ML20238F636
| ML20238F636 | |
| Person / Time | |
|---|---|
| Site: | Beaver Valley |
| Issue date: | 12/31/1986 |
| From: | HOUSEHOLD INTERNATIONAL, INC. |
| To: | |
| Shared Package | |
| ML20238F596 | List: |
| References | |
| NUDOCS 8709160253 | |
| Download: ML20238F636 (477) | |
Text
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lo c Jnternationa~ 1986 #banua Report lr
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Almpt Our Cover 1
Shareholc er Value Household International is committed to increasing shareholder value.Over the years this commitment has been our prime motivator and a constant guiding force during periods when strategies have been altered or direction changed.
. A significant measure of howwellwe have met dds commitment is die increase in value of an investment in Household stock. '
The graph on the cover of this report shows that over the past five years an investment in Household stock has increased in value by more than 320 percent,and has out performed the S&P 500 by approximately70 percent.
This indicates that we are being successful in our efforts to increase shareholder value.That j continues to be our objective, and our commitment to it is as vigorous as ever. l O Household Intemational Common Stock $42.31
- Standard a Poor's 500 Index
$24.68 1
Investment Performance l
$10.00 This graph illustrates the growth in value of a $10 investment
.. in flousehold International common stock over the last
[ five years, compared with an equivalent investment in the sap 500 Indem including reinvestment of all dividervss. Assume
,:; the two $10 investments were made at December 31,1981,and )
i that dividends were reinvested at the month of rec.aipt closing
. . - - JC , b 96) ; $54 price. Dividends are rounded to the nearest tenth of a cent.
12/81 82 83 '84 85 86
9 me e e
mancia Hagu.g,ts ll. n,, fual,I latern nonori. Inr . unal nl..ialuu n .
til,I. llan run.nour. sala i slurn Iner minen ilato are .roavel ur onellonn.
),,n ,,ulval lsen emia. , II ( *, n , ,a jo;;i, Io;;; e tu,a ,. ,
\ct -ale- and rewnue- $ 2.710.5 8 2..i~ro.9 i n " ,,
\et innune 208.6 2 in.9 t l Primary earning- per common hare .l.18 3.05 li l'ully dilutnl earnings per common -hare 1.31 3.51 22 herage number of common -hare, out-tanding:
l'rimary 13.4 51 i s l#o l'ully diluteil 18.1 59.6 Ilos lleturn on shareholders' equity 15.3 % 12.0"n H llewrnlovr Il
\n et- $ 13.206.6 $ 10.720.0 al" ,
l'inance rece'.ahles 9.100. t
' 6.872.2 17 Sharehohler* equity.ewtuding preferred stock ubject to mandatory redemption 1.161.6 1.63n.9 (2'n llook salue per common share.as uming comersion of $2.375 and $2.50 preferretl stock 28.08 31.03 Contents i.etter to Shareholders 2 Corporate \lission 6 Our Performance 8 Our ilu inew es 11 l'inani ial Sen ires 12
\ manufacturing 16 Corporate Profile 20
\lanagementi ()iscu--ion and \nalyri* 22 littalleial bialetHt'nto 33 lloard of !)irector, 56
\lanagement 58 Stock Information 59 Corporate lniormation 60 1
c
\et ilH1Hnt' lrd Hn Nie ibfee lHI' IH'""' U" operated in 198h anlounted to bNUN b Willi'H-
-lightb below die 821II.O in}l! ion reMW " U To Our Sharehok ers: Jan irheim - u uainyu ~he"dhin=. I 8e-ult- for 1086 reflect a 8135 million gain Change- made in llou-ehold International in from the ah of %tional Car and re-tructuring the pa-t year or -o huse been dramatic. co-l o[$l521 million.Therefore. linal net income We -old two major hu-ine--c . Hou ehohl "Pl"'"'I*"I"I) 'lual, w hat it would base been had th heen i o -ale o \ational Car and no re-trur
\ Merchandising alul \ational Car Rental.
turing co t,.$ome of the re-tructuring co t- impact he espamled our financial Sersice, hu ine-- at continuig operations.Tll of the gain from the "
an accelerated rate.with total receivables increasi"F sale d NtionalCar and some of the restructuring 33 percent in 1985 and another 37 percent in 1986.
co-t, impact discontinued operation .Therefore.
Se are materially repositioning our \lanulac. thi3 year's re ulu, are more com[dicatel to report turing hu3ine-- to significantly improse its future and understand.
profit potential. Continuing operations represent hu ine-3e we intend to keep as part of Househohl International Me re-tructured our balance sheet by reducing .
while d.i contmued operations represent hu-ine--e, the number of outstanding conunon and equha-alreads wohl or those planned for disposition but
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lent share- of Ilousehohl -tock hv 25 percent.
not yet sold.
We 3 strengthened our financial po ition and Income from continuing operation- was enhanced future "arning pro-pect, through a $l38.1 million.after $18.5 million of aftertas
-erie- ol charge- against 1986 earnings.w hile still restructuring costs.This compare, with 1985 reporting record earning per 3 hare and a 15.3 per- income of $154.5 million from there operation .
cent return on equity.
Financial Services Results
.l'hi report addrenes what these changes and achievement mean lor the f.uture of. Househohl Financial Services reported substantially improsed resenues in 1986 in each of its three segments-Internanonal. It di cusses our perf.ormance. our mneumer.cmumercial and ordinary life in urance. j mi--ion.our objecthe, and our strategies for continuing to create salue for our -shareholders. Income from continuing operation- of Si 11.1 mil-lion.after $24.2 million aftertas of re-tructuring 19116 Financial Re ults
""'ts.was e -entially unchanged from 1985. l n te mnsmner segment we improsed our in 1986 net -airs and resenue-increased 10 percent maitet share in du> doine3 tic consunny linance compared to 1985. amounting to $22 billion.
Con-olidated fully diluted earnings per conunon busine .and in Maryland we shaped and refined our concept of America 3 Family Bank. readying
-hare reached a record S 4.31.a 22 percent increa-c mer the prior 3 ear.Our 15.3 percent return on share- Il I"'"'P""' ion to other states. Con-umer finance holder 3' equit3 eseceded our target of 15 percent.
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rereisable-increa-ed 25 percent to S l.8 billion. \lanufacturine Re uits while con mner banking receisahle increa- d \\ iih thi- report we base reorganierd ihr unii- of l 68 percent to $2.h bill ion [thtal con umer receis- llou-ehohl \lanularturing into Ibree e2 ment ~
able, reitelled a fertttd SI.l bill ion. a growth <>f buibline. ..ioi-niner aml i innincreial-indii tri ii.
.18 percent mer the prior year. Credit quality Thi i- con-i-tent with our ohjertise of rapitalizine remained -trong a the proportion of real e tate on ronunon production aiul marketing arih itie-
-crured rtTeisahlt'- inrtea t'd Ior the third (intwer- willNn the lllft'e -eutncills, othe scar and reached it, highe-i lesel in our Sale- increased mode tiv to ST) 1.3 million hi tory.56 percent of total consumer recchable . a' ; lou chohl \lanufarturing in 1980. Income in the conunercial egment we al-o achlesed .um runtinuing operation- of 825 million. aher out-tanding growth in rerchable .which increased $21.3 million of aftertas restructuring co-t .
nearly 31 percent to 82 hillion.New conunercial compares with $51.7 million in 1985, husiner, lines were launched to prmide a hroader The re-haping of our portfolio of companie-product ha,e and to increase cro, >elling oppor in \ manufacturing continued during the sear.
tunitie .The proportion of non-tachenefited Seseral unit, were iilentified for po--ihle hu ine grew -uhstantially in 1986.and a new li po ition. Acquisition, were made in the dki ion.busine s equipment financing.was formed. commercial food enice equipment area.which in our ordinary life insurance segment. we beliese ha appealing growth pro-pect .The
\lesander llamilton 1.ife achiesed record resenue, acqui-ition, complement flousehohr- esi-tine of $583.2 million and a 31 percent increase in line of food senice equipment.which inchnh -
income to $23.5 million. In part these results were Seat-man. the top mnking manufacturer of ice-due to escellent acceptance of new products. making machines.and Hal3cs Taylor. producer of water coolers and drinking fountains.
Donald C.tlark Before restructuring co-ts.the huihling and i hm,mnn ,,j the Hmmt unalI.hrrl Lwoany Utficer commercial-industrial segments both hail a good year. reflecting generally favorahle hou ine and con 3truction market 3.The con umer -egmem wa-I impacted by a suh3tantial earning- der line at the
. l'.S.Thermo, divi < ion.w hich was af fected by
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foreign competition in some product line .
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Stock Repurchase Program During 1986 we repurcha3ed for $684.3 million approximately 14.9 million common share- ami t'(ltlIvalents.at an aserage ro t per -hare of appro\-
if natt'l) b lb. priinarily ll ing prortTd- Irtlnt llle 1983
, ale 1>f Ilousehold \lerchandi-ing.The tepurcha-e-resulted in a 25 percent reduction in the number i
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Cof common and equisalent hare- out tanding Options for Grow th
-ince the end of 198~.This program ha izably b will u c the proceed-imm the -ale of \ational .
' increa-ed each remaining shareholders interest in ome combination of the following wa) : to in the earning < of Ilou ehold. finance internal growth of our busine-- -egment .
to make additional-trategic acquisition in or Sale Of National Car related to our existing bu ine c .or to repurcha-e On llecember 31.1986 we completed the ale of more shares of flousehohl stock. Each of these National Car Rental Sptern to a group of imestors options desenes elaboration. particularly a3 thes led by Painebbber Capital. Inc.. for $ 159 million relate to our ongoing strategies:
in cash. National has not earned adeiluate returns on our imertment in recent years and our forecast finun falSerricest Further investments in the did not indicate an adequate level of return in the three segments of our Financial Senices busines immediate future.Considering the value and timing are likely in 1987 as a result of the outstanding of the offer we received for National.we determined growth achieved and expected.We intend to extend that the proceeds of the sale could be applied to at least two new geographic areas our Americai to other opportunities which will provide a greater Family Bank concept. and we will aggres hely return to sharehoklers.h recorded an aftertax develop our credit card and mortgage banking gain of $155 million on the sale of National. operations.We will seek continued growth in all product lines in our consumer finance busines.
Restructuring Costs with special focus on real estate secured. resolving I
Concurrent with the sale of Nationalwe evaluated lending products. !
our remaining bu ineses to determine how best to Our commercial segment will continue to continue increasing the value of our shareholders' grow in 1987. primarily through internal mean-ime tment in llousehold Liternational. As a result. but also potentially through acquisition.% expect we recorded against 1986 earnings $152.7 million in substantial growth in all commercial busine*
aftertas restructuring costs related to the proposed lines and will continue to develop and refine discontinuation of certain business lines.the write- products and appropriate distribution channels dm.n of selected as3ets.and retirement of certain for attractive markets.
high coupon debt.The net effect of these actions % will expand our life insurance segment will be a significantly stronger balance sheet and through aggressive product and matet deselop-enhanced opportunity for greater future profit- ment and possibly through acquisita a. In 1987 we ability. Even with the restructuring costs.we expect to enter the New York State market for the exceeded our projected caruings per share for first time. and we will continue to design innovathe t
the y ear. annuity and life insurance prmiucts.The new tax l laws result in a decided advantage for certain insurance products versus other imertment aher-natises.and we believe that we are well po-itioned to participate in the growth of this industry.
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- f Iltmn/acturing:Our intention in \ manufacturing puldi hed on the nest page ol thi- report. h i-is to reduce our espo ure in unprofitable or tollowed by a discu -ion of thr objecthe- and l marginally profitable area and to buihl upon -trategies desetoped by Hou-chohl Financial esi ting strength . Emphasis will he on increa-ing Senire, and flou-chohl \lanulacturine to carn market -hare and deseloping new products.and them forward.
we will continue to implement program > which \\c also prmide -ome mea-urement ol the reduce co t- and maximize the salue of in place progre,3 we base made :n recent year .Thrs production and distribution sy3 tem . demonstrate our suet e33 in meeting our ha-ic In 1986 your Boani approsed an acquisition commitment to imprme 3hareholder salue.
program in the commercial food service equip- For 198..we expect to report merea-e m ment area.an area which has been highly profit- consolidated earnings. earnings per hare and able for us.The program is well underway and has return on shareholders ~ equity.
heen funded entirely by the Tlanufacturing business. b always.we are grateful to the empimer-of the corporation for their fine performance
//ousehold Stock:In our slew the earning potential in 1986 and for their continuing enthu-ia-m of your company is not fully reflected in the stock and cooperation.
price.and therefore we are continuing the pur-cha e of additional shares from time to time. On behalf of the Board of Director .
Executive Change Jo eph W. James. Executise Vice President of ,_
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llousehold International. has elected to take early Donald C. Clark retirement. lie came to Household in 1973 as Chairman of the Board and pre. ident of NationalCar Rental.and over the Chief Executive Officer years has made many significant contributions to the uecess of that company and the corporation. February 10.1987
\\c wish him well.
Our .ilission Revisited b the foregoing discussion illu3trates.we have before us many promising alternatives for shaping the future direction and growth of Household International.We will be guided in our actions hs our corporate mission statement.which i3 l
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. s Our Mission Our Oajectives Household Internationalism a major a To understand customer needs and diversified corporation serving consumer meet them by creating products and and commercial markets in selected core services of outstanding quality and businesses, or segments, primarily in value, m To maximize shareholder financial services and manufacturing. It value by earning a return on sham- -i is our mission to provide customers with holders' equity of at least 15 percent products and services of superior value annually. In addition, it is our goal to 1 i
and to maximize return on the invest- regularlyincrease the annual cash -
l ment of shareholders. By so doing we are dividend on common stock,with a total able to offer rewarding opportunities for payout on common and preferred shares employees and serve our communities of 35 to 40 percent of earnings. m To and society at large, maintain within the company a value system which supports our concept of operational excellence. mTo provide our employees with a work environment that encourages personal development, rewards initiative and recognizes the dignity of the individual. m To be a contributive corporate citizen in the communities in which we operate.
. m To be ethical, honest and fair in all our dealings.
9 7 %"
i Our Operating Princiales l
In managing our businesses we are We seek to continually demonstrate crea- j guided by these operating principles: tivity and imagination in developing j a Selective diversification provides answers to customer needs because we i greater opportunities for maximizing believe that is the surest way to maintain !
shareholder value than does a single long-term customer relationships. Cost i business activity.Our approach is to management applies equally to financial develop and maintain a portfolio of policy and operational expenses. We seek !
D businesses which compete in attractive a low cost of capital through use of debt
{ industries and hold advantageous positions. Our goal is to achieve above-consistent with maintaining a strong b balance sheet and appropriate credit ;
y average growth and returns for our ratings.By closely controlling all !
, shareholders.We practice diversification expenses,we achieve value pricing for >
- - not just among major business areas customers and maximize earnings for i but also among the core businesses, shareholders. m Our bottom-line l or segments,within those areas.Our results are directly linked to our concept objective is to maintain a portfolio of of operational excellence. Operational <
six to ten business segments. A principal excellence entails developing and advantage of our diversification strategy motivating people,doing superior is the ability to shift assets and resources strategic and tactical planning, and among our business segments and to encouraging a vigorous performance new opportunities. Our strategy couples orientation that focuses on end results active pursuit of new areas for investment for customers and shareholders, with divestiture of operations which no Achieving success requires a company i longer meet our long-term expectations. value system that supports the concept a In a diversified company, a decentral- of operational excellence. At Household, ized management structure improves our value system is characterized by a decision making.We emphasize decen- strong work ethic and adherence to high tralized management with centralized ethical standards.We strive for open accountability and control. Decisions communications and a cooperative are made by managers who are close team approach.
y to our customers and markets.
J e Quality and innovation in products
- { and services.and cost management, are keys to profitability.
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Our Performance Return on Equity Assets i
This measure indicates the aftertax rate of return Total assets have doubled since 1982 with l on average shareholders' equity.Over time we con- particularly strong growth over the last three years.
I sider 15 percent to be a reasonable objective for The major reason for this growth is a substantial ;
. our businesses.In 1986 we achieved a 15.3 percent increase in finance receivables at Household y return, and we expect to surpass that in 1987. Financial Services.This growth indicates the suc-cess of our marketing strategies for financial services products.
Percent Billions ofdouars 0*i,,. '
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Earnings Per Share Market Value and Book Value Fully diluted earnings per common share is a key This comparison of the year-end market value of a determinant of the selling price of the company's share of Household common stock versus the book shares.We aim for consistent tamual increases value per share indicates the premium paid in the in this measure. In 1986 consolidated earnings marketplace for a share of our stock.Our aim is to per share grew 22 percent.The bottom portions steadilyincrease the amount of this premium.
of the bars indicate earnings per share from continuing operations.
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. Dollars Dollars ammr 5 50 4 ;. 40
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82 83r 84. 85 86 82 83 84 85 86
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?, E Continuing , E WrtmValue I h d *1986 includes extraordinaryib a'-
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g-Five Year Return On Stock Dividends Declared Per Share This chart indicates the five year total return on Paying predictable, and increasing, dividends per a share of Household stock at each of the last five share is an important attribute of an established.
year-ends. assuming reinvestment ofd hidends. successful corporation. Household has paid [
For example,a share of stock purchared five 245 consecutive quarterly dividends on its years prior to the end of 1986,with all dividends common stock.and total per share dhidends !
I reinvested,would have returned an average of paid annually have increased in each of the last l
33 percent per year to the shareholder.Our 34 years. -
objective is to achieve returns over time greater l
than general market indices.Shown here for I comparative purposes is the S&P 500 Index five year total return, Pment ~
Dollars 35 l.85
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Our Businesses Household Financial Senices llou chold financial Senice- i a major diser,ilie9l #
financial enice organization,with a et of almo t l
$12 billion.,ening three market egment*,
(lonsumer Con-umer hanking eenice, are offered through .'d hank hram he, in is states and through mklitional branche, m Canada ami the t nited Kingdom. Consumer finance eenices are prosided through nearly 1.400 offices and branches in the t nited State *. Canada. Australia and the l nited Kingdom.
Con-umer segment a .ets total approximately $8 billion.
1 (YoHUnelT nl A saricts of cornmercial financial eenices are offered throupli four disi ion *: specialty products. capital equip-ment. real estate eenices and huwine s equipment.Com-mercial segment a > cts total approximatdy $2 billion.
Insumnce
\lesander llamilton 1.ife insurance Company has asset, ol alyerosimately $1.8 billion. its credit and ,pecialty in urance products are cold throughout the flousehohl J l'inancialienice, network.and indisidual life and annu- llel mice distribution ofnuets of flouselmld l'innm ini ity product, are ohl through 7.000 independent agents. Serr.ces in its thn>e murl.et segments.
Household Manufacturinge flousehohl \ manufacturing.with ale- of STI 4.3 million.
operate,34 production facilitic, in the I nited State- and 16 plants in Canada the l nited kingdom. Italy. lira /il.
\lexico and bt I;ermany. it al o participate in a joint senture in the People'= Republir of China,ilon-chohl products are *old to three market -eement .
fluilding I'n> ducts our building pnnluct are u-ed in re identialrunnner-cied and indoctrial construction. Sale- in I486 were
$346.7 million.
i Consumer l'noduct.s Barbecue grill sacuumware. hand tool, and a re- orie-for home entertainment equipment are -old thronch j thou and* of retail outlets. Con-umer cument ale in
\ 1986 were $204.9 million.
Cwnmen int-Industrially'n> ducts Commercial food enice equipment. power componeni-rutting tools. industrial i s-ter, ami appliance control-
/tcintire contribution to 1986 sales of the ihn e marlier find u e in many commercial and indu trial appli-segments screed br flousehold \ manufacturing. rations.iale> in 1986 were S162.7 million.
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V The Changed 31arketplace Thr enal e-tabli hed in the mi ion tatemem "I n.,u ch,aa nnoncial senice, n accuh~en iu-
, , chance-in the fituntial eenice-indo try ince the Fm, ancia Services +osa+n en.- heuen+ anod n-u in sitution- were not o nmeerned with hasing broad "The niirion statement of lion .chohl Financial P""lun une . or inicing nonipentiu4 or ining a :n-he marketer . llut recent development hase made berures is a working doettment.M.e use it e\ery .
financial market, more dy namic and competithe than day to focue our efforts and to measure our . .
i i
thes base eser been..l'he mo t izmb.. rant of. the change- !
progre- . h's a short statement.only three unlihe,c. l 3entencu.and very much to the point. 5 The line, separating lending in,titution, base hecome unn a una anks eened general nnancial "It says: E Our mission is to be a premier needs. asinp and loan asociation, provided mortuace i
. financial services organi:ation meetin" e the lendm.g. finance companies made omall hune. -ale-needs ofindividuals and companies through finance companies handled big-tit Let con,umer .wr- '
consumer banking andfmance commercial cha3es. automobile credit companies financed auto , ale . i y finance, and insur- and so forth.blav there is wide competition from both ance.IIe trill be traditional and non-traditional competitor >. Commercial n riened hv our cus- banks are weeking con >umer customer.. asing and ;
loans are offering more bank-like eenice . finance com-tomers and sta][
panies offer mortgages.aaJ sirtually all of the player
- as o((ering a broad hate a *take .m the crec , 3rd businen.%. hat thi, mean-product h.ne.I>ro- . .
.i that competition in the - aal senice, indn'try i-riding high ralue
.. . now broadtv based rather than .:arrowl.v focu ed.
at competitne pnces. E Technology has changed marketing practices. it ha,
- and delitering the become a key marketing tool and a major cost center.
I best serrice in the Whether it be through automatic teller machine,. cice-industry. lfe trill tronic information outlets or instant data communica-he a"n"ressire, innotyttite and a leading tionsaechnology is now being u.ed as a marketing medium.The customerdata base that previou h participant in the markets ne sent urhile .
. contamed only bn.e f financial data now is. loaded w.a h maintaining a lecel of.pmfa.tabih.ty conststent .
. a mass ofm. formation on customer demographic, truh corponne targets, and esen psychographics.This opens many marketing "We want to be the best at and.cipating customer P""ibilities. but also creates the need for sigorou, co,t management of the technolop function. I needs. des elop.mg products that meet those t
. E L..onsumers are more soph. .isticated.The commum.-
needs.and proviih.ng levels of. customer semce cations Dow. speeded up by technology. ha, ghen wluch are much mo: responsive than the customers more information. allowing them to make !
competition.When we succeed at these things counder decisions regarding their financial need.. l we maximize benefits for our three most And because of the blurring of traditional eenice lines. I important constituencies-our customers. customers base more sources available.5o they can pick our hareholder and our employees.- and choo e with more confidence. The phrase "The
' {
cu tomer is king"is more apt today than eser before.
I A udc.itanhncht E in this market-driven. customer oriented emiron-em,s, ,a uns on f i: won,n. oM"'r llouwhnhl l'ennne ,od hernt n ment the packaging and marketing of financial product, g fj9y(lyl ,pp.; ;g are learning that innos ation, in product lines.and distribution method, coupled with technolop. are
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l Sharon anil Janws lbs cr* ogwn Irnne er,a i ted bi kuren b.ur protoss yw( enerrs in lufte,-
an .icrount at a new flousehold I.igw (righ0. u*tomer irrsice and w di comert other office
- I inancial t enter in Anosullr. rrpre entatisr 1114 o;wned to the new ronrept in 19117.
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rust ju-l de-iralde hut mandatory in onlcr to maintain a rotnpetitise a ei;:e.
Our Strengthh ln Ihi rhanged aanl i lianging (narketpla. e. llou rindd
. ... , ha- a ln>-ition ol trength.De hase been in the linan,ial
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-enice- hu inc., for 109 year . alul in that time hate learned tjuile a hit about dealing with people uln> hase
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( financial necil .%e know Imu to talk to i.or ru. tom. r-l, m, about mones.t her the scar we base buih ari esten he 7
( ru-tomer ha e which todas i, one of our mo-l saluable
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3' a > cts \nd we base the finan' rial,tren-th e to he
- -0 [_.Qc-, rompetitise in all egment of our hu*ine .
In our management group we base a imiijur coinhination of both new arn! weaponed manager .The seteratu. prmide the esperience. di cipline and run,ie-
/ tency that are ewmential to a linancial organizatium the neuromero bring innosalhe ideaa in tune with today".
sophisticated customerm. lt's att effertise cornhination.
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- The Future
\p we aoarve the atrt'ngths and ansets we briftp to the
~
rhanged finanrial marketplace,it' ricar that j opportunities ahound. Each of the egment, we now rene-con-umer hanking and finance. commercial linance,and insurance-offer
- un the potential for greater penetration and profitability.The pecific direction
- we base rho en for espanding in each ol the*e .eginents follow from the corporate trategie we base dewigned for the growth of Hou chold financial Senices as a whole. In rap ule form these corporate otrategies are:
E To concentrate ori deseloping optimum -ize to traig tlather.regionaldirretur with an lilinoin family, nlasimize efficiency tind profitability. 5ize itsell for tirsander llamikon New tas lawe huse made life will prmide adsantage, in terms of si*ibility. rro -
life in urance Company, insurance a more nitractis e welling of eersirc+ and management +3nergic .
.ti ru c our product h. ne .
om r$tment, 5 To focus on pertinent target market, and continue following a niche strategs"in elected area . E -entially this Incans llnding e[n*ri[ir market
- tbat are under*
rened.then dneloping products that can he delisered to Ibo e Indf kets cl[iriently and economically.
E To continually broaden our knowledge of con-tlinerp.and u*e tilat knowledge to create *enice-Conoufflerk watit.
B To halance our core busirie- rs. Pro l,cr lialavice. i a preitt'rtion againPt downturn kn all) iine ed tile -egmefit .
- i. To .nid riew cgm tite a* aplitopriate. l:nlarging i,ur ha ir financial,enice rapabilitie- will prmide new olI[tortullklice for gr81wlli.
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1__ . The Value of Tianufacturing j -lhespite all the ohinwrier I;,r Imeric,m numu-pu turing. nnu it ofit is ,mprisin:,$v Iwnliln l crhe Wall Stn et Journal. December t pWo. 1M_aHUIaClUrino. b .The -entence abme- trom an article on ihr "At Household .\ manufacturing our diversity I"'P'"'"*""i in E.s. produciisit3- make- the poim thet there i a mi-conception about manula< turin-
. is our trength.W.e utih.ze the production and . . . .-
Imlu+tries. The iisconce ption is that inanula, turin-marketing know-how of 19 individual business i, hwi its importanie a an economic acihity uni units serting cu-tomers in more than 20 indus- therefore. manufacturing companie- are no lonner an tries throughout the world.and focus all this auractis e inseetment. l [ experience in three business segments.The Such thinking ignores two critical point . Fir i.the process creates tremendous vitality. ahare of the gros national product of the l nited 8 tate-
' represented by manufactured goods ha- not declined. in "Our segments are tied tcgether by our common fact.it has been relatively em aant- about W peccent-mission.That mission is three-fold: mTo for the past 30 years.and there is no indication thi-pro \ide products that share will diminish in future years.
meet the needs of Second. U.S. manufacturing is actually gening our customers and healthier because of increases in productivity. From provide superior 1981 through 1985. output per man-hour in manufac- 1 tt. ring grew 4.1 percent a year.This is a con iderabh-value when compared improvement f. rom the annual gain of 1.3 percent f. rom i to the competition. i973,y i93i, aTo consistently The second point is particularly pertinent to strive to improve Household Manufacturing because imprming total productivity through productivityis a key element in our operatina philo - efficient management ophy. It's a principle all of our companier follow. of physical resources regardieu of their location or product line. and effective utilization of human resources. How We Operate E,fo meet corporate targets f.or proh..tahih.ty Other operating principles e apply: and return on shareholders,equ.ay. We maintain a balance be een corporate guidance f "These objectives are applicable to all of our and entrepreneurial drise. A -big c,mpan3 capability i-operations, w hether they produce Thermos "PPlied * *t"F i " "I ""i"E fi""""i"E ""d *"""E"*""'
- development. but the energ~s and flexibility of our mail
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company umts 6hape manufacturing and marketmg. heach. exotic Elj,er spas for the modern we constantly seek new ways to get full salue from hathroom. or Scotsman ice machines for our productise awets.Whether it be u ing plant facili-restaurants. And these objectives are under- ties. applying proces technology.3 haring di tribution tandable in all countries in which we operate." channels or exploiting popular brands.the empha i-1 is on increasing the efficiency of asset utilization. l can G.Dmon We seek synergies through resource sharing and twie,n ana chic /t:ienan r og,cer internal trade-offs. in deseloping segment, we find way-tion.e6ela uanup,cn,nnpinc. ili ineering. proc urement. prod uction. marketing and distribution capabilities. 5ome current esamples: use of our production facility in \lesico to provide manufacturing support to erwral dhi ion-: tapping the popularity of theThermo brand for a new line of Structo-made ga grills: mergingThor enTool
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Inur , ompanie are profit oriented rather thar ize oriented. Profit growth ha a higher priority than ale-
- growth. \ drise to increa-e -hare of market i motisaird by the increa-ed earning- to be obtained rather than a ile-ire for higher ale solume alone.
\ll our companie under-tami that maintaining high tandanl of pnuluet quality and cu tomer enice i e ential to keeping a competitive edge.
l l The Future l Ilmtwehohl \ manufacturing ha three primary -trategie- ) for gnmth. The first i. to become an esen more efficient pnnlucer.Emphasi wdlin on broader cost redu. tiim pnigram3. more effectise utilization of peopic. i apital Insettments that wili increase efficiene) and other
, , actions to improse productivity, k
f \ occond strateg\ is to identify area where internal growth can be accelerated through greater penetration of existing markets or development of additional market segment opportunities. Because of our -ucce- in doine this in the past.76 percent of our pnnluct, currently are
,ohlin growth markets.and 88 percent of our ponhn t-rank first.second or third in their market .
A third strategy is to upplement internal enmth through a selectise acquisition proce . acquiring compnies u hich increase our focus and offer oppor-tunities for eynergies. An example of this i the recent acquidtions we base made in the food enice equip-ment industry.We now hase four companie-in thi-Wendy Hreitman.neasonal representathe 'n Rockland. market.which has strong growth potential. buyer for Hradier. Depart- itawachunetts.Hy merging As these strategie are applied, our portfolio of ment 5 tore Companyaicus Thermon and Structo we can businesses will change..New companie will be added the new line ofThermo gas make better utilization of omee - ng compan e, cou n> inerged Some wW grill with Don Smith. be disested.We base the tiesibility and the re-ource- to their brand name and make such changes.and will do -o w heneter it further-I bermo* and 5tructo distribution strengthn. our commitment to maximize *hareholder salue. IX
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Sandra imugh. installation 300 unit housing desclopment inanager for Concord in \lissi**auga. Canada. N ! kirk fireplaces. Toronto, a**ints had one of the best 1986 with inata!!ation of a Selkirk performances among our heat circulating fireplace at a building products companies. i W l 1
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Corporate Profile 1 1 Financial Services i t s Consumer . i Banking Commercial and Finance Finance flousehold Bank. fab flousehold C- ---d : Fin == rial Sernas.Inc. Consumer and mortgage banking Capital equipment financing, specialty financing, Neuport Beach, California (Cahfornia, Colomdo, Illinois, Kansas, real estate financial services, and business equipment 3farWand, Ohio) financing and services Valley National Bank.The flousehold Bank ""'"#
- Consumer banking Salinas,Cahfornia '\,
llousehold Fhiance Corporation Consumer and sales finance Pmspect fleights.lllinois , IIFC Financial Services Limited Consumer finance, leasing, insurance S.niner Austmlia (Austmlia) l
/ '
llousehold Finance Corporation of Canada / \ llouseholdTrust Company f [nSUranCe l Consumer finance and banking services Alexander llamilton Life Insurance Company of America Toronto, Canada (Canada) Credit and ordinary life insurance liFCTrust and Savings Limited Y"" " l Ilanking. consumer finance. commercial lending i ilmdnell. Berlahirr, England (United Kingdom) EFI Fund Management J,du< ational expenses program Pnnpect fleights.lllinois Honey Management Institute
.'onsumer education l',,'yect fleights.lllinais 20
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'a Manufacturing ,
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3 -f.f. s Commercial-l Building I 'g Industrial t Products E Products Dry Manufacturing Albion Industries k Ventilation registers and grills Industrial casters Winters. Texas: Coleman, Texas Albion. Michigan Eljer Booth,Inc.
, Vitrous china, cr.ameled cast iron and plastic plumbing fixtures; Soft drink dispensing equipment
; faucets and a :cessories for bathrooms and kitchens Dallas, Texas Pittsburgh. Pennsyhunia; Ford City Pennsyhenia: Marysville, Ohio; Salem 0hio: Tupelo, Mississippi; Wihon Nonh Carolina Gear Mucts
- Custom gean; gear usembb.es: speed reducers lialseyTayice Chicago Illinois; Libeny, South Camlina Water coolers; drinking fountains
#' " Glenco-Star Refrigerator: storare freezers: refrigerated display casu Selkirk Phdadelphia Pennsyhnnia fabricated metal chimneys: gas vents: fireplaces
\fisshsauga. Ontario, Canada;Brockville,0ntario Canada; C
W."Y apphance controls Logan.0h4:Nampa. idaho: Bamstaple, England: Mullicott Cmss, g England: Cologne,Uest Germany U.S. Brass Schwitzer Faucets: brass and polybutylene plumbing supplies Turbocharger; cooling systems: dampers Plano. Texas: Abilene. Texas: Commerts, Texas; Elkhan,lk Indnanapol is,lndsana: Asherslie,Nonh Camlina: Rolla, \lw>un: Bmdford. England; Stmtford, Ontano. Canada: Campinas. Bm:d m m b* "'" Commercial ice systems: specialty consumer refrigerators: ice machines q Albert Lea. Minnesota; Fairfaz. South Camlina: Mdan, italy: Castelfmnco,ltaly Simonds Industrial cutting tools: hand files Consumer ritchbure, Massachuseus: Ne-erstou n. 0hio: P-la l'robUCls N "Canada;Cluhuahua
" ' * " ' ' * " 'Mexku *"','""""'""'""*"'
GC Thorsen Parts and scensories for home entee.ainment equipment: non-powered hand tools Rockford. Illinois; Dallas, Texas Thermos Company Thermos vacuumware and plastic insulated products: Thermos and Structo barbecue grills Freepon. Illinois: Batesvale, Mississippi: Taftville, Connecticut: Burntumi. England: Thetfoni. England; Scarborough, Ontario. Canada 1
- 21
Selected l'inancial Data and 5tatistics It. n .els,.I.I interomio : lcu . nnol 'o1 1no.frairv-s f' illal Jinv nevoura. nths r olium twr .imro *lran arte stalvol ta mollu,as.
% ra vmicellivread.or 11 l'K:n l*Gli l'U I YU l'K .'
\et -ale an<l resenue- $ 2.710.5 8 1156.9 81.9Hf 6. I 8 l.762.< > s 1.5: 3.9 Income trum continuing up. ration- 138.1 151.5 l11.7 l?".h I "9.9
\ct ilicoffit' 208.6 j l f l.it O.l l. I NIlf t.I 12.~3. I l$dflliflg- lter d's tfHition *llare' lre ofH e'olitilluing i plH*ralil Hl*
l'rif fla ry 2.}{5 J,.*35 j,. lll 2,. lj l,7 l l'olly ililuteil 2.85 2.59 139 2 :;; [.7 l l-lartliflg per capillin#41 -llare: l'riinar) }. $8 . l.h3 j. l 8 .$.h8 if it s l'ully dilute #l 4.31 1.54 3.9. 3 .t.50 2.o g fligidernl declared per comnuen hare 1.835 1.78 1.725 1.675 l .n3 lleturn on hareholder ' equity 15.3% 110"n l 1.1"n 13.5".n 7,i r ,, the< emloer 'll l'Hih I'Mi l'MI l'NU l'o:U
\*ets $13.206.6 $ 10.720.0 S8.035.1 $6.790.1 86.628.3 senior and senior ubonlinated debt (with original maturitie, mer one year) 1.872.2 3.774.6 3.106.9 3.051.0 3.071.1 Convertible preferred stock subject to mandatory redemption 81.0 1716 1717 172.7 1717 Shareholder,' equity cwluding preferred stock
-ohjeet to mandatory redemption 1.161.6 1.630.9 1.526.7 1. 4;." #.h 1.111.9 lbok salue per common hare.awuming comer ion of $2.375 and $2.50 preferred tock 28.08 31.03 29.23 27.51 25.87 e
e
n innanrine pn,2ramcnn. impari ..nhi- pr" i.nn EHI E1Hitintiing aspi ration- w,* litilicaleil l4 a b bI. I UNI-
! ion allertas leef n'lkt l rom iniff emenlille IH'h pCll-l'dl h[anaUeITlent b. s """nnd": +""lani i--""h'y the Financial \n ononn
. . %naara noa,a ana by a sn8 non;on anerias n..n.n Discussion anc Anaysis
- im.m dm n.ceimd dom Ed .mmdn;- om i-=-n--
resuhing inon the new Federal ias law. Henguition ni (consolidated Results ihi- lea inc lienefit wa the primary larior in redniin: Fully diluted earning per common -hare of Ilou chohl the compang F786 cifretiw tax rate for continuin International reached a renerd S L31.an increa c of op ration, to 1"> percent. 22 percent mer 1985 and 9 percent mer 1984. Primary earning per common hare inrrea ed 23 percent to Restructuring S4.48. ignilirantly ahme the S3.65 of 1985 and higher The company Iocu e on market, with uninth and profit than the 84.18 of 198 4.The companyi return on awr- opportunities that are sufficiently attractim to meri age hareholderiequhy increased to 1.5 3 percent in owrall corporate objectiw . In line with thi . manc.- 1986. compared with 12 percent in 1985 md 11.4 per- ment di3po ed of the \lerchandi ing bu ine- in los rent in 1984. Earnings per share and return on share- and on December 31.1986 concluded the ale of h-holderiequity were po3itiwly imparted by the Tran*portation busine . National Car Rental s-icm. companh *tock repurchase programs. During 1986 inc.. realizing an aftertas gain of $155 million.The the company repurcha ed $520 million ofits Common company has taken further 3tep, to ail pt prodori .
-tock and $169.3 million ofits S6.25 preferred stock. manufacturing facilitie* and proce- r .di trihotion The disidend payment rate per share to common hare- ptem3.and management information and runtrol holder wa rai ed to St.86 per year in 1986.the 3 4th -ptems to improw its ability to compete and prmide consecutiv year in which disidends paid increa ed. ,olid returns to -shareholders.These rep haw inchnied
\et sale, and rewnues of the Company ro e elimination ofinefficient propertie, and di po ition 16 perrent to $2.7 billion as both Financial Senice, and of marginally productiw a, ets.
\lanularturing showed imprmement from the 1985 and On January 15.1987 the compan3 annonm ni 198 4 lewl- of S2.1 and S2 billion. respectiwly. Net a restructuring program that would w uh in a -ignil-income for the year was $208.6 million.slightly below icantly +tronger balance -heet and enhance oppur-the S219.9 million earned in l485 and below the record tunities for greater future profitability. \ftertas ro t-
$231.1 million in 1984. Act income for 1985 and 1984 of $152.7 million were charged to income in the included re-ults from the \ merchandising businew fourth quarter of 1986 for thi program.
diw ted.at year-em! 1985. \, a part of the restructuring program.the rom-pany is pursuing diwstiture of certain manufacturing Net Sales und Revenues operations in the commercial-indu-trial produri-n,n,,,n . pion"" ____ __ egment which will narrow ilanufacturini- torn-a, To help improw return, in continuing manula, turin operations.the company plans to clo-e certain inchi-n; ' cient facilities and take additional-tep to lower co i-
- - - - - - - ~
and impn>w operating efficiencies .The altertas co-t HI OIthese action- reduced income Irom Continuin" operatmn, and income from di-continued opera-
.3 t .u i.; an 1; 1" tions of the \ manufacturing bu-ine,+ by 52 L3 and E hn no a .cn;. c. 865 million. re,pertiwly.
E u.a.nt .mnna For Financial Senice, the re-tructuring included a $24.2 million aftertas write off of re idual goodwill For 1986 income from continuing operation. was related to banking operation, acquired in prior war . 8138.1 million. Re oh, were negatiwly imparted by The nempany al o decided to n tire certain debt
$18.5 million of the $152.7 million altertas co t ot a prior to . heduled maturity.The e debt i oe hear 21
. coupon intere t rate -ub tantially in ewe- of current Finance iteceisable Net market.The pre-ent salue of future intere-t -as ing- inn ~n -f denon jf'ofn the earl) retirement HIIbPSP dPbl UP' P\' Ped' the current co t of the retirement. in addition. the retirement of certain debt climinate- re-trii tise inden- . 4 3., . p litre prosi ilm allowing inanagelnent to opfinII7e the f company' Papital tructure.The 839.2 million altertas m co t of thi carly debt estingui hment i- reported a-p6 yll ! an estraonlinary hem in the accompanying financial .: a n i m g5
-tatement . For further discus ion -ce note 9 to the financial tatement*,
c..n.u m.., yj - g g,ng,.7, g gi p; Financial Services Business Total nnance receivable, reached $9. i hiuion P ltesenue, from Financial Senices increased 21 percent at year-end 1986.an increase of 37 I>creent mer the # to $2 billion. up innn $ 1.7 billion in 1985 and $ 1.3 billion prn
$6.9 billion at year-end 1985 and 82 percent mer the in 1984.The higher resenues were generated by substan- 1984 lesel. Financial Senices acquired the remaining tially increased lesels of receivables in both the consumer 50 percent of its Australian operation in. lune 1934 and commercial segments and increased premiums and w hich. w hen consolidated. contributed $2 41.7 million i imestment income from the insurance 3egment. to 1986', portfolio growth. In 1985.$159.6 million of the f
Income from continuing operations of $l41.1 mil- increase in receivables was attributable to acqui-ition-lion in 1986 wa, er entially unchanged from $142.8 mil- of savings and loan awociations in Ohio. Kan-a and lion earned in 1983 and compared with income of Colorado. Operating expenses as a percentage of awrage
$153.3 million in 1981. Income in 1986 was reduced. total receivables were 5.4 percent in 1.986.down from primarily in the consumer segment. by aftertas restruc- the 1985 lesel of 6.3 percent and the 1984 lewt of turing co,t of $24.2 million. additional unallocated 0.5 percent.The significant decline is attributable to credit 10 4 re-enes and other costs of approximately the substantial consumer and commercial receiuble- $20 million aftertas.and reduced lending spreads. growth and increased productivity.
Income al o included a $25.8 million aftertas benefit fnun recalculation of earning
- on leseraged lea >es as Consumer a result of the new federal tas law and a $6.7 million itesenues from the consumer ergment increa-ed altertas benefit from implementation of the new pension 24 percent to $1.3 billion.up from $1 billion in 1485 accounting etandants. \ lost of the pension benefit was and $.9 billion in 1984..herage consumer receisable, included in the consumer *egment. Results for 198 4 increased 38 percent to $6.7 billion compared with were fasorably af fected by $9.4 million due to fresh start $4.8 billion in 1985 and $4.1 billion in 1981. Arong prmi ion for in urance operations contained in 1984 growth in both consumer finance and con umer l'ederal tas reform. banking was the major factor in the increased rew-Financial Sers ices- Statements of Income Ul daHor emre unn om> Mared m mdims tveu ended })er vmt,vr.ll 1986 IOH' l'N,' I llewnue- $2,026.2 $ 1.673.0 $1.323.1 Co t* and espen e-Operating 526.8 123.9 336.0 1nterest 647.3 193.8 191.9 Policy hokleri benefits 532.1 476.4 286.1 Prmi ion for en dit lo ses 131.9 381) 18.1 He tructuring 24.2 income tase- _ 22.5 ._ . 75.0 00,8 locome before estraonlinan item 141.1 l12.8 133.3 f.straardinary item, net of income tas benefits .. . 327.3)
Total income $ 113.6 S 112.8 s I;u 21
i* 813.9 millinn ilm rea nl Irom A!T.2 million in IC anil 8ll13. I milliim ill UIO l. Irt'\ hiHi*b lilefilii*nMi l A - re trurf uring ne-t af ul prmi-um- lor unalbmainl i inlil [ . , lo re-en e- and olher ro-t . together willt n.n times fd . leinlitig inargin .were the tuaiti fai tor- contriluning to the det line.The-e lai tor were nu nle-tly oil ri in { a 8ti.I million aftertas benefit from impicineniation ol flew pell*fon arrotinting lainlard , Con umer receisable- growth re uhnl from { g aggre- he marketing campaign . particulars lor l resohing product *.which now aerount for 50 pen ent of the consumer finance port (' olio.The iraterie hilt to real estate occured.nariable rate leruling proshn t .ndol the ub tantial recehabic3 growth.althnogh ai rnlun.d Trula and Jack jordan get help from manager Scott Schneider
-preads. In 1986 consumer finance espanded f orther
' .mto the credit card bu .mer at Vallev National Bank.
as they open a resohing check credit account ith linusehold gg,g ,; ; , g_gg Finance to purchase retirement property in Florida. fles ohing Sl44.4 million oser 1985. Consumer hanking confino, - credit lines now account for 50 percent of our con umer to be a major grewth opportunity and has allownl finance portfolio. Financial Senice to significantly esparul it- d! trihu-tion system and product offering to more fully ati h consumers' financial der ices need,. Con umer han ising i receivables were $2.6 billion at year-end P)86.85 per- l cent of which were secured by first or second nn.ricau... Deposits increa,ed 53 percent to $2.1 billion at war-end 1986 compared with $1.4 billion in 1983. Retail operations of Valley %tional Bank were tran+ferred in 1986 to flou-ehohl Bank. f h.a manaar-ment continued implementation ofits trategic plan for espansion of consumer banking operation . Income from Hou+ehold Bank. fsb. in l086. escluding
$19.4 million of aftertas restructuring co t . benelited from the -ale of mortgage into the -ecorulary market flousehold llank customer Jill \tackley is met by "\lecter and exceeded management's expectation lor thi- new
, Greeter" Rick Sutton. I'ermnalized customer service in a Ley and growing business. Income from \alles %tional ingredient in our Americai family llank concept. Bank.whore operation, now con ist solely of We unht i card busine 5.was reduced by $1.3 million from altertas restructuring cost, as the remaining e"oodwill f rom thi-
' asssst 1980 acqui*ition was written off.
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The provision for credit lo -e, charged to earnine-l m 8 I .e totaled $122.1 million compared with S55.1 million in g <t* g l985 and S16.8 million in 1484.Thi increa e primarily
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y' , was due to the recehables growth of mer $2 billion since the company prmide- for estimated credit lo c-
} l 'em a
at the time consumer loan, are originated.Thi- method re-ults in a consenathe pre-entation of net finance
.' recchable- and adwrwely impact 3 earning- in period-k A
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P' of rapid rerchable growth. ue h a wa experienced - . in P186. In addition.the prosi ion for credit hi- e wa- . increa ed h 823.1 million and income tasr- derr. a-ed 3 by a imilar amonnt due to the tax elleri of porrha ,. ~ aerounting entrie relate d to the 1936. hargroll of e: . y ' loa i niade h -asing and loan a oriation prior to , their arym ioon h3 lion chold. \; , w.< - l linring 1986 management loro ed increa ed atten-
- Y- I tion on the quality of loan made. delinquency.and .
strengthening of collertion procedure to better control s e aml rnonitor potentia'l problem In pite of the nation-wide increase in bankrupleic . credit quality remained
~ ih 5
7 high in P)36. fleal e tate eeured loans increa ed " J to 36 percent of the con umer portfolio. comparing fasorably with 50 and 16 percent in 1985 and 1984.
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re pectiwly.Two month, and mer delinquency mea - . 3 ured on a recenry of pay ment haei, wa- 1.8 percent at ) car end. near hhtorical low *. Net chargeoff3 of
\ " ~
consumer recchabler were $67.3 million or 1.01 per' Alesander llamilton offers an array of unbrrsallife in urance cent of awrage con urner rerchable, compared with prod ucts. .meluding irresistible Life.New Life 11 and Til\. 93 percent in 1981 and 1.06 percent in 1984.The allowance for credit lo e, at year-end 1986 was These contributed to un increa c of 14 percent in ordinary life 8185.2 million compared to $164.6 million in 1985 P'*"i"mn for Alesander llamilton in 1986. and SIT 6J million in 1984. b a percentage of , recchable- on a produrt havi'.the 1986 allowance wa' ilou'ehold Commercial Financial Senice, prmide* financing comparable to 10 3 reserses carried in 1985 and 1984. for \leDonald's franchi$en.among them thi Pa adena.Tesa-Con umer operating espen e were $442.3 million. outlet ow ned by K.P.Kaden and D.E. Clark. escluding $2 f.2 million of restructuring co-ts.com-pared with $355.9 million in P)85 and $291.4 million in 1981.Thi increa e reflect,imestments in personnel. marketing and technology required to implement our long-term plan whirh call for wub.tantial growth in all operation . Producthity imprmed in 1986 with itperating espen*e a* a percentage o[aserage con'umer ret eisable- ol h.D perreftl.a des rea e from the 1985 , , lew! 017.1 percent and the 1984 lew! of 7.1 percent. ~ t I:scluding the 1986 acqui ition of the Australian .It. operation . thcTe wa a 17 percent decline in the number g of workhside branch location in 1986.Thi, decline t' , re uheilInim a redefinition of the di tribution ha e and . . oh equent run olidation of 281 hranches.primarily in
%rth \merica.to increa c cificiencie, in con umer espe ration'.Ihewe ritn olidations were facilitated b) ignilirant growth in remhing product.s. ahich are le--
labor inten he and haw higher balance . Streamlining the di tribution netumk impniw, producthity by peneratilig predter loan arrttunt alid number ti[ aret tunt* ller einphlwe.
