<PAGE>
================================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- - --- Act of 1934 for the quarterly period ended September 30, 1997
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 incorporation or (I.R.S. Employer
organization) Identification No.)
500 West 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:
105 shares of Common Stock, $.25 par value, outstanding at October 31,
1997.
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Website is http://www.hellerfin.com
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1997 1996
-------------- ------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents............................................ $ 331 $ 296
Receivables (Note 3)
Commercial loans
Term loans......................................................... 2,587 2,434
Revolving loans.................................................... 1,667 1,493
Factored accounts receivable........................................ 2,469 994
Equipment loans and leases.......................................... 1,748 1,614
Real estate loans................................................... 1,554 1,726
Indirect consumer loans............................................. 332 268
------- ------
Total receivables............................................... 10,357 8,529
Less: Allowance for losses of receivables (Note 3).................. 255 225
------- ------
Net receivables................................................. 10,102 8,304
Equity and real estate investments................................... 478 419
Debt securities...................................................... 256 251
Operating leases..................................................... 181 135
Investments in international joint ventures.......................... 200 272
Other assets......................................................... 381 249
------- ------
Total assets.................................................... $11,929 $9,926
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior debt
Commercial paper and short-term borrowings......................... $ 4,039 $2,745
Notes and debentures (Note 4)...................................... 4,678 4,761
------- ------
Total debt...................................................... 8,717 7,506
Credit balances of factoring clients................................. 1,120 590
Other payables and accruals.......................................... 383 306
------- ------
Total liabilities............................................... 10,220 8,402
Minority interest in equity of Heller International Group, Inc....... 59 57
Stockholders' equity
Cumulative Perpetual Senior Preferred Stock, Series A.............. 125 125
Noncumulative Perpetual Senior Preferred Stock, Series B (Note 6).. 150 -
Cumulative Convertible Preferred Stock, Series D (Note 5).......... - 25
Common Stock and additional paid-in capital (Note 5)............... 685 663
Retained earnings.................................................. 690 654
------- ------
Total stockholders' equity...................................... 1,650 1,467
------- ------
Total liabilities and stockholders' equity...................... $11,929 $9,926
======= ======
</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,
-------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income.................................................. $ 233 $ 198 $ 679 $ 598
Interest expense................................................. 129 111 376 334
----- ----- ----- -----
Net interest income............................................ 104 87 303 264
Fees and other income............................................ 53 12 132 49
Factoring commissions............................................ 28 14 71 40
Income of international joint ventures........................... 8 11 27 31
----- ----- ----- -----
Operating revenues............................................. 193 124 533 384
Operating expenses............................................... 91 58 243 177
Provision for losses............................................. 48 12 104 61
----- ----- ----- -----
Income before income taxes and minority interest............... 54 54 186 146
Income tax provision............................................. 12 17 57 38
Minority interest in income of Heller International Group, Inc... 2 2 6 4
----- ----- ----- -----
Net income..................................................... $ 40 $ 35 $ 123 $ 104
===== ===== ===== =====
</TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF
CHANGES IN RETAINED EARNINGS
(in millions)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------
1997 1996
---- ----
(unaudited)
<S> <C> <C>
Retained earnings at December 31, 1996 and 1995............................... $ 654 $ 571
Net income................................................................. 123 104
Common stock dividends..................................................... (42) (36)
Preferred stock dividends.................................................. (10) (9)
Net changes in unrealized holding gains or losses on securities available
for sale, net of tax...................................................... (7) 8
Deferred translation adjustment, net of tax................................ (28) (1)
----- -----
Retained earnings at September 30, 1997 and 1996.............................. $ 690 $ 637
===== =====
</TABLE>
The retained earnings balance includes unrealized net gains on securities
available for sale of $6 and $3, net of tax, at September 30, 1997 and 1996,
respectively. Retained earnings also includes deferred foreign currency
translation adjustments of $(43) and $(15), net of tax, at September 30, 1997
and 1996, 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,
-------------------------
1997 1996
-------- -------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 123 $ 104
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses............................................... 104 61
Losses from equity investments..................................... 38 50
Amortization and depreciation...................................... 21 8
Provision for deferred tax asset................................... (6) (6)
Increase (decrease) in accounts payable and accrued liabilities.... 4 (43)
Undistributed income of international joint ventures............... (19) (24)
Increase (decrease) in interest and dividends payable.............. 27 (15)
Other.............................................................. 8 -
------- -------
Net cash provided by operating activities........................ 300 135
INVESTING ACTIVITIES
Longer-term loans funded............................................ (3,593) (2,003)
Collections of principal............................................ 2,173 1,847
Sales and syndications of longer-term loans......................... 1,440 435
Net increase in short-term loans and advances to factoring clients
Due to the consolidation of Factofrance.......................... (789) -
Other............................................................ (587) (532)
Investment in operating leases...................................... (101) -
Investments in equity interests and other investments............... (248) (138)
Sales of investments and equipment on lease......................... 272 117
Factofrance goodwill and noncompetition agreement................... (96) -
Other............................................................... 2 (11)
------- -------
Net cash used for investing activities........................... (1,527) (285)
FINANCING ACTIVITIES
Senior note issuances............................................... 969 286
Retirement of notes and debentures.................................. (1,108) (593)
Increase in commercial paper and other short-term borrowings
Due to the consolidation of Factofrance.......................... 682 -
Other............................................................ 612 326
Proceeds from preferred stock issuance.............................. 147 -
Net decrease in advances to affiliates.............................. 20 23
Dividends paid on common and preferred stock........................ (52) (45)
Other............................................................... (8) -
------- -------
Net cash provided by (used for) financing activities............. 1,262 (3)
------- -------
Decrease in cash and cash equivalents................................. 35 (153)
Cash and cash equivalents at the beginning of the period.............. 296 599
------- -------
Cash and cash equivalents at the end of the period.................... $ 331 $ 446
======= =======
</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, 1996. 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 to conform to the current year's presentation.
