<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1996 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 31,
1996.
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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>
ASSETS September 30, December 31,
1996 1995
-------------- ------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents........................................ $ 446 $ 599
Receivables (Note 2)
Commercial loans
Term loans.................................................... 2,468 2,743
Revolving loans............................................... 1,558 1,425
Real estate loans............................................... 1,664 1,677
Equipment loans and leases...................................... 1,411 1,241
Factored accounts receivable.................................... 1,022 816
Indirect consumer loans......................................... 191 183
------ ------
Total receivables....................................... 8,314 8,085
Less: Allowance for losses of receivables (Note 2).............. 224 229
------ ------
Net receivables......................................... 8,090 7,856
Investments...................................................... 737 693
Investments in international joint ventures...................... 244 233
Other assets..................................................... 210 257
------ ------
Total assets............................................ $9,727 $9,638
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior debt
Commercial paper and short-term borrowings.................... $2,549 $2,223
Notes and debentures (Note 3)................................. 4,837 5,145
------ ------
Total debt.............................................. 7,386 7,368
Credit balances of factoring clients............................. 596 497
Other payables and accruals...................................... 241 343
------ ------
Total liabilities........................................ 8,223 8,208
Minority interest in equity of Heller International Group, Inc... 54 46
Stockholders' equity
Cumulative Perpetual Senior Preferred Stock, Series A
($.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............................................. 637 571
------ ------
Total stockholders' equity.............................. 1,450 1,384
------ ------
Total liabilities and stockholders' equity.............. $9,727 $9,638
====== ======
</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,
-------------------- -------------------
1996 1995 1996 1995
-------- -------- ------ --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income................................................. $ 198 $ 215 $ 598 $ 635
Interest expense................................................ 111 117 334 348
----- ----- ----- -----
Net interest income........................................... 87 98 264 287
Fees and other income........................................... 26 54 89 126
Income of international joint ventures.......................... 11 9 31 26
----- ----- ----- -----
Operating revenues............................................ 124 161 384 439
Operating expenses.............................................. 58 53 177 155
Provision for losses............................................ 12 56 61 134
----- ----- ----- -----
Income before income taxes and minority interest.............. 54 52 146 150
Income tax provision............................................ 17 15 38 46
Minority interest in income of Heller International Group, Inc.. 2 2 4 5
----- ----- ----- -----
Net income.................................................... $ 35 $ 35 $ 104 $ 99
===== ===== ===== =====
</TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF
CHANGES IN RETAINED EARNINGS
(in millions)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------
1996 1995
------ ------
(unaudited)
<S> <C> <C>
Retained earnings at December 31, 1995 and 1994............................... $ 571 $ 517
Net income................................................................. 104 99
Common stock dividends..................................................... (36) (34)
Preferred stock dividends.................................................. (9) (9)
Net changes in unrealized holding gains or losses on securities available
for sale, net of tax..................................................... 8 (8)
Deferred translation adjustment, net of tax................................ (1) 5
----- -----
Retained earnings at September 30, 1996 and 1995.............................. $ 637 $ 570
===== =====
</TABLE>
The retained earnings balance includes unrealized net gains (losses) on
securities available for sale of $3 and $(3), net of tax, at September 30,
1996 and 1995, respectively. Retained earnings also includes deferred
foreign currency translation adjustments of $(15) and $(12), net of tax, at
September 30, 1996 and 1995, 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,
-------------------
1996 1995
------- -------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income ....................................................................... $ 104 $ 99
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses ......................................................... 61 134
Losses from equity investments ............................................... 50 32
Increase in net deferred tax asset ........................................... (6) (27)
(Decrease) increase in accounts payable and accrued liabilities .............. (43) 8
Undistributed income of international joint ventures ......................... (24) (21)
(Decrease) increase in interest payable ...................................... (15) 4
Other ........................................................................ 8 (20)
