue............ 984 1,275 2,055 2,444 Less: Net charge-offs....................................... (1,367) (1,344) (2,809) (2,616) -------- -------- -------- -------- Risk adjusted revenue....................................... $ 2,199 $ 2,465 $ 4,402 $ 4,716 ======== ======== ======== ======== Average interest-earning assets............................. $124,806 $115,476 $124,879 $114,598 Managed basis risk adjusted revenue......................... 7.05% 8.54% 7.05% 8.23% 58 HOUSEHOLD INTERNATIONAL, INC. RECONCILIATIONS TO GAAP FINANCIAL MEASURES THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------------ ----------------------- JUNE 30, MARCH 31, JUNE 30, JUNE 30, JUNE 30, 2004 2004 2003 2004 2003 ------------------------------------------------------------------------------------------------------ (DOLLARS ARE IN MILLIONS) CONSUMER NET CHARGE-OFF RATIO: Consumer net charge-offs: Owned basis......................... $ 966 $ 970 $ 931 $ 1,936 $ 1,805 Serviced with limited recourse...... 401 472 412 873 811 ---------- ---------- ---------- ---------- ---------- Managed basis....................... $ 1,367 $ 1,442 $ 1,343 $ 2,809 $ 2,616 ========== ========== ========== ========== ========== Average consumer receivables: Owned basis......................... $ 96,189 $ 92,974 $ 85,836 $ 94,581 $ 84,379 Serviced with limited recourse...... 23,568 25,278 24,080 24,423 24,117 ---------- ---------- ---------- ---------- ---------- Managed basis....................... $ 119,757 $ 118,252 $ 109,916 $ 119,004 $ 108,496 ========== ========== ========== ========== ========== Owned basis consumer net charge-off ratio............................... 4.02% 4.17% 4.34% 4.09% 4.28% Managed basis consumer net charge-off ratio............................... 4.57 4.88 4.89 4.72 4.82 RESERVES AS A PERCENT OF NET CHARGE-OFFS Loss reserves: Owned basis......................... $ 3,795 $ 3,753 $ 3,659 $ 3,795 $ 3,659 Serviced with limited recourse...... 1,904 2,159 1,980 1,904 1,980 ---------- ---------- ---------- ---------- ---------- Managed basis....................... $ 5,699 $ 5,912 $ 5,639 $ 5,699 $ 5,639 ========== ========== ========== ========== ========== Net charge-offs: Owned basis......................... $ 966 $ 970 $ 931 $ 1,936 $ 1,805 Serviced with limited recourse...... 401 472 412 873 811 ---------- ---------- ---------- ---------- ---------- Managed basis....................... $ 1,367 $ 1,442 $ 1,343 $ 2,809 $ 2,616 ========== ========== ========== ========== ========== Owned basis reserves as a percent of net charge-offs..................... 98.2% 96.7% 98.2%(1) 98.0% 101.3%(1) Managed basis reserves as a percent of net charge-offs..................... 104.2 102.5 104.9(1) 101.4 107.8 EFFICIENCY RATIO (RESTATED): Total costs and expenses less policyholders' benefits............. $ 1,228 $ 1,297 $ 1,149 $ 2,525 $ 2,476 HSBC acquisition related costs incurred by Household............... - - - - (198) ---------- ---------- ---------- ---------- ---------- Total costs and expenses less policyholders' benefits, excluding nonrecurring items.................. $ 1,228 $ 1,297 $ 1,149 $ 2,525 $ 2,278 ========== ========== ========== ========== ========== Net interest income and other revenues less policyholders' benefits: Owned basis......................... $ 2,889 $ 2,930 $ 3,107 $ 5,819 $ 6,098 Serviced with limited recourse...... 148 253 617 401 1,024 ---------- ---------- ---------- ---------- ---------- Managed basis....................... $ 3,037 $ 3,183 $ 3,724 $ 6,220 $ 7,122 ========== ========== ========== ========== ========== Owned basis efficiency ratio.......... 42.5% 44.3% 37.0% 43.4% 40.6% Owned basis efficiency ratio, operating basis..................... 42.5 44.3 37.0 43.4 37.4 Managed basis efficiency ratio........ 40.4 40.7 30.9 40.6 34.8 Managed basis efficiency ratio, operating basis..................... 40.4 40.7 30.9 40.6 32.0 --------------- (1) Ratio does not recompute from dollar figures presented due to rounding. 59 HOUSEHOLD INTERNATIONAL, INC. RECONCILIATIONS TO GAAP FINANCIAL MEASURES JUNE 30, MARCH 31, JUNE 30, 2004 2004 2003 ---------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) TWO-MONTHS-AND-OVER-CONTRACTUAL DELINQUENCY: Consumer two-months-and-over-contractual delinquency: Owned basis............................................... $ 4,534 $ 4,671 $ 4,734 Serviced with limited recourse............................ 1,194 1,280 1,211 -------- ---------- -------- Managed basis............................................. $ 5,728 $ 5,951 $ 5,945 ======== ========== ======== Consumer receivables: Owned basis............................................... $ 99,115 $ 93,299 $ 87,915 Serviced with limited recourse............................ 22,836 24,357 24,268 -------- ---------- -------- Managed basis............................................. $121,951 $ 117,656 $112,183 ======== ========== ======== Consumer two-months-and-over-contractual delinquency: Owned basis............................................... 4.57% 5.01% 5.38% Managed basis............................................. 4.70 5.06 5.30 RESERVES AS A PERCENT OF RECEIVABLES: Loss reserves: Owned basis............................................... $ 3,795 $ 3,753 $ 3,659 Serviced with limited recourse............................ 1,904 2,159 1,980 -------- ---------- -------- Managed basis............................................. $ 5,699 $ 5,912 $ 5,639 ======== ========== ======== Receivables: Owned basis............................................... $ 99,432 $ 93,650 $ 88,307 Serviced with limited recourse............................ 22,836 24,357 24,268 -------- ---------- -------- Managed basis............................................. $122,268 $ 118,007 $112,575 ======== ========== ======== Reserves as a percent of receivables: Owned basis............................................... 3.82% 4.01% 4.14% Managed basis............................................. 4.66 5.01 5.01 RESERVES AS A PERCENT OF NONPERFORMING LOANS: Loss reserves: Owned basis............................................... $ 3,795 $ 3,753 $ 3,659 Serviced with limited recourse............................ 1,904 2,159 1,980 -------- ---------- -------- Managed basis............................................. $ 5,699 $ 5,912 $ 5,639 ======== ========== ======== Nonperforming loans: Owned basis............................................... $ 3,684 $ 3,881 $ 3,867 Serviced with limited recourse............................ 958 1,055 978 -------- ---------- -------- Managed basis............................................. $ 4,642 $ 4,936 $ 4,845 ======== ========== ======== Reserves as a percent of nonperforming loans: Owned basis............................................... 103.0% 96.7% 94.6% Managed basis............................................. 122.8 119.8 116.4 60 HOUSEHOLD INTERNATIONAL, INC. RECONCILIATIONS TO GAAP FINANCIAL MEASURES JUNE 30, DECEMBER 31, 2004 2003 ---------------------------------------------------------------------------------------- (RESTATED) (RESTATED) (DOLLARS ARE IN MILLIONS) EQUITY RATIOS TANGIBLE COMMON EQUITY: Common shareholder's equity................................. $ 17,379 $ 16,391 Exclude: Unrealized gains (losses) on: Derivatives classified as cash flow hedges.............. (97) 10 Securities available for sale and interest-only strip receivables............................................ (163) (167) Intangible assets, net.................................... (2,668) (2,856) Goodwill.................................................. (6,821) (6,697) -------- -------- Tangible common equity...................................... 7,630 6,681 Purchase accounting adjustments............................. 2,449 2,548 -------- -------- Tangible common equity, excluding purchase accounting adjustments............................................... $ 10,079 $ 9,229 ======== ======== TANGIBLE SHAREHOLDER'S EQUITY: Tangible common equity...................................... $ 7,630 $ 6,681 Preferred stock............................................. 1,100 1,100 Mandatorily redeemable preferred securities of Household Capital Trusts............................................ 1,028 1,031 Adjustable Conversion-Rate Equity Security Units............ 525 519 -------- -------- Tangible shareholder's equity............................... 10,283 9,331 Purchase accounting adjustments............................. 2,396 2,492 -------- -------- Tangible shareholder's equity, excluding purchase accounting adjustments............................................... $ 12,679 $ 11,823 ======== ======== TANGIBLE SHAREHOLDER'S EQUITY PLUS OWNED LOSS RESERVES: Tangible shareholder's equity............................... $ 10,283 $ 9,331 Owned loss reserves......................................... 3,795 3,793 -------- -------- Tangible shareholder's equity plus owned loss reserves...... 14,078 13,124 Purchase accounting adjustments............................. 2,396 2,492 -------- -------- Tangible shareholder's equity plus owned loss reserves, excluding purchase accounting adjustments................. $ 16,474 $ 15,616 ======== ======== TANGIBLE MANAGED ASSETS: Owned assets................................................ $120,533 $119,052 Receivables serviced with limited recourse.................. 22,836 26,201 -------- -------- Managed assets.............................................. 143,369 145,253 Exclude: Intangible assets, net.................................... (2,668) (2,856) Goodwill.................................................. (6,821) (6,697) Derivative financial assets............................... (2,158) (3,016) -------- -------- Tangible managed assets..................................... 131,722 132,684 Purchase accounting adjustments............................. (330) (431) -------- -------- Tangible managed assets, excluding purchase accounting adjustments............................................... $131,392 $132,253 ======== ======== EQUITY RATIOS: Common and preferred equity to owned assets................. 15.33% 14.69% Tangible common equity to tangible managed assets........... 5.79 5.04 Tangible shareholder's equity to tangible managed assets ("TETMA")................................................. 7.81 7.03 Tangible shareholder's equity plus owned loss reserves to tangible managed assets ("TETMA + Owned Reserves")........ 10.69 9.89 Excluding purchase accounting adjustments: Tangible common equity to tangible managed assets......... 7.67 6.98 TETMA..................................................... 9.65 8.94 TETMA + Owned Reserves.................................... 12.54 11.81 61 ITEM 4. CONTROLS AND PROCEDURES -------------------------------------------------------------------------------- DISCLOSURE CONTROLS. As of the end of the period covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of the end of such period, our disclosure controls and procedures were effective in timely alerting them to material information relating to Household International, Inc. required to be included in our periodic reports with the Securities and Exchange Commission. As a result of a subsequent evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by our Annual Report on Form 10-K for the year ended December 31, 2004, with the participation of our Chief Executive Officer and Chief Financial Officer, we identified a material weakness in our internal controls over financial reporting relating to the process of establishing and maintaining effective hedges under the "shortcut" method of accounting pursuant to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." As a result, and as set forth in Note 2 to the Consolidated Financial Statements and the "Restatement" section included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, we have restated our unaudited consolidated financial statements for the periods covered by this report. We have also undertaken remedial action to address and correct the weakness in our internal controls over this process. INTERNAL CONTROLS. In our quarterly report on Form 10-Q for the period ended March 31, 2004, we reported that management had undertaken certain measures to strengthen the corporation's internal controls relating to certain accounting processes. During the second quarter, management and the Audit Committee determined that the corporation's internal control over financial reporting would benefit from a restructuring of responsibilities for certain functions in the corporation's accounting department. Additional management is in the process of being transferred from other parts of the HSBC group and is expected to assume responsibilities in the third quarter. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS -------------------------------------------------------------------------------- GENERAL. We are parties to various legal proceedings resulting from ordinary business activities relating to our current and/or former operations. Certain of these actions are or purport to be class actions seeking damages in very large amounts. These actions assert violations of laws and/or unfair treatment of consumers. Due to the uncertainties in litigation and other factors, we cannot be certain that we will ultimately prevail in each instance. We believe that our defenses to these actions have merit and any adverse decision should not materially affect our consolidated financial condition. MERGER LITIGATION. Several lawsuits were filed alleging violations of law with respect to the merger with HSBC. We believe that the claims lack merit and the defendants deny the substantive allegations of the lawsuits. These lawsuits are described below. Between August 27, 2002 and January 15, 2003, derivative lawsuits on behalf of the company and class actions on behalf of Household common stockholders were filed against Household and certain of its officers and directors. See Bailey v. Aldinger, et al., No 02 CH 16476 (Circuit Court, Cook County, Illinois, Chancery Division); McLaughlin v. Aldinger, et al., No. 02 CH 20683 (Circuit Court, Cook County, Illinois, Chancery Division); Pace v. Aldinger, et al., No. 02 CH 19270 (Circuit Court, Cook County, Illinois, Chancery Division); Williamson v. Aldinger, et al., No. 03 600331 (United States District Court for the Northern District of Illinois). The lawsuits principally asserted claims for breach of fiduciary duty in connection with our restatement of earnings announced on August 14, 2002, the allegedly improper lending practices by Household's subsidiaries and the alleged failure by certain Household officers to take appropriate steps to maximize the value of the merger transaction between Household and HSBC 62 Holdings plc announced on November 14, 2002. On March 18, 2003, a memorandum