(2) Acquisition of Factofrance
On April 2, 1997, the Company's subsidiary, Heller International Group,
Inc. ("International Group"), purchased the interest of its joint venture
partner in Factofrance Heller S.A. ("Factofrance") for $174 million. As a
result, International Group increased its ownership interest in Factofrance from
48.8% to 97.6%. International Group has held an interest in Factofrance for over
30 years, using the equity method of accounting for its previous ownership
position. Factofrance, founded in 1965, is the leading factoring company in the
French marketplace. Factofrance is headquartered in Paris and has seven regional
sales offices covering local markets.
The Factofrance acquisition was accounted for using the purchase method of
accounting in accordance with Accounting Principles Board Opinion (APB) No. 16,
"Business Combinations." Under this method of accounting, the purchase price was
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the date of purchase. Goodwill related to the acquisition was $78
million and is being amortized over 25 years. The acquisition price includes $18
million for a noncompetition agreement which is being amortized over the five
year life of the agreement.
The following table presents pro forma combined income statements of the
Company and Factofrance and its subsidiaries for the nine months ended September
30, 1997 and 1996. The pro forma combined income statements are presented as if
the acquisition had been effective January 1, 1996. The combined historical
results of operations of Heller and Factofrance for 1997 and 1996 have been
adjusted to reflect the amortization of goodwill, the amortization of the
noncompetition agreement and the costs of financing for the transaction.
This information is intended for informational purposes only and is not
necessarily indicative of the future results of operations of the Company or of
the results of operations of the Company that would have occurred had the
acquisition been effective in the periods presented.
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------
1997 1996
---- ----
<S> <C> <C>
Interest income............................................................ $695 $663
Interest expense........................................................... 385 370
---- ----
Net interest income...................................................... 310 293
Fees and other income...................................................... 139 64
Factoring commissions...................................................... 84 92
Income of international joint ventures..................................... 24 20
---- ----
Operating revenues....................................................... 557 469
Operating expenses....................................................... 263 243
Provision for losses....................................................... 106 68
---- ----
Income before income taxes and minority interest......................... 188 158
Income tax provision....................................................... 57 46
Minority interest in income of Heller International Group, Inc............. 7 7
---- ----
Net income............................................................... $124 $105
==== ====
</TABLE>
5
<PAGE>
(3) Impaired Receivables and Repossessed Assets
The Company does not recognize interest and fee income on impaired
receivables classified as nonearning or on repossessed assets, which are set
forth in the following table:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(in millions)
<S> <C> <C>
Impaired receivables...................................... $ 209 $ 264
Repossessed assets........................................ 29 14
----- -----
Total nonearning assets.................................. $ 238 $ 278
===== =====
Ratio of total nonearning assets to total lending assets.. 2.3% 3.3%
===== =====
</TABLE>
The average investment in nonearning impaired receivables was $252 million
for the nine months ended September 30, 1997.