'd ,
HO
- m% y
s perentoer il p g;n, r o;; 1%I Consumer Operating Statistics Receisable- helore allowance- and re ene- (million4 5 7.7 l 1..> Si.f iM.2 S 11.51 > Number of worldwide branch location, 1.437 1.591 1.nni
\umbrr of account, (thou-and4 2.163 2.u9 L l."MM Number of liranch employee- 6.979 n.n U to t' kerage receisahle per branch (thou and-) 5 5.368 5 3.554 5 '
_J n kerage receisable per branch employce (thou anda $ 1.105 8 834 8 7n0
.\mnher of account per branch employee 367 .U n W, Intere-t rate pread, declined to 8.7 percent com- Intere t rate pread for the commercial egment pared with 10.2 percent in 1985 and 11 percent in 1984. were 4.7 percent compared with a.a pen ent m 1985 and The decline relate, to a strategic ehift in the portfolio mis 1.. percent m 1984.The co t of f uni- aserard u.5 per-toward sariable rate real estate secured product which cent compared with 10 percem in 1985 and in.7 percent hase narrower lending margins. In addition. increasing in 1984.
competition in the con,umer lending market ha led to a turther narrowing of spreads.The oserall cost of funds Ordinary Life Insurance
]
aseraged 8.3 percent.which fasorably compared with Resenues from the ordinary life insurance ,cynem l 8.9 percent in 1985 and 9.1 percent in 1984. increased 12 percent to $583.2 million compared with $520.3 and $314.3 million in 1985 and Pt81. Commercial respectively. Income increased 31 percent in 1986 to Resenue, from the commercial segment increa ed $23.5 million.up from $l8 millior, in 1985 and com-35 percent to S171.7 million.up from $127.1 million in pared with $24.1 million in 1984. Income in 198 I wa-1985 and $9L5 million in 1984..berage commercial fasorably affected by S9.4 million a- a re-ult of fre h receisable increased 39 percent in 1986 to $1.6 billion start prmision- contained in 1984 Frderal tas n form. compared with $1.2 billion in 1985 and $.9 billion in Earned premium, from ordinar3 file and annuity
! 1981.The substantial growth in commercial receivables products increa,ed 7 percent in 1986. \nnuity prodm t-wa primarily re ponsible for the increased resenues. accounted for 59 percent of earned premium ser-u-Income increa ed 96 percent to $73.7 million.up from 64 percent in 1985 and 53 pe cent in 1981.Unlinary lile S37.6 million in 1985 and $23.8 million in 1984. premiums increased 19 percent as \lesander Hamilton income in 1986 wa, fasorably affected by receivables continued to esperience strong demand for it uniwr at growth and a S25.8 million aftertax benefit from the life products.Two new indisiduallife product, were recalculation of earnings on leseraged leases as a result succes fully introduced in 1986. At llecember 31.1986 of the new Federal law lowering future tax rates. unisersallife accounted for 63 percent of the onlinary The growth in commercial receivables included life insurance in force compared with bl percent in further loan diwr,ification during 1986 through 1985 and 56 percent in 1984.
espan ion or Le financing and leasing of businees imestment income in-reased 57 percent to equipment a, well as continued growth in the traditional $138.2 million serous S88.2 million in l985 due to commercial hu ine,5es. Loan, and lea-es on capital the , substantially higher ime-tment ha e re uhing from equipment increa ed 252 percent while real estate the growth of utnery life and annuity product ale . eccured receivables increased 59 percent mer a year \lso contributing to the increwd ime tment income ago.The credit quality of the commercial portfolio were higher capital gains as a result of tasorable has continued at high lesels with relatiwly little delin- imestment conditions. quenc3.The aggregate amount of loans charged off during the past three year has totaled only $1.4 million.
.a -
4
llSnufacturing Ilusinek Olanufaciuring-Statements of income Ilhlullne nnmma, nn. somni m nullum.. tent emini Um emswr JI py;o, 141:1 14;;I Tet -al"' 5711.3 sh83.9 Shon.T f.n-t and espen e : (:n-1 of product- old 5 l 8,2 64 l ,7 (31,7 Sellin:.: aml admini tralise 95.2 92.0 93.1 intere t 13.8 I l .8 in. ; lle trneturing 45.3 l 0, { income tase, 16.8 36.1 32.9 Income from continuing operation . 25.0 51.7 27,5 l Income (lo4-) from di continued operation- ' income J.9 ,) from operations. net of tase* 3.5 (1.6) 3.1 1 Prmi, ion for 10 - on disposal. net of tas benelits (65.0) Extraordinary item. net of tas benefits _]6.3) _ Total income (lo-<) 5(42.8) s 50.1_ _s 12.9 llousehold llanufacturing's sales increa,ed 4 percent in 1986. reaching $714.3 million compared with Building Products
$b83.9 million in 1985 and $660.7 million in 1984.The Sales in the building produ' ets segment inen a,ed ales imprmement ma.:nly resulted from increases in the 4 percent to $346.7 million from $334.3 million in 1085 ! commercial-industrial products and buihling products and compared with $329.1 million in 1984.The sale, segments. Income from continuing operations was increase mer 1985 was primarily due to market 3 hare S25 million after $24.3 million of aftertas ni structuring gains and new product introductions. Income of costs compared with $51.7 and $27.5 million reported $12.1 million.after restructuring costs of $12.6 million in 1985 and 1984.respecthcly. Income from continuing aftertax. decreased 42 percent from $21 million operations in 1986 was famrably affected by $3.7 million reported in 1985 and increased over the $10 million altertas from the implementation of the new pension of earnings in 1984. Income in 1986 for building accounting tandants. Income from continuing opera- products was favorably affected by $2.2 million from tion in 1984 was udsersely affected by a 86.3 million the implementation of new pension accounting -tand-aftertas charge for restructuring. ards. Eljer's sales and income base shown substantial growth since 1984. primarily attributable to strong ales ) manufacturing Net Sales by Segments of china plumbingware achieved through market share l it.Ilum, "l a , ann gains and new product introductions. L'.S. Brasiincome w, was below the 1985 and 1984 lesels primarily due to lower sales of faucets and plumbing supplie, stemming r, from depressed economic conditions in key southwest markets.Selkirk's sales and income were ahme 1985 by
- n . 17 and 31 percent. respectively, and compared favorably with 1984.These increases were attributable to 30 mo e,oo 800 significant market share gains in residential and I noaa;ny m.an.u commercial chimney 5 and gas vents in the l nited j C t.on,nnwr pn.dui u States. introduction of a new chimney product line in
( .0 tmnnwn isl-Indu irial pn lu. t. Europe, and fasorable eschange rates. 2H
i s Consumer Products Sale- in the e ontunier produi t- egment decrea-cd i percent to $20 ).4 million f rom $216.2 million in !"M's and compared witb $100.7 million in 198 8.t .on-nmer product lo - ol S3.6 million included ahertas re-trm - turing ro-t- of 89.1 million, locome ol Sl 1.9 and S 1.6 million wa reported in 1983 atul 198 l. r"-pec-tisch.Therino worldwide -ale- and income w-re below
"~
1983 on lower -ale ol gla - sarunmware product due l to competitive pricing pre- ure . primarily from oH h. re import *. anti increa cd expen e- due to major marketing progratnw.Thermoiworldwide 1986 ale- were abme
*5 the 1984 level. but income declined due to pricing pre- ures and increased marketing espen e . sale- ol f.ljer'. Designer Series oflusury bath fixtures and aiec. orie, Strueto gas barbecue grills increa,cd mer 1983 prin-contributed to the strong grow th Eljer has achiesed user the ripally due to continued strong consumer demand.
IId'E i "* ""'" I"wer as a re ult on initen+r price poi i o s ear.. j competition and imestments in new product design-l Structo' 1986 sale, and income result compared fasorabl3 with 1984 lesels. l i new hand held remote control comerter is one of the latest acce**nrien for home entertainment centers introduced by Commercial-Industrial Products t.C-Thorsen.GC Electronics and Thorsen Tool were merged in Sales in the commercial-industrial product- -egment 1986 to take adsantage of common procurement. distribution increased to $162.7 million from $133.4 million in 1983 and compared with $140.9 million in 1984. Income for and marketing opportunities, commercial-industrial products of $16.3 million.whi, h was reduced by aftertax re-tructuring ro,1 of $2..I mil-lion.was essentially esen with 1985 and 19 percent abme 1984. Earnings in 1984 included S2 million of aftertax restructuring costs. Contributing to the 1986
~
sales improvement were inclusion of the re-ult- ol Glenco-Star and CastelTIAC acquisitions made in mid-1986 and late 1985. respectively. King-seelef. ale- and income increased mer 1985 and 1984 primarily due to higher market share in applianer control .
" I j9
. Corporate Corporair espen e derlined h ao 3 percent in PsHo n, 828 million from $10 million in Um3 and Sd9.1 million in Pm i. Corporate aihnini tratise espen e- were below the prior year primarily herau-e of co-t n duction CillPrl , nd lod'djed hnlefe-l e\ pen e %d hgnhf egy( g below Pm3 principally a a re ult of ime-tment income varm d on proceed Irom -ale of the \lerchandi-ing bn ine - and h,wer miere-i ran . $./ 1 Liquidity Analysis and Capital Resources s ! The financial Senice, and \lanulacturing hu ine, e-are funded inilependently.with cash llow[. lirjuidity and ' ' capital re ource, monitored at both the businc,- and ' corporate lesel .The company receise, funds from its .,, oh idiarie in the form of cash dividend, and income tas remittance .Tas payment generally are allocated to j Financial Senice, and \ manufacturing as though rep- , orate return
- were filed. in addition.tas benefit, are paid io the commercial linance operation as tax credit and aceclerated depreciation benefits are utilized in the ron olidated tas return. Funds remitted to the company are di hur ed to sharehohlers. creditors.the Internal .,
llesenue Senice.or returned to sub idiaries as addi-tional ime ted rapital.The decision to invest in or to A withdraw capital f. rom sperdic husinen eegments is ha ed on their profitability. growth potential and target capital tructure. - The eompany and its sub-idiarie, hase debt scoisman ice machine. at the R4.adison suite. Hoici near agrectuent uhirh impo-e certain restrictions on the Chicago help the catering staff provide quick ser ice to hotel pay ment of disidend . but these restrictions currently . guests. Scotsman aho produces compact ice makers for the home. do not pre ent a practical h,mitat on on the company,5 ability Io pay disidends to shareholders. During the The resohing lounge of the Pier 66 Resort oserhinking three year ending 1)ecember PMh.the internal cash ri. Lauderdale turns on a .tructure supported by more than generation. liquidity and rapital po itions of the 200 tibion ca iers.cu. tom application. .uch , thi, account financial Senice- and \ manufacturing husines es for an important share of Albion's annual sales, remained at lesel ulficient to upport their indisidual i rapital need and the company's dividend and other ' reijuirement-On December 31.1986 \ational Car }{ ental Splem. :' ' Inc. was -old for net ra-h proceeds of SL39 million.The ] ro, my i. c..e id-n, ms,e mn,1se e,-. f , < . prorced . including financing internal growth. making .# #
^
trategic ai qui-iiion-in or related to esi ting busineses. .
~
anil replifrha ing the t umpan) * -tot'k. ( ing the rash prorced Irom the 1985 \lerchandi,ing dir >o ition and - ' ~ " ~ f ~.
- ome financing. the compam repurcha-,d 8089.3 mil- =:
lion ol it, common and prelerred tot k in lO86. l. g
#l +
w e t, - 4
=
.3A.M}A y V v .g . .
Financial SerAn in P186.awrage uriable rate .ichi tim inilio: Financial penice ' liquidity i a function .d the tornowr { ru tomer banking depo-ita eweeded awrace unalde j of linance n ceisable .in-urance pn minm collected. ratr a--et hs Sinh million.down from 8201 million in car ning, on ime-tment and arce-- in debt market- ami 1u35. I herall.sariabic rate a--et increa nl in 1986 in Ull-tofner bank!ng depo il*. k a lH nrntage ed ascrage a 3n penynt ol non-in-Or mre earning a-*el Compared n reiuhle .rollection of prin l pal balance .d ron- with 15 percent at year-end lo85.The-" improwment-
-umer loan- were 19 perrent in Umb.10 penvnt in were accompli-heit by the -trategic hift to n whin 1981 and 18 percent in 1981.The mlume of run-umer pnnhn t in con-umer finance and uriable rate i lending increa-ed 57 percent to S5.3 billion in 1986. mortgage- in con-omer banking. I Commercial linance mlume.ewlu ise of the acqui-ition During l486 Financial Senice-ime-ted I of pun ha,ed whirle contracte. increa-ed 48i n nvnt to $38.9 million in capital espendimre compan d with l S.8 billion in 1986. Growth in con umer and commer- 808.2 million in 1985 and S35.1 million in 148 8.
cial receisable, generally i* matched with debt hasing Expenditures in 1986 included run,aruction .d a new imilar rate and maturity structures. United Kingdom headquarter- ami purcha r ora ocw
) llou chold Finance Corporation C HFC").the facility in California for the Bankrani operation. In 1985 compan3'* large,t Financia; Senices sub3idian. issue - expenditure
- included comersion in a new computer I
conunercial pagmr which continues to carry the highest system in con 4umer finance idlice to enhanre i u-iomer h rating
- of the major cretht rating senices. Term credit enice and increase productivity of branch per-onnet 0 facilitie, al,o are maintained. Long-term debt is i -ued f wben the cost of funds o attractise and generate, an %nufacturing -
adequate intere,t rate spread owr the life of the debt in Tianufacturing. cash prmided by continuine i,-ue. During 1%6 a total of $707.4 million of domestic operations in 1986 was $77.1 million rompan d with l long+ term debt was is+ued with rates ranging from $67.1 million in 1985 and SM.3 million in 1981.The 6 percent to 8.7 percent. In 1986 and 1985 llFC ,old a 1985 and l984 ca h prmided by operation- ruluded total of $150 million of non-soring exchangeable money the impact of a 1984 disidend payable to Ih u chold market cumulatise preferred 3tock to the public.This International.The 1986 cash llow wa in ewe of tm k has a sariable dividend rate that is reset by dutch working capital and capital espenditun requin ment . auction at 49 day intenals.The sharee are redeemable \ manufacturing maintain, ca,h and hort-term ime t-or ewhangeable for senior subordinated money market ments to meet seasonal need, for wort ing rapital. note, only at the option of IIFC. ilanufacturingi working capital need generall3 are
\ -ource of liquidity in the Financial Senices greater during the first half of the year. h i- espn ied bu ine , which continues to increase in importance is that \lanufacturingi cash position. internal ca-b eener-co tomer banking deposits.which grew 53 percent to ation and capital structure will continue to eweed
$2.1 billion at year-end 1986. Liquidity in the insurance working capital and capital expenditure need-operation i, prmided by premium collections. earning, During 1986 \ manufacturing ime<ted 821.8 million j on its imestment portfolio and matching of ime,tment in capital expenditures compared with 82 4.2 million i characteri tic, whh the underlying liability to in 1985 and $22.9 million in 1984. Capital espenditon -
! policy holders. in 1986 included purchase of machiner3.npiipment in Financial Senices. liquidity is clo-ely linked to and tooling primarily related to productivity impn.w-
- the management of a *et and liability rate and maturity ments and product line esten, ions. In 1985 capital structure . Financial Senices currently is implementing expenditures related to new facilitie- at GC Electronic- l an enhanced a et-liability management system for and at manufacturing operations in \lesico, mea,uring and controlling interest rate espo-ure .
financial Senice- also utilizes interest rate swaps. j lloating rate debt and other financial instruments a, I l a set-liahilit) management tools. I 1 1 1 al
Management's Comments on theTax Reform Act
\ new federal tas law. thetas Reli>rm Act of 1986 f the "\rt"). wa ,igned on October 22.1986.The \rt included reduction in income tas rate . retroactiw )
elimination ofime tment tas credits and impo ition ol'an alternatiw minimum tas.\\ hile the majority of change required by the new law uill occur in future 3 ears. ume current 3 car implication, impacted re ult-of operation in the fourth quarter. Income in the commercial finance segment was favorably affected by recalculation of caniings on leveraged leases as j a result oflower future tax rates.These gains were partially offset by an approximate $11 million loss. primarily in the Transportation business, of investment tas credits retroactive to lanuary 1.1986 for capital assets generally acquirehiner that date. The effects of the An on future results of opera-tions and financial position are not readily quantifiable. Ilowewr. the company expects an increase in current law, payable,due to the, alternative minimum tax. This primarily will impaqFinancial Service ' cash flows. elimination ofinwstmentt tax credits is not expected to hase a significant impact on the company or any ofits busine ses. l l 1 l l l l 4 L
r . . l 1 Financia Statements { 1 l Contents
)
Statements of Income 34 Balance Sheets 35 Statements of Changes in Financial ibition 36 Statements of Changes in Other Shareholders' Equity 37 Business Segment Data 38 Notes to Financial Statements 40 Slanagement's and independent Auditors' Report 53 Selected Quarterly Financial Data (L'naudited) 54 i I 33
m.s.w.uwu n , vc uuuuam-
^
' 1fnuwhnid internats.'onal. int. and Subudinnes til amounte nther than per share data aw stated m millums of dollars, g tear endedilecemlwr3I ' qqun t<gn pyy ;
~ ~ ~ ~ ' ~ ~
' Net Sales and Revenu:s l Financial Services . $2.026.2 $1.673.0 $ I.325.4
\ manufacturing 714.3 683.9 hhn; Total net sales and revenues 2,740.5 2.356.9 1.986.1 Costs and Expenses Fine ;cial services operating expenses 1.013.6 810.3 575..i j
;f manufactured products sold 518.2 491.7 '484.7 Selling and administrative expenses . 296.7 269.8' 232.4
' Interest expense . 680.5 553.0' 149.0 Restructuring costs
- 69.5 10.1 Total costs and expenses . 2.578.5 2.124.8 1.751.5 s
' Income from continuing operations before income taxes . 162.0 232.1 234.6 Income taxes . 23.9 77.6 - ^
92.9 1 Income from continuing operation: . 138.1 154.5 l41.7 j Income from discontinued operations, net of income taxes
- 109.7 56.4 92.4
' income before extraordinary item . 247.8 210.9 234.1 Extraordinary item, net of income tax benefits ** (39.2)
Net income . $ 208.6 s 210.9 $ 234.1 Earnings Per Common Share
' Primary i
' Continuing operations . $ 2.85 $ 2.55 $ 2.33 '
- Discontinued operations . 2.53 1,10 1.85 Extraordinary item . (.90)
Primary . $ 4.48 $ 3.65 s 4.18 Fully Diluted Continuing operations . $ 2.85 $ 2.59 $ 2.39 Discontinued operations . 2.27 .95 1.56 Extraordinaryitem (.81) Fully diluted $ 4.31 $ 3.54 $ 3.45
*See note 19 for funher discussion. "See note 9 for funher discussion.
i
.i i
l l J ne am>mpanying notes are an integmlpart of thesefmancial statements 34
TC [Baiance Sheets II.no rhnid lnternaumnnt. ine. nnd ,%hdelmere.
. Allumnunu are stated in mdlinn. nf dnlinrs.
fg-
'lleremher 31 go;;r, p o;;1 I - Assets -
Cash. s 35.n s 77.0
- Note receivable-sale of discontinued operation 520.0
'Imestrnents in securities 2.465.1 1.618.0 Finance receivables 9 t00.4 n.872.2 Trade receivables 126.8 1.1 H. t
. Inventories 154.7 150.8- !
Properties and equipment 308.3 28').2 Insurance policy acquisition costs 160.2 1.18..!
'Other. 414.3 184.2 Net assets of discontinued operations . 99.8
. Total assets . $ 13,206.6
_ 193..I s10.720.0 I Liabilities and Shareholders' Equity [ Commercial paper, bank and otherhorrowings $ 2.800.6 s 2.o29.1 Customer banking deposits . 2,104.5 1.:176.o Accounts payable and accrued liabilities . 803.7 <> t4.2
' Insurance policy and claim reserves . 1.275.0 895.7 Deferred income taxes .- 108.0 199.9 Senior and senior subordinated debt (with original maturities over one year) . k872.2 _ _;}.?I.t.9 Total liabilities . >
11.964.0 H.o in.5 Convertible preferred stock subject to mandatory redemption . 81.0 II3.n Other shareholders' equity: Comertible preferred stock . 2.4 3.7
. Common stock . 52.1 - 51. t ] Additional paid-in capital . 220.8 212.2
- j. Hetained earnings . .
1,521.5 - I.182.8 Foreign currency translation adjustments . (116.4) ( 121..li l Common stock in treasury.. (522.1) i2.1>
'l.- . Unrealized gain on marketable equity securities . 3.3 _ ... J.2 Total'other shareholders' equity . 1,161.6 1.ndo.9 Total liabilities and shareholders' equity . $13.206.6 $10.720.0 l
l-1 1 7 I 1
\
!I l l l j The am>mpan.ung nears an an mnegmlpart ofthenefman<ial,suremenu. l' 33 7; . _ - - _ _ - - _ _ _ _ _ _ _ - - _ _ - . - - _ . - _ - - D
p -- - - ; w- '~'^^'"'" 1
*HouAhnid inNrnannnnt. fru ssnd .* ulnnhun"'
, tilnrnomnts are ,turedin nullis.n< ofdodinrs i .; g l 1enr endedik.remberd!'
. . _ . _ _ _ _ ~tw. . I'd h:u Cash at Anuarv i - .
~~S 33.6 8 12A 8 10.7 Cash Provided'hy Operations and fletained in the Business ' ~ ~ ~
. Income from continuing operations ' $
138.1- 151.5- 111.7 Add (deduct) items not affecting cash: I Provision for credit looes on finance receivables 4 131.9 58.6 18.i
' Polics holders
- future benefits l 404.6 378.6 f il.o Depre' ciatiori and amortization of tangible assets
~ Deferred income taxes 4.2 31.3 28.8 flestructuring cmts. (35.7) 37.0 26.7 69.5 Trade receivables . 10.1 Imentories (l1.1) 7.7 i23. li Accounts payable and accrued liabilities (6.9) I 1.7 121.0)-
81.1 21.9 an.o Other . , . 0.1 (110.3) Cash provided by continuing operations . (8 1.73 3 815.8 591.0 Sw? i Cash provided (used) by discontinued operations: Income from discontinued operations 109.7. 56.4 Other. net 92.1 (77.7) (15.4) . (3 1.11 - Cash provided by discontinued operations . 32.0 41.9 Extraordinaryitem _ __ _ i 1.0 (39.2)
' Dividends to shareholders .
(91.4) (114.5) t i lo.'4
. Cash provided by operations and retained in the business .
' Investments in Operations 717.2 5203 ~ ~is.8 Finance receivables. net of collections . (2,436.8) (1.585.1)- (630.21
[ Properties and equipment. net of disposals . Securities. net . (61.8) (82.9') 04.3) (821.0) (723.0) (218.m - Proceeds of business operations sold. net . 459.0 628.0 Note receivable-sale of discontinued operation . 520.0 (320.0) Cash (decrease) from investments in operations . (2,340.6)
~ Cash (decrease) before financing transactions . (2.2_8A0) __ _.J___8')2.51 (1,623.4) (1.762.5) (565.7)
FinancingTransactions Commercial paper, bank and other borrowings 762.9 1.069.6 Customer banking deposits . on.o 728.5 346.3 101.6 issuance of senior and senior subordinated debt . 1,244.0 995.8 623.7 Retirement of senior and senior subordinated debt . (381.3) (654.1) Repurchase of common stock. (217.5) (520.0) (2.1) Repurchase of preferred stock'. (169.3)
~ Cash increase from financing transactions 1,664.8 1.755.5 _ _j674 Cash at December 31 5 77.0 $ 35h S 12.h The annmpanymg noses are on insegmlpart nfthese pnnr.vint rin gernenix.
-36 i
^ i j Statenwnts of Changee in Other Shareholders' Equity y linu,eh>Ad Internathmnl. im . nnd balnkhnnes Lunnertolde udm mart
; Illnmuunswtherthan whnweintu Ywlerwd Cummnn Vmd m Hernmed _
Mu* ,
. nw sinted_un nullbms u{dullnis. Stou t brook - (.nputal f:nrnme I"'"I
[ Balance at December 31,1983
. Net income S 8.5 $ 49.4 $ 106.6 $ 1.263.2 234.1 S (87.8) Sl.129.0 231.l !
Cash dividends: Preferred-at stated rates (25.1) C5.li Common-$1,725 per chare (85.8) 185.8) Foreign currency translation
. adjustments. net of $5.3 million of income taxes (3n.8)
(30.8) Comersion of preferred stock ** (2.4) 0.8 1.6 Exercise of stock options . o.3 4.4 Balance at December 31,1984 . _ _ _ t .- ' 6.1 __ 30.2 202.6 _ 1.386.4 (l18.6) 1.526.7 Net income 210.9 210.9 Cash d'Adends:
' Preferred-at uted rates C3.4) C3.1)
Common-$1.78 per share . (91.1) (91.1) Foreign currency translation i adjustments, net of $5.1 million of income taxes . (5.7) 43.-) l Conversion of preferred stock ** (24) 0.8 1.7 0.1 Exercise of stock options . . 0.4 7.9 s.3 Unrealized gain on marketable l equity securities . 7.2 7.2 Repurchase of common stock . _,_ (2d) (2.1) Balance at December 31,1985. 3.7 51.4 212.2 1.482.8 (119.2) 1.630.9 Net income . 208.6 208.6 Cash dividends: Preferred-at stated rates (14.1) (14.1)
; Common-$1.835 per share ' (77.3) (77.3)
Foreign currency translation adjustments. net of $.9 million L of i icome taxes . 7,9 7,9 Conte rsion of preferred nock ** (1.3) 0.5 1,6 0.8 Exercise of stock options . 0.2 7.0 7.2 l- Unrealized gain on marketable
'I equity securities , (3.9) (3.9) i Repurchase of common stock (520.0) (520.0)
Repurchase of preferred steck . (78.5) (78.5) Balance at December 31,1986.. $ 2.4 $52.1 $220.8 $ 1,521.5 $(635.2) $ 1.161.6 9t December 31.1986 and 1985 items in the other column include: Ioreign currency translation adjustments of $(116.4) and $024.3) million. rnpet1hely: unrealized pin on marketable equity securities of $3.3 and $7.2 million,respectively: and common stock in trenury of $622.1) and
$(0.D million. re,pecthely.The balances at December 31.1984 and 1983 related solely to foreign currency translation adjustments. j "Ineluding $6.25 preferred stock. ,
l Convertible Pwferwd Semk Cummun stml, Shares ,2_m ,2.3o ,,,,a ,,y,,,,, t Balance at December 31,1983. 374.549 1.320.698 49.137.433 Conversion of preferred stock . (43.039) (469,444) 800.966 - Exercise of common stock options 271.275 ( L Conversion of $6.25 preferred stock . 23 i Balance at December 31,1984 . 331,510 851,254 50.209,697 Comersion of preferred stock . (39.819) (463,021) 784,104 i 377.756 Exercise of common stock options . Conversion of $6.25 preferred stock 4,959 Repurchase of common stock. (50.tm Balance at December 31,1985 291.691 388.233 51,376.516 (50.000) Comersion of preferred stock . (99,577) (142,561) 437,803 Exercise of common stock options 243,228 I 31.102 l I . Conversion of $6.25 preferred stock Hepurchase of common stock (11,464,136) Balance at December 31,1986 192.114 245,672 52.088,649 (l1,514,136) 1-
, The accompanymg notes are an unregrrapart af thesefmanesal nunrement,.
I j l 4 I J
y
. Business Scenient Data ll ou wh.dd linerrunts;,,, i1.u .
und Sido.ufunron . lit urnounts nre cured '5"I""" U "'"** . il ln mong l% Int Im .. ,,,.
- n. ' n nulluuny nfdadlars. ' 14Hb 14H,5 junn l&I i
, 14:14 . ^ Iqui lunn luni
_ pen Financial Services: Consumer $1.271.3 $1.025.6 $ 919.6 $ 89.9 $ 151.6 $ 198.1 5 43.9 $ 87.2 s lo3.;
' Commercial 171.7 '127.1 91.5 38.2 39.0 21.7 73.7 37.6 Ordinary life 23.3 insurance- 583.2 _320.3 314..] _35.5 2 .21 21.3 Total Financial 23.5_ _ 18.0 2 t.1 Services 2.026 2,. .l.325.4 163.6 l.673 0_ 217.8 2 14.1 141.1 142.8
> manufacturing: l 33.3 Building products 3 16.7 334.3 329.1 30.1 12.6 30.9 12.1 21.0 10.0 Consumer products . 204.9 216.2 190.7 (6.7) 25.3 10.6 (3.6) 13.9 16 Commercial Industrial products . 162.7 133.4 140.9 32.2 31.7 29.3 16.5 16.8 13.9 Total '
Stanufacturing . 714.3 683.9 660.7 55.6 99.6 70.8 25.0 51.7 _ _27.5 Corporate: Administrative . (24.0) (26.1) (23.2) (25.0) (26.1) (23.2) Unallocated interest (19.4) (47.4) (46.7) (19.4) 147.41 (16.Ti Unallocated tax benefits 15.4 33.5 _ 30.8 Total Corporate . (43.4) _._(73.5) TotalContinuing (69.9) J28.0) (40 & 339.1) Operations . $2.740.r. $2.356.9 $1.986.1 $175.8 $243.9 $245.0 $138.1 $154.5 S111.7 l Business Segments llousehold international operates two major businesses: Financial Services and 5f manufacturing. Financial Senices is classified into three business segments.The consumer segment offers,through an international network of branch offices. real estate secured loans. personal loans, banking senices and credit insurance products.The commercial segment consists primarily ofinvestments in leveraged leases. term preferred stocks. equipment loans and leases and real estate secured loans on commercial income producing property.The ordinary life insurance segment provides ordinary life. annuity and specialty insurance products. During the fourth quarter 1986. management changed its allocation of revenues and income of certain insurance products and resulting investment income from the consumer to the ordinary life segment to better reflect these growing and changing operations. Results of prior periods have been restated to conform to the current year presentation. During 1986, the Stanufacturing business realigned its operating units from five to three segments.The new alignment and reporting thereon better match the markets being served.The building products segment includes
. plumbingware products and fixtures. ventilation registers and grilles. chimneys. gas vents. water coolers and drinking fountains.The consumer products segment includes non powered hand tools. parts and accessories for home entertainment equipment.vacuumware. plastic insulated products. barbecue grills and school lunch kits.The commercial-industrial products segraent included industrial casters and wheels. cooking appliance controls, commercial ice systems. com ercial refrigerators / freezers, specialty consumer refrigerators. power components.
gears and cutting tools. Results of prior periods have been restated for continuing operations and to conform to the current year presentation.
\
3Ri _.-__-___w
l' Asset Data . a llane wholut internntmmol. fru . nnd pubsidusroes lovpreu mtn.in nml Imunn:nown tilnmdunts nre sented .. . Ide"*fnid" luety ni lunulde hvo, t opn.d I arvnd?ran
& in nullinn, nf dullnr3 _ VM6 _ _
Pm* . _ pml pmn ym; pm; ponu pm- pml p Financial Services: l' Consumer $ 8,173.1 $ 6.312.0 ' $4.814.3 $ 21.0 S 13.6 8 8.9 532.6S60.8830.8 Commercial 2,054.0 1.551.1 908.8 0.1 0.2 n.4 0.1 Ordinary life L insurance 1.629.0 1.221.0 . 814.6 3.2 3.2 2.5 6.5 7.3 1.3 l Total Financial Senices ; 11.856.1 9.081.4 6.572.7 24.3 17.0 11.8 38.9 68.2 35.1 Manufacturing: Building products 252.9 258.0 262.9 10.5 9.2 8.6 8.7 11.0 14.6 Consumer products 145.2 141.8 137.5 5.4 4.7 4.6 7.1 10.4 6.1 l Commercial-Industrial products 105.9 69.6 82d 2.9 2.2 _ 2.6 6.0 2.8 2.2 Total - Manufacturing . 504.0 469.4 482.5 _18.8 16.1 15.8 21.8 21.2 22.9 Corporate 772.5 736.2 64.2 1.1 1.2 1.2 Total . 13,132.6 10.290.0 7.119.4 44.2 34.3 28.8 60.7 92.4 58.0 Intercompany eliminations (25.8) ' (63.3) (101.8) TotalContinuing Operations $13.106.8 $10.226.7 $7.017.6 $ 44.2 $ 34.3 $ 28.8 $ 60.7 s 92.4 s 58.o Geographie Area Aet Sales and Resenure identofmble .hwts OpemtmgPnfa 1986 198.5 1984 1986 198.5 1981 1986 143.5 P,ml United States . $11.073.6 $ 8.975.5 $6.090.0 $2,312.6 $2.039.7 $ 1.672.1 $117.3 $198.1 $201.5 Canada. 949.0 751.8 706.1 175.7 165.5 174.9 22.3 24.7 24.3 Other. 1,110.0 562.7 323.3 252.2 151.7 139.1 36 2 25.1 19.2 Total Continuing Operations $13.132.6 $10.290.0 $7.119.4 $2.740.5 $2.356.9 $ 1.986.1 $175.8 $243.9 $215.0 1he increaws in other geographic area identifiable asects. net ulee and resenues and operating profit are pnnripally due to the acqui.ition ni the n maining .~30 perernt nf the tustralian financial wrsire.e operation. acquisition of manufacturing operations in Italy and hian account grwsh in the t nned kingdom. Presentation of Income Data The Tax Reform Act of 1986 (the "Act") was signed into law on October 22.1986.The Act contained current year implications.which primarily affected Financial Senices and certain discontinued operations. Because future tax rates are an important assumption in calculating revenues and taxes for leveraged leases. Financial Senices bene-lited from recalculating earnings on leveraged leases as a result oflower future tax rates. Revenues and operating profit in the commercial segment dropped by $12.4 million,however, income increased by $25.8 million in the fourth ciuarter 1986 to reflect this impact of the Act. For 1986, results from continuing operations were negativelyimpacted by $69.5 million of pretax restructuring costs. In Financial Senices* consumer egment.$24.2 million of restructuring costs are included in operating profit. Operating profit for 1986 was reduced for Manufacturing restructuring costs of $21.9.$18.6.and $4.8 million for building products, consumer products and commercial-industrial products,respectively.These restructuring co+ts were partially offset by $6.7 and $3.7 million of aftertax benefits at Financial Senices and Manufacturing.respec-tively from implementation of new pension accounting standards issued by the Financial Accounting Standards Board See note 15 to the financial statements for further discussion. Operating profits are before interest for the Manufacturing business and before taxes for both Financial Senice< and Manufacturing businesses. Interest costs of $647.3.$493.8 and $391.9 million are included in operating profits of the Financial Senices segments for 1986.1985 and 1984.respectively.as financing costs are int gral to such oper-ations. Income by segment assumes each businen senices its own debt. Financial Senices and Manufacturing gener-ally provide for income taxes as if separate tax returns were filed subject to certain consolidated return limitations 34
L Lies to FimnciJ Statements i' iluwhrk!Inwrnutsornnt. inn and.%ulosunn!*n I
- 1. Summary of Significant Accounting Policies Basis ofConsolidation-The financial statements include the accounts of Household Internati
" company") .md all wholly owned subsidiaries. All significant ' intercompany accounts and transactions have eliminated in consolidation.
Finance RemiraMes- Resenue is accrued using the constant yield method. For consumer an estate secured receivables accrual is suspended when payments are more than three months c Provisions for credit losses are made in amounts sufficient to maintain the allowan to cover losses resulting from future liquidation of the existing portfolio in the ordinary . e t-course of busin ables are written off when the possibility that an account is uncollectible becomes appare receivables. write-offis mandatory when a full payment has not been received for more than reserves applicable to credit risks on consumer loans are treated as a reduction of receivables in the since payments on such policies generally are used to reduce outstanding receivables. fnsumnce- Premiums for ordinary life policies are recognized as revenue when due. Credit recognized as revenue over the period at risk in relationship to anticipated claims. Resenues fo recognized as received. Policy liabilities on ordinary life risks are established principally using method and actuarially derived estimates of future investment yields. withdrawals, mortality, and dividen acsociated with the acquisition ofinsurance risks are deferred and generally amortized in relationship Investments-Investments in securities generally are carried at cost or amortized cost exc securities held by the company's insurance subsidiaries are carried at market. Cost ofinvestments in secu principally is determined using the first-in, first-out ("FIFO") method. Innntories-Inventories are stated at the lower of cost or market. Cost is determined using the last-in, (" UFO") method for substantially all domestic inventories and the first-in, first-out ("FIFO") m inventories. Pmperties- Properties and equipment are recorded at cost and depreciated over estimated useful liws o principally using the straight line method for financial reporting purposes and accelerated meth Gunmntees-Fees received for guarantees are amortized over the guarantee period using the straig Direct costs associated with the guarantees reduce fees received. TreasurvStock-The company accounts for repurchase of common stock using the cost method with com in treasury classified in the balance sheet as a reduction of other shareholders' equity. Repurchase of co preferred stock subject to mandatory redemption is accounted for using the par value method with the exces mer stated value of repurchased preferred stock charged to retained earnings. Foreign Currenry Tmnalation- Although the company and its subsidiaries operate worldwide. f assets and liabilities primarily are located in Canada. Australia and the United Kingdom. Foreign subsi data generally are translated into U.S. dollars at the current exchange rate and translation adjuunents a lated as a separate component of other shareholders' equity. As the company intends to maintain its inves
. foreign operations indefinitely, ultimate realization of these translation adjustments is highly uncertain. E foreign currency translation are offset gainst the cumulative foreign currency adjustment in the in financial position. Foreign currency transaction gains and losses are minimal and included in in Income Taxes-The company and its United States subsidiaries, other than life insurance subsidiaries. file a co dated Federal income tax return. Federal and state income taxes are not provided on undistributed ear foreign subsidiaries that had been or are intended to be reinvested indefinitely or on undistributed earn insurance subsidiaries accumulated as policyholders **urplus under tax laws in effect prior to 198 of such surplus being taxed is considered remote.The flow-through method of accounting for investment tax c was followed except f 3r investment tax credits generated byleveraged leases for which the deferral method 40
discontinued Opemtiom-The company's Tran portation and \len handising bu-ine- e were sold II"' emb"r 11. 1986 and 1985.re>pecthely. Also in 1986 the company decided to pursue dise titure of certain manuf acturing operc j' tions in the commercial-industrial product,,egment. Accordingly. the e dise titure hase been reported a-ih-con-tinued operations. All resenues and expeme* attributable to thr-e bu ine, e, base been remosed from continuinc operations and included in the ,tatements of income under the caption " income from discontinued operation . net of income taxes." Similcrly, all awets and liabilities a of December 31.1986 and 1985 for the e manufacturing operations.and a sets and liabilities of the dise tedTran portation busine , as of December 31.1985 are egrruated on the balance sheet a " Net assets of discontinued operations." Footnote disclosure
- relate to continuing operation-and therefore exclude effects of 51 merchandising. Transportation and certain manufacturing operation,. 1 Emptmee Benefir Ihns-The company and its subsidiaries -pon or sarious defined benefit pension and definrd contribution plans.and provide for certain health care and life insurance benefits to aethe and retired employer .
During 1986 the company adopted Financial Accounting Standards No.87" Employers' Accounting for Pen ion " for all U.S. and foreign pension plans.The company's funding policy is based on an actuarially determined cost method allowable under Federal tax law.
- 2. Investments in Securities Investments in securities at December 31 were as follows (millions of dollarsh
/W6 _ . .._19C Carmng i orn uw Cmt %rket I alue Cmt Uarket i<due l
- Starketable equity securities
Common stocks $ 109.7 $112.6 5 112.6 $ 88.5 6 45.3 $ ou Preferred stocks 160.7 162.5 162.5 172.0 175.2 17 ',. 2 Subtotal 270.4 275.1 275.1 260.5 270.5 270.5 Other: Gmernment bonds 317.9 328.8 317.9 302.2 310.5 102..' Corporate bonds 621.0 690.1 621.0 451.5 440.2 451.3 Commercial paper 923.6 923.6 923.6 158.7 158.7 158.7
\1ortgage loans on real estate 184.7 184.7 217.3 217.3 Other 142.8 142.8 217.8 _ _ 21J.8 Tetal imestments in securities $2.160.4 $2.465.1 s1.608.0 $ I.6 la o % mounts not readily detenninabic.
Insurance subsidiaries of the company held $1.5 and $1.1 billion of the investments at December 31.1986 and 1985, respectively. At December 31.1986 and 1985 the marketable equity securities portfolio had groo unrealized ; I gains of $14.5 and $13.8 million, respectively.and gross unrealized losses of $9.8 and $3.8 million. respectively.The unrealized gain on marketable equity securities is recorded in other shareholders' equity net of $1.4 and $2.8 million of income taxes as of December 31.1986 and 1985 respecthely. Sales of marketable equity securitie re-ulted in net realized gains of $10.4.$4.8 and $.6 million in 1986.1985 and 1984. respecth ely. I I i
)
1 1 4I
I
.TO(cS to fiDHHCla! bf 8(OMPUIS leOliminO 1%wimlullnterme mnal. im amt hh.nlinne.
. 3. lleceivalus i finance recch ables at Decernher 31 con +isted of the following (million, of dollarsh In lun; Consumer:
Real estate +ectired
$4.357.6 $2.856.o fletailinstallment and bankcard 1.443.5 1.007.5 i Other 1.913.4 1.8n l .7 Allowance for credit ha es (185.2) (164.6)
L nearned credit in,urance premiums and claim re enes (98.6) 0 03.5) Con +umer finance receivables. net 7.430.7 3.397.1 Commercial: ~~ Term preferred stocks 540.0 152.o 1.everaged leases 436.4 3 73.6 Heal estate secured 381.5 239.6 Equipment loans and leases 330.4 93.9 Purchased vehicle contracts 42.5 205.'i Other 266.1 127.! Allowance for credit losses . (27.2) f 16.66 Commercial finance receivables. net 1.%9.7 l.175.1 Finance receivables. net
$9.400.4 $6.872.2 (mestments in term prefened stocks by Financial Senices' commercial segment are included in receivables, generally because of their mandatory redemption provisions.
Imestment in leveraged leases at December 31 consisted of the following (millions of dollars): 10H6 /Wfi Hental receivables (net of principal and interest payable on nonrecourse debt) $ 452.0 $ 380.7 Estimated residual value ofleased assets 226.3 227.2 l'nearned income (225.1) (219.21 llnearned imestment tax credits . (16.8) jl5.h lmeetment in leseraged leases
$ 436.4 $ 373.6 At December 31.1986. contractual maturities of finance receivables were as follows (millions of dollarsh 19H7 1988 1989 1990 1991 Thermiter Consuiner:
Realestate ecured $ 447.1 $ 294.2 $ 262.2 $246.5 $242.0 $2.865.6 Retail installment and bankcard 567.2 415.4 361.9 60.8 37.7 0.5 Other 641.4 512.7 376.6 219.0 150.6 13.1 Commerciah Term preferred stocks 39.4 186.6 39.3 27.5 19.8 227.4 1.cs eraged leases
- 6.4 6.2 8.4 15.0 14.6 627.7 Heal estate secured 45.6 42.0 62.7 60.6 80.9 89.7 j Equipment loans and leases 40.7 33.6 28.1 22.1 17.9 188.0 Purchased schicle contracts 42.5 Other 73.0 32.5 7.6 22.4 10.7 119.9 Total $1 m 3.3 $ 1.523.2 $ 1.146.8 $673.9 ' $574.2 $4.131.9
%ntra toal matunties indude net rentals recenable and estimated residuahaluce and are before deducuans for unearned in tas t rnha.
Consumer receivable, have maximum terms of 30 years.howeser.it is the company's experience that a substan-tial portion of such loans will be paid prior to contractual maturity.The above tabulation.therefore. is not to be regarded as a forecast of f uture cash collections.The ratio of annual cash collections of principal to aserage con-sumer principal balances approximated 49.50 and 48 percent in 1986.1985 and 1984. respectively. Trade receisable, are >hown net of allowances for doubtful accounts of $6.3 and $3.3 million at December 31. 1986 and 1985, respectively. 42
J 4. Inventories
.g " f rnentories at Deet mber 31 consisted of the following (millions of dollars):
=- -
P*H'* Pd hms: , hed goods g 33,3 g 7i, ;
. Work in proce>* gg,3 333
- Raw material
- 42.9 47.7 Total imentories - ~ 7 H 4,t g l .,.ut -
l The exces of estimated current co t user 1.lFO carrying salue u a, approximately $11.3 and $13.4 million at l December 31.1986 and 1985. respectively. Liquidation of LIFO imentories did not significantly impact co-t ol. l, ' manufactured products sold during the past three 3 ears.
- j. ~ imentory carrying salues exceeded their tax basis by $19.5 and $19.6 million at Deceintwr 31.1986 and 1985.
respectively, representing excess of replacement over LIFO costs at the date certain manufacturing businc,-e, were acquired.
- 5. Properties and Equipment Properties and equipment at December 31 consisted of assets owned and leased under capital lease arrangement, a4 follows (millions of dollars):
two _ , , _ ton *. Owned: Land. $ 20.0 S 13.0-l Buildings and leasehold improvements . - . . 150.5 138.2 l Machinery, fixtures and equipment . 307.2 268.3 Accumulated depreciation and amortization _(184.3) (1II'h Owned. net . 293.4 273A Leased: 1: Buildings 15.8 til Machinery and equipment . 5.7 iui Accumulated amortization . (6.6) us.16 Leased, net . I 4.9 - Iin Properties and equipment. net $ 308.3 $ 2tt'i.2
- 6. Commercial Paper, Bank and Other Borrowings Data on commercial paper, bank and other borrowings at December 31 were as follows (millions of dollars):
Balance af flownmings treightvolloven..t Hare. 1986 1985 IWM IUHb IUN3 VIHI Financial Senices: Commercial paper . $2,022.3 $ 1,471.1 $662.3 6.3% 8.o'% 's.1" .. Ilank and other borrowings . 498.5 398.7 249.9 8.4 ,_ 44 9.2 Total _ 2.520.8 _l.869.8 912.2 6.8 8.4 gi-Manufacturing and Household International: Hank and other borrowings 279.8 159.3 6.6 7.1 _8A 10.8 Total $2.800.6 $2.029.1 $918.8 6.8% H.4% 0.2'W i
-13 ,
o
p -Notes to Hnancial Statements 6wuinued)
]l.no.chnid internnwmul. Inurnd bubudunnes The maximum aggregate outstanding commeccial paper. bank and other borrowing, at the end of any month during 1986,1985 and 1984 was $2.612.7.$1.936.7 and $1.178.9 million. respecthely. for Financial Senice, and
$279.8.$159.3 and $8.3 million. respectively. for Manufacturing and liousehold international..herage horrowing, and related weighted aserage intenst rates. including cost
- of maintaining lines of credit. were as follows (million*
of dollars): 19Hh imli I*cn Financial Senices: Commercial paper $ 1.778.2 $941.3 $797t, llank and other borrowings 471.6 315.6 233.5 Weighted average interest rates . 7.3% 8.6% _ _ lo.ep, Manufacturing and Household International: . llank and other borrowings . $ 97.4 Weighted average interest rates .
$ 16.1 $ 6.4 7.3% 9hm I I.h
- 7. Credit Agreements The company and its subsidiaries maintain various brnk credit agreements primarily to support commercial pap borrowings. At December 31.1986. these agreements included $175.2 million of fonnal credit lines and $2.151.5 mil-lion of revolving credit agreements. Credit lines are reviewed annually and revohing credit agreements expire at various daten from July 1987 to June 1991 cat December 31.1986, credit lines and revohing credit agreements not in use were $170.2 and $1.810.8 million.respectively. Borrowings under credit agreements generally are available at the prime rate or at a surcharge over the London interbank Offered Rete. Annual commitment fee requirements to support the availability of credit agreements totaled $3.5 million at December 31,1986.
i 8. Customer Banking Deposits i , Customer banking deposits at December 31 consisted of the following (millions of dollars): Time cer:ificates . 1986 29
$1.509.6 $ 9253 Demand accounts .
400.7 3 44.8 Savings accounts 194.2 _, 105.3 intal customer banking deposits . $2.104.5 $ 1376.0 - 1 Customer banking deposits relate to savings and loan, bank and trust activities of the Financial Services business. Average customer banking deposits were $1,857.4.81,153 and $547.2 million.and celated weighted ave
' interest rates were 8.4%,9.1% and 9.4% for 1986,1985 and 1984 respectively.
Maturities of time certificates at December 31.1986 were as follows (millions of dollars): u.- 1987 1988
$ 4h1.5 . a
' 173. )
1989 114.h ', Thereafter Total time certificates
, 230.1 ;
$ l.5M__6 _
Time certificates have maximum terms of 10 years: however,the redemption ef these (enlicates is permitted upon demand generally subject to an interest penalty. I' N t
.i k
4 1 44 ___.__._____m _ _ . _ _ _ . _ _ _ _ _ _ _ _ k.
