<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1995 PURSUANT TO
- --- SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
Commission file number 1-6157
HELLER FINANCIAL, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1208070
-------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 W. Monroe Street, Chicago, Illinois 60661
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(312) 441-7000
--------------
(Registrant's telephone number, including area code)
None
----
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
100 shares of Common Stock, $.25 par value, outstanding at October 27, 1995.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions, except for information on shares)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................... $ 222 $ 99
Receivables (Note 2)
Commercial loans
Term loans........................................ 2,763 2,786
Revolving loans................................... 1,565 1,071
Real estate loans................................... 1,895 2,031
Equipment loans and leases.......................... 1,091 943
Factored accounts receivable........................ 871 785
------ ------
Total receivables.............................. 8,185 7,616
Less: Allowance for losses of receivables (Note 2).. 245 231
------ ------
Net receivables................................ 7,940 7,385
Investments......................................... 702 634
Investments in international joint ventures......... 225 174
Other assets........................................ 202 184
------ ------
$9,291 $8,476
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior debt
Commercial paper and short-term borrowings......... $2,326 $2,451
Notes and debentures (Note 3)...................... 4,800 3,930
------ ------
Total debt..................................... 7,126 6,381
Credit balances of factoring clients................ 473 452
Other payables and accruals......................... 263 274
------ ------
Total liabilities.............................. 7,862 7,107
Minority interest in equity of Heller International
Group, Inc........................................ 46 39
Stockholders' equity
Cumulative Perpetual Senior Preferred Stock,
Series A ($.01 Par Value; stated value,
$25; 8.125%; 5,000,000 shares authorized
and outstanding)................................. 125 125
Cumulative Convertible Preferred Stock, Series D
(No Par Value; 1/2% under prime; 1,000 shares
authorized and outstanding)...................... 25 25
Common Stock ($.25 Par Value; 1,000 shares
authorized; 100 shares outstanding) and
additional paid-in capital....................... 663 663
Retained earnings................................. 570 517
------ ------
Total stockholders' equity..................... 1,383 1,330
------ ------
$9,291 $8,476
====== ======
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these statements.
2
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in millions)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1995 1994 1995 1994
--------- ------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income................................................. $ 215 $ 188 $ 635 $ 509
Interest expense................................................ 117 89 348 238
----- ----- ----- -----
Net interest income........................................... 98 99 287 271
Fees and other income........................................... 54 39 126 122
Income of international joint ventures.......................... 9 7 26 17
----- ----- ----- -----
Operating revenues............................................ 161 145 439 410
Operating expenses.............................................. 53 47 155 137
Provision for losses............................................ 56 48 134 138
----- ----- ----- -----
Income before income taxes and minority interest.............. 52 50 150 135
Income tax provision............................................ 15 19 46 39
Minority interest in income of Heller International Group, Inc.. 2 1 5 3
----- ----- ----- -----
Net income...................................................... $ 35 $ 30 $ 99 $ 93
===== ===== ===== =====
</TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF
CHANGES IN RETAINED EARNINGS
(in millions)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------
1995 1994
--------- ---------
(unaudited)
<S> <C> <C>
Retained earnings at December 31, 1994 and 1993............................... $ 517 $ 440
Net income................................................................. 99 93
Common stock dividends..................................................... (34) -
Preferred stock dividends.................................................. (9) (9)
Net changes in unrealized holding gains or losses on securities available
for sale, net of tax....................................................... (8) 1
Deferred translation adjustment, net of tax................................ 5 (4)
----- -----
Retained earnings at September 30, 1995 and 1994.............................. $ 570 $ 521
===== =====
</TABLE>
The retained earnings balance includes deferred translation adjustments of
$(12) and $(16) at September 30, 1995 and 1994, respectively. Unrealized net
(losses) gains on securities available for sale were ($3) and $10 at September
30, 1995 and 1994, respectively.
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these statements.