Loan Modifications--
The Company had $14 million of loans that are considered troubled debt
restructures at September 30, 1997 and December 31, 1996. The Company also had
$17 million of loans at September 30, 1997 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, 1997, 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 $102 million and gross writedowns and
recoveries of $103 million and $13 million, respectively. The consolidation of
Factofrance resulted in an increase of $18 million in the allowance for losses
of receivables during the nine month period. Impaired receivables with
identified reserve requirements were $149 million at September 30, 1997 and $176
million at December 31, 1996.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(in millions)
<S> <C> <C>
Identified reserve requirement for impaired receivables.. $ 59 $ 57
Additional allowance for losses of receivables........... 196 168
----- -----
Total allowance for losses of receivables............. $ 255 $ 225
===== =====
Ratio of allowance for losses of receivables to
nonearning impaired receivables....................... 122% 85%
===== =====
</TABLE>
6
<PAGE>
(4) Notes and Debentures
The Company issued and retired the following notes and debentures during
the nine months ended September 30, 1997 (excluding unamortized premium and
discount):
<TABLE>
<CAPTION>
Principal
Senior Debt - Notes and Debentures Amount
-------------
Issuances: (in millions)
<S> <C>
Variable rate medium-term notes due on various dates ranging from
April 7, 1998 to April 22, 2002.................................. $ 599
6.33% medium-term notes due July 28, 2000.......................... 15
6.35% notes due August 15, 2009.................................... 200
(Notes are callable or putable on August 15, 1999)
6.39% medium-term notes due July 17, 2000.......................... 15
6.44% medium-term notes due August 8, 2000......................... 10
6.48% medium-term notes due September 12, 2000..................... 10
6.49% medium-term notes due September 18, 2000..................... 10
6.58% medium-term notes due February 28, 2002...................... 10
6.64% medium-term notes due May 13, 1999........................... 25
6.66% medium-term notes due July 11, 2002.......................... 10
6.70% medium-term notes due March 20, 2000......................... 10
6.71% medium-term notes due March 21, 2000......................... 10
7.00% medium-term notes due March 19, 2002......................... 40
7.03% medium-term notes due March 21, 2002......................... 5
------
$ 969
======
Retirements:
Variable rate medium-term notes due on various dates ranging from
January 15, 1997 to August 29, 1997.............................. $ 621
3.80% notes due August 26, 1997.................................... 146
6.45% notes due February 15, 1997.................................. 5
7.69% medium-term notes due May 27, 1997........................... 3
7.73% medium-term notes due May 20, 1997........................... 5
7.75% notes due May 15, 1997....................................... 200
Variable rate notes due on March 24, 1997.......................... 128
------
$1,108
======
</TABLE>
In April 1997, the Company increased its existing bank credit facilities
under a modified agreement which provides $3.0 billion of liquidity support at
more favorable terms to the Company. The total bank credit facility is comprised
of two equal facilities, a 364-day facility expiring April 7, 1998 and a 5-year
facility expiring April 8, 2002. The modified terms of the agreement principally
reflect reduced pricing.
(5) Conversion of Convertible Preferred Stock
In May, 1997, the Company's Parent, Heller International Corporation,
converted all of its shares of Cumulative Convertible Preferred Stock, Series D,
no par value, into an aggregate of five shares of Common Stock of the Company at
the conversion price of one share of Common Stock for each 200 shares of
Convertible Preferred Stock. No other shares of the Series D Convertible
Preferred Stock remain outstanding.
(6) Issuance of Preferred Stock
In June, 1997, the Company issued 1,500,000 shares of 6.687% Noncumulative
Perpetual Senior Preferred Stock, Series B ("Noncumulative Perpetual Preferred
Stock") at $100 per share and received proceeds of $150 million less
underwriting costs of two percent. The shares were initially sold to Lehman
Brothers Inc., Chase Securities Inc. and Merrill Lynch & Co., each of whom
agreed to offer or sell such shares only to qualified institutional buyers in
reliance on Rule 144A under the Securities Act of 1933 and to a limited number
of institutional accredited investors pursuant to Regulation D under the
Securities Act. The Company has agreed to
7
<PAGE>
use its reasonable best efforts to file a registration statement within 150 days
of issuance with respect to an offer to exchange the Noncumulative Perpetual
Preferred Stock for shares of substantially identical fixed rate noncumulative
perpetual senior preferred stock of the Company. The Company is prohibited from
paying cash dividends in any period on Common Stock or upon any other preferred
stock that ranks, with respect to dividends, equal to or junior to the
Noncumulative Perpetual Preferred Stock unless current dividends on the
Noncumulative Perpetual Preferred Stock have been paid. The Noncumulative
Perpetual Preferred Stock is not redeemable prior to August 15, 2007. On or
after such date, the Noncumulative Perpetual Preferred Stock will be redeemable
at the option of the Company, in whole or in part, at a redemption price of $100
per share, plus any accrued and unpaid dividends.
In connection with the issuance of the Series B Noncumulative Perpetual
Preferred Stock, the Company and The Fuji Bank, Limited, amended the termination
provisions of the Keep Well Agreement so that after December 31, 2002, the
agreement may only be terminated if the ratings by Moody's Investor Service,
Inc. and Standard and Poor's Corporation of the Series A and Series B Preferred
Stock were no lower than the ratings at the time of issuance. Similarly, after
December 31, 2002, the agreement may only be terminated if the Company's senior
debt ratings were unchanged as a result of the termination of the agreement. If
the Series A and Series B Preferred Stock are no longer outstanding, the
agreement may in any event be terminated on December 31, 2007.
(7) Derivative Financial Instruments Used for Risk Management Purposes
The following disclosures are provided to supplement the disclosures of the
Company's policy for accounting for derivative financial instruments in the
Company's annual report on Form 10-K for the year ended December 31, 1996 in
accordance with the Securities Exchange Commission final rules on "Disclosure of
Accounting Policies for Derivative Financial Instruments." The policies noted
below are consistent with the Company's historical practices.
Gains or losses on terminated interest rate swaps that were hedges of
underlying obligations are amortized to interest income or interest expense over
the remaining life of the related underlying obligation. If the underlying asset
or obligation is sold, the gain or loss related to closing the swap is
recognized currently in income. Gains or losses on terminated foreign currency
exchange contracts which were hedges of net investments in a foreign subsidiary
or joint venture continue to be deferred and are recognized when the
international investment is sold or is substantially liquidated.