------- -------
Net cash provided by operating activities ................................ 135 209
INVESTING ACTIVITIES
Longer-term loans funded ......................................................... (2,003) (2,120)
Collections of principal ......................................................... 1,847 1,559
Sales of longer-term loans ....................................................... 435 369
Net increase in short-term loans and advances to factoring clients ............... (532) (523)
Investment in equity interests, equipment on lease, and other investments ........ (138) (136)
Sales of investments and equipment on lease ...................................... 117 58
Other ............................................................................ (11) (30)
------- -------
Net cash used for investing activities ................................... (285) (823)
FINANCING ACTIVITIES
Senior note issues ............................................................... 286 1,132
Retirement of notes and debentures ............................................... (593) (261)
Increase (decrease) in commercial paper and other short-term borrowings .......... 326 (125)
Net decrease in advances to affiliates ........................................... 23 34
Dividends paid on common and preferred stock ..................................... (45) (43)
------- -------
Net cash (used for) provided by financing activities ..................... (3) 737
------- -------
(Decrease) Increase in cash and cash equivalents ..................................... (153) 123
Cash and cash equivalents at the beginning of the period ............................. 599 99
------- -------
Cash and cash equivalents at the end of the period ................................... $ 446 $ 222
======= =======
</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 in
conjunction 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, 1995. 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,
1996 1995
------------- ------------
(in millions)
<S> <C> <C>
Impaired receivables.......................................... $ 282 $ 261
Repossessed assets............................................ 14 28
----- -----
Total nonearning assets...................................... $ 296 $ 289
===== =====
Ratio of total nonearning assets to total lending assets...... 3.6% 3.6%
===== =====
</TABLE>
A valuation allowance for repossessed assets of $2 million is included in
other assets on the balance sheet at December 31, 1995.
The average investment in nonearning impaired receivables was $285 million
for the nine months ended September 30, 1996.
Loan Modifications--
The Company had $14 million of loans that are considered troubled debt
restructures at September 30, 1996 and December 31, 1995. The Company also had
$53 million of loans at September 30, 1996 that were restructured at a market
rate 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. Interest income of less than $1 million has been recorded on
these receivables under the modified terms. At September 30, 1996, 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 $59 million and gross writedowns and
recoveries on receivables of $102 million and $38 million, respectively.
Impaired receivables with identified reserve requirements were $204 million at
September 30, 1996 and $234 million at December 31, 1995.
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(in millions)
<S> <C> <C>
Identified reserve requirement for impaired receivables....... $ 68 $ 57
Additional allowance for losses of receivables................ 156 172
----- -----
Total allowance for losses of receivables.................. $ 224 $ 229
===== =====
Ratio of allowance for losses of receivables to
nonearning impaired receivables........................... 79% 88%
===== =====
</TABLE>
5
<PAGE>
(3) Notes and Debentures
The Company issued and retired the following notes and debentures during
the nine months ended September 30, 1996 (excluding unamortized premium and
discount):
<TABLE>
<CAPTION>
Principal
Amount
Senior Debt - Notes and Debentures ------
Issuances: (in millions)
<S> <C>
Variable rate medium-term notes due on various dates ranging from
January 22, 1997 to November 18, 1998................................. $162
6.27% medium-term notes due May 20, 1998................................ 20
6.56% medium-term notes due May 20, 1999................................ 31
6.57% medium-term notes due May 20, 1999................................ 25
6.88% medium-term notes due September 13, 1999.......................... 25
6.79% medium-term notes due September 17, 1999.......................... 10
7.21% medium-term notes due September 13, 2001.......................... 13
----
$286
====
Retirements:
Variable rate medium-term notes due on various dates ranging from
May 6, 1996 to September 30, 1997..................................... $345
Nikkei equity indexed medium-term notes due on December 20, 1999........ 23
6.45% notes due February 15, 1997....................................... 10
9.22% medium-term notes due on March 28, 1996 and April 1, 1996......... 55
8.85% notes due April 15, 1996.......................................... 100
9.31% notes due April 22, 1996.......................................... 50
6.45% notes due August 15, 1996......................................... 10
----
$593
====
</TABLE>
In April 1996, the Company replaced its existing bank credit facilities
with a new agreement that provides $2.3 billion of liquidity support at more
favorable terms to the Company. The modified terms of the agreement primarily
include reduced pricing and the ability to increase the aggregate facilities to
$3 billion.