of understanding was signed by the parties containing the essential terms of the settlement of all four lawsuits. Those settlement terms included a $55 million reduction in the termination fee for the Household-HSBC merger, a supplemental disclosure to Household shareholders in the supplemental Household proxy statement, a confirmation from Goldman Sachs stating that as of the date of the confirmation it was aware of nothing that would cause it to withdraw its November 14, 2002 opinion about the fairness of the Household-HSBC merger to Household's common shareholders and payment by the defendants of plaintiff's costs relating to notice to stockholders as well as $2.0 million in attorneys fees for plaintiffs' counsel. A stipulation reflecting the settlement was signed by the parties on September 22, 2003 and the Circuit Court, Cook County, Illinois, Chancery Division preliminarily approved the settlement of the Bailey, McLaughlin and Pace lawsuits on September 29, 2003 and directed that notice be provided to Household stockholders and class members. Following the distribution of the notice, the Circuit Court, Cook County, Illinois, Chancery Division held a settlement fairness hearing on December 23, 2003. The final order dismissing the state court cases (Pace, McLaughlin and Bailey) was entered on June 7, 2004. The final order dismissing the Williamson case was entered by the United States District Court for the Northern District of Illinois on July 23, 2004. CONSUMER LENDING LITIGATION. During the past several years, the press has widely reported certain industry related concerns that may impact us. Some of these involve the amount of litigation instituted against finance and insurance companies operating in certain states and the large awards obtained from juries in those states (Alabama and Mississippi are illustrative). Like other companies in this industry, some of our subsidiaries are involved in a number of lawsuits pending against them in these states. The Alabama and Mississippi cases, in particular, generally allege inadequate disclosure or misrepresentation of financing terms. In some suits, other parties are also named as defendants. Unspecified compensatory and punitive damages are sought. Several of these suits purport to be class actions or have multiple plaintiffs. The judicial climate in these states is such that the outcome of all of these cases is unpredictable. Although our subsidiaries believe they have substantive legal defenses to these claims and are prepared to defend each case vigorously, a number of such cases have been settled or otherwise resolved for amounts that in the aggregate are not material to our operations. Appropriate insurance carriers have been notified of each claim, and a number of reservations of rights letters have been received. Certain of the financing of merchandise claims have been partially covered by insurance. In a case decided on March 31, 2004 and published on May 13, the Appellate Court of Illinois, First District (Cook County), ruled in U.S. Bank National Association v. Clark, et al., that certain lenders (which did not include any subsidiaries of Household) violated the Illinois Interest Act by imposing settlement fees in excess of 3% of the principal amount on loans with an interest rate in excess of 8%. The Appellate Court held for the first time that when the Illinois legislature made amendments to the late fee provisions of the Interest Act in 1992, Illinois opted out of the Federal Depository Institutions Deregulation and Monetary Control Act of 1980 ("DIDMCA") and, in "certain instances," the Federal Alternative Mortgage Transaction Parity Act of 1982 ("AMPTA"). DIDMCA and AMPTA each contain provisions that preempt certain state laws unless state legislatures took affirmative action to "opt-out" of the federal preemptions within specified time frames. The Court found that as a result of 1992 legislative action, the State's 3% restriction on points and finance charge fees are now enforceable in Illinois. The Appellate Court's ruling reversed the trial court's decision, which had relied on previous opinions of the Illinois Attorney General, the Illinois Office of Banks and Real Estate, and other courts. Should the decision stand and be applied retroactively throughout Illinois, lenders would be required to make refunds to customers who had a closed-end real estate secured first mortgage loan of double the interest paid or contracted for, whichever is greater. The plaintiffs in the Clark case have filed a notice of appeal with the Illinois Supreme Court. Three cases have been filed against subsidiaries of Household based upon the Clark decision: Wilkes v. Household Finance Corporation III, et al., Circuit Court of Cook County, Illinois, Chancery Division, filed on June 18, 2004 (purported class action); Aslam v. Accredited Home Lenders, Inc., et al., Circuit Court of Cook County, Illinois, Chancery Division, filed on June 11, 2004 (purported class action); and Morris, et al. v. Household Mortgage Services, Inc., U.S. District Court for 63 the Northern District of Illinois, filed on June 22, 2004. At this time, we are unable to quantify the potential impact of the Clark decision should it receive retroactive application. SECURITIES LITIGATION. In August 2002, we restated previously reported consolidated financial statements. The restatement related to certain MasterCard and Visa co-branding and affinity credit card relationships and a third party marketing agreement, which were entered into between 1992 and 1999. All were part of our Credit Card Services segment. In consultation with our prior auditors, Arthur Andersen LLP, we treated payments made in connection with these agreements as prepaid assets and amortized them in accordance with the underlying economics of the agreements. Our current auditor, KPMG LLP, advised us that, in its view, these payments should have either been charged against earnings at the time they were made or amortized over a shorter period of time. The restatement resulted in a $155.8 million, after-tax, retroactive reduction to retained earnings at December 31, 1998. As a result of the restatement, and other corporate events, including, e.g., the 2002 settlement with 50 states and the District of Columbia relating to real estate lending practices, Household, and its directors, certain officers and former auditors, have been involved in various legal proceedings, some of which purport to be class actions. A number of these actions allege violations of federal securities laws, were filed between August and October 2002, and seek to recover damages in respect of allegedly false and misleading statements about our common stock. To date, none of the class claims has been certified. These legal actions have been consolidated into a single purported class action, Jaffe v. Household International, Inc., et al., No. 02 C 5893 (N.D. Ill., filed August 19, 2002), and a consolidated and amended complaint was filed on March 7, 2003. The amended complaint purports to assert claims under the federal securities laws, on behalf of all persons who purchased or otherwise acquired Household securities between October 23, 1997 and October 11, 2002, arising out of alleged false and misleading statements in connection with Household's sales and lending practices, the 2002 state settlement agreement referred to above, the restatement