3
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
For the Nine Months Ended
---------------------------
September 30,
---------------------------
1995 1994
---------- ----------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................... $ 99 $ 93
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses.................................................... 134 138
Loans originated for resale............................................. (39) (62)
Net proceeds from sales of loans originated for resale.................. 42 54
(Increase) decrease in net deferred tax asset........................... (27) 42
Increase in accounts payable and accrued liabilities.................... 8 15
Undistributed income of international joint ventures.................... (21) (11)
Increase (decrease) in interest payable................................. 4 (1)
Other................................................................... 9 19
------- -------
Net cash provided by operating activities............................. 209 287
INVESTING ACTIVITIES
Longer-term loans funded................................................. (2,120) (2,011)
Collections of principal................................................. 1,559 1,411
Sales of longer-term loans............................................... 369 293
Net increase in short-term loans and
advances to factoring clients........................................... (523) (431)
Investment in equity interests, equipment on lease,
and other investments................................................... (136) (119)
Sales of investments and equipment on lease.............................. 58 46
Other.................................................................... (30) (20)
------- -------
Net cash used for investing activities................................ (823) (831)
FINANCING ACTIVITIES
Senior note issues....................................................... 1,132 641
Retirement of notes and debentures....................................... (261) (518)
(Decrease) increase in commercial paper and other short-term borrowings.. (125) 601
Net decrease (increase) in advances to affiliates........................ 34 (19)
Dividends paid on common and preferred stock............................. (43) (9)
------- -------
Net cash provided by financing activities............................. 737 696
------- -------
Increase in cash and cash equivalents.................................... 123 152
Cash and cash equivalents at the beginning of the period................. 99 170
------- -------
Cash and cash equivalents at the end of the period....................... $ 222 $ 322
======= =======
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these statements.
4
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
These consolidated condensed financial statements should be read with the
financial statements and notes included in the annual report on Form 10-K of
Heller Financial, Inc. (the "Company") for the year ended December 31, 1994. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included in these financial statements and were of a
normal, recurring nature. Certain prior year amounts have been reclassified in
order to conform to the current year's presentation.
(2) Impaired Receivables and Repossessed Assets
The Company does not recognize interest and fee income on impaired receivables
classified as nonearning and on repossessed assets, which are set forth in the
following table:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------- -------------
(in millions)
<S> <C> <C>
Impaired receivables...................................... $ 271 $ 284
Repossessed assets........................................ 35 19
----- -----
Total nonearning assets.................................. $ 306 $ 303
===== =====
Ratio of total nonearning assets to total lending assets.. 3.7% 4.0%
===== =====
</TABLE>
The average investment in impaired receivables was $330 million for the nine
months ended September 30, 1995.
Effective January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" and the related disclosure requirements of SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosure." These pronouncements require that impaired receivables be measured
based on the present value of expected future cash flows discounted at the
receivable's effective interest rate. Impairment may also be measured based on
the receivable's observable market price or the fair value of the collateral if
the receivable is collateral dependent. When the recorded balance of an impaired
receivable exceeds the relevant measure of value, impairment is recorded through
an increase in the provision for the allowance for losses of receivables.
The Company had previously measured receivable impairment using methods
consistent with those prescribed in SFAS No. 114. Accordingly, upon adoption of
these statements, there was no effect to total nonearning assets nor to the
total allowance for losses as previously reported at December 31, 1994.
SFAS No. 114 also requires changes in the presentation and disclosure of
certain impaired receivables. Receivables that were considered in-substance
repossessions of collateral are now presented as impaired receivables until the
underlying collateral is physically possessed or legally foreclosed. Upon
adoption, this requirement was retroactively applied resulting in the
reclassification of $31 million of in-substance repossessed assets to impaired
receivables and $4 million of related valuation allowance to the allowance for
losses of receivables at December 31, 1994.
5
<PAGE>
Loan Modifications--
The Company had $26 million and $54 million of loans that are considered
troubled debt restructures at September 30, 1995 and December 31, 1994,
respectively. The Company also had $99 million of receivables at September 30,
1995 that were restructured at a market rate of interest and written down from
the original loan balance. The recorded investment of these receivables is
expected to be fully recoverable. Interest income of approximately $2 million
has been recorded on these receivables under the modified terms, along with cash
interest collections of the same amount. At September 30, 1995, the Company was
not committed to lend significant additional funds under the restructured
agreements.
Allowance for Losses--
The change in the allowance for losses of receivables during the nine month
period included an additional provision of $121 million and net writedowns of
$107 million. Impaired receivables with identified reserve requirements were
$249 million at September 30, 1995 and $195 million at December 31, 1994.