In August 1996, the Company replaced its $500 million factored accounts
receivable sales program with a new facility. This new facility allows the
Company to sell an undivided interest of up to $550 million in a designated pool
of its factored accounts receivable to five bank-supported conduits. Underlying
liquidity support for the conduits is provided by unaffiliated entities. One of
the conduits has an operating agreement with The Fuji Bank, Limited.
(4) Derivative Financial Instruments Used for Risk Management Purposes
The Company entered into $310 million of interest rate swaps during the
nine months ended September 30, 1996 to more closely match the interest rate and
currency characteristics of its debt and assets. These instruments had the
effect of converting $275 million of three- and six-month LIBOR based medium-
term notes to a fixed rate, $25 million of fixed rate notes to variable rate and
$10 million of variable rate medium-term notes based on the federal funds rate
to a rate based on three-month LIBOR.
The Company invests in and operates commercial finance companies
internationally. In order to minimize the effect of movements in exchange rates
on its financial results, the Company periodically enters into forward currency
exchange contracts and options. These financial instruments serve as hedges of
its investment in international subsidiaries and joint ventures or effectively
hedge the translation of the related foreign currency income. The Company held
$264 million of forward contracts and $6 million of purchased options at
September 30, 1996.
6
<PAGE>
(5) Statement of Cash Flows
Noncash investing activities which occurred during the nine month period
ended September 30, 1996 include $9 million of receivables which were classified
as repossessed assets. For the nine month periods ended September 30, 1996 and
1995, the Company paid income taxes to its Parent of $60 million and $81
million, respectively, of which $25 million paid in 1996 was related to the 1995
income tax provision.
(6) Accounting Developments
Effective January 1, 1996, the Company adopted the provisions of 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."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment. Whenever
events indicate that the carrying amount of an asset may not be recoverable, an
impairment loss should be recorded based on the fair value of the asset. The
statement also requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. The Company had previously recognized impairment
of long-lived assets when events indicated that the carrying amount may not be
recoverable. Consequently, the adoption of this statement did not have a
material impact on the Company's consolidated financial statements.
Effective January 1, 1996, the Company adopted the provisions of Financial
Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122 requires that a separate asset be recognized for rights
to service mortgage loans for others, however those servicing rights are
acquired. The total cost of the mortgage loan is required to be allocated
between the servicing rights and the loans, without the servicing rights, based
on their relative fair values. The adoption of this statement did not have a
material impact on the Company's consolidated financial statements.
The Financial Accounting Standards Board has released Statement of
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996. This statement provides standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. The Company is currently assessing the impact of this statement.
7
<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
1996 1995 Change 1996 1995 Change
----- ----- ------- ----- ----- -------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Interest income......................... $ 198 $ 215 (8)% $ 598 $ 635 (6)%
Interest expense........................ 111 117 (5) 334 348 (4)
----- ----- ----- -----
Net interest income.................... 87 98 (11) 264 287 (8)
Fees and other income................... 26 54 (52) 89 126 (29)
Income of international joint ventures.. 11 9 22 31 26 19
----- ----- ----- -----
Operating revenues..................... 124 161 (23) 384 439 (13)
Operating expenses...................... 58 53 9 177 155 14
Provision for losses.................... 12 56 (79) 61 134 (54)
----- ----- ----- -----
Income before taxes and minority
interest............................. 54 52 4 146 150 (3)
Income tax provision.................... 17 15 13 38 46 (17)
Minority interest in income of Heller
International Group, Inc............... 2 2 4 5 (20)
----- ----- ----- -----
Net income........................... $ 35 $ 35 - % $ 104 $ 99 5%
===== ===== ===== =====
</TABLE>
Net income increased by 5% for the nine months ended September 30, 1996 and
was unchanged for the third quarter versus the prior year's period due to a
significantly reduced provision for losses which was partially offset by a
decline in operating revenues and an increase in spending for developing
businesses. The decline in the loan loss provision is a result of the continued
strong credit quality of the post-1990 portfolio coupled with a decline in gross
writedowns and the recognition of several large recoveries on the pre-1990
portfolio. The decrease in operating revenues is primarily a result of a shift
in the portfolio mix to lower risk, lower return products and a decline in net
investment gains.