The Company entered into $4.5 billion of interest rate swaps that were
effective during the nine months ended September 30, 1997. Of these interest
rate swaps, $1 billion were entered into prior to January 1, 1997. During the
nine months ended September 30, 1997, $1.7 billion of interest rate swaps were
terminated or matured. The interest rate swaps were purchased to modify the
interest rate and currency characteristics of the Company's debt and assets to
control the overall level of financial risk arising from normal business
operations. These instruments had the effect of converting $1.5 billion of
floating rate obligations to fixed rate, $1.9 billion of variable rate
obligations from one index to another, and $975 million of fixed rate
obligations to a variable rate. The Company also entered into $106 million of
cross currency interest rate swap agreements which had the effect of converting
fixed rate U.S. dollar denominated obligations to fixed rate French Franc
denominated obligations in connection with the Factofrance acquisition.
The Company also periodically enters into forward contracts or purchases
options to effectively hedge the translation of the related foreign currency
income. The Company held $348 million of forward contracts at September 30,
1997.
(8) Statement of Cash Flows
Noncash investing activities which occurred during the nine month period
ended September 30, 1997 include $24 million of receivables which were
classified as repossessed assets. For the nine month periods ended September 30,
1997 and 1996, the Company paid income taxes to its Parent of $32 million and
$60 million, respectively.
(9) Accounting Developments
Effective January 1, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." Under
this Statement, after a transfer of financial assets, an entity recognizes the
financial and servicing
8
<PAGE>
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when
extinguished. This Statement provides standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. The
adoption of this Statement did not have a material impact on the Company's
consolidated financial statements. The FASB released SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions of SFAS 125" which defers until January
1, 1998 provisions of SFAS 125 relating to secured borrowings and collateral,
repurchase agreements, securities lending and similar transactions.
In June, 1997, the Financial Accounting Standards Board released Statement
of Accounting Standards No. 130, "Reporting Comprehensive Income," which the
Company is required to adopt no later than 1998. This statement establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements.
Statement of Accounting Standards No. 131, "Disclosures About Segments of
an Enterprise and Related Information" was also released in June, 1997 and is
required to be adopted no later than 1998. SFAS 131 requires segments to be
reported based on the way management organizes segments within the Company for
making operating decisions and assessing performance.
The Company plans to adopt the above pronouncements effective January 1,
1998.
9
<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
1997 1996 Change 1997 1996 Change
---- ---- ------- ---- ---- -------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Interest income........................ $233 $198 18% $679 $598 14%
Interest expense....................... 129 111 16 376 334 13
---- ---- ---- ----
Net interest income............... 104 87 20 303 264 15
Fees and other income.................. 53 12 342 132 49 169
Factoring commissions.................. 28 14 100 71 40 78
Income of international joint ventures. 8 11 (27) 27 31 (13)
---- ---- ---- ----
Operating revenues................ 193 124 56 533 384 39
Operating expenses..................... 91 58 57 243 177 37
Provision for losses................... 48 12 300 104 61 70
---- ---- ---- ----
Income before taxes and minority
interest....................... 54 54 -- 186 146 27
Income tax provision................... 12 17 (29) 57 38 50
Minority interest in income of Heller
International Group, Inc.......... 2 2 -- 6 4 50
---- ---- ---- ----
Net income..................... $ 40 $ 35 14% $123 $104 18%
==== ==== ==== ====
</TABLE>
Net income for the third quarter of 1997 totaled $40 million and increased by
$5 million or 14% versus the third quarter of 1996, while net income for the
nine months ended September 30, 1997 totaled $123 million and increased by $19
million or 18% over the first nine months of 1996. The increases in net income
resulted from significant growth in operating revenues.
On April 2, 1997, the Company's subsidiary, Heller International Group, Inc.,
completed its acquisition of Factofrance from its joint venture partner. Heller
International Group has held an interest in Factofrance for over 30 years, using
the equity method of accounting for its previous ownership position.
Factofrance, founded in 1965, is the leading factoring company in the French
marketplace. This increase in ownership from 48.8% to 97.6% resulted in
Factofrance being reported on a consolidated basis as of the date of purchase.
With Factofrance's results now accounted for on a consolidated basis, operating
revenues and operating expenses increased $64 million and $36 million,
respectively for the nine months ended September 30, 1997. Virtually all of the
changes in factoring commissions were the result of the consolidation of
Factofrance. This acquisition had a modest favorable impact on the Company's
third quarter and nine month net income as the increased share of Factofrance's
earnings was offset by the costs of the acquisition.
Net interest income totaled $104 million and increased by $17 million or 20%
for the third quarter of 1997 compared to the third quarter of 1996, while net
interest income for the nine months ended September 30, 1997 totaled $303
million and increased by $39 million or 15% over the first nine months of 1996.
The increase in net interest income reflects growth in lending assets and
increased fee accelerations on loan repayments.