- 9. Senior and Senior Subordinated Debt (with original maturitie, oser one searl Senior and $enior subordinated debt at December 31 con isted of the following (million of dollar-n
- . _ . ~ _ _ . _ . - -
on m. llouwhold International: Th% to 12% due 1987 to 1994 $ 370.8 9 2ToB l'namortized discount Total liousehohl international __ ll7.0) < la li 353.8 231.1 Financial Senices: Senior debt: 158 % to 6.9% due 1987 to 1996 707.2 170.0
"'% to 7.94%: due 1988 to 1999 687.3 1711 8% to 8.9% due 1987 to 2007. 591.9 1113 9% to 10.99% due 1987 to 2000 472.8 itd .J 11% to 11.99%: due 1987 to 1995 586.1 oliai 12% to 17.5% due 1987 to 1994 404.8 2212 interest rate periodically reset with London Interbank Offered Rate. !
Two-YearTreasury Hate, or 91-dayTreasury bills: due 1987 to 1994 *59.2 186.9 i Senior subordinated debt: i 7% to 9%%: due 1990 to 2004 300.0 23 1.3 10%% to 12h% due 1987 to 2004 250.0 230.o
, 9 % changeable money market cumulative preferred stot k 150.0 w "Q 'll tientures in treasury and unamortized discount . (22.5) _. . (13.7)
Tond Financid Senices 4,386.8 ___ _ 3.398.1 Manufacturing ' 4.0'#/o to 14.9% due at various times through 2003 109.1 100,i Subtou? 4,849.7 3.731.0 Cap.tedized h nse obligations . 22.5 2in Total senior and sernor subordinated debt . $4.872.2 < L77 la, Weighted interest rates, excluding capitalized lease obligations,were 9.1% and 9.5% at December 31.1980 and 1985, respectively.
, At Decenther 31,19ft6 end 1985, senior and senior subordinated debt included $149.7 and $194.4 million.
respectively.of sinking Smd debentures. Maturities and sinking fund requirements at December 31.1986.escluding capitalized lease obliga'.!vns, were as follows (millions of dollars). 1987 $ 781.7 1988 320.9 1989 M2 l990 328.3 1991 ini i Thereafter _. 2.3111 Total St.8 M T Maturities in 1987 include $405.3 million of semor and senior subordinated debt to be extinguished prior to j scheduled matu-ity. An extraordinaryloss of $39.2 million t$27.5 million for Financial Senices $6.3 million lor Manufacturing and 15.4 million for flousehold !nternaticaat) after deferred income tax benefits of $31.8 million. wa-recorded in bidt; to m,er utimated premium and other com attributable to this ear!v debt extingui hment. In 1986 :md 1985 the company's Financial Senices business imd nonwodng exchangeable money market cumulative preferred nock ("MMP").The shares may be redeemed oc exhanged for senior subordinated money market notes solely at the option of Financial Senices.The dividend rate on MMP is determined in accordance with a fornata based on on{m plwed 6 a dutch auction held esen 49 dvs.This stock and the related disidend hase b~ been cla,sdsd u debt and interest npmse' reweedvely,in the compans financial staten.ents. \, > 13
y
*/l m sehidd lernnwmul, im nmi uhwimne' '
The companyi major subsidiaries are independent borrowers and generally their debt is upported only bs their respective anets. Approximately 40 percent of subsidiarieinet asets of $1.2 billion are restricted by their indisidual l debt agreements which limit transfers of fund, to the company in the form of either advances or disidend .The ' effect of these restrictions is not conudered to be. for all practical purposes,a limitation of Householdi ability to pay dividends or repay debt.Certain parent company debt agreements restrict the payment of disidends to harehoblrr* through impo ition of tangible net worth requirements. At December 31.1986.approximately $384 million of consolidated retained earnings were free of such restnctmns. J
- 10. Convertible Preferred Stock Subject to Mandatory Redemption i At Dreember 31.1986 and 1985, the company had outstanding 1.619.492 and 3.451.844 shares.respectively.of $6.25 l cumulatise convertible preferred stock subject w mandatory redemption provisions. During 1986.1,816.178 shares were repurchased and at year end were held in treasury. Each share is convertible into 1.923 shares of common etock and is entitled to one vote, as are other preferred and common shares.The liquidation value of the $6.25 preferred stock is $50 per share. Holders of such stock participate on an equal basis with other preferred shareholders and are entitled to payment before any distribution is made to common shareholders. From 1991 through 2010. the company is required to provide sinking fund amounts sufficient to redeem annually 4 percent of the series and is required to redeem all of the remaining unconverted and unredeemed shares in 20ll. If certain conditions are met. the company may redeem the $6.25 preferred stock at $50 per share plus accrued and unpaid dividends.
- 11. Convertible Preferred Stock and Common Stock At December 31.1986 and 1985 the company had authorized 67.5 million shares of $1 par value common stock and 8.2 million shares of no par value cumulative convertible preferred stock. At December 31.1986,3.9 million shares of common stock were reserved for conversion of preferred stock.
Terms and amounts of the cumulative convertible preferred stock issues not subject to mandatory redemption are summarized as follows:
$2.375 $2.50 _ l.ml stated Value:
Per share $ 6.75 $ 4.50 Aggregate (millions of dollarsh December 31,1986 . $ 1.3 $ 1.1 $ 2.4 December 31.1985 $ 2.0 $ 1.7 $ 3.7 Preference value in involuntary liquidation-December 31,1986: Per share $30.00 $18.00 Aggregate (millions of dollars) . $ 5.8 $ 4.4 $10.2 Rate of conversion into common shares 2h 15 December 31,1986 redemption price . $50.00 $50.00
- 12. Preferred Stock Purchase Rights l The company has issued one preferred stock purchase right for each share of common stock. Under certain conditions.each right may be exercised to purchase one one-hundredth share of a new series of participating preferred stock at an exercise price of $100. subject to adjustment.The rights may be exercised only after a public announcement that a party acquired or obtained the right to acquire 20 percent or more of Household's common stock or after commencement or public announcement of an offer for 30 percent or more of Household's common stock.The rights.which cannot vote. expire on August 31,1994 and may be redeemed at a price of $.50 per right at any time prior to expiration or acquisition of 20 percent of Household's common stock.The participating preferred stock purchasable upon exercise of the rights will be nonredeemable and subordinate to other series of Ilousehold preferred stock. j i
l l l 4b ________n
In the event that Household is acquired in a merger or other business combination transaction. pmsision . hall be made so that each holder of a right shall have the right to receive. upon exercise thereof at the then current exercise price.that number of shares of common stock of the surviving company which at the time of such transaction would have a market value of two times the esercise price of the right
- 13. Incentive Compensation and Stock Option Plans
! The company's stock option and long-term incentive plans provide for issuance of non qualified stock option,. incentive stock options. stock appreciation rights. performance unit awards. performance share awards and restricted stock awards. Stock options permit the holder to purchase, under certain limitations.the company's common stock at a price not less than 100 percent of the market value of the stock on the date the option is granted. Common stock option data are summa: Led as follows: Shares i nder Optinn % mher l% e Per s..uv Outstanding at December 31,1983, 1.287.625 $ 10.82-$ 30.82 Granted . 292.000 26.50- 31.75 Exercised . (276.625) 10.82- 21.25-Expired or canceled . f45.800) 15.69- 27.00 Outstanding at December 31,1984. 1.257.200 12.75- 31.75 Granted . 286,900 35.82- 36.50 Exercised . (417.900) 12.75- 27.00 Expired or canceled . (201.700) 17.00- 36.50 Outstanding at December 31,1985 . 924.590 15.64- 36.50 Granted . 209,700 42.88--46.94 Exercised . (263,600) 15.69- 36.50 Expired or canceled . (96.800) 17.00- 42.88 Outstanding at December 31,1986. 773.800 $15.69-$46.9 s The stock option plans permit previously acquired sharer, of the company's common stock to be used as payment upon the exercise of a stock option. In 1986,1985 and 1984,20.372,40,144 and 5.350 shares. respectiwk. of the company's common stock were reacquired in this manner and immediately reissued as part of stock option exercises. At December 31.1986. shares under exercisable options totaled 346.625 and shares available for future grants totaled 1.139,000.
- 14. Leases The company and its subsidiaries lease certain of its offices, buildings, machinery and equipment for periods of up to 30 years with various renewal options.The majority of such leases are noncancellable operating leases. Rental expense charged to continuing operations under operating leases was as follows (millions of dollars):
1986 10 0 IWO Niinimum rentals . $43.7 $39.6 $35.9 Sublease rentals received . (0.6) _(o-) 10.4) Rental expense. net . $43.1 $38.9 $35.5 Future minimum lease commitments under noncancellable operating and capital leases (together with the present value of net minimum lease commitments) at December 31,1986 were as follows (millions of dollars): Opemtme Leases Caputal f.ense, 1987 $ 35.2 $ 2.8 1988 25.7 2.5 1989 18.1 2.1 1990 12.9 1.7 1991 8.4 1.7 Thereafter 36.3 32.6 Net minimum lease commitments $ 136.6 45.~4 Estimated interest 20.9 l' resent value of net minimum lease commitments $22.5 li
' Notes to Financist Statements nyminned; Y
' thruhs.Irlinwrnutwnut.im.umi su l4hnnes
- 15. Employee Benefit Plans The company and its subsidiaries have sarious defined benefit and defined contribution pension plan, cmer-ing substantially all of its employee 3. During 1986. the company and its .ub-idiarie, adopted Financial Accountin;t Standards No.87 -Employers' Accounting for Pen ions" for its l'.5 and foreign pension plans. As prior year pen ion coats were determined in accordance with Accounting Principles Board Opinion No.8.1986 pension data is not comparable with prior periods.The effect of the change in accounting in 1986 was to increase income from t
continuing operations and fully diluted earnings per share by $10.4 million and $.21.respectively. Pension cost (income) for defined benefit pension plans included in continuing operations was S(17.6). 85.1 and
$4.2 million for 1986.1985 and 1984.respectively. Plan benefits primarily are based on years of.enice. Plan awets generally consist of common and preferred stocks. corporate and Government obligations and real estate.
Approximately $29 million of plan assets are invested in stock futures and foreign equities and approximately
^ $5 million are invested in the company's comertible preferred stock subject to mandatory redemption.
The pension cost (income) for defined benefit plans included the following components (millions of dollan.): imu, Senice cost-benefits earned during the period .
$ 73 Interest cost on projected benefit obligation .
16.5 Actual return on assets . (53.1) Net amortization and deferral . Net pension (income) - I L.5 ;
$ (17.N The funded status of defined benefit pension plans at December 31 was as follows (millions of dollars):
l%
- Actuarial present value of:
Vested benefits obligation .
$ 187.1 Nontested benefits obligation . ,
;0.0 Accumulated benefit obligation .
207.1 Effects of anticipated future compensation levels and other events . 48 8 Projected benefit obligation 233.9 Plan' assets at fair value 418.2 Plan assets in excess of projected benefit obligation $ 162.3 The projected benefit obligation was determined using assumed weighted avem:e discount rates ranging from 8.5 to 10 percent and an assumed compensation increase ranging from 5 to 6.5 percent. Assumed weighted aserage long term rates of return on plan assets ranged from 9 to 10 percent. At December 31 the excess of plan assets over projected benefit obligation includes the following components (millions of dollars):
/W## ~ llnamortized prior senice cost S 0.2 >
Net unrecognized loss from past experience different from assumed and effects of changes in assumptions . (3.7) j l'namortized asset at January 1,1986. 148.2 i Prepaid pensi ,n cost . 17.6 Plan assets in excess of projected benefit obligation $ 162.3
~
j
]
The stn ight-line method of amortization is used for prior senice costs and unrecognized gains and losses. The ac .uarial present value of accumulated plan benefits as of January 1.1985 was $202.5 million. including
$183.4 milbon of sested benefits.These amounts were determined under the prior pension accounting method and anumed a rate of return of 8 percent. Net as.ets available for plan benefits as of January 1,1985 were $348.8 million.
48
i l For defined contribution plan rach participants contribution i matched in whole or part bs the rompans ! up to a maximum of 6 percent of the participant' < ompen,ation.For Umb thr e co t, totaled S3.3 million.The company and its sub idiaries al o prmide for < ertain health care and life in-urance benefit < to retired emplosee . Postretirement benefits are asailable to empimee il thes rea, h normal retirement age while working for the company. Hou chold charge the co t of retiree health care and life insurance benefit, to expen e wben benetit- ) are paid to retiree, or pay ments are made to in-orance companie and other thini partie . For 1986 and 1985. I the-e costs totaled $3.2 and $2.9 million. re pectisely.This pay-a you go method is in accordance with generally { accepted accounting principle .The Financial \ccounting Stamlard- Boant pre-ently i reconsidering thi method- I ology and esaluating the appropriate accounting for uch co ts mer the senice lises of employer .
- 16. IncomeTaxes f
Provisions for income taxes on continuing operations were a. follow (millions of dollars): l Iwth Iwa pmt i United States: Current $ 39.7 $23.9 s4t,a Deferred (37.4) 36.2 2n.o Foreign: Current 19.9 16.7 10.9 Deferred 1.7 0.8 n.7 Total income taxes 5 23.9 $77.6 802.o Income before income taxes from foreign operations was $87.6.$52 and $42.2 million in 1986,1985 and 1984. respectively. Effectise tax rates from continuing operations are analyzed as follows: IWth twG pml Statutory federalincome tax rate 46.0 % 16.0 % imes i Increase (decrease) in rate resulting from: Dividend 5 receised deduction applicable to term preferred stocks (12.9) (7.7) t1.46 Foreign tax ef fects (2.6) (1.5) IJ Chargeoff of acquired loans, net of purcha-e accounting tax effects (7.1) (l.1) Impact of new tax law for leasing (1986) and insurance (1984) bu3inesws (20.1) t tw Restructuring costs 7.6 Capital gains benefit (2.6) Other 6.5 (2.3) n.8 Effectise tax rate 14.8 % 3.5.4 nn to.n " ., In accordance with the company's accounting policy. provision for U.S. income taxes had not been made at December 31.1986 on $219.7 million of undistributed earnings of foreign subsidiaries and on $88.6 million of undistributed earnings of life insurance subsidiaries accumulated as policyholders',urplus under tax laws in effect prior to 1984. At December 31.1986.the company had net operating loss carryforwards of $114.1 million w hich expire in 2001. l l l
}U l _ _ _ _ _ _ _ _ _
; ku wimid Inte enntmemi. Ine. umi nubudinron ' '
l}- 3- : Deferred income tax provisions from continuing operations included the following (million* of dollard: ( _ _._, _. 14Hb l'ut t l'_Nii
; Leveraged lease transactions. net ' - $ 64.9 S47.1 $2tu l Insurance policy acquisition costs.. 8.0 11.1 )
lui
- General businen credit carryforwards. 5.9 2.2 7.6 i . Accelerated depreciation ~ 3.8 - 2.5
~
.u-Difference between cash and accrual basis 2.8
, Provision for state taxes 1.8 (8.5) 6.7 3.2
( 1.9i
)
Re.tructuring costs - (20.2) 1.9 (3.2i - Provision for credit losses (13.6) .1.2 (7.3; Insurance reserves .
- (0.I) (7.9) 2.0 Provision for pension (expenses) income 8.8 - I (0.7)
~ Accelerated income-leasing transactions 1.9 (4.2) -
; Reversal resulting from new tax law for leasing (1986)
' and insurance (1984) businesses . (42.3) er.O
' Net operating loss carryforwards (54.8)
. 0ther .
(2.6) (9.4) .2.2 Deferred income taxes $(35.7) $37.0 $26.7
' 17. . Earnings Per Common Share The computations of earnings per share were as follows (in millions.except per share data):
1986 1985 lulH Fully Fully Primary Fulh Dducid . Pnmarr Ddutsd Pnman Uduced Earnings: Income from continuing - operations , . $138.1 $138.1 - $154.5 $154.5 $141.7 $141.7
' income from discontinued operations 109.7 109.7 56.4 56.4 92.4 42.1 Extraordinary item . (39.2) - (39.2)
Preferred dividends . _ ' (14.2) (23.4) (25.1) Adjusted earnings . $194.4 $208.6 $ 187.5 $210.9 $209.0 $234: Aterage shares: Common . 43.1 43.1 51.0 - 51.0 49.6 49.6 Common equivalents . 0.3 5.3 0.4 8.6 0.4 9.7 Total ' 43.4 48.4 51.4 59.6 50.0 59.3 Earnings per common share: Continuing operations . $ 2.85 $ 2.85 $ 2.55 $ 2.59 $ 2.33 $ 2.39 Discontinued operations . 2.53 2.27 1.10 45 1.85 1.56 Extraordinary item . (.90) (.81) Total 5 4.48 5 4.31 $ 3.65 5 3.54 5 4.18 $ 3.95 Common share equivalents assume the exercise of stock options,if dilutive. Fully diluted earnings per common 1 hare computations also assume conversion of dilutive preferred stock into common equivalents. Preferred stock is considered dilutive if its dividend rate per common share assuming conversion is less than primary earnings per ! common share. l
. Earnings per common share from continuing operations in 1985 and 1984 are higher on a fully diluted basis than on a primary basis because the company's $6.25 preferred stock is dilutive to total camings but is anti-dilutise to earnings from continuing operations. - 50
1 ' I
- 18. Commitments and Contingent Liabilities l 1
The Financial Senices business is committed to sariou type of off holance hert guaranter . l nder the mn-i j significant form of such commitments. credit enhancement *. Financial Senice- had guaranteed payment of prim ipal : and interest on municipal bonds of approximately SM6 million at December 31. U186.The e guarantre, expire irom 1 1991 through 2005. Additionally. Financial Senice- has guaranteed rental payment, of $58 million on a leseraged lease transaction which expires at various date, through 1991. Financial Senices has ,ecurity intere t in underlying properties for these co nmitments.The probability of potential low on euch guarantees i, con idered remote.
- 19. Restructuring and Discontinued Operations On January 15.1987 the company announced a restructuring program that would result in a significantly troncer balance sheet and enhanced opportunity for greater future profitability. Aftertax costs of $152.7 million were charged to 1986 carnings for this program.The restructuring program consisted of $39.2 million aftertas charge, for the extinguishment of debt prior to scheduled maturity at all businesses (see note 9).$48.5 million of altertas restructuring costs impacting continuing operations and $65 million aftertax provision for loss on disposal of certain manufacturing operations.The pretax restructuring costs totaled $24.2 and $45.3 million at Financial Senice and
$1 manufacturing, respectively. For Financial Senices, restructuring costs consisted of writing-off residual goodw di associated with savings and loan associations acquired in 1985 and 1984 and charter costs and goodwill related to its national bank acquired in 1980. 51 manufacturing's restructuring program consists primarily of consolidation and closing of inefficient facilities and additional steps to lower costs and improve operating efficiencies.
The company sold itsTransportation business for $459 million in cash on December 31.1986 and its 11 merchandising business for approximately $628 million in notes and securities on December 31.1985.The company remains contingently liable under certain suniving representations and warranties made in the sale, agreement-most af which expire in 1987 and 1988. In 1986. management also decided to divest certain manufacturing opera-tio .a the commercial-industrial products segment. Results of these businesses are summarized in the tatement-of income as " Income from discontinued operations. net of income taxes" and were as follows (in million,h 14Rb 10Hi 1%i het sale
- and resenues:
Transportation $ 888.8 $ 810.1 8 non.2
\ manufacturing 196.1 215.0 217.2 llerchandising 3.302.3 5. ton.n Totat $ 1.084.9 $6.328.6 86.',111 income from discontinued operations:
Transportation: Income from operations, net of $2.3.$(19.1) and
$4.6 million of income taxes (benefits) in 1986, 1985 and 1984. respectively . $ 16.2 S 15.0 $ 17.I Gain on disposal. including $19.5 nuiHon of income tax benefits 155.0
\ manufacturing:
Income from operations, net of $5.7 $5.1 and $9.7 million of income taxes in 1986.1985 and 1984, respectively 3.5 (l.b) '.1 i Provision for loss on disposal. net of $13.2 million ofincome tax benefits (65.0)
\ merchandising:
Income from operations through September 30,1985, net of income taxes of $17.5 million 25.6 Income from operations, net of income taxes of $41.3 million tot Gain on disposal. including results during phase-out period. gain from pension plan resersion and special imentory adjustment made under sales agreement, nei of 3 income taxes 17.t l Total $ 109.7 s 5s~t g of. ;
)
1 31
]
3 Oles tb financial Statements 4,,nlinu,w; - y t he wh..ld lado.rnjohrow.i. lod. umi .*nhImrin i-
'.The effects of discontinued operations on earnings per common share were as follows:
l . Iwu, l'M1 , l'oit t
. Primary:
Tran*ponation: ,. Income from operations s .37 . S ~.29 8 .75 l' . Gain on di*posal ~3.5 7 l Manufacturing: 1 Income frohn operations - .08 (.03) .. I 1 f.ou on dispo al (1,39) i' - Merchandising: Income from operations _ .59 99 Gain on disposal . .34 Primary-discontinued operations . $ 2.53 $1.10 S 1.8 i y . Fully diluted:
- Transportation:
Income from operations . $ .34 -$.26 $ h3 Cain on disposal . 3.20 Manufacturing: Income from operations . .07 {.03) .09
- Loss on disposal . (1.34)
Merchandising: Income from operations . .._.. .43 .84 Gain on disposal . .29 L Fully diluted-discontinued operations $ 2.27 - $ .95 S I .56 . The net assets of the certain manufacturing operations divested and to be divested as of December 31.1086 and 1985 and the net assets of the discontinuedTransportation business as of December 31.1985 are carried at their his-torical cost in the balance sheet caption ' Net assets of discontinued operations l* and included (millions of dollarsh M ~_P81
. Assets Cash and securities . 5 0.7 $ 7.9 '
Finance receivables 242.6 Trade receivables 35.2 113.2 Imentories 63.6 64.5 Ilesenue-earning vehicles . 954.3 Properties and equipment 80.3 205.3 Cost of imestments in acquired businesses in excess of net tangil le assets at acquisition . 18.7 149.1 1 Other _ 5.9 22.9
. Total asets 204.4 1.7592 Liabilities - i Commercial paper, bank and other borrowings 1.5 405.6
-\ecounts payable and a~cerued liabilities . 103.0 231.1 Deferred income taxes . 0.1 177.8 Senior and senior subordinated debt (with original maturities over one year) 432,.0
' Totalliabilities 104.6 1.266.5 f
l Net anets of discontinued operations . $ 99.8 $ 4933 52'
Management's Report A To the Shareholders of Household International. Inc. Wnagement is responsible for the preparation. integrity and objectivity of the companf. financial -tatement .Surb j etatements are prepared from the companyi books and reconi, of tran. anion- reconled in the onlinary cour e ut bu ine and include amounts that are ha ed upon management'- best e,timates and judgment .all in conformity with generally accepted accounting principles. financial information included ehew here in the annual report }- conti* tent with that in the financial statements. The company maintains ystems of internal accounting control
- and procedures which management beliese-pnnide reasonable auurance that financial record, are reliable for preparing financial statements and maintaining accountability for a ets. Internal auditors evaluate the adequacy of and inse,tigate adherence to these contnel- and procedures. Independent auditors also .tudy and evaluate the companyi accounting sprems and related contnel-and perform te,ts of transactions and account balances in accordance with generally accepted auditing standanl .
This permits them to render an opinion as to the fairness of the company's financial statements. The Audit Committee of the Board of Directors is composed solely of outside directors. It meets periodically with independent auditors. internal auditors and management to discuss auditing and financial reporting matter . Both internal and independes aditors have unrestricted access to the Audit Committee without presence of company management to discuss results of their audit work and their opinions as to the adequacy of internal ! accounting controls and quality of financial reporting.
%nagement has long recognized its responsibility for conducting the Company's affairs in a manner which i-responsive to the interests of employees. shareholders. investors and society in general.This respwibility i, included in our statement of policy on ethical standards which provides that the company will fully comply with laws. rule and regulations of esery community in w hich it operates and adhere to the highest ethical standards. Officers. employee-and agents of the company are expected and directed to manage the business of the company with complete hone-t).
candor and integrity.
.G W aw 4. Mi D.C. Clark E. A.Wiegner G.N. tarson thmeman nfthe finned. Senwr l' ice l'reudent and Chiefl'inancial oprer Gnmp i iu e l%sdent.
1%udent und Chuef Execume offecer CuntndlerandLheel tornunima Ollher Independent Auditors' Report To the Shareholders of Household International,Inc. We base examined the balance sheets of Household International.Inc. (a Delaware corporation) and subsidiaries-as of December 31.1986 and 1985 and the related statements ofincome, changes in other shareholders' equity and changes in financial position for the years then ended.Our examinations were made in accordance with generally accepted auditing standards and, accordingly. included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.The statements ofincome. changes in other share-holderiequity and changes in financial position for year ended December 31.1984 were examined by other auditors whose repgrt thereon dated February 7.1985 expressed an unqualified opinion on those statements. In our opinion.the financial statements referred to above present fairly the financial position of Hou3ehohl International. Inc. and subsidiaries at December 31.1986 and 1985 and the results of their operations and the changes in their finaneirl position for the years then ended. in conformity with generally accepted accounting principles which.except for the change.with which we concur.in the method of accounting for pensions as described in note 15 to the financial statements,were applied on a consistent basis. Ye $1N: m Y, , i 4
.33
.-- r v
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\v .fluo tit aY?n;n;u td d iniernarvonal. ine ""d "id'""" 1%4hree Unn^th, f.nded ' 'i sr urherthnnfor.hnn dnta . . _ _
- I'mi~ lhn.e llanth,I na;; i arMinsed in ondlian< nidnllari U -
s, he learn <. Mar.' H a. . yor 1,orri va,
' Net Sales and Revenues
. Financial Services . l $530.0 $530.9 $506.5 )
$458.8 - ' $449.6 $ 400.3 $ 125.6 ' s w?j Manufacturing . 168.1 167.6 200.2 -)
178.1 145.7 160.0 196.1' Total net sales and revenues 181.8 6.98.1 Costs and Expenses 698.5 _ _706.7 1 637.2 . _545.!L560.3 622.0 . , 579.3 a
' Financial senices operating expenses , 285.2 257.9 253.5 217.0 215.8 189.0 214.6 Cost of manufactured products . 190.9 sold.- 119.2 122.8- 145.3 130.9 103.8 ! !6.2 139.9 Selling and administrate 131.8 o
expenses .. 83.5 74.1 69.8 69.3 75.5 65.1 66.6 Interest expense. , 187.0 62.6 177.5 165.9 150.I' 153.7 141.0 132.5 125.8 Restructuring costs '. 69.5 Total costs and expenses . 744.4 632.3 634.5 567.3 548.8 Income (loss) from continuing 511.3 ~ 553.6 ali.I
~
operations before income taxes ;. (46.3) 66.2 72.2 69.9 46.5 49.0
, income taxes (benefits) . 68.4 68.2
.,_{49.6) 18.5 28.2 26.8 4.1 l.3 26.1 30.1 income from continuing operations - ,.
3.3 47.7 44.0 43.1 37.4 36.7 42.3 38.1 Income from discontinued operations, net ofincome taxes . 87.6 11.9 8.8 1.4 12.9 l4.0 21.1 income before extraordinary ~8. .t ltem . 90.9- . 59.6 52.8 44.5 50.3 50.7 63.4 46.5
. Extraordinaryitem net ofincome tax benefits . (39.2)
_ Net income , $ 51.7 $ 59.6 $ 52.8 5 44.5 $ 50.3 $ 50.7 $ 63.4 ST5
- Eirnings Per Common Share Primary
' Continuing operations . $ .05 $ 1.05 $ 95 $ .80 $ .61 $ .60 $ 71 $ .63 Discontinued opaations 2.03 .27 .20 .03 .25 .27 .41 .l?
Extraordinaryitem , (.90) Primary $ 1.18 $ 1.32 $ 1.15 $ .83 Fully diluted
$ .86 $ .87 $ l.12 $ .80 Continuing operations - $ .13 - $ 1.01 $ .91 $ .80 $ .62 $ .62 $ .73 $ .62
- Discontinued operations 1.82 .25 .19 .01 .22 .23 .34 .16
. Extraordinary item; (.81)
Fully diluted. . $ 1.14 $ 1.26 ' $ l.10 $ .81 Income by Business
$ .84 $ .85 $ 1.07 $ 78 Continuing operations Financial Senices $ 24.2 $ 42.3 $ 38.4 - $ 36.2 $ 33.0 $ 34.3 $ 35.4 $ 10.1 Manufacturing . (11.5) 9.8 14.6 12.1 15.0 10.7 14.5 11.5
- Corporate (9.4) (4.4) (9.0) (5.2) (10.6) (8.3)
- Continuing operations . 3.3 (7.6) __(13.5) 47.7 44.0 43.1 37.4 36.7 42.3 38.1 Discontinued operations . 87.6 11.9 8.8 1.4 12.9 14.0 21.1 8.4 income before extraordinary item . 90.9 59.6 52.8 44.5 50.3 50.7 63.4 46.5 Extraordinaryitem
~
(39.2) Net income . $ 51.7 $ 59.6 $ 52.8 $ 44.5 $ 50.3 $ 50.7 $ 63.4 $ 4613 Earnings per enn mon share for continuing operations are higher on a fully diluted basis than on pntnary for certain quarte
$645 preferred stock is dilutise to total earnings. but is enti-dilutive to carnings Irorn continuing operations.
1 M.
Discussion of Fourth Quarter Activity Consolidated net sale, and resenues for the founh quarter 1986 increa3rd 17 percent mer 1987, tourth quarter. Growth in consumer and commercial receivables and increased eained premiums for ordinary life and annuin products re ulted in increa3rd fourth quarter revenue in the Financial Senii e busines.. \lanufacturini ale-were abme the 1985 fourth quarter primarily due to acquisition . Con olidated fourth quarter income from continuine operation, decrea-ed from the fourth quarter of 1985 primarily as I-inancial Sersires and \lanufacturingi tourth quarter result, were adsersely affected by re-tructuring co ts.See note 19 to the financial >tatements on page 31 for further di-cu ic,n of these costs. \lso impacting feurth quarter income was the Tax Reform Act of 1986 (the "Act").The \ct contained current year implication-which primarily affected Financial Services and the discontinued Transportation busine35. Financial Senicci income benefited by $25.8 million from recalculating earnings on leseraged leases as a reeu't oflower future tas rates. Transportation's income,which is reported as " Discontinued operations." was adsersely Jfected by approsi-mately $10 million as a result of the loss of imestment tax credits. Corporate expenses. including taxes. lor the fourth quaner 1986 were below the comparable prior year period as a resuh of lower administrate and intere-i expenses. Interest expense is below the prior year principally due to investment income related to the proceed, from the sale of the .\ merchandising business. During the fourth quarter of 1986 the company sold itsTransportation business and decided to divest certain manufacturing operations in the commercial-industrial products -eg-ment.On December 31.1985.the company sold its .ilerchandising business. All financial information for thr,e businesses bas been reclassified as " Discontinued operations" See note 19 to the financial statements on page .it for further discussion. 1 i l l l l l 1 l 3,5
a Boarc of Directors John C. lliegler Gonlon 1.0 ler Chairman (Retired). Chairman. Price ITitterhouse km> Canada Pipel.ines 1.imited (Certifiedpublic wrountants) (Tmnsmission ofnaturalgas) Donald C. Clark Arthur E. Rasmussen Chairman of the Huant and ChiefErecutiur Djficer Dinctor Gary G. Dillon George W. Hauch President and ChiefEsecuritv Offucer, OfCounsel. Household \ manufacturing.Inc. Chapman & Cutler (. Ittorners)
\lary Johnston Evans Dinctor Raymond C. Tower Pn'sident and ChiefOperating Officer. ?
Dennis C. l'ill F3fC Corpomtion I Chairman and ChiefEtecutice oficer. (Chemicah. machinerv and equipment) tiestmark International. inc. j (\ledicalequipment) \liller Cpton Dirrctor
- Joseph W. James 1 l'
Etecutier l' ice Pn.sident (Retin d> l ewis W. l.chr Chairman and ChiefEterutiur Officer (Retired).
\linnesota \liningand \lanufacturingComp<my (Diurrsified manuliteturing) 56
Committees of the lloard
- Audit Committee Finance Committee The Audit Committee resiew, the corporation internal The Finance Committee appnne- the i--nann of controls. financial reporting practices. annual financial ecurities bs thr corporation and it major -ub-idiarie-etatements and the examination made by internal and and review? dividend polin.~
I independent auditors.This committee n>n<ist* entirely of non-mariagemerit directors. ('ordon l'.t)-ler.Choirman John C. Ilie;:ler John C. Eliegler. Chairman Donald C. Clark MaryJohnston Esans Garv G. Dillon Det.'nis C. Fill Jodph W. James Gordon P.Unter Lewis W. Lehr George W. Hauch Compensation Committee Nominating Committee The Compensation Committee determines the salaries. The Nominating Committee recommend
- candidate for bonuses and stock options for senior management. board membership reviews board eize and composition.
This committee consists entirely of non-management recommends changes in board compen ation.and directors. reviews management succession and development plan . Miller Upton, Chairman Raymond C. Tower. Chairman Mary Johnston Evane Donald C. Clark i)ennis C. Fill Miller Upton Lewis W. Lehr flaymond C. Tower Executive Committee Arthur E.Rasmussen.as Chairman of the Eventisr During intervals between board meetings.the Executive Committee.is also an ex officio member of the \ndit. Committee.with some exceptions.may act for the board. Compensation, Finance and Nominating Committee,. Arthur E. Rasmussen. Chairman Donald C. Clark Gordon P. Oiler George W. Rauch Miller Upton l 1 r
ilanagernerit i } t
, .llousehold International flousehold Financial Sers ices
- 1)onald C. Clark
" Edwan! G. liar hhcid Chairman ofthe Honnt und ChiefEnecurite Ollicer l'reddent und Chiv(lh ectaire illhi er J. Richani llull Richan! II. licadire Senior I ice President and Genemi Counsel Erecurite I it e Prv~ident-Insumnce Jarne 1.. \lrCorrnick Donald G. l.ohmann Senior I ice I%ident-Government and Public:lflairs Et ecutive I ice 1%ident-Commen ini Finance Jame D. l'inkerton Glenn R. Sander. Senior I ice 1%ident- Administmtion and Secretarv Executive I ice 1%ident-Consumer Finnnve Edwani A.Wiegner Donald J. Stahl Senior I ice President and ChiefFinancial 0 Dicer SeniorI1ce 1%ident-ErJcing Gaylen N.1. arson Gmup Isee President and Contmiler ifausehold Stanufacturing Theodore K.Thornton Gary G. Dillon ; Iice I%ident and Treasurer 1%ident and Chh:{Exen,tive Ojp<vr Scott G. Arbuckle Erecurite 11ce President Terence J. ilcCarthy Exe<vtite Iice 1%ident Richard C.O borne Executive Iice President I i i l I I
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Comrmm and Preferred Stock information L (
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f ___L. - F Common Stock Preferred Stock [ . Ilou chold International. Inc. common ,tock i listed flou.+ehold International has three series o'f preferred .
- on the New York Stork Eschange and the Tlidwest stock: the $2.375.$2.50 and $6.25 series of rumulatise Stock Eschange,it al o has unlisted trading prisileges comertible voting preferred trock.The $6.25,eries ha, on the flo to'n. Pacific and Philadelphia *tock a mandatory redemption feature. All series are listed on eschange,. Call an i put options are traded on the the New York Stock Exchange.
\merican Stock Eschange.The common stock ticker ;
*ymbol is 111.
1986 /W : tlarket Pnce Ihndends tinrl,et 1% e Ihndend, tinrl et pnren are statedin d.dlars. Quaner High Lune Decland High Lme flerInn~I Common Stock ist 47 41 % $ .4525 37% 32! $ .4375 2nd 45 % 39 % .4525 39Vs 33*n .4375 3rd 51% 39% .%50 38% 32 % .1525 4th 52 % 46 % .4650 43h 33 .4525 l Total Dividends Declared $1.835 s 1.7F
$2.375 Convertible Preferred Stock Shares are convertible into common 1st 105 95 $ .59375 83 % 73 % $ .59375 at a rate of 2% shares of common 2nd 100 91 .59375 86 78t: .59375 for each share of preferred 3rd 112 92 % .59375 85h 76 4 .59375 4th 114 % 105 .59375 95 82 .59375 Total Dividends Declared $2.375 $2.375
$2.50 Convertible Preferred Stock Shares are comertible into common 1st 69% 63 % $ .625 55W 48h S .rd5 -
at a rate of 15 shares of common 2ad 67 62 .625 57 52 .625 for each share of preferred 3rd 74 % 60 % .625 58 % 49 .625 4th 77 % 70 % .625 63 % 40% .625 Total Dividends Declared $2.50 $2.50
$6.25 Convertible Preferred Stock Shares are comertible into common ist 93 % 83 % $1.5625 77% 68 4 S t.5625 at a rate of 1.923 shares of common 2nd 93 % 82 1.5625 31% 74 1.5625 for each share of preferred 3rd 103 % 84 1.5625 81 % 75 4 1.5625 4th 110 98 1.5625 87 % 76h 1.5625 Total Dividends Declared $6.25 $6.25 4 1986 l%
daNs Outstanding at December 31 Common . 40,574,513 51.326.5 lb i
$2.375 Preferred 192.114 291.691
$2.50 Preferred 245,672 388.233
$6.25 Preferred 1,619,492 3.451.844 Shareholders of Record at December 31 Common . I8.799 22.106
$2.57b Preferred 1,156 1.431 ,
$2.50 Preferred 1,210 1.505
$6.25 Preferred 1.883 2.258 Total 23,048 27.300 fu
Corporate Information - -I
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+ Household International.inc. . Disidend Reinvestment 2700 Sanders Road : For the comenience of,hareholderulisidend rnas he i *-
' Prospect Heights. Illinoii60070 automatic. ills reirneste d in Hou3ehold Interniitional (312) 564-3663 common etock. Inquiries regarding this ser ice should be directed to: . . ..1 i
Annual .\lecting - U"'.risTmst and Sasings Bank [ The annual shareholders' meeting will be held on Diudemi Heime tment Wednesdm. May 13.1987 at 9:30 a.m. E'E U" A3309 at flouseh'old l' international's headquarters. Chicago. Ul.ima, Wm
- Sh$reholder Service I"****"'I"9"I'I'"
Shareholder address changes and inquiries regardin"a wcunty analysts. shareholders and iryvestment shareholder accounts. dividend payments and stock pmfessi nals should direct busmess mqumes to the transfers should be directed to the Stock Transfer and Director of Investor Palations at corporate headquarter >. Dm. .dend Disburs.ing Agent: or call (312) 564-6053.
'g' Stock Transfer DivisionHarrisTrust and favings Bank Form 10-K 311 West Monroe Street Copies of the Form 10-K Annual Report to the Chicago. Illinois 60606 Securities and Exchange Comminion.as well as the 1986 Financial and Statistical Review. may be obtained from the company's investor RelationiDepartmene.
.In New York. deliver stock certificates for transfer to:
HarrisTrust Company of New brk Stock Transfer Division
, '110 William Street
.New %rk. New %rk 10038 '
Those forwarding stock certificates are advised to use registered mail. J i. 4 i
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2I l i d 5' 1 h l i 1
-Trademarks ().
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-tmerica's Family HanLT -tildon."-Eljer? "Glenco."-Ilal cy Taylor? *i
%ntsman? -selkirkT -star? -5tructo" and -Thermon" are trademark. f/
and .enice marks of Household internationalInc. d 60'
s HSUSEH@LD ' INTERNATI@NAL Second Quarter Report , June 30,1987 I J D sjubstantialincreases i u in revenues, income from _ continuing operations and fully diluted earnings per share were achieved for both the second quarter ~ r and first half. IT T
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_,ousehold Bank brings -d
" America's Family Bank" _ g concept to Ohio with
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opening of fourColumbus- ' area offices. I.# - 1 5_5
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ousehold International is leaner, sharper and more focused for growth than - at any time in recent years, CEO Clark tells shareholders at annual meeting. c
hinanci:1 Highlights o Our Shs Household International. Inc. and Subsidannes Three m*>nths ended June so, Perer n t Sax m*>nths e nded June .h Ynuit- {. pr r,.e n g _ in millions except po-r share data. 1987 I9MI Change In: 19M Change L oC' W* rn Net Sales and Revenues: quarter. n Financial Services .. $604.8 $506.5 19% $1,124.9 8 965.3 17% from c"r.t
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Manufacturing 226.1
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200.2 13 431.5 378.6 14 earnine ; Total 5834.9 S706.7 18 % $1,556.4 $1.343.9 16 % our ! l
=== == ,l ple bed tl i Income:
Financial Services - $ 43.8 8 38.4 14 % s 84.2 8 74.6 13% 19"T"*"# ! Manufacturing . 15.8 14.6 8 28.6 26.7 7 PT { Corporate . "*""i (5.1) (9.0) (43) (9.8) (14.2) (31) Continuing operations . 54.5 44.0 24 103.0 87.1 18 d' * "P *' Discontinued operations . 8.8
"' 'I 10.2 Net income , "
S 54.5 S 52.8 3% S 103.0 S 97.3 6% to purcha mately $6 Earnings PerCommon Share: { Householt Primary l:nited 8t Continuing operaticns . $ 1.36 S .95 43 % $ 2.50 S 1.75 43 % g, Discontinued operations . .20 .23 with aU il Total. s 1.36 S 1.15 18 % s 2.50 S 1.98 26 % sumer pn
. Householi Fully Diluted 15 pereen Continuing operations . $ 1.30 S .91 43% S 2.40 S 1.71 40% division fi Discontinued operations . .19 .20 divestitur Total. S 1.30 S 1.10 18% $ 2.40 S 1.91 26% TheI companyi Average Common with the (
Shares Outstanding recent ani Primary . 37.9 4 3.0~ (12)% 39.0 44.9 (13)% ! secutive t Fully diluted _ 41.7 47.2 (12)% 42.9 50.9 (16)% The Board representi shares out C orporate Pronle "'"" patton m Household International is solidly based in six business segments which serve ' Sincerely, broad, expanding markets. House %6d Financial Serv 6ces is a major provider of consumer finance and banking services, commercial financial services, and ' personal insurance products. Household Manufacturing manufactures and dis-Donald C. tributes barbecue grills, vacuumware, hand tools and other products for the Chairman consumer market, building products used in residential, commercial and industrial Chief Exe-construction, and food service equipment and specialty products for industrial and commercial markets. August 3
@ Our Sharsholdsrs: -
Results for the second quarter of 1967 showed continued growth in revenues. . income and earnings per common share compared with the prior year. In the quarter, net sales and revenues increased 18 percer.t to $830.9 million. Income from continuing operations grew 24 percent to $54.5 million. Fully diluted earnings per share reached $1.30. an 18 percent increase over 1986. Our Financial Services and Manufacturing businesses both reported improved results over the prior year second quarter and first half. We are particularly
. pleased that income from two businesses in the second quarter and first half of l 1987 exceeded the earnings from three businesses in the same periods a year ago. ;
Improved Financial Services results for the quarter and first half were due to excellent performances in the consumer and life insurance segments. Recent developments in our consumer barMag and bankcard operations include the June introduction of our " America's Family Bank" concept in the Ohio branches of l Household Bank, the Ju!y purchase of one credit card portfolio and an agreement I to purchase a second portfolio.These portfolio acquisitions, totaling approxi-mately $645 million, complement our existing customer base and will place Household Financial Services among the top 15 issuers of bank cards in the p' ~; { United States. Manufacturing sales and income also improved in the quarter and first half , with all three segments reporting increased sales and with the building and con-sumer products segments reporting higher income. We remain confident that Household Manufacturing will generate a return on equity well in excess of 15 percent for 1987. In early August we concluded the sale of our Gear Products division for about $25 million.This was one of the operations targeted for , divestiture at the end of 1986. - The Board of Directors in July increased the annual cash dividend on the company's common stock to $2.00 from S1.86.The increase becomes effective D,~ with the dividend to be paid October 15.This increase in the dividend rate reflects recent and expected strong earnings performance and represents the 35th con-secutive year in which dividends paid on Household common stock have increased. The Board also authorized the repurchase of up to 2 million common shares, representing approximately 5 percent of the 41 million common and equivalent shares outstanding. I would like to express my appreciation to stockholders for their partici-pation in the annual meeting. Sincerely, , ( Donald C. Clark Chairman of the Board Chief Executive Officer August 3,1987 4 A
[ B o.in s nw.e
- - Houwhold international. Inc. and Subsidiaries l Three months endedJune :10.
Ini a Au amounts are stated in minions;fdottara 1987 tyss im Not Sales and Revenues income Net Sale: ; Financial Services 1 Consumer . $372.2 $307.4 $21.5 818.9 s 727.{ Commercial 54A 44.2 13.8 13.4 95. Individual life insurance . ~ ~ 177A 154.9 85 6.1 302.
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Total Financial Services . . _ _ _ 6043 __. 5UU _ . _ _ _ 43A _ 38 4 1,124. 1 Building products . 97.1 85.3 6.2 5.3 183.l 1 Consumer products . 76.7 64.5 4.1 3.3 153.! Commercial-Industrial products . 523 50.4 5.5 55 94. Total Manufacturing . 226.1 200.2 15A 14.3 431. Total.. $830A $706.7 $1,556 corporate , Administrative . (5.4) (6.7) Unallocated interest . (3.0) (6.n Unallocated taxes . 33 4.4 Total Corporaf.e . (5.1) (9.0) Income from continuing operations . 545 44.0 income from discontinued operations . 8.8 Total.. S54.5 $52.8
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See notes to condensed)inancial statements.' l
- S ummaryof ResuM. respectively. Fully diluted earnings per common share increased to $1.30 Net sales and revenues rose 18 percent for the second quarter and 82.40 for to $830.9 million for the second quar- the first six months of 1987, reaching ter compared with S706.7 million in record levels for each period.The per the same period a year ago. For the share increases were due to higher first six months revenues increased earnings and substantially fewer 16 percent. Financial Services and average shares outstanding.These j Manufacturingboth contributed to factors more than offset absence of j those increases. Compared with 1986, income from operations sold or j j
I income from continuing operations discontinued in 1986. increased 24 and 18 percent for the ] j three and six month periods ending Financ6al Serv 6ces Susinese i June 30,1987, respectively. Net income Revenues from Financial Services j for the second quarter and first half increased 19 percent in the second of 1987 was $54.5 and $103 million, quarter and 17 percent in the first E L
it ana :fo, six months ended June .to, down from the 1986 level of 2.8 per- . Im im 19#7 im 18"r im cent. The decline is attributable to incomy Net Sales and Flevenues income increased productivity as the expense 321.5 918 9 s 727.7 S 598.7 $ 45.4 S 38.8 base is supporting greater amounts ( l 13.8 13.4 95.0 85.2 24.7 24.5 of receivables. 8.5 6.1 302.2 281.4 14.1 11.3 D'tring the six months ended ' 43.8 1,124.9 965.3 84.2 74.6 38.4 June 30,1987, consumer receivables . increased 16 percent to $8.9 biilion 6.2 5.3 183.5 160.4 10.4 8.8 from S7.7 billion at year end. Real 4.1 3,g 153.7 131.6 8.8 7.9 estate secured loans increased to S 60 percent of the portfolio compared . 5.5 5.5 94.3 86.6 9.4 10.0
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with 56 percent at year end. Consumer 15,8 14.6 4313 378.6 28A 26.7 # banking receivables increased 27 per-81 % OI'[43 9 . cent from year end to $3.3 billion, 86 percent of which are secured by first or second mortgages. Variable (5.4) (6.7) (10.4) (12.3) rate products remamed essentially (3.0) (6.7) (5.5) (6.1) constant with year end. 3.3 4.4 6.1 4.2 Consumer segment revenues , (5.1) (9.0) (9.8) (14.2) increased by 21 and 22 percent in 54.5 44.0 1034 87.1 the second quarter and the first six 8.8 10.2 months, respectively, over 1986. Aver-E475 ~ 552.8 $103.0 $ 97.3 age consumer receivables for the first six months increased 35 percent to
$8.2 billion comt,ared with $6.1 billion a year ago.This exceeded the general earnings six months compared with a year ago. growth of conaumer credit in Finan-led to 31.30 Higher revenues were generated by cial Services' markets, reflecting i 82.40 for substantial increases in consumer and market share gains for both consumer l7, reaching commercial receivables and continuing finance and consumer banking opera- .d.The per demand for universallife products. tions. Consumer segment income o higher Second quarter income increased increased 14 percent to S21.5 million fewer 14 percent to $43.8 million compared for the second quarter and 17 percent
- 4. These with S38.4 million in 1986. Income for to S45.4 million for the first six months
>sence of the first six months was $84.2 million, over comparable 1986 periods.
dd or up 13 percent over 1986. Consumer lending interest rate Net finance receivables reached spreads for the first six months
$10.9 billion at June 30,1987, an declined to 7.7 percent compared with increase of 16 percent over year end. 9 percent in 1986.The decline reflects ervices Operating expenses for the first six a continuing shift to secured products second months as a percentage of total aver- which typically are made at narrower he first age receivables were 2.5 percent, spreads reflecting lower costs of D
l servicing such loans and lower loss increases in consumer bankruptcy in rates.0verall cost of funds averaged the United States which presently is 8 percent, which compared favorably at historically high levels. Financial to 8.6 percent in 1986. Services
- increase in bankruptcy losses Consumer operating expenses for is below nationwide trends due to the first six months were $242.9 mil- tight lending standards and other lion compared with $207.9 million in efforts made to reduce exposure to 1986. Productivity improved in the such losses. Increased chargeoffs also first six months of 1987 with opera- reflect an increased proportion of the ting expenses as a percentage of portfolio in credit cards which tradi-average consumer receivables decreas- tionally have much higher loss rates ing to 3 percent from 3.5 percent a than secured portfolios. Losses on year ago. credit card receivables remain sub-Credit quality in the consumer stantially below industry norms, segment remained good with two Revenues from the commercial l
months and over delinquency meas- segment increased 24 percent in the ured on a recency of payment basis second quarter and 12 percent for the dropping to 1.66 percent compared first six months from 1986. Average with 1.97 percent a year ago.The commercial receivables in the first six provision for credit losses through months increased to $2 billion com-June 30,1987 totaled $55.7 million pared with $1.5 billion a year ago. compared with S43.5 million in 1986. Income increased 3 percent in the The increase over the 1986 level second quarter and 1 percent for the results from the planned portfolio first six months over the prior year j growth. In 1986 the provision was periods. Interest rate spreads declined increased by approximately $12.5 mil- to 3.1 percent compared with 6 per-lion and income taxes were decreased cent in 1986 primarily as a result of a similar amount for the tax effects of a decline in pretax yield on the lever-purchase accounting entries related to aged leasing portf.>lio.The decline the chargeoffs of loans made by sav- resulted from rebooking the leveraged ings and loan associations prior to leasing portfolio (in the fourth quarter their acquisition by the company, of 1986) using the lower income tax f Net chargeoffs of consumer rates established in the Tax Reform receivables were $21.3 million,or Act of 1986 (the *Act"). Substantially
.25 percent of average consumer offsetting this decline in yield is a receivables during the second quarter lower tax provision associated with I
and $40.2 million, or .49 percent for the Act.The interest rate spread decline also was impacted by intro-the first six months.These levels compare with .20 and .41 percent duction of new products with lower in the second quarter and first six margins.The cost of funds for the months of 1986, respectively.The first six months averaged 9.2 percent increase results primarily from compared with 9.8 percent in 1986 0 :
cpley in reflecting generally bwer borrowing Sales in the building products gntly is rates on new business. segment increased 14 percent over lancial Revenues from the individual 1986 in both the second querter and Scy losses life insurance serment for the second first six months. Increases were due e to quarter and first six months increased to a strong housing market and Sher over comparable 1966 periods due to new product introductions. Income tre to continuing demand for the company's increased to S6.2 million for the sec-offs also universal life products and despite a ond quarter and to 810.4 million for s of the declining emphasis on deferred the first six months of 1987. Eljer b tradi. annuity products. Income increased benefitted from strong sales of 2 rates 39 percent for the second quarter and china and iron plumbingware and an
- s on 25 percent for the first six months increased number of distributors.