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------- -------------
(in millions)
<S> <C> <C>
Identified reserve requirement for impaired receivables.. $ 84 $ 66
Additional allowance for losses of receivables........... 161 165
----- -----
Total allowance for losses of receivables............. $ 245 $ 231
===== =====
Ratio of allowance for losses of receivables to
nonearning impaired receivables....................... 90% 81%
===== =====
</TABLE>
The valuation allowance for repossessed assets of $6 million at September 30,
1995 and December 31, 1994 is included in other assets on the balance sheet.
(3) Notes and Debentures
The Company issued and retired the following notes and debentures during the
nine months ended September 30, 1995 (excluding unamortized premium and
discount):
<TABLE>
<CAPTION>
Principal
Senior Debt - Notes and Debentures Amount
-------------
Issuances: (in millions)
<S> <C>
Variable rate series F medium-term notes due on various dates ranging from
August 28, 1996 to September 29, 2000..................................... $ 631
2.65% Eurobonds denominated in Japanese yen due September 29, 2000.......... 205
7% notes due May 15, 2002................................................... 150
4 1/2% Eurobonds denominated in Japanese yen due June 16, 2000.............. 100
6.51% medium-term notes due September 20, 1999.............................. 25
7.27% medium-term notes due May 30, 2002 and August 21, 2002................ 21
------
$1,132
======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Retirements:
Variable rate series E medium-term notes due on various dates ranging
from May 5, 1995 to June 2, 1995...................................... $ 86
9.1% medium-term notes due on various dates ranging
from February 6, 1995 to February 16, 1995............................ 60
Variable rate series F medium-term notes due August 16, 1995............ 50
8.92% medium-term notes due August 7, 1995.............................. 30
6.45% notes due February 15, 1995 and August 15, 1995................... 20
6.70%-6.77% medium-term notes due on May 22, 1995 and May 23, 1995...... 15
----
$261
====
</TABLE>
In April of 1995, the Company replaced its existing bank credit facilities
with a new agreement that provides $2.2 billion of liquidity support at more
favorable terms to the Company. The terms of these facilities primarily include
reduced pricing, an increase in the term for $1.1 billion of the facilities to
five years, required stockholders' equity of $900 million, and the elimination
of any funding covenant based on material adverse change in the financial
condition of the Company.
On May 3, 1995 the Company and Fuji Bank agreed to extend the term of the
Keep Well Agreement for an additional two years from December 31, 2000 to
December 31, 2002.
(4) Derivative Financial Instruments Used for Risk Management Purposes
The Company entered into several derivative instruments during the nine months
ended September 30, 1995 to more closely match the interest rate and currency
characteristics of its debt and assets. These instruments include $950 million
of basis swaps which had the effect of changing the index on an equivalent
amount of medium-term notes from the three month London Inter-bank Offered Rate
("LIBOR") to a rate based on Prime. The $950 million of basis rate swaps will
expire at the end of 1995. The Company has also entered into $1 billion of basis
swaps effective January 2, 1996 which expire at the end of 1996.
The Company also entered into various other swap agreements during the nine
month period which had the effect of converting $168 million of variable rate
medium-term notes based on various floating rate indices to rates based on three
month LIBOR and $21 million of 7.27% medium-term notes to a variable rate based
on six and three month LIBOR. Additionally, the Company employs cross currency
interest rate swap agreements to convert foreign currency denominated debt to
U.S. dollar denominated debt. During the nine month period ended September 30,
1995, the Company converted the 4 1/2% and 2.65% Eurobonds denominated in
Japanese yen to $100 million and $205 million, respectively, with interest based
on six month LIBOR. The terms of these swap agreements generally coincide with
the life of the related debt issuance.
In order to minimize the effect of movements in exchange rates on its
financial results, the Company periodically enters into forward contracts and
purchases options. These financial instruments serve as hedges of its foreign
investment in international subsidiaries and joint ventures or effectively hedge
the translation of the related foreign currency income. The Company held $222
million of forward contracts and $22 million of purchased options at September
30, 1995.
7
<PAGE>
(5) Statement of Cash Flows
Noncash investing activities which occurred during the nine month period ended
September 30, 1995 include $62 million of receivables which were classified as
repossessed assets and $31 million of in-substance repossessed assets which were
classified as impaired receivables in accordance with SFAS No. 114. Receivables
of $34 million were exchanged for investments of the same amount, and a $12
million gain was realized on an exchange of available for sale equity
securities. During the comparable 1994 period, $117 million of positions in two
repossessed companies were converted to equity investments. In addition, $59
million of receivables were classified as repossessed assets and $19 million of
repossessed assets were resolved and returned to receivables. For the nine month
periods ended September 30, 1995 and 1994, the Company paid income taxes of $81
million and $19 million and received refunds related to income taxes paid in
prior years of $10 million and $21 million, respectively.