Fees and other income increased to $53 million from $12 million and $132
million from $49 million for the quarter and nine months ended September 30,
1997, respectively, versus prior year periods. The increase in fees and other
income for the third quarter was primarily due to an increase in net investment
gains which totaled $26 million for the quarter ended September 30, 1997
compared to a net investment loss of $5 million for the same period in 1996. For
the nine months ended September 30, 1997, fees and other income increased $83
million from prior year reflecting the continued strong income of the Company's
real estate business, as well as $26 million of securitization gains. Gross
investment gains were $75 million and $61 million, while losses and writedowns
were $42 million and $50 million for the nine months ended September 30, 1997
and 1996, respectively.
10
<PAGE>
Operating expenses, excluding the impact of the Factofrance consolidation,
increased by 29% and 17% for the third quarter and first nine months of 1997,
respectively. This increase is primarily due to continued investment in growing
the asset based businesses and expansion of loan origination and portfolio
management resources in the Company's commercial mortgage loan area, along with
increased investment in technology and costs associated with record new business
originations.
The provision for losses increased to $48 million from $12 million and $104
million from $61 million for the quarter and nine months ended September 30,
1997, respectively, versus prior year periods despite a modest decrease in gross
writedowns. These increases are primarily due to lower levels of recoveries in
the current year combined with provisions for growth in lending assets. The
ongoing portfolio demonstrated strong credit performance with the post-1990
lending assets requiring only $42 million or 60 basis points of net writedowns
during the first nine months. Gross writedowns totaled $103 million and $105
million, while recoveries totaled $13 million and $38 million for the nine
months ended September 30, 1997 and 1996, respectively. Gross writedowns totaled
$44 million and $30 million, while recoveries totaled $3 million and $12 million
for the three months ended September 30, 1997 and 1996, respectively.
The Company's effective tax rate increased to 31% for the nine months ended
September 30, 1997 from 26% for the same period in 1996. The effective rate for
1997 and 1996 remained below statutory rates due to the use of foreign tax
credits, the effect of earnings from international joint ventures and favorable
tax issue resolutions.
11
<PAGE>
PORTFOLIO COMPOSITION
Total lending assets and investments grew by $1.9 billion or 20% for the
nine months ended September 30, 1997 which reflects the $1.5 billion impact of
the consolidation of Factofrance and continued growth in the lower risk asset
based businesses of $714 million. During the first nine months of 1997 new
business volume totaled $4.3 billion, a 58% increase over the prior year period.
The Company's portfolio continued to exhibit strong liquidity as evidenced by
paydowns, loans sales, syndications and securitizations totaling $3.7 billion in
the first nine months of 1997. Growth continued to be concentrated in the
Company's lower risk asset based businesses.
<TABLE>
<CAPTION>
Lending Assets and Investments as of
September 30, December 31,
----------------- -----------------
1997 Percent 1996 Percent
-------- ------- ------- -------
(dollars in millions)
<S> <C> <C> <C> <C>
By Product Category:
Asset based finance.......................... $ 4,984 43% $4,270 44%
International asset based finance............ 1,809 16 337 3
Corporate finance............................ 2,270 20 2,447 26
Real estate finance.......................... 2,026 17 2,062 21
Specialized finance.......................... 212 2 232 3
Investments in international joint ventures.. 200 2 272 3
------- --- ------ -----
Total lending assets and investments........ $11,501 100% $9,620 100%
======= === ====== =====
By Asset Type:
Receivables.................................. $10,357 90% $8,529 89%
Repossessed assets........................... 29 -- 14 --
------- --- ------ -----
Total lending assets........................ $10,386 90% $8,543 89%
Equity and real estate investments........... 478 4 419 4
Debt securities.............................. 256 2 251 3
Operating leases............................. 181 2 135 1
Investments in international joint ventures.. 200 2 272 3
------- --- ------ -----
Total investments........................... $ 1,115 10% $1,077 11%
------- --- ------ -----
Total lending assets and investments........ $11,501 100% $9,620 100%
======= === ====== =====
</TABLE>
The asset based lending portfolio is comprised of equipment loans and
leases to end-users, factored accounts receivable, secured working capital
loans, vendor finance program loans and leases, small business finance
activities and indirect consumer loans. The table below provides a breakdown
among the Company's various asset based product groups. Lender Finance
represents the Company's financing of other financial service providers. This
portfolio is comprised of the former Sales Finance portfolio as well as a
portion previously included in the Vendor Finance product group.