Bsub. over the prior year. Investment income Selkirk's sales for the first six months es. for the first six months increased increased over the 1986 level princi-nreial 34 percent over the 1986 level to paily due to stronger Canadian sales . in the S85.9 million.This increase was due of fireplaces, chimneys and gas vents 1 for the to higher capital gains and a larger as well as favorable exchange rates. 9 Grage investment base resulting from the Sales in the consumer products first six year-to-year increase in universal segment increased 19 percent in the , com. life insurance and annuity business. second quarter and 17 percent for the tgo. Yield on insurance investments first six months compared with 1986. the and securities was 11.4 percent in the For the first half of 1987, income was ?or the first six months of 1987 compared S8.8 million on sales of S153.7 million. > year with 11.5 percent in the comparable Second quarter income increased by declined prior year period. These yields include 8 percent over the same period of 3 per. capital gains of 821.8 and $14.6 million 1986 primarily due to improvement at sit of in 1987 and 1986, respectively. GC-Thorsen. Higher sales of electronic & lever. products and tools contributed to !!ine Manutecturing Business increased income at GC Thorsen. Scragt d Household Manufacturing's sales Sales and income of gas barbecue ) quarter increased 13 percent to $226.1 million grills increased over 1986 due to a e tax in the second quarter and 14 per- gain in market share and introduc-aform cent to S431.5 million for the first tion of the new Thermos brand gas atially six months over the comparable prior barbecue grill. Osa year periods due to sales increases in Sales in the commercial industrial with all segments. Income from continuing products segment increased 4 and ed operations increased 8 percent in the 9 percent for the second quarter and atro- second quarter tad 7 percent for the first six months, respectively, over the lower first six months compared with a year prior year periods. Results of Glenco-the ago.The increase in income was due to Star and Booth, Inc. acquired in late percent improved results in the building prod- 1986 and early 1987 respectively, con-1986 ucts and consumer products segments. tributed to the 1987 sales improvement. D l 1 s
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, Hm j Second quarter income of 85.5 million was even with the comparable 1986 ul
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period.~while income for the first six months of 1987 declined 6 percent to F,..x
$9.4 million.The six month income decline was primarily attributable to lower earnings at Scotsman resulting "* !
from higher warranty expenses and - J lower distributor and consumer sales. II" !> em m For the second quarter corporate .Ii Sel expenses declined 43 percent U primarily as a result ofinvestment Int,i income earned on the proceeds of . the divested Transportation business. Tot
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Corporate expenses declined in the 8 first six months of 1987 mainly due
-N to a 15 percent decrease in adt.tinis-trative expenses as a result of cost N'
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reduction efforts. o In" S W W Events In July 1987, Financial Services pur-chased S325 million of credit card receivables and agreed to purchase an additional S320 million portfolio. - Een In early August, Household Prin Manufacturing sold the Gear Products C"" division for approximately $25 million. UI* Tot; Fully Pon M Dim Tot a k4
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)
ondensed Statements ofincome liousehuld International. Inc. arid Subsidiaries
- All amount; other than Thver months ended Sa m<entiss ended per share data are stated . lune Jn, JuneJ4, in mnllions tofdallare, 1987 1986 1987 ts.ts Not seios and Revenues Financial Services . 8604.8 8506.5 S1,124.9 8 965.3 Manufacturing . 226.1 200.2
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4313 378.6 Total net sales and revenues . ~83d[9 506.i 1,556.4 1.343.9 Costs and Erpenses Financial services operating expenses 297.3 253.5 5413 470.5 Cost of manufactured products sold . 167.3 145.3 3183 276.2 Selling and administrative expenses . 78.8 69.8 152.2 139.1 Interest expense . 204.9 165.9 3964 316.0 Total costs and expenses 744J 634.5 1,406A
.4 1.201.8 income from continuing operations before income taeos . 84.6 72.2 148.4 I42.1 Income taxes . 30.1 28.2 45.4 55.0 -
income from r!&h.; operatione 543 44.0 1034 87.1 Income from discontinued - operations, net ofincome taxes . 8.8 ~ ' 10.2 Not income , 3 544 S 52.8 s 1034 8 97.3 Eemings Per Common Shore Primary Continuing operations . 8 IJ6 S .95 8 2.50 S 1.75 Discontinued operations . .20 .23 Total. s 136 S 1.15 s 230 S 1.98 Fully Diluted Continuing operations . 81J0 S .91 8 2.40 6 1.71 Discontinued operations . .19 .20 Total. 8 1J0 S 1.10 $ 2.40 S 1.91 See notes to condenardfinancrat statenwnts. G
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hndensed Balanco Sheets ilouwhold internati .nal. Inc. and Sub*idinries
$it j
.it..y 1
Allamhuntt are ntated Ju n .in. (we .n. 3 1
-in enillions nf dollare, von 7 ipu Issets Cash l Cash. $ 68.1 8 77.0 cash I Investments in 8ecurities . 1.975.5 2.465.1 Inc..n k Finance receivables . 10,683.8 9.400.4 A11,i , .
Trade receivables . 184.4 126.8 P2i Inventories 151.3 154.7 pot Fropu ties and equipment . 314.4 308.3 De Insurance polley acquisition costs . 167.4 160.2 Trt Other. 494.7 414.3 Ins ' Net assets of discontinued operations . _ 93.9 99.8 ac. Total assets . .. $14.333.5 S13.206.6 Ot'
- - . - - . - .:====
l Cash unblihies and Shareholders' Equity Cash Commercial paper, bank and other borrowings . $ 3,355A S 2.800.6 Ini Customer banking deposits . 2,299A 2.104.5 Ot Accounts payable and accrued liabilities .. 915.2 911.7 Cash-
' Insurance policy and claim reserves . 1,434.5 1.275.0 Divis Cash
. Senior and senior subordinated debt (with original maturities over one year) . 5,183.4 4,872.2 Irnes 13.187.9 11,964.0 Fina Total liabilities .
Prop Convertible preferred stock subject to 81A 81.0 Secu mandatory redemption . ~ Other shareholders' equity: Note 2.3 2.4 Cai.h Convertible preferred stock . Common stock . 52.3 , . I 2.1 Orh Additional paid-in capital . 227.1 220.8 ' Pnat;i Retained earnings . 1,583/.i 1,521.5 ./Am y (11fr.1) , '/ I?ust Foreign currency translation adjustments . (96J) Cosnmon stock in treasury . (707.7) ( 5 2 s.11 ,, / foua
# ~ ,1.3 Retir Unrealized gain on marketable equity securities . . 3.9 Total other shareholders' equity . 1,064.6 1.161.6 Rgd '
$14,333.5 S13.206.0 Repu Total liabilities and shareholders' equity . = = = = g.
CSN
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G Sn notee to rundenndinnannat statemente. < l l l
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@ondensed Statements tf Changes in Financial Position Household International. Inc. atid Sub*idiaries Are, til, s,s ,,..... s , a,d. .I
. All nmeunta are stated sin Jon.e .m.
on mdliane enfdollars tw 4.n Ceeh at January 1.. S 77.0 8 35.6 5 77.0 . Cash Prov6ded by Operatione and Retamed in the Business 2,465.1 Income from continuing operations . 103.0 87.1 9,400.4 Add (deduct) items not affecting cash: 1 126.3 Provision for credit losses on finance receivables . 58.8 44.9 154.7 Policyholders' future benefits 177.1 198.3 l . 308.3 .
' Depreciation and amortization of tangible assets 23.6 19.9 160.2 Trade receivables .
(57.8) (34.9) l 414.3 Inventories . 3.4 3.4 99.8 Accounts payable and accrued liabilities . 58.4 (53.6) 13,206.6 Other. (71.1) 4.9 Cash provided by continuing operations . Cash provided by discontinued operations:
] 295.s _ 270.0 2.800.6 Income from discontinued operations .
10.2 2,104.5 Other, net . 36.3 - 911.7 Cash provided by discontinued operations . 46.5 1,275.0 Dividends to shanholders . (41.0) (47.4) Cash provided by operations and retained in the business . 254.8 269.1 4,872.2- Invoetmente in Operatione 31,964.0 Finance receivables, net of collections . (ts4483) (1,127.8) . Properties and equipment, net of disposa!s . 81.0 Securities, net . (25.5) (24.3) , ] 489.s 40.2 Note receivable-sale of discontinued operation . 520.0 2.4 Cash (decrease) from investments in operations , (984.2) (591.9) 52.1 Cash (decrease) before financing and capital transactions . (729.6) _ (322.8) 22G.8 Finanoire and CapitalDanesceone 1,521.5 Commerelat paper, bank and other borrowings . 529.2 196.1 (110.4) Customer banking deposits . 162.9 443.6
. (522.1) Issuance of senior and senior subordinated debt . 841.8 595.1 3.3 Retirement of senior and senior subordinated debt . (627.4) (324.61 l'IIII6 Repurchase of common stock .
(186.8) (406.9) f.1206.6 Repurchase of preferred stock .
** (168.0) '
I Cash increase from financing and capital transactions . 720.7 _335.3 . . _ Ceeh at June 30 . S 68.1 S 48.1 [/ _~__..-_t . r*, .1
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S*r notes b.vndensedfinancial statements. Q f p' 1 i'
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otos to Condensed Financial Staternsnts ' 'l ^ ' # ' munehold International. :ne. and subsidiaries .i: l 'l -
- 1. summary of sientacent Acccr w2ng Mici.af
~
- I '
Accounting policies used in the prepaiadon of the ojuarterly sdensed ' runneial x statements are consistent with accounti g policies d+$cribed in tN*. notN to 7 i s a ,
'I financial statements centained ir the company's 1986 Annual Repo6 ty.Re x- Q #
l holders.The compe.ny's businesses are subject to seasonal facto a and, a^ c wrd.
'ingly, quarterly results are not necessarily indicative of results lor the entire year
- 2. Anonce Maceivables ' '
~ Finance receivables consisted of the following:
hne 30. 'Dec. n. l Imillions ofdollars)
. 198r 1986
+.-- - . . ,
Consumer: ^
- Real estate secured . s 5,396 7- $4,357.6 Retail installment and bankcaro ,, 1.s05A ^ . 1.443.5
'm (l
' Other .' , w7.s : 1,913.4 f
' Allowance for credit losses . "
(MA)} (185.2) ; Unearned credit insurance pre:;ninms re.d ! E claim reserves .. -4 f.is.1 - (98.6) , Consumer finance receivables, net , e,s33.7 - 7,ag
- Commercial:
~
Term preferred stocks . .-.. 067.2 540 f Leveraged leases . ... ~ '414.2 4364 \ Real estate secured 442.7 36 i ~ 3 Equipment loans and leases ., . see.f ( !'s.4 Other . . . 6.-. 307.1 /d8A Allowance for credit losses ..._. . . - . . . _f (29.9) _. _ , .C._74) < i Commercial finance receivables, net . 2,250.1 < -i,939.7. ' ^ Finance receivables, net . . $10,ssas 3 6) 00.4
= =m m
- 3. inventories Inventories consisted of the following:
hu so. Dre.in, a :i (millions ofdollare) lost to, e Finished goods . _. S 7s4 SV2 y Work in process . ;M.i ~ " 23.7 MS q Raw materialt. .
- Total inventories .
48,2 sista
-- $154.7
_ m=_ '
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- 4. Income Tamee ,
i Effective tax rates for the six months ended June 30, .5987 and 1986 of 30.6 and W 38.7 percent, respectively, differ from the statutcry fed >:ral kcome tax rate because of the effects of(a) renegotiation in 1987 of certain !everv.;ed 3 0
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cable to term peferred stocks and !.d) s tate and local income taxes. net of 3 2 to notes., Share- g . %- federal tax benefit.. Ed,1cdrdh - he entlr ar. 5. Foreign Currencyit!wulethm ArJjustments
.g% * ! ?. } Weakening of the U.S. dour nd hereases in the Cadenn and United Kir.gdom Qj'y exchanga rates were the ppneipal factors causing cum.th.t!ve foreiga cur.
cj j ' r?ncy tri.nsiadon aQustraents to dec: e ace S19.6 millig lifS96.8 million from 60.f ; hd31. Dlcember 31,19tfS to' !ane 30,198'.. At the comparyinter.ds to maintain its
- D?- ' , investments in foreign operations Indefinitely, ylti r.nh teallZation of these
~<
translatk,n adjust %ents is ilt:certain. 19 S4.3573 h D' 1,,44N ; 4
- 6. Eamhys Per Commen Share -
O. ~ '13 /33 , Computat!ons of earningt per star were as follows: h) {If$.2j' , Six months endedJune so. 1987 sese
,,._. . . _. - . l
.9 , ,
Fully - Fully . Ls) ',, . ".J in El>s. . lin millions. e1.;pt ver n a. mtal
. . . _ 'v.ary P
Deluted Y1ny Duluted .\
' j30.7 ; Earnirigs:
LT .
, Income from coebr.oing g '540.0 T pestions . SW3D S103.0 $07.1 887.1 1
k $36.4 nc ire hm houtM 7 '
' perattom M 102 381.5 '
O 330.4 Preferred dividends . ' G.8) (8.6) a.1 308.6 ,> Adiust&arnings . $ 97.5 $m3.0 S38.7 897.3
=.= x -g- '--
g x Average shares:
- 0. : 1,969.7 3 Common . 38.7 38.7 44.6 44.6
~} O. S9 90.4 Commen equinients . ..-.. 0.3 4.2 0.3 6.3 = w- -
.- Totai. < 39.0 42.9 44.9 50.9 i
Ehrn.ngs per e annon chare:
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Ccnthdng overations . $ 2.50 8 2.40 $1.75 S1.71 4 p.f } ' 'ose.si/ '
% >m.tmuec opera'. ions . .23 .20 9L - ' ' 388 8
- tal . . ;..
8 2.50 8 2.40 $1.98 S1.91 ; f ' S 83.3 ' ' l
- 28.5 , ,
[ Common abate equivalents astume exemise of stock options. lf dilutive. Fully diluted ; 6 42.9 tarrdngs pcr share computations also at:pame conmrsion of dilutive preferred stock 0,1
= =
S154.7 Iqto common equin'ents. Pteletwbtoch is cana.kfemd dihative if its dividend rate ptr common shue assumitg conversien 19 J(ss thsn primary earnings per share. i s s )bf 30.6 and . ?. Busmsa W h , fez. rate The consumer and commercial seginelito af Financial Services earned $7482 pd ', i < ud $629.5 million of interest income and incurred ii3831, and $302.4 million of j twerest expense f;r the six rnonths ended .3une 30,1997 and 1986. respectively. i h '\. L , E y+ , e j s ? y ,
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.g "U-:E::d For Growth"is Annual Meeting Theme I '
" Moving through the many changes business, which finances revolving t i.
made in this corpore. tion since credit accounts for retail vendors of he l December of 1985, we have emerged consumer products. to a receivables ye l leanc, sharper and more focused than. base of S2.5 billion by 1990. p, at any time in the recent past." a Developing new Alexander Hamilton rt. ; With this comment Donald C. life insurance products which can be th Clark, chairman and chief executive merchandised through independent th officer, set the theme for his address insurance agents or through our to the annual meeting of stockholders consumer branch facilities- ho on May 13 at company headquarters.
- Maintaining the excellent growth Discussing Household's growth rate of our commercial finance I plans fcr the rest of the decade, he activities. ar. I bu reviewed the major economic trends "From growth programs such as wi i on which our long term strategic these," Mr. Clark said,"we expect to on planning is based, saying,"The mar. build by 1990 an asset base of $20 bil-mi ketplace environment created by these lion or more for Household Financial th.
trends offers great opportunities Services, which would about double the th, for Household" size ofits assets at the end of 19W an Household Finenoiel Services Household Manutecturing th! Speaking of the growth expected Turning to Household Manufacturing, for for Household Financial Services, Mr. Clark pointed out that a high tw Mr. Clark identified these goals: percentage of cur products fit hand the a Reshaping the distribution system in glove with consumer desires for bu within Household Finance Corpora- home-oriented products which provide tion to improve service to customers convenience and high quality, and Ib while reducing operating costs our productsin the building and for relative to revenues.This involves commercial-industrial segments ym shifting from present offices to fit niche markets which have solid
" retail" oriented Household Financial growth potential.
Centers of the type successfully Making the point that new product tested in Tennessee last year. development is essential to market a Expanding Household Bank by leadership, Mr. Clark said,"It's exterding to other states our con- because of our past product develop-cept of " America's Family Bank" ment activity that 88 percent of our introduced in Maryland. (See products rank first, second or third in adjoining story) their markets.That is a position we a Building our credit card business to intend to maintain." a base of1.3 million card holders and 81 billion in receivables. (Two recent Our EspecteWone acquisitions have put us close to Looking beyond 1987 to the end of these goals.) the decade Mr. Clark said one goal g a Expanding our merchant finance was to see an extension of two p isi-
___ _ _ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~ I
@ousehold Bank Expands into Ohio ig , tive performance trends Household
" America's Family Bank" came to Ohio is of has established. "Over the last five in June when Household Bank f.s.b.,
ales years," he said, "our average earnings opened four Columbus-area offices per share growth and our average to provide Household's personalized Iton return on equity have both exceeded banking services. a be that of the S&P 500. We want to see The " family bank" concept empha-ent those trends continue." sizes services for individuals and Concluding his remarks to share- families: no corporate or commercial holders, Mr Clark said: accounts are accepted. Household i
"We are focused for growth.We Bank offers a broad line of products, are now concentrating on two major an innovative application procedure, businesses-not three or four-and extended hours, and a retail-oriented ias within these we are concentrating bank decor designed to make cus-Lo on six major segments. By directing tomers feel comfortable and at ease.
bil- management's time and talent to The concept wasintroduced by tai these six segments, we can optimize Household Bank in Baltimore, Md,in le the the growth potential for each of them. 1986 and received excellent accept- , 3" and for the corporation as a whole. ance.The move into Ohio is the first "An indication of the benefit of in a series of expansions which even-this approach is that our projections tually will make " America's Family I Ing. for 1987 call for total income from our Bank" a nationwide service, two existing businesses to be greater a >d than totalincome from the four businesses we had in 1985. svide "It is this kind of focusing that I believe will drive us to the high per-formance levels I expect to report to you in the coming years" uct t
>p.
ur Steve Daigle, branch manager, greets d in customer at opening of
- America's Family lc Bank *in Columbus, Ohio.
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.h f:- SECURITIES AND EXCHANGE COMMISSION
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i Weehogton, D.C. 20549 i Form 10-Q Ouarterty Report Under Sectiori 13 or 15(d) OY
?q J of the Secunties Exchenge Act of 1934 a
d . por O.rier anded w 30,19e7 Commi ion rii. uumber 123:2 9 .
@aE SOUTHERN' CALIFORNIA EDISON COMPANY
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CAUFORNIA ismosi norne or repeareni as apesmed h as chanerp 95-1240335 L j+ toism w eeerpmecuan of f'R Errosever
'i e hearperemon er orpenusson) -
idenneceaan eso.) Y f 2244 Weinut Grove Avenue - h Mai (P.O. Box 800) Q.6. Roeemoed. Ceirtomie 91770 ( Aeeens of princesi esecueve emmen, indesne as weel 'Nis ej TJ _ M. 818-302 1212 w@ M N -f.JDt taseleinwire sessanone riantier,insmenne aree camel S. J.*', ..
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/0 7 Indicate by check rnark whether the registrant (1) has flied as reports required to be filed try 5
-@,'M Section 13 or 15(d) of the Securttles Exchange Act of 1934 during the proceding 12 months (or for ,...W -
j$yf[g such shorter period that the regnetrant was required to flie such reports), and (2) has been subpect y'
. .;t s.wp to such filing requirements for the past 90 days. Yes g No ,,,, s .
s kNM Indicate the number of shares outstanding of each of the lasuer's classes of Common Stock, as iji{X of the latest practicab6e date: ggg ches
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4 h,p Q~ Common Stock 84% per value 216,968.078
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A Part1. Anandalinformation:
- 1 g' Report of independent Puboc Accountants . . . .... ...... .... .............. ... 2 I ftem 1. Anancial Statements '1y:c "cA Statements of incorne -Three, Six and Twelve Months Ended June 30.1987 and g 1900 .... ........ ..... . ... .. ... .. . ...... . ... . . . ..... ... 3 &
4- O Balance Sheets -June 30,1987. December 31,1986 art $ June 30.1966.. Statements of Sources of Funds Used for Constructed Experdtures-Three. Six
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; and Twehe Months Ended June 30,1987 and 1986 . . . . . . . ... . . . . 6 wg_
Statemems of Common Shareholders' Egurty-Three. Six and Twelve Monti:s Ended June 30.1987 and 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... 7 j V.pam Stetsments of Capitalization-June 30,1967. December 31,1986 and June 30,1986 8 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 q,. Item 2. Management's Dimenaam and Analysis of Rostfin of Operations and Financis' -- Condition......................................,............................. 24 ' Part II. Other Information: M, leem 1. tagal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
- 7. .
u Item 8. Other information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 - Item 8. Exhibits and Reports on Form 6-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .. 29 2 s%.
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PART 1- FINANCIAL INFORMATION
- f REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS j 1
To Southem Ca#fomia Edison Company: I y , We have exam:ned the balance sheets and statements of capetalitat>on of Southern Cahfornia _ Edeson Company (a Cahfornia corporation, hereinafter referred to as tne ' Company") as of June 30.1987, December 31,1986 and June 30.1986 and the related statements of mcome, common f , shareholders' equity and souws of funds used for construction expenditures for the tnroe , six., T . and twelve-montn penods ended June 30,1987 and 1986. Our examer.stons were made m accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditmg procedures as we considered necessary a the circumstances, + in our opinion, the financial statements referred to above present Carrty the financial postpon of the Company as of June 30,1987, December 31,1986 and June 30,1986 and the results of its - operaDons and the sources of its funds used for construction expenditures for each of the three , 5 six., and twelve month periods ended June 30,1987 and 1986, in comformrty with generath - ' acoopted accounting prmc; oles whech. except for the change, with which we concur, m accounting for untHiled revenues as discussed in Note 1 to the financial statements, were applied on a
, ccasistent basis.
'Y kYrot R ,
ARTHUR ANDERSEN & CO.
+ _
.y Los Angeles, California, h August 7,1987 . h* "
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\ FINANCIAL. STATEMEN*$
SOUTHERN CAUPORNIA EDISON COMPANY STATEMENTS OF INCOME 8 assume enend 8asenesBases 12 neeness enend Jimie an. Juneas. June Jo, tes? 1een 1ee7 1ess tes7 toes (le 7housenes) 3 Oposseng Revenese: Sasse (Noses f sie 2) . . . . . . . . . . . . . . . . . . . . . . . . 81.324.527 81.212.518 18.284 82.598.890 82.481.798 $3.392 88.422.739 fl.189.498 5.545 O mer.. ............ ............. .......... 7.029 11.652) (944)
- Total operseng revenuse ... ... . ...... 1.331.568 1 210.888 2.815.254 2.450.856 S.478.131 5.175.043 . .
v 0*****"8'******* Fust (Mars 21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283.512 177.272 502.989 404.824 978.208 1.296.754 Purchased pommer (Nels 8) . .. .... 188.702 183.388 332.007 375.448 732.483 793.669 J., provensono sur reguistory ediusevien'.clausee
........... - 9.074 8.880 $3.481 (38.408) 229.751 (327.443) s
, not (Neue f) . . . . .......... 388.407 - 383.104 825.301 780.457 .y Omar esponses (Nosse 7 and 8) ..... 200.282 198.2S3 100,307 388.170 A Ademiennenos ( ff........................ 84.878 138.198 87.384 124.275 171.494 270.775 248.000 333.884 830.487 473.732 "
Desresseson (Nose t i . . . . . . . . . . . . . . . . . . . . . . . hiseme tenes (Mese d) . ............ . . . . . . . . . . . 173.000 184.548 310.300 338.000 707.883 898.220 Property and seier temas . . . . . . . . . ., . . . . . . . . . . . 42.2DT 34.234 84.000 71.128 188.238 131.375 Telef opereeng empensee ............. . 1.000,740 978.8P3 2.124.712 1.988.473 4.481.981 4.211.820 y Opssatog inessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281.018 234.883 400.5 4 488.382 984.100 983.223 O8ier Inseene end Sesass8mmer tone ressess to nucasar guara dise8ousence (Nase 2) . o . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- = (137.877) - (173,216) -
Income temas russend to nuuleer plant toes
'(Nese4J..................................
- - 71.448 a 82.271 A8ouvenes for esulty funde used chstng con. l serungen (Nose f) . . . . . . . . . . . . . . . . . . . . . . . . . . 10.184 28.048 37.218 87.318 88.444 122.188 m Innerest income.. . . .........................
Temos ca rem operating income (Note 4) ...... 10.917 333 30.300 (8.788) 40.148 173 58.188 (1.831 81.387 12.754-100.103 4.341 ?. 4 ( Deier encome one ancome coaucsons -not .. . 4.180 29.023 18.102 33.538) 28.832 58.382 % Totat o81er income (dmenearis) ......... 42.584 78.800 30.710 148.213 12S.470 2W4.992 Nt insenes Befese laterest Charges ... ............ 304.380 313,481 621.282 833.588 1.108.860 1.248.215 *2 Interest Charges ,- innares,e (No f) . . . . .t.on saa84erm este and amoritesson
........................ m327 itt.Sa 200.ui 228.2i8 407334 440.s18 i 00ier interest charges . . . . . . . . . . . . . . . . . . . . . . . 18.288 15874 29.418 31.448 48.221 88.278 y rotel heerest es................... 118.758 127.233 228.880 2SS.881 488.755 808.798 .M Alloquence for borroquod used Surtig con- , . .
, eerugeon (Nase f) . . . . . . . . . . . . . .. . . . . . . .. . (11.201) (7.818) (21.796) (16.979) (38.288) (34.381) ./
,. (T Not Insurest charges . . ...... . . . . . . . 104.582 119.415 _20 @ 240.882 420,490 472.415
'j Innesne Sefere Cumeleeve 80est of a Chengo le #' {
;Y Assoun8ng Pvtnessee . . . . . . . . . . . . . . . . ..... 198.788 144.078 313.487 382.913 488.180 775.800 "'"
- I y .T .
Cumuleeve effect on pnor yeere (to December 31 1988) of unexiled revenus-not of $.dy.t 1 p- . Mooms teses of 752.000 (Nores f and 4) .. - - 80.044 - 80.044 - t 194.078 382.913 757.204 773.800 Ar Not income . . . . Devisonos on Cumuleswo Preferred and Preferenos
. . . . . . . . . . . 198.788 381.901 a
~*
. 800s................................... 12.579 12.M1 25.288 28.107 $0.843 _ 84.719 s W Seminge Ave 8eets ter Comunen and Original preserved Steen . . . . . . . . . . . . . . . . . . . . . . . $ 187.200 8 101.115 6 358.238 8 383.808 8 708.381 S 111.081 ht 7.r.
Weigtvies.Awarece Shares of Common and Ortgl. 6 nel Preferred Stock Outstandmg (000) .... .. 117,903 217.000 217.800 217.878 217.834 217.153 temenes per Shere:
- T.
', .q Sofore cumuleevs eSect of a change in account.
Ing prmcipee . . . . . . . . . . . . . . . . . . Cumuisewe seect of a change in scoounang
. .. 8.M 8.83 81.32 $1.87 82.93 $3.27 Q ,
o pnnoismo (Nose f) . . . , . . . . . . . . . . . . . . - - .31 - 31 - "M. S 88 8 83 $1.83 51 67 33 24 53 27 6 E Totei................................ Mw Olvesenes Desiered Per Commen Shere .. . . . S.59W 8.57 81.18vr 81.11 82.30W $2.19 g y O The accompanying notes are an integral part of these finarcal Statements. e, 3 4e I i i t I y $n .. p[qh: w . > W PQ Mpb@ M 4Q r ) ma - v :i
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s a < SOUTHERN CAUFORNIA EDISON cot 9PANY $ RALANCE SHEETS ASSETS JunsSe. caemmber 31 June Se. tee 7 1ess teos De Thoussass) UWty Pladet: Utility plant, at ortghel cost (Notes f and 6) . . . . . . $14.050.958 $13.676.746 $12.723.560
, Lees - Accumulated depreciation (Notes 1 and 6) . 3,793,930 3.586.080 3.359.593
' - 10.257.028' 10.090.066 9.363.967 Construction work in progrees (Notes f and 6) ... . 1.414.616 1.342.169 1.742.623 e Nucieer fuel, at amortized cost (Notes f. 3, and 7) . . 572.512 619.343 643.362 12.244,156 12.062.178 11.749.952
)
income taxes (Notes f and 4) . . . . . . . . . . . .. . . . . . 774.502 708.436 619.678 Totel utsty plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.489.664 11.343.742 11.130.276 Ogier Property and Mverensr.ts: NonutWty property and other investmerits, at cost - less accumulated depreciation . . . . . . . . . . . 51.830 45.546 47.701 investments in and advances to sutWdiaries ' (Note f ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209.492 207.282 195.283 Yolol other prcperty and investments. . .... ...... 261,322 252.828 242.984 'y Cunent Assets:
' Cash and equivalents (Note 3) . . . . . . . . . . . . . . . . . . 106.775 33.603 58.757 Cash investments - financing subsediary (Note f) . . 32,993 65.546 112.374 Receivables, including untWied revenues, lose feeerves of 812.080.000. 811,874.000.snd 88.722.000 for unconectible accounto at respecove dates (Note f) . . . . . . . . . . . ................... 800.034 364.396 383.774
Fuel stock (Note f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117.994 233.528 277.216 Motoriale and supplies, et everage cost . ..... .... 121.889 123.480 115.954
. Regulatory balancing accounts -not (Notes f and 2) ... ... . . ..... ... ....... 582.095 739,060 888.173 Propeyments and other . . . . . . . . . . . . . . . . . . . . . . . . 23.873 72.000 44.781 Total current acaets. . . . ................... . 1.585.653 1.632.410 1.881.029 Deferred Cher9ee:
Unamortized debt issuance and requisition expense (Note f ) . . . . . . . . . . . . . . . . . . . . . . . . . . . 299.995 303.599 205.101 Rate phase-in plan (Note 2) . . . . . . . .. .. ....... 164.006 90.650 - l Other deferred charges (Note 8) ... ..... ..... 154.635 145.439 130.546 Total deferred charges . . ..... ........ .... 618.636 539.688 335.647 Total Assete . . . , . . . . . . . . . . . . . . . . . . . . . . . $13.935.265 313.768.668 $13.589.930 l g The accompanying notes are an integral part of these financial statements. 4 l l WW' y .
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4 SALANCE SNEETS j e CAPITAUZATION AND LIABILITIES J, _ _ June so, pesammer 31 June so, 1987 1900 1900 m ten Thousange) I CapiteEgetion. Yr , Common stock, at par value. 216,956.326. 216.906.527 and 216,736.732 shares outstandag 8 903.985 & 903,777 8 903.070 at respecove dates ..... . ...... ..... .. . j.. Additional paid-in capetal . . .. . . . . . .. 1.547.004 1.546.541 1.544.315
/NR , Earnings reinvested it' the business . . . . . . . ... .. 2.446.349 2.343.957 2.242.180 k Common sharehoiderf equity . . . . . . . . . . . . . 4.8J7,338 4.794.275 4.689.565 Preferred and preference stock without mandatory redempton requirements . . . . . . . . . . . . . . . . . . . . . . 365.332 365.654 365.967 Preferred and preference stock with mandatory i ; redempton requirements . . . . . . . . . . . . . . . . . . . . . . . . 282.336 299.049 M5.049
[ Long term debt (Note f) . . . . . . . . . . . . . . . . . . . . . . . . . 4.502.605 4.667,891 4.715.230
? Total capitalization. 10,047,613 10.126,869
........................... 10.075.831 a Long-Term Otillgetlene:
@ Nucieer fuel obligation - financing subsidiary (Notes 7, 3 and 7) . . . . . . . . . . . . . . . . . . . . . . . . . .
7 371,443 410.487 422.590 -
)
. d"= Accumulated provesions for pensions, insurance. and other (Ncte 5) ... . .. ......................
Totat ion 9-term obligations . . . . . . . . . . . . . . . . . . . 96.521 467.964 95.600 606.187 93.964 I {
% 516.554 1 c
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hp Preferred and proforence stock to be redeemed within one year . . . . . . . . . . . ...... ........ 21.713 18.213 - 18.213 _ Long-term debt due wein one year . . . . . . . . . . . . . . 129,425 t'$* Short. term borrowings (Note 3) . .. .. ........ 520.277 103.315 328,000 111.210 317.500 m Short-term 6v
;[gs$_ (Notes 1,3 and 7-[- ........
-financing subsidiaries
...... . . .... . 179.687 162.029 216.112 Y4, Accounts payable... . . ...... ................ 421.171 415.118 386.590 "
h M . Accrued taxes (Note 4) . . . . . . . . . . . . . . . . . . . . . . Accrued interest . . . . . . . . . . . . . . . . . . . .... ... 438.151 109.345 460.171 109.034 344,358 105.759 i T,p DMdends payable . . .. .... .... ..... ...... 133.231 127.783 127.769
/+f Accumulated deferred income taxes -not (Note 4) 264.534 340.952 445.754 :
;5g,f Other... .... . .. ........ . . .. ..... . 250.781 134.174 85.948 5 r j Total current liabihties. ... . . ........... 2.488.315 2.198.789 2.159.213 ,
3yM .9 - oeferred Creets. - L* Accumulated deferred investment tax credits "
',M F (Note d) . . . . . . ... ...... .. . . . . .... 534.319 544.866 519.807 A l Accumulated deferred income taxes - not (Note 4) 151.403 121.943 60,878 y Cusiomer advances and other rjeferred credits. .. 245.651 270.034 257.653 {
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vt-_ Total deferred erodrts . ... .. ... ... ...... ,. 931.373 936.643 838.338 - I 1
.f .a W Contingency
,l % (Notes 2. 7,8 and 9)
_/ T- Total Caprtalizabon and Usbilites . . ... $13.935.265 $13.768.668 $13.589.936 a.
.g. . , . The wv .y;ng notes are an integral part of these financial statements.
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SOUTHERN CAUFORNIA EDf80N COMPANY STATEMENTS OF SOURCES OF FUNDS USED FOR CONSTRUCTION EXPENDITURES 3 heenesEnded 8esenme Ended 12 Menem Endes l June 30. June 10. .nsne 10. 1ee7 1eet 1ee7 1eee tee 7 toes (in 7housenes)
'm PUNOS PROY10ED BY-Operemone. -
Net mcome . . . . . . . . . . . . . . . . . 81t9.788 $ 194.C76 8 381.501 8 392.913 8 157.204 5 M5.800 l l af femme m not income not effecong woridng captol-M -- v Ospreciaton . . . . . . . . . . . . . . . . . . . . . . 136.196 124.275 270.n5 245.009 530.467 . , ' 6 473.732 Amortiseson of nuclear fuel... ....... 38.306 18,146 62.619 36.820 119.738 76.131 - Atowence for equity and borrowed funde used cunng construccon . ... . -2 ) (33.355) (36.864) (58.984) (73.298) (120.909) (156.567) ~% 1 Rote phase-m plan . . . . . . . . . , . . . (35.402) - (73.356) -
- (164.006) -
Deterred income texas . . . . . . . . . . . . . . 78.811 62.187 95.526 116.744 246.351 198.250
'e Dolorred erwesenant tax credit - not . . (8.097) 18.798 (10.547) 34.193 14.512 79.403 Other - not . . . . . . , . . . . . . . 5.343 2.783 (3.910) 2.295 13.890 3.892 ?
Teest funde provided by operseone. . . . 388.588 384.381 663.824 754.678 1.396.047 1.450.641 i = Olvidendo . . . . . . . . . . . . . . . . . . . . . . . ( 142.229 ) (137,019) (279.109) (270.418) (552.973) (540.691) f(, f Tessi tende provided by operemone seinvested ... ........ .. .. . 244.380 f 247.3_62 384.515 484.200 843.074 909.950 [s ^ 1
/ .dq Leng Tenn Pineneinge ~
seios of escunees- - Common stock . . .... .. ........... 362 328 871 $33 3.542 47.334 y$ - l Lan9. term debt . . . . . . . . . . . . . . . . . 288 306.859 3.002 ancreene m nucieer fusi etagecon . .
...... 9.446 7.n2 18.')90 906.408 28.200 524.620 57,498
- 1.665.909 43.n9 M. w i
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A? d.- Corwersion of preference stock ........ . (4.813) - (1.313) (13.149) (98) (159) (13.713) (17.649) (10.213) '~,1
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(321) (513) (653) (936) Padman for long-term dett due within one rL ,,ykp9 W[ (65.015) (51,759) (78,356) Q V$ /M year . . . . . . . . . . . . . . . . . . .. ........... (102.255) (79.426) (110.366) gr panesian in nucteer fuel obegation due withm
**1 y* one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29.418) (38,306) (58 034) (82.618) (108.646) (119,737) ' ,My Mr Refundeig and early recreme#4 of preferred '
~a V etock end ieng-term dent-net.. . . . (9Q1,2) (723,463) (98,316) (1.065.629) 4.* Teesi fundo provided (seed) by long-term (773.575) (1.43C 776) if.M -
K./ nneneing . . . . . . . .. .. (185 960) (410.042) (225,523) (300.487) (394.288) 96.994 J( _.;%y o.}9 Tetsf fundo provided (meed) .. ... ,. 58 400 (162.680) 158.992 183.773 448.786 1.006.944
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' 07Han eOunces (uses) OF PUNOS- C AP IF .d worten8 capnes chenese f.trL, 4
Cean and equrveiente and cash investments Receive 0see - not . . . . . . . . . . .. . . . . 12.958 388.389 (50.210) (39.034) (235.638) (40.820) 30.606 (32.679) 31.363 (216.260) 70.083 (31.553) MW@ - M s . Fuel stock, metensis and supohee....... 19.955 (10.621) 117.125 153.287 Re0uletory belenemg eccounte - tiet. . . . . . 181.793 (31.339) 156.955 (31.484) (96.162) 306.078 34.712 ".~il} N.S ." Aamumulated deferred income taxes - not . . (44.834) 14.491 (56.418) 53.973 (161.220) (483.733) 246.371
<7 1 %;c Preferred and preference stock and long- .' d 1
_,A term doet due withm one year . 17.556
. . . 16.051 29.810 63.850 21.715 5.960 ' O.W Short. term borrowmge .. . . . . . . . . . .
' ('$.
f' Accounte peyeblo . .. . 106.527 (2.798) 74.608 24.932 209.935 0.053 275.823 166.352 124.531 ~
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.... (14.899) 34.581 (34.704) 77
."r Accrued temoe . . . . . . . . . . . .
Deterred urDilled revenue . . . . . . . . .
... .... (9.840 19.097) 35.646 (22.020) 110.636 93.793 214.095 (* .MV
- g. Other changes in workmg captal.. .. (114.889) (15.597) 117.163 54.138 36.3n 117.163 n.626 40.736
( ' .h."! r., Net decroses in wortung caprtal . . . .. 195.315 457.526 336.283 396.040 vff
$g Osier - net .
624.478 182.498 ~i 7',g
.. . . . . .. (8 280) _ (3.725) (15.369) (2.910) (13.877) (21.716) .
a2 Total esser sourses of funde . 187.035 453.801 320 914 393.130 #, '. ,1' W Punde Used for Construction tapendituree
$ 245 435 8 291.121 8 479.906 $ 576 9 6 5 1.059.387 $ 1.157.726 610.601 160.7F2
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'd The $ccompanyng notes are an integrei part of tnese financial Statements.
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y . j - SOUTHERN CAUPORNIA EDtSON COMPANY STATEMENTS OF COMAAON SHAREHOLDER $* EQUF s asume esses e samme em ta samme emees Junees. June ",.3, Junese, et 1ees te47 igen 1NF 1ees (asTheessese) CGnemen Steak-per weiue 84to per ehere. 200.000.000 shares
., authorized. 216.966.326 ano 216.736.732 outeteneng et respeceve desse(s ) . . . . . . . . . . . . . 8 903.988 8 903.070 8 903.906 8 903.070 8 903.986 9 903.070
. AdStenal Poid4n Cepleek Beianos et beginning of ported ... 31,546.700 $1.544.076 81.546.541 31.543.933 81.544.315 81.506.000 Premium received on sale of Common Stock and escurity conversions (s) . . . . . . . . . . . . . . . ISS 243 488 415 2.729 38.310 Capital espok esponse . . .. . . . . . . . (20) (4) (20_) (38) (40) (86)
Belenos et and of period......... 81.547.004 g $1.547.004 g g 81.544.316
, se,m e nom.eense is em Businesse Selence et beginning of period ... 82.308,790 32.146.123 82.343,967 $2.128.648 82.242.100 32.018.032 Add:
Not income . . . . . . . . . . . . . . . . . . 190,788 194.076 381.501 392.913 757.204 775.000 2.588,578 2.379,199 2.725.458 2.521.559 2.999.384 2.791.832 Lees: Dividende deciered on capital elock - Common . . . . . . . . . . . . . . . . . 129.103 123.540 252.748 240.567 400.900 474.191 Original Preferred . . . . . . . . 547 818 1.006 1.038 2.100 2.073 CumuleWye Profemed ...... Preference . . . . . . . . . . . . . . . 12.015 564 12.233 728 24.029 1.237 27.202 1.813 48,138 2.606 80.885 3.542 j.g se.nq 142.229 137.019 279,100 270,418 552.973 540.891 . A.,Ip Laos on reacquired capital et0 2....................... - - - 8,981 82 8.961 Belence et end of period (b) ..... g.340, $2.242.180 32.446.349 82.242.180 82.446.349 82242.180 ,. Tsent Canunen Shersheiders' nn . Equity at End of Perted ......... g g 84.897.338 $4.689.586 $4.097.338 84.689.565 9 (a) As Ace 30.19e7. eneres or Conenen Sesek reserved for eseuenes eure se seesme: shmes . Comoreen el Proserence Sena. 5Jo% Conwerebee sertoe . . . . . . . .. ........._.
. . . Iss.est Cerweresen et 12% Conweresse aeoramased Desereses. Due toer leeued ey sousnern Ceefortes Eason Anence Company N.V. . , . .. . . . . . . . . . . . . . . . . . . . . . , . . . . . ... . .. des.1st Sesen pureness peene . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , 4.23a.s7s*
Teeef.. . ., . . . . , . . . . . . ., , , . . . . . . . . . . . . . ..... . . . . .. . 4 set.aos
- These same heaues tne Deweend neewoosnone end Stock Purcnese men. Stock Sawmpo Pius Men and Empeoyee Benck Oanersnr mtor Ni Conunen sneen reewree for Ine peans are prowsood enrough open momet putneses, inmunn uneseawma g
(e) esserser.asonese nyeo e mes,c pro,sem av s4.274. coo et June 30. test.ee unosasosaew sweeena os str.seuco one eneroonstea ; re-eewe sara The accompanying notes are en integret part of these anencial statements. 7 g.
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I 90WHERN CAUFORNIA EDISON COMPANY STATEMENTS OF CAPfTAUZATION Jew 30.1ter
~' Onores Assommesa June 30 Deesmeer 21 June 30 Onassename pnee 1s07 toes iges (in Themsense)
Comenee theseksteers' Seuer- doeWlad on page 7 . 21, see ten - 3 4 087.330 8 4.794.275 8 4 ees.546 i pensense ans mesurenes semen - wmout mannatory resen, son _ _ 'el(D): ; Ongous Metened- 8% j e - _. per v er were .. . 400.000 - 4A00 4.000' 4.000 cu,nw.e.e as.eno.enus - .or ,se.e Np. cumwoose, paresseerit not 80s per enerer 4As% Sense... . . 1.000.000 $ ISJo 28.000 35.000 28.000 gr
~'
4Je% Sense . , . . 1J00.000 28.80 30.000 30.000 30.000 a 4JR% Sense. .. .. . 1.003.43B 2835 41J30 41.330 41.338 . 4.79% Sense .... .. . 1J00.700 35.80 32.419 32.419 32.419 . S.80% Senes ... .. . 2J0Ler10 asas 98.000 34.000 85.000 N 9100 tammutesse Mosened.-per value 3140 mr enerse 7ASE Senes ..... ... 750.000 101.00 75.000 75.000 75.000 hf 0.70% Senes ..... . 900A08 104A0 00A00 90.000 50.000 'My
- SAs% 8ense... ..... 800AOS 104A0 00.0W 50.000 30.000
$A0% Conversase Puederense-per venue 800 per enerer Genes .. . .. . . . 1MA07 38A0 2.877 2 AGE 3.238 3100 meserenes-per vense $100 per enere.... . . . . . . . - - - - - ( I i
Tsaal Molened and Preference seosk - espinia ? mancesary resengeon reeusent 1e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305.3N 308.054 300.907 p
.. Pretened med Psoferense Sense --moln maudesory resumpeen reserememet eH c):
$100 Cumweeve WWened = per sepus ,
8100 per enere: 7.330% Senes.. 030A00 104.04 $$A00 93.000 08.000
,(
. . .s 730 % Sense .... . 524.908 110.00 82J00 82J00 96.500 +94
'a 844 % Serles ....... 837.500 105.88 83.700 M.000 04.000 i.
j L76 % feartes A.. . 400.374 110.00 4G.85F 40J00 48.542 tg 1241 % Senes.. . 500.000 105.83 90.0m 30.000 90.000
]1, Presorence-per vense Ses per eneret 7J79% Senes... .
. 1.184A40 3SAO 28.008 37.200 37.200 ,"' 1 304.08s 317.282 323.262 T-N!.
Pretened and Preference Gesce to be redeemed wenn one year . . . . .. . . . . . . . f21313) (18.213) (10 213) *6 *
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total Prederred and Preference Saeck -sain mondesary redempeen roodressense . .. Lang.Tene Doet - 202.3 2 290.0se aos 049
. v }%.
s Innseems Itseen P Pht ens medunem0 hacrtgage Bende(d)(e): r *L, ys g Due 1987 soeugh 1991 Due 1982 swougn 1900 414 % - 1 0 % SW4 0%% 642.000 SH 000 648.000 966.000 844.000 858.000 Q*P. g? Due 1987 fraugn 2001 Tien- $1t% 500.000 $00.000 800.000 Cf Chas StM swougn 2000 Ste%- 9.90% 400.ON 414.250 414.250 l E%; . j Due 3007 twougn 2010 SeWE.13% 1.006.413 1.101.612 1.493 328 .. $* , ' 3.ai43 3Jea.e02 3.e00A78 .
- h. Peaumon Conrad kidnesedname(f): Due 1988 swaugn 2018 7%- tote % and E~. '
[ Veneteo 087.730 087.730 087.730 b+.h: g_ Dahermees and Pvonuseery , O senneteneHg): oue iste swouen 1sef 10%%-13% 300.0m 30s.10e 3sa.ste *- Coer Longaene DeatteMh): . . . . . . .. . . . . . . . . . 1Ls7% 2s.73r 2tL797 27131 y 3 Pnnelpel Amounte Oueseenomg .... .. .