and the HSBC merger. The amended complaint, which also names as defendants Arthur Andersen LLP, Goldman, Sachs & Co., and Merrill Lynch, Pierce, Fenner & Smith, Inc., fails to specify the amount of damages sought. In May 2003, we, and other defendants, filed a motion to dismiss the complaint. On March 19, 2004, the Court granted in part, and denied in part the defendants' motion to dismiss the complaint. The Court dismissed all claims against Merrill Lynch, Pierce, Fenner & Smith, Inc. and Goldman Sachs & Co. The Court also dismissed certain claims alleging strict liability for alleged misrepresentation of material facts based on statute of limitations grounds. The claims that remain against some or all of the defendants essentially allege the defendants knowingly made a false statement of a material fact in conjunction with the purchase or sale of securities, that the plaintiffs justifiably relied on such statement, the false statement(s) caused the plaintiffs' damages, and that some or all of the defendants should be liable for those alleged statements. The Court has ordered that all factual discovery must be completed by January 13, 2006 and expert witness discovery must be completed by July 24, 2006. Other actions arising out of the restatement, which purport to assert claims under ERISA on behalf of participants in Household's Tax Reduction Investment Plan, have been consolidated into a single purported class action, In re Household International, Inc. ERISA Litigation, Master File No. 02 C 7921 (N.D. Ill). A consolidated and amended complaint was filed against Household, William Aldinger and individuals on the Administrative Investment Committee of the plan. The consolidated complaint purports to assert claims under ERISA that are similar to the claims in the Jaffe case. Essentially, the plaintiffs allege that the defendants breached their fiduciary duties to the plan by investing in Household stock and failing to disclose information to Plan participants. A motion to dismiss the complaint was filed in June 2003. On March 30, 2004, the Court granted in part, and denied in part, the defendants' motion to dismiss the complaint. The Court dismissed all claims alleging that some or all of the defendants breached their co-fiduciary obligations; misrepresented the prudence of investing in Household stock; failed to disclose nonpublic information regarding alleged accounting and lending improprieties; and failed to provide other defendants with non-public information. The claims that remain essentially allege that some or all of the defendants failed to prudently manage plan assets by continuing to invest in, or provide matching contributions of, Household stock. The Court has ordered that all discovery, including class certification issues, must be completed by September 17, 2004 and dispositive motions and responses must be filed by November 8, 2004. 64 On June 27, 2003, a case entitled, West Virginia Laborers Pension Trust Fund v. Caspersen, et al., was filed in the Chancery Division of the Circuit Court of Cook County, Illinois as case number 03CH10808. This purported class action names as defendants the directors of Beneficial Corporation at the time of the 1998 merger of Beneficial Corporation into a subsidiary of Household, and claims that those directors' due diligence of the Company at the time they considered the merger was inadequate. The Complaint claims that as a result of some of the securities law and other violations alleged in the Jaffe case, the Company's common shares lost value. Pursuant to the merger agreement with Beneficial Corporation, we assumed the defense of this litigation. In September of 2003, the defendants filed a motion to dismiss which was granted on June 15, 2004 based upon a lack of personal jurisdiction over the defendants. The plaintiffs have filed notice of their intent to appeal. In addition, on June 30, 2004, a case entitled, Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Caspersen, et al., was filed in the Superior Court of New Jersey, Law Division, Somerset County as Case Number L9479-04. Other than the change in plaintiff, the suit is substantially identical to the above West Virginia Laborer's Pension Trust Fund case, and is brought by the same principal law firm which brought that suit. With respect to these securities litigation matters, we believe that we have not, and our officers and directors have not, committed any wrongdoing and in each instance there will be no finding of improper activities that may result in a material liability to us or any of our officers or directors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------------------------------------------------------- (a) Exhibits 3.1 Amended and Restated Certificate of Incorporation of Household International, Inc., as amended. 10.7 Household International, Inc. Directors Non-Qualified Deferred Compensation Plan. 10.9 Household International, Inc. Non-Qualified Deferred Compensation Plan for Executives. 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 31 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Debt and Preferred Stock Securities Ratings. 99.2 Report of KPMG LLP, independent registered public accounting firm. 99.3 Letter of independent registered public accounting firm, KPMG LLP, regarding unaudited interim financial information. (b) Reports on Form 8-K During the quarter ended June 30, 2004, the Registrant filed a Current Report on Form 8-K on May 17, 2004 with respect to the financial supplement pertaining to the financial results of Household International, Inc. for the quarter ended March 31, 2004. 65 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. HSBC FINANCE CORPORATION (formerly known as Household International, Inc.) (Registrant) /s/ Simon C. Penney -------------------------------------- Simon C. Penney Senior Executive Vice President and Chief Financial Officer Date: March 31, 2005 66 EXHIBIT INDEX -------------------------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation of Household International, Inc., as amended. 10.7 Household International, Inc. Directors Non-Qualified Deferred Compensation Plan. 10.9 Household International, Inc. Non-Qualified Deferred Compensation Plan for Executives. 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 31 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Debt and Preferred Stock Securities Ratings. 