<TABLE>
<CAPTION>
Lending Assets and Investments as of
September 30, December 31,
---------------- ----------------
1997 Percent 1996 Percent
------- ------- ------- -------
(dollars in millions)
<S> <C> <C> <C> <C>
Equipment Finance and Leasing.......... $1,187 24% $ 981 23%
Business Credit........................ 1,084 22 867 20
Current Asset Management............... 961 19 928 22
First Capital.......................... 677 14 403 9
Lender Finance......................... 550 11 434 10
Vendor Finance......................... 525 10 657 16
------ --- ------ -----
Total lending assets and investments.. $4,984 100% $4,270 100%
====== === ====== =====
</TABLE>
Growth in asset based lending assets and investments of $714 million for
the nine months ended September 30, 1997 was distributed among five of the asset
based product groups. Lending assets and investments for Equipment Finance and
Leasing, Business Credit, First Capital and Lender Finance increased due to
strong new business, with the Company funding over $2.1 billion of asset based
financings during the nine month period. Partially offsetting this asset growth
was the securitization of approximately $260 million of Vendor Finance and
Equipment Finance
12
<PAGE>
and Leasing receivables during the third quarter. The Company has not retained
any residual interest in this securitization as all of the receivable backed
notes were sold to third parties on a non-recourse basis. The Company continued
to maintain strong credit disciplines in all of its asset based businesses.
These portfolios experienced approximately $7 million in net writedowns for the
nine months ended September 30, 1997. At September 30, 1997, the Company had
contractually committed to finance an additional $1.1 billion to new and
existing asset based borrowers.
The Company funded in excess of $1.1 billion of corporate financings during
the nine months ended September 30, 1997, resulting in growth in the ongoing
portfolio. At September 30, 1997, the Company was contractually committed to
finance an additional $790 million to new and existing corporate finance
borrowers. Corporate finance lending assets and investments decreased as strong
new business fundings were more than offset by runoff in the pre-1990 portfolio
as well as syndications and participations in the post-1990 portfolio.
The real estate portfolio decreased slightly during the nine months ended
September 30, 1997. Strong new business fundings, primarily in apartments and
retail property types, of approximately $980 million during the nine month
period nearly offset payoffs and the June, 1997 securitization of approximately
$500 million of commercial mortgage loans. The Company has not retained any
residual interest in this securitization as all of the commercial mortgage pass-
through certificates were sold to third parties on a non-recourse basis. In
addition, the Company has not retained any servicing obligations on this
portfolio. Unfunded contractual loan commitments to new and existing borrowers
were $90 million at September 30, 1997.
The international asset based finance portfolio, which is comprised of
assets of the Company's consolidated international subsidiaries, grew by $1.5
billion primarily as the result of the Factofrance consolidation. In addition,
investments in international joint ventures decreased due primarily to the
acquisition of Factofrance, which was previously recorded as a joint venture.
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, net fees and other income and
factoring commissions 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,
-----------------------------------------
1997 Percent 1996 Percent
------- ----------- ------- ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Asset based finance.......................... $ 369 41% $ 277 39%
International asset based finance............ 96 11 28 4
Corporate finance............................ 184 20 213 30
Real estate finance.......................... 214 23 166 23
Specialized finance.......................... 17 2 3 -
Investments in international joint ventures.. 29 3 31 4
----- --- ----- ---
Total revenues.............................. $ 909 100% $ 718 100%
===== === ===== ===
</TABLE>
Total revenues increased $191 million or 27% from the prior year
principally reflecting increases in interest income, fees and other income and
factoring commissions. Asset based finance experienced an $84 million increase
in interest income consistent with an increase in lending assets of
approximately $900 million from September 30, 1996. International asset based
finance total revenues increased $68 million from the prior year primarily as
the result of the consolidation of Factofrance. Corporate finance interest
income decreased by $31 million from the first nine months of 1996 principally
due to lower levels of lending assets and investments. Real estate finance fees
and other income increased by $48 million from September 30, 1996 primarily due
to the gain on securitization recognized in the second quarter of 1997 and
strong income from real estate investments.
13
<PAGE>
PORTFOLIO QUALITY
The Company's ongoing portfolio continued to demonstrate strong credit
performance in the third quarter as evidenced by a significant reduction in
nonearning assets from 3.3% of total lending assets at December 31, 1996 to 2.3%
at September 30, 1997. In addition, the Company's allowance for losses of
receivables is now in excess of 100% of nonearning impaired receivables. The
Company continues to resolve and reduce its exposure to pre-1990 accounts.