. . - . . . . . . . . . . . . . . . . . . . . 4.006.4 5 4.790.490 4.863.073 Dag, Lane.eenn Deat Due puun One Year-nette) . .. .. . . . . . . . . . .. (125.435) (103.315) (111.210) j A tAiemorence Doet hemman or (Olocount) -not.. .. . . . . . . . , ......
(18.000) (17.089) (10.407) j/ A Sewiese Mead sy Trusesee(f) . .'... ... . . . . . . . . . . .. (7. teel (11.223) (18 428) -4 F
- Teens Long.eenn Doet , . . . . . . . . . .. . . . .. 4.502 em a es7 set a ris.230 Tegel P& . . . . . .. .. .. . . . . . ... .. 510.047.413 Sto 128.869 $10 075 est 4*'*34, t
A Notee to Statements of Capitalizacon are on page 9. The accompanying notes are an integral part of these Anancial statemengs. 5 e i J-m . l
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P' _ -r,- e SOUTHERN CAUPORNIA EDifON COA 4PANY Notre to Statentent0 of CapiteNastlen-( ar er a 30. sur. mahere ed wwm sor = . pret=,ed. s2s C.,r.ae. pre-ved. sio0 Canuse. Prc es. sa prosper as and f190 Preserence Sance were #0.000. 24. .000.12.000.000.10.000.000. and 2.000.000 shares. respecavesy. Ad eenes of $ aone oro receemeces et es opeon of tne Company. The f,30.000 enerse Cumdesse of $100 h- PreservedPrueurved. 8100 Cwnuseew Becca.12.31% Senes. arePreserved noe sue and Pre #ererno S,ect to sucn renenpean uner asey 1,1M2. The venous sense of 4100 Cumideous Preaurved Beeck erve tw presenmos Secca. 7J7W W are sue,ect en omrten roomceans on redempaan lor refunaang PWeeses r (D) As of June 30.1987,we converson prios of ege Preterwice 8enek. 620% Converente Sense wee $16 79 per ehere. The IN% d Converuzes Samarenseed Demoneses sus 1997. emeued by Soutnem Cassorvue Echeon Fr.mo Company N.V. (Fnence) 6re convermees ese CONWeny Commen Squak e We conwormon pnee of $18.1975 por eners. (t) por preserved and Prefereras $erm mean enendseory redempson rockeremones, sw agyugees aient.geory redengnon recurements for see Ove : _ _ _J. peroes eunesermnt to June 30.1987 are se fotows; See, of 19 Seenees Ended June E, Shores Casanenshg 1980 10B0 1900 1991 1983 LCu"easse gi, gn,,,,,,,3 , FJWh . .. . . . .. . . . . . . . . . . . . . . . . 30.000 7131/95 8 3.000 8 3.000 8 3.000 8 3.000 8 3.000 a 7J0% .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.000* 11/20t73 1.500 1.000 1A00 1.000 tJ00 SAdm . . . . . . . . . . ... . . . . . . . . . . . . . . . .. StJ00" 8t30/00 - - RJ00 1.300 2.2'
~
L70%A . . . . . . .. . . . . . . . . . . . . . . . . . . . . . 13.128 Staples 1213 1213 1.313 1J13 1.314 7 it.3m................................. u.000~ 4/30tm 3400 San 3ss sus 3270 o puuhwanes
?J75%.. . .. . . . . . . . . . . . . . .. ... 406.000 2t01/05 12.400 12.400 y --
Ed2 M g sn,130 ,s; igg .2
' bieresses to 18.000 eneros begeven0 m Nevernbar 1908.
[ " 48A00 shorn reisen0 to 1000 and 1000 have been ecquesd reeugh open merest purchnees.
- 3. ~ osernea = a7s0 sh = nepanm0 m apre imo. .
- g. ' (d) 8detenseer es of pie propernes of sie Company are eutvect to se tons of Trust mdenswes. .d'g '
4 (si unesen and emimo two re us as a isnn dem sor = e y - -run p, de pune.wn w. 30, int no = ym 4 - de
' 7wasso nessee Snead Jose 30 theing poesi IIwasenso naquesmenen Teest A;I+# -
w. (to7hemsenes) PT I;3 4,: 1980 . . . . . . . . . . . . . ... 1124.178 96.250 8125.425 MJ f-1000 . . . . 1980 . .
. 82.414 74.000 5.250 8.250 F7.M4 70.930 Q?
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.. ... . . . .. .. ... . , . . 277.974 6.726 201.000 gp
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271.301 s 230 277.s3 gp c.u kd (f) plret Ond RefungRne Bones ered einer mespee6 meet have been isowd to govemmented agericsos m ear p- tram tw neuence eosumon conwa mennue sonos and pumumen Cuwe nennue acundne sende. The s,menge oceedsfor hetos s.y%- mean asonened men Trueemos and are usered to cofrey the consen soon enr. otner noecrhed cases of posumon corwol facesse and
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foirement of shnamng mouse. Suen sorsemens WO secunty dessers whecti provede be recommed at the enacoon of the Bond noeners. The Company has eniored ento Wie fnensono Or purchese of we Songs when auch esecEm are #neos.
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.. . (0) progressery Notes peysets to Fmence have beenineuo6in a tor proceeds from the lueuence of Detentwos ery Anance. As of *k
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.or opa.ym.en,.t e - en. o,f the ~
875.000. erwt 85.63 canceoel end meerest enon 0 - - 3,.000 un n mJ erne .t.s .o,f.th.e.Decen.t.u.res.were. n d De s e,e y . 9enwerWee meD WW Corr 9eay e Common $
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, c SOttt'hERN CALIFORNIA EDtSON COMPANY N0ftS TO PINANCIAL STATEMENTS
.h NOTE 1-Senmery of SignHicent Accounting Poinc6es s aseuisma - -
E! The Company is regulated by the Califomia Public Utstities Commission (CPUC) and the
>3 Federal Energy Reculatory Commission (FERC). Accounting records are maintamed in accordance .
V with the Uniform System of Accounts prescribed by the FERC and adopted by the CPUC. The financial statements reflect the retomalung policsos of these commissions in conformrty wrth
- generody accepted accounting principles applicable to rate-regulated enterpnees. *
+ ,
U n ty pient -
- The cost of addleons,includir,g replacemoms of units of prop 2rty and betterments,is capital.- N
, isod and included in uguty plant. Costs include contracted wot, direct mater 6al and labor, construc-
, tion overhead, and an allowance for funds used during construction.
3' [k
Maintenance, repairs, and minor repiscoments of and additions to property are charged to maintenance expense. The cost of property replaced, renewed, or otherwise reored, plus removal or 1 88*panal costs, less esivege,le efsarged to accumulated deproctagon.
M Property rehted accumulator ,seferred income taxes art deducted from utsty plant in conform.
& ity with the retemsidng method used to determine rate bees, w w h% Assestee k Femem Used W ConeWuosers (AN)- ,
5 AFUDC represents the cost of debt and equity funds that finance the construction of new
- I@ facilities. AFUDC capitalized to also reported in the Staterronts of inwrne as a reduction of interest i.A charges for the borrowed funds girWwra and as other income for the equity funds component.
Mg ANhough AFUDC increasse not income, it does not represent cash osmings. The cash recovery of [
%9t;;,.
AFuDC, s. won a. oin.r con.iruaan occurs wh.n =mpieted preen ar. ec.d inio commercial operation and related depreciation is authortzed to be recovered through rates. , Nh The Tax Reform Act of 1986 requires interest costs on debt related to certain plant construenon to be capitailzed for determin6ng depreciable tax basis. As a result, w.
/ 't rG.,in 1987, the debt > '# e 4.l4ygg. component of AFUDC is computed using interoet expense which has not been ar'#usted for appincebis income taxes. Prior to 1987, interest was included in the AFUDC calculaton not of the tax i ,, . ;N ]'(Q. # . p* g g
benefit realized from deducting such amounts from tan aNa income. The AFUDC rate, whsch reflects aemiennual compounding, is 11.57% for 1987 under the gross method and was 10.53% for 1986 y
' g uncier the not of tax method. These rates were ceiculated in accordance with a si. stGd FERC n formula . @f, 5 .
k'iya % ': - gh"f For financial reporting purposes, depreciation of utility plar't, other than nuclear fuel, is computed on a straight-line, remaining life basis using the composite service ines by classes of g .w -
, h sproc6able property, c
Nuclear generating station decommissioning costs of $328 million are being recovered in rates - through an annual allowance and charged to deprecianon expense.
% e .
G Nuoleer Fuet- # . . The cost of owned and leased nuclear fuel, including its disposal, is amortized on the units of producton mettod on tne basis of generanon over its sonnes life. Nuclear fuel costs are recovered N. *
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SOUTNERN CALIFORNIA EDISON COMPANY NOTES TO FINANCIAL STATEI4ENTS (Continued) NOTE 1-Summary of Significant Aecounting Poacies (continued) through regulatory talancing account mechanisms. Leased nuclear fuel is discussed further in Note 7. ,' neeentch and C. _ , _ - :(nw)-
" R&D costs are expensed as incurred if they are of a general nature. R&D costs relating to specific protects in advance of construction are capitalized until a deternunation is made as to
.%- ,p whether such protects w.ll result in the construcdon of electnc piant. If the construction of electnc
; , piant don not utometee r ruutt, the costs we cnarged to expenu ,
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- l Rao so.a. ch.rg.e to e.e.n.e.. .. . .. . . . . 8 0.888 8 9.737 817.741 810.021 ses.842 880.000
., Rao e e, ra. -. . . . . . . i.= non 3.= tan v.sie m==mmn
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v.w me n .. . . . . . . . . - mesmo rue. - I Deenrod income tan m provided for owtain t none ruszed from depr. canon d.duenone utilized for tax purposes, regulatory befencing accounts, debt reacquisttlon expenses, and certam other specific items. Income tax accounting policiere are rum,namad further in Note 4. . *
.A -
.y thenaertised Dent leeuence and neecqufession Exponee -
5 Debt premium, dieocont, and reisted issuance expenses are amortized over the Sves of the V "d,;t p issues to which they portam. Debt reacquisition expenses are amordzed over the remaming Eves of lk a io - the roared indebtedrwee when reacquired without refunding and ovw the lives of the new debt glf,.ih . issues when reacquired with refunding pg
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, Change m __ PrineJple- ' **
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$g . :. . Prior to 1987, revenues were recorded based on cycle biange rendered to customers. Effective 1M ?
7 January 1,1967, the Company began accruing esumated unbilled revenues for electncity denvered to customers subsequent to cycle billing dates through the and of e:.ch month. The accounting
- g. g h[f m
'Jgg change conlbrms to provis6ons of the Tax Reform Act of 1986 requiring utilities to include unbilled +
e.y ,evenu.s in t-abio - -ng m im and - a better ,n.teng f ,evenuos and a:.] 4, j gy apenas, , 4 Is), The after-tax of'oct of this accoundng change increased not income by $10.193.000 for the I (l'
~. er- montns .nd.d sune so. iw du. to sosonai vananons m o.s i.vois. For tn. six and two,ve - '91 a# YM. .s <
- months ended June 30.1967 the after tax effect of this accounang change increased not income by .*yU.V **
G. ses.sss.ooo inciuding the cumuisove effeci of accruing unbeed revenue not of appi cabie income - n.;q% ines = of Decembe 31,19es. wnien amounted to ses.ou.ooo. ,. y v; m, .a -
"a s
.+ .
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SOUTHERN CALIFOftNIA EDISON COMPANY NOTES TO FINANCIAL $TATEMENTS (Continued) -, NOTE 1-Summary of Signifloent "mC., Policies (continued) . The tab 6e below prov6 des pro forma Not income and Eamings Per Share as if the new rnethod i had been in effect prior to the income statement periode presented. The 1987 pro forms arnounto in - the table are adjusted to remove the cumulative effect of the change in accounting method. as aseenes~~ ove poems . _4 per per
- feet Not -[
tosses Shore inessee shore _ (in Thomosede. asseet per __ ehore ameuses) , June et,1ess Three mentais ensed . . . . . . . . . . . . sise.07e e .e3 e207.371 8 es
*- [
msnmo oneed . . . . . . . . . . . . . . . . . . . 3 2.e13 1.e7 3es.em t ee menes ended .. .. . . . . . . . . . . 779.se0 327 7se.sef 324 g Just as 1NF Three menes ended . .. .. .
.. . . . .. s'oe.7W e .W stes.7W e .se k
ahn suussets ensed .. . .... . .. ,, . . . . . . . . . . . So1.e01 1.es 313,4e7 1.32 huske menme ensed . . .. . . . . . . . . . . . . . . . . . 7s7.itse SJ4 es1.s70 ff e0 > neguissary soienche Aeoeunes-opereeing mecenuse-s. The CPUC has authortred an Elsetric Revenue Adjustment Mechamem that fornovos the effect on semings of fluctuations in kilowett hour sales to rotas customers. Under $6e mechanism. dmorences between authertred and recorded bem rate revenues are accruso in a regulatory "
. s baianomg account.
^
- g' Asergy Coods - ; .
4: - 9 y An Energy Cost Adluetment Clause (ECAC) belancing account adjuste results of operations for g% g e
- varianone between the recorded fuel and purchased power coste and revenvu conected to recover such costs. Differenose are accumulated in the belancing account untu they are recovered from or MA i gg g refunded to customere through future rate adjustments. Commencing in 1966, the ECAC balancing so0 cunt includse a fuel ou carrying charge based on short-term interest rates, in prior periode, such j% .g {
. y canying charges w.ro b.e.d on in. rm of reium .Wn.d on r= be.e. .jy,,g
' y",%4 .e .4, Commencing in 1987, the CPUC suthortred a one-time writo< lown of the cost of fuel ou **'
h'* inventory to market prices and the subsequent use rif the leet-in, first-out rrmthod for measuring the 3 7 recoverable cost of fusi oil consumpoon. The one-tame write-down aggregating $96.5 milliott has ky "i > y been recorded in the ECAC balancmg account pending future rate recovery. nm- , r a 3' The CPUC has established performance incentive mechanisme for San Onofro Nucisar Unite 2 ,, V y , , and 3 and the Palo Verde Nucieer Generating Station which set forth a targeted range of generation ,,-
.F gM levels. Fuel savings or coste attributable to gencration levole above or below the target range are * '
dMded equally between shareholders and customers. I *
'6s 4, 1 g- '
s hin}er Mont Additione- .' 3dg ,. Ey,i p Major Adatt6one . .g.sstment Clause (MAAC) balancmg account mechanisme have been estab. [ c [, z llehod to account for the differences between revenues spoofically authonred to provide recovery of . Jh p Sea Onofre Unite 2 and 3 and Palo Verde Unrte 1 and 2 ownership costs and those actuasy incurred.
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L. / 7 y . SOUTHERN CALIFORNIA CDISON COMPANY NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 1 -Summe:y of Significant err, PoNcies (continued) keerent and Taaen - truerest on reguistory belancing accounts is accrued at the most recent three-rnonth prime
- a commercial paper rete as p&lished ty the Federal Reserve. The weghted-average 6nterest rates were 6.47% 6.22% and 6.12% for the three, six, and tweive months ended June .30,1967,
/ , G _ _ _ d,, and were 6.81% 7.2$% and 7.46% for the three, six, and tweive months saded June 30.190s, roepectively. The income tax effects of the changes in the regulatory betencing accounts N are desoned.
sman, se-Inveelments in unconeondated subsidary companies are accounted for by the equity method oncept subeimertes engaged in Eurodebenture and nucteer fuel financmps. For these amartes, j oseh invesenente, short-term borrowings, and the long-term portion of the nucteer fust obilgation are presented esperossly on the Balance Sheets. Nucieer fuel owned by the subsidiary le included wth careoWy owned nucteer fuel. Other mW are not considered significant for financial #
,/
neeeeeemenee-Belence Sheets prior to June 30,1967 have been restated to reflect leased nudeer fuel and the reisted obilgelions in accordance with amended dieciosure requirements for rate-regulated enter. prises. For a further ha an of the effects of thee rootstement refer to Note 7. needessaloselene-Certain lleme have been reclaselfled in prior periode to conform them to the financial, statement presentations at June 30,1987. NOTE 2-Regwetery Meteore Maoiser Generedhy Faceles h b Asie t%nfo thste f,2 anaf 3-soweeed noen r,es orn a,,d ose.seweno. - { Pelo Verde Unita 1 and 2 have been in commercial operation for ratemaking purposes since February 1, and September 19,1986, respecovely. Unit 3 le ached And for commercial operation in 4 i , late 1967. On May 31,1906, an application wee flied wtth the CPUC for rate recovery of Unit 1 operating and ownership costs on the basis of traditional retomaking practices com.wce4 when fg me unit achieved commercial operation, In, response to a Commission directive and to avoid the protracted hearings and substantial sapense that a formal reasonsbieness review might have entaned, the Cornpany and the Public Staff a j negotiated an agreement on Palo Verde ratomaid,4 issues end, on June 25,1986, filed a joint ' s stipulation with the CPUC. The stipuisbon, approved by the CPUC on October 1, t 906, provides for: e
- A dioellowance of the Company's Palo Verde investment for retomaking purposes based on 19.33% of the amount disallowed in the San Onofre Units 2 and 3 reasonableness review, j
- A 10-year rate phase-in plan, which prov6 des for the deferral dunng the first four years of
.% coeremone of 8200 malion of investment related revenue for occh of the three units 7 7-144 on their commercial operabon date. Revenue deferred for each unit under the 13 j
o 1 i , N l r~ p l
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s l SOUTl 'ORNIA EDISON COMPANY j NOTES TO t. STATEMENTS (Continued) NOTE 2-Regulatory Metters (continued)
\
plan for fears 1 through 4 is $80 million. $60 million. $40 million and $20 million. respectively. t Such deferrals and related nterest are to be recovered on a straight-kne basis dunng the final six years of the phase-in plan.
- A target capacity factor operating performance incentive mechanism substantially identical to
, the procedure in effect for San Onofre Unsts 2 and 3.
Because Palo Verde Units 1 and 2 were placed in commercial operation before the investigation . of altemotive retomaking methods could be completed, the CPUC suthonzod the implementation of
. an intonm balancing account procedure for the costs of owning and operating Units 1 and 2. With 1 CPUC approval of the shpulation, a reclassification from the interim balancing account to a deferred asset account was made dunng 1986 to record the initial phase-in plan deferrals for Units 1 and 2.
Additional deferrals are mntinuing pursuant to the phase-in plan. The deferred asset balance aggregates $164 mili6on, including interest, as of June 30.1987. The Financial Accounting Standards Board is considering the appropriate accounting treatment
)
for rate ph ase-in plans and is expected to issue an accounting standard for such plans dunng 1987. I The effect of recent CPUC decisions on recovery of the Company's investment in Palo Verde is
,mamaaad below in w a i.e., with the San Onofre Units 2 and 3 disallowance.
\
Sen Onehw Unite 2 and 3 -
. noen tronement-When San Onofre Units 2 and 3 were placed in commercial operation in 1963 and 1984, /
- 4. ,
' respectively, the CPUC did not authorize recovery of the full cost of these units through customer rates. Instead, the CPUC authorized the recovery of a portion of costa and directed the accrual,in a s
MAAC balancing account, of the portion of rtvenues not included in rates. These accrued revenuee have been included in reported oamings without benefiting cash flow. -
/
~
Since January 1,1985, the total authorized customer rates for San Onofre Units 2 and 3 have
;[M approximated investmeni-remed wets. d.pn 9 o
. v,. CPuC ofaenawance -
= 1 The CPUC has concluded its review of $3.4 billion of the Compeny's investment in San Onofre Units 2 and 3 to determine the reasonableness of construction coste for rate recovery purposes.
g"
% Cm October 24,1986, the Administrative Law Judge ( AU) who presided over the reasonable-h ness review proceedings issued his recommended decis6on irt this case. The AU's decision
.[s
,Q
- recommended that none of the San Onofre Unrts 2 and 3 investment costs be disallowed for *-
,t r;; ratemaking purposes, i y
On October 29,1986, the CPUC issued its initial decision in this proceeding which, bared on the
'[ 'a m,
Company's 75.05% ownership interest, disallowed for ratemaking purposes $258.6 minion of the #fd
$3.4 tWnion investment in San Onofre Units 2 and 3 under review. Under the Palo Verde stipulation 'y M discussed above. 350 million of the Company's estimated $1.5 tWHion Palo Verde investment was '
9 also disallowed for ratemaking purposes. [ Since the CPUC's initial decision, the fonowing regulatory actions have taken place:
- r' 9e
- On December 8.1986, the Company filed an application for rehaaring on $213.4 million of the rp 5258.6 minion San Onofre disallowance with the CPUC. The uncontested $45.2 milhon of San J .,, e JN M2 Onofre investment disa!iowance was increased by 19.33% in compliance with the stipulated M. * .
% ratomaking agreement for Palo Verde investment costs, bnnging the total uncontested " /.
y disanowance to $$4 million. %.*
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- N-SOUTHERN CALIFOftNIA EDISON COMPANY NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 2-Regulatory Matters (continued) e On March 17,1987, the CPUC agreud to reht.ar $74 mdlion of the $213.4 minion of the San Q l Onofre disallowance petitioned for reheanng. The $139.4 million of investment disanowance which was not reheerd equates to $168.3 milhon after including the stipuisted 19.33% Palo Verde disallowance of $28.9 mdlion.
- On July 29.1987, the CPUC disallowed $14.3 million of the $74 million invt
- mnt disallow-ance granted reheanng which equates to a total of $17 milhon after incturang the stipulated 19.33% or $2.7 minion otsallowance rotatmg to Palo Verde.
To reverse prevbusly recorded revenues associated with tfw San Onofre and Palo Verde " disanowances, the Company wroto off $15 miH6on after income taxes in the fourth quarter of 1988 for the portion of disallowance the Company decided not to appeal. The Company wrote-off $68 milian after income taxes in the first quarter of 1987 for the portion of the disallowance which the Company appealed but which was denied rehearing by the CPUC. The CPUC's final decision will not significantly impact eamings and concludes the wrne-off to current earrwngs for this matter, in December 1988, the Financial Accounting Standarde Board adopted a new accounting a standard requinng the wrtto off of construction costs disallowed and excluded from rate base. The new account 6ng standard, which becomes effective for the Company on January 1,1988, provides for the restatement of prior period financial statements for cost disallowances occurring pnor to the p _ effective date of the new standard. Acco*dingly, in 1988 financial statement presentations including 1988 and 1987 financial statements, the disallowance win result in a one time restatement of the 1988 financial statements, in its 1988 financial statement presentations, the Company will record an after-tax charge against 1988 eamings in tne amount of approximately $176 miHlon, or 80 cents por share, to reflect the one. time rate base adjustment. The related restatement of shareholders' equity wiu be reflected in the 1380 presentation of 1988 and 1987 financial statements. Fuel Supply Contract Settlements and Proposed Dieanowance - During 1985, an agreement was reached wtth a major fuel ou supplier to settle litigation arising
, from the termination of a fuel supply contract, in accordance wrth the agreement, $350 million was paid to the supplier and a ten-year option agreement for the purchase of low sulfur fuel oil was 3 entered into. Under the terms of the option agreement,89 million is paid annually for the supplier's
, commitment to dehver fuel oil on relatively short notice at current market pnces. On June 15,1987, the CPUC authorized recovery of $344.8 miillon of the $350 minion settlement payment plus 90% of .
the Svust commitment fee. Such recovery is to be comp 6eted by the end of 1989 and includes Interest since the payment date. The Company has entered into two uranium supply contract termination agreements which
,, required payments totaling 582.1 m6llion. The reasonableness of these agreements is being addressed as part of a Commission investigation on uranium procurement practices for which haarings were completed in February 1987. - -
The Company believes that the terms and conditions of these uranium termination agreements are reasonable and in the best interest of the Company 6nd its ratepayers. Although unable to ;
.. determine whether the CPUC win allow recevery of costs incurred pursuant to the termination ,
<"'., l agreements, the Company behoves that such costs are a proper atom for rate recovery and does not ( t5
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SOUTHERN CAUFORNIA EDISON COMPANY
- 1. NOTES TO PINANCIAL STATEMENTS (Continued)
- ]N T
~
~ NOTE 2-Reguistory Menore (cenerwed) expect that it wtB be denied recovery of emounto that wtX haive a material adverse eGect on ite
*4
, Ananonal cond6 eon. The portion of fuel supply and uranium contract setsoment coste senDutable to whoissais customers wee included in resale rates effaceve March 7,1986.
Setsoment payments for fuel oil and uterilum contracts have been recorded in a regulatory-
. belencing secount and will be amortied in accordance with CPUC decleone regurding rate recovery 1
~
~ \
. Tae Redene- ,#)
As explained more fuWy in Note 4. the CPUC le investigating the regulatory imped of the Tax l Reform Act of 1906. Commencing January 1,1987, revenue designed to recover federelincome tax , expones le being collected subject to refund pending the outcomo of the investigamest J l e j Assele Asees - 1 in accorderes with FERC procedures, rossie rate incrm are subject to refundidth interest to the eirtent that they are subsequeney disallowed by thw FERC. As of June 30,198F. revenueo subject to refund aggregated approximately 8822 mnon. The Company believes thof nie amount of fofunds. lf any, likeiy to reewit from the outetencng rimi+; would not have a metsief effect on .[ i the remune of operseone. t, ll 2 I. NOTE 8-Short Term SeptWnge j Unrestricted deposits aggreganng approximately 87 million are maintained at converecisi banks
?
In ortler to continue unos of credit. The lines of credit are avaliable to support commescirJ paper " ) D" borrowings to Anance general cash requirements, fuel ou inventory and, cor'imensieg in 1967, dk .
]4-various reguietory beienchg accounts gy Cornme,. , suppo,ted oy - nee of c,e- by e e y wned aima,y and used for the capitaliza#on of an affiliate engaged in Eurodebenbre tierrowings. MT: J
.; ii, Effecpye June 11,1967, commercial paper supported by the Company's linee of creer wee also J leeued to Anance en offiliate engaged in leasing nucieer fuel to the Company. The asDeidlery's <<;
a e oomm.rm paper ha b n gunn=d by in. Company and a pr.o.nied on in. Company a - seience sh.ei. w. - e . Amoun= oumanding and w.igni.d ev. reg. ini.r.. re e are a fonows: Y
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Th . . . e 1.127 o e est.o e see4 ,
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,, ,f aessnan, Accounto and Fuel Os., .
8 - saoJ 213.0 2eLJ g
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- thiest creet noen cornmortnel eenks wNch snow the Cornoeny to retinance short terrn carrommes on a lon0- -
tonn p igenshan of ine sueeunery reci esensa as iono.esrm cohgesons en ras canance f
.,% st.
to E~ 9.; 7 v .k.- y\ , - ' , ' <v r.. l y u c
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SOUTHERN CALIFORNIA EDISON COMPANY NOTRS TO FINANCIAL STATEMENTS -(Condnued) NOTE 4-Income Taxes Curwet and Dederred Tazes - The current and deferred components of income tax exponeo are as follows: ; aasenee anses e meneeansed 12 unnom Ensed J June 3o. June 30. June 30, 1987 1908 1987 LeQ ,, _ 1987 fees (to TWs. Feders.. .. . ... . . .. 8117.000 8 53.482 $200,720 $ 98.632 $436.921 8115.842 ames .. . . . .. . . . . . 27.000 21.5a2 58.152 40.746 123.607 41.360 e, , 146.066 . 79.074 2e6.472 130.277 660 610 177202 osennee6 Federal and semes: . musessene een eroses - nee . . . . .. . . . . . . . (4.4a0) 18.798 (0.800) . 34.100 18.848 79.403 Aesseurend ones esecr.ory system property 37.574 62.387 80.010 06.800 156.302 171.703 Ree@ lory essenung amounes ... .. . (17,310) 20.877 (38.942) se See (104.814) 241.37s % Does sessansson euroness . . . . 338 17.4e8 (900) 20.4se St.479 40.420 Puoi eenesse essenants ...... .... .. 18.213 2.400 17.218 8.002 20.002 13.317 Loss rented to nusteer peere _ . . _ _ . . . . . .. . . . . . . . . . . . . .-. === (71.442) - (92.271) - Caenseeve seest of costansm0 changs ... - - 98.7s2 - St.7s2 - omer. . . . . . . . , , . . . . . . . . (2.ses) (23.797) _ (e.064) (22.144) (8.981) (20.530) < 27.878 80241 31.640 197.814 101.782 814.es3 fatalincome ten essense... . . . . .
.... g g g 3330.301 g sees.ee6 j W or hoome Teneet j molused in operseme empensee . . . 8173.900 8164.84e $310.300 $335.0e0 8707.e63 Sete.228
+
mahand m oeher encome..... (333) 8.706 (179) 1.831 (12.754) (4.341) '
, Lane reisted to nudeer piens seasowance - - -
(71.442) (92.271) - Reassed chance. . to..cumuassve. .... eseos or- scoounano.
.. - es.7s2 - 1a.762 -
feed mesmo sea esponse., . .. . g ste3.31s s297.521 saan.est g.3e0 g
*j Total income tax expense includes the current tax listety generated f/om opershone and
, o j deferred income taxes provided on certain items of income and expense which are reported in 4 T
3
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different periods for tax and financial reportnig purposes. Consistent wtth current ratomaidng procedures, the major items for which deferred income taxes are provided include regulatory
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i l,,7 balancing account provisions, phase in plan defer 7als, accelerated deproc6ation under the prov6-elone of the Accelerated Cost Recovery System, and debt reacquisition costs. ag + j f, . Pursuant to the Tax Reform Art (Act) of 1986, the cumulative effect of accruing unbuted 4 i l revenues is included in taxable income over a period of four years beginning on January 1,1987. j,
;h yp Deterred income taxes have been provided on the portiert of unbliled revenues which have been > '
reported for financial reporting purposes but not yet included in taxable income
- G T~ For ratomaidng purposes, property related accumulated deferred federal income taxes are
.,,% deducted from rate bene and amortized or othenutes apphed as a reduction (or increase) in federal 5 4y
;- income tax expense in future years. Accumulated deferred investment tax crodrts (iTC) are 3
~
"6 amortized over the lives of the reisted properties Prior to 1987, tax deductions relating to j construction overheads such as interest, pension provisions and taxes charged to construccon
, were accounted for as cur 7ent reductions in incorne tax provtsions, g Commencing in 1967, the Act requires the capitanzation of construction overhead and financing costs for determining the depreciable basis of certain properties for tax purposes. This change has
#g increased taxable income and has reduced the differences between construction costs for tax and N financeal accounting purposes. ]Q , )
- d. Deferred income taxes for construccon overheads and tax depreciation prior to 1981 have not .y
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SOUTHERN CAUFORNIA EDISON COMPANY NOTES TO FINANCtAl. STATEMENTS (Continued) NOTE 4-Income Tases (continued) rate. making purposes untu the taxes become payable. The cumulative not amounts o' tiese timing dHforences were $2.266 mdlion st June 30,1987. 52,196 mnon at December 31,1986, and $1.992 Nelon at June 30,1986. The following table reflects the differences between state and federalincome temos reported
. and the tax amount determined on income before taxes by applying the federal statutory tax rate.
The federal and the composite federal and state statutory income tax rates are 48% and 51.164%. respectively, for portodo presented prior to January 1,1987, and 40% and 44.338% respectively, for 3y a m anese , g es. - 1 tWP 19e8 1987 10W tWF INS ' l r-- ) ..- m Z i ,,'"."""l1. .,,m . 7sm s.e e me - .
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(6.008) (16.4ef) (13.800) (38.717) (41 2 ) (78.031) Pederal denseeum ter elate tense en mesmo.. (13.200) (11.220) (22.088) (34.711) (Mar) . (81.54e)
. 34.003 27.det 44.4e8 90.401 98,NI 97.873
.repreelesen Wmg tise tes proudseen . ..efeerenes
.. .. . . . .not deterred .
3SJ37 j
. . . . 34.408 80.0f7 83.720 121.8F4 112.000 Af ester SIssensee ..... ... g t
... . ... _ (13.448) Jt.S.174) (40.190) (44.812) (7s m ) (M.332) {
foteHnseme tem expense... ... . . . . . . . . $173.87e $143J18 8297.621 8338.801 8 M1JW 8 es3.806
- T Peelen heeme . . . . . . . . . . . . . . . . . . . . . . . Str3Jte 8367JD1 3879.ott 8729. sod 8 s.4to.aed St.ees.M5 homme) . . .. . . . . .
g.st 48.ea 47 2 % Tan neierm- k in addition to the changes discussed above. the Act . -.="cd, repealed ITC for property pieced into service after December 31,1986. except for property then under construction for which i there are various transitional rules. However, the Act requires a 100% reduction in depreciable basis I for any trenoittonal frC. Because the Company defers the i v.G of ITC, its emminadon has not ' significungy impacted earnings.
. The Act also reduced federal income tax retos to 40% in 1987 and 34% in 1908 and later years.
The provioeons of the Act are not expected to adversely aNect not income under present accounting standards, deferred income tax belances are not adlueted to reflect changes in income tax law or rates. However, an amendment to present accoundng requirements
- hee been proposed which would require adjustment of deferred tax belances to renect fie effects of such changes w....-v in 1988.
Andemeddng. . . . _t - . The CPUC has initiated an investigation to determine the effects of tax reform on retomaking practices. The investigation may conssder whether and to what extent reductions in certain norb
. property reisted deferred tax balances should be conveyed to customers through reduced rates.
Any refunde ultimately required by the CPUC should not adversely affect earnings but would prevent
- i. the retention of the trsnefits of the tax rate reductnons by the Company te l
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; NOTES TO FINANCIAL. STATEMENTS (Continued)
D wrt 8-sagdeyee seneet Plane A es,enen nee- -
-0 ' The Comprey maintains a trusteed, rcnw. a.Aory pension plan which covere %t ^er, se employees. Benente paid to retirees are bened upon age at recrement. years of credited service, and average earninge. Annual contribucone to the plan are determined on a level premium actuar6al .
, funding method. Prior serv 6ce costo reiseng to 1982 and 1906 plan amendmente are being funded over 30p periods Pension costo amounted to $13.1 million 829.4 melon and $49.0 million for the three, six, and twelve months ended Jure 30,1987. respectively; and $12.7 million. 828.9 miillon.
, and $66.3 mimon tar the three, six. .Put twelve monthe ended June 30,1986, r=- -1J,.
as Josessy 1, tene(s) 1eeB Ashapte peesse vrtd of eseumuassue plan eensese
, Vueese .. .. . . .. . ... . .. .. . ... . .. .. ..... . east 21e estEJ4
., 80eMessee ... ................................... e1.7e1 #AGO l seat emesse essamme ser namn eensee . . ..................g g (e? t.easet eveamme emes.
, Actuartel rate of retum assumpeone used in determining vie present value of accumulated plan l
\ f benents were 8% and 7.5% at of January 1.1906 and 1986, respectisfy.
kN " Commencing in 1967, a new pension accouneng etendard for defined benefit piene requires the use of a standardized actuartel method for measuMng the Company's annual pension obligetlan. Under curent regulatory procedures, authortred revenues for recovery of pension expones are bened on annual pension plan contributions. In e der to match revenue and expenseslutanes t
- resolving auch retomaking treatment are permitted to continue to expense pension contribuuons Insteed of pension expones as computed under the new accounung standerd. However, an asset or
, liebaty must be recognized to the extent that cumuistive pension contribunone are above or beeow the level determined under pension accounnng methode. For 1967 the difference between the j funding level and accounting expense le e=W to be insignificer't.
ls , r l Empiepee Steet Nene ~ An Empicyos Stock Ownership Plan (ESOP) and a Stock Savings Plus Plan (SSPP) are maintained to supplement employees' routement income Contributions to the ESOP are funded {- j- primarity by federal income tax benefits and contribut6one made by parecipating .a6,:n
,; Contributions to the SSPP amounted to $4.4 million,88.3 mimon, and 816.1 mimon for the three eix, m and tumive monthe stund June 30.1987 respecWyofy and were $4 mimon. 87.6 mie6an, and 814.5 mimon for the three, six, and twelve months ended June 30.1986, respecovery o.e, ,s ti,eme,, .ene.e -
i Certain health care and life insurance benefits are provided for redred employaes and their e dependente. Group life insurance benefits are provided through an insurance company. Health care 7 benente are provided through a combinacon of Company facinded and insurance programa. The
. cost of prov6 ding these benefits to retirees was 84.6 mimon. 88.8 mill 6on and 816 million for the three, b}-
eix, and twelve months onded June 30.1987, roepecovely and wee $3.9 mimon. 87.8 mmion, and 814.9 mimon for the three, six, and tweNo months ended June 30,1986, roepecovely
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- j NOTES TO FINANCIAL STATEMENTS (Continued) l l
NOTE 6-Joindy Owned Ugety Projects ! The Company owns undivided interests in several jointly-owned generating statkms and . trenomiesson systems for which each partcpant must provide its own financing. The proporbonate share of exponese pertaining to such propcts is included in the appropriate ;ategory of operating j expenses in the Stasernents of incorne. The amounts in the table below represent the investment in j each such project as reported on the Balance Sheet as of June 30,1937. t em en m.or.te os o un e Ase.mme.nt.ed se an . omme.re.nd.e tin themsenest W ooraes Transneasson Syseem ...- , . . . .....8 21.sas s 7.064 8 72 80.00%(a) Pew Comers cast emnersen0 season - unge 4 and S .. See.s07 stJeg 1.1e1 44.00 Idahous Coal eeneree'0 Season . . . . . . . . . .... 230.808 88.388 719 98.00 Pasats beares oC Tronomeehan syeuwn .. . .. 111.874 31.000 S.746 90.00 Pese venes Husaser eenersene Samson .. .. . est 838 30X4 642.800 18.00 San onnes Musener eenormung 8tB8e's that t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 901.057 124.474 23.806 80 00 Unos t end 3 . . . . . . . . . . . . - . . . . . . . . . . . . . . . 2.944.704 303.273 18.001 75.05 Comnon restess-Unge 2 and 3 ... . . 819.408 79.384 7.s30 78.08 Comunen Fenouns - unne 1. 2 and 3... . . . . . . . 174.805 20.183 3.404 FSM teser one Genereeng teoson .. . . . . . . . . . . .. 18R2 17Et - 80.00 Ywna Aass Comeoned Cyesu eensreeng Samson . . . 12.300 9.757 - 23.30
, Casseme oregon SCO KV Trenamenelon Line.. . .
__ 4292 14.71 Toenf . . . . . . . . . . . . . . . . . . . .. se.217J40 se66.s30 $406.s01
-(e) Aspresense a songoous reas.
24 . NOTE 7-Laseos g. M[ The Company obtains a portion of its nuclear fuel requirements under a capitil lease. Under the
,$ terms of the lease agreement. quarterty payments are based upon consumption of nuclear fue! and 3
;*" are designed to retum the accumulated investment in nuclear fuel and a financing charge on 8 )
unrecovered costs to the lessor, in accordance with an accountag standard appiscable to rate g regulated enterprises, the Company began recording the asset and obligation associated wtth the / # 4 i nuclear fuel lease in 1987. An Balance Snoots and Statements of Sources of Funds Used For Construcnon Expenditures presented for periods prior to 1987 have been restated to reflect the 1 p.
. capitallration of leased nuclear fuel The effect of this restatement increased nuclear fuel and the Li related obligations at June 30,1988 and December 31,1988 in the amount of $542.3 million and y ~*
8623.7 mili6on, respecthetty. This change did not impact revenues, not income, or retained earnings. i On June 10.1987, a wholly owned subsidiary of the Company purchased the nuclear fuel -- leasing company. The ocet of the acquisdion. which approximated 5521.2 million, was financed y primar0y by the assumption of the lease company's commercial paper obligations. The Company
, has presented leased nucasar fuel indebtedness on its Balance Shoots.
$ Rental payments representing interest and amortization under the nuclear fuel lease which were
.* charged to operating expenses were $43.2 million. 571.5 million. and $137.4 million for the three, six.
and twelve months ended June 30.1987, respectively. and $21.7 million. $44.1 million, and $90.6 4 I T f y} miulon for the three, six, and twelve months ended June 30,1966. respectively. Such payments are g recoverable through balancing account procedures. Future minimum lease payments under the %" =p" nuclear fuellease cannot be reasonably es1 mated due to vanatens in the consumption of nuclear 7 *
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NOTE 7-Lesses (continued) fuel. Leased nucteer fuel, not of accumulated amortization, totale $480.1 mielon. 8523.7 minion, and
$842.3 mnon at June 30,1987. Dommber 31,1988 #M June 30,1988, respecovely The Company amo leases automotive. computer. ofnce, and miseenaneer.ss equiument through j
operating rental agreements. These leases nave verymg terms. provis;ons, and uperston dates. 4 At June 30,1987, estimated rental commitments for noncancellable operating leases conented
.. . of the following veer eness o.ammes,31
* ,w tesF . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . e i t .ees
- 1em . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . et.eas tem . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......... . te.eN toes . . . . . . .. . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1724 test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.7e7 toes .. . .. . ................................... t t.eee .
Por pennet thorsoner... .. .. .. . .. .. . . . . . . . . . .........o 14*e TJeol Piswo Asmal Commmments ..... . . .. . ..... g NOTE 8 -Ceauelemente Centerussion Proyem and Maf Suppfy-Significant purchase commitments exist in connecthe with the continuing construction pro. gram. As of July 18,1987, budgeted construccon expoeditures are estwnated at 81.022.8 mMon for 1987. 8889.1 mul6cn for '988 and 8858L5 mWn for 1989. Minimum long-torm commitments of l approximately $1.878 mmon, exclusive of the amounto regtsod by the contract settlement, with major fuel suppelers enamaaad in Note 2. existed on June 30.1987 under fuel supply transportetton t j *"*"O****'* 4 Nuedeer traces Posey Act- %f A Pursuant to the Nuclear Waste Policy Act of 1982, contracte have been entered into with the U.S. Department of Energy (DOE) for disposal of spent nucieer fuel Under contract terms, a h- q~. f
- guar 1erty fee of one me per kliow:.tt-hour la paid to the DOE for nuclear generation on and after Apre j i 7.1983. For generation prior to Apre 7.1983. peyment of a one time fee equhralent to one mWI por * '
knowett-hour plus accrued interest is required. This one-time fee has been recorded se a deferred I
- charge pending future rate recovery and, including accrued interset, approstmated 825.1 mmon at June 30,1987. The otsgation for inie one tme fee is bemg discharged by egget payments over 40 -
guerters. Such paymente mmmenced during 1986. The amounts charged to income for current generstion were 84.5 mMon 87.3 mWon. and 13.9 mMon for the thrsa, ein and twelve monthe
. ended. June 30,1987. respectively, and 82.2 muor R2 mmon, and $8.8 mmon for the three, six. .
and twelve months ended June 30,1988, respectively. Expenses associated with disposal of spent I nuaiser fuer are recovered inrougn tne EcAc procedure. r l l Lang Term Purchened Power and Trenomeeseen Centracts - l Under firm contracte the Cor spany has agreed to purchase portions of the genersteg output of certain facilities and to purchase firm transmission service where appropnete. Although there is no A l q i investment in such facastles, these contracte provide for the payment of certain m6nwnum amounts l . (which are beoed in part on the deot service requirements of the provider) whether or not the facility or trenamission line le operating. None of these power contracts provNies, or le expected to provide. n[
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NOTES TO FINANCiAt. FJATEMENTS (Consnued) w 300TE 8-Commelments (continued)
, h exones of 5% of currort or eenmated future operating capacity. The cost of power and firm i transmiselon service obtained under these contrarra, includeng payments mace when a facility or s transmission bne is not operating, is included M Purchased Power and Other Operating Expenses.
respecevely. In the Statemente of income. Purchased power costs are generally recoverable T , through the ECAC belancing account procedure. Selected informanon as of June 30, 1387 g
, ;* pertaining to purchased power contracts is summartzed in the followmg table: **
erase or anessee opweeg cesseny-(c) . . . . . . . . gm e. .
. . e, 4...... . . . . . . . . . . . . . .
s ,a . r a n==ar a' O*g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .a== 43Eaimaaaaaimi's;aWG l
""'*""'**E.n 3 4,een INM ones e,siiGiu'# gesii A ,,sh 2: er - assensen ier.siW E 74 E siE E E:: ! U.".s.as
. . . . . . . . . . . . . . . . . . . . . . er (a) Amews hoes been emessed som these resorted prevenner ese to en sonhanson er a entwas eemn u no annig tone.
.,m,,,,, w .r.ose, ~ c yues. roe,-e - - k, Addinonel information as of June 30.1987 pertainhg ic both ptirchased power ar M.'snemioaor service contracts is summettred in the fonowing table: {;
Facessened Tseessikaales Passertt.) servee jl Delse et faseresen.. . .. . . . . . . . . . . . . . . . . . . , . . . . . . . . . . tote tes%2018 Weselse Caispensnes et centecas. . . . . . . . . . . . . . . . . . . . (D (b) g . , . Aseneres Pvaare tenemum Annual Paymenes
.e,' '.",+ ( Theemsum4 b
491).................. 19f f ...
...... . . . . . . . . . . . . . . . . . . . . . . . ... I 28.e00 8 .7e2 1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . et.Sto 11.Ses -
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . 41.547 SAtt :
w 1 . . .............................3... . . . . . . 13.et? sA73
< .,8;u ; $let . . . . . . . 4.a14
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,- l Laser peere ..
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _ 9s.938
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, TsGef i8vrehesse Ier sie Three beenehe tintni . haw 30. ,
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- 18e7 . .... . . . . . . . . . . . . . . . .. . . . . . . . . 8 $4KU
$ 6.00s
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. . . . . . . . . . . . . . . . . . . . . . . $ 11.047
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( , tote . . . . .. . . . . . . . . . . . . . . .. 119.483 12.03s f g i, la) ameest neue been ensuces born stoes reponed pe eaussy suo to ow escam.on er a contem wasoi te no longer long- ; tareL % ereats are l (n) sosse the vermener en se egensonsnu u.a. mises er eneseensea so'se serwon.teses on 9 preven arve r# asemi esereng maniennance, and fusi l h N0ft 9 - t 2 m ___
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The Prico. Anderson Act currently limits the public fiability claims that could arise frorn a nuclear r try.tidaM to a max! mum amount of 8710 miillon for each licensed nuclear f acility. Prtvate inus ance for -
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this exposure has been purchased by the participants 6n San Onofre and Psio Verde eri the marimum " eveliable amount, presently $160 million, with the balance to be provided by seconrury fituncial N (. 'f . Protec00n required by the Nuclear Regulatory Commission (NRC) Unoer the agfgement with the i 22 [* .- w a
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t toimtERN CAUPORNIA EDISON COMPANY V # 1907E3 TO PINANCIAL STATEMENTS (Continued) NOTE 9-C.J1 - . f tvf otnured) NMC, retrwsseve pret.Eum adjustments of esp to 527.7 million per year could be essessed in the owwe of nucosar irms invoMng any licensed reactor in the United States. The Price-Anderson Ant M tel**Jied to ard 's in 1989 however, Congress is coneadering proposale to, amend and exted the em. / M . ' PrtcW% dam %W nWMsgei is provided for losses up to $600 mili6on at San Onofre and Paio _. Verde. Omontarernen 3dmil'.y erv1 property damage aneuronos in suomes of the pnmery $600
.. miinora ktwr has s!w,t;mi puronmed. Insurance to cover a porson of the addleasel expense of
. repiteament spew resulcrg from an accioent-roisted outage of a nucieer unit le etno provided. A menemwo avesady indernntr/ in the amount of 83.1 miNHn tor a single unit for 62 weeks commences 1
'*' ateur tie ftSt 26 essoke rst such an outege. An adrhenal $1.5 mielen por week le provided for the l fand 88 weeks.1htsse polloles are primarify provideo through mutual insurance sempentes owned .
- l
% by unnes otrowener f scilities. lf losnee at any nucir.ar facety covered by the arrangement were to assomed the aownuistr4 furwAam.able for snees insurance proyams, the Company could be 4 l assermed reefjepocNya ;iremkan n 6tAtwte of up to 880.7 mielen por year. Inomeios premiums are charged to Operreg Expenses.
6, j go.e,woenmeoneos i TM forms au provleinns of Paenses gremed by the United States cover the Osmpany's mejor % and metah mm vrp ossetric piants. ween a total enoceve opereung caoneny of 943 megeweas. These neenese sto7,wer certain storop and reguimeng reconsoire and reisted tronominaion %l, fetelges. / i The above econoes expire at various times between 1987 and 2000. The Bosnese cornein ' teamerous restrictkms and obliganen on the put of the Company, including the ripit of the United i States to a:ciuire Compay propernes or. under certain conditions, the FERC to lesse a lleense to a
- new kenoso tgon the petment to the Company of spectned compensation. Appenosons for the retcensind sJ certain hydroelectnc plants referred to above with approgets eAscove operating copesay of 61 enegawmte are pending. Any new mooness received are expected tobe issued under w terms ord cond#tione leu favorable then thoes of the empired lioenees. ,
, Amift wtImgeWon -
In hvch 1178, five receio customere filed a sult in federal court ateging vietsuon of certain , o angtruet Wws. Tie complaint seeks monetary damages, a treteng of such damages and certain kqureJd The complaint asegn that the Company (1) le engaging in anacompocove behavior ss by creen; te ore for electrutty said to the resens customers than is charged to careen cheeses of ns -.' roles customas ("prtce seasers"), and (u) hee taken acuan alone and in ouncert with other ' unuse to pnwa or omit such rossie customem from obtaining buk power simpass from other - ;' sources to redme er rerA*M the resale custcaiers' purchemes from the Company (*1oreciosure"). V'
, The peninoffe settnate $ esv actual damages for saeged prios agumens, boere tratang, at approx 6 .
metafy 722.7 rThri nM friectosure damages stemming from alleged lose of energy and capacity at
. ntronimately f?85millun before treteng, for the perted Februs y 1,1978 to December 31.1986. > h tev began on My 8. tese, and concluded on september 26.1906. Finetos of Fact and Cutoeions of Law were need by the Company with the Court or bvemner 21,1906. No date has *%s:
team geven hr the docteaan. The foregosng gm.4si, involves compias issues of low and fact and,
- 7 #NVA.gtt the Company le unable to predet their final outcome, it has categoricesy densed the asegans r> these ressie customers.