99.2 Report of KPMG LLP, independent registered public accounting firm. 99.3 Letter of independent registered public accounting firm, KPMG LLP, regarding unaudited interim financial information. EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF HOUSEHOLD INTERNATIONAL, INC. (AS AMENDED MAY 11, 2004) HOUSEHOLD INTERNATIONAL, INC. RESTATED CERTIFICATE OF INCORPORATION INDEX DATE DESCRIPTION ---- ----------- 5/11/04 Amended Certificate of Designations of Series A Cumulative Preferred Stock of Household International, Inc. 3/28/03 Certificate of Merger of Household International, Inc. with and into H2 Acquisition Corporation 3/27/03 Certificate of Amended and Restated Certificate of Incorporation of H2 Acquisition Corporation 3/27/03 Amended and Restated Certificate of Incorporation of H2 Acquisition Corporation 3/26/03 Certificate of Designations of Series A Cumulative Preferred Stock of H2 Acquisition Corporation AMENDED CERTIFICATE OF DESIGNATIONS OF SERIES A CUMULATIVE PREFERRED STOCK OF HOUSEHOLD INTERNATIONAL, INC. PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE Household International Inc., a Delaware corporation (the "Corporation"), in accordance with the provisions of Section 151 (g) of the Delaware General Corporation Law, hereby certifies on June 30, 2004 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 a resolution authorizing the creation and issuance of a series of said Preferred Stock to be known as "Series A Cumulative Preferred Stock" and the Certificate of Designations for the Series A Cumulative Preferred Stock was filed with the Secretary of State of the State of Delaware on March 27, 2003; THIRD: As of May 30, 2003, the Board deemed it advisable to amend the Certificate of Designations of the Series A Cumulative Preferred Stock and HSBC Holdings plc, the sole owner of all outstanding shares of the Series A Cumulative Preferred Stock and the sole shareholder of the common stock of the Corporation approved such amendment, which was filed with the Secretary of State of the State of Delaware on August 1, 2003; FOURTH: As of May 11, 2004, the Board deemed it advisable to further amend the Certificate of Designations of the Series A Cumulative Preferred Stock and adopted a resolution as set forth below, the effectiveness of such resolution to be subject to approval of such amendment by HSBC Holdings plc, the sole owner of all outstanding shares of Series A Cumulative Preferred Stock and by HSBC Investments (North America) Inc., the sole shareholder of the common stock of the Corporation; and FIFTH: As of May 12, 2004, HSBC Holdings plc and HSBC Investments (North America) Inc. approved the amendment to the Certificate of Designations of the Series A Cumulative Preferred Stock as set forth in the following resolution; "RESOLVED, that the Board deems it advisable, subject to approval of HSBC Holdings plc, the sole shareholder of a series of authorized preferred stock (the "Preferred Stock") of the Corporation, and the approval of HSBC Investments (North America) Inc., the sole shareholder of the Corporation's outstanding common stock, that the Certificate of Designations for such series shall be amended, 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. 2 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 begin to accrue and be cumulative from the date of original issue of such shares (which date is March 28, 2003, as reflected on the certificates evidencing the same), and shall be payable in annual payments on 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 "Annual Dividend Payment Date"), commencing in respect of each share of Series A Preferred Stock on October 15, 2004. (b) Following the initial dividend, the amount of dividends payable shall be determined on the basis of twelve 30-day months and a 360-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 75 days nor 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 an Annual 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 an Annual 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 Annual Dividend Payment Date and shall constitute an additional Arrearage from and after any Annual Dividend Payment Date to the extent not paid on such Annual 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 Annual 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 75 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 to receive 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 3 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) issue 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 an Annual 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 4 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 $0.01 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 shall liquidate, 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 search for term 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 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. 5 "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 50% 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. HOUSEHOLD INTERNATIONAL, INC By: /s/ Patrick D. Schwartz ------------------------------------ Patrick D. Schwartz Vice President, Deputy General Counsel-Corporate and Assistant Secretary ATTEST: /s/ Darcie J. Oakes -------------------------------------- Darcie J. Oakes Assistant Secretary 6 CERTIFICATE OF MERGER OF HOUSEHOLD INTERNATIONAL, INC. WITH AND INTO H2 ACQUISITION CORPORATION PURSUANT TO SECTION 251 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE H2 Acquisition Corporation, a Delaware corporation ("H2"), does hereby certify: FIRST: That the name and state of incorporation of each of the constituent corporations of the merger are as follows: STATE OF NAME 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 of H2. 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 7 CERTIFICATE OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF H2 ACQUISITION CORPORATION Paul L. Lee, being the Vice-President, Secretary and Treasurer of H2 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 8 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; 9 (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., 7th Floor New York, NY 10018 10 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 statute 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. 11 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. 12 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 the 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 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 Ior, 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 13 Series A Preferred Stock entitled to receive payment of a dividend declared thereon, which record date shall be no more than 60 days nor 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 to receive 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 14 (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. 15 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 shall liquidate, 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. 16 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 17 EXHIBIT 10.7 HOUSEHOLD INTERNATIONAL DIRECTORS NON-QUALIFIED DEFERRED COMPENSATION PLAN SECTION 1. Purpose. The purpose of this Plan is to provide non-management directors (the "Directors") of Household International, Inc. (the "Company") the opportunity to defer receipt of cash compensation paid by the Company to such person in their role as Director and to provide for future savings of compensation earned. The provision of such an opportunity is designed to aid the Company in attracting and retaining as members of its Board of Directors, persons whose abilities, experience and judgment can contribute to the well being of the Company. SECTION 2. Name, Effective Date. The Company previously maintained a deferred compensation plan known as the Household International Deferred Fee Plan for Directors which had an effective date of January 10, 1995 as well as a plan known as the Household International Deferred Phantom Stock Plan for Directors which had an effective date of July 11, 1995. These two plans are referred to herein as the "Prior Plans." The Company now desires to substantially change the provisions of the Prior Plans especially with respect to investment options and deferral elections. Accordingly, this plan known as the Household International Directors Non-Qualified Deferred Compensation Plan (the "Plan") is to be effective as of May 1, 2004 (the "Effective Date"). SECTION 3. Plan Year. The initial Plan Year shall begin on May 1, 2004 and end on December 31, 2004. Thereafter, a Plan Year shall be the calendar year. SECTION 4. Administration of the Plan. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"). The Committee shall conclusively interpret the provisions of the Plan, decide all claims, and shall make all determinations under the Plan. The Committee shall act by vote or written consent of a majority of its members. However, the Committee may appoint one or more persons or an entity as its delegate to handle various administrative matters on its behalf such as recordkeeping and other administrative duties with respect to the Plan. SECTION 5. Eligibility. Any Director serving on the Board of Directors of the Company who is not deemed to be an employee of the Company or any of its subsidiaries or affiliates is eligible to participate in the Plan. SECTION 6. Deferred Compensation Account. An unfunded deferred compensation account shall be established for each person who elects to participate in the Plan. A separate account shall be established for each Plan Year's deferrals. An amount equal to the compensation deferred will be credited to the participant's deferred compensation account for that Plan Year within three business days of the date such compensation would otherwise be initially payable. SECTION 7. Amount of Deferral. For Plan Year 2004 and for each Plan Year thereafter, a participant may elect to defer receipt of Board of Director fees (including annual retainer and chairperson committee retainer fees) that would otherwise be paid in that year and which have not yet been earned. The annual aggregate deferral election made by a participant for a particular Plan Year must be at least $5,000. SECTION 8. Election of Deferral. An election to defer compensation for each Plan Year shall be made on forms provided by the Committee for that purpose and shall be effective on the date indicated, but not before the date filed with the Committee. For the initial Plan Year of the Plan, valid elections must be filed by April 23, 2004 and will be effective with the first pay date on or after May 1, 2004. Any deferral election made under the Prior Plans with respect to compensation earned for 2004, shall become ineffective with respect to any amounts that would become payable on or after May 1, 2004. For 2005 and Plan Years thereafter, the elections must be filed by December 15 to be effective for unearned compensation that would otherwise be paid in the following Plan Year. In the case of newly elected Directors who first become eligible to participate in the Plan subsequent to the first day of a Plan Year, such newly eligible participant shall be entitled to make an election to defer compensation for services to be performed subsequent to the election provided such election is made within 30 days after the date such Director becomes eligible. In this case, such election shall be effective when made with respect to any compensation to be paid during the period beginning with the date following the date of the election through December 31 of the same initial year of participation. At the time that the participant makes a deferral election for a particular Plan Year, he or she shall also select a time for distribution as well as the form of distribution. A participant may elect to receive the deferrals for a particular Plan Year either at termination from Board membership, or at a future specified date while still serving on the Board. Termination from Board membership means termination from the Board of Directors of the Company and the Boards of all of the Company's subsidiaries and affiliates. Any future deferred distribution date chosen by a participant must be at least two years after the end of the Plan Year for which the election is made. If a participant has failed to select a future deferred distribution date for a Plan Year deferral or if he or she terminates Board membership, for a reason other than death, prior to reaching the selected future deferred distribution date, then distribution of such deferred compensation will be made or commence in the calendar year following the date of the participant's termination of Board membership. The usual form of distribution is a lump sum. However, at the time of deferral, a participant is eligible to select an optional form of distribution consisting of annual or quarterly installments of up to 10 years. Quarterly installments will be paid in January, April, July, and October. Notwithstanding the foregoing, if at initial valuation the amount to be distributed (i.e., a common distribution date and a common installment method) is less than $25,000, then distribution will be in a lump sum. The method of distribution (from one form of installments to another form of installments or to a lump sum and vice versa) can be changed by filing a form with the Committee at least 12 months prior to the distribution date. However, subject to Section 18, the election to receive a Plan Year's deferrals at termination of Board membership or at some future date while still a Board member is irrevocable. SECTION 9. Hypothetical Investment. Each deferred compensation account for a particular Plan Year will be credited with earnings from the date on which deferred compensation is credited to the account until the date of payment. The participant can elect to have the amount credited to his or her account for a particular Plan Year invested hypothetically in various benchmark funds. The benchmark funds that initially will be available under the Plan are as follows: 1) Van Kampen Real Estate Securities - A Shares 2) Oppenheimer Global - A Shares 3) AIM Small Cap Growth - Class A 4) HSBC Investor Small Cap Equity - Class Y 5) Fidelity Advisor Mid Cap Stock - Class A 6) Dreyfus S&P 500 Index 7) HSBC Investor Growth & Income - Class Y 8) HSBC Investor Fixed Income - Class Y 9) HSBC Investor Money Market - Class Y. The benchmark funds may be subsequently changed by the Committee or its delegate as it sees fit. In the absence of an investment election for a Plan Year, the participant's deferred compensation account balance for that Plan Year will be deemed invested in the HSBC Investor Money Market - Class Y. The participant can change his or her investment election as to the amount for a particular Plan Year already credited or to be credited to his or her account in whole percentages on a monthly basis by filing an appropriate election form with the Committee by the 25th day of the month prior to the first day of the month in which the election is to be effective. Each Plan Year of deferrals may have a separate investment allocation. There is no guarantee a participant's deferred compensation account deemed invested in a particular benchmark fund will increase; amounts may decrease based on the performance of the benchmark fund. SECTION 10. Prior Plan Deferrals. Amounts that were previously deferred by a participant for a Plan Year under the Prior Plans and which have not been distributed as of the Effective Date will be credited to the participant's deferred compensation account under this Plan known as the Prior Plan Balance. Amounts credited to the Prior Plan Balance for any prior plan year will be distributed according to the