<TABLE>
<CAPTION>
September 30, December 31,
-------------- -------------
1997 1996
-------------- -------------
(dollars in millions)
<S> <C> <C>
Lending Assets and Investments:
Receivables......................................................................... $10,357 $ 8,529
Repossessed assets.................................................................. 29 14
------- -------
Total lending assets.............................................................. 10,386 8,543
Equity and real estate investments.................................................. 478 419
Debt securities..................................................................... 256 251
Operating leases.................................................................... 181 135
Investments in international joint ventures......................................... 200 272
------- -------
Total investments................................................................. 1,115 1,077
------- -------
Total lending assets and investments.............................................. $11,501 $ 9,620
======= =======
Nonearning Assets:
Impaired receivables................................................................ $ 209 $ 264
Repossessed assets.................................................................. 29 14
------- -------
Total nonearning assets........................................................... $ 238 $ 278
======= =======
Ratio of nonearning impaired receivables to receivables............................. 2.0% 3.1%
======= =======
Ratio of total nonearning assets to total lending assets............................ 2.3% 3.3%
======= =======
Allowances for Losses:
Allowance for losses of receivables................................................. $ 255 $ 225
======= =======
Ratio of allowance for losses of receivables to:
Receivables....................................................................... 2.5% 2.6%
======= =======
Nonearning impaired receivables................................................... 122% 85%
======= =======
Delinquencies:
Earning loans delinquent 60 days or more........................................... $ 176 $ 143
======= =======
Ratio of earning loans delinquent 60 days or more to receivables................... 1.7% 1.7%
======= =======
For The Nine Months
Ended September 30,
-------------------
1997 1996
-------- -------
(dollars in millions)
Net writedowns of lending assets:
Net writedowns on receivables...................................................... $ 87 $ 64
Net writedowns on repossessed assets............................................... 3 3
======= =======
Total net writedowns............................................................. $ 90 $ 67
======= =======
Ratio of net writedowns to average lending assets (annualized)................... 1.3% 1.1%
======= ========
Net writedowns on post-1990 lending assets.......................................... $ 42 $ 19
======= ========
Ratio of post-1990 net writedowns to average total lending assets (annualized)...... 0.6% 0.3%
======= ========
</TABLE>
14
<PAGE>
Nonearning assets decreased to 2.3% of total lending assets at September 30,
1997. The majority of nonearning assets continue to be comprised of pre-1990
corporate finance and real estate accounts, which constitute 60% of total
nonearning assets at September 30, 1997.
Net writedowns increased slightly to 1.3% of average lending assets for the
nine months ended September 30, 1997 as compared to 1.1% for the same period in
the prior year. Gross writedowns declined to $103 million from $105 million
while recoveries were $13 million as compared to $38 million in the first nine
months of 1997 and 1996, respectively. The post-1990 portfolio continued to
demonstrate strong credit quality requiring only $42 million of net writedowns
or 60 basis points of lending assets during the first nine months.
Loans considered troubled debt restructures were $14 million, unchanged from
December 31, 1996. The Company also had $17 million of receivables at September
30, 1997 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 to reduce the pre-1990 corporate finance and real estate
portfolios. The pre-1990 portfolio decreased by $316 million or 32% due to the
resolution or run-off of credits during the nine months ended September 30, 1997
and now totals only 5.8% of the Company's lending assets and investments. The
following table provides a breakdown of the pre-1990 portfolio.
<TABLE>
<CAPTION>
Pre-1990 Portfolio Profile
September 30, December 31,
------------------- -------------------
1997 1996
---- ----
(dollars in millions)
<S> <C> <C>
Pre-1990 lending assets and investments.......... $ 663 $ 979
===== =====
Pre-1990 nonearning assets....................... $ 143 $ 163
===== =====
Ratio of pre-1990 lending assets and investments
to total lending assets and investments......... 5.8% 10.2%
===== =====
For the Nine Months
Ended September 30,
1997 1996
---- ----
(dollars in millions)
Net writedowns on pre-1990 lending assets........ $ 48 $ 48
===== =====
Ratio of pre-1990 net writedowns to average total
lending assets (annualized).................... 0.7% 0.8%
===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
To meet its funding requirements for asset growth, debt retirement and payment
of dividends during the nine months ended September 30, 1997, the Company
supplemented its cash flows from operations by issuing $969 million of senior
notes and debentures, issuing $150 million in preferred stock and increasing its
level of commercial paper and short-term borrowings by $612 million. The
consolidation of Factofrance had the effect of increasing commercial paper and
short-term borrowings by $682 million. In addition, all of the Company's
Convertible Preferred Stock Series D was converted into Common Stock of the
Company during the second quarter.
The ratio of commercial paper and short-term borrowings to total debt was 46%
at September 30, 1997 and 37% at December 31, 1996. Of this increase, 4% was due
to the consolidation of Factofrance in the second quarter. Factofrance primarily
uses commercial paper and short-term borrowings to fund its assets which are
short-term in nature. Leverage (net of short-term investments) increased
slightly to 5.1x at September 30, 1997 from 5.0x at December 31, 1996, as the
effect of the consolidation of Factofrance was offset by the issuance of $150
million of preferred stock during the second quarter. 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.
15
<PAGE>
On April 8, 1997 the Company extended and increased its bank credit
facilities from $2.3 billion to $3.0 billion. The total bank credit facility is
comprised of two equal facilities, a 364-day facility expiring April 7, 1998 and
a 5-year facility expiring april 8, 2002. In addition, at September 30, 1997 the
Company had $377 million (U.S. dollar equivalent) in committed foreign bank
credit facilities for the consolidated international subsidiaries, $35 million
under the foreign currency revolving credit facilities and $550 million under a
factored accounts receivable sale facility. Since Factofrance is a registered
financial institution in France, over $200 million of additional alternative
liquidity is available by discounting eligible French receivables with the
French central bank. Committed U.S. bank credit facilities and asset sale
facilities are well in excess of 100% of U.S. commercial paper borrowings. On a
consolidated basis, total bank credit and asset sale facilities, including the
$200 million of additional alternative liquidity described above, represent 102%
of outstanding commercial paper and short-term borrowings at September 30, 1997.
All of these facilities are in addition to $500 million of liquidity support
provided by the Keep Well Agreement.