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asanaasneeery 8 DISCUSSION AND AMAH.7M OF s.% F3SU.LTS OF OPEAATIONS AND FINANCIAL. COWDITION < ( Meaths of Operemone Samhpe Seelantary
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'r eminge per ehere for the second quartar of 1967 were 86c cc vered v.'? 438 for the same v
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ed 4 inet year. For the sim. and twoNo-months ended June 33.1987, seirvge pec there were [ . ' 2, j ; J1.o end 83.24 compared with 8t.67 and $3.27, respective #y. in 1986 Jets srvoerete imsvovement
;fre; br the quarter le primertly attritetable to incrossed sale
- volume and wee achnered w,fi though the ,
l sulhortred rate of retum on anmor! equity wee adNeted downward from 14.9% i.ar 90f to '.4 9% l for 1987, 4 N 1 . Eamings for the six and tweeve months ended Jurn 30, 1987 Indude %e adoption of.ra X Y aseounung change m the first quarter of 1987 to include tyvertues from s'octicety which has Aem - , detwered to customere but for wh6ch bits have riot yet been sent, chargewised tu the dia'abow.ed
, l' nuseer pient investment costs, and a provtsion for tne cotif of addlOnel tourtreelt beru&, and ik*~
e severence paymente reisted to an eeny roeroment program. Reducincete in inturerst exper.ee ud 1 a' 4
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preferred d6v6dende for as pertodo ended June 30,1987 ore the roeuit of the Converry's reilne: icing program and lower interest roses. 'i
@eredng Asvenues anaf Sake 's Frer the twelve-months onded June 30,1987, approximately 97% of the conpenyW reionues iar b from sales were aut$ect to the jurtediccon of the CPUC. The remWning 3% represer>to sales to q,
, i. whoissale customers which are reguisted by the Federei Energy IW;;istory Comrrieren (FERC).
& Tf4 sechne in FERC reguissed seios le avar aws to congnus as tiri ishoissele custostwee receNo
, 4,, more power from sourose outside the Company's oyotom.
~
' )[ Electric operating revenuse for the three. eix and tweeve-monthe ended .Aens ?O,1987,
>t kicreeaed from comparable perude in 1906 by 10.0% 6.7% and.5.8% roepecevesy.1his nafiscted, iri addition e the not offect.of changes in rates, en incrosse in idlowatthu,# eales of 2.9% fer the quarter and 2.8% for ths, six-month portodo. Due 80 mild temperettfree during the last haff cf t96) and toduced seiosio resale and industrial customere who are obtsbiry; more of their pcwee irarn
~
i_ ; outside the system er from eeff generstlon, kilowetthour sales for the tuono momho entted June 30,
~ . ' " "% ' ti 1987 decreened by approximately 0.1% frorn the twohe-monthe ender! Jure 30,11606.
The not effect of changes in rates, including the eflect of accruing outbGed r9vervJo, we3 t)
?* . Incrosee the overen revenue per kilowatthour by 6.2% 3.1% and 6.0% for the three, su. rd tweeve
$ months ended June 30,1987. . ; .r,. when compared to the same penode in 1986.
The table below shows the changes in major componente of operating revenues which [ ;h ' ~ contranuted to the overeu vanonon from the same periode in 1986.
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\ . -% f6er vos oceeAt in d87 iur tfoscovery of federal v come tax sapense e e faubjem tr> refund y i parurng ' tis outcome rt c CP#,jnvestigraten of the ebeces of tM Tax Referm Act of 1986 on ,
p ta austomer raw. [ .y Opereshg Esponeer n q Fuel expeqees beter/Ed tc 876.2 r::tnon and $98.2 mron for the et.rst and six-rAvithe ,
- i ended June p0, M/ i@ecting Irmd two of Compen.-owned ; gervareg faasties wr.icti 3 .,\
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tier.:sne rvy gorcedel arwi raplaced monocty povery.rchases. Fuel expwises 3tareamed 8319.5 ph 4% M PW wha onde;aun6 %,19(7 whu ccmpared to the same preiod a yeaf
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A .- [ ogst diri 97 rv,Taced fieturelp pdces and increated os of t>wer cos',nicieer arid CLE1perserratpon. t . .
)i The e#ect on ses Mngs +'l .%rAasticas in the Comr.2fs fusi arsJ pur.:hased power empwse is f'A j ,
; Anhimited try reguietary 6 fustment cteuses established by the CIV) and the FERC.
jIk ' leieresenlt in other opmuting and deprocleticr exronas s to alntie to be influenced by eyv.um grrW, inclusang te conrAiscio! aperation of Palo Vertli Nuoer Genersting Sta*'et Urw' t on .,, im 1.190s ao unt 2 u Seperenter 19,1st L 1he>m wnon sa: enpoeted to com. rad the
/ costi c.it opereeng F ato Veu Jnits 1 and 2 arePoctret it' fut.we r4miodr and mh ocemercial opovM id ch le scheduced for tar *de ybar, e when U dt 31s placed
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_ frA to a rede6an' lit t e level of required melrAerimers activbes, mrJritenames expense
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. 649eesed tor me 5.iree . six , lnd twohe-monme ende* Juns 30,1987 when compared to the same y , , ' portade in 1997 Iy $12.5 millir.1,518.5 milliots enc 'W 3 rsinton, reig>scereJy, s 'I Racovery of depnsoleson exp1tr.46 attritiutalde'to Ren Onofre IJnits 2 arid 3 and Peits Verde d
, Unht f s'ing 2 to authertsed throv3h Major Addidone Adfustrna 4 ClhasseeJw these unite,ircreasse
~
h detwedoton experava erWang r. mounts curroney being recovered in rates are senorded h haiencine encounts ps.asng wre rete recovery s.9c', itwofore. do not afiset sammes. s be C19.4 malicsi incresoe in operseng income tax exponoe for the quarter e. ides June 30, [g, :j 195't, vien compe2nd to the same perb;f in 1906, le due to Irvossed pbesax income a4 deferred 1
- y. hcome tax prawleions which are only Sutlehy o# set by the soner otyporr.to tax rear,
, As estpieined :t@v fury in. Note 4 of " Notes to Financial Kielerrents," the dedcit b f e , m . coritorate tax rets under 1M Tax l'Istorm Act of 1986 reduces federal incorne tu emense in 1947 ,, 3 and future years. This radictor, win be scrampanied 'by a reduction in catemor retJ are thur is ,
- , *, eurscted to have llute er. in impact rm not income Any refunds wtuch s3ey roeult hem the CPUC's investigersan to dstmtitare the seats of tar
. reform on ratomsking pract'cas are not ts pec.ed to edgnft.ca.itly offed:t not Wne but would prevent the osmpany fitim rotasmng the benetne o* recuch.wres m t nirmoes reeuttmg from de:Jaes m
- W# '"'"***
Q ;f . i O Cmer meerie , I U ., ' iMjes are permPted lo capitadte thr) cost OF 4ebt and equity Turb.13 ue$4 b Enatsce the !
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ce uFcoon of bulity rom.This e accomplished thruugi the a i-casri Alowances mr R, tics used Gdan Construren p ruGC). Tte Tax Reform Act of 1986 requese Werm1t on Ostuslated to c.mith ploit Omst'ucton to be espitelltesd for deter *tNng depracts> **tx basis, h a result, ser snencbg in 1987, the Company has not reduced the deot componett c8 AFUDC fcr the related ) deferred Mxes. Accordirvy, tf's twirstet tax benefit le no longer required to be romrded as a ! reds,*Jon of non.operati.3 incree tt e.xpense. The overall effect is 19 meresse VUDC and 7 hererse non operaung incorrirrax expense witiout affecting not incones. %*
. . _J h -hg
,esm p . .; + W dactne in AFUDC fcr the three, tlx., and twelve-months ended June 30. ?S$7 resulted invre a %% or 5328 miuen decrease in s',r.a.p.truenon Work in Prrares s. due pnmardy to the transfer 6 of Pelo Verde Unsts 1 and 2 to Utility Plai1t during 1986. & M' gf # p.; k M
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. . y Interest income decrossed by $11.4 million,819.0 million, and 818.7 mul6on for the three , six , O 3
and twelve months onded June 30, 1987 compared to the same penods of the preceding year - 4 reflecting a dochne in cash investments and reduced balancing account underconeccone. Pinenedel CondNon e,. ,een-o e,errunde j DurinD the poet three years, the Company has cbtained the majortry of its required wortung l# espisel from operssons. 4 Apprimimately 80% of the Company's capital requirements for the tweeve months ended June 80,1987 were proveded by imemelly pensreted funds, which compares to 80% for the same portod ; w
.E
- lest year. The incrossed level of funde generated intomalty es pnmarWy attributebte to placmg
- . ,- #" completed nuclear facHities into rate base, the tax benefits roeutung from growth in the Company's 8evestment in plant assets, and the reducton in beiencing socount undeMa**6ms, During the twelve months ended June 30,1987, the intemal generation of fwide has been poedsvoly affected by a 8308 mimon reducson in not balancing account underconecuons which wee ^
j partlany onset by $184 mimon of revenue deferred pureuent to the Peso Verde Phase-In Plan. The e ( CPUC has authortsed eacovery, by the end of 1989, of $382 maion of fuel supply contreet setnement ^ costs whleh we beneth the intemel generemon of funde during the recovery period. The Tax Reform Act of 1986 is having a negouve effect on the Company's intemed generston of funds. The nogethe impoet results from the retroecove mpeal of the irwootment tax credit one reduced e#pweDie deductione for depreciation. Any refund of prior years' deferred tax balances ultimately required by the CPUC to reflect corporate tax rate reductlone resultmg from the Act would
- (
have a further ne0esve impact on intomally generated fundo. The company's cash flow and nauldny we eiso be ofrected by revenues determd to future t-vy retorneking periode pursuant to the Paio Verde Phaeo-in Plan and comeceans on belancing ecoount p Q i
,, >r underconoceone. The aming and amount of revenue deferred under the phase-in plan are discussed W ,"i Iff **
d h thee 2 of " Notes to Financial Statements " q y en
> LhnldlEty anaf Capitof neeeurnee h 'f k*
M.if tr In conformity with the CPUC's energy cost retomaking policy, the Company uttiizes short term borowings to finance fuel oil inventory. Effecove in 1987, the Company also commenced financing h;;"g A beancing account undercollections with short term borrowings. The $202.8 miinon increams in T
- enort-term borrow 6ngs from June 30, 1386 to June 30, 1987 is stanbutable primarity to such f y s j financing. The cost of these Lvii6. .v. is recovered through balancing account procedurse. DetaHe th@
of the Company's unos of credit and reisted short term borrowings are discussed in Note 3 of "Ncess to Financial Statements? p^jg fu+-
' (
in addluon to the short term Anancings discussed above, the Company's liquidity is effected by Wie construction program and other capitgJ requirements including debt and capital stock rn1turmes. r The capital resources avonsbee to meet those requirements include funds from intomal generation f and extemal finai cing. Imamally genersted funds depend upon economic conditions and the k g' adequacy of timely rete rehef. Extemel financmg through short term borrowngs and secunty
- e issuences to innuenced by market condinons and other factors inciudmg 16mitanone imposed by the Company's Arecies of incorporation and Trust indenture. At June 30,1987, the Company could 9,, y i a@g issue approximeiwy ss.8 tdion of addiuonal First and Refundmg Mortgage Bonde or $4.2 bilhon of E 17 preferred stock at current interest and dividend rates. --
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cw, - The loupwing table presente the Company's protected capital requirements for 1987 through 1991: l in l Coneevesen Essenelwoo ! " . . . . . . .. . . . . . . . . . . St.023 Sete Se69 8 790 $772: - Asensenes er Long-Tonn Date . . . . . .. 103 80 et 20t 172 Reemmenons of Pmeoned and Preference Semak., . . . . . . 10 22 24 12 12 l .* c ca no.s n no .. . ... . m=ggg e L cepast seween, l
- The company's long-term goal is to maintoin a capaal structure witn approxwtery equet
% emounts of debt and equity. Tne Company's capnet structure se of Juny 30.1967 to reflected in the table below:
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PART11 OTHER INFORMATION lesse 1. Legal Proceedings mese assmore Generof Ato Case On December 26,1986. the Company flied an applicanon with the Califomie Public Utilinee
/ Commission ("CPUC") for a general rete increase. On March 20,1967, the Company sutwrutted revised cost of cepetal toenmony in whch the requested rate of retum on common equity wee reduced from 14.76% to 13.75%. The impact of thee enenge. plus a revisen to the Company's requested energy management program funding level. lowered tne Company's request by 889 l -
melon. ANowing for transfer of cortam costo from proposed bene rates and other revenue seguiremere ed)ustments. the Company's current rate request for the test year le approxhnete6y 0164 tmHNon. Heartnge were concluded on June 25,1987, and a declaion le expected in late 1987.
" General Rete Cese" was previously discussed in Form 10-K for the year ended December 31, 1998.
l Aegler AdWWone Ad/urement CJeues ("MA4C") The information on MAAC est fortn in Part 1. Note 2 of the Finandet Statemente le incorporated l -- c herein by thle referonos-
"MAAC" wee previounty ru-aamd in Form 10 K for the year ended December 31.1906 and in Form 10-Q for the quarter ended March 31,1987. -
Anspusf eindere The information -,_.;..e the anstrust 16tigaton which commenced on March 2.1970 le set forth in Port 1. Note 9. of the Notse to Financial Statemente and is incorporated herein by thle reference. -
"Anturuet Mattere" were previously discussed in Form 10-K for the year ended December 31, 1906 and in Form 10-Q for the quarter ended March 31,1987 Item 8. Ogier infonnelsen awa, Ce=,w.r Fennesen-aw*arr Aepresef segM
, On Apre 16.1987. the Company announced it we seek approval from the CPUC to create a p 2 holding company. The CPUC apptceton was fWed May 6.1967 with hearings scheduled for Septer$er. A decisaan by the CPW le anecipated by the end of the year. The Company also flied a roguest for a ruling from the intomal Revenue Serv 60s ("lRS") determining that the reorgaruzanon le a tas-free event for the Company and he shareholders. A ruhng by the IRS le anticipated in earty -
fall . , e On August 6.1987, an appucagon was filed wtth the Federal Energy Regulatory Commission ("FERC") for an order granting authorization for the proposed corporate reorganiza00n. In addinon
**** ' ' " to outeining the approval of the CPUC and FERC. the Company we sock from the Secunnes and Exchange Comrrussion an exemonon from the provtsions of the Public Utikry Holding Company Act '
of 1935 ("Act") se an intrastete holding company under Sectum 3(a)(1) of the Act. Shareholder approval of the holding company wNi be sought in Apne 1988. In anucipet60n of formation of the holding company, H. Frederick Chrisco win res6gn se Precedent and Derector of the Company effecuve September 1.1987. As of that date he we becorne
.- 28 1
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President of the Mission Group, a Cailfomia corporation. The M6esen Group wiu become a s@eidery of the holding comps 1y . and will engage in non-regulated businesses.
" Holding Company Formaton was prev 6ously discucsed in Form 10-Q for the quarter orded March 31,1987.
Censdrucdon Progreat aruf Capitaf ExperuWIuros f Construction expe:idetures for the 1967 1991 period are esemated (as of July 16,1967. the , date of the Company's latest approved budget) as folkms: /I E [ E, E M theette genom rmnas... .... . ... . . . .. . . . . 8 384 8107 s 2 0 s230 8258 81 216 Sessic _ _
. ' A anos and r . .. . . . , 15 2e4 aos 134 N 798
- Soestn essenJ#Jn anos end -- _. . .. . . . . . . . . . . . 45 ofd 300 22 412 2J01 oper emoonesee .
Teof sensevamn esses.is., 144 _N J J _7s 1.1R 900 800 85 ott 4.002 400 1 Lane assesress for funen used swing noneywoon . . .. . . .. . . . . . j1e J _de J J 270 Punes sorsees ter _. - sepenensee . . . . ... . . .. . ... . . [1/AB S8OD 0000 s790 8772 84JR2 Apprcedmetely 2% of the " Total construcean addisons" for years 1 9e ruhted to the construceon of nucteer VWes at Palo Verde. The Company's share of the total cost of ranstucWon and startg testing of those urves was budgeted, as of July 18.1987 et $1.5 belon, of which approximately $1.482 mimon had been expended inrcM0h June 30.1987. As of June 30,1987 construcuan of the l'alo Verde Units were substannalty completed. Approximetah 10% of the " Total construcuan addltlone" for the years 1987 through 1991 are related to capital expenditures to be ! made at San Onofre Units 1. 2 and 3. Item 6. EsMWes and Repr5 en Form 8-K (a) EmM Wes See ExhitWt mden on page 31. - I O N s [ l 29 i
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. i liighlights of Our 194th Year (Dollan in thousands, except per share data) 1986 1985 Change Earnings Per Share Primary . . . . . . . . . . . ........... 5 1.97 5 1.60 Excluding gain on leveraged leases in 1986. . . . . . . . . . . . .. 1.87 1.60 17 % Fully diluted . . . . . . . . . . . . . . . . . . l.84 1.45 Excluding gain on leveraged leases in 1986. . . . . . . . . . . . . . . . . 1.75 1.45 21 Dividends Per Share Cash dividends declared . . . . . . . . . . . .34 .30 20 Income Net income . . . . . . . . . . . . . . . . . . . . 71,395 55.254 Excluding gain on leveraged leases in 1986. . . . . . . . . . . . . . . . . 67,823 55,254 23 r Return on Equity Excluding gain on leveraged leases in 1986. . . . . ........... 19.0 % 18.8 %
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Ye are pleased to report that 1986 dimensions of the intermediation process. Funds to a was another excellent year for State Street.The 6 nance New England companies' growth can come j highlights on page one summarire our 6nancial from anywhere in the world. U.S. pension funds progress. Excluding non recurring items, earnings have increased their overseas ins esiments from , i per share have grown at an annual compound rate virtually nothing 6ve years ago to more than $10 l of 19% over the last 6ve years and were 21% higher billion in 1986. Money managers in 6nancial centers for 1986.han for 1985. Return on stockholders
- such as Tokyo, London, and Zurich are turning i'
equity was 19% increasingly to investments outside their own The dividend rate at year <nd was 25% Jomestit markets. higher than a year ago reflecting awo increases Statt Street's opportunities in this during 1986. Our fourth wo-for.one stock split in emerging marketplace continue to expand. Our the past 6ve years was distributed in August. roles are twofold.We provide to investors services The emergence of a worldwide Gnan- such as securities custody, recordkeeping, and cial marketplace is a desclopment of considerable investment management.We invest in 6nancial importance to State Street. As 6cancial assets asse s and provide related services. Both functions of people and institutions all over the world ger.e. ate interest and fee inmme and contribute to become more signi6 cant, there is a strong trend steady growth of our earnings. In both roles, we toward professional management and care of those are contributors to the emergence of a worldwide assets. Financial markets throughout the world 6nancial marketplace and the bene 6ciaries are linked by information technology. Hundreds of its expansion. of trading rooms mmmunicate with dozens of During 1986, total assets under our j market floors to form a worldwide marketplace. custody surpassed $440 billion, strengthening our Users of capital are put in touch with suppliers of position as one of the world's largest securities capital w;th increasing disregard for where custodians. In mutual fund and master trust [ cither is located. services, we have established strong leadership Sesuritization, underwriting, and positions, and we ancie:pate continued success in distribution are transcending the previously local providing services to the growmg mutual fund and n.,,
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!'r \- e 1 l l pension industries. Our corporate trust business further some of the busineses in shich our is benc6tting from the rapid development of strategy far growth is producing successful results. securitization. For example, we mere selected as State Street's participation in the broad trustee and custodian for the collateralized development of a worldwide 6nancial marketplace mortgage obhgations issued by a major investment oders long term opportunities to serve a growing banking 6rm, and as trustee for the securitization number of customers and to create value for our of 54 billion of GMAC automobile loans, the stockholders. largest private debt o6ering it' U.S. history. More recently, another large investment banking 6rm selected State Street as trustee for its REMICs, the new real estate mortgage investment conduits. We provide custody, investment management, and participant recordkeeping services William S. Edgerly Chairman for the increasingly popular dc6ned contribution plans such as 401(k) plans.To help our corporate customers develop sophisticated, creative solutions 7 to their nnancing needs, se continue to expand our corporate 6 nance capabilities. In connection with [ Peter E. Madden our securities processing businesses, we increased President our foreign exthange trading during the year to { accommodate our customers' international l activities. In the following pages, we describe 1 I i 1
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T. e N enummp>= k Ih h fWrihNg worLhnde puncist marartplace ofm 1 siguipcast { opportunitin for i I l State Street.
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l Serving a Growing Number of Customers Worldwide l j .. fund industry has experienced remarkable expansion, and its yowth has accelerated in recent years. By year <nd 1986, industry assets totaled $716 billion. State Street's growsh in mutual fund custody services, at 36% in 1985 State Street serves and 43% in 1986, reflects the a growing number of customcrs industry's rapid growth. On worldwide by emphasizing December 31,1986, we had over quality. We place a high priority $286 billion in mutual fund assets on innovation. In each of our in our custody. businesses, we aim to be a As the industry has recognized leader in the grown,it has responded to the reliability and value of our changing needs of investors by services, developing a broad array of funds with a variety of investment With 40% of the objectives. Product lines have U.S. mutuai fund industry's expanded and now include assets under custody, State Street money market funds, municipal is the nation's largest supplier of bond funds, stock and bond custody services to this dynamic funds, and Ginnie Mae funds, industry. At year <nd 1986, the as well as investment products number of musual funds serviced such as futures and options. by State Strat equaled 46% of the industry's tot 41 funds. Since 1924, when the irst mutual fund chose State Street to provide fund accounting and recordkeeping, the mutual l 1
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l i in addition, mutual funds are success in marketing mutual funds f enables us to meet the industry's increasingly being used as to their customers. expanding needs. During 1986,
, investment vehicles for retire- We attract and retain enhancements to Horizon ment plans such as the IRA and mutual fund customers because f
included the automation of Keogh plans and ! " variable life of our high level of customer complicated payment processing insurance products. During the service, a broad range of products, for Ginnie Mae securities and past year, signi6 cant growth and a continuing partnership with municipal bond funds, and a occurred in international mutual our customers to develop new remote report writer and data funds, and Stare Street's global products. Custody services include retrieval module that enables our custody service is a valuabic portfolio accounting, general mutual fund customers to addition to our services for these ledger accounting, and securities retrieve data from State Street's funds. custody. We have developed an 6les to generate a variety of Stat; Street provides innovative accounting system, customized reports. services to partic pants in all called Horizon,'" with a modular We expect to con-segments of the industry. In structure whose flexibility tinue to take adsantage of the addition to independent invest-opportunities created by the ment companies, the industiy .m grow h in the mutual fund includes broker / dealers, insurance :ndustry. In addition, we are companies, and hanks collaborat- currently adapting our mutual ing with fund distributors, all of fund custody services to meet whom have achieved excellent the insurance industry's record.
, ,u keeping and reporting needs for their genel account assets. We believe our expansion into this market offers signi6 cant oppor-tunities for future growth.
si < o 4 a v. State samt's Grooth in W: al Fund Aucu (Jnder Custody (Bdli..n .a J. A ist
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.: capabilities as a custodian for the to cover all of the world's maior mutual fund industry, State Street financial markets.We provide our has become a leading supplier customers with comprehensive of custody, recordkeeping. portfolio re x,rdkeeping services i uh m and benefit plan services to for their international investments.
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of the mutual institutional investors. During Large corporate fundindustry's assets 1986, we were ranked the nation's Pension plans are a major part of in our care, state street largest master trus: custodian the market for these services. ) in the nation's Lsvgest , bank. At year end, doi stic Public pension funds are a J
'"#" *I'""## rapidly growing segment of the a> sets for which we act as master services to this i i
trustee or master custodian for pension market, and we have dynsmic industry. U.S. pension plans totaled adapted our capabilities to the in 1986, State Strret
$99 billion, special requirements of these u'as also ranked as the l As master trurtee, plans. State Street's custody l nation's leading master !
State Street provides securities services are also widely used by l erect cunodian bornk. safekeeping, income collection, endowment funds. Our approach l trade wttlement, eash manage- to the market is client driven. ment, and timely reporting of By developing expertise in the portfolio information worldwide, special requirements of each Related services include perfor- market segment, our teams of mance measurement, portfolio professionals provide services analyus, oroline access to port- tailored to our clients' needs. tolio information, and securities lending. Plan sponsors continue to wek broader diversifi-cation through increased interna. tional investments. Our global custody wrsite begun in 1981, W b__ _
i State Street's services segmem of the market or, in the ninth largest bank money for de6ned contribution plans, some cases, outperform market manager in the United States. such as 401(k) plani, include averages. These products are State Street has employee recordkeeping, in vest- becoming increasingly popular, as developed a variety of investment 1 l ment management, ponfolio managers oflarge pension funds products for institutional inves. l 1 xcounting, and bene 6: payments. seek reliable investment results tors who seek dis ersi6 cation We provide these services to a for sizeable portfolios. Our through i nernational investments, I growing list of Fortune 500 closed end real estate funds enable including the 6rst ERISA-approveJ companies. During the year, our pension fund managers to commingled international index 1 Selection Fund, an innovative diversify their portfolios and fi.ad, country selection funds, and approach to pooled guaranteed capitalize on specialized real our High Wlue Fund, which takes insurance contracts (GICs), more estate insestment management. a more active approach to >tock than doubled in size.This fund At year end 198n, State Street had selection. During 1986, we created
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otters our clients safety and $24 billion of institutional assets a globalindex fund for the flexibility at higher rates than under management. We are ranked overseas subsidiarf pension plans traditional approaches. of a maior U.S. corporation. We i .'O are currently the largest manager State Street's of international indexed assets 'in j extensive experience in providing , the United States. custody services led us to develop investment management The international products designed for institu-
- expansion of our securities l
tional investors. We focus on custody and recordkeeping quantitative investment products, services extends our proven with special emphasis on index expertise to non U.S. custorr.ers. funds designed to replicate a State Street has provided custody
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fand and our exarnded andex fundfor a pomon af a p,umn .ua vnda <a s& caHe a hown inn imng ceded snso de As a rutadun for AT&n baldc{an AT&T priumn funds, Sute Srme caMedsynng hp. taas a /qualchant [or 4
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y,- , , ,,: L;,9 ; y' p 1 We have identi6ed strong growth State Street oKers i- opportunities for our global lending and other financial custody services in the interna- services to middle market tional pension fund market, - compar.ies.The New England especially Australia, the United region's expanding economy Bourstrength uilding on Kingdom, and Canada. Signi6 cant provides a strong base for our grosth and change in these mar. services. Our head oEce banking as the nation's leading kets have prompted pension plan approach distinguishes us from master trust and sponsors to disersify by hiring other banks that address this musulfund custodian, i multiple investment managers and market through subsidianes or State Street is investing signi6 cant portions of loan production o6ces. State expanding custody their tJsets in foreign markets. Street's corporate customers servrces aerldwide. During 1986, we work directly with highly trained, Internationalassets expanded our operation in knowledge ~able banking o$cers under our custody London to serve an increasing who have ready access to top totaled $20 billion at number of European customers. management and product special-yearat, nearly o Our oEce in Sydney, opened ists. A steadily growing number shr\refoldincrease in late 1985, provides custody of well. managed companies are sorr 1985. and recordkeeping services for choosing State Street as their our growing list of customers primary bank, in Australia and Asia. In addition, State Street's credit we installed our new intercon- services include unsecured tinental telecommunications facihties, asset based 6 nance, and system that links State Street's leasing. Our real estate 6nancing oEces worlJwide. At year end services are directed toward 1986 international au,ets under premier real estate developers. our custody, including '.J.S. assets Te also otter cash management for non U.S. cusumers, totaled serves, as well as investment
$20 billion, nearly a threefold ins rease over December 31,1985.
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management for both corporate international financi:al ma:Lets, 4 funds and rmployee benefit plans, and State Street ec>ntinue, to Our international - capand its activities in this area. j trade services support the import Our money market operations and rxport activities of our complement our credit setvices t sure $treet, corporate cuitomers. For by providing funding sourecs s u headofice importers, we provide letter of that match the varied pricing banking meaes quality. (redit and other documentary structures of commercial lending finding oficm. who services that assure efkien: and State Street's funding activities how ready access to reliable payrnent for goods. For include the ,tse of intirrest cett top management eyi exporters, in addition to odering swaps and financial futures in highly trainedpnluct documentary services, we proside combination with conventional specialists, seru our tradr finance services to assist in funding methods. In addition, we customm directly, managing the risk of selling o6er to our corporate customers b abroad while arranging terms a variety of short and medium-that are competitive in the world term investment vehicles, marketplace. In addition to ir cluding certi6 cates of deposit, supporting the trade 6nanse repurchase agreements, imured 1 i needs of our domestic corporate money market accounts, bankers customers, State Street Asia acceptances, and municipal and 1.imited, our Hong Kong mbsid. governmeni securities. During iary, and State Street Bank 1986, we expanded our municipal (Swnzerland) are addmg an bond ariderwriting activities and irwrc.tsing number of userseas broadened our customer base for companies to ent u,rporate distribution of these tax exempt custorner list. securities by over 50% St,t: Street's fwecign Capetal nurhrn exchange trading utmh supports t ~ Jctivttles are At tht' tenter of the MTo%th and development of ' l u .a. ,: . ., A-mm
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ia swuritization offer g ~ gnneth opportunities that operate in Eu ope and require a leading trustee and money foreign exchange, deposit, and macqct for personal wealth. for State Sturet. In
' lereding fac.;lities. The issuance of in ad3rion to our traditional
,. 1986. Stau kreet tcan > i . Eerodollar certi6 cates of deposic personal trust business, we have
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" alternatives to many of our services to professionals and
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! corporate financt wrvices are our growth m, these weas.
ing U.S. kristory. provided thn> ugh State Street More than 50,000 j ,
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Bostori Capital Corporation. new credit ord accounts were
,r gg i / These services include private added during the year, and plaierner t of debt acquisitions cardholder loans !stereawd by and d ; e.ritures, arid project 60% Our card ervices are tinante. We also proude loan marketed to creditworthe New J ,
syndication scruces to our corpo England consumers. During 1986, ya rate customers. As deregulation we added a number of atfinirv -/-[., treates new opportunans vor youp aid programs, a hich ar-l cammercial banks to provide
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I aimed at people affiliated with were selected as trustee for universities and other the securitization of $4 billion organizations. of GMAC autor.iobile loans, We completed the the largest psivate debt offering consolidation of our branch in U.S. history. We believe banking system into six otlices. securitization will continue to We played a key role in the offer substantial opportunities for ) j formation of a New England- State Street. wide cash machine network, which will give State Street State Street combines i customers access to more than information technology with 1.800 Yankee 24. machius in all banking to serve a growing six New England states. number of customers worldwide. The expansion of We aim to strengthen further our our corporate trast business is leadership positions in our benefitting from the trend toward existing businesses, and se see securitization of debt. Building cxcellent growth opportunities in on our experience as bond trustee the rapidly developing worldwide and sophisticated recordkeeper, financial marketplace. we are providing truster servises for collateralized mortgage obligations and automobile loan bond issues. During 1986, we
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~ Finarnial flistory Stau Sirret &ntors Corprainors esd Substdwies i Compound Growth Rate (Dollars in millions, cxcept per share data) 1986'" 1985 1984" 1983'" 1982* 1981 81-86* Condensed Income Staternents Net interest income, taxable equivalent $212.1 $ 185.1 $ 152.6 $ 150.2 $ 151.2 $ 116.8 13 % Taxable equivalent adjustment . . . 31.1 29.5 24.9 19.5 18.1 17.4 la Provision for loan losses . . . .. 17.9 12.5 4.0 4.7 8.5 5.0 29 Other cperating income . . . . .. .. 248.0 177.7 143.1 115.6 112.1 65.2 31 Other aperating expenses . . . ... ... 301.0 232.2 189.9 176.3 152.5 122.9 20 in:ome taxes . . . . . . . . . . . . . . 38.7 33.3 27.9 26.8 25.3 10.5 30 Net income. , ....... ... .. .. $ 71.4 $ 55.3 $ 49.0 $ 38.5 5 48.9 $ 26.2 22 Per Share"' Earnings: Primary . . . . . ...... . $ 1.97 $ 1.60 $ 1.42 $ 1.11 $ 1.47 $ .78 19 Fully diluted . . . . . . ....... 1.84 1.45 1.29 1.05 1.39 .72 19 Cash dividends declared . . ... . .. .36 .30 .25 .23 .20 .17 17 Book value at year end .. . .. 11.19 9.48 8.10 6.96 6.09 4.90 18 Closing price . .... . .. . 23.38 20.63 11.50 7.25 6.91 3.86 43 Average Ralances Interest. earning aswts . . . . $ 4,967 $3.957 $3.078 $ 3,147 $2,717 $2,352 16 Loans, net of unearned income . . 1,938 1.660 1,332 1,279 1,207 1,144 11 Total assets . . . . . .. .. . . 6,288 4,935 3,902 3,938 3,535 3,058 16 Noninterest bearing deposits . . . 2,241 1,550 1,184 1,176 1,056 979 18 Long. term debt .. . . . 81 79 82 69 65 69 3 Stockholders
- equity . . , . 358 293 251 224 "9 153 19 Ratiosa' Return on average equity . . 19.0 % 18.8 % 18.3 % 18.3 % 19.4 % 17.2 %
Return on average assets . .. . 1.08 1.12 1.18 1.04 .98 .86 Internal capital generation rate. .. 15.5 15.5 15.0 14.8 15 6 13.6 Primary capital ratio (average) . 6.3 6.6 7.1 6.4 5.7 5.7 Net charge. offs to average loans. . .64 .34 .25 .12 .29 .33 Allowance for loan losses to ending loans.. 1.95 1.78 1.76 2.11 2.09 1.90 191EsdmL ng ik pm en le:gragniIcans. tauble ayais.slent ner mtemt mcome u 1:11.664.000. net mcome u 1R8:3.000, ummy per h or avr $18% andpully ddused esmme per .h.n.r arr Il!$ 11Esdadmg ik pm on dupautum of optsorts, ner mwne n 141.bs9.000, rammes per Anur arr $lJJ. andfully dstated esmme per herr aor IIl1. ; I t 1 j Esdudmg sk luu an abw u;e .6,kuluvues net mcome u 140.972.000. umman per hu r a r Ills, andfully JJuted 4.umsngs pn hr r er lill. 101ladsdmg ihr pm an tk wie d.ralevate uptran s net mcome so 114 h10.000, esmmp ptv Juur er ll04, andfully JJuied eammy p,* so r er l pf ist Ratun and compuend g meth cases < sdude ruort en uertng otsvu Imladmg .br,e utenus. *rturer um syutts es l0.0% 14 s% 17 % ausd l?4%. and marn on aurts n i!4% i:n. vart a sd LW% lur19 % 14.94 IvM) anet (W:. mortttrely. IWlts herr ameents far lMI to NMs k,its % mtasalto nht t:nvinvvm ask ~plas stur=:hmted m IW:.19M),1%$ .srsi14% 1 e r:t>
Financial Resicw
. . . . . . . . -mm This wetion provides information about the operating re>ults and 6nancial condition of State Street Boston Corporation for the enree year, ended December 31,1986. This section should be read in conjunction sith the consolidated 6nancial statements,6nancial history, and supplen. ental 6nancial data.
.. : w Summary J In 1986, fully diluted earnings per share were $1.84.These results in.
f cluded 5.09 per share from a non. recurring gain from accounting for leseraged leases brought about by the Tax Reform Act of 1986. Excluding this gain, earnings per
,. .. . ,m share were $1.75, an increase of 21% from 1985. net income of $67.8 million was up 23%, and return on stockholders' equity was 19.0%. This is the 6fth year in a rov
/
f that State Street's return on equity exceeded 18%. Improvement in earnings per share resulted from a 40% increase in other operating income and, excluding ihr.non. recurring gain, a 17% increase in
.2 taxable equivalent net interest income, partially offset by increased expenses and a higher provision for loan losses.
State Street's revenue u reported in two maior categories-other operating income and net inte:est income. In 1986, other operating income, or fee
, income, continued to account for an increasing percentage of taxable equivalent
",,",,, ',,,, income before operating expenas, reaching 56%.
For 1986, earnings of $1.75 represent a 19% annual growth rate since brisings Per share 1981, when carnings per share were 5.72. This growth reflected a 31% annual growth thth thw,sn in other operating income an>l a 13% antiual growth in taxable equivalent net 41 5 114' 4 interest income. .
- i arnenc Per %4.,I a.luding s.m m.m nash<m Other Operating income in 1986, the growth rate in other operating income accelerated to 40%
from 29% in 1985. Other operating income increased $70.3 million to $248.0 million. The growth in 1986 resulted primarily from the rapid growth in 6duciary
.. 22 compensation and also from increased foreign exchange trading income.
The following table shows the components of other operating income. Non recurnng gains are intluded on a separate line in the table. 15 4 Other Operating Income Cornp >und Gros th Change Rate
, ,y (Dallars in millions) 191L6 1985 1984 1983 1982 1981 85-86 81-86 bdusiary s ompenuiion . 5176.6 1122.4 $ 46.9 5 797 $ 60.1 139.8 44 % 35 %
I toc Bank .ard im . f oreign eshange trading . 23.7 14.3 20.5 i7 16 6 2.2 13 7 1.5 9.9 0.5 8.1 16 16 151 24 55 Serme len. 12.1 99 82 8.5 9.3 74 I Corrnp >ndent 22 10
. .. e <rw eten. 8.5 43 90 7.3 8.5 7.1 2 4 Trading gains thmnL net. 1.5 14 C 3) 0.3 0.2 01 Mur nin gsns I
ni s: o4 o
- loscL net.
Ot her . 0.7 10.6 27 48 31 SC (! !) 57 (3 2) t3 9) 54 50 248.0 17?.7 137 7 l i f* 6 'F3.7 65.2 40 H Other Operating luom' %n rnurring (F a luj.na N. . kn eer,ng htma gains 54 21.4 464 ll mud A.Iteru li f =6:4r, tompnw .a btal other operaung income $248.0 5177.7 1843 1 1115 6 5112.1 56 5.2 +0 41
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a Fin:ncirl Review 7 i Fiduciary compensation increased 44% to $176.6 million in 1986. < The major services contributing to 6duciary compensation were securities custody and recordkeeping for mutual funds; master trust services for pension plans, endowments, and foundations; global custody; personal trust services; investment management for employee bene 6: plans; the administration of retirement plans; and services for de6ned contribution plans. The increase in 6duciary compensation included growth in all product areas and was primarily attributable to new business and the growth of existing clients' assets. Fiduciary compensation reflects revenue based on the volume of assets under custody or management, portfolio activity, and other services. In addition to fees, certain services have associated demand deposits.These deposits are invested, and the resulting income appears on the income statement as interest income. The following table shows the growth in assets under custody and assets under management: Assets Under Custody and Management Compound Growth Change Rate (Assets in bilhom) 1986 1985 1984 1983 1982 1981 85-86 81-86 Total assets under custody . . . . . . . . $440.8 $326.2 $245.1 $178.8 $151.5 $110.4 35 % 32 % Mutual funds . 286.3 199.8 146.7 110.3 108.2 83.0 43 28 Master trust, domestic. . 99.1 80.6 55.0 43.8 33.9 20.7 - 23 37 International 19.9 6.8 4.0 3.3 1.5 .9 193 86 Total assets under management . . , 26.1 15.3 11.7 9.7 8.5 5.1 71 39 Institutional . 23.5 13.t 9.8 7.9 7.0 3.8 79 44 Penonal . 2.6 2.2 1.9 1.8 1.5 1.3 18 15
%Inda mumus.sn.J mata.Jfurnd aca Growth in assets under custody was the primary reason for the increase in 6duciary compensation. At year.end, total assets under custody were $441 billion, up 35% from $326 billion at year <nd 1985.
Mutual fund assets increased 43% following a 36% increase in 1985, reflecting the accelerating growth of the mutual fund industry. Assets of nearly all types of mutual funds soared. Bond and income funds grew dramatically, particularly U.S. government income, Ginnie Mae, long. term municipal bond and corporate bond funds. Equity, short-term municipal bond and money market funds also increased. State Street's market share of the U.S. mutual fund industry, measured by assets under custody, is 40%. During 1986, State Street added 160 new funds for current and new clients, bringing the total funds serviced to 851,46% of U.S. mutual funds. Domestic master trust assets under custody increased 23% to $99 billion, primarily because of asser growth and additional portfohos from clients. State Street unks as the nation's largest master trust custodian bank and has approximately 6% of the U.S. market. Dur ng 1986, the global custody business grew substantially. New clients around the world were serviced from expanded facilities in Qumey (Massachusetts), London a 1 Sydney. International assets under custody near!y tripled, reach:ng $20 billion. This number meludes portfolios of non U.S. customers, and the international portfolios of U.S. pension plans and mutual funds. i.,*n t., l 1
Fintncial Review a ? l l
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i The growth in 6duciary compensation also reflects rapid growth in assets managed. During 1986, institutional assets managed increavd to $23.5 billion, up 79%, due to new business, use of additional products and funding by existing clients, and asser appreciation. Growth was particularly notable in passive equity products, with substantial growth also in passive internuional equities, passive 6xed income, and short. term investment funds. Personal trust services continue to be an important and growing source of 6duciary income. During 1986, new business and asser appreciation contributed to the growth. ; Rapid growth in services for de6ned contribution plans, particularly 4Cl(k) plans, contributed to the increase in 6duciary compensation. Income continued to grow from the administration of retirement plans, primarily IRAs and Keogh plans. Foreign exchange trading income was $14.3 million, up $8.6 million,
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or 151%, from 1985 due to an increased customer base combined with increased participation in an active market. Bank card fees include annual membership fees, transaction fees and merchant discounts earned on credit and debit cards. In 1986, bank card fees grew 16% to $23.7 million due to increased credit card usage and an 18% increase in the number of credit card accounts. The $2.2 million, or 22%, increase in service fees resulted primarily from additional commercial loan fees. State Street places emphasis on the fee component of its compensation for commercial tending services. 2e Net Interest Income Net interest income is the amount by which inc6me generated by earning assets (loans, investment securities, and money market assets) exceeds the interest cost of deposits and fund: purchased.The presentation of ner interest
.. income is on a taxable equivalent" basis to adjust for the tax.cxempt status of income earned on certain investments and loans. In 1986, taxable equivalent net interest income was reduced by $3.6 million from an adjustment for leveraged leases brought about by the Tax Reform Act of 1986. This was more than o6 set by the reduction in taxes. The remainder of this discussion excludes this non. recurring itern
. 820 from taxable equivalent net interest income, yields, and margin.
In 1986, taxable equivalent net interest income was $215.7 milhon, up 17% from 1985. The improvement resulted primarily from increased l noninterest. bearing deposits, largely from activity and growth of securities processing j
, businesses. Interest carning assets increased 26%, including a 17% increase in loans.
This growth was funded by a 40% increase in noninterest. bearing funds .nd by a 19% increase in interest. hearing liabilities The bene 6ts of balance sheer growth were partially o6 set by the c6ect of lower interest rates. Short. term interest rates averaged approximately I.5 percentage points lower in 1986 than in 1985. y qcy o. Taxable Equivalent Net Interest income Compound Net lateren lacane Growth Change Rate
.7j Nan in milhonst 1956 19!!5 1984 1983 1982 1981 85-86 81-86 Interes neome $393.5 $3671 133? 4 1326 8 $3516 5336 5 J Taxable equnalent adiusement . 33.5 29 5 24 9 19 5 18.1 17 4 427.0 346 6 362..' 346 3 3'll 3539 Interest expense 211.3 2ll 5 21C 1 196.1 230.5 2371 Net interest inwme<amable equivalent basis - $215.7 11185 1 1152 6 il50 2 1141.2 5116.8 17% 13 %
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'e Eerning Assers. The components of earning assets are shown in the fo!!owing table:
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dvhrsgeinterrst. Earning Assets' Average Volume Average Rate (D..ollars in millions) 1984 1985 1984 1986 1985 1984 Interest. bearing depedts with banks . . . . . . $ 859 $ 803 $ 725 7.54% 9.47% ll.X)% Federal funds sold and securities purchased under resale agreements , . 606 392 223 6.80 8.14 9.94 investment securities: U.S. Treasury and Federal agencies . 1,004 745 522 9.01 10.55 11.05 State and municipal. . . 311 236 197 10.24 10 44 11.13 Other investments . .. 184 48 43 7.63 11.21 12.81
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' Total investment securities. 1,501 1.029 762 9.16 10.55 11.09 Trading account assets . 63 73 36 7.27 8.22 9.%
Loans, net of unearned income: Commercial and financial . . 1,071 1,030 877 8.13 10.03 12.42 Real estate construction . . 192 126 85 9.30 10.64 12.57 Psal estate mortg26e.. 80 67 51 9.67 11.04 13.49 Consumer . . 3% 236 191 12.76 13.28 14.44 Foreign . 170 136 79 7.55 8.24 11.79 leases. . . 89 65 49 8.89 10.48 12.33 Total loans. . .. ' t~538 1.660 II)32 9.09 10.48 12.76 Total interest <arning assets . $4.967 $3,957 $3,078 8.59 10.02 11.79 Average loans increr,ed 17% to $1.9 billion. Commercial and financial loans, which comprised 55% of the loan portfolio in 1986, grew 4%. An increase in loans to middle market companies was partially offset by a decline in less profitable loans to large national companies.The consumer loan portfolio grew 42% to $336 million primarily as a result of the credit card expansion program begun in May, 1985. Under this program, the number of credit card accounts increased 30% to over 300,000 ucounts. In 1986, real estate construction loans increased $66 million to
$192 million. The increase in foreign loans of $34 million, or 25%, results from the inclusion of the loans of State Street Bank (Switzerland) for a full year.
As sources of funds increased, an additional $472 million was invested in securities. $259 million was placed in U.S. Treasury securities. Additional State and municipal securities were purchased at the end of 1985 in anticipation of a Federal tax law change. During 1986, $138 million of other mvestrnent securities l l were added to the portfolio, including mortgage. backed securities, floating rate notes j of corporations and bank holding companses, and Euronores and corporate bonds with short m:turities. ] i The Corporation invested a portion of its rapidly growing noninterest. bearing deposits overnight in Federal funds sold, which insreased ) i Federal funds sold and securities purchased under resale agreements by $214 million to $606 million. l l i l w .m ,.
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Financial Review Emnding Sources. During 1986, there was a shift in the funding trix toward lower. priced funds. as shown below: Sources of Funds Average Volutne . Average Rae (Dollars in millicns) 1986 1985 1984 1986- 1985 1984 Interest. bearing depos ts. Savings and NOW. . . . . . . . $ 163 $ 157 $ 119 5.52 % 5.89 % 6.33% Insum! money mankes accounts. .. 516 357 228 5.94 7.29 9.05 Certi6 cues of $100.000 or more. . . . . . . 436' 529 580 7JI S.31 10.3) Other time. . .. .. .. 36 33 26 6.68 7.99 10.21 Foreg' n . . . . .......... . .. $97 535 333 7.25 8.56 10.82 Federal tunds purchasei . . . , . . .... .. 412 277 234 6.45 7.94 ' 10.24 Securities sold under trpurthase agreements 934 695 500 6.13 7.44 9.48 Debt (short and long4crm). ... 131 125 133 7.83 8.32 8.98 Totalinterest. bearing li.bilities. . . . ... 3,225 2.708 2.153 6.55 7.81 9.76 Nonimerestb.sring sources . . I,742 1.249 925 Total sources . . . .. $4,967 $3.957 $3.078 4.25 5.34 6.8) Nonint: rest. bearing sources of funds grew at an accelerated rate, increasing 40% from 1985. This was due primarily to a 45% increase in noninterest. bearing deposits, based to a great extent on activity and growth in the securities processing businesses. Stockholders' equity grew 22%, primarily from the retention of earnings and also from the conversion of debentures. Interest. bearing liabilities increased 19%. Securities sold under repurchase agreements were up $239 million, or 34%, in conjunction with the expansion of the U.S. Treasury securities portfolio. Insured money market accounts were up $159 million, or 45%, reflecting additional deposits from personal trust clients, governments, corporations, and law firms holding deposits on behalf of their clients. Correspondent banks sold us additional Federal funds, increasing l Federal funds purchased by $135 million. The Corporation reduced its use of large certi6 cates of deposit by 193 million. Net Intercsr M.srgin. Net interest margin, defined as taxable equivalent net interest income divided by average interest earning assets, declined to 4.34% in 1986 from 4.68% in 1985 due to lower market interest rates and the resulting lower asset yields. Because 35% of funding for interest. earning assets comes from noninterest. bearing sources, State Street's net interest margin tends to reflect the level of market interest rates.