Net interest income declined by 8% and 11% for the nine months and third
quarter ended September 30, 1996, respectively. The decrease in interest income
reflects the continued shift of the portfolio to lower risk, lower priced asset
based products, competitive pricing pressures, reduced fee accelerations on loan
payoffs and a decline in market interest rates compared to the prior year.
Interest expense has decreased due to a lower effective market interest rate for
the Company's debt relative to the prior year.
Fees and other income is comprised of factoring commissions, fees and
participating income and net investment gains. Factoring commissions, which
represent the largest component of fees and other income, increased 9% for the
nine months ended September 30, 1996 due to an increase in factoring volume.
Fees and participating income were lower for the nine months ended September
30, 1996 as compared to the prior year due to lower prepayment fees. Net
investment gains were $11 million for the nine month period ended September 30,
1996 while the third quarter had a net investment loss of $5 million. This is a
decline from the net investment gains of $29 million and $27 million for the
nine and three month periods ended September 30, 1995. Gross investment gains
and losses were $61 million and $50 million, respectively, for the nine months
ended September 30, 1996 as compared to $61 million and $32 million,
respectively, for the nine months ended September 30, 1995.
Income of international joint ventures increased by 19% for the nine months
and 22% for the third quarter ended September 30, 1996 due to earnings growth
primarily from European joint ventures, while joint venture income from the
Asia/Pacific region also showed substantial growth.
8
<PAGE>
Operating expenses grew 14% for the nine months and 9% for the third
quarter ended September 30, 1996, principally due to continued investment in the
growing asset based businesses and the impact of consolidation of the Mexico
subsidiary.
The provision for losses decreased for the nine months and third quarter
ended September 30, 1996 as a result of the continued strong credit performance
of the post-1990 lending assets combined with lower writedowns and increased
recoveries, primarily from the pre-1990 portfolio. The post-1990 portfolio
continued to demonstrate excellent credit quality, requiring only $19 million of
net writedowns for the nine months ended September 30, 1996. Gross writedowns on
receivables and repossessed assets declined to $105 million for the nine month
period ended September 30, 1996 as compared to $142 million for 1995. Gross
writedowns on the pre-1990 portfolio were $78 million for the nine months ended
September 30, 1996 as compared to $111 million for 1995. Recoveries, primarily
from pre-1990 lending assets, increased to $38 million for the nine months ended
September 30, 1996 as compared to $24 million in 1995.
The effective income tax rate decreased to 26% for the nine months ended
September 30, 1996 from 31% for the same period in 1995. The effective income
tax rate for 1996 and 1995 remained below statutory rates due to the effect of
earnings from international joint ventures and subsidiaries, the use of foreign
tax credits and favorable tax issue resolutions.
PORTFOLIO COMPOSITION
The Company continues to achieve its goal of building a more balanced,
lower-risk portfolio and diversifying its sources of income as evidenced by
growth of over $850 million or 29% in the asset based portfolio since December
31, 1995. This portfolio, which is comprised of six distinct business groups, is
the largest product category representing 41% of lending assets and investments
as of September 30, 1996. Total lending assets and investments grew by $270
million or 3% for the nine months ended September 30, 1996 as growth in asset
based finance was partially offset by a decrease in corporate finance of $569
million, of which $246 million or 44% related to the pre-1990 portfolio.