In connection with the issuance of the Series B Noncumulative Perpetual
Preferred Stock, the Company and The Fuji Bank, Limited, amended the termination
provisions of the Keep Well Agreement so that after December 31, 2002, the
agreement may only be terminated if the ratings by Moody's Investor Service,
Inc. and Standard and Poor's Corporation of the Series A and Series B Preferred
Stock were no lower than the ratings at the time of issuance. Similarly, after
December 31, 2002, the agreement may only be terminated if the Company's senior
debt ratings were unchanged as a result of the termination of the agreement. If
the Series A and Series B Preferred Stock are no longer outstanding, the
agreement may in any event be terminated on December 31, 2007.
Risk Management
Derivative agreements were entered into during the first nine months of
1997 to accomplish the Company's risk management objectives to control the
overall level of financial risk arising from normal business operations. The
Company entered into interest rate swap agreements with aggregate notional
amounts of approximately $4.5 billion which were effective during the first nine
months of 1997. Of these swaps, $1 billion were entered into prior to January 1,
1997. In addition, $1.7 billion of interest rate swaps were terminated or
matured during the nine month period.
As of September 30, 1997, the Company held $348 million of forward currency
exchange contracts which 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.
Accounting Developments
Effective January 1, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." Under
this Statement, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provides standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. The adoption of this Statement did not have a
material impact on the Company's consolidated financial statements. The FASB
released SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
SFAS 125" which defers until January 1, 1998 provisions of SFAS 125 relating to
secured borrowings and collateral, repurchase agreements, securities lending and
similar transactions.
In June, 1997, The Financial Accounting Standards Board released Statement
of Accounting Standards No. 130, "Reporting Comprehensive Income," which the
Company is required to adopt no later than 1998. This Statement establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements.
Statement of Accounting Standards No. 131, "Disclosures About Segments of
an Enterprise and Related Information" was also released in June, 1997 and is
required to be adopted no later than 1998. SFAS 131 requires
16
<PAGE>
segments to be reported based on the way management organizes segments within
the Company for making operating decisions and assessing performance.
The Company plans to adopt the above pronouncements effective January 1, 1998.
17
<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 January 30, 1997, the Company filed with the U.S. Securities and Exchange
Commission (the "SEC") a Current Report on Form 8-K, dated January 27, 1997, to
announce the Company's earnings for the year ended December 31, 1996.
On April 4, 1997, The Company filed with the SEC a Current Report on Form 8-K,
dated April 3, 1997, to announce the acquisition by Heller International of
Compagnie de Suez' 48.8% share in Factofrance.
On April 24, 1997, the Company filed with the SEC a Current Report on Form
8-K, dated April 22, 1997, to announce the Company's earnings for the quarter
ended March 31, 1997.
On July 28, 1997, the Company filed with the SEC a Current Report on Form 8-K,
dated July 24, 1997, to announce the Company's earnings for the quarter ended
June 30, 1997.
On October 22, 1997, the Company filed with the SEC a Current Report on Form
8-K, dated October 22, 1997, to announce the Company's earnings for the quarter
ended September 30, 1997 and the Company's issuance on October 6, 1997 of $250
million principal amount of its 6.44% notes due October 6, 2002.
18
<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, 1997
19
<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, 1997
------------------
<S> <C>
Net income before income taxes and minority interest in
income of Heller International Group, Inc.................... $ 186
Add-Fixed charges
Interest and debt expense.................................... 376
One-third of rentals......................................... 6
-----
Total fixed charges......................................... 382
-----
Net income, as adjusted....................................... $ 568
-----
Ratio of earnings to fixed charges............................ 1.49x
=====
Preferred stock dividends on a pre-tax basis.................. 14
Total combined fixed charges and preferred stock dividends.. $ 396
-----
Ratio of earnings to combined fixed charges and
preferred stock dividends.................................... 1.43x
=====
</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, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<INT-BEARING-DEPOSITS> 331
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 30
<INVESTMENTS-HELD-FOR-SALE> 241
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 10,357
<ALLOWANCE> (255)
<TOTAL-ASSETS> 11,929
<DEPOSITS> 0
<SHORT-TERM> 4,039
<LIABILITIES-OTHER> 1,503
<LONG-TERM> 4,678
<COMMON> 685
0
275
<OTHER-SE> 690
<TOTAL-LIABILITIES-AND-EQUITY> 11,929
<INTEREST-LOAN> 679
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 679
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 376
<INTEREST-INCOME-NET> 303
<LOAN-LOSSES> 102
<SECURITIES-GAINS> 0<F1>
<EXPENSE-OTHER> 245
<INCOME-PRETAX> 186
<INCOME-PRE-EXTRAORDINARY> 186
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123<F3>
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<YIELD-ACTUAL> 4.41
<LOANS-NON> 209
<LOANS-PAST> 131
<LOANS-TROUBLED> 14
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 225
<CHARGE-OFFS> 103
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 255
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 255
<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 $57 million income tax provision and $6 million of
minority interest in international income.
</FN>
</TABLE>