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Net Interest Margin 1985 pH 1983 m N kield on interesterning assets.' ' 8.59% 10.02 % 11.79 % 11.01 % 13.68 % 15.05 % Rate on employed funds. 4.25 5.34 6.8) 6J4 8.48 10.08 Net interest margin. 4J4% 4.68 % 4 4.77 % 5. 4.97% _ . . _ . _%% _ _._20% __ i.,*mn., i
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, a Finsacial Review l I
. ... no Provision for Loan Losses / Credit Experience <
The provision for loan losses chargul to income was $17.9 million, up from $12.5 million in 1985. This increase was due to a 17% increase in average loans and higher loan charge.ons. Net loans charged.o6 were $12.4 million, up from l i
- W $5.6 m.illion in 1985.This was due to an increase in the amount of consurr.er loans charged.o6 from the expanded credit card portfolio, higher commercial loan charge.oEs, an.d fewer recoveries.
The allowance for loan losses increased to $42.4 million, equal to I.95% of ending loans. Non. accrual loans declined to $9.3 million, or .43% of loans
, , , at year <nd. There were no interest concession loans or other real estate owned on December 31,1986.
Cmfit Esperience (Do!!ars in. millions)
. . . . _ . . _ _. _ 1986 1985 1984 1983 1982 1981 so Provisio.t for loan losses . . .
$ 17.9 $ 12.5 $ 40 54.7 58.5 55.0 Charge. ohs . .
17.1 12.1 72 9.2 11.5 11.7 Recoveries. ... .. .. 4.7 6.5 ).8 7.6 8.0 8.0 1I - si u as se ss se 0 Net loan charge.ods . Allowance for loan losses. year <nd. . Non-performing loans. . Ratios:
"lT4 ~
42.4 9.3 R2 5.6 10.6 3.4 27.1 99 1.6 26.5 5.4 3.5 27.6 8.2 3.7 22.6 12.6 Net charge.ods to average loans net . . .64% .34% 25 % 12 % 29 % .33% Anowance for Imn Lomes Allowance to ending loans, net . . . . 8 All"*'a" " taa l**= = l.95 1.78 1.4 2.11 2.09 1.90 Non-performing loans to ending lo.ns. net . .43 .52 .64 42 .62 1.06 e PmemagnJ Enang Lans W Nn Chuge4Msasa Other Operating Expenses
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Other operating expenoes include all expenses other than interest expense and the provision for loan losses. The following table surnmarizes the component > of other operating expenset Other Operating Espenses . . . . . - Compound Growth Change Rate (Dollars in millions) 1984 1985 1984 1983 1982 1981 85-86 81-86 Compensation . . . . .$ 140.6 $ 113.7 $ 89.4 $ 84.4 $ 76.0 5 60.1 24 % 19% Other personnel costs . 20.3 17.5 17.7 16.1 13 9 11.9 16 11 Total personne: 60sts . 160.9 131.2 107.1 100.5 89.9 72.0 23 17 Occupancy. net 21.7 15.2 12.7 11.5 11.7 10.5 43 16 Equipment . 22.9 18.3 14.8 13.9 11.2 85 25 22 Eaternal contract wrvices . 18.4 12.4 10.3 8I 6.9 4.4 43 33 Powage, stationery and supplies . II.4 9.5 7. 7 40 70 6.4 20 12 Professional fees. 9.9 ?2 49 61 47 4.5 38 17 Advertmng and customer conta.:t . 7.2 76 5.9 58 46 40 (5) 12 Teletommunwanons . 8.5 54 4.5 41 15 2.8 57 25 Insurance . . . . . 6.8 3.7 2.2 23 2.1 1.2 84 41 Lou on sale of subudianes . I3 Other . 33.3 21.7 17.8 14 7 10 9 4.6 Total other operaung expenses . $301.0 1232.2 5189 9 $176.3 $ 152.5 1122.9 3C 20
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e Financi.d Review i in 1986, other operating expenses were $301.0 million, up 30% from 1985. Compensation, the largest category, was up 24% primarily as a result of adding 675 sta6 during 1986 to procen increased business. Salary raises, as well as increased use of contract help and overtime, also contributed to the year-to-year increase. Other personnel . costs, up 16%, reflected the increase in stad. While one maior coroponent of other personnel costs, medical insurance, increased with the growth in stad covered, a weond component, pension expense, declined due to better l investment perform,nte relative to actuarial assumptions. In 1987, State Street 3ill adopt the new regulations of the Financial Accounting Standards Board on pension accounting w hich if applied in 1986 would have caused a reduction in pension expense. Occupancy expense increased 43% due to the addition of office space ouring 1986. This included the acquisition of a 150,000 square foot building in Quincy, Massachusetts: the use of an additional 95,000 square feet in two och'er buildings in Quincy; the occupancy of an additional 1% Aoors in the headquarters building in Boston; the expansion of facilities in New York, London, Munich, and Sydney; and the opening of an ofice in Cahfornia.The cost of bank branches was lowered with the closing of nine ofices. At year-end 1986 State Street had six branches in greater Boston. F.quipn ene expenses increased 25%,in part because of an increased number of computer terminals and additional mainframe capacity. Expansion of global custody services accounted in part for the 48% increase in external contract services and the 57% rise in telecommunications. Professional fees incrosed 38% as a result of business growth The 84% rise in insurance costs nsulted primarily from increases in premium rates The year to year increase in "Other" included higher operating losses, start up expenses associated with global custody, and the timing of charitable contributions. Income Taxes
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- The income taxes charged to earnings were $38.7 million in 1986, or 35% ofincome before taxes. The tax provision of $33.3 million in 1985 represented 38% of income before taxes. The 1936 decrease in the edective rate primarily results from the impact of the Tax Reform Act of 1986 on accounting for leveraged leases.
, Under applicable accounting rules, the rate changes which become e6ective in 1987 and 1988 required the Corporation to recalculate its net investment in its leveraged lease portfolio and recognize the edect in 1986. This resulted in a decrease in loan income of $1.1 million, a reduction in taxes of 54.7 million, and an increase in net mcome of $3 6 million. On a taxable equivalent basis, loan income decreased $3.6 n mdlion and taxes were reduced by $7.2 rmilion.
Dividends and Common Stock Dividends per share were increased twice m 1986, cont.nuing a practice started in December,1978. At the end of 1986, the dividend rate s is 25% higher a chan at the end of 1985. For 1986. the Jividend pavout ratio was to%. In witing dividend policy, the Board of Directors >eeks both growth in div dends and internal capital generation to support earnings growth. smce 1981, cash c.ividends declared per share have gros n at a 17% annual rate. A two-for.one stos k spht was distributed on A agust 5,1986, the
"""""" tourth m five years. A 7ecember 31,1986, the Corporanoa had authorization to purcha.c up to 1.280,000 additional shares of common steck in the open market j Dmdmlirer h or in privately negotiated tran>aerions. There were 4,439 scoskholder> of record i
a ulu at year.cnd. (
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I Fin:ncist Review -
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- The following table shows dividends and market value per share ,
for 1985 and 1986:
. . . . . .. . . . . sm Dwidends and Comnen Stock .
Market Price Dividends End of Common Smek (per share) Dedared low High ) Period
. . se %
Firs . . . .... . .. . ... . 5.06 $11% $13% $13 Second . . . . . . . . .. .08 128 % 1 17 % 16 % Third . . . . . . . .08 14 19 %. 15 %.
.,,, , ,e Fourth . . .. . . . .. .08 14' W 20 % 20 %
1986 Firs . . . . . . . .. . .. $.08 $19 % $26%
$24 Second... . . .. . .09 22 % 28 % 28 %
.# Third . . . .. .. . . . ,. . .09 19 % 28 W 21 %
Fourth . ._. . . . . . _. . . 2 28 % 23 % __ ._.__ _ .10_ __ _0 % __ _ _ Capital 8 88 '2 85 " 'S Equity capital grew primarily from the retention of earnings. In 1986, and for the preceding four years, capital was generated internally at a rate exceeding
" 14% each year. On December 31,1981, stockholders
- equity was $165 million, as shown on the chart. As of December 31,1986, stockholders' equity had increased to tu,u ..% $392 million, a 19% annual growth rate. In 1986 stockholders
- equity increased $69 million. Of this increase, $8 million came from the conversion of debentures and
$59 million came from the retention of earnings. The average regulatory ratio of primary capital to assets was 6.3% in 1986, compared to the minimum regulatory requirement of 5.5%
During the fourth quarter of 1986, State Street issued $75 million of long. term notes, which are included in the Federal regulators
- definition of total capital. On aveage during 1986, the Corporation's total capital ratio was 7.1%
No one financial ratio or formula satisfactorily mec.sures the totallevel of risk at a bank holding company, nor, by extension, the adequacy of its capital base. One additional meaningful way to evaluate the adequacy of capital is to rr.asure the ratio of primary capital to risk assets. Among the assets included as risk assets are: losns, municipal investment securities, and other investment securities. The ratio excludes assets with minimal credit risk, such as U.S. Treasury securities, interest. bearing bank balances, cash and due from banks. Federal funds sold, i securities purchased for resale, and trading account assets. As of June 30,1986, State i Street's ratio was 13.2%, ranking it above 95% ofits peer group of 83 bank holding ! companies with assets of $3 to $10 billion. Balance Sheet Strength Asset composuson. The composition of State Street's balance sheet reduces credit I risk. On average during 1986,48% of State Street's assets were invested in money I market assets (investment securities, deposits with other banks, and federal funds j sold). Loans were 31% of assets, a relauvely low level. The remaining 21% of assets l were noninterest earning, including customers' acceptance liability, premises and equipment, and accrued income receivable. j. Liqinday. Liquidity is the ability to satisfy demands for withdrawals of deposits. lending obligations, and ot'er Corporate needs. Liquidity is provided from { maturing investments, the large portfolio of marketable investments, payments on l loans, and through access to borrowed funds and dep -its. l l l lasst w/r l i I l
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- The short maturity structure of State Street's assets enhances liquidity.
As of Detember 31,1986,52.3 billion, or 74%, of inve>tment securities and money market anets had maturities within one year. The loan portfolio had $1.3 billion of loan due within one year. StateCtre'et continued to expand.and diversify its funding sources
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during 1966. Noninternt. bearing depmits supported 36% of State Street's total assets, a relatively.high percentage. Interest-bearing deposits and liabilities, whis-h increased 19% in 1986, sere held primarily by corporatiorm institutional investors,
- banks, and savings and loan associations. Individuals held add;tional interest bearing deposits in the form of insured money market accounts, savings and NOW accounts, and certificates of deposit. State and local governments and non profit organizations provi 8e d additional funding.
Country risk. Country risk arises from borrowers' possible inability to repay because of the it-(onvertibility of their assets into dollars. At December 31,1986, anets with couatry risk included $910 million of Eurodollar placements, $209 millien of acceptance financing and 5% million of loans. Eurodollar placements, usually for six months or less, were with foreign branches of large U.S. banks and - in large international banks in Western Europe, Asia, and Canada. Acceptance finar.cings were with large international Western European and Asian banks.The Corporation had foreign outs:andings of 1% or more of total assets in Japan, United Kingdom, Switzerland, Italy, France, Canada, and Germany. Total country risk in Latin Am.rica was $14 million, with no more than $4.5 million in any one country. Interest unsismoy rian. gement. The Corporation manages the structure of interest eatning assets and interest bearing !iabilities to balance the objective of income growih against the risk of internt rate fluctuations. Interest race risk arisn from a mismatch of repricing timeframes between assets and liabilities. The Corporation monitors the volume, yields, and repricing characteristics of l rate sensitive assets and liabilities over various time horizons. Interest rate risk is controlled by maintaining a close match between the volume of assets and liabilities subicet to repriting during a given period, and by adjusting to market conditions and thanging interest rates. On December 31,1986, interest earning assets and interest bearing liabilities sabieet to rate change were as follows:
' Interest Sensitivity Position at December 31,1986 Interest Sensitivity Period in months (Dollars ir. millions) Balante 0-3 4-6 7-12 over12 Internt-Earning Aswtw Loans .. 5 1.864 51.283 1% $ 32 1 513 Invntment muritin . l.622 '
. 99 197 329 797 Monn market auets' . 1.513 1.041 272 198 2 total interntrar ning assets . 4.999 2.623 505 559 1.312 Internt Branng Liabilain.
Depo.iti.... . .. 1.862 l,639 55 32 136 Inleral tunJ, rur6hami and repurshue agreements . 9c2 902 Odwr imernt h-anng liabition 202 % 1%
- bal imernt branng habilitin 2,966 2.607 55 32 272 Internt wnutmty pmtion . 16 a50 527 1.04C Cumulative internt wnutmty pmtion . 16 466 991 2.0))
%dsto bne. inn.or r.> u~~.ulve tw one J.o pmewn t.
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- l. Fin.im ial Resiew As the previous table shows, on December 31,1986, State Street had $16 million more of assets than liabilities maturing or repricing within the succeeding three months.Within the welve month timeframe, the position was $993 million ,
more in interest sensitive assets than in liabilities. l The Corporation maintains flexibility in its balance sheet to adjust ! its gap position. State Si et's interest bearing sources of funds are predominantly short. term, and the Corporation correspondingly has mamrained a generally short structure for its interest-earning assets, including loans. Within the shorter timeframes, State Strert .diusts its gap position to increase earnings in a changing rate environment. During 1986, the Corporation reduced the maturities on some of its short. term liabilities and, as a result, bene 6tted further from declining intere>t rates. . The Tax Reform Act of 1906 The Tax Reform Act of 1986 will 46cci State Street's business in 1987, and to a groter extent in 1988 when the maiority of the provisions of the new law are fully edective. It is hard to predict how markets that have been tax. advantaged will adjust to the new tax law. Because of State Street's business mix, any negative adjustments will likely be more than onset by the bene 6e from the reduction in the corporate tax rate. The repeal of the investment tax credit will have a signi6 cant impact on the leasing business, necessitating changes in the form and pricing structure of leases. Interest expense related to holding most of the newly acquired tax exempt securities will no longer be tax deductible, making these insestment securities less attractive. Mutual funds will become relatively more attractive investment vehicles, and individuals will have additional cash to invest. 06 setting this may be somewhat slower growth in IRA investments in mutual funds, as some individuals , previously contributing to IRAs will no longer have their contributions fully tax deductible. The change in the treatment of the provision for loan losses for tax purposes will have no signi6 car.: earnings impact on State Street, as the Corporation's tax deductions have essentially been limited to net charge-ods for several years. The tax. basis bad debt reserve ull be recognized as taxable income i over four years. This will have a moderate impact on cash dow but no direct ' impact on the income statement. The Federal tax rate has been reduced from 46% in 1986 to 40% in 1987 and to 34% in 1988 State Street currently pays substantial taxes.The reduction in the corporate tax rate will lover taxes immediately, and over time this rate { reduction could be of increasing btne6e as 5:are Street's businesses, currently taxed at a 46% rate, continue their rapid pwth. ) j Inflation I As measured by the prelimm.ry GNP deflator, indation was 17% Whde the edect of inflation sas retainely small in 1986, over time inflation does adect reported ornings. Reported earnings redett the impact ofintlation on other operatmg expenses, fee nsume, and net interest income. The costs of doing business, including compensation, other personnel costs, orke space, and equipment, are impacted bv mtlation as well as other factors. Otisettmg this, State Street maintains the flexibility to reprice most of its products and sen nes. To the degree that intlation influences the lesel of market mierest raies, intiation has an impact on net interest income. I i l l l I 1 i
l'inana ial Res icw a Comparison of 1985 Versus 1984 In 1985, fully diluted earnings per share were $1.45.This compares with
$1.20 in 1984, when earnings per share induded 5.08 from a gain on disposition of options.When this non recurring item is excluded from 1984, earnings per share were up 20%.
In 1985, taxable eg ,ivalent net interest income increased 21% to $184.5 million.This improvement resulted primar.ly from a 31% increase in noninterest. bearing deposits, and also from a 25% increase in loans. The benefits of balance sheet growth were partially odset by the edect of lower short-term interest rates, l which averaged about two percentage points lower in 1985 than in 1984. Net interest margin declined from 8.96% to 4.68% due to lower interest rates and the resulting lower asset yields. The provision for loan losses charged to income vas $12.s million in 1985, up from $4.0 million in 1984.This was due primarily to the 25% increase in average loans, and also because of a $2.2 million increase in net loans charged od. Net loans charged.od expresscd as a percent ge of aserage loans were .34%, compared with .25% in 19H. The allowance for loan losses at the end of 1985 was
$36.2 million, equal to 1.78% of ending loans.
Other oper: ting income was $177.7 million in 1985. This compares with
$143.1 million in 1984, which included $5.4 mi!! ion from a gain on disposition of options. Excluding this non-recurring item from 1984, other operating income was up 29%. The largest component of other operating income, fiduciary compensation, increased 26% to $122.4 million primarily due to new business.
Othe operating exp naes increased 22% to $232.2 million in 1985.The largest component of non interest expen:c, personnel costs. was up 23% as a result of additional stad added to process iner ased business. l' The Corporation's c6cetive tax rate was 38% in 1985.This compares with 36% in 1984. when the edective tax race was lowered by a gain on d sposition of options taxed at the capital gains rate. l l l
Consolid ted Siztements of Condition Swe St,eet &nto s Corpor.utwn .snd Sulmdunes a (Dollars in thousands) December 31,
. 1986 1985 Assets Cash and due from banks-Note B .. .. . . . ... .. . . $ 1,323,412 $ 818,82l Interest-bearing deposits with banks . . . . . . .. .. . .. ...... ....... .. 1,047,435 891,143 investment securities (market value $1,644,316 and Si,276,939)-Note C . . . . . . . 1,622,477 1,271,748 '
Trading account assets . . . . . . . . . . . . . ..... .. . .. ... . 33,740 167,589 Federal funds sold and securities purchased under resale agreements . . . 455,000 981,550 Loans (net of unearned income of $3,342 and $5.109)-Note D . . . . . . . . . . 2,169,490 2,031,661 Allowance for loan losses . . . . . . . .. .. . . .. . . (42,355) (36,214) Net loans . . . . . . . .. .. . .. ... . . .. . . .... 2,127,135 1,995.447 Premises and equipment, net-Notes E and G . .. . . .. . .. 131,190 72,152 Customers' acceptance liability . . . . . . . ... .. ... . .. 216,852 260,606 Accrued income receivable . . . .. . ... .. .... . ... . .. .. .. 111,503 %,774 Other assets . . . . .. ... ... .. . . . . . ... . .. 121,074 %,865 i Tota Anets . . . .. .. . .. . . . .. . .. ...... $7,189,8 st $6,652,695 i Liabilities ! Deposits: Noninterest bearing: Domestic ... .. . .. .. . . .. . . . . . $3,38'2 ,719 $2,678,457 Foreign . . .. . . .. . . . . 23,540 17,772 Interest bearing: Domestic . . ... .. . .. .. . . . . .. . . . .. 1,321,887 1,297,416 Foreign .. . .. . . . . . . . .. . . . 541,450 576,256 Tota: deposits . . . . . .. . , . . . . 5,269,596 4,569,901 Short. term borrowings-Note F . .. . . . . 968,028 1,206,830 Acceptances outstanding ., .. .. . . .. . . 218,158 263,030 Accrued taxes and other expenses-Note N . . . . . . . ... 113,592 83,316 Other liabilities . . .. . . .. . . 92,087 136,281 I ong term debt-Note G . . . . .. .. . 135,993 70,129 Total Liabilities . . . .. .. . 6,797,454 6,329,487 Commitments and contingent liabilities-Note Q Stockholders
- Equity-Notes G, H and I Preferred stak, no par:
Shares authorized. 3,500,000, none issued Common stock, $1 par: Shares issued. 35,078,000 and 17,048.000 . . . . . 35,078 17,C48 Surplus ,
. 38,671 46.542 Retained earnings . . . . . 318,615 259,618 Total Stockholders' Equity . 392,364 323.2q8 Total Liabilities and Stockholders' Equity . , . . . .. $7,189,818 $6.652,695 in ,,am so ca akJJ umut .we,,e,n l
i l o., w. .. l l l'
p.
.t 4
Ccasolidried Sirtements of income Stae Senet Bauon Corpvutwn and Wiwm (Dollars in thousands, except per share data) 1986 1985 1984 l Interest income Loans, including fees . . . . . . . . . . . . ... . .. . ..... . $160,488 $157,365 $156,384 Investment securities: U.S. Treasury and Federal agencies . . .. .... . .. ..... ..... 90,461 78,656 57,651 i State and municipal (exempt from Federal taxes) .. .. ... . . ..... 17.410 13,121 11,442 ' Other investments . . . . . . . . . . . . . . . . . ... .. .... ... 13,795 4,592 4,748 Trading account assets . . . . . . . . . . . . . . . . . . ..... .. . .. ... . 4,029 5,399 3,490 Deposits with banks - 64,957 76,074 81,956 Federal funds sold and securities purchased under resale agreements . . . . 41,165 31,905 22,140 Total interest income . .. . . ... .. .. .. .... ..... 392,305 367,112 337,811 Interest Expense Deposi t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ... ....... 117,205 127,487 126,854 Short.cerm borrowings . . . . . . . . . . . ....... . .. .. .. .... 87,233 77,523 76,505 f.ong term debt . ... .. . .. .......... .. . .. . . ... _ 6,854 6.525 6,812 Total interest expense . . . . . . . . . ....... .. .. .. . ... . 211,292 211,535 210,171 Net interest income . . . . . . . ...... . . .. . ..... .... 181,013 155,577 127,640 Provision for loan losses-Note D . . . . . . . . . . . .... ... .
,, 17,914 12,501 3,998 Net interest income after provision for loan losses . .. . ... 163,099 143,076 123,642 Other Operating Income Fiduciary compensation . ... .. . .... .. . . .. . ... 176,643 122,444 96,936 Bank card fees . . . . . . ... ... . .. . ... . ... ...... 23,698 20,468 16,577 Gain on disposition of options-Note J . . . . . .. . .... 5,412 Other-Note K . . . . . . . ., . .. .. ..... . ..... 47,643 34,785 24,178 Total other operating income . . ... . .. . .. .. 247,984 177,697 143,103 Income before other operating expenses ... . . .. 411,083 320,773 266,745 Other Operating Expenses Compensation . . . . ........... . . .. . . . . . 140,649 113,670 89,435 Other personnet costs-Note M . . . . .. ... .. .. . .. . 20,296 17,529 17,636 Occupancy, net . ............ . ... . .. . .. . . 21,714 15,159 12,657 Equipment . . . ... . . . . .. . . ... . 22,857- 18,279 14,835 Other-Note L . . . . . . . ....... . . . . 95,478 67,556 55,325 Total other operating expenses . . .. 300,994 232,193 189,888 Income before income taxes . . . . 110,089 88,580 76,857 ;
Income taxes-Note N . . . . .... . 38,694 33.326 27,842 Net income . . . . . . . . . . $ 71,395 $ $5,254 $ 49,015 r.=_= __-m._, _ e _ _. Earnings per Share Primary ... .. . . . $1.97 $1.60 $1.42 l Fully diluted . . . . . 1.84 1.45 1.29 Average Shares Outstanding (in thousands) Primary . . . ... . . 36,178 34.584 34,566 , Fully diluted . . . 39,552 19.300 39,577 ' i U.,en J.,u l i i
\
- ~O
# l I
Consolidated Statements of Changes in Finantial Poi,ition ' he Semt Boston Corpontion and Subudunes (Dollars in thousands) k 1986 1985 1984 { Source of Funds Nm Operations: l Net income . . . . . . . . . . . . . . . . . . . . . ..... . .... . $ 71,395 $ 55.254 $ 49,015 I Provision for loan losses . . . . . ... ...... . . 17,914 12,501 3,998 { Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. 5,857 20,453 13,487 Depreciation and amortization. . . ... .. .. .. ] 14,303 _ 8.287 5,640 Total funds from operations . . . .. . . . 109,469 96,495 72,149 Issuance of long. term debt . ... .. .. . . . ., .. .. 75,000 1ssuance of cornmon stock. . . . . . . . . . . .... . .. .. . 10,159 614 125 Issuance of treasury stock . . . . . . . . . . . 10.9/6 297 increase in: Deposits. . . . . . . . . . . . . . . . . ... ... . . .. .. 699,695 1,358,871 719,543 Short term borrowings . . . . ... ... ... . . ... . . 410,610 Other liabilit ies . . . . . . . . . . . . . . . . . . . . . . . . . . .... 78,809 Decrease in: Cash and due from banks .. . .. ... . .. .. . . . 18,849 j Trading account assets . . . . . . . .. ... . .... .. . . 134,004 Federal funds sold and securities purchased under resale a6reements. . . . . . . . . . . .. . . . 526,550 Other assets. .... ..... .. ... . . 85,952 Total Source of Funds . . . . .. .. $ 1,554,877 $ 1,975,224 5 878,057 Use of Funds Cash dividends de:lued. . . . . . . . .. . . . $ 12,506 $ 9,907 $ 8,330 Conversions and payments of long. term debt . . 9,136 11,463 555 Common sock acquired . . . . . . . . .. . . . .. 214 15,812 increase in: Cash and due from banks . . . . . . . . . . .. . 504,591 393,789 Interest bearing deposits with banks . .. .. . . 156,292 153,272 49,594 Investment securities . . . . . . . . . . . . . . . .. ... 354,652 473.629 15,871 Trading account assets. . . . ... . . 148,125 Federal funds sold and securities purchased under resale agreements. . . . .. .. . 606,913 22,574 Loans.. . . . .. . . . . . 149,602 496,107 283,747 Pretnises and equipment . . .. . 69,484 20.200 8,273 Other assets. . . . .. . . . . 39,027 55.304 Decrease in: Short. term borrowins;s . . 238,802 78,542 Other liabilities . .. .. . 20,785 970 Total Use of Funds. . .. . $ 1,554,877 $ 1,975.224 5 878.a57 se own, to wuchd.wdJualnuteme,,a lhn t..ar l
Consolidated Statement, of Change, in Sio. Lholders' Equity
.%c $rmt Boston Corporstwn .md Subsidurws
- w Common Retained Treasury (Dollars in thousands), , , Stock Surplus, Earnings Stock Total Balance at December 31.1983.. ......... . $ 8,676 $58,928 $173,705 $ $241,309 Net income . . . . . . . . . . . . . . . . . . . .. . ... 49,015 49,015 Cash dividends declared, $.25 per skre . . .
(8,330) (8,330) Issuance of common stock (7,869 shares). . . 8 117 125 issuance of treasury stock (23,652 shares) . . (498) 795 297 Common stock acquired (480,000 shares) . .. . (15,812) (15,812) Balance at December 31,1984. . . . . . . .. 8.684 58,547 214,390 (15,017) 266,604 Net income . . . . . . . . . . . . . . . . ... . 55,254 55.254 Cash dividends declared, $.30 per share . . . .,. (9,907) (9,907) Stock dividend, two for.one split . . ... .. . . 8,330 (8.330) Issuance of common stock (34,772 shares). . .. 34 580 614 Issuance of treasury stock (459,709 hares) .. (4,255) 15,231 10,976 Common stock acquired (3,361 shares) . .. .. (21+) (214) Fareign currency translation. . . ..... . .... (119) (119) Balance at December 31,1985... ...... . .. 17,048 46,542 259,618 323,208 Net inco me . . . . . . . . . . . . . . . . . .. ... 71,395 71,395 Cash dividends declared, $.h per share. . .. (12,506) (12,506) Stock dividend, two for on: split . . . . . . . .. 17,331 (17,331) Issuance of common stock (699,931 shares). 699 9,460 10,159 Foreign currency transition. . . . . . . . . . . 108 108 Balance at December 31,1986.... .. .. $35,078 $ 3. 8,671-.- $318,615 $ 0 $392,364 __..._= _-.- - - - - - 190$fl $O M & 80 lleCW $$8$dWFWIf$L l i l l l ll's.ts n 1 4
- - - _J
Notes to Consolidaard Financial Siatement, Swe senrt Baum Corpur,eruon .ond %ImJune l Note A-Summary of Significant Accounting Policies The accounting and reporting policies of State Street Boston Corporation (" State Street") and its subsidiaries conform to generally accepted accounting principles.The significant accounting policies are summarized below. Basis of Presentation: The consolidated financial statements include the accounts of State Street Boston Corpontion and its subsidiaries, including its principal subsidiary, State Street Bank and Trust Company (" State Street Bank"). All significant intercompany accounts and transactions have been eliminated upon consolidation. State Street's investment in its 50% owned affiliate, Boston Financial Data Services,Inc.,is accounted for on the equity method. On May 3,1985. St. ate Street acquired the net assets of Continatal Illinois Bank (Switzer!and). The acquisition has been accounted for as a purchase and, accordingly, the accompanying consolidated financial statements include its results of operations from date or acquisition.The acquisition cost and the prior operating results are not material to the consolidated financial statements. Income and expenses are recognized using the accrual method of accounting except for certain trust fees and other sources of income and expense which are recorded as received or paid. These exceptions are immarerial to the results of operations. Certain 1985 and 1984 amounts have been reclassi6ed to conform to the 1986 method of presentation. Where appropriate, number of shares and per share amounts have been restated to reflect stock splits (see Note H). Securities: Investment securities are stated at cost adjusted for amortization of premiums and accretion of discounts. Gains or losses on securities sold are computed based upon identified cost. Income taxes related to net securities gains were $390,000, $373,000 and $38,000 ir 1986,1585 and 1984, respectively. Trading account assets are car-ied at market value. Loans and Lease Tinancing: 1.oans are placed on a non accrual basis when they become 60 days past due as to either principal or interest. Subsidiaries of State Street provide equipment financin,g to customers through a variety of lease arrangements. Direct 6nancing leases are carried at the aggregate of lease payments receivable plus estimated residual value less unearned income. Leveraged leases, a form of financing lease, are carried net of nonrecourse debt. Unearned income on direct financing leases and leveraged leases is amortized over the lease terms by methods producing approximate level rates of return on net ( lease assets and net investment in leases, respectively, i Allowance for Loan tosses: The adequacy of the allowance for loan losses is evaluated on a regular basis by management. Factors considered in evaluating the adequacy of the allowance include previous loss experience, current economic conditions and their edect on borrowers, and the performance of individual credits in relation to contract terms. The provision for loan losses charged ! to earnmgs is based upon management's tudgment of the amount necessary to maintain the allowance at a level adequate to absorb probable losses. Foreign Exchange Trading: Foreign exchange trading positions, includmg ledger balances and spot and forward contracts, are valued daily at prevailing exchange rates. The resulting gam or loss is included in other operating l Income. Foreign Currency Translation: The assets and habilities of foreign operations are translated at exchange rates prevailing at the end of esth year, and income and expeme accounts are translated at averap exchange rates m e6ect dur ng lhoct s . s 1
w
. Netes to Conwlidated Fin.inii.it Si.iicmeni-ii Sw Samt Boston Corpurinn .md Subsdwws 1l ; i d.
L < Note A-Summary of Significant Accounting Policies (contin'ued) the years. Gains or losses from the tr'anslation of the net assets of certain foreign subsidiaries, net of foreign currency hedges and related taxes, are charged or credited ( to retained earnings. Gais s or losses from other translations are included in other
. operating income.
Interest. Rate Futures: Financial futures are used by State Street to provide hedges on sertin net interest sensitive pcsitions. Futures contracts are adjusted to market value on a current basis and gains or losses are included in other - operatmg mcome.
. Premises and Equipment: Premises and equipment are stated at cost J less accumulated depraiation and amortization. Depreciation and amortization
. charged to expense are computed by the straight line method using rates based on estimated useful lives.
Pension Costs: Actuarially determined costs of pension plans, induding amortization of prior service costs, are funded annually. Income Taxes: Provision for income taxes includes deferred income i- , taxes arising as a re. ult of reporting tertain items of income and expense in different wears for tax and 6nancial reporting purposes. Investment tax credits are accounted Ior using the deferral snethod under which tax benents are recognized ratably over the lives of the assets acquired. Earnings Per Share: The computation of primary earnings per sharc is based on the weighted average number of shares of common stock and common stock equivalents outstanding during each year. The computation of fully diluted earnings per share is based on the assumption that'the convertible capital notes and debentures had been converted as of the beginn ng of each year, with the elimina-tion of related interest expense less intome tax effect. Note B-Restrictions on Cash and Due from Banks Subsidiary banks are required to maintain reserve balances sith the Federal Reserve Banks. The aserage reserve balance for the year ended December 31, 1986 was $190,798.000. Note C-Investment Securities insestment murities consisted of the following at December 31: (Dollars in thousands) 1986 1985 Cost Market Cost Market U.S. Treasury and Federal agencies $ 1,046,230 $ 1,065,117 $ 852,465 5 864.433 State and mun tipal 187,354 290,334 351,224 344,360 Other investments , 288,893- 288 865 68,059 68,146 Total invest ment securities . $ 1.622,477 $ 1,644,316 $ 1.271,748 $1.276.939 Scturities tarried at $N33.319,0C0 and $927,407.000 at December St.1986 and 1985. respectively, were designated as set urity for public and trust deposits, borrowed funds and for ochtr purposes as provided by law. I
Notz: ta Censolid:ted Financial Statement,
$we Srms Auton Corpmtwn and %durses t
I Note D-Loans i Loans, net of unearned income, included the following at December 31: i (Dollars in thousands) 1986 1985 Commercial and 6nancial . . . . . ... ... ......... 51,232,863 $1,198,220 Real estate construction . . . . . . .. . .. ..... .. 189,060 175,858 Real estate mortgage . . . . . ..... ... .............. 110,742 72,204 lastalment and consumer ... . ... ............. . 395.198 311,420 Fore ign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... .... 142,344 182.266 Lease 6nancing . . . . .... .. .......... . ...... 99,283 91,693 Loans, net......... .. . .. ............... $2.169,490 $2.031.661 Included in loans at December 31, are non accrual loans as follows: (Dollars in thousands) 1986 1985 Non-accru al loan s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,330 $10,595 Interest income which would have been recorded under original terms . . . . . . . . . . . . . . . . . . .. ... ... ... .. 995 - 1,350 Interest income actually recognized. . . . . . . . . . . . . . . . . . . 419 714 At December 31.1986 and 1985, there were no loans outuanding whose terms had been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the nnsacial position of the borrower. At December 31.1986 there were no commitments to lend additional l funds to debtors whose terms had been modi 6ed in troubled debt restructuring. ' Changes in the allowance for loan losses for the years ended December 31, were as follows: (Dollars in thousands) 1986 1985 1984 Balance at beginning of year . . . . . . . . . ... . $36,214 $27,115 $26,4% Provision for loan lows . ... . . .. 17,914 12,501 3,998 Loans charged off . . . . . . . . . . . . . . .. .. (17.133) (12.117) (7,242) Recoveries previously charged off . . . . .. . 4,720 6.492 3.863 Allowance of subsidiary purchased . .. .. 1,807 Foreign currency translation . .. . .. 640 416 Balance at end of year . . .
$ 42.355 $ 36.214 527.115 Note E-Premises and Equipment Premises and equipment consisted of the following at December 31:
(Dollars in thousands) 1986 1985 Buildings and land ,
.. $ 92,493 $ 51.254 Leasehold improvements . 40,397 2MW Equipment . 56,434 44.159 189,324 !!8.712 Accumulated depreciation and amortization . (58.134) (46.560)
Premises and equipment, net . 5131.190 $ 72.152 6 .
Note > io Consolklaivil Financial Staiement,
. 5"" S"*' h** W'"*" U'U"'"
Note F-ShortTerm Borrowings Short-term borrowings consisted of the following at December 31: (Dollars in thousands) 1986 1985 Federal funds purchased . . . . . . . . . . . . . $ 277,100 $ 290,260 Securities told under repurchase agreements . ..... 624,353 830,932 U.S. Treasury demand notes . .. .. . . 45,000 45,000 Other . . . .. . .. . ... . .. ... 21,575 40,638 Total short-term borrowings . . .. .. . $ 948,028 $ 1,200,830 Federal fuads purchased generally represent one day borrowings. Securities sold under repurchase agreements are borrowings, which generally mature from I to 49 days, secured by U.S. Treasury and Federal agency securities. State Street's lines of credit with various banks aggregated $27,000,000 at December 31,1986. These lines of credit have not been activated. There are no compensating balance regairements under these agreements. Note G-Long. Term Debt The following are included in long term debt (less unamortized original i'5"' discount ,,where applicable) at D_ecember 31: (Dollars in thousands) 1986 1985 8%% Notes due 1996 ............ . ... . . .. ... $ 74,631 $ 7%% Convertible subordinated debentures due 2008. . .. 31,517 39,184 9%% Mortgage note due 2009 . . . . . . .. 29,134 29,502 l 5% Convertible capital notes due 1994 . . 711 _ 1,443 Total long-term debt . .. . . . .. $ 135,993 $ 70,129 The 8%% notes are direct, unsecured obligations of State Street.The notes may be redeemed in whole or in part, at any time on or after November 1, 1993 at 100% of the prmeipal, with accrued and unpaid interest to the date fixed for redemption. The 7%% convertible subordinated debentures are convertible at the option of the holder at a conversion price of $11.50 per share, subject to adjustment for certain events. The debentures are redeemable at any tinie at the option of State Street, in whole or in part, at a price of 106.20% at May 1,1986, and declining annually to par at May 1,1998 and thereafter. At December 31,1986,2,740.609 shares of authorized common stock have been reserved for issuance upon conversion. During 1986 and 1985, $7,667,000 and $10.816.000 of notes were converted into 666,696 and bJ,476 ihares of common stock, respectively. Aggregate maturities of the mortgage note for the years 1987 through 1991 are $408,000, $448,000, $493,000,1542,000 and $591,000, respecavely. At December 31,1986, property having a net book salue of approximately $39,944,0C0 : serves as collateral for the mortgage notes. The 5% notes are convertible at any time into common stock of State Street at a conversio : price of $3.97 per share, subject to adjustment for certain events. During 1986.1985 and 1984, $732,000, $30,000 and $250,000 of notes we~e (onverted into 184,439, 78.866 and 62,936 shares of common stock, respectively. At December 31,1986, F9,147 shares of authorized common stock have been reserved for issuance upon tonscrsson.
e j. bosc% to (on%oliddled biodm iJ! bJtenWotn
$sase Stor t Bmoon Corpor,stums and.%uds.mes Note H-Stockholders' Equity i The authorized number of common shares increased from 14,000,000 to 25,000,000 in 1985 and 28,000,000 to 56,000,000 in 1986. In 1985 and 1986, Stare Street distributed a wo.for-one stock split in the form of a 100% stock dividend to stockholders resulting in an increase in common shares of 8,300,000 and 17,331,000, respectively. The par value of these additional shares was capitalized by a transfer l from surplus to common stock.
Under the 1981 Stock Option and Performance Share Plac ("1981 Plan") for officers at the policy making level, an aggregate of 2.400,000 shares of common stak may be issued.The exercise price of non-qualifkd and incentive stock options may not be less than the fair market value of such shares at the date granted and expire no longer than ten ycars from date of grant. Seock appreciation rir, hts (SARs) were granted under the 1981 Plan, whereby the grantee mav surrender exercisable options and receive cash, common stock or a combination olboth, measured by the difference between t!,e option price and the fair market value of the stock on the date of surrender. Performance shares granted under the 1981 Plan are earned by the participants over a performance period, as defined by the 1981 Plan,in relation to the degree of attainment of perfortnance between minimum and maximum performar,ce tugets. Payrnent for performance shares will be made in cash equal to the fair market value of the remmon >tock after the conclusion of each performanec period. No further grants will be made under the 1931 Plan which expired in April,1986. The 1985 Stock Op. ion and Performance Shares Plan ("1985 Plan"), similar in terms to the 1981 Plan, was adepted by the Board of Directors and approved by the Stockholders in 1985. Under the 1985 Plan, options and SARs covering 1.000,000 shares of common stock and a maximum of 1,000,000 performance shares may be inued. Compensation expcase is recorded for performance shares equal to the fair market value of common stuck of Stase Street for the estimated number of shares to be awarded. Ce mpemation expense related to performance sharet and SARs for 1986,1985 and 19E4 ras $3,439,000, $3,779.000 and $1.832,000, regectively Under the 1984 Stock Option Plan ("1984 Plan") the maximum number of shaies of common stock which may be issued is 1,400,000 shares. Stock options awarded under the 1984 Plan are intended to qualify as incentive stak options but may be granted as non qualified stock options. Options may be aanmpanied by stosk appreciation rights. The option price of incentive stock options may not be less than the fair raaiket value of the common stock on the date of grant and the option prien of non qualified stak options may not be less than 50% of the fair market value of common stock on the date of the grant. No option may ha$e a term greater than ten yean. An opoon may be excrused by the payment of the option price m cash or by the delivery of shares of State Street sommon semk havmg a merket value equal to the opnon pnce or by a combination of cash and stock. l State Street has granted non qualified and incentive stock options to pur6hase sharemf common irosk io tertain officen of State Street and its subsidiaries under a Long Term Common Stock Incentive Program. Opuons become exercisable tive years trom date of grant and exp re no longer than ten years from date of grant. Non-quahtied optmns inued under this plan permit the optionee to resell to state vrect not more than 50% of such opions. Incentive stwk options were granted at a prxe not leu than the fair market value at the date of the grant. This plan expired in . February,1984. I 1 v. l 1 l
L! - Notes to Concolidaint Finsnrial Statement,
,,_ Sute Snwt Boston Corporation vul .%budurm i
Note H-Stockholders
- Equity (continued)
Option activity during 1986 and 1985 was as follows: Option Price
;. (In thousands, except per share amounts) Shares Per Share Total' Outstanding. January 1,1985 .. ... ..... ., 2,224 $ 1.38. S.54 $ 8,449 Granted . . . . . . . . . . . . . ..... ...... 881 11.69 16.97 14.012 y Exercised . . . . . . . . . . . . . . ............. (163) 1.38 4.36 (378)
Cantelled or expired . . . . . . . . . . . . . . . ...... _ (219) 2.57 12.85 (798) Outstanding. December 31,1985..... .. ... .. 2,723 1.38 16.97 21,285 c G ranted . . . . . . . . . . . . . . . . . . . .. ... til 22.47 2,481 , i E xercised . . . . . . . . . . . . . . . . . . . . . ... (125) 1.38 2.57 (310)
.! Cancelled or expired . ........, ..........
(83) 2.57 22.47 (74 0) Outstanding, December 31,1986..... . . . .. 2,626 1.38 22.47 $22 723 o At December 31,1986,1,152,316 options and 147,200 SARs w:re exercisable and 1,477,510 options and SARs were available for future grants. During 1984,50,096 options were exercised at a price of $1.38 per share. Note I-Restricted Net Assets Federal and State banking regulations place certain restrictions on dividends paid and loans or advances made by su'osidiary banks to State Street. At December 31,1985, net assets of State Street Bank amounting to $184,039,000 were available for distribution to State Street in the form of dividends and loans or advances. At December 31,1986, consolidated retained earnings included
$1.212,000 of undistributed earnings of Boston Financial Data Services,Inc, a 50% , owned affiliate.
Note J-Disposition of Options On March 21,1984. a settlement was reached on the lawsuit by State Street to enforte the exercise oioptions acquired in 1980 to purchase common stock of a bar,k holding company. Under the terms of the settlement, State Street received cash and recognized a gain of $5,412,000. This increased net income $3,146,000 or 5.08 per share fully diluted. Note K-Other Operating Income The following items are included in the "other" category of other operati. ncome for the years ended December 31: (Dollars in thousands) 1986 1985 1984 Foreign exchange trading . . $14,299 $ 5.674 $ 2.175 Servke fees . .. . 12,114 9.893 8,228 Corrnpondent servin '- . . 8,534 8.293 9.048 Trading gains (lones). ... .. . 1,477 1.377 (265) Securitin garns (loan), net .. . .. 738 '06 '2 Other , 10,481 8,842 4,920 Total "ot her" . . $47,643 534.785 524.178 i..,...,. l l
r: 1
- l Notes to Conwlidatest Finaniial Statementi.
State Srner & mon Corporanun and %b.adurws Note L-Other Operating Expenses ' y The folloopv,g items are ir.cluded in the "other" category of other operating expenses for the years ended Decetr.ber 31: (Dollars in thousands) 1986 1985, 1984 External contract services . . . . . .. .. 518,398 $ 12,381 $ 10,274 Postage, stationery and supplies . . . .. 11,416 9,505 7,717 ' Professional fees . . . . . . .. . . . . . . .. 9,876 7.156 6,896 Telecomrrunications . . . ... . .. .. 8,497 5.457 4,526 ! Advertising and customer contact . .. 7,192 7,590 5,921 I Insurance . . . .. . . ... 6,789 3,737 2,188 Other . . . ... . .. .. .. 33,310 21,730 17,803 Total "other" .. . . . . . . ... $ 95.478 $ 67,556 $ 55,325
= :.:
Note M-Retirement and Salary Savings Plan State Street and certain subsidiary companies participate in t j noncertributory retirernent plans coveririg employees eligible as to age and length of service. Contributions to the plan are funded as accrued, and are limited to . I amovin that are currently deductible for tax reporting purposes. Efective July 1,1985, State Street changed its actuarial valuation i method to the projected unit credit me: hod from the entepge normal method. This new method results in an annus1 pension expense which more appropriately { j matches the cost of projected retirement benents to the year in which such benc6u are earned. Revisions were also made in the assumed weighted average rate of return 1 on investments and the assumed rate of wage increases. These changes, combined ' ' with strong ini.estment performance, have resulted in decreasing retirement expense since 1984. Total retiremer.t expense for each of the years ended December 31, aesuarial assumptions, accumulated plan bene 6t information as estimated by consulting actuaries, and plan net assets at June 30(the actuarial valuation dates). were as followr: (Dollars in thousands) 1986 1945 1984 Total retirement expense . , .... . $ 1,532 $ 3.6'io $ 4,736 Weighted average assumed rate of return . . . 6% 6% 5% Wage increase assurnption . . ... 5 5 4 Actuarial prewn: value of accumulated plan bene 6ts:
\'ested . . $ 44,532 $ 42,395 $ 43,281 Nonvesteu .. . 3,012 2,134 1,922 Total . . $ 47,544 $ 44.H9 $45.m Net aswts available for benents $94,875 $ 75,477 $ $7,271 '
Emplovers of State Street and tertain subsidiary companie with two or more years servitr are chgible to participate in State Street's salary savings plan. Seate 5:reet's related ex penses were $1.808.000 $1.476.300 and $1.359,000 en 1986,1985 and 1984. respectively. Siare Street and 6erta n subsidiaries provide health care and life imurance bene 6t> for retired emplo>res. The cost of such benests are not materkl and are expensed as slaims are paid. ' 1 I. , k
';ys.
---- - - -- 7<
g
.yz gy s
Notes to Consolated Financial Statements -
$sar Srmt basok Croplun alS ,ktune, y .
1 it .
,4 Note N-Income Tazes y The provision for iaxes included in the Cor solidated Statements of in(6ne is comprised of the following:
(Dollars in thousands) 1986 1985 1984 Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,91 1 $ 4,213 $ 7,176 State.... . ...................... .......... 10,926 8,660 7,179
;y Totalcurrent ..... ...... .............. .. 32,837 12,873 14.355 De6etred:
Federal . , . ... .. .......... .. . .. ...... . 3,127 18.001 11,706 St a te /. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.730 2,452 1,781 Teal deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,857 20,e53 13,487 s Tv.at. income taxes . . . . . . . . . . . . . . . . . . . ....
,$ 38,694
_.= -- $33,326 $27,842 ( . The provision for deferred income taxes, which result from the recogmtion'of certain items in diferent years for 6nancial and income tax reporting Purpyes,iscomprisedof he following _ t (Dolla 2 in thousands) 1986 1985- 1984 Leasc Erancing ., a. actions . . . . . . . .... ..... $ 15,168 $ 14,165 $ 7,201 lovd;arnt tax credit . . . . . . . ............ .. . 9,966 5,906 q: @ 'p Provkior for loan losses . . . . . . . . . . . . . . . . . . . . . . . (2,800) (2,721) (330) 4 '
!' ' Other. net . . . . . .... .............. .... .. .. (6,511) (957) 710 Total deferred . . . . . . . . . . . . . . . $ 5,857 $ 20.453 $13.487 i}
r = .- - _- I* j A reconciliation of income taxes to an income tax provision computed i by applying the Federal statutory tax rate to income before income taxes is as follows: '9i . (Dollars in thousands) 1986 1985 1984 Federaliacome taxes, at statutory rate ...... ...... $ 50,641 $40,747 $35.317 q Increase (decrease)in taxes resuking from: Tax exempt income . . . . . . . . . . . . . .... (12,186) (10,957) (9.309) l State ax, > net of Federal bene 6t . . . . . . . . .. 7,374 6.000 4,837 Investment tax credit amortization . ... .. (2,672) (2,973) (2,198) J Leveraged leases-tax rate change . . ... . (4,715) Other. net . . ., .. . .. . . ... 252 509 (805) Totalincome taxes . . . $ 38,694 $ 33.326 $ 27.842 Deterred income taxes payable, included in accrued taxes and other expenses, werr $44,951.000 and $40.4t6.000 at December 31.1986 and 1965.