<TABLE>
<CAPTION>
Lending Assets and Investments as of
September 30, December 31,
----------------- ----------------
1996 Percent 1995 Percent
------- ------- ------- -------
BY PRODUCT CATEGORY: (dollars in millions)
<S> <C> <C> <C> <C>
Asset based finance.............................. $ 3,860 41% $ 3,003 33%
Corporate finance................................ 2,523 27 3,092 34
Real estate finance.............................. 1,958 21 1,966 22
International factoring and asset based finance.. 543 6 506 6
Specialized finance and investments.............. 425 5 472 5
------- --- ------- ---
Total lending assets and investments............ $ 9,309 100% $ 9,039 100%
====== === ======= ===
BY ASSET TYPE:
Receivables...................................... $ 8,314 89% $ 8,085 89%
Repossessed assets............................... 14 - 28 1
------- --- ------- ---
Total lending assets............................ $ 8,328 89% $ 8,113 90%
Investments...................................... 737 8 693 8
International joint ventures..................... 244 3 233 2
------- --- ------- ---
Total investments............................... $ 981 11% $ 926 10%
------- --- ------- ---
Total lending assets and investments........... $ 9,309 100% $ 9,039 100%
======= === ======= ===
</TABLE>
The asset based lending portfolio is comprised of factored accounts
receivable, secured working capital finance, vendor finance program loans and
leases, equipment loans and leases to end-users, small business finance
activities and indirect consumer finance. The following provides a breakdown
among the Company's various asset based product groups:
9
<PAGE>
<TABLE>
<CAPTION>
Lending Assets and Investments as of
September 30, December 31,
---------------- ---------------
1996 Percent 1995 Percent
------- ------- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Current Asset Management Group......... $ 986 25% $ 802 27%
Business Credit........................ 854 22 601 20
Vendor Finance Division................ 682 18 663 22
Commercial Equipment Finance Division.. 719 19 543 18
First Capital.......................... 419 11 208 7
Sales Finance.......................... 200 5 186 6
------ --- ------ ---
Total lending assets and investments. $3,860 100% $3,003 100%
====== === ====== ===
</TABLE>
During the nine months ended September 30, 1996 growth in asset based
lending assets and investments totaled $857 million and was distributed among
all of the asset based product groups. Lending assets and investments for all of
the product groups increased due to strong new and existing business fundings
totaling $1,675 million during the nine month period. The Company achieved these
levels of fundings while maintaining strong credit disciplines in all of its
asset based businesses, as evidenced by these portfolios having less than $5
million in net write downs of receivables for the first nine months of 1996.
Nonearning assets in these portfolios have remained stable from year end levels
and are below 1% of lending assets. At September 30, 1996, the Company had
contractually committed to finance an additional $950 million to new and
existing asset based finance borrowers.
Corporate finance lending assets and investments decreased by $569 million
as fundings of $527 million were offset by portfolio runoff in pre- and post-
1990 accounts and syndications in the post-1990 portfolio. The Company continues
to maintain strong credit disciplines on lending multiples and average hold
sizes and utilizes syndication capabilities to effectively manage customer
concentration levels. At September 30, 1996, the Company was contractually
committed to finance an additional $704 million to new and existing corporate
finance borrowers. Corporate financings are generally considered by certain
regulatory agencies as highly leveraged transactions.
The real estate portfolio decreased slightly as fundings of $557 million
were diversified among various property types. Fundings, primarily in the self
storage, industrial, manufactured housing, hotel and apartment property types
were offset by continued strong liquidity in the entire portfolio. This
liquidity is demonstrated by the sale of $72 million of receivables and
investments during the nine months ended September 30, 1996. In addition, the
pre-1990 portfolio experienced significant runoff. Unfunded contractual loan
commitments to new and existing borrowers were $68 million at September 30,
1996.