(6) Subsequent Events
In October, 1995 the Company securitized approximately $220 million of mobile
home park, self storage and limited service hotel receivables, net of discounts
and deferred fees. Of the amount securitized, approximately $176 million was
sold, with recourse limited to the investment retained by the Company. The
Company estimates its exposure will be minimal and has established a reserve of
$1 million for this purpose.
In October, 1995 the Company issued $315 million of one year variable rate
medium-term notes.
On October 6, 1995 the Securities and Exchange Commission declared effective
the Company's registration statement on Form S-3 pursuant to which the Company
registered $2.5 billion of debt to be issued from time to time. On October 17,
1995 the Company filed a prospectus supplement which established a medium-term
notes program for the sale of these notes at varying maturities and rates which
will be determined at the time of issuance.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
Percent Percent
1995 1994 Change 1995 1994 Change
------- ------ -------- ------ ------ --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Interest income......................... $ 215 $ 188 14% $635 $509 25%
Interest expense........................ 117 89 31 348 238 46
----- ----- ---- ----
Net interest income.................... 98 99 (1) 287 271 6
Fees and other income................... 54 39 38 126 122 3
Income of international joint ventures.. 9 7 29 26 17 53
----- ----- ---- ----
Operating revenues..................... 161 145 11 439 410 7
Operating expenses...................... 53 47 13 155 137 13
Provision for losses.................... 56 48 17 134 138 (3)
----- ----- ---- ----
Income before taxes and minority
interest............................. 52 50 4 150 135 11
Income tax provision.................... 15 19 (21) 46 39 18
Minority interest in income of Heller
International Group, Inc............... 2 1 100 5 3 67
----- ----- ---- ----
Net income........................... $ 35 $ 30 17% $ 99 $ 93 6%
===== ===== ==== ====
</TABLE>
Net income for the third quarter of 1995 increased by $5 million or 17% due to
higher revenues from fees and other income, an increase in income of
international joint ventures, and a decrease in the provision for income taxes.
These were offset by an increase for the quarter in the provision for losses and
continued spending for developing businesses. Net income for the nine month
period ended September 30, 1995 increased by $6 million or 6% over the prior
year's comparable period to $99 million. This increase was due to growth in net
interest income and an increase in income of international joint ventures
partially offset by increased spending for developing businesses and an increase
in the income tax provision.
Third quarter net interest income decreased slightly from the prior year
period primarily due to costs of carrying higher average levels of equity
investments. Net interest income increased 6% for the nine month period ended
September 30, 1995 as growth in earning fund levels and a moderate increase in
net interest margin exceeded the costs of carrying a higher average level of
equity investments. Rates charged on 81% of average earning funds for the nine
month period ended September 30, 1995 were based on floating indices such as the
average three month London Inter-bank Offered Rate, which increased to 6.1% from
4.3% and contributed to the 14% and 25% increase in interest income for the
three month and nine month periods, respectively. Interest expense increased for
the three months and nine months ended September 30, 1995 partly due to the rise
in the average borrowing rate to 6.9% from 5.2% and the higher level of debt
used to finance portfolio growth.
Fees and other income increased $15 million or 38% for the third quarter due
to higher gains from equity investments and increased revenues from real estate
transactions which were partially offset by $13 million of equity writedowns.
For the nine month period ended September 30, 1995, fees and other income
increased slightly as higher gains from sales of equity investments, increased
revenues from real estate transactions and gains on project investments were
offset by equity writedowns of $32 million.
Income of international joint ventures increased for the quarter and for the
nine month period ended September 30, 1995 due to growth in earnings primarily
from European joint ventures and benefits from changes in foreign exchange rates
relative to the U.S. dollar.
9
<PAGE>
Operating expenses were higher principally due to increased spending on
developing businesses which continue to grow their earning fund levels. The
ratio of operating expenses to average fund levels is expected to remain
relatively stable during the balance of 1995.