participant's previous deferral election for that plan year under the Prior Plans subject to the participant's right to change the manner of distribution in accordance with Section 8, if eligible. The amounts credited to the participant's account under the Prior Plans which were hypothetically invested in the Stock 2 Component shall continue to be hypothetically invested in such Stock Component until such time as the participant elects to have such amounts transferred to one or more of the benchmark funds offered under the Plan but no deemed dividends on such amounts nor new deferrals nor transfers from other benchmark funds can be hypothetically invested in the Stock Component. However, any amounts that are credited or would be credited to the participant's account under the Prior Plans invested in the Cash Component will be invested in the HSBC Investor Money Market - Class Y. The participant may make an election to have amounts representing the Prior Plan Balance for each prior plan year invested hypothetically in the benchmark investment funds offered under this Plan and the investment election for any plan year can be changed from time to time in accordance with Section 9. SECTION 11. Value of Deferred Compensation Accounts. The value of each participant's deferred compensation account shall include compensation deferred, adjusted for any increase or decrease thereon, pursuant to Section 9 of the Plan. SECTION 12. Payment of Deferral. Subject to Section 18, a distribution may be made from the participant's deferred compensation account as soon as practicable in the calendar year following the date of the termination of the participant's Board membership unless an earlier date for distribution while serving as a Board member is specified by the participant in his or her election to defer compensation or in the event of the participant's death. If a participant elected to defer any Plan Year's compensation to a specific date while serving as a Board member, such Plan Year's deferred compensation and earnings or losses thereon will be payable in cash in a lump sum or installments, if applicable, on the date specified unless it is paid earlier due to termination of Board membership or death. If a participant terminates Board membership, for a reason other than death, before the date chosen for distribution, then distribution will occur in the calendar year following such termination. The account balance will be distributed in the same form of distribution elected for termination of employment subject to the minimum requirements for installments. If a participant terminates Board membership while receiving in-service installments, then the remaining installments will be distributed as they fall due. SECTION 13. Taxation. All distributions from the Plan are treated as ordinary income subject to federal and state income taxation at the time of distribution (with the exception of states that assess taxes at the time of deferral). Distributions (including investment returns) are also subject to self-employment and Medicare taxes. The participants and their beneficiaries, distributees, and personal representatives will bear any and all federal, foreign, state, local or other income or other taxes imposed on amounts deferred or paid under the Plan. SECTION 14. Designation of Beneficiary. A participant may designate a beneficiary or beneficiaries which shall be effective upon filing written notice with the Committee on the form provided by the Committee for that purpose. If a Participant is married and has not designated his or her spouse as the sole primary beneficiary of his or her account, then such spouse must provide written consent to the participant's beneficiary designation form or else the account will be paid to such spouse, if living, upon the death of the participant. If no beneficiary is designated, the beneficiary will be the participant's estate. If more than one beneficiary statement has been filed, the beneficiary or beneficiaries designated in the statement bearing the most recent date will be deemed the valid beneficiary or beneficiaries. SECTION 15. Death of Participant or Beneficiary. In the event of a participant's death before he or she has received the full value of his or her deferred compensation account, the then current value of the participant's deferred compensation account shall be determined and such amount shall be paid to the beneficiary or beneficiaries of the deceased participant as soon as practicable thereafter in cash in a lump sum. If no designated beneficiary has been named or survives the participant, the beneficiary will be the participant's estate. SECTION 16. Participant's Rights Unsecured. The right of any participant or beneficiary to receive payment under the provisions of the Plan shall be an unsecured claim against the general assets of the Company, and any successor company in the event of a merger, consolidation, reorganization or any other event which causes the Company's assets or business to be acquired by another company. No provisions 3 contained in the Plan shall be construed to give any participant or beneficiary at any time a security interest in the deferred compensation account or any other assets of the Company. SECTION 17. Statement of Account. Statements will be sent to participants following the end of each calendar quarter reflecting the value of their deferred compensation accounts as of the end of that quarter. The accounts will be valued daily but recorded monthly. SECTION 18. Hardship Withdrawals. Notwithstanding anything in this Plan to the contrary, a participant may request a hardship withdrawal of all or a portion of the balance of his or her deferred compensation account by filing a written request with the Committee in a form acceptable to the Committee for that purpose. A hardship withdrawal will be granted on a limited basis and only due to the participant's or dependant's illness or accident, casualty loss of the participant's property or similar circumstances arising out of events beyond the control of the participant. A participant requesting a hardship withdrawal will be requested to submit documentation of the hardship and proof that the loss is not covered by other means. This request may be granted, solely in the absolute discretion of the Committee. No member of the Committee may vote on, or otherwise influence, a decision of the Committee concerning his or her request for a hardship withdrawal. A hardship withdrawal by a participant shall have no effect on any amounts remaining in the participant's account and shall not have any effect on any current or future deferral election after the hardship withdrawal. SECTION 19. Assignability. No right to receive payments hereunder shall be transferable or assignable by a participant or a beneficiary. SECTION 20. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. SECTION 21. Amendment or Termination of Plan. This Plan may at any time or from time to time be amended, modified or terminated by the Committee. No amendment, modification or termination shall, without the consent of a participant, adversely affect such participant's accruals on his or her prior elections. Rights accrued prior to termination of the Plan will not be canceled by termination of the Plan. SECTION 22. Payment of Certain Costs of the Participant. If a dispute arises regarding the interpretation or enforcement of this Plan and the participant (or, in the event of his or her death, his or her beneficiary) obtains a final judgment in his or her favor from a court of competent jurisdiction from which no appeal may be taken, whether because the time to do so has expired or otherwise, or his or her claim is settled by the Company prior to the rendering of such a judgment, all reasonable legal and other professional fees and expenses incurred by the participant in contesting or disputing any such claim or in seeking to obtain or enforce any right or benefit provided for in the Plan or in otherwise pursuing his or her claim will be promptly paid by the Company with interest thereon at the highest Illinois statutory rate for interest on judgments against private parties from the date of payment thereof by the participant to the date of reimbursement to him or her by the Company. 4 EXHIBIT 10.9 HOUSEHOLD INTERNATIONAL NON-QUALIFIED DEFERRED COMPENSATION PLAN SECTION 1. Purpose. The purpose of this Plan is to provide certain executives of Household International, Inc. (the "Company") and certain of its direct and indirect subsidiaries (the Company and such subsidiaries being referred to as the "Employers") the opportunity to defer receipt of compensation and provide for future savings of compensation earned. The provision of such an opportunity is designed to aid the Company in attracting and retaining as executives, persons whose abilities, experience and judgment can contribute to the well being of the Company. SECTION 2. Name, Effective Date. The Company previously maintained a deferred compensation plan known as the Household International Non-Qualified Deferred Compensation Plan (the "Prior Plan") which had an effective date of December 1, 1996. The Company now desires to substantially change the provisions of the Prior Plan especially with respect to eligibility, investment options and deferral elections. Accordingly, this plan also known as the Household International Non-Qualified Deferred Compensation Plan (the "Plan") is to be effective as of May 1, 2004 (the "Effective Date"). SECTION 3. Plan Year. The initial Plan Year shall begin on May 1, 2004 and end on December 31, 2004. Thereafter, a Plan Year shall be the calendar year. SECTION 4. Administration of the Plan. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"). The Committee shall conclusively interpret the provisions of the Plan, decide all claims, and shall make all determinations under the Plan. The Committee shall act by vote or written consent of a majority of its members. However, the Committee may appoint one or more persons or an entity as its delegate to handle various administrative matters on its behalf such as recordkeeping and other administrative duties with respect to the Plan. SECTION 5. Eligibility. Any executive of the Employers who is on the United States payroll, other than as a secondee, and whose compensation is at least $150,000 as of February 15, 2004 is eligible to participate in the Plan for the initial Plan Year beginning on May 1, 2004. For Plan Years thereafter, an executive of the Employers who is on the United States payroll, other than as a secondee, must have compensation of at least $150,000 as of the November 1 preceding the Plan Year for which an election is made in order to be eligible to participate in the Plan for that Plan Year. Compensation shall be determined prior to any reduction for any salary contributions to a cafeteria plan established pursuant to Section 125 of the Internal Revenue Code of 1986, as amended (the "Code") or to a plan qualified pursuant to Section 401(k) of the Code or due to a transportation fringe under Section 132(f) of the Code. For purposes of eligibility, compensation means annualized base salary for the current calendar year plus annual bonus, commission, and performance based incentive awards earned in the previous calendar year and paid by the time of the eligibility determination date. A participant must meet the annual minimum for each Plan Year in order to make a deferral election for that Plan Year although the $150,000 minimum may be changed by the Committee. SECTION 6. Deferred Compensation Account. An unfunded deferred compensation account shall be established for each person who elects to participate in the Plan. A separate account shall be established for each Plan Year's deferrals. An amount equal to the compensation deferred will be credited to the participant's deferred compensation account for that Plan Year within three business days of the date such compensation would otherwise be initially payable. SECTION 7. Amount of Deferral. For Plan Year 2004 and for each Plan Year thereafter, a participant may elect to defer receipt of up to 80% of the unearned salary, commissions and performance based incentive awards that would otherwise be paid in that year and/or up to 80% of the annual bonus earned for that year which generally becomes payable to the participant in the following year. No deferral election shall reduce a participant's compensation below the amount necessary to satisfy the amounts needed for applicable employment taxes, benefit plan withholding requirements or income tax or other tax withholding. The annual aggregate deferral election made by a participant for a particular Plan Year must be at least $5,000. SECTION 8. Election of Deferral. An election to defer compensation for each Plan Year shall be made on forms provided by the Committee for that purpose and shall be effective on the date indicated, but not before the date filed with the Committee. For the initial Plan Year of the Plan, valid elections must be filed by April 23, 2004 and will be effective with the first pay date on or after May 1, 2004. Any deferral election made under the Prior Plan with respect to compensation earned for 2004, shall become ineffective with respect to any amounts that would become payable on or after May 1, 2004. For 2005 and Plan Years thereafter, the elections must be filed by December 15 to be effective for unearned compensation that would otherwise be paid in the following Plan Year. At the time that the participant makes a deferral election for a particular Plan Year, he or she shall also select a time for distribution as well as the form of distribution. A participant may elect to receive the deferrals for a particular Plan Year either at termination of employment, including retirement due to disability, or at a future specified date while employed. For purposes of the Plan, termination of employment refers to termination of employment from all the Employers and their subsidiaries and affiliates. Any future deferred distribution date chosen by a participant must be at least two years after the end of the Plan Year for which the election is made. If a participant has failed to select a future deferred distribution date for a Plan Year deferral or if he or she terminates employment, including retirement due to disability, for a reason other than death, prior to reaching the selected future deferred distribution date, then distribution of such deferred compensation will be made or commence in the calendar year following the date of the participant's termination of employment. This information is provided by RNS The company news service from the London Stock Exchange More to follows IR BFLFXEXBXBBB

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