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 and net fees and other income from
domestic and consolidated 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,
-----------------------------------------
1996 Percent 1995 Percent
------- ----------- ------- ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Asset based finance.............................. $ 270 38% $ 212 27%
Corporate finance................................ 209 29 310 39
Real estate finance.............................. 166 23 184 23
International factoring and asset based finance.. 59 8 46 6
Specialized finance and investments.............. 14 2 35 5
----- --- ----- ---
Total revenues................................. $ 718 100% $ 787 100%
===== === ===== ===
</TABLE>
10
<PAGE>
Total revenues decreased by $69 million or 9% from the prior year
principally reflecting a decline in interest income and lower net gains from the
sale of investments. Consistent with the Company's goal of diversifying its
sources of income, revenue growth of $58 million in the asset based finance
portfolio has resulted in its emergence as the largest revenue producing group.
The increase is due to growth in lending assets and investments across all asset
based finance product groups which more than offset the impact of market pricing
pressures. Revenues for corporate finance decreased by $101 million from the
prior year as a result of lower levels of lending assets and investments coupled
with a decline in interest rates and fees received. Revenues for real estate
finance decreased by $18 million from the prior year primarily as a result of a
decline in interest rates. Revenues for international factoring and asset based
finance grew by 28% due primarily to an increase in income from European joint
ventures, the impact of consolidating the Mexico subsidiary, and an increase in
income from joint ventures and consolidated subsidiaries in the Asia/Pacific
region. Revenues from specialized finance and investments were below the prior
year due to lower fees and the impact of equity writedowns on project
investments in 1996.
PORTFOLIO QUALITY
The Company continued to execute its strategy of pursuing portfolio growth
through lower risk asset based products. These portfolios and those in corporate
finance and real estate finance funded under the Company's post-1990 revised
lending strategies continued to demonstrate strong credit quality.
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1996 1995
---------- ---------
(dollars in millions)
<S> <C> <C>
LENDING ASSETS AND INVESTMENTS:
Receivables............................................... $8,314 $8,085
Repossessed assets........................................ 14 28
------ ------
Total lending assets.................................... 8,328 8,113
Investments............................................... 981 926
------ ------
Total lending assets and investments.................... $9,309 $9,039
====== ======
NONEARNING ASSETS:
Impaired receivables...................................... $ 282 $ 261
Repossessed assets........................................ 14 28
------ ------
Total nonearning assets................................. $ 296 $ 289
====== ======
Ratio of nonearning impaired receivables to receivables... 3.4% 3.2%
====== ======
Ratio of total nonearning assets to total lending assets.. 3.6% 3.6%
====== ======
ALLOWANCES FOR LOSSES:
Allowance for losses of receivables....................... $ 224 $ 229
====== ======
RATIO OF ALLOWANCE FOR LOSSES OF RECEIVABLES TO:
Receivables............................................. 2.7% 2.8%
====== ======
Nonearning impaired receivables......................... 79% 88%
====== ======
DELINQUENCIES:
Earning loans delinquent 60 days or more.................. $ 117 $ 117
====== ======
Ratio of earning loans delinquent 60 days or more to
receivables............................................. 1.4% 1.4%
====== ======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
For The Nine Months
-------------------
Ended September 30,
-------------------
1996 1995
------ ------
Net writedowns of lending assets: (dollars in millions)
<S> <C> <C>
Net writedowns on receivables..................................................... $ 64 $ 107
Net writedowns on repossessed assets.............................................. 3 11
------ -------
Total net writedowns....................................................... $ 67 $ 118
====== =======
Ratio of net writedowns to average lending assets (annualized).................... 1.1% 2.0%
====== =======
Net writedowns on post-1990 lending assets........................................ $ 19 $ 24
====== =======
Ratio of post-1990 net writedowns to average total lending assets (annualized).... 0.3% 0.4%
====== =======
</TABLE>
The performance of the lower risk funding strategies employed in the post-
1990 portfolio continues to exceed management's expectations as evidenced by the
low levels of writedowns and nonearning assets. Total nonearning assets as a
percentage of lending assets remained stable for the nine months ended September
30, 1996. Post-1990 nonearning assets totaled $101 million or 1.2% of total
lending assets at September 30, 1996, as compared to 1.1% of total lending
assets at December 31, 1995. Pre-1990 corporate finance and real estate
nonearning assets of $195 million represented 66% of total nonearning assets at
September 30, 1996, declining slightly from 1995 year end levels.