The provision for losses increased by $8 million and decreased by $4 million
for the three and nine month periods, respectively. Net writedowns of
receivables and repossessed assets increased for the quarter and nine month
period by $12 million and $5 million, respectively, compared to the prior year
periods as the Company continued to aggressively resolve pre-1990 real estate
and corporate finance problem accounts. This aggressive account resolution
resulted in an 18 percent reduction in nonearning assets during the third
quarter while the Company's newer business portfolios continued to exhibit
strong credit quality.
The Company's effective tax rate increased from 29% for the nine months ended
September 30, 1994 to 31% for the same period in 1995. The Company's effective
rate remained below statutory rates due to the favorable resolution of certain
state tax issues. The Company's provision for income taxes for the nine months
ended September 30, 1994 was lower than the statutory rate due to favorable tax
issue resolution and the recognition of additional deferred tax benefits.
10
<PAGE>
PORTFOLIO COMPOSITION
During the nine month period ended September 30, 1995, lending assets and
investments increased $704 million or 8% as the Company continued to build a
more balanced portfolio by diversifying its asset base and sources of income.
The asset based finance category includes secured working capital finance,
vendor finance program loans and leases, equipment loans and leases to end-
users, factoring, and small business finance activities.
<TABLE>
<CAPTION>
Lending Assets and Investments as of
September 30, December 31,
---------------- ----------------
1995 Percent 1994 Percent
------ -------- ------ --------
BY PRODUCT CATEGORY: (dollars in millions)
<S> <C> <C> <C> <C>
Corporate finance........................................... $3,260 36% $3,309 39%
Asset based finance......................................... 2,810 31 2,103 25
Real estate finance......................................... 2,130 23 2,152 25
Specialized finance and investments......................... 481 5 505 6
International factoring and asset based finance............. 466 5 374 5
------ --- ------ ---
Total lending assets and investments....................... $9,147 100% $8,443 100%
====== === ====== ===
Lending assets include receivables and repossessed assets.
BY ASSET TYPE:
Receivables................................................. $8,185 89% $7,616 91%
Repossessed assets.......................................... 35 - 19 -
------ --- ------ ---
Total lending assets....................................... $8,220 89% $7,635 91%
Investments................................................. 702 8 634 7
International joint ventures................................ 225 3 174 2
------ --- ------ ---
Total investments.......................................... $ 927 11% $ 808 9%
------ --- ------ ---
Total lending assets and investments....................... $9,147 100% $8,443 100%
====== === ====== ===
</TABLE>
Corporate finance lending assets and investments continued to decrease as a
percentage of the overall portfolio due to runoff or resolution of pre-1990
accounts and a relatively high level of payoffs in the newer portfolio. The
Company funded $1.1 billion of corporate financings during the nine months ended
September 30, 1995 compared to $902 million in the prior year period, while
continuing to maintain strong credit disciplines on average hold size and debt
multiples. The average retained transaction size decreased to $16 million at
September 30, 1995 from $18 million at December 31, 1994, which is consistent
with the Company's strategy to hold smaller positions in individual
transactions. The Company was contractually committed at September 30, 1995 to
finance an additional $1.2 billion to new and existing corporate finance
borrowers. Corporate financings are generally considered by certain regulatory
agencies as highly leveraged transactions.
Asset based finance became the second largest product category during 1995
increasing $707 million to 31% of total lending assets and investments at
September 30, 1995. This increase is due primarily to growth in secured
working capital finance, vendor program finance, and end-user equipment finance
combined with a seasonal increase in factored receivables. New business
fundings of secured working capital finance receivables, vendor program
finance receivables, and end-user equipment loans and leases increased during
the nine month period and amounted to $254 million, $253 million, and $189
million, respectively, compared to $162 million, $191 million, and $141 million
in the prior year period. The Company achieved this level of funding while
continuing to maintain strong credit disciplines in these developing businesses.
At September 30, 1995, the Company had contractually committed to finance an
additional $691 million to new and existing borrowers of asset based finance.
11
<PAGE>
Real estate finance decreased to 23% of total lending assets and investments
as the Company continued to lower its office building concentration and
diversify its portfolio among several other property types. Real estate
fundings amounted to $468 million during the nine month period and consisted
primarily of hotel, mobile home park and discounted loan portfolio financings.
Unfunded contractual loan commitments to new and existing borrowers were $253
million at September 30, 1995. During October 1995, the Company securitized
$220 million of its mobile home park, self storage and limited service hotel
receivables. Of this amount, $176 million was sold with limited recourse.