; respectively. included in these Lmounts sere deferred investment tax credits of
" 19,700.000 and $14.745.000. respectively.
Under Generally Accepted Accounting Principles. the lower tax rates in future years, which a cte brought about by the Tax Reform Act of 1986. required the Corporation to recalculate its net investment in leveraged leases and recognize the effect in 1986. This resulted in a $1.143.000 decrease in loan interesi income, a 14.715.000 reduction in the provision for income taxes and a $3.572.000 increase to net income or $.09 per fully diluted share.
.}
f ..n ?!. ____.__________.___________________9
- - ^
__ - - _ _ _ = _ _ _ _ - _ - - - - - t
* [ ,
} 1 /_+ i L* Notes to Consolidated Finam ial St,aementi, f 1 I swe sems so ron Corpor.ution .ond salsra, - o ' (<
, . .\
t ? Note O-Quarterly Results of Operations (Unaudited) The following is a tabulation of the unaudited quarteriy reiutts of l operations. Certain !?86 and 1985 amounts have been reclassified to confor.9 to t i 1986 method of presentation. Where appropriate, number of shares and per share ' ar ovnts have been restated to reflect stock splits (see Note H,). / (In thousands, cxcept per sharc amounts) 1986 Quarters First Second Third Fourth * { i laterest income . . .. . ... 5100,462 5100,174 f 94,955 5 %,714 i Interestexpense . . . . .. 57.143 56,347 49,380 48,422 Net interest income Provision for loan losses . . . .
.. .. . 43,319 4,16S 43,827 4,373 45,575 48,292 'y A4'h i . 4,874 s i, ;
Net interest income after provision for , loanlosses . . .
. . ... 39,151 39,454 41,076 43,t38 #
Other operatingincome . .. . .. 52,773 59,439 65,7< > 70,029 Other operating expenses . , . .. . 65,828 73,039 78,235 83,N2 f
<3 income before taxes . . .. . 26,096 25,854 28,584 29,555' incometaxes . . . .. 9,867 9,673 IlJ00 7,854 Net income . . .. . . .. .... 5 16,229 5 16,181 5 17,284 5 21,701 -
Earnings Per Share: -' Primary . . . . . . . . . . ... 5.4 'i, 5.45 5.48 5.59 Fully diluted . . . . . . .. . .42 .41 .45 .56 " Average shares outs:anding: Primary . . . . . .... 35,824 36,188 36,255 36,437 Fullvdiluted ... . .. 39.526 39,686' 39,5".4 39,543'
%Imin a .:.m m amng ym anIrw agalkw ofU.572.Mor 109prvfully JJasdJwe (In thousands, except per share amounts) 1985 Quarters First Second Third Fourth Interest income . . . . . 5 86.250 5 91,224 $ 91/78 3 v7,7@
Interest expense 49,330 53,534 13,974 ~ 54,07 ~ Net interest income , , 36,920 N,A90 37,904 13,063 i Provision forloan losses . 2,444 2,719 3,527 3,811 !
, f Net mterest income after p*ovision for loan I >sses .. 34.476 34,971 44,377 59.252 Other operating income . . 38.474 a ,75g s5,975 A,490 :
~
Other or* rating expenses . 51,C38 55.675 59,101 56.329 income beforetaxes 21.862 22.054 21.251 23,413 incomeuxes . 8.203 8,531 7.6c4 -d.726 Net mcome 5 13,659 5 13,523 5 13,387 6 14.685 Earmngs Pe, Share: Primarv . 5.40 5.39 5.39 5.42 Fullv Jiluted . .36 36 .35 .38 , Ascragesharesouts anding: Primarv . . . 34.239 34,398 34,601 35.C55 Fullydiluted 39,048 39.236 39.115 39,276 l fi l l________ _
j T .j , 4 ,
$? A ,
%tes to Conwlidated Finantial Statements (kf y .n
.1 Swe Strut Boston Corporatwn ad S., lulu ~m
$ s ,
,, Note V- Lesso:s Rentalespenseis u follows:
(DoP,ars in thousands) 1986 1985 1984
,1 Minimum rentals . . . ... . ... 520,016 $1;/74 $ 10.187 Csitingent rentals .. .. . ... . ... .. . 817 781 773 Subicase rentalincome . . . . . .. .. (3,546) p54) (690)
Totalremalexpense . .. .. .. . . $ 17,287 $ 12.601 $ 10,270
==_m. -
Contingent rentals relating to leased equipment are based on usagt in excessof spmfied minimumt Fucure minimum noncancellable operating with leasc. initial or payments remaini:y; terms byofyear one ye,tr andorhimorethe aggregate ander consistej of the following a Decemoer 31.1986: (Dollars in thousands) 1987 1988 1939 1990 1991 Therttiter Total
$15,838 515,301 $123)0 $10.876 $9,860 548,4 % $112,611 Sublease rental commitments of $5.060,000 through 1993 have been deducted from premises commitments. Substantially allleases for preudses and quipment include options to renew.
Note Q-Commitments and Contingent Lidilities
. The hnancial statements do not rebt various commitmems and
<.ontingent liabdities which arise in tbc normal course of business. These ;nclude 3, .j commitment.s to extend credit, letters of credit, guarantees and foreign crchange contracts. At December 31,1986, commitments under outstanding staraby letters of
,- credit aggretated $128.237,000.
On April 19,1983, counsel for Union National Bank, a subsidiary of
<.; SAat<> Street which way sold to The Conifer Group, Inc. oe. December 30,1983,
. received a letter from th.. Envirotwncal Protection Agency stating thdntention of i the EPA to make espmditures undes the federal so-called "Superfund" Act toward the cleanup of a site civned by Siiresim Chemical Corporation, to which Union had mad sectred loans from 1970 to 1976. In its letter, the EPA stated thn under the Act, responsible partica may be liable for money exper.ded by ab government to take necer try corrective actions at the vie and asserted that 'th, EPA had determittal Union to le an owner or operator of the site and is'therefore a responsible party. Under the "Superfund Act", an owner os operaint may be hable for the total costs of he t cleanup of the site and other damages which are m&serminate at this time. Un6 r h.ts denied that it ever was an owner or opernor of the site. Under the terms of as agreement relating to the sa'e of Union.5: ate Street agreed to indemnify The Conifer Group, Inc. for any costs which they may mcar in this matter. In the opmion of management, this action can be successful'y de' ended or resolved without material adverse efia t on the fin:ncial position of Sta a Serect.
1 .. --.- -----.. ( l, ,, L_______-__ . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - --
.V i.
' Notes to Consolid.ucil Finaniial Statement.
$ nase Senart Benton Cnpor.: tion .md Sulnulww, Note R-Financial Statements of State Street Boston Corporation '
(Parent only) - Statements of Condition (Dollars in thousands) December 31, 1986 1985 Assets Cash and due from banks. . . . ... .... ........ .. $ 50 $ 7 In vest ment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 Securities purchased under resale agreements. . . . . . . . . . . . . 20,986 47,268 investment in consolidated subsidianes: Bank..... ... ... .... .......... .. ....... 394,925 284,580 Nonba n k . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... ... 13.579 12,082 Capital notes of bank subsidiary . . . . . . . . . ............ 16,211 18.211 Notes receivable from nonbank subsidiaries . . . . . . . . . . . . . . 44,781 3,870 investment in unconsolidned affiliate. .... ...... ....... 10,337 5,079 Other assets , . . . . . . . . ... . . . .. . .. .. ....... 1,907 7,119 Total Assets . . . . ...... . . .... . ... . $520,776 $ 378.216 Liabilities Accrued taxes and other expenws . . ....... . .. . .... $ 16,689 $ 10,666 Other liabilities . . . ........ .............. .......... 4,864 3,715 Long. term debt . . . .
... . ... . .... ... ....... . 106.859 40.627 Total Liabilities . . . . . . . . . .. ...... . ..... 128,412 55,008 Stockholders
- Equit y. . . . . . . . . . . . . ... .... ..... 392,364 323,208 Total Liabilities and Stockholders' Equity . . . . . . . . . . $520,776 $378,216 Statemems of Income (Dollars in thousands) 1986 1985 1984 Interest and dividend income . . , .. . ... .. .. 5 6,353 $ 6.766 $ 8,457 Gain on disposition of options. . . . .. .
5.412 Total income. .... .. . . . . . 6,353 6,i66 13,869 Interest expense on long. term debt .. ..... . 3,915 3.708 3,964 Other expenses . . ... . .. . . . 1,116 1,751 1,643 Total expenses. . . . .... . .. . 5,C31 5.459 5.607 Income taxes . . . . ... .. .. 645 363 _ 3,099 _ income before equity in undistributed mcome of subsidianes . . .... . . 677 944 5,163 Equity in undistnbuted income of subsidiaries and affiliate: Consolidated bank . . . . . 68,768 54.033 43.650 Consolidated nonbank. . . . 2,067 924 132 l' consolidated atfiliate . . . (117) (647) 70 70,718 54.310 43.852 Net income .
$ 71,395 555.254 5 49.0.=15 1
J 4 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _A
n. , Notes to Consolklateil Finaniial Statement, State Star & won Corporatwn and Sulmdurm l Note R-Financial Staternents of State Street Boston Corporation (Parent only) Statements of Changes in Financial Position (Dollars in thousands) 1986 1985 1984 Source of Funds From operations: Net inco me . . . . . . . . . . . . . . . . . . . . . . . .. $ 71,395 $ 55,254 $ 49,015 Equity in undistributed income of subsidiaries and affiliate 4. . . . . . . . . (70,718) (54,310) (43,852) _ Total from operations . . . . . . . . . 677 944 5,163 Issuance of long. term debt. . . ... . . 75,000 Issuance of common stock. . .. ... 10,159 614 125 issuance of treasury stock . . . . . . . . . . . . . . . . 10,976 297 increase in other liabilities. . . . . . ... .. 7,280 655 Decrease in: Cash and due from banks . .. . . . 5.3 239 Investment securities . . . . . .. ...... . 4,935 Investmeu in bank subsidiaries . . . . . . . .. 72 Investment in nonbank subsidiaries.. . . . . . . 570 456 Securities purchased under resale agreements . . 26,282 24,931 Notes receivable from nonbank subsidiaries. . 1,649 416 Other assets. . . . 9,465
-J,2-.
12 103 Total Source of Funds . . .. . ... . $ 125,180 $ 24,884 $ 36,209
- .= = . . - - = . . - -
Use of Funds Cash Jividends dedared. . . . . . .... . $ 12,506 $ 9,%7 $ 8,330 Conversions and payments of long-term debt .. 8.768 11,129 250 Common stock acquired . . . . 214 15.612 increase in: Cash and due from banks . . .. 43 investment securities . . . . . .. . .. 16,000 l Investment in bank subsidiaries. . . . .. . 41,577 1,906 i investment in nonbank subsidiaries. 2.828 Securities purchased under resale agreements . 1,179 3 Notes receivable from nonbank subsidiaries. . 40,911 t Investment in unconsolidated affiliate . . . 5,375 2,455 Decrease in other liabilities . .. 7,083 Total Use of Funds. . $ 125,180 $ 24.884 $ 36.209
. -=
t
Notes to Consolidated Financial Statementr, Swe $t,vre Boaous Corpourwo: .ud % dunes Note S-Foreign Activities The following selected amounts related to foreign operations are included in the consolidated financial statements as of and for the years ended December 31: (Dollars in thousands) 1986 !?'8 1984 Asset s . . . . . . . . . . . . . . . . . ... . $ 1,483,01C $ 1,438,280 $ 1,085,369 Interest and other operating income . . . . . 98,215 97,634 %,341 Income before income taxes . . . . . .. 3,314 3.244 1,812 Net income . . ... . . . . . ... . 1,225 1,113 827 Interest costs allocated to international operations for domestic funds are ba<<d on domestic money market rates.The allocation of administrative expenses is bmd upon services provided or received. 1 ( l { , i 1 I I ( { l
, ... , . s..
l q 1 J__ _
q C_~ _ _ l Anouniant.' Report I To the Stodho!Jers and Board of Devertors State Street Boston Corporation Boston, klassachusetts We have examined the consolidated statements of condition of State Strcct Boston Corporation and subsidiaries as of December 31,1986 and 1985, and the related ionvolidated statements of income, changes in stockholders' equity l and charges in finandal position for each of the three years in the period ended De6 ember 31,1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, induded suth tests of the accounting resords and suth other auditing procedures as we considered necessary in the ; cir6umstant'em. In our opinion, the finansial statements referrW to above present fairly the consolidated 6nancial position of State Street Boston Corporation and subsidiaries at December 31,1986 and 1985, and the consolidated results of their operations and thanges in their 6nantial position for each of the three years in the period ended December 31,1986,in conformity with gene. ally accepted accourting principles applied on a consistent basis.
%d V $4 Boston, Afan.achusetts 8
J.snuary 13,1987
t Supplemental Financial 1)ata Swe Sener Boston Corpore ion and %budurws l Condensed Average Statements of Condition with Net Interest Income Analysis . . . _ ( Taxable equivalent basis) 1986 (Dollars in millions) Balance Interest Rate ! Assets Due from banks. .... .... . . . 5 859 Investment securities:
... .. . . .. .. $ 65.0 7.56%
U.S. Treasury and Federal a .. 1,004 Scate and municipal . ..... . gencies. ..
.. .. .. . . .. . . 90.5 9.01 Other investments .
. . ... . . . ..... . . 311 31.9 10.24
.... . . .. . . .. . .. . .. 186 14.2 7.63 Trading account asets. .. .... .. . . . . . . 63 4.6 7.27 Loans, net of unearned income Commerrial and financial . . . . .. 1,071
. .. . .. m 87.0 8.13 Real estate constr uction. . . . .. . . . . . .. 192 17.8 P. cal estate mort 9.30 Consumer . . . . gage ...
. . .. .. . . . . . . . .. . 80 7.7 9.67
. .... .. . . ..... .. . . .. 336 42.8 12.76 Foreign . . . .. . . . . . 170 12.8 7.55 Leases. .. ....... . ... ... . . .. .. . . . . .. .. . 89 7.9 8.89 Total loans . . . . . . . . ......... ......... . l938 176.0
. ... . 9.09 Federal funds sold and securities purchased under resale agreements. . . . . 606 41.2 6.80 Total interest carnin 4.967 423.4 Cash and due from banks . . g assets. . . . . . . .. . .
.. . . . .. .. . 8.59
. .. .. . 747 Allowance for loan losses . . . . ... . .... ... ... . ... .. .. .
i Premises and equiprnent. net (41) l
. . ... .. ....... . . .. 93 Customers' acceptance liability . . . . . . . . .. . ... . . . 305 Other assets. , ... . .. . . . .... ..... 217 Total anets. .... . .... . .... ..... .. . 56,288 Liabilities and Stock holders' Equity Interest bearing deposits:
Savings and NOW . . . Insured money market accounts. .
. . ... . . .. . . ... 5 163 9.1 5.52
, ... . . .. . .... 516 30.9 5.94 Certdicates of $100,000 or more . . .. . ........ 436 31.5 7.21 Other time . . ... . ..
36
. . .... .. .. . .. 2.4 6.68 Foreign . . . . . . . . . .. .. ... . . 597 43.3 7.25 Total interest. bearing deposits . . . .. ... ... . 1,748 117.2 6.71 shori term debt . .
1,396 Long term debt.
. . .. .. 87.2 6.25
. .. .. . 81 6.9 8.47 Totalinterest bearing liabilities . . . 3.225 211.3 6.55 Depostis. . .. . . 2,241 Acceptances outstanding . . . .
306 Other liabilities . . . .
. . 158 Stockholder 5' equity 358 Total liabilities and stockholders' equity . $6.288 Net interest income . ,
$212.1 Excess of rate carned over rate paid . 2b%
Net interest margin
- 4.345-
'mer miemt owsm n tsuHe etunanent net miemt mwmc ttn. int ry stem entems wntnt suru Atem ute, Mr iv% rul Jr uk efn t ni rk nom m ovemg g.tm un levagnt leases insemt mame on neuer t.t n He .ntsstrenent .n uestars ana .' sun
- mclaman ti'r efn t of I.ssaNr egatuuret adrustme'uts, unmit a federd! La r.h ul %"a
.utmssatfor pusMr . tat: en mr saw at 4 tk .ri.an* Intrul ta irnen isun favs mcia. int m mtemt unsume.ur not nateral N.. m nui lams ,or win.wst m ont mtw ..m sats r -
1
l 1985 1984 1983 1982 Balance Interest Rate Balance Interest _ Rate _Balance Interest , , Rate _ , Balance _Ir. teres _ Rate _
$ 803 $ 761 9.47 % $ 725 $ 82.0 11.30% $ 5% $ 54.5 9.81% $ 480 $ 68.8 14.35%
745 78.6 10.55 522 57.6 11.05 704 84.5 12.00 507 66.7 13.17 2% 24.6 10.44 197 21.9 11.13 194 20.8 10.74 182 23.5 12.94 48 5.4 11.21 43 5.6 12.81 18 1.7 9.68 73 6.0 8.22 % 16 9.96 36 3.2 8.68 44 5.2 11.59 1,030 103.4 10.03 877 108.9 12.42 711 670 126 13.4 10.64 85 10.8 12.57 80 84 67 7.4 11.04 51 6.9 13.49 181 163 2% 31.3 13.28 191 27.7 14.44 203 184 1% i1.2 8.24 79 9.4 11.79 59 72 65 7.3 10.48 49 6.2 12.33 45 34 1,660 174.0 10.48 1,332 169.9 12.76 1,279 148.9 11.65 1,207 170.7 14.14 392 31.9 8.14 223 22.1 9.94 360 32.7 9.07 297 36.8 12.37 3,957 3 %.6 10.02 3,078 % 2.7 11.79 3,147 346.3 11.01 2,717 371.7 13.68 543 486 491 572 (33) (28) (29) 66 (26) 58 61 . 60 238 191 149 93 164 117 119 119
$4.935 $3,902 $3,938 $3,535
..p.e.t.no..
i umego
$ 157 9.I 5.89 $ 119 7.6 6.33 $ 182 10.7 5.94 5 173 10.0 5.77 357 25.9 7.29 228 20.6 9.05 192 16.1 8.37 7 .4 6.50 529 44.0 8.31 580 59.9 10.33 626 56.9 9.09 652 84.0 12.87 33 2.6 7.99 26 2.7 10.21 84 8.5 10.10 108 13.4 12.42 535 45.8 8.56 333 % .0 10.82 222 21.0 9.44 222 31.2 14.08 1,611 127.4 7.9I . l.286 126.8 9.85 1,306 113.2 8.67 1,162 139.0 11.97 1,018 77.6 7.62 76.5 9.75 785 889 77.1 8.67 750 85.9 11.45 79 6.5 8.27 82 A8 8.32 69 5.8 8.40 65 5.6 8.55 2,708 211.5 7.81 2,153 210.1 9.76 2,264 196.1 8.66 1,977 230.5 11.66 1,%0 1,l H 4 1,176 1.056 239 192 149 93 145 122 125 230
- 29) 251 2?4 179
$4,935 $3,902 13,938 $3,535
$185.1 $152.6 $150.2 $ 141.2 l
l 2.21 % 2.03% 2.35 % 2.02 % 46s% 4.96% 4.77% 5.20 %
~
1
1
. l 1
3' ExecutWe Directors ! OOicers ' o j l l 1 1 Wal ase i Edgerty Jannes F. Conway.Jr. Albert J. Kelley John E. Spring i i Cha.rman Chairman alshe Boani Chareas. Arthur D. Latie wekh k Forbes i and Chd Iwcwive 06icer. Prorcam Syuerns Managen..ne i Powr L Madden Courier Corpormion Compey Edward B. Stevens Pnudene j Pm. dent. ; Tilliasu S. Edgerty Nanneri O. Ecohane Ames Teside Corpormion i Howard H. Fairweatlwr CWrman Prcs. dear. Weileilev Colley Esawm Vse Preuden '
)
Henry S. Streeter I villiaan F.Clavin Cearse H. KIMer Ropen k Cruy GeorgeJ. Fesus Yre Chaarmaa. Hemcoway 4 Barnes l Enscum Vue Preudens j Xeros Corpormios Morris l'anenbaum i Peter E. Madden V=,C Lrman. RJ A.Cela john B. Cesy Pres. des ATkT J 4 Eammm Vue Peruden Fren. dent, Denwon Manufacturing Company David R. Perini Yelliam R.Thurston Devid A.5pi,na C 6 ,maa.P m aenianJ Preudent and Chwi Esecutive Eamna m Yse Preudent Charles H. Hood Chs Eines.cofuee. Orncee. GenRad, Inc. Pm dens. Peries Corporation Bradford S. T Charles te. Hood roundu.on Phyllis A.Talla. Sea.or Vue P na Anhur M. Sackler. M.D. Prolenor. Alfeed P. Slosa School Charles F. Kaye amernm onal Publatn. of Management. Maumbuwm i Chairman of the Snard Medsal Tribune Group inmitute of Tesknology and Ch cf Esecutive Oficer. XTRA Corporai.on Norton Q. S&aan Ennuuve Vice Pmedent. Cabos Corporation Ollin ol' Siait Street !!oston Curperatbn Corporate lnt'ormatior) State Street Bank State Street Bank $ tate Servet London Uinited Annual Meeting: and Trust Company Inte national km kmt House The Corpormion's annual 225 Trankhn kei 20 Bro d kreen L2/0 Nuholas Lar.e meeting wdi be held an homon. Maua hunctis 02110 New York New York ic004 Losdon EC4N 7BN. E ngland Wednesisy. April 15. t*st, as London Brarach 10 00 a m. at 225 Franklin Samt. Sute $tsus Bank and Trust Brueneis Branch annon. Musach6nm. kaie kwi Houw Company of California, N.A. da Ketieruke-Se. Quiniin 1270 Nwkla Lane SIS $outh Figurrua kren 4-18 Rs. joseph 11 Trander Agent: Lnndon EC4N 7BN England Los Angelet. California 900? 1040 Brussels. Sels;um km kmi knk and Trust Company Cayman Islands Brancle he Street Boston he Street Bank Boa 166 P O Bos 50. Capital Corporation (Siritzerland) Boi w. Musac huwst. c2:0 Cnorgetown Grand Cayman 225 r,anklin kreen Siadeboieruraise 22 g611 125 5000. En. 2705 1 Brianh Teu ludm i souan. Mmachuw:is O!!to s024 Zurah/Swisserland j Cape Cod Personal Stock L,ating: i he $tmt Boston he Street GmbH The corram umk n irated Trust C4cc wng e yy$ y,,,glggy, Monige!n Palais e ver<rw.cou ner on the National 297Nonhk mt ,,g,g, gag, Kardinal Faulhaber Sir ida Market t y* tem. Hrannis, Maum buicits 0260s 8000 Mun= hen 2 NASDAQ symbat STEK Bouon. Mauskn.: 32H0 ! bde.nl Republac at Gr.many j florida Repmentative SSB Investments. Inc. General Irquir;* 129c North Federal Highway 225 Frankbn ser-e, State 4mt Australa Seme kreet Boi.on Corporm.on l i Suite 200 toman. Mama howits 0?no Limaed Bus 158 l Ba s Raion. tlor la 3)412 8) Clarence k eeri Bouon. Mauachmesti c2 tot Boston Financial Data ivdney NSW 2NO (619 7 4 000 ( he Street Bank j services. lac. 6uurs' + and Trust Company. N.A. 2 p.enia, Drm Form 10E and Other Reports. M Bau hav Quinct. Mmmhuirit s 02171 State kmt Asia L.ansud N ai nual epo i no the
%. Lak. Nr. Werk 10005 402. Glomener To.e, 'wiurne and b hange
't. Pedd.. Leen Comnum.on iform CKL Cemral additional copws at this report.
Kong Kung quanerly repom. and call reports may or obt ained from ihr Madrung Dmison.Laie Sire t Bonon Corporzieun. Son 151. Bounn. Mauat huwsti 02101. f .17h54-D8) l I'inancial Information: l A nelvi.s. unt k holders. and l nemors imerened .n addaranal l hnanualiniormatior ma. allor l weice suunne G Claret 4 4e Pre. aeni.(e4716%41477. lies: a
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l I ' SECUEITIES ARD EECEANGE C010 FISSION Washington, D.C. 20$49 _
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i 4. W QUARTEELT REPORT UNDER SECTION 13 or 15(d) or TEE SECURITIES EICEANCE ACT OF 1934 For the Quarter Ended June 30. 1987 0 510 y Commission File Number b.46M ETATR STm**T Li-ium t'r* 80 RATION (Esact name of registrant as specified in its charter) t'
=..ealth of Massachusetts 04-2456637 (state or other jurisdictica of incorporation) (I.E.S. Employer Identification Number) 225 Franklin Streer. Boston. Manaachusetts 02110 (Address of principal esecutive offices) (Eip code)
Eegistrant's telephone number, including area code (617) 786 3000. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. TES ,,L 30 Number of shares was 36.430,717, of registrant's common stock outstanding on July 31, 1987 AUG 17 1967 80Chigill110fmidl0n SeWiteS Geithersbag. Muyland
STATE STREET BOSTOR CORPORATION AND SUBSIDIARIES Table of Contents Part I - Financial Information Cernsolidated Statements of Condition 1 Consolidated Statements of Income 23 Consolidated Statenents of Changes in Financial Position 4 Notes to Conso11daud Financial Statements 5-9 Report on Review by Independent Public Accountants 10 ManaSement's Discussion and Analysis of Financial Condition and' Results of Operations 11-13 Part II Other Information 14 gal Proceedings 14 Changes in Securities 14 Defaults Upon Senior Securities I 14 ! Other Information l 14 Exhibits and Reports on Forn 8 K 1 14 l Additional Exhibits 14 Signatures 15 I l 1 { l i l
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STATE STREIT 30ST05 CORPORATION AB SUBSIDIA1123 Consolidated Statements of condition (Dollars in thousands) June 30, December 31, 1987 1986 ASSETS (Unaudiced) (*) Cash and due free banks $ 683.982 $1.323,412 Interest bearing deposits with banks 1,036,848 1,047,435 Investment securities 1,891,463 1,622,477 Trading account assets 19,244 33,740 Federal funds sold and securities purchased under resale agreements 713,000 455,000 loans (not of unearned income of $2,599 and $3,342) 2,131,509 2,169,490 Allowance for loan losses (46.019) Net loans (42.355) 2,085,490 2,127,135 Premises and equipment, net 137,334 131,190 customers' acceptance liability 207,615 216,852 Accrued income receivable 135,901 111,503 Other assets 151.264 121.074 Total Assets $7,062,141 $7,189,818 LIABILITIES Deposits: Noninterest bearing: Domeseic $2,513,362 Foreign $3,382,719 23,877 23,540 Interest bearing: Domestic 1,171,618 1,321,887 Foreign 77!.867 l Total deposits 541.450 4,484,724 5,269,596 Tederal funds purchased 319,390 277,100 Securities sold under repurchase sgreements 1,139,473 624,353 other short term debt 75,523 66,575 Acceptances outstanding 208.197 Accrued taxes and other expenses 218.158 112,761 113,592 Other liabilities 161,202 long tora debt 92,087 126.050 135.993 Total Liabilities 6,627,320 6,797,454 STOCKE0!EE15' EQUITY Preferred stock, no par: Shares authorized, 3,500,000; none issued Common stock, $1 par: Shares authorized, 56,000,000 Shares issued, 35,967,000 and 35,078,000 35,967 35,078 Surplus 47,680 38,671 Retained earnings 351.174 318.615 i Total Stockholders' Equity 434.821 392.364 Total Liabilities and Stockholders' Equity $7,062,141 $7,189,818
*From audited financial statements.
See notes to consolidated financial statements. 1
STATE STREET 808705 CORPORATIDW AED SURSIBIARIES Consolidated Statements of Income Three months ended June 30, (Dollars in thousands, except per share data) (Unaudited) INTEREST INCOME 1987 1986 14ans, including fees '
$ 41,118 $ 40,690 Investment securities:
U.S. Treasury and Federal agencies 23,599 23,000 State and municipal 4,197 4,.301 Other investments 5,998 3,096 Trading account assets Deposits with banks 393 1,257 17,236 17,487 Federal funds sold and securities purchased under resale agreements 11.480 _10.343 Total interest income 104,021 100,174 Irrt1EST EXPERSE Deposits 30,085 31,684 Short-term borrowings 22,627 23,242 fong-term debt 7.784 1.421 Total interest expense 53.496 56.347 Net Interest Income 48,525 43,827 Provision for loan losses 5.84 2 _ 4.373 Net interest income after provision for loan losses 42,683 39,454 OTHER OPERATING INCOME Fiduciary cepensation 56,849 42,330 Bank card fees 5,739 Other 6,008 11.461 _11.101 Total other operating income 74.049 59.439 Income before other operating expenses 116,732 98,893 OTRER OPERATING EIFIRSES Compensation 40,282 35,199 Other personnel costs 6,040 Occupancy, not 5,658 6,590 5,486 Equipment l 7,208 5,752 Other 25.774 20.944 Total other operating expenses 85.894 Income before income taxes 30,838 2}R 25,854 Income taxes 10.818 Net Income 9.673
$20,020 $16,181 Earnings per Share:
Primary Fully diluted
$ .54 $ .45
.51 .41 Average Shares outstanding (in thousands)
Primary 36,960 36,188 Fully diluted 39,713 39.686 Cash dividends dec1cred per share $.11 $.09 l See notes to consolidated financial statements. 2 1
l
.STAH STR E T 308705 CORPORATION AND SUBSDIAE.IES Consolidated Statements of Income Six Months Ended June 30, (Dollars in thousands, except per share data)
(Unaudited) INTEREST INC M 14ans, including fees 1987 - 1986
$82,154 $82,639
!avestament securities:
U.S. Treasury and Federal agencies 46,018 State and municipal 44,677 8,238 8,969 other investments 11,026 Trading account assets 5,169 Deposits with banks 834 3,142 34,208 35,383 Federal funds sold and securities 3 purchased under resale agressents 26.687 a Total interest income 20.657 209,165 200,636 ; INTEREST EIFIRSE } Deposits 59,440 64,382 { Short-term borrowings 43,902 l tong-term debe 46,248 5.688 2.860 Total interest expense 109.030 Not interest Income 1.13.490 1 100,135 87,146 Fravision for loan losses 11.450 Net interest income after 8.541 )' provision for loan losses 88,605 78,605 ONER OPERATING DCO M Fiduciary compensation 108,472 78,648 Bank card fees Other 11,461 10,923 , 27.816 22.641 ' Total other operating income 147.749 112.212 Income before other operating expenses 236,434 190,817 DNER OPERATING EIFENSES Compensation other personnel costs 83,102 67,355 Occupancy, not 11,924 10,950 Ectlpeent 14,004 11,003 Other 13,808 10,763 50.841 38.796 Total other operating expenses 173.679 138.867 Income bafore income taxes 62,755 51,950 Income taxes Net Income _22.818 19.540
$39,937 $32,410 EAPEINGS PER SHARE:
Primary nally diluted $1.08 $0.90 1.02 0.83 EARNINCE PER SHARE: Primary Pully diluted 36,889 36,008 39,715 39,676 Cash dividends declared per share 0.21 0.17 i See notes to consolidated financial statements 3
STATE STREST 308T08 CotPOSATION AB SUBSID7Annta Consolidated Statements of Changes in Financial Position Six months ended June 30, i I (Dollars in thousande) (Unaudited) SOERCI 0F FUBS 1987_ 1986 From Operations: Nat Income
$ 39,937 32,410 Provision for loan losses 11,450 Deferred taxes 8,541 Depreciation and amortization 5,191 6,578 Total funds from Operations 't . 624 S.892 64,202 53,421 Issuance of common stock 9,898 5,494 Increase in Short term borrowings s i Other liabilities 566,358 417.094 62,461 Decrease in:
-Cash and due from banks Interest-bearing deposits with banks 639,430 Trading account assets 10,587 89,333
!aans, net 14,496 113,929 Total Source of Funds 30.195 114.094
$1,397,627 $793,367 USE OF FUNDS .
Cash dividends declared
$ 7,469 5,878 Cowersions and payments of long term debt 9,943 3.839 Increase in:
Cash ar.d due from banks Iwestment securities 17,134 270,098 202,009 Federal funds sold and as urities purchased under resale agreements Premises and equipment 258,000 210,013 Other assets 12,620 27,722 54,625 13,857 Decrease in: Deposits Other liabilities 784,872 222,480 Total Use of Funds 30.435
$1.397,627 $ 793,367 See notes to consolidated finanetal statements.
4
i NOTES TO CONSOLIDATED FINANCIAL STATEMEFIS (Unaudited) l Note A -Basis of Presentation l The consolidated financial statements include the accounts of State Street Boston Corporation (" State Street") and its subsidiaries, including its ' principal subsidiary, State Street Bank and Trust Company. All significant intercompany transactions have been eliminated upon consolidation. state Street's investment in its 50% owned affiliate, Boston Financial Data Services, Inc., is accounted for on the equity method. In the opinion of management, all adjustments consisting of normal recurring accruals which are necessary for a fair presentation of the financial position of State Street at June 30, 1987, and December 31, 1986, and the results of its operations for the three and six month periods ended June 30, 1987 and 1986 have been made. These statements should be read in conjunction with the financial statements, notes ' and other information ) included in the Company's latest annual report on form 10-K. Certain amounts have been reclassified to presentation. conform to the 1987 method of periods have been restated to reflect the and Average ntssber of shares per share amounts for prior two-for one common - stock split distributed on August 5,1986.
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1 Note 8 -Investment securities 1 f Investment securities consisted of the following: l 1 (Dollars in thousands) June 30. 1987 December 31. 1986 Cost Market Cost Market !
'O.S. Treasury and j Federal agencies $1,269,892 $1,265,405 j State and municipal $1,046,D0 $1,065,117 275,371 275,647 287,354 290,134 q
other 346.200 338.159 288.891 288.86$
$1,891,463 $1.879.211 $1,622,477 $1,644,316 Note C -Allowance for lean losses The adequacy of the allowance for loan losses is evaluated on a regular basis by management.
Factors considered in evaluating the adequacy of the allowance include previous loss experience, current economic conditions and the ir effect on borrowers, and the performance of individual credits in relation to contract terms. The provision for loan losses charged to operating expense is based upon management's judgement of the amount necessary losses. to maintain the allowance at levels adequate to absorb probable i 1 5
s NOTES TO COR$0LIDATED FINANCIAL syATEMENTS (Unaudited) s Note C - Allowance for loan I.osses (continug Changes in the allowance for loan losses, including amounts applicable to bank and non bank subsidiaries, for the three and six month periods ended June 30, 1987 and 1986, were as follows: Three Months Ended Six Months Ended (Dollars in thousands) June 30.
~ _ June 30.
1987 .1986 1987 seginning Balance 1986
$44,273 $37,917 $42,355 $36,214 Provision for loan losses 5,842 4,373 11.450 8,541 loans charged off (5,046) (4,388) (10,067) (8,208)
Recoveries previously charged off 925 1,092 2,096 foreign currency translation 2,315 _ 25 174 185 Ending Balance 306
$46,019
$39,168 $46,019 $39,168 Note D . Income Tawas The provision for income taxes in the accompanying consolidated statements of income include deferred income taxes arising as a result of raperting certain reporting items of income and expense in different years for tax and financial purposes.
deferral method, underInvestment tax credits are accounted for on the which tax benefits are reco8nized ratably over the lives of the assets acquired. Tax expense of $38,000 and $ 71,000 from securities gains and losses, not for the three ponth periods ending June 30, 1987 and 1986, respectively, and tax expense of $101.000 and $ 84,000 for the six month periods ending June 30, 1987 and 1986, respectively, are included in the provision for income taxes. State Street and its domestic s l subsidiaries file a consolidated federal income tax return. The provision for income taxes is comprised of the following for the three month and six month periods ended June 30: Three Months Ended Six Months Ended (Dollars in thousands) June g June 30. j 1172 1986 . 1987 Current S 8,349 $7,065 1986 Deferred $17,627 $12,962 2.469 2.508 5.191 .6.578
$10,818 $9,673 $22,818 $19,540 l
! The provision for income taxes for the three sonth and six month periods ended the U.S.June 30, 1987 and 1986 is less than the amounts computed by applying 1987 and Federal income tax rates of 40% and 46% to income before taxes for 1986, respectively. This is due primarily to the effects of tax exempt interest income, and the amortization of investment tax credits. These state income reductions taxes. in the provision fer income taxes are partially offset by 6 L__ ---
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BOTES TO CONSOLIDATED FIN 4NCIA1. STATEMElrFS (Unaudited) f Note E - other income The following items are included in the "other" category cf other operating income for the three and six month periods ended June 30, 1986: 1987 and Three Months Ended SLx Months Ended (Dollars in thousands) June 30. __,_ June 30. 1987 1986 _.l?11 1986 Service fees $ 3.829 $ 3,534 $ 8,244 $ 6,892 Foreign exchange trading 3,172 3,189 8,196 6,570 Correspondent service fees 2,173 2,214 4,275 Trading gains (losses), not 4.311 135 (253) 1,089 269 Securities gains (losses), net 106 136 239 i Other 160
.2.046 2.281 5.773 ,4.439
$11,461 $11,101 $27,816 $22,641 Note F - other Ernenses The following items are included in the
- ocher" category of other operating expenses 1986:
for the thres and six month periods ended June 30, 1987 and { Three Months Ended Six Months Ended (Dollars in thousands) June 30. June 30. 1987 _.1986 ._1987 __ l?86 External contract services $ 5,037 $ 3,907 $10,459 $ 7,558 Postage, stationery and supplies 2,940 2,827 5,749 5,546 Telecosesunications 2,632 2,161 5,046 Professional fees 3,653 3,326 2,334 5,739 4,035 Insurance 1,925 1,343 4,018 2,697 Advertising and custour contact 2,404 2,072 4,385 Other 3.562 7.510 .6.300 15.445 11.7A5
$25,774 $10.944 $50,841 $38,796 i
7 1
{ l 1 a RYTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) l Note C Commitments and continnent Liabilities The financial statements do not reflect various comunitments and contingent j liabilities which arise in the normal course of business. These include i commitments to extend credit, letters of credit, guarantees and foreign exchange contracts. 1 On April 19, 1983, counsel for Union National Bank, a subsidiary of State Street which was sold to the Conifer Group, Inc. on December 30, 1983, received a letter from the Environmental Protection Agency stating the intention of the EPA to make expenditures under the federal so called "Superfund" Act toward the cleanup of a site owned by Silresia Chemical Corporation, to which Union had made secured loans from 1970 to 1976. In its letter, the EPA states that under the Act responsible parties nay be i liable for money expended by the government to take necessary corrective actions at the site and asserted that the EPA had determined Union to be an owner or operator of the site and is therefore a responsible party. Under the "Superfund" Act, an owner or operator may be liable for the total costs of the cleanup of the site and other damages which are indeterminate at this time. Union has denied that te is or ever was an owner or ope'ator site. r of the Under the terms of the agreement relating to the sale of Union, State Street agreed to indemnify The Conifer Croup, Inc. for any costs which they may incur in this matter. In the opinion of management. this action can be successfully defended or resolved without material adve :e effect on the financial position of State Street. l 1 i 8 i I l
= I NOTES TO CONSOLIDATED FINANCIAL STATENEFfS (Unaudited) Note H . F_arninem Pe r C-- n Share l the compuustion of earnings per cosamon share is based on the weightad average ntsaber of shares of coasmon stock and common stock equivalents outstanding duringoneach per share is based the period. The computation of fully diluted earnings j assuspcion that the convertible capital notes and ' debesitures had been converted as of the beginning of each year with the elf,mination of related interest expense less income tax effect. The computation of earnings per share is as follows: f (Dollars in thousands, three Months Ended except per share data) Six Months Ended June 30. Juna 30 1987 1986 1987 Primary 1986 Aversgo shares outstanding 39,960,031 36,187,520 36,889,159 36,008,248 Net income $20,020 $16,181 $39,937 $32,410 l Earnings per share .54 .45 1.08 .90 Fully Diluted
- Average shares outstanding 36,964,934 36,261,400 36,889,276 36.143,816 Assuming conversion of 54 convertible capital ;
notes due 1994 and ( 7 3/44 convertible subordinated debentures dua 2008 2.748.487 3.424.876 2.825.611 3.532.008 Aversgo shares fully diluted basis 39,713,421 39,686,276 39,714,887 39,675,824 Not income $20,020 $16,181 $39,937 $32,410 Elimination of interest on 54 convertible capital notes dua 1994 and 7 3/44 convertible subordinated debentures due 2008 less related income tax effect ... 267 353 599 715 Net income on fully diluted basis $20,287 $16, %4 $40,536 $33,125 Earnings per share .51 .41 1.02 .83 i l 1 9
4 Ernst&Minney 200 cis,..do. St, t i Boston, Massachusetts 02116 617/266-2000 To the Stockholders and Board of Directors I State Street Boston Corporation j Boston, Massachusetts j j l
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We have made a review of the consolidated statement of condition of State Street toston corporation and subsidiaries as of June 30, 1987, and the consolidated statements of income for the three-month and six-month periods ended June 30, 1987 and 1986, and the consolidated statements of changes in financial position for the six-month periods ended June 30,1987 and 1986, in accordance with standards established by the American Institute of Certifled Public Accountants. A review of interim financial information consists principally of obtaining an understanding of the system for the preparation of interim financial information. applying analytical review procedures to financial data, and
- making inquiries of persons responsible for financial and accounting matters.
It is substantially less in scope than an examination in accordance with generally accepted audAting standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material mod 1fications that should be made to the consolidated interim financial statements referred to above for them to be in conforzity with generally accepted accounting principles. We previously examined, in accordance with generally accepted auditing standards, the consolidated statement of condition as of December 31, 1986 (presented herein) and the related consolidated statements of income, changes in stockholders' eouity and ctanges in financial position for the year then ended (not presented herein); and in our report dated January 13, 1987, we expressed an unqualified opir. ion on those consolidated financial state'nents. hdli ! LUbun ERNST&WHINNE{ Boston Massachusetts July 15, 1987 10
MARACDENT'S DISCUSSI05 AND ANALTSIS OF FIEANCIAL CONDITION AND RESULTS OF OPERATIONS Summaary Second quarter earnings per share were $.51 on a fully diluted basis, up 24% from $ .41 per share in the second quarter of 1986. Not income for the quarter was $20.0 million, up from $16.2 million in 1986's second quarter. The earnings gain resulted primarily froe strong grceth in fee income, partially offset by increased operating expenses and a higher provision for loan losses. Fee income increased to 60% of taxable equivalent income before operating expenses. Return on average stockholders' equity was 19.14. The following table sets forth the components of the income statement, with net interest income expressed on a taxable equivalent basis: Condensed Income Stataments Taxable equivalent basis - (in millions of dollars, except per share data) Three Monthe Ended June 30 Sir Months Ended June 30 1211 iffi Ghanga 1 1211 liff Change 1 Net interest income $55.4 $52.4 $ 3.0 Frovision for loan losses 5.8 6 $113.5 $105.1 $ 8.3 8 4.4 1.5 34 11.5 8.5 2.9 34 other operating income 74.0 59.4 14.6 25 147.7 other operating expense 112.2 35.5 32 AL1 2LD 12.J. 18 ILLJ. 138.9 M 25 Income before income taxes 37.7 34.4 3.3 10 76.1 69.9 6.2 9 Income taxes 10.8 9.7 1.1 12 22.8 Taxable 19.5 3.3 17 equivalent adjusteent ., L1 M IL.11 (20) _1L1 _1.LQ 14.1.1 (26) Net income $20.0 $16.2 $ 3.8 24 $ 39.9 $ 32.4 $ 7.5 23 For Share Primary $ .54 $ .45 $ .09 20 $ 1.08 $ .90 $ .18 20 I For Share fi 11y Diluted .51 41 .10 24 1.02 $ .83 I
.19 23 {
i ($ and 4 change based on dollars in thousands) 1
}
l l 11 f _ -_ _ - - - - A
i i i 1 i , i MAR &CEMEFf'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS i Bet Interest Income Taxable equivalent not interest income of $55.4 million was up $3.0 million, or 66 over 1986's second quarter. The improvement resulted from growth of as sets and liabilities. Noninterest. bearing deposits increased 144, principally due to the activity and growth in the securities processing businesses. The benefits of balance sheet growth were partially offset by the negative effect of lower interest rates and a narrower spread between interest rates earned and paid. During the six month period ending June 30, taxable equivalent net interest income was $113.5 million, up $8.3 million or 8% over 1986, for the same reasons. Other Operatine Income Other the secondoperating income quarter of $74.0 million, was up $14.6 million 'or 25% over of 1986. The largest component of other operating income, fiduciary compensation, was $56.8 million, up 344. Fiduciary compensation includes fee income from mutual fund, master crust, global custody and personal trust services, and from investment management for institutions. large dollar Global custody and mutual fund services provided particularly increases. Fee income for global custody services was more than twice that of a year ago as a result of new business and additional assets from current clients. Substantial new business was installed during the second quarter. Domestic master trust / master custody assets rose 22% in the quarter to $133.1 billion, due in large part to the installation of California State Teachers' Retirement System in early April. During the quarter, the number of mutual funds earviced increased by 85, bringing the total to 978. For the six month period ending June 30, other operating income was $147.7 million , up $35.5 million or 32% over 1986. Fiduciary compensation was j
$108.5 million, up 38%. {
As of June 30, total assets under custody were
$531.2 billion, up from $440.8 billion at year.end. i Other Operatina Ernenses t j
Other operating expenses of $85.9 million were up $12.9 million, or 18% over l 1986's second quarter. ) The increase was mainly from additional people, services, computer equipment, and office space supporting business growth. j For the 25%, for six themonth portod ending June 30, other operating expenses were up same reasons. j
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12 f J
J { l 1 MANAGEMENT'8 DISCUSSIDE AND ANALYgIS OF F17ANCIAI. 00EDITIOR AND RESULTS OF OPERATIOWg ! I I l 1 Inan Ouality h provision for loan losses charged to income was $5.8 million, an increase of $1.5 million from the second quarter of 1986. Net charge offs during the quarter were $4.1 million reflecting in part the expansion of the credit card portfolio which began in May of 1985. The allowance for loann losses increased to $46.0 million, equal to 2.16% of loans at June 30, 1987 j Non performing loans declined to $11.0 million, or .52% of ending loans. ' During the quarter, the company's loans to Chile were sold, reducing the Latin American credit exposure to $10.8 million. The credit quality of
' State Street's Latin American loans had already been recognized in setting the level of the allowance for loan losses. Accordingly, no special provision was made for Latin American debt during the second quarter.
14an Ratios 1987 1986 22 1Q !tQ M .EL Net charge-offs ,1Q to average loans 0.796 0.784 0.73t 0.584 0.704 0.55% Allowance to ending loans 2.16 2.23 1.95 2.10 2.05 1.95 Non performing loans to ending loans 0.52 0.60 0.43 0.26 0.35 0.35 Caciral and 1.ieuidity The Corporation is well capitalized for its current operations and continues to generate espital internally at a high rate. On average during the second quarter of 1987, State Street's primary capital ratio increased to 6.7%, which compares favorably with the minimum regulatory requirement of 5.54 In the same period, the Corporation's total capital ratio was 8.lt. Equity capital continues to grow primarily from the retention of earnings. In the second quarter of 1987 capital was generated internally at 15.3%. Liquidity is provided from maturing investments, the large portfolio of markatable investments, payments on loans, and through access to borrowed funds and deposits. Noney market instruments and investment securities were 63% of average interest earning assets for the second quarter, providing substantial liquidity. These assets have less credit risk and more marketability than loan assets. N relatively short maturity structure of State Street's assets also enhances its liquidity. 7 13
. . . _ _ _ - - . - - - _ _ - - - - - - . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~ -~ ~
- 1 Part Ir . o+k-r f=Formatica )
i ta mal Proceedfama Reference is made to Note C to Consolidated Financial Statements on page 7. t%*a-as in Securities. None Defaulta Unon,$anf or Securitten None Oehar information l None Ruhthita and Ranorts on Form 8-E No reports oo Form 8K were filed during the quarter. AAAftlanal Ruhibita Rahibit 28 Filed herewith: 28.1 Acknowledgement letter for report on unaudited financial information. I l l 14 I l
f< j ._ e i L L SIGNATURES 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 authcrized. i STATE STREET BMTON CORPORATION 1 Date: Aunust 12. 1987
- b By: - .
David (.Al. Spina . Executive Vice President & Treasurer Date: Aunust 12. 1987 By: ' ^' i Rex'S. Schuette Senior Vice President & Comptroller 1 15
4 r Ernst&Whinney a ci.,rodo.S w o I Boston, Massachusetts 02116 Exhibit 28.1 617/266-2000 I State Street Boston Corporation We acknowledge the use of our report on the interim financial statements of State Street Boston Corporation for the interim period ended June 30, 1987, 3
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which is incorporated by reference in Registration Statement Number 33-9499 on Form S-3 dated October 24, 1986, in Registration Statement Number 33-2882 on Form S-8 dated January 23, 1986, in Registration Statement Number 2-93157 on Fons S-8 dated September 7,1984, in Registration Statement Number 2-63641 on Form S-8 dated December 22, 1983, in Registration Statement Number 2-68698 on Form S-8 dated July 30, 1980 and in Post-Effective Amendment Number 2 to Registration Statement Number 2-68696 on Form S-8 dated July 26, 1983. A4& f ERNST & WHINNEY ' t Boston, Massachusetts July 15, 1987 ' i l 1
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