Total net writedowns have decreased considerably for the nine month period
ended September 30, 1996 reflecting the continued strong credit performance of
the post-1990 portfolio combined with a decrease in writedowns and an increase
in recoveries recognized primarily on the pre-1990 portfolio. The post-1990
portfolio continued to demonstrate excellent credit quality requiring only $19
million of net writedowns during the nine month period ended September 30, 1996.
Gross writedowns on receivables and repossessed assets for the nine month period
ended September 30, 1996 decreased to $105 million, of which $78 million or 74%
relate to the pre-1990 portfolio. This compares with gross writedowns of $142
million for the nine months ended September 30, 1995, of which $111 million or
78% relate to the pre-1990 portfolio. Recoveries were $38 million and $24
million for the nine month periods ended September 30, 1996 and 1995,
respectively.
Loans considered troubled debt restructures were $14 million, unchanged
from December 31, 1995. The Company also had $53 million of receivables at
September 30, 1996 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.
PRE-1990 PORTFOLIO PROFILE
- - --------------------------
The Company continued its efforts to reduce the pre-1990 corporate finance
and real estate portfolios. The following table provides a breakdown of the
pre-1990 portfolio.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------ -----------
1996 1995
---- ----
<S> <C> <C>
Pre-1990 lending assets and investments............................................ $1,122 $1,526
====== ======
Pre-1990 nonearning assets......................................................... $ 195 $ 202
====== ======
Ratio of pre-1990 lending assets and investments
to total lending assets and investments........................................... 12.1% 16.9%
====== ======
</TABLE>
A significant decrease in lending assets and investments of $404 million or
26% was realized on the pre-1990 portfolio due to the continued resolution and
run-off of accounts during the nine months ended September 30, 1996.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1996, the Company increased lending assets
and investments by $270 million, retired $593 million of senior notes, and paid
$45 million in dividends to common and preferred stockholders. To meet these
funding requirements, the Company supplemented its cash flow from operations by
increasing commercial paper and short-term borrowings by $326 million, issuing
$286 million of senior notes and debentures and reducing cash and cash
equivalents by $153 million.
Leverage and the proportion of commercial paper and short-term borrowings
to total debt continued at conservative levels during the first three quarters
of 1996. The ratio of commercial paper and short-term borrowings to total debt
was 35% and 30% at September 30, 1996 and December 31, 1995, respectively.
Leverage (net of short-term investments) was 5.0x at December 31, 1995 and 4.8x
at September 30, 1996.
On April 10, 1996 the Company extended and amended its bank credit
facilities. The total bank credit facility of $2.3 billion is comprised of two
equal facilities, a 364-day facility expiring April 9, 1997 and a 5-year
facility expiring April 10, 2001. In addition, at September 30, 1996 the Company
had $550 million available under its factored accounts receivable sale program,
$53 million in available foreign bank credit facilities for the consolidated
international subsidiaries, and $50 million available under the foreign currency
revolving credit facilities. Credit and sale facilities available from
unaffiliated financial institutions represent 121% of outstanding commercial
paper and short-term borrowings at September 30, 1996.
In August 1996, the Company replaced its $500 million factored accounts
receivable sales program with a new facility. This new facility allows the
Company to sell an undivided interest of up to $550 million in a designated pool
of its factored accounts receivable to five bank-supported conduits.
RISK MANAGEMENT
The Company uses derivatives as an integral part of its asset/liability
management program to reduce its overall level of financial risk arising from
normal business operations. 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. The Company is not an interest rate swap dealer nor is it a trader
in derivative securities, and it has not used speculative derivative products
for the purpose of generating earnings from changes in market conditions.
Agreements entered into during the first nine months of 1996 were entirely
related to accomplishing these risk management objectives and consisted of swap
agreements with aggregate notional amounts approximating $310 million.