The Company's obligation to fund loan commitments is generally contingent upon
the maintenance of specific credit standards by the borrowers.
Total revenues include interest income, fees and other income from wholly-
owned domestic and international operations, and the Company's share of the net
income of its international joint ventures.
<TABLE>
<CAPTION>
Total Revenues
For the Nine Months Ended September 30,
-----------------------------------------
1995 Percent 1994 Percent
------- ----------- ------- ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Corporate finance................................ $ 310 39% $ 277 43%
Asset based finance.............................. 212 27 159 25
Real estate finance.............................. 184 23 154 24
International factoring and asset based finance.. 46 6 36 5
Specialized finance and investments.............. 35 5 22 3
----- --- ----- ---
Total revenues.................................. $ 787 100% $ 648 100%
===== === ===== ===
</TABLE>
Total revenues increased $139 million or 21% from the prior year principally
reflecting growth in assets and higher market interest rates.
12
<PAGE>
PORTFOLIO QUALITY
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1995 1994
------ ------
<S> <C> <C>
Lending Assets and Investments: (dollars in millions)
Receivables....................................................... $8,185 $7,616
Repossessed assets................................................ 35 19
------ ------
Total lending assets............................................. 8,220 7,635
Investments....................................................... 927 808
------ ------
Total lending assets and investments............................. $9,147 $8,443
====== ======
Nonearning Assets:
Impaired receivables.............................................. $ 271 $ 284
Repossessed assets................................................ 35 19
------ ------
Total nonearning assets.......................................... $ 306 $ 303
====== ======
Ratio of nonearning impaired receivables to receivables........... 3.3% 3.7%
====== ======
Ratio of total nonearning assets to total lending assets.......... 3.7% 4.0%
====== ======
Allowances for Losses:
Allowance for losses of receivables............................... $ 245 $ 231
Valuation allowance for repossessed assets........................ 6 6
------ ------
Total allowance for losses....................................... $ 251 $ 237
====== ======
Ratio of allowance for losses of receivables to:
Receivables...................................................... 3.0% 3.0%
====== ======
Nonearning impaired receivables.................................. 90% 81%
====== ======
Delinquencies:
Earning loans delinquent 60 days or more.......................... $ 97 $ 103
====== ======
Ratio of earning loans delinquent 60 days or more to receivables.. 1.2% 1.4%
====== ======
</TABLE>
<TABLE>
<CAPTION>
For The Nine Months
-------------------
Ended September 30,
-------------------
1995 1994
------ ------
<S> <C> <C>
Writedowns: (dollars in millions)
Net writedowns on receivables..................................... $ 107 $ 92
Net writedowns on repossessed assets.............................. 11 21
------ ------
Total net writedowns............................................ $ 118 $ 113
====== ======
</TABLE>
The overall credit quality of the portfolio continued to improve as portfolio
growth was concentrated in the Company's lower risk asset based product areas.
These portfolios and those in corporate finance and real estate finance funded
under the Company's post 1990 revised lending strategies continued to exhibit
strong credit quality.
Nonearning assets decreased to 3.7% of total lending assets at September 30,
1995 compared to 4.0% at December 31, 1994. The decrease is the result of the
Company's continued efforts to resolve its pre-1990 corporate finance and real
estate troubled accounts combined with strong credit performance in the
Company's newer portfolios. Increases in nonearning assets due to the addition
of certain pre-1990 corporate finance and real estate accounts during the first
six months of the year were offset by a net reduction during the third quarter
due to the sale of one large pre-1990 apartment complex account and the
restructure of several large pre-1990 real estate credits. The Company had $99
million of receivables at September 30, 1995 that were restructured at market
rates of interest, written down from the original loan balance and returned to
earning status. The recorded investment of these receivables is expected to be
fully recoverable. Nonearning assets principally consist of corporate finance
and real estate accounts originated prior to 1990.
Total net writedowns increased $5 million for the nine month period ended
September 30, 1995 as a result of the significant amount of pre-1990 real estate
and corporate finance resolutions which occurred during the period. Delinquent
receivables decreased from the prior year end reflecting continued strong
performance of the Company's newer portfolios combined with the restructure of
several pre-1990 real estate credits. Loans considered troubled debt
restructures decreased to $26 million from $54 million in the prior year due to
the sale of one large pre-1990 corporate finance credit.
<PAGE>
Effective January 1, 1995, The Company adopted the provisions of Statement of
Financial Accounting Standard ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," and the related disclosure requirements of SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosure." These pronouncements require that impaired receivables be measured
based on the present value of expected future cash flows discounted at the
receivable's effective interest rate. Impairment may also be measured based on
the receivable's observable market price or based on the fair value of the
collateral if the receivable is collateral dependent. The Company had previously
measured impairment using methods similar to those prescribed in SFAS No. 114.
Accordingly, there was no effect to total nonearning assets nor to the total
allowance for losses as previously reported at December 31, 1994.
SFAS No. 114 also requires that receivables that were previously classified as
repossessed assets under in-substance repossession rules now be presented as
impaired receivables until the collateral is physically possessed or legally
foreclosed. This provision was retroactively applied resulting in the
reclassification of $31 million of in-substance repossessed assets to nonearning
impaired receivables and the transfer of $4 million from the related valuation
allowance to the allowance for losses of receivables at December 31, 1994.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1995, the Company increased lending assets and
investments by $704 million, reduced the level of commercial paper and short
term borrowings by $125 million, retired $261 million of senior notes, and paid
$43 million in dividends to common and preferred stockholders. To meet these
funding requirements, the Company supplemented its cash flow from operations by
issuing $1,132 million of senior notes and debentures.
The ratio of commercial paper and short-term borrowings to total debt
decreased by 5% to 33% at September 30, 1995 compared with 38% at December 31,
1994, reflecting the Company's decision to continue to reduce the level of
short-term funding. Leverage was increased slightly to 5.2x at September 30,
1995 compared to 4.8x at December 31, 1994, due to the 8% growth in lending
assets and investments and an increase in liquidity from a higher level of cash
equivalents. Leverage and the level of commercial paper and short-term
borrowings continue to remain within ranges targeted by the Company to maintain
a strong financial position.
At September 30, 1995, the Company had unused bank credit facilities of
$2,210 million, liquidity support of $500 million from Fuji Bank under the Keep
Well Agreement and $494 million available under the factored accounts receivable
sale program, all of which provide the Company with an aggregate amount of
$3,204 million of committed credit and sale facilities representing 138% of
outstanding commercial paper and short-term borrowings. Committed credit and
sale facilities from unaffiliated financial institutions represent 114% of
outstanding commercial paper and short-term borrowings at September 30, 1995.
The liquidity provided by the bank credit facilities and the Keep Well Agreement
remain unused at September 30, 1995.
During the second quarter, the bank credit facilities' terms were changed to
include reduced pricing, an increase in the term for $1.1 billion of the
facilities to five years, required stockholders' equity of $900 million, and the
elimination of any funding covenant based on material adverse change in the
financial condition of the Company.
On May 3, 1995 the Company and Fuji Bank agreed to extend the term of the Keep
Well Agreement for an additional two years from December 31, 2000 to December
31, 2002.
RISK MANAGEMENT
The Company maintains a conservative currency and interest rate risk posture
by using derivatives as an integral part of its asset/liability management
program to reduce its overall level of financial risk. These derivatives,
particularly interest rate swap agreements, are used to lower funding costs,
diversify sources of funding or alter interest rate exposure arising from
mismatches between assets and liabilities. Agreements entered into during the
first nine months of 1995 were entirely related to accomplishing these risk
management objectives and consisted of notional amounts approximating $1.4
billion of basis and cross currency interest rate swap agreements.
The Company invests in and operates commercial finance companies throughout
the world. Over the course of time, reported results from the operations and
investments in foreign countries may fluctuate in response to exchange rate
movements in relation to the U.S. dollar. While the Western European operations
and investments are the largest areas of the Company's activities, reported
results will be influenced to a lesser extent by the exchange rate movements
in the currencies of other countries in which our subsidiaries and investments
are located. To minimize the effect of movements in exchange rates on financial
results, the Company will periodically enter into forward currency exchange
contracts and purchase options which serve as hedges of translation of foreign
currency income and investment amounts to U.S. dollars. As of September 30,
1995, the Company held $244 million of forward currency exchange contracts and
purchased options related to this purpose.
14
<PAGE>
ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board has released Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," and SFAS No. 122,
"Accounting for Mortgage Servicing Rights," effective for financial statements
for fiscal years beginning after December 15, 1995. The Company does not expect
the adoption of these pronouncements to have a material effect on its results of
operations or financial position.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(12) Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
(27) Financial Data Schedule
(b) Reports on Form 8-K
On July 31, 1995, the Company filed with the U.S. Securities and Exchange
Commission a Current Report on Form 8-K, dated July 28, 1995, to announce the
Company's earnings for the quarter ended June 30, 1995.
On October 3, 1995, the Company filed with the U.S. Securities and Exchange
Commission a Current Report on Form 8-K, dated September 29, 1995, to announce
the appointment of a successor Trustee, Registrar and Paying Agent for Senior
Securities and Junior Subordinated Securities issued under the Company's
Registration Statement No. 33-58716, dated February 25, 1993.
On October 17, 1995, the Company filed a prospectus supplement under
registration statement no. 33-62479, which established a Medium-Term Notes
program for the sale of up to $2.5 billion of notes due from 9 months to 30
years from the date of issue.
On October 18, 1995, the Company filed with the U.S. Securities and Exchange
Commission a Current Report on Form 8-K, dated October 17, 1995 to file the
Distribution Agreement, Supplemental Indentures, Forms of Medium-Term Notes and
tax opinion in connection with the establishment of its Medium-Term Notes,
series G program.
On October 24, 1995, the Company filed with the U.S. Securities and Exchange
Commission a Current Report on Form 8-K, dated October 24, 1995, to announce
the Company's earnings for the quarter ended September 30, 1995.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned thereunto duly authorized.
HELLER FINANCIAL, INC.
By: Richard J. Almeida
--------------------------------------------
Richard J. Almeida
Executive Vice President and
Chief Financial Officer
By: Lawrence G. Hund
--------------------------------------------
Lawrence G. Hund
Senior Vice President, Controller and
Chief Accounting Officer
Date: October 27, 1995
17
<PAGE>
EXHIBIT (12)
HELLER FINANCIAL, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(unaudited)
(dollars in millions)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30, 1995
------------------
<S> <C>
Net income before income taxes and minority interest in
income of Heller International Group, Inc........................ $150
Add-Fixed charges
Interest and debt expense........................................ 348
One-third of rentals............................................. 5
----
Total fixed charges......................................... 353
----
Net income, as adjusted............................................ $503
----
Ratio of earnings to fixed charges................................. 1.42x
====
Preferred stock dividends on a pre-tax basis....................... 13
Total combined fixed charges and preferred stock dividends.. $366
----
Ratio of earnings to combined fixed charges and
preferred stock dividends........................................ 1.37x
====
</TABLE>
For purposes of computing the ratio of earnings to combined fixed charges and
preferred stock dividends, "earnings" includes income before income taxes, the
minority interest in Heller International Group, Inc. income and fixed charges.
"Combined fixed charges and preferred stock dividends" includes interest on all
indebtedness, one third of annual rentals (approximate portion representing
interest) and preferred stock dividends on a pre-tax basis.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HELLER
FINANCIAL INC. QUARTERLY REPORT FORM 10Q FOR THE PERIOD ENDING SEPTEMBER 30,
1995 PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 0
<INT-BEARING-DEPOSITS> 222
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 22
<INVESTMENTS-HELD-FOR-SALE> 120
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 8,185
<ALLOWANCE> (245)
<TOTAL-ASSETS> 9,291
<DEPOSITS> 0
<SHORT-TERM> 2,326
<LIABILITIES-OTHER> 736
<LONG-TERM> 4,800
<COMMON> 663
0
150
<OTHER-SE> 570
<TOTAL-LIABILITIES-AND-EQUITY> 9,291
<INTEREST-LOAN> 635
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 635
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 348
<INTEREST-INCOME-NET> 287
<LOAN-LOSSES> 121
<SECURITIES-GAINS> 0<F1>
<EXPENSE-OTHER> 168
<INCOME-PRETAX> 150
<INCOME-PRE-EXTRAORDINARY> 99
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99<F3>
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<YIELD-ACTUAL> 4.96
<LOANS-NON> 271
<LOANS-PAST> 75
<LOANS-TROUBLED> 26
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 231
<CHARGE-OFFS> 131
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 245
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 245
<FN>
Notes:
<F1> The Company is a finance company whose normal operations do not include
the trading of investment securities.
<F2> Earnings per share information not provided as Heller Financial, Inc. has
only one common shareholder.
<F3> Net income is net of $46 million income tax provision and $5 million of
minority interest in international income.
</FN>
</TABLE>