The Company invests in and operates commercial finance companies
internationally. 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 international activities,
reported results will be influenced to a lesser extent by the exchange rate
movements in the currencies of other countries in which subsidiaries and
investments are located. To limit the effect of movements in exchange rates on
financial results, the Company periodically enters into forward currency
exchange contracts and purchases options. These financial instruments serve as
hedges of translation of its investment in international subsidiaries and joint
ventures or effectively hedge the translation of the related foreign currency
income. As of September 30, 1996, the Company held $264 million of forward
currency exchange contracts and $6 million of purchased options related to this
purpose.
ACCOUNTING DEVELOPMENTS
Effective January 1, 1996, the Company adopted the provisions of 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."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment. Whenever
events indicate that the carrying amount of an asset may not be recoverable, an
impairment loss should be recorded based on the fair value of the asset. The
statement also requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. The Company had previously recognized impairment
of long-lived assets
13
<PAGE>
when events indicated that the carrying amount may not be recoverable.
Consequently, the adoption of this statement did not have a material impact on
the Company's consolidated financial statements.
Effective January 1, 1996, the Company adopted the provisions of Financial
Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122 requires that a separate asset be recognized for rights to
service mortgage loans for others, however those servicing rights are acquired.
The total cost of the mortgage loan is required to be allocated between the
servicing rights and the loans, without the servicing rights, based on their
relative fair values. The adoption of this statement did not have a material
impact on the Company's consolidated financial statements.
The Financial Accounting Standards Board has released Statement of
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996. This statement provides standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. The Company is currently assessing the impact of this statement.
14
<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 26, 1996, the Company filed with the U.S. Securities and Exchange
Commission a Current Report on Form 8-K, dated July 22, 1996, to announce the
Company's earnings for the quarter ended June 30, 1996.
On October 23, 1996, the Company filed with the U.S. Securities and
Exchange Commission a Current Report on Form 8-K, dated October 22, 1996, to
announce the Company's earnings for the quarter ended September 30, 1996.
15
<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: Lauralee E. Martin
------------------------------------------
Lauralee E. Martin
Executive Vice President and
Chief Financial Officer
By: Lawrence G. Hund
------------------------------------------
Lawrence G. Hund
Senior Vice President, Controller and
Chief Accounting Officer
Date: October 31, 1996
16
<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, 1996
------------------
<S> <C>
Net income before income taxes and minority interest in
income of Heller International Group, Inc........................ $ 146
Add-Fixed charges
Interest and debt expense........................................ 334
One-third of rentals............................................. 5
-----
Total fixed charges.......................................... 339
-----
Net income, as adjusted............................................ $ 485
-----
Ratio of earnings to fixed charges................................. 1.43x
=====
Preferred stock dividends on a pre-tax basis....................... 12
Total combined fixed charges and preferred stock dividends... $ 351
-----
Ratio of earnings to combined fixed charges and
preferred stock dividends........................................ 1.38x
=====
</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, 1996 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<INT-BEARING-DEPOSITS> 446
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 27
<INVESTMENTS-HELD-FOR-SALE> 201
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 8,314
<ALLOWANCE> (224)
<TOTAL-ASSETS> 9,727
<DEPOSITS> 0
<SHORT-TERM> 2,549
<LIABILITIES-OTHER> 837
<LONG-TERM> 4,837
<COMMON> 663
0
150
<OTHER-SE> 637
<TOTAL-LIABILITIES-AND-EQUITY> 9,727
<INTEREST-LOAN> 598
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 598
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 334
<INTEREST-INCOME-NET> 264
<LOAN-LOSSES> 59
<SECURITIES-GAINS> 0<F1>
<EXPENSE-OTHER> 179
<INCOME-PRETAX> 146
<INCOME-PRE-EXTRAORDINARY> 104
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104<F3>
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<YIELD-ACTUAL> 4.45
<LOANS-NON> 282
<LOANS-PAST> 99
<LOANS-TROUBLED> 14
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 229
<CHARGE-OFFS> 102
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 224
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 224
<FN>
<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 $38 million income tax provision and $4 million of
minority interest in international income.
</FN>
</